SECURITIES & EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended December 31, 2004, or

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                        For the Transition Period from to

                          Commission File Number 0-9341

                     Security National Financial Corporation
             (Exact name of registrant as specified in its Charter)

           UTAH                                       87-0345941
- --------------------------------      ---------------------------------------
(State or other jurisdiction          (I.R.S. Employer Identification Number)
of incorporation or organization)

5300 South 360 West, Suite 250 Salt Lake City, Utah            84123
- ---------------------------------------------------          --------
(Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code:       (801) 264-1060
                                                          --------------

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

     Title of each Class             Name of each exchange on which registered
  ----------------------------       -----------------------------------------
Class A Common Stock, $2.00 Par Value          Nasdaq National Market

Class C Common Stock, $0.20 Par Value                None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                             Yes [X]  No___

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of the last business day of Registrant's  most recently  completed
second fiscal quarter was $19,539,000, based upon the closing price on that date
on the Nasdaq  National  Market.  There were 5,441,685  shares of Class A Common
Stock and 6,380,197 shares of Class C Stock outstanding at March 31, 2005.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  definitive  Proxy  Statement for the  registrant's  2005 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.

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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 38 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 four in the state of
Arizona.  The Company also engages in pre-need selling of funeral,  cemetery and
cremation services through its Utah, Arizona and California operations.  Many of
the  insurance  agents  also  sell  pre-need  funeral,  cemetery  and  cremation
services. The mortgage loan segment is an approved governmental and conventional
lender that originates and underwrites  residential and commercial loans for new
construction  and existing  homes and real estate  projects.  The mortgage  loan
segment operates through 17 offices in seven states, and is an approved mortgage
lender in 20 states.

The design and structure of the Company is that each business segment is related
to the other business segments and contributes to the profitability of the other
segments.  Because of the  Company's  cemetery and mortuary  operations in Utah,
California  and Arizona,  the Company  enjoys a level of public  awareness  that
assists in the sales and  marketing  of  insurance  and  pre-need  cemetery  and
funeral  products.  The  Company's  insurance  subsidiaries  invest their assets
(representing  in part the pre-paid  funerals) in investments  authorized by the
respective  insurance  departments  of  their  states  of  domicile.   One  such
investment  authorized by the  insurance  departments  is high quality  mortgage
loans.  Thus,  while each  business  segment is a profit center on a stand-alone
basis,  this  horizontal  integration  of each  segment  is  planned  to lead to
improved  profitability of the Company.  The Company also pursues growth through
acquisitions of both life insurance companies and cemeteries and mortuaries. The
Company's  acquisition  business strategy is based on reducing the overhead cost
of the  acquired  company  by  utilizing  existing  personnel,  management,  and
technology while still providing quality service to customers and policyholders.

The Company was organized as a holding company in 1979,  when Security  National
Life  Insurance  Company  ("Security  National  Life")  became  a  wholly  owned
subsidiary of the Company and the former  stockholders of Security National Life
became  stockholders of the Company.  Security  National Life was formed in 1965
and has grown  through  the direct  sale of life  insurance  and  annuities  and
through the acquisition of other insurance companies, including the acquisitions
of Capital  Investors Life Insurance  Company in 1994,  Civil Service  Employees
Life  Insurance  Company  in 1995,  Southern  Security  Life  Insurance  Company
"Southern Security Life" in 1998 and an asset purchase  transaction with Acadian
Life Insurance Company ("Acadian") in December 2002. Effective January 26, 2004,
the Company purchased all of the outstanding  common stock of Paramount Security
Life  Insurance  Company  ("Paramount")  now Security  National  Life  Insurance
Company of  Louisiana  ("Security  National  Life of  Louisiana"),  a  Louisiana
domiciled life  insurance  company,  for the purchase  price of  $4,398,000.  In
addition, effective January 1, 2005, Security National Life and its wholly-owned
subsidiary,  SSLIC Holding Company, completed a merger transaction with Southern
Security Life Insurance  Company in which SSLIC Holding  Company was merged with
Southern  Security Life Insurance  Company,  that resulted in Southern  Security
Life Insurance  Company becoming a wholly-owned  subsidiary of Security National
Life and the  unaffiliated  stockholders  of Southern  Security  Life  Insurance
Company  becoming  entitled  to receive an  aggregate  of  $1,884,733  for their
shares.

The cemetery and mortuary  operations have also grown through the acquisition of
other cemetery and mortuary  companies,  including the  acquisitions of Paradise
Chapel Funeral Home,  Inc. in 1989,  Holladay  Memorial Park,  Inc.,  Cottonwood
Mortuary,  Inc. and Deseret Memorial, Inc. in 1991, Sunset Funeral Home in 1994,
Greer-Wilson  Funeral Home,  Inc. in 1995 and Crystal Rose Funeral Home in 1997.
In 1993, the Company formed SecurityNational Mortgage Company ("SecurityNational
Mortgage")   to   originate   and   refinance   mortgage   loans.   Since   1993
SecurityNational  Mortgage has opened 17 branches in seven states.  See Notes to
Consolidated  Financial  Statements  for  additional  disclosure  and discussion
regarding segments of the business.





Life Insurance

  Products

The  Company,  through  its  insurance  subsidiaries,  Security  National  Life,
Southern  Security  Life  Insurance  Company,  and  Security  National  Life  of
Louisiana,   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
face  coverage  of up to  $15,000.  The  Company  believes  that  funeral  plans
represent  a marketing  niche that has lower  competition  since most  insurance
companies do not offer similar coverages. The purpose of the funeral plan policy
is to pay the costs and expenses  incurred at the time of a person's death. On a
per  thousand  dollar  cost  of  insurance  basis,  these  policies  can be more
expensive to the  policyholder  than many types of  non-burial  insurance due to
their low face amount,  requiring the fixed cost of the policy administration 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 savings for college and repayment of loans a child may have after
college.  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  Policy  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 save for,  fund or repay loans  incurred
during  college.  The product is offered to parents who have children  generally
under the age of 25.

  Markets and Distribution

The  Company is  licensed  to sell  insurance  in 38  states.  The  Company,  in
marketing  its life  insurance  products,  seeks to locate,  develop and service
specific "niche" markets. A "niche" market is an identifiable  market, which the
Company believes is not emphasized by most insurers.

Funeral plan policies are sold  primarily to persons who range in age from 45 to
75. Even though people of all ages and income levels purchase funeral plans, the
Company  believes  that the highest  percentage of funeral plan  purchasers  are
individuals who are older than 45 and have low to moderate income.

Higher  education  funding is for  families  that  desire to  prepare  for their
children's  higher  education  needs.  Such preparation can include searches for
scholarships, grant applications,  guaranteed student loan applications, and the
purchase of life  insurance and  annuities.  In 1965,  the Higher  Education Act
created the  guaranteed  student loan programs  participated  in by the Company.
Federal  Family  Education  Loan (FFEL)  Program,  which now  comprises  Federal
Stafford Loans  (formerly  Guaranteed  Student Loans),  Federal PLUS Loans,  and
Federal  Consolidation  Loans.  The FFEL  Program  makes these  long-term  loans
available to students  attending  institutions  of higher  education,  vocation,
technical, business and trade schools and some foreign schools. State or private
nonprofit guaranty agencies insure FFEL's and the Federal Government  reimburses
these agencies for all or part of the insurance  loans they pay to lenders.  The
federal guaranty on a FFEL replaces the security  (collateral)  usually required
for a long-term consumer loan. These government programs have numerous rules for
qualification  and have limits on how much you can borrow.  The Company's  whole
life  product has an annuity  rider that can provide a way for  families to save
additional funds for their children's education.  The Company has a student loan
resource  department,  which is available to  policyholders  to help parents and
students apply for various scholarships, grants and loans.





A  majority  of the  Company's  funeral  plan  premiums  come from the states of
Arizona,  Arkansas,  Colorado, Idaho, Kansas,  Mississippi,  Oklahoma, Texas and
Utah. A majority of the Company's  non-funeral plan life insurance premiums come
from the states of Alabama, California, Florida, Georgia, Louisiana, New Mexico,
South Carolina and Utah.

The Company sells its life insurance  products through direct agents and brokers
and independent  licensed  agents who may also sell insurance  products of other
companies.  The commissions on life insurance  products range from approximately
10% to 100% of first year  premiums.  In those cases where the Company  utilizes
its direct agents in selling such  policies,  those agents  customarily  receive
advances against future commissions.

In some  instances,  funeral plan insurance is marketed in conjunction  with the
Company's  cemetery and mortuary sales force. When it is marketed by that group,
the beneficiary is usually the Company's cemeteries and mortuaries.  Thus, death
benefits that become payable under the policy are paid to the Company's cemetery
and  mortuary  subsidiaries  to the extent of services  performed  and  products
purchased.

In  marketing  the funeral  plan  insurance,  the Company also seeks and obtains
third-party  endorsements  from  other  cemeteries  and  mortuaries  within  its
marketing areas. Typically, these cemeteries and mortuaries will provide letters
of endorsement  and may share in mailing and other  lead-generating  costs.  The
incentive for such  businesses to share the costs is that these  businesses  are
usually made the beneficiary of the policy.  The following table  summarizes the
life insurance business for the five years ended December 31, 2004:
2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Life Insurance Policy/Cert Count as of December 31 357,767(1)(2)(3) 353,017(1)(2) 341,909(1) 74,335 71,178 Insurance in force as of December 31 (omitted 000) $2,914,135(1)(2)(3) $2,914,438(1)(2) $2,635,436(1) $2,425,557 $2,049,789 Premiums Collected (omitted 000) $ 30,560(1)(2)(3) $ 28,598(1)(2) $ 14,699 $ 14,860 $ 14,959
(1) Includes asset purchase transaction with Acadian Life Insurance Company on December 23, 2002. (2) Includes reinsurance assumed under agreement with Guaranty Income Life Insurance Company on October 1, 2003. (3) Includes stock purchase transaction with Paramount Security Life Insurance Company, now known as Security National Life Insurance Company of Louisiana, on March 16, 2004. Underwriting Factors considered in evaluating an application for ordinary life insurance coverage can include the applicant's age, occupation, general health and medical history. Upon receipt of a satisfactory (non-funeral plan insurance) application, which contains pertinent medical questions, the Company writes insurance based upon its medical limits and requirements subject to the following general non-medical limits: Age Nearest Non-Medical Birthday Limits 0-50 $75,000 51-up Medical information required (APS or exam) When underwriting life insurance, the Company will sometimes issue policies with higher premium rates for substandard risks. The Company also sells funeral plan insurance. This insurance is a small face amount, with a maximum policy size of $15,000. It is written on a simplified medical application with underwriting requirements being a completed application, a phone inspection on selected applicant and a Medical Information Bureau inquiry. There are several underwriting classes in which an applicant can be placed. Annuities Products The Company's annuity business includes single premium deferred annuities, flexible premium deferred annuities and immediate annuities. A single premium deferred annuity is a contract where the individual remits a sum of money to the Company, which is retained on deposit until such time as the individual may wish to annuitize or surrender the contract for cash. A flexible premium deferred annuity gives the contract holder the right to make premium payments of varying amounts or to make no further premium payments after his initial payment. These single and flexible premium deferred annuities can have initial surrender charges. The surrender charges act as a deterrent to individuals who may wish to surrender their annuity contracts. Annuities have guaranteed interest rates of 3% to 4 1/2% per annum. Above that, the interest rate credited is periodically determined by the Board of Directors at their discretion. An immediate annuity is a contract in which the individual remits to the Company a sum of money in return for the Company's obligation to pay a series of payments on a periodic basis over a designated period of time, such as an individual's life, or for such other period as may be designated. Holders of annuities generally enjoy a significant benefit under the current federal income tax law in that interest accretions that are credited to the annuities do not incur current income tax expense on the part of the contract holder. Instead, the interest income is tax deferred until such time as it is paid out to the contract holder. In order for the Company to realize a profit on an annuity product, the Company must maintain an interest rate spread between its investment income and the interest rate credited to the annuities. From that spread must be deducted commissions, issuance expenses and general and administrative expenses. The Company's annuities currently have credited interest rates ranging from 3% to 5%. Markets and Distribution The general market for the Company's annuities is middle to older age individuals who wish to save or invest their money in a tax-deferred environment, having relatively high yields. The major source of annuity considerations comes from direct agents. Annuities are also sold in conjunction with other insurance sales. This is true in both the funeral planning and higher education planning areas. If an individual does not qualify for a funeral plan due to health considerations, the agent will often sell that individual an annuity to fund those final expenses. In the higher education planning area, most life insurance sales have as part of the transaction an annuity portion that is used to accumulate funds. The commission rates on annuities are up to 10%. The following table summarizes the annuity business for the five years ended December 31, 2004: 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Annuities Policy/Cert Count as of December 31 7,365 7,206 7,711 8,021 8,443 Deposits Collected (omitted 000) $1,972 $2,026 $3,215 $2,550 $3,039 Accident and Health Products Prior to the acquisition of Capital Investors Life in 1994, the Company did not actively market accident and health products. With the acquisition of Capital Investors Life, the Company acquired a block of accident and health policies which pay limited benefits to policyholders. The Company is currently offering a low-cost comprehensive diver's accident policy. The diver's policy provides worldwide coverage for medical expense reimbursement in the event of diving or water sports accidents. Markets and Distribution The Company currently markets its diver's policy through water sports magazine advertising and dive shops throughout the world. The Company pays direct commissions ranging from 15% to 30% for new business generated. The following table summarizes the accident and health business for the five years ended December 31, 2004: 2004 2003 2002 2001 2000 --- ---- ---- ---- ---- Accident and Health Policy/Cert. Count as of December 31 15,778 17,391 18,921 19,343 21,454 Premiums Collected (omitted 000) $308 $352 $365 $413 $464 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, 2004, reinsured by other companies aggregated $188,542,000, representing approximately 5.8% of the Company's life insurance in force on that date. The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties which are renewable annually. The premiums paid by the Company are based on a number of factors, primarily including the age of the insured and the risk ceded to the reinsurer. Investments The investments that support the Company's life insurance and annuity obligations are determined by the Investment Committee of the Board of Directors of the various subsidiaries and ratified by the full Board of Directors of the respective subsidiaries. A significant portion of the investments must meet statutory requirements governing the nature and quality of permitted investments by insurance companies. The Company's interest-sensitive type products, primarily annuities and interest-sensitive whole life, compete with other financial products such as bank certificates of deposit, brokerage sponsored money market funds as well as competing life insurance company products. While it is not the Company's policy to offer the highest yield in this climate, in order to offer what the Company considers to be a competitive yield, it maintains a diversified portfolio consisting of common stocks, preferred stocks, municipal bonds, investment and non-investment grade bonds including high-yield issues, mortgage loans, real estate, short-term investments 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 12 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, internment 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 eight 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 4% to 21% 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 Beginning in 1993, the Company, through its subsidiary, SecurityNational Mortgage Company has been active in both the residential as well as commercial real estate markets. The Company has current approvals through HUD, Fannie Mae, Freddie Mac and other substantial secondary market investors, which enable it to originate a wide variety of residential mortgage loan products that are subsequently sold to these investors. The Company uses internal funding sources as well as maintaining external warehouse lines of credit with unaffiliated financial institutions. The Company also originates residential construction loans. Security National Capital, a subsidiary of SecurityNational Mortgage Company, originates commercial real estate loans both for internal investment as well as for sale to unaffiliated investors. Markets and Distribution The Company's residential mortgage lending services are marketed primarily to individual homeowners. SecurityNational Mortgage Company maintains a retail origination presence in the Salt Lake City market in addition to 17 wholesale branch offices located in Arizona, California, Colorado, Florida, Nevada, Utah and Texas, with sales representatives in other states. Recent Acquisitions and Other Business Activities Southern Security Life Insurance Company Effective as of January 1, 2005, Security National Life and SSLIC Holding Company, a wholly owned subsidiary of Security National Life, completed a merger transaction with Southern Security Life Insurance Company. Under the terms of the merger and pursuant to the Agreement and Plan of Reorganization, dated August 25, 2004, including the amendment thereto dated December 27, 2004, SSLIC Holding Company was merged with and into Southern Security Life Insurance Company, which resulted in (i) Southern Security Life Insurance Company becoming a wholly-owned subsidiary of Security National Life Insurance Company, and (ii) the unaffiliated stockholders of Southern Security Life Insurance Company, holding an aggregate of 490,816 shares of common stock, becoming entitled to receive $3.84 in cash for each issued and outstanding share of their common stock of Southern Security Life Insurance Company, or an aggregate of $1,884,733. As a result of the merger, the separate existence of SSLIC Holding Company ceased as Southern Security Life Insurance Company became the surviving corporation of the merger. Southern Security Life Insurance Company continues to be governed by the laws of the State of Florida, and its separate corporate existence continues unaffected by the merger. In addition, as a result of the merger, Security National Life owns all of the issued and outstanding common shares of Southern Security Life Insurance Company. Security National Financial Corporation, through its affiliates, Security National Life Insurance Company and SSLIC Holding Company, owned 76.7% of the Company's outstanding common shares prior to the merger. The purpose of the merger is to terminate the registration of the common stock of Southern Security Life Insurance Company under the Securities Exchange Act of 1934 (by reducing the number of its stockholders of record to fewer than 300 stockholders) and the Nasdaq listing of the common stock, reduce expenses associated with such registration and listing, and provide the stockholders an opportunity to sell their shares in an illiquid trading market without incurring brokerage commissions. As a result of becoming a non-reporting company, Southern Security Life Insurance Company is no longer required to file periodic reports with the SEC, including among other things, annual reports on Form 10-K and quarterly reports on Form 10-Q, and is no longer subject to the SEC's proxy rules. In addition, its common stock is no longer eligible for trading on the Nasdaq SmallCap Market. Security National Life Insurance Company of Louisiana, formerly Paramount Security Life Insurance Company On March 16, 2004, Security National Life purchased all of the outstanding common stock of Paramount Security Life Insurance Company, now known as Security National Life of Louisiana, a Louisiana domiciled insurance company located in Shreveport, Louisiana. As of December 31, 2003, Security National Life of Louisiana had 9,383 policies in force and 29 agents. There were no material changes to the number of policies in force or the number of agents between December 31, 2003 and March 16, 2004. The purchase consideration was $4,398,000 and was effective January 26, 2004. Security National Life of Louisiana is licensed in the State of Louisiana and is permitted to appoint agents who do not have a full life insurance license. These agents are limited to selling small life insurance policies in the final expense market. The Company believes that with this license it will be able to expand its operations in Louisiana. The Company is servicing Security National Life of Louisiana policyholders out of its Jackson, Mississippi office and has closed the Shreveport office. Acadian Life Insurance Company On December 23, 2002, the Company completed an asset purchase transaction through its wholly owned subsidiary, Security National Life with Acadian Life Insurance Company ("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 on June 6, 2001, which, at that time, consisted of all the insurance policies of Gulf National Life Insurance Company 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, following Acadian's recapture of the insurance in force from its reinsurer Scottish Re (U.S.) Inc. on September 30, 2002. The coinsurance agreement also provides that Acadian is 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. On January 1, 2003, Security National Life entered into an assumption agreement 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. Regulation The Company's insurance subsidiaries, Security National Life, Southern Security, and Security National Life of Louisiana are subject to comprehensive regulation in the jurisdictions in which they do business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding aggregate reserves for life policies and annuity contracts, policy claims, unearned premiums, and other matters. The Company's insurance subsidiaries are subject to this type of regulation in any state in which they are licensed to do business. Such regulation could involve additional costs, restrict operations or delay implementation of the Company's business plans. The Company is currently subject to regulation in Utah, Florida and Louisiana under insurance holding company legislation, and other states where applicable. Generally, intercorporate transfers of assets and dividend payments from its insurance subsidiaries are subject to prior notice of approval from the State Insurance Department, if they are deemed "extraordinary" under these statutes. The insurance subsidiaries are required, under state insurance laws, to file detailed annual reports with the supervisory agencies in each of the states in which they do business. Their business and accounts are also subject to examination by these agencies. The Company's cemetery and mortuary subsidiaries are subject to the Federal Trade Commission's comprehensive funeral industry rules and are subject to state regulations in the various states where such operations are domiciled. The morticians must be licensed by the respective state in which they provide their services. Similarly, the mortuaries and cemeteries are governed and licensed by state statutes and city ordinances in Utah, Arizona and California. Reports are required to be kept on file on a yearly basis which include financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually on the basis of such reports. The cemeteries maintain city or county licenses where they conduct business. The Company's mortgage loan subsidiary, SecurityNational Mortgage, is subject to the rules and regulations of the U.S. Department of Housing and Urban Development and to various state licensing acts and regulations. These regulations, among other things, specify minimum capital requirements, the procedures for the origination, the underwriting, the licensing of wholesale brokers, quality review audits and the amounts that can be charged to borrowers for all FHA and VA loans. Each year, the Company must have an audit by an independent CPA firm to verify compliance under these regulations. In addition to the government regulations, the Company must meet loan requirements of various investors who purchase the loans. Income Taxes The Company's insurance subsidiaries, Security National Life, Southern Security and Security National Life of Louisiana are taxed under the Life Insurance Company Tax Act of 1984. Under the act, 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 a significant decrease in life reserves will result in taxable income. Security National Life, Southern Security and Security National Life of Louisiana may continue to receive the benefit of the small life insurance company deduction. In order to qualify for the small company deduction, the combined assets of the Company must be less than $500,000,000 and the taxable income of the life insurance companies must be less than $3,000,000. To the extent that the net income limitation is exceeded, then the small life insurance company deduction is phased out over the next $12,000,000 of life insurance company taxable income. Since 1990, Security National Life, Southern Security and Security National Life of Louisiana 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 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, 2004, the Company employed 366 full-time and 34 part-time employees. Item 2. Properties The following table sets forth the location of the Company's office facilities and certain other information relating to these properties.
Approximate Owned Square Location Function Leased Footage -------- -------- ------ ------- 5300 So. 360 West Corporate Headquarters Owned (1) 33,000 Salt Lake City, Utah 755 Rinehart Road Insurance Operations/ Owned (2) 27,000 Lake Mary, Florida Mortgage Sales 6522 Dogwood View Parkway Insurance Operations Leased (3) 5,300 Jackson, Mississippi 7916 Wrenwood Blvd., Suite C Insurance Operations Leased (4) 300 Baton Rouge, Louisiana 2800 Youree Drive Bld. 1, Suite 207 Insurance Operations Leased (5) 2,500 Shreveport, Louisiana 410 North 44th Street, Suite 190 Mortgage Sales Leased (6) 3,700 Phoenix, Arizona 12150 Tributary Point Dr., Suite160 Mortgage Sales Leased (7) 1,800 Gold River, California 7676 Hazard Center Drive, Suite 625 Mortgage Sales Leased (8) 1,300 San Diego, California 27201 Tourney Road, Suite 125 Mortgage Sales Leased (9) 1,600 Valencia, California 6208 Lehman Drive, Suite 201 Mortgage Sales Leased (10) 2,200 Colorado Springs, Colorado 14001 East Lliff Ave., Suite 120 Mortgage Sales Leased (11) 1,800 Aurora, Colorado 7785 Baymeadows Way, Suite 101 Mortgage Sales Leased (12) 1,800 Jacksonville, Florida 1617 Santa Barbara Blvd Mortgage Sales Leased (13) 700 Cape Coral, Florida
Item 2. Properties (Continued) - -------------------- Approximate Owned Square Location Function Leased Footage -------- -------- ------ ------- 5620 Tara Blvd., Suite 103 Mortgage Sales Leased (14) 1,200 Bradenton, Florida 6655 W. Sahara, Suite A-214 Mortgage Sales Leased (15) 2,300 Las Vegas, Nevada 12750 Merit Drive, Suite 1212 Mortgage Sales Leased (16) 2,100 Dallas, Texas 10850 Richmond Ave., Suite 270 Mortgage Sales Leased (17) 2,400 Houston, Texas 5251 Green Street, Suite 350 Mortgage Sales Owned (18) 5,000 Salt Lake City, Utah 5258 Pinemont Dr., Suite B280 Mortgage Sales Owned (19) 2,900 Murray, Utah 970 East Murray-Holladay Rd., Mortgage Sales Leased (20) 6,400 Ste. 4A Salt Lake City, Utah 474 West 800 North, Suite 102 Mortgage Sales Leased (21) 2,000 Orem, Utah
(1) The Company leases an additional 5,576 square feet of the facility to unrelated third parties for approximately $96,500 per year, under leases expiring at various dates after 2004. (2) The Company leases an additional 9,903 square feet of the facility to unrelated third parties for approximately $182,200 per year, under leases expiring at various dates after 2004. (3) The Company leases this facility for $84,000 per year. The lease expires in July 2005 (4) The Company leases this facility for $5,900 per year. The lease expires May 2005. (5) The Company leases this facility for $1,900 per year, with a month-to-month lease. (6) The Company leases this facility for $35,300 per year. The lease expires in October 2006. (7) The Company leases this facility for $48,100 per year. The lease expires in August 2009. (8) The Company leases this facility for $42,800 per year. The lease expires in June 2008. (9) The Company leases this facility for $39,200 per year. The lease expires in November 2005. Item 2. Properties (Continued) - ------------------- (10) The Company leases this facility for $27,300 per year. The lease expires in June 2006. (11) The Company leases this facility for $27,500 per year. The lease expires in June 2006. (12) The Company leases this facility for $27,200 per year. The lease expires in September 2006. (13) The Company leases this facility for $8,400 per year, with a month-to-month lease. (14) The Company leases this facility for $23,800 per year. The lease expires in July 2006. (15) The Company leases this facility for $49,100 per year. The lease expires in October 2006. (16) The Company leases this facility for $25,600 per year. The lease expires in January 2006. (17) The Company leases this facility for $37,400 per year. The lease expires in June 2008. (18) The Company leases an additional 25,000 square feet of the facility to unrelated third parties for approximately $442,500 per year, under leases expiring at various dates after 2004. (19) The Company leases an additional 135,700 square feet of the facility to unrelated third parties for approximately $838,800 per year, under leases expiring at various dates after 2004. (20) The Company leases this facility for $75,000 per year. The lease expires in January 2006. (21) The Company leases this facility for $34,800 per year. The lease expires in February 2007. The Company believes the office facilities it occupies are in good operating condition, are adequate for current operations and has no plans to build or acquire additional office facilities. The Company believes its office facilities are adequate for handling its business in the foreseeable future. As leases expire the Company will either renew or find comparable leases or acquire additional office space.
The following table summarizes the location and acreage of the six Company owned cemeteries, which each include one or more mausoleums: 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) 1640 East Lakeview Dr. Bountiful, Utah 1973 7 40 5 35 Mountain View Cemetery(3) 3115 East 7800 South Salt Lake City, Utah 1973 15 54 13 41 Redwood Cemetery(3)(5) 6500 South Redwood Rd. West Jordan, Utah 1973 27 78 26 52 Holladay Memorial Park(4)(5) 4900 So. Memory Lane Holladay, Utah 1991 5 14 3 11 Lakehills Cemetery(4) 10055 So. State Street Sandy, Utah 1991 9 41 3 38 Singing Hills Memorial Park(6) 2800 Dehesa Road El Cajon, California 1995 8 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, 2004, there were mortgages of approximately $26,000 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries. (4) As of December 31, 2004, there were mortgages of approximately $1,545,000 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, 2004, there was a mortgage of approximately $397,000 collateralized by the property.
The following table summarizes the location, square footage and the number of viewing rooms and chapels of the twelve Company owned mortuaries: Name of Date Viewing Square Mortuary Location Acquired Room(s) Chapel(s) Footage - -------- -------- --------- --------- --------- -------- Memorial Mortuary 5850 South 900 East Murray, Utah 1973 3 1 20,000 Memorial Estates, Inc.: Redwood Mortuary(3) 6500 South Redwood Rd. West Jordan, Utah 1973 2 1 10,000 Mountain View Mortuary(3) 3115 East 7800 South Salt Lake City, Utah 1973 2 1 16,000 Lakeview Mortuary(3) 1640 East Lakeview Dr. Bountiful, Utah 1973 0 1 5,500 Paradise Chapel 3934 East Indian Funeral Home School Road Phoenix, Arizona 1989 2 1 9,800 Deseret Memorial, Inc.: Colonial Mortuary(1) 2128 South State St. Salt Lake City, Utah 1991 1 1 14,500 Deseret Mortuary(1) 36 East 700 South Salt Lake City, Utah 1991 2 2 36,300 Lakehills Mortuary(3) 10055 South State St. Sandy, Utah 1991 2 1 18,000 Cottonwood Mortuary(1)(3) 4670 South Highland Dr. Holladay, Utah 1991 2 1 14,500 Greer-Wilson Funeral Home 5921 West Thomas Road Phoenix, Arizona 1995 2 2 25,000 Adobe Funeral Home 218 North Central Avondale, Arizona 1995 1 1 1,850 Crystal Rose Funeral Home(2) 9155 W. VanBuren Tolleson, Arizona 1997 0 1 9,000
(1) As of December 31, 2004, there were mortgages of approximately $1,545,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary. (2) As of December 31, 2004, there was a mortgage of approximately $112,000, collateralized by the property and facilities of Crystal Rose Funeral Home. (3) These funeral homes also provide burial niches at their respective locations. Item 3. Legal Proceedings An action was brought against the Company in May 2001 by Glenna Brown Thomas, individually and as personal representative of the Estate of Lynn W. Brown, in the Third Judicial Court, Salt Lake County, Utah. The action asserts that Memorial Estates, Inc. delivered to Lynn W. Brown six stock certificates totaling 2,000 shares of its common stock in 1970 and 1971. Mr. Brown died in 1972. It is also asserted that at the time the 2,000 shares were issued and outstanding, the shares represented a 2% ownership of Memorial Estates. It is further alleged that Mr. Brown was entitled to preemptive rights and, 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 of his right to purchase more stock. It is further asserted that Thomas has the right to the transfer of Brown's shares on the books of Security National Financial Corporation as well as Memorial Estates, and to the restoration of Brown's proportion of share ownership in Memorial Estates at the time of his death by issuance and delivery to Thomas of sufficient shares of the Company's publicly traded and unrestricted stock in exchange for the 2,000 shares of Memorial Estates stock, including payment of all dividends from the date of Thomas's demand. The formal discovery cutoff was January 15, 2004. The Company has been verbally informed that Thomas will dismiss the case but such dismissal has not been communicated in writing. Until the case is actually dismissed, the Company intends to vigorously defend the matter, including the assertion that the statute of limitations bars the claims in their entirety. The Company received a letter dated November 9, 2004 on behalf of Charles Hood, who worked at Singing Hills Memorial Park in El Cajon, California. He was hired in April 2003 as a groundskeeper with his work concluding on October 30, 2003. Mr. Hood claims that he wrote a letter to the Company outlining his concerns regarding the operation of the cemetery, and that the next day he was terminated. Even though he recognizes his relationship was as an at-will employee. Mr. Hood's claims against the Company also include, but are not limited to, violation of labor laws, whistleblower retaliation and infliction of emotional distress. The letter proposes a settlement in the amount of $275,000. No lawsuit has been filed in the matter. The Company has been engaged in a review of the claims made in the letter. Based on its investigation, the Company believes that Mr. Hood voluntarily quit and was not terminated. Counsel for the Company and counsel for Mr. Hood have been in discussion concerning the matter. At this stage of the investigation, the Company does not believe there is any justification for the claims being made. If a resolution of the dispute is not achieved and litigation ensues, the Company is prepared to vigorously defend the action. The Company also received a letter dated November 29, 2004 on behalf of Roger Gornichec, who the Company recognizes as having been an independent contractor. The attorney who wrote the letter on behalf of Mr. Hood also wrote the letter on behalf of Mr. Gornichec. Mr. Gornichec concluded his services as an agent selling insurance in the spring of 2003 and his license to sell cemetery plots was not renewed in the summer of 2004. Mr. Gornichec asserts that he was an employee contrary to the Company's position. The claims made on behalf of Mr. Gornichec include, but are not limited to, wrongful termination in violation of public policy, misrepresentation, age discrimination, whistle-blower retaliation, interference with economic advantage, breach of contract, breach of the covenant of good faith and fair dealing, and infliction of emotional distress. Mr. Gornichec also claims that he is owed a certain amount from a retirement plan. The letter proposes a settlement in the amount of $420,000. Based on its investigation, the Company believes that Mr. Gornichec was an independent contractor, not an employee, and that the claims and the settlement amount sought are not justified. If the matter is not resolved and litigation ensues, the Company is prepared to vigorously defend the action. 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. Based on management's assessment and legal counsel's representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above claims in the consolidated financial statements. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of the Company's shareholders during the quarter ended December 31, 2004. 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, 2005, the closing sales price of the Class A Common Stock was $3.51 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, 2003: Period (Calendar Year) Price Range High Low 2003 First Quarter $6.59 $4.31 Second Quarter 6.01 5.02 Third Quarter 5.98 4.98 Fourth Quarter 7.10 5.47 2004 First Quarter 8.47 6.36 Second Quarter 6.51 3.71 Third Quarter 3.89 3.08 Fourth Quarter 3.81 2.90 2005 First Quarter 4.29 2.99 The above sales prices have been adjusted for the effect of annual stock dividends. The Class C Common Stock is not actively traded, although there are occasional transactions in such stock by brokerage firms. (See Note 11 to the Consolidated Financial Statements.) The Company has never paid a cash dividend on its Class A or Class C Common Stock. The Company currently anticipates that all of its earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Class A or Class C Common Stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate. A 5% stock dividend on Class A and Class C Common Stock has been paid each year from 1990 through 2004. As of December 31, 2004, there were 4,437 record holders of Class A Common Stock and 126 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, 2004, are derived from the audited consolidated financial statements. The data as of December 31, 2004 and 2003, and for the three years ended December 31, 2004, 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, 2004 2003(1) 2002 2001 2000 ---- ------- ---- ---- ---- Revenue Premiums $ 25,979,000 $ 23,295,000 $14,077,000 $13,151,000 $12,876,000 Net investment income 15,939,000 17,303,000 12,540,000 12,947,000 12,136,000 Net mortuary and cemetery sales 11,661,000 10,944,000 10,638,000 9,881,000 8,741,000 Realized (losses) gains on investments 74,000 (2,000) 1,021,000 10,000 424,000 Mortgage fee income 62,690,000 92,955,000 57,008,000 40,086,000 22,922,000 Other 855,000 550,000 479,000 152,000 305,000 ------------ ------------ ----------- ----------- ----------- Total revenue 117,198,000 145,045,000 95,763,000 76,227,000 57,404,000 ------------ ------------ ----------- ----------- ----------- Expenses Policyholder benefits 23,362,000 21,755,000 13,756,000 11,775,000 12,931,000 Amortization of deferred policy acquisition costs 4,602,000 4,929,000 3,994,000 3,870,000 3,189,000 General and administrative expenses 82,097,000 102,926,000 68,459,000 52,247,000 35,959,000 Interest expense 2,174,000 3,642,000 1,970,000 2,791,000 2,126,000 Cost of goods and services of the mortuaries and cemeteries 2,304,000 2,328,000 2,045,000 1,772,000 1,952,000 ------------ ------------ ----------- ----------- ----------- Total benefits and expenses 114,539,000 135,580,000 90,224,000 72,455,000 56,157,000 ------------ ------------ ----------- ----------- ----------- Income before income tax expense 2,659,000 9,465,000 5,539,000 3,772,000 1,247,000 Income tax expense (652,000) (2,891,000) (1,565,000) (913,000) (305,000) Minority interest in (income) loss of subsidiary 115,000 22,000 18,000 (18,000) (46,000) ------------ ------------ ----------- ---------- ----------- Net earnings $ 2,122,000 $ 6,596,000 $ 3,992,000 $ 2,841,000 $ 896,000 ============ ============ =========== =========== =========== Net earnings per common share(3) $.35 $1.13 $.72 $.52 $.16 ==== ===== ==== ==== ==== Weighted average outstanding common shares (3) 6,002,000 5,852,000 5,573,000 5,485,000 5,511,000 Net earnings per common share-assuming dilution(3) $.34 $1.10 $.69 $.52 $.16 ==== ===== ==== ==== ==== Weighted average outstanding common shares-assuming dilution (3) 6,218,000 6,003,000 5,744,000 5,486,000 5,528,000
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated) (Continued) Balance Sheet Data: December 31, 2004(2) 2003 2002(1) 2001 2000 ------- ------- ---- ---- ---- Assets Investments and restricted assets $183,876,000 $112,006,000 $106,161,000 $ 94,514,000 $108,810,000 Cash 15,334,000 19,704,000 38,199,000 8,757,000 11,275,000 Receivables 53,737,000 120,698,000 102,590,000 59,210,000 36,413,000 Other assets 63,527,000 61,075,000 61,112,000 51,088,000 52,249,000 ------------ ------------ ------------ ------------ ------------ Total assets $316,474,000 $313,483,000 $308,062,000 $213,569,000 $208,747,000 ============ ============ ============ ============ ============ Liabilities Policyholder benefits $226,785,000 $220,739,000 $217,895,000 $142,291,000 $141,755,000 Notes & contracts payable 13,331,000 17,863,000 19,273,000 12,098,000 14,046,000 Cemetery & mortuary liabilities 10,789,000 10,562,000 10,076,000 9,344,000 8,659,000 Other liabilities 20,091,000 21,187,000 22,007,000 15,630,000 12,921,000 ------------ ------------ ------------ ------------ ------------ Total liabilities 270,996,000 270,351,000 269,251,000 179,363,000 177,381,000 ------------ ------------ ------------ ------------ ------------ Minority interest 3,813,000 3,957,000 4,298,000 4,237,000 4,625,000 Stockholders' equity 41,665,000 39,175,000 34,513,000 29,969,000 26,741,000 ------------ ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity $316,474,000 $313,483,000 $308,062,000 $213,569,000 $208,747,000 ============ ============ ============ ============ ============
(1) Reflects the asset purchase transaction with Acadian Life Insurance Company on December 23, 2002. (2) Includes the purchase of Paramount Life Insurance Company, now Security National Life Insurance Company of Louisiana, on March 16, 2004. (3) Earnings per share amounts have been adjusted for the effect of annual stock dividends. 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 and other "niche" mortgage products. SecurityNational Mortgage Company ("SNMC") is a mortgage lender incorporated under the laws of the State of Utah. SNMC is approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), to originate mortgage loans that qualify for government insurance in the event of default by the borrower. SNMC obtains loans primarily from independent brokers and correspondents. SNMC funds the loans from internal cash flows and lines of credit from financial institutions, including the Company's insurance subsidiaries. SNMC receives fees from the borrowers and other secondary fees from third party investors who purchased the loans from SNMC. SNMC pays the brokers and correspondents a commission for loans that are brokered through SNMC. As of December 31, 2004, SNMC had 17 branches in seven states. In 2001, SNMC opened wholesale branches in Phoenix, Arizona and Houston, Texas. In 2003, SNMC opened offices in Tampa and Jacksonville, Florida; Las Vegas, Nevada; Denver, Colorado; Bountiful, Utah; and Dallas, Texas. SNMC opened one office in 2004 at Cape Coral, Florida. SNMC originated and sold 11,567 loans ($1,781,000,000 loan amount), 17,494 loans ($2,560,000,000 loan amount), and 11,737 loans ($1,721,000,000 loan amount) in 2004, 2003 and 2002, respectively. SNMC's loan volume decreased in 2004 due to an increase in interest rates resulting in fewer borrowers refinancing their loans. On December 17, 1998, the Company purchased all of the outstanding shares of common stock of SSLIC Holding Company, formerly Consolidare Enterprises, Inc., and Insuradyne Corporation for a total cost of $12,248,194. As of December 31, 2004, Security National Life and its wholly-owned subsidiary, SSLIC Holding Company, held approximately 77% of the outstanding shares of common stock of Southern Security Life Insurance Company. In addition, effective on January 1, 2005, Security National Life and its wholly-owned subsidiary, SSLIC Holding Company, completed a merger transaction with Southern Security Life Insurance Company in which SSLIC Holding Company was merged with Southern Security Life Insurance Company, which resulted in Southern Security Life Insurance Company becoming a wholly-owned subsidiary of Security National Life and the unaffiliated stockholders of Southern Security Life Insurance Company becoming entitled to receive an aggregate of $1,884,733 for their shares. On December 23, 2002, the Company completed an asset purchase transaction with Acadian Life Insurance Company, a Louisiana domiciled life insurance company, 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 on June 6, 2001, consisting of all of the insurance policies of Gulf National Life Insurance Company that were in force and in effect on June 1, 2001. On March 16, 2004, Security National Life purchased all of the outstanding common stock of Paramount Security Life Insurance Company, now known as Security National Life of Louisiana, a Louisiana domiciled insurance company located in Shreveport, Louisiana. As of December 31, 2003, Security National Life of Louisiana had 9,383 policies in force and 29 agents. There were no material changes in the number of policies in force or the number of agents between December 31, 2003 and March 16, 2004. The purchase consideration was $4,398,000 and was effective January 26, 2004. Security National Life of Louisiana is licensed in the State of Louisiana where it is permitted to appoint agents who do not have a full life insurance license. These agents are limited to selling small life insurance policies in the final expense market. The Company believes that with this license it will be able to expand its operations in Louisiana. The Company is servicing Security National Life of Louisiana policyholders out of its Jackson, Mississippi office and has closed its Shreveport office. Significant Accounting Policies The following is a brief summary of our significant accounting policies and a review of our most critical accounting estimates. Please also refer to Note 1 of our consolidated 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 consolidated financial statements. Premium revenues reported for traditional life insurance products are recognized as revenues when due. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits. The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued. For interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted when the Company revises the estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity. Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year on the level of claims incurred under insurance retention limits. The profitability of the Company is primarily affected by fluctuations in mortality, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency. The Company has the ability to mitigate adverse experience through sound underwriting, asset/liability duration matching, sound actuarial practices, 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 or the caskets are delivered. Pre-need sales of cemetery internment rights (cemetery burial property) - revenue and costs associated with the sales of pre-need cemetery internment 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" (SFAS No. 66). Under SFAS 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 SFAS 66, described above. Pre-need sales of cemetery merchandise (primarily markers and vaults) - revenue and costs associated with the sales of pre-need cemetery merchandise are deferred until the merchandise is delivered. Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees) - revenue and costs associated with the sales of pre-need cemetery services are deferred until the services are performed. Prearranged funeral and pre-need cemetery customer obtaining costs - costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of Statement of Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance Enterprises" (FAS No. 60). Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business, are deferred until the merchandise is delivered or services are performed. Revenues and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured and there are no significant obligations remaining. Mortgage Operations Mortgage fee income is generated through the origination and refinancing of mortgage loans and is realized in accordance with SFAS No. 140. The majority of loans originated are sold to third party investors. The amounts sold to investors are shown on the balance sheet as due from sale of loans, and are shown on the basis of the amount of fees due from the investors. Use of Significant Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. 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 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. 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. 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 receivables due on mortgage loans sold to investors, cemetery and mortuary operations, mortgage loan operations and other receivables. The allowance is based upon the Company's experience. The critical issues that would impact recovery of the cemetery and mortuary receivables is the overall economy. The critical issues that would impact recovery of 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 or the service is performed. The Company, through its mortuary and cemetery operations, provides a guaranteed funeral arrangement wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential mortuary customer utilizes one of the Company's facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. Mortgage Loan Loss Reserve The Company accrues an estimate of future losses on mortgage loans sold to third party investors. The Company may be required to reimburse third party investors for costs associated with early payoff of loans within the first year of duration and to repurchase loans in default within the first year. The estimates are based upon historical experience and best estimate of future liabilities. Deferred Compensation The Company has deferred compensation agreements with several of its current and past executive officers. The deferred compensation is payable upon retirement or death of these individuals either in annual installments (10 years) or lump sum settlement, if approved by the Board of Directors. The Company has accrued the present value of these benefits based upon their future retirement dates and other factors, on its consolidated financial statements. Depreciation Depreciation is calculated principally on the straight-line-method over the estimated useful lives of the assets which range from 3 to 40 years. Leasehold improvements are amortized over the lesser of the useful life or remaining lease terms. Results of Operations 2004 Compared to 2003 Total revenues decreased by $27,847,000, or 19.2%, from $145,045,000 for fiscal year 2003 to $117,198,000 for fiscal year 2004. Contributing to this decrease in total revenues was a $30,265,000 decrease in mortgage fee income and a $1,364,000 decrease in net investment income. This decrease was partially offset by an increase in mortuary and cemetery sales of $717,000, an increase in insurance premium and other considerations of $2,684,000, an increase in realized gains on investments of $76,000 and an increase in other revenue of $305,000. Insurance premiums and other considerations increased by $2,684,000, from $23,295,000 in 2003 to $25,979,000 in 2004. This increase was primarily due to the additional insurance premiums that were realized on new insurance sales and included premiums from policies acquired from Paramount Security Life Insurance Company in 2004. Net investment income decreased by $1,364,000, from $17,303,000 in 2003 to $15,939,000 in 2004. This decrease was primarily attributable to reduced interest income on fewer mortgage loans originated by SecurityNational Mortgage Company during 2004. Net mortuary and cemetery sales increased by $717,000, from $10,944,000 in 2003 to $11,661,000 in 2004. This increase was primarily due to pre-need cemetery sales. Realized gains on investments and other assets increased by $76,000, from a loss of $2,000 in 2003 to a gain of $74,000 in 2004. Other revenue increased by $305,000 from $550,000 in 2003 to $855,000 in 2004. Other revenue increased in part from the recovery of funds from a member of management who was found to have fraudulently obtained expense reimbursements over a period of several years. The total amount of payments that the employee fraudulently obtained was $111,000. The employee was terminated and the Company demanded and received full restitution. The employee made restitution by transferring to the Company shares of the Company's common stock that the employee owned at the time he was terminated. Mortgage fee income decreased by $30,265,000, from $92,955,000 in 2003 to $62,690,000 in 2004. This decrease was primarily attributable to a decrease in the number of loan originations during 2004 due to an increase in interest rates resulting in fewer borrowers refinancing mortgage loans. Total benefits and expenses were $114,539,000 for 2004, which constituted 97.7% of the Company's total revenues, as compared to $135,580,000, or 93.5% of the Company's total revenues for 2003. During 2004, there was a net increase of $1,607,000 in death benefits, surrenders and other policy benefits, and in future policy benefits from $21,755,000 in 2003 to $23,362,000 in 2004. This net increase was the result of an increase in reserves for policyholders offset by decreases in death benefits, and surrenders and other policy benefits. Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired decreased by $327,000, from $4,929,000 in 2003 to $4,602,000 in 2004. This decrease was primarily due to reduced amortization of deferred policy acquisition costs and cost of insurance acquired, which is in line with actuarial assumptions. General and administrative expenses decreased by $20,829,000, from $102,926,000 in 2003 to $82,097,000 in 2004. Contributing to this decrease was an $18,846,000 decrease in commission expenses, from $67,537,000 in 2003 to $48,691,000 in 2004 due to fewer mortgage loan originations made by SecurityNational Mortgage Company during 2004. Salaries increased $312,000, from $14,080,000 in 2003 to $14,392,000 in 2004 primarily due to merit increases. Other expenses decreased $2,295,000, from $21,310,000 in 2003 to $19,015,000 in 2004. These decreases were primarily the result of reduced expenses due to fewer mortgage loan originations made by SecurityNational Mortgage Company during 2004. Interest expense decreased by $1,468,000, from $3,642,000 in 2003 to $2,174,000 in 2004. This decrease was primarily due to reduced warehouse lines of credit required for fewer mortgage loan originations by SecurityNational Mortgage Company during 2004. 2003 Compared to 2002 Total revenues increased by $49,282,000, or 50.5%, from $95,763,000 for fiscal year 2002 to $145,045,000 for fiscal year 2003. Contributing to this increase in total revenues was a $35,947,000 increase in mortgage fee income, a $4,763,000 increase in net investment income, and a $9,218,000 increase in insurance premiums and other considerations. Insurance premiums and other considerations increased by $9,218,000, from $14,077,000 in 2002 to $23,295,000 in 2003. This increase was primarily due to the additional premiums from policies acquired in the asset purchase transaction with Acadian Life. Net investment income increased by $4,763,000, from $12,540,000 in 2002 to $17,303,000 in 2003. This increase was primarily attributable to the additional investment income from the assets acquired in the asset purchase transaction with Acadian Life. Net mortuary and cemetery sales increased by $306,000, from $10,638,000 in 2002 to $10,944,000 in 2003. This increase was primarily due to additional at-need cemetery and mortuary sales. Realized gains on investments and other assets decreased by $1,023,000, from a gain of $1,021,000 in 2002 to a loss of $2,000 in 2003. The realized gains on investment and other assets in 2002 was primarily from the sale of property at Lake Hills Cemetery. Mortgage fee income increased by $35,947,000, from $57,008,000 in 2002 to $92,955,000 in 2003. This increase was primarily attributable to a greater number of loan originations during 2003 due to the opening of new offices and to lower interest rates resulting in additional borrowers refinancing their mortgage loans. Total benefits and expenses were $135,580,000 for 2003, which constituted 93.5% of the Company's total revenues, as compared to $90,224,000, or 94.2% of the Company's total revenues for 2002. During 2003, there was a net increase of $7,999,000 in death benefits, surrenders and other policy benefits, and in future policy benefits from $13,756,000 in 2002 to $21,755,000 in 2003. This net increase was primarily due to the additional death benefits, surrenders and other policy benefits acquired from the additional policies acquired in the asset purchase transaction with Acadian Life. Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired increased by $935,000, from $3,994,000 in 2002 to $4,929,000 in 2003. This increase was primarily due to the additional amortization of deferred policy acquisition costs and cost of insurance acquired from the additional policies acquired in the asset purchase transaction with Acadian Life. General and administrative expenses increased by $34,467,000, from $68,459,000 in 2002 to $102,926,000 in 2003. Contributing to this increase was a $25,422,000 increase in commission expenses, from $42,114,000 in 2002 to $67,537,000 in 2003. Salaries increased $3,666,000, from $10,414,000 in 2002 to $14,080,000 in 2003. Other expenses increased $5,379,000, from $15,931,000 in 2002 to $21,310,000 in 2003. These increases were primarily the result of additional expenses due to increased numbers of loan originations made by the Company's mortgage subsidiary in 2003 and to additional expenses associated with the asset purchase transaction with Acadian Life. Interest expense increased by $1,672,000, from $1,970,000 in 2002 to $3,642,000 in 2003. This increase was primarily due to additional warehouse lines of credit required from the additional mortgage loan originations by the Company's mortgage subsidiary, SecurityNational Mortgage Company, and bank borrowings for the asset purchase transaction with Acadian Life. Cost of the mortuary and cemetery goods and services sold increased by $282,000, from $2,045,000 in 2002 to $2,327,000 in 2003. This increase was primarily due to increased at-need cemetery and mortuary sales. 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 the warehousing of 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 $81,051,000 as of December 31, 2004 compared to $51,564,000 as of December 31, 2003. This represents 62% of the total insurance related investments in 2004 as compared to 48% in 2003. 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, 2004, 2% ($1,659,000) and at December 31, 2003, 3% ($1,739,000) 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 $149,469,000) 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) $18,169 $10,620 $(12,346) $(26,842) 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, 2004 and 2003, the life subsidiaries exceeded the regulatory criteria. The Company's total capitalization of stockholders' equity and bank debt and notes payable was $54,995,000 and $57,039,000 as of December 31, 2004 and 2003, respectively. Stockholders' equity as a percent of total capitalization was 76% and 69% as of December 31, 2004 and 2003, respectively. Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2004 was 9.0%, as compared to a rate of 8.6% in 2003. On December 17, 1998, the Company completed the acquisition of Consolidare Enterprises, Inc., a Florida corporation ("Consolidare") pursuant to the terms of the Acquisition Agreement, which the Company entered into on April 17, 1998, with Consolidare and certain shareholders of Consolidare for the purchase of all of the outstanding shares of common stock of Consolidare. Consolidare owns approximately 77% of the outstanding shares of common stock of Southern Security Life Insurance Company, a Florida corporation ("SSLIC"). The Company also acquired all of the outstanding shares of stock of Insuradyne Corp., a Florida corporation ("Insuradyne"). As consideration for the purchase of the shares of Consolidare, the Company paid to the stockholders of Consolidare at closing an aggregate of $12,248,194. In order to pay the purchase consideration, the Company obtained $6,250,000 from bank financing, with the balance of $5,998,194 obtained from funds then currently held by the Company. In addition to the purchase consideration, the Company caused SSLIC to pay, on the closing date, $1,050,000 to George Pihakis, the President and Chief Executive Officer of SSLIC prior to closing, as a lump sum settlement of the executive compensation agreement between SSLIC and Mr. Pihakis. The Company entered into an Administrative Services Agreement dated December 17, 1998 with SSLIC. Under the terms of the agreement, the Company 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 will pay the Company an administrative services fee of $250,000 per month, or $3,000,000 on an annual basis, which may be increased, beginning on January 1, 2001, to reflect increases in the Consumer Price Index over the index amount as of January 1, 2000. However, such fee is to 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 Company has not made any increases in the amount of the Administrative Services Fee to reflect increases in the Consumer Price Index. The Administrative Services Agreement is to remain in effect for an initial term expiring on December 16, 2003. The term of the agreement was automatically extended for an additional one-year term expiring December 16, 2004. 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. Neither the Company nor SSLIC provided written notice prior to September 30, 2004, stating a desire not to extend the term of the agreement. As a result, the agreement will be extended for an additional one-year term ending December 31, 2005. Effective as of January 1, 2005, Security National Life and SSLIC Holding Company, a wholly owned subsidiary of Security National Life, completed a merger transaction with Southern Security Life Insurance Company. Under the terms of the merger and pursuant to the Agreement and Plan of Reorganization, dated August 25, 2004, including the amendment thereto dated December 27, 2004, SSLIC Holding Company was merged with and into Southern Security Life Insurance Company, which resulted in (i) Southern Security Life Insurance Company becoming a wholly-owned subsidiary of Security National Life Insurance Company, and (ii) the unaffiliated stockholders of Southern Security Life Insurance Company, holding an aggregate of 490,816 shares of common stock, becoming entitled to receive $3.84 in cash for each issued and outstanding share of their common stock of Southern Security Life Insurance Company, or an aggregate of $1,884,733. As a result of the merger, the separate existence of SSLIC Holding Company ceased as Southern Security Life Insurance Company became the surviving corporation of the merger. Southern Security Life Insurance Company continues to be governed by the laws of the State of Florida, and its separate corporate existence continues unaffected by the merger. In addition, as a result of the merger, Security National Life owns all of the issued and outstanding common shares of Southern Security Life Insurance Company. Security National Financial Corporation, through its affiliates, Security National Life Insurance Company and SSLIC Holding Company, owned 76.7% of the Company's outstanding common shares prior to the merger. The purpose of the merger is to terminate the registration of the common stock of Southern Security Life Insurance Company under the Securities Exchange Act of 1934 (by reducing the number of its stockholders of record to fewer than 300 stockholders) and the Nasdaq listing of the common stock, reduce expenses associated with such registration and listing, and provide the stockholders an opportunity to sell their shares in an illiquid trading market without incurring brokerage commissions. As a result of becoming a non-reporting company, Southern Security Life Insurance Company is no longer required to file periodic reports with the SEC, including among other things, annual reports on Form 10-K and quarterly reports on Form 10-Q, and is no longer subject to the SEC's proxy rules. In addition, its common stock is no longer eligible for trading on the Nasdaq SmallCap Market. 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 on June 6, 2001, which, at that time, consisted of all of the insurance policies of Gulf National Life Insurance Company 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, following Acadian's recapture of the insurance in force from its reinsurer Scottish Re (U.S.) Inc. on September 30, 2002. The coinsurance agreement further provides that Acadian is 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. On January 1, 2003, 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. On March 16, 2004, Security National Life purchased all of the outstanding common stock of Paramount Security Life Insurance Company, now known as Security National Life of Louisiana, a Louisiana domiciled insurance company located in Shreveport, Louisiana. As of December 31, 2003, Security National Life of Louisiana had 9,383 policies in force and 29 agents. There were no material changes in the number of policies in force or the number of agents between December 31, 2003 and March 16, 2004. The purchase consideration was $4,398,000 and was effective January 26, 2004. Security National Life of Louisiana is licensed in the State of Louisiana where it is permitted to appoint agents who do not have a full life insurance license. These agents are limited to selling small life insurance policies in the final expense market. The Company believes that with this license it will be able to expand its operations in Louisiana. The Company is servicing Security National Life of Louisiana policyholders out of its Jackson, Mississippi office and has closed its Shreveport office. At December 31, 2004, $27,208,316 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's insurance subsidiaries. The life insurance subsidiaries need to comply with applicable state regulations before a dividend can be paid to their parent company. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. The Company desires to take advantage of the "safe harbor" provisions of the act. Forward-Looking Statements This Annual Report of Form 10-K contains forward-looking statements, together with related data and projections, about the Company's projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management's then-current expectations. The business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate. Factors that may cause the Company's actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include among others, the following possibilities: (i) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; (ii) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products; (iii) fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investment; (iv) failure to obtain new customer, retain existing customers or reductions in policies in force by existing customers; (v) higher service, administrative, or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (vi) loss or retirement of key executives or employees; (vii) increases in medical costs; (viii) changes in the Company's liquidity due to changes in asset and liability matching; (ix) restrictions on insurance underwriting based on genetic testing and other criteria; (x) adverse changes in the ratings obtained by independent rating agencies; (xi) failure to maintain adequate reinsurance; (xii) possible claims relating to sales practices for insurance products and claim denials and (xiii) adverse trends in mortality and morbidity. Off-Balance Sheet Agreements The Company's off-balance sheet arrangements consist of operating leases for rental of office space and equipment. The Company leases office space and equipment under various non-cancelable agreements, with remaining terms up to five years. Minimum lease payments under these non-cancelable operating leases as of December 31, 2004, are approximately as follows: Years Ending December 31: ------------------------- 2005 $ 588,000 2006 381,000 2007 97,000 2008 90,000 2009 49,000 ---------- Total $1,205,000 Total rent expense related to these non-cancelable operating leases for the years ended December 31, 2004, 2003 and 2002 was approximately $734,000, $396,000 and $200,000, respectively. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after September 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance may have been accounted for as equity, must now be accounted for as liabilities (or an asset in some circumstances). The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. This Statement is effective for all such financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company entered into an agreement with a stockholder in August 2003, in which it purchased 124,000 shares of Class A Common Stock from this stockholder for $6.00 per share. The purchase of these shares is reflected in treasury stock. Also, under the terms of this agreement, the stockholder has agreed not to purchase or control, directly or indirectly, any additional shares of Class A or Class C Common Stock through August 2007, and on August 27, 2004, 2005, and 2006, the stockholder may request, but is not obligated to request, the Company to purchase an additional 100,000 shares of Class A Common Stock held by this stockholder for $6.00 per share. On October 26, 2004, the Company completed the stock purchase agreement, when the Company purchased the remaining amount of 51,929 shares, thus under the agreement the Company will not be required to purchase any additional shares. Effective December 31, 2003, the Company adopted EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides guidance on the disclosure requirements for other-than-temporary Impairments of debt and marketable equity investments that are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of EITF 03-1 requires the Company to include certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The adoption of EITF 03-1 did not have a material impact on the Company's financial position or results of operations. In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or receivable under certain reinsurance arrangements, and (ii) a debt instrument that incorporates credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the balance sheet and changes in fair value reported in income. Issue B36 became effective on October 1, 2003. The adoption of Issue No. B36 did not have a material impact on the Company's financial position or results of operations. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51", and subsequently issued a revision to this Interpretation in December 2003. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies to those variable interest entities considered to be special-purpose entities no later than December 31, 2003. The Interpretation must also be applied to all other variable interest entities no later March 31, 2004. Interpretation No. 46 did not have a material impact on the Company's financial position or results of operations. In December 2004, FASB revised SFAS 123 to Share-Based Payment ("SFAS 123(R)"). SFAS 123(R) provides additional guidance on determining whether certain financial instruments awarded in share-based payment transactions are liabilities. SFAS 123(R) also requires that the cost of all share-based transactions be recorded in the financial statements. The revised pronouncement must be adopted by the Company by July 1, 2005. Implementation of SFAS 123(R) will not have a significant impact on the Company's consolidated financial statements in the period of implementation. However, any future stock options granted could have a significant impact on the Company's consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company has no activities in derivative financial or commodity instruments other than those recorded and disclosed in the financial statements. See note 17 of the consolidated financial statements included elsewhere in this Form 10K. The Company's exposure to market risks (i.e., interest rate risk, foreign currency exchange rate risk and equity price risk) through other financial instruments, including cash equivalents, accounts receivable and lines of credit, is not material.
Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES Page No. Financial Statements: Report of Independent Registered Public Accounting Firm............36 Consolidated Balance Sheet, December 31, 2004 and 2003......................................................37 Consolidated Statement of Earnings, Years Ended December 31, 2004, 2003, and 2002......................39 Consolidated Statement of Stockholders' Equity, Years Ended December 31, 2004, 2003 and 2002. .........................................................40 Consolidated Statement of Cash Flows, Years Ended December 31, 2004, 2003 and 2002.......................41 Notes to Consolidated Financial Statements.........................43 Financial Statement Schedules: I. Summary of Investments -- Other than Investments in Related Parties...................................83 II. Condensed Financial Information of Registrant....................85 IV. Reinsurance......................................................91 V. Valuation and Qualifying Accounts................................92
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 REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004 and 2003, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security National Financial Corporation and subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for the three years in the period ended December 31, 2004, 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 LC Salt Lake City, Utah March 31, 2005
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet December 31, Assets: 2004 2003 - ------- ---- ---- Insurance-related investments: Fixed maturity securities held to maturity, at amortized cost (market $72,330,878 and $38,624,978 for 2004 and 2003) $ 69,984,761 $ 37,293,989 Fixed maturity securities available for sale, at market (cost $10,486,309 in 2004 and $13,214,057 in 2003) 11,066,025 14,270,037 Equity securities available for sale, at market (cost $2,037,249 and $1,981,461 for 2004 and 2003) 4,166,769 3,453,444 Mortgage loans on real estate and construction loans, net of allowances for losses of $254,893 and $14,893 for 2004 and 2003 65,831,586 29,914,745 Real estate, net of accumulated depreciation and allowances for losses of $4,408,030 and $4,059,934 for 2004 and 2003 9,709,129 8,519,680 Policy, student and other loans 13,312,471 11,753,617 Short-term investments 4,628,999 2,054,248 ------------ ------------ Total insurance-related investments 178,699,740 107,259,760 ------------ ------------ Restricted assets of cemeteries and mortuaries 5,176,463 4,745,709 ------------ ------------ Cash 15,333,668 19,704,358 ------------ ------------ Receivables: Trade contracts 5,333,891 5,173,964 Mortgage loans sold to investors 47,167,150 114,788,185 Receivable from agents 1,416,211 1,318,958 Receivable from officers 1,540 37,540 Other 1,120,157 1,086,523 ------------ ------------ Total receivables 55,038,949 122,405,170 Allowance for doubtful accounts (1,302,368) (1,706,678) ------------ ------------ Net receivables 53,736,581 120,698,492 ------------ ------------ Policyholder accounts on deposit with reinsurer 6,689,422 6,795,983 Cemetery land and improvements held for sale 8,547,764 8,387,061 Accrued investment income 1,743,721 1,142,690 Deferred policy and pre-need contract acquisition costs 20,181,818 17,202,489 Property and equipment, net 10,520,665 11,009,416 Cost of insurance acquired 14,053,497 14,980,763 Excess of cost over net assets of acquired subsidiaries 683,191 683,191 Other 1,107,230 873,424 ------------ ------------ Total assets $316,473,760 $313,483,336 ============ ============
See accompanying notes to consolidated financial statements. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet (Continued) December 31, 2004 2003 ---- ---- Liabilities: - ------------ Future life, annuity, and other policy benefits $224,529,539 $218,793,693 Unearned premium reserve 2,254,991 1,945,203 Bank loans payable 10,442,106 14,422,670 Notes and contracts payable 2,888,539 3,440,694 Deferred pre-need cemetery and funeral contract revenues 10,762,357 10,520,280 Accounts payable 1,064,269 1,274,183 Funds held under reinsurance treaties 1,184,463 1,294,589 Other liabilities and accrued expenses 6,371,343 7,745,120 Income taxes 11,497,967 10,914,845 ------------ ------------ Total liabilities 270,995,574 270,351,277 ------------ ------------ Commitments and contingencies -- -- ------------ ------------ Minority interest 3,813,346 3,956,628 ------------ ------------ Stockholders' Equity: Common stock: Class A: $2 par value, authorized 10,000,000 shares, issued 6,755,870 shares in 2004 and 6,275,104 shares in 2003 13,511,740 12,550,208 Class C: convertible, $0.20 par value, authorized 7,500,000 shares, issued 6,468,199 shares in 2004 and 6,469,638 shares in 2003 1,293,641 1,293,927 ------------ ------------ Total common stock 14,805,381 13,844,135 Additional paid-in capital 14,922,851 13,569,582 Accumulated other comprehensive (loss) and other items, net of deferred taxes of $445,761 and $274,091 for 2004 and 2003, respectively (11,352) (437,973) Retained earnings 15,365,259 15,414,681 Treasury stock at cost (1,315,075 Class A shares and 79,103 Class C shares in 2004; 1,276,518 Class A shares and 75,336 Class C shares in 2003, held by affiliated companies) (3,417,299) (3,214,994) ------------ ------------ Total stockholders' equity 41,664,840 39,175,431 ------------ ------------ Total liabilities and stockholders' equity $316,473,760 $313,483,336 ============ ============ See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Earnings Years Ended December 31, ------------------------ 2004 2003 2002 ---- ---- ---- Revenues: Insurance premiums and other considerations $ 25,979,341 $ 23,294,373 $14,076,652 Net investment income 15,939,176 17,302,597 12,539,430 Net mortuary and cemetery sales 11,661,053 10,944,365 10,638,754 Realized gains (losses) on investments and other assets 74,431 (2,155) 1,020,820 Mortgage fee income 62,689,391 92,955,165 57,008,283 Other 854,425 550,064 479,424 ------------ ------------ ----------- Total revenue 117,197,817 145,044,409 95,763,363 ------------ ------------ ----------- Benefits and expenses: Death benefits 13,248,960 13,315,266 5,637,217 Surrenders and other policy benefits 1,291,621 1,726,275 2,086,829 Increase in future policy benefits 8,821,497 6,712,961 6,031,685 Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired 4,602,072 4,929,006 3,993,393 General and administrative expenses: Commissions 48,690,807 67,536,703 42,114,240 Salaries 14,391,958 14,079,908 10,414,392 Other 19,014,776 21,309,897 15,930,804 Interest expense 2,173,778 3,642,046 1,970,342 Cost of goods and services sold of the mortuaries and cemeteries 2,303,821 2,327,475 2,045,476 ------------ ------------ ----------- Total benefits and expenses 114,539,290 135,579,537 90,224,378 ------------ ------------ ----------- Earnings before income taxes 2,658,527 9,464,872 5,538,985 Income tax expense (651,536) (2,890,669) (1,565,393) Minority interest 115,281 22,294 17,688 ------------ ------------ ----------- Net earnings $ 2,122,272 $ 6,596,497 $ 3,991,280 ============ ============ =========== Net earnings per common share (1) $.35 $1.13 $.72 ==== ===== ==== Weighted average outstanding common shares (1) 6,001,861 5,851,814 5,572,783 Net earnings per common share assuming dilution (1) $.34 $1.10 $.69 ==== ===== ==== Weighted average outstanding common shares assuming dilution (1) 6,217,951 6,003,773 5,744,154
See accompanying notes to consolidated financial statements. (1) Earnings per share amounts have been adjusted for the effect of annual stock dividends.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Accumulated Other Additional Comprehensive Class Class Paid-in Income (loss), Retained Treasury A C Capital and Other Items Earnings Stock Total -------- ------- --------- --------------- -------- ----- ----- Balance as of January 1, 2002 $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 losses -- -- -- (32,067) -- -- (32,067) ---------- Total comprehensive income -- -- -- -- -- -- 3,959,213 ---------- Stock dividends 552,024 58,883 690,316 -- (1,301,223) -- -- Conversion Class C to Class A 45,036 (45,036) -- -- -- -- -- Exercise of stock options 264,742 -- 422,003 -- (686,745) -- -- Sale of treasury stock -- -- -- -- -- 584,880 584,880 ----------- ---------- ----------- ----------- ------------ ----------- ----------- Balance at December 31, 2002 $11,588,984 $1,236,533 $11,280,842 $1,191,863 $11,992,542 $(2,777,353) $34,513,411 ----------- ---------- ----------- ---------- ----------- ----------- ----------- Comprehensive income: Net earnings $ -- $ -- $ -- $ -- $ 6,596,497 $ -- $ 6,596,497 Unrealized gains -- -- -- 352,784 -- -- 352,784 ----------- Total comprehensive income -- -- -- -- -- -- 6,949,281 ----------- Acquisition of Company Stock held in escrow (see note 17) -- -- -- (1,982,620) -- -- (1,982,620) Stock dividends 603,549 61,617 1,529,240 -- (2,194,406) -- -- Conversion Class C to Class A 4,225 (4,223) (2) -- -- -- -- Exercise of stock options 353,450 -- 759,502 -- (979,952) -- 133,000 Purchase of treasury stock -- -- -- -- -- (437,641) (437,641) ----------- ----------- ----------- ---------- ----------- ----------- ----------- Balance at December 31, 2003 $12,550,208 $1,293,927 $13,569,582 $ (437,973) $15,414,681 $(3,214,994 $39,175,431 ----------- ----------- ----------- ---------- ----------- ----------- ----------- Comprehensive income: Net earnings $ -- $ -- $ -- $ -- $ 2,122,272 $ -- $ 2,122,272 Unrealized gain -- -- -- 426,621 -- -- 426,621 ----------- Total comprehensive income -- -- -- -- -- -- 2,548,893 ----------- Exercise of stock options 255,776 -- 775,801 -- (1,031,577) -- -- Purchase of Treasury stock -- -- -- -- -- (422,946) (422,946) Sale of Treasury stock -- -- 142,500 -- -- 220,641 363,141 Stock dividends 643,864 61,602 433,862 -- (1,139,328) -- -- Conversion Class C to Class A 61,892 (61,888) 1,106 -- (789) -- 321 ----------- ---------- ----------- ---------- ----------- ----------- ----------- Balance at December 31, 2004 $13,511,740 $1,293,641 $14,922,851 $ (11,352) $15,365,259 $(3,417,299) $41,664,840) =========== ========== =========== ========== =========== =========== ===========
See accompanying notes to consolidated financial statements
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flows Years Ended December 31, ------------------------ 2004 2003 2002 ---- ---- ---- Cash flows from operating activities: Net earnings $ 2,122,272 $ 6,596,497 $ 3,991,280 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Realized (gains) losses on investments and other assets (74,431) 2,155 (1,020,820) Depreciation 2,013,113 1,866,924 1,553,399 Provision for losses on real estate accounts and loans receivable (165,781) 225,072 (300,412) Amortization of premiums and discounts (2,489) 44,092 121,329 Provision for deferred income taxes 636,430 2,862,343 970,139 Policy and pre-need acquisition costs deferred (6,051,793) (4,527,546) (4,462,624) Policy and pre-need acquisition costs amortized 3,370,763 3,611,674 3,214,710 Cost of insurance acquired amortized 1,231,308 1,317,332 778,683 Change in assets and liabilities net of effects from purchases and disposals of subsidiaries: Land and improvements held for sale (160,703) 42,154 626,688 Future life and other benefits 9,000,715 7,426,761 5,349,152 Receivables for mortgage loans sold 67,621,035 (25,333,080) (38,760,032) Other operating assets and liabilities (2,624,510) 3,402,371 975,682 ----------- ----------- ----------- Net cash provided by (used in) operating activities 76,915,929 (2,463,251) (26,962,826) ----------- ----------- ----------- Cash flows from investing activities: Securities held to maturity: Purchase - fixed maturity securities (37,371,166) (15,396,993) (4,147,878) Calls and maturities - fixed maturity securities 6,293,614 11,147,744 8,025,610 Securities available for sale: Purchases - equity securities (21,993) (51,921) (327,726) Sales - equity securities 2,675,301 3,860,000 3,303,095 Purchases of short-term investments (29,893,323) (19,065,874) (13,819,476) Sales of short-term investments 26,731,711 22,347,104 9,937,642 Purchases of restricted assets (262,195) 610,155 (56,899) Mortgage, policy, and other loans made (78,437,965) (30,192,467) (10,129,993) Payments received for mortgage, policy, and other loans 41,116,662 20,479,056 4,939,374 Purchases of property and equipment (1,241,898) (1,623,310) (1,348,752) Cash received on sale of property and equipment 149,040 -- -- Purchases of real estate (1,856,931) (1,807,658) (3,153,299) Cash paid for purchase of subsidiary (304,042) -- -- Sale of real estate 352,054 2,287,831 2,825,666 Cash received in assumed reinsurance transaction -- -- 55,827,793 ----------- ----------- ----------- Net cash (used in) provided by investing activities (72,071,131) (7,406,333) 51,875,157 ----------- ----------- -----------
See accompanying notes to the consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flows (Continued) Years Ended December 31, ------------------------ 2004 2003 2002 ---- ---- ---- Cash flows from financing activities: Annuity and pre-need contract receipts 5,387,393 5,785,310 7,635,422 Annuity and pre-need contract withdrawals (10,276,576) (10,410,247) (10,866,398) Repayment of bank loans and notes and contracts payable (4,401,500) (3,695,521) (1,824,440) Proceeds from borrowing on notes and contracts 135,000 -- -- Proceeds from borrowings on bank loans and notes and contracts payable -- -- 9,000,000 Stock options exercised -- 133,000 -- Purchase of Treasury stock (422,946) (437,641) -- Sale of treasury stock 363,141 -- 584,880 ----------- ------------ ------------ Net cash (used in) provided by financing activities (9,215,488) (8,625,099) 4,529,464 ----------- ------------ ------------ Net change in cash (4,370,690) (18,494,683) 29,441,795 ----------- ------------ ------------ Cash at beginning of year 19,704,358 38,199,041 8,757,246 ----------- ------------ ------------ Cash at end of year $15,333,668 $19,704,358 $38,199,041 =========== ============ ============
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: Future life, annuity and other policy benefits $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 =========== The following information shows the non-cash items in connection with the purchase of Security National Life Insurance Company of Louisiana on March 16, 2004: Liabilities assumed: Future life, annuity and other policy benefits $ 1,865,038 Less non-cash items Cost of insurance acquired (304,042) Bonds received (1,537,801) Common stock received (326,325) Mortgage loans received (471,593) Real estate received (32,668) Policy loans received (28,180) Short-term investments 586,601 Receivables (13,589) Accrued investment income (24,983) Property, plant and equipment (16,500) ----------- Cash paid $ (304,042) =========== See accompanying notes to the consolidated financial statements. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 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 four mortuaries in Arizona. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction, existing homes and real estate projects primarily in Arizona, California, Colorado, Florida, Nevada, Texas and Utah. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles which, for the life insurance subsidiaries, differ from statutory accounting principles prescribed or permitted by regulatory authorities. Certain amounts in prior years have been reclassified to conform with the 2004 presentation. 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, mortgagors of mortgage loans on real estate and obligors on construction loans, 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, 2004, 2003, and 2002 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 consolidated 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, construction loans and other receivables, 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, 2004, are as follows: Security National Life Insurance Company SecurityNational Mortgage Company Memorial Estates, Inc. Memorial Mortuary Paradise Chapel Funeral Home California Memorial Estates Cottonwood Mortuary, Inc. Deseret Memorial, Inc. Holladay Cottonwood Memorial Foundation Holladay Memorial Park, Inc. Sunset Funeral Home, Inc. Greer-Wilson Funeral Home SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) Crystal Rose Funeral Home Hawaiian Land Holdings SSLIC Holding Company Insuradyne Corporation Southern Security Life Insurance Company (77%) Security National Life Insurance Company of Louisiana (formerly Paramount Security Life Insurance Company) Security National Capital, Inc. Security National Funding 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., and Insuradyne Corporation for a total cost of $12,248,194. As of December 31, 2004, Security National Life and its wholly owned subsidiary, SSLIC Holding, owned approximately 77% of the outstanding shares of common stock of Southern Security Life Insurance Company. The acquisition was accounted for using the purchase method. Effective as of January 1, 2005, Security National Life and SSLIC Holding Company, a wholly owned subsidiary of Security National Life, completed a merger transaction with Southern Security Life Insurance Company. Under the terms of the merger and pursuant to the Agreement and Plan of Reorganization, dated August 25, 2004, among Security National Life, SSLIC Holding Company and Southern Security Life Insurance Company, including the amendment thereto dated December 27, 2004, SSLIC Holding Company was merged with and into Southern Security Life Insurance Company, which resulted in (i) Southern Security Life Insurance Company becoming a wholly-owned subsidiary of Security National Life Insurance Company, and (ii) the unaffiliated stockholders of Southern Security Life Insurance Company, holding an aggregate of 490,816 shares of common stock, becoming entitled to receive $3.84 in cash for each issued and outstanding share of their common stock of Southern Security Life Insurance Company, or an aggregate of $1,884,733. As a result of the merger, the separate existence of SSLIC Holding Company ceased as Southern Security Life Insurance Company became the surviving corporation of the merger. Southern Security Life Insurance Company continues to be governed by the laws of the State of Florida, and its separate corporate existence continues unaffected by the merger. In addition, as a result of the merger, Security National Life owns all of the issued and outstanding common shares of Southern Security Life Insurance Company. Security National Financial Corporation, through its affiliates, Security National Life Insurance Company and SSLIC Holding Company, owned 76.7% of the Company's outstanding common shares prior to the merger. The purpose of the merger is to terminate the registration of the common stock of Southern Security Life Insurance Company under the Securities Exchange Act of 1934 (by reducing the number of its stockholders of record to fewer than 300 stockholders) and the Nasdaq listing of the common stock, reduce expenses associated with such registration and listing, and provide the stockholders an opportunity to sell their shares in an illiquid trading market without incurring brokerage commissions. As a result of becoming a non-reporting company, Southern Security Life Insurance Company is no longer required to file periodic reports with the SEC, including among other things, annual reports on Form 10-K and quarterly reports on Form 10-Q, and is no longer subject to the SEC's proxy rules. In addition, its common stock is no longer eligible for trading on the Nasdaq SmallCap Market. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) 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 Life entered into an assumption agreement in which Acadian transferred and assigned to Security National Life all of its right, title and interest in the reinsured policies and Security National Life took over the operations of this block of business. The assets and liabilities acquired have been included in the Company's consolidated balance sheet as of December 31, 2002. Since the Company did not take over the operations from Acadian until January 1, 2003, nothing was included in the consolidated statement of earnings during 2002. On March 16, 2004, Security National Life purchased all of the outstanding common stock of Paramount Security Life Insurance Company, now known as Security National Life of Louisiana, a Louisiana domiciled insurance company located in Shreveport, Louisiana. As of December 31, 2003, Security National Life of Louisiana had 9,383 policies in force and 29 agents. There were no material changes to the number of policies in force or the number of agents between December 31, 2003 and March 16, 2004. The purchase consideration was $4,398,000 and was effective January 26, 2004. Security National Life of Louisiana is licensed in the State of Louisiana where it is permitted to appoint agents who do not have a full life insurance license. These agents are limited to selling small life insurance policies in the final expense market. The Company believes that with this license it will be able to expand its operations in Louisiana. The Company is servicing Security National Life of Louisiana policyholders out of its Jackson, Mississippi office and has closed its Shreveport office. Investments Investments are shown on the following basis: Fixed maturity securities held to maturity - at cost, adjusted for amortization of premium or accretion of discount. Although the Company has the ability and intent to hold these investments to maturity, infrequent and unusual conditions could occur under which it would sell certain of these securities. Those conditions include unforeseen changes in asset quality, significant changes in tax laws, and changes in regulatory capital requirements or permissible investments. Fixed maturity and equity securities available for sale - at fair value, which is based upon quoted trading prices. Changes in fair values net of income taxes are reported as unrealized appreciation or depreciation and recorded as an adjustment directly to stockholders' equity and, accordingly, have no effect on net income. Mortgage loans on real estate - at unpaid principal balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses. Real estate - at cost, less accumulated depreciation provided on a straight-line basis over the estimated useful lives of the properties, and net of allowance for impairment in value, if any. Policy, student, and other loans - at the aggregate unpaid balances, less allowances for possible losses. Short-term investments at cost - consists of certificates of deposit and commercial paper with maturities of up to one year. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) Restricted assets of cemeteries and mortuaries - consist of assets held in Trust Account for future mortuary services and merchandise and consist 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 statement 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 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 forty years. Leasehold improvements are amortized over the lesser of the useful life or remaining lease terms. Recognition of Insurance Premiums and Other Considerations Premiums for traditional life insurance products (which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, limited-payment life insurance policies, and certain annuities with life contingencies) are recognized as revenues when due from policyholders. Revenues for interest-sensitive insurance policies (which include universal life policies, interest-sensitive life policies, deferred annuities, and annuities without life contingencies) consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the period. Deferred Policy Acquisition Costs and Cost of Insurance Acquired Commissions and other costs, net of commission and expense allowances for reinsurance ceded, that vary with and are primarily related to the production of new insurance business have been deferred. Deferred policy acquisition costs for traditional life insurance are amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For interest-sensitive insurance products, deferred policy acquisition costs are amortized generally in proportion to the present value of expected gross profits from surrender charges, investment, mortality and expense margins. This amortization is adjusted when estimates of current or future gross profits to be realized from a group of products are reevaluated. Deferred acquisition costs are written off when policies lapse or are surrendered. Cost of insurance acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred policy acquisition costs. Allowance for Doubtful Accounts The Company accrues an estimate of potential losses for the collection of receivables. The significant receivables are the result of receivables due on mortgage loans sold to investors, cemetery and mortuary operations, mortgage loan operations and other receivables. The allowance is based upon the Company's experience. The critical issues that would impact recovery of the cemetery and mortuary receivables is the overall economy. The critical issues that would impact recovery of mortgage loan operations would be interest rate risk and loan underwriting. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) Future Life, Annuity and Other Policy Benefits Future policy benefit reserves for traditional life insurance are computed using a net level method, including assumptions as to investment yields, mortality, morbidity, withdrawals, and other assumptions based on the life insurance subsidiaries experience, modified as necessary to give effect to anticipated trends and to include provisions for possible unfavorable deviations. Such liabilities are, for some plans, graded to equal statutory values or cash values at or prior to maturity. The range of assumed interest rates for all traditional life insurance policy reserves was 4.5% to 10%. Benefit reserves for traditional limited-payment life insurance policies include the deferred portion of the premiums received during the premium-paying period. Deferred premiums are recognized as income over the life of the policies. Policy benefit claims are charged to expense in the period the claims are incurred. Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 4% to 6.5%. Participating Insurance Participating business constitutes 2%, 2%, and 2% of insurance in force for 2004, 2003 and 2002, respectively. The provision for policyholders' dividends included in policyholder obligations is based on dividend scales anticipated by management. Amounts to be paid are determined by the Board of Directors. Reinsurance The Company follows the procedure of reinsuring risks in excess of $75,000 to provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. The Company remains liable for amounts ceded in the event the reinsurers are unable to meet their obligations. The Company has entered into coinsurance agreements with unaffiliated insurance companies under which the Company assumed 100% of the risk for certain life insurance policies and certain other policy-related liabilities of the insurance company. Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Expense allowances received in connection with reinsurance ceded are accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. Cemetery and Mortuary Operations Pre-need sales of funeral services and caskets - revenue and costs associated with the sales of pre-need funeral services and caskets are deferred until the services are performed or the caskets are delivered. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) Pre-need sales of cemetery internment rights (cemetery burial property) - revenue and costs associated with the sales of pre-need cemetery internment rights are recognized in accordance with the retail land sales provisions of Statement of Financial Accounting Standards No. 66, "Accounting for the Sales of Real Estate" (FAS No. 66). Under FAS 66, recognition of revenue and associated costs from constructed cemetery property must be deferred until a minimum percentage of the sales price has been collected. Revenues related to the pre-need sale of unconstructed cemetery property will be deferred until such property is constructed and meets the criteria of FAS No. 66 described above. Pre-need sales of cemetery merchandise (primarily markers and vaults) - revenue and costs associated with the sales of pre-need cemetery merchandise are deferred until the merchandise is delivered. Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees) - revenue and costs associated with the sales of pre-need cemetery services are deferred until the services are performed. Prearranged funeral and pre-need cemetery customer obtaining costs - costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of Statement of Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance Enterprises" (FAS No. 60). Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business, are deferred until the merchandise is delivered or services are performed. Revenues and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection reasonably assured and there are no significant obligations remaining. The Company, through its mortuary and cemetery operations, provides a guaranteed funeral arrangement wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential mortuary customer utilizes one of the Company's facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. However, management believes that given current inflation rates and related price increases of goods and services, the risk of exposure is minimal. Mortgage Operations Mortgage fee income consists of origination fees, processing fees and certain other income related to the sale of mortgages. For mortgages sold, mortgage fee income and related expenses are recognized at the time the loan meets the sales criteria for financial assets which are: (1) the transferred assets have been isolated from the Company and its creditors, (2) the transferee has the right to pledge or exchange the mortgage, and (3) the Company does not maintain effective control over the transferred mortgage. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) The majority of loans originated are sold to third party investors. The amounts sold to investors are shown on the balance sheet as mortgage loans sold to investors and are shown on the basis of the amount due from the investors, which includes fees. Any impairment to sold loans or possible loan losses are included in a separate provision for loan losses. The estimates are based upon historical experience and best estimate of future liabilities. At December 31, 2004 and 2003 the provision for loan losses was $1,432,000 and $1,919,000, respectively. The Company accrues an estimate of future losses on mortgage loans sold to third party investors. The Company may be required to reimburse third party investors for costs associated with early payoff of loans within the first year of duration and to repurchase loans in default within the first year. The estimates are based upon historical experience and best estimate of future liabilities. 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 evaluates annually or when changes in circumstances warrant the recoverability of the amounts recorded and if there is a decrease in value they are recognized in income. 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. Long-lived Assets Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset, and long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. 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 basic and diluted earnings per share. Basic earnings per share are computed by dividing net earnings by the weighted average number of common SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) shares outstanding during each year presented, after the effect of the assumed conversion of Class C Common Stock to Class A Common Stock, the acquisition of treasury stock, and the retroactive effect of stock dividends declared. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the year plus the incremental shares that would have been outstanding under certain deferred compensation plans. Stock Compensation 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 three fixed option plans (the "1993 Plan" the "2000 Plan", and the "2003 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 $1,090,458, $490,145 and $533,520 in 2004, 2003 and 2002, respectively. As a result, basic and diluted earnings per share would have been reduced by $.18 and $.08 in 2004 and 2003, respectively, and basic of $.10 and diluted of $.09 for the year 2002. The weighted average fair value of options granted in 2004 under the 2000 Plan and the 2003 Plan is estimated at $1.71 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 3.4%, and an expected life of five to ten years. The weighted average fair value of each option granted in 2003 under the 1993 Plan, and the 2000 Plan is estimated at $2.63 as of the grant date using the Black Scholes option-pricing model with the following assumptions: dividend yield of 5%, volatility of 73%, risk-free interest rate of 4%, and an expected life of two years. The weighted average fair value of options granted in 2002 under the 1993 Plan, and the 2000 Plan, is estimated at $2.88 as of the grant date using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 5%, volatility of 74%, risk-free interest rate of 3.8%, and an expected life of five to ten years. The 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 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. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after September 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's results of consolidated operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance may have been accounted for as equity, must now be accounted for as liabilities (or an asset in some circumstances). The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. This Statement is effective for all such financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company entered into an agreement with a stockholder in August 2003, wherein it purchased 124,000 shares of Class A Common Stock from this stockholder for $6.00 per share. The purchase of these shares is reflected in treasury stock. Also, under the terms of this agreement, the stockholder has agreed not to purchase or control, directly or indirectly, any additional shares of Class A or Class C Common Stock through August 2007, and on August 27, 2004, 2005, and 2006, the stockholder may request, but is not obligated to request, the Company to purchase an additional 100,000 shares of Class A Common Stock held by this stockholder for $6.00 per share. On October 26, 2004, the Company completed the stock purchase agreement when the Company purchased the remaining amount of 51,959 shares, thus under the agreement the Company will not be required to purchase any additional shares. Effective December 31, 2003, the Company adopted EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides guidance on the disclosure requirements for other-than-temporary Impairments of debt and marketable equity investments that are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of EITF 03-1 requires the Company to include certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The adoption of EITF 03-1 did not have a material impact on the Company's consolidated financial position or results of operations. In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or receivable under certain reinsurance arrangements, and (ii) a debt instrument that incorporates credit risk exposures that are unrelated or only partially related to the SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 1) Significant Accounting Principles (Continued) credit worthiness of the obligor include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the balance sheet and changes in fair value reported in income. Issue B36 became effective on October 1, 2003. The adoption of Issue No. B36 did not have a material impact on the Company's consolidated financial position or results of operations. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51", and subsequently issued a revision to this Interpretation in December 2003. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies to those variable interest entities considered to be special-purpose entities no later than December 31, 2003. The Interpretation must also be applied to all other variable interest entities no later March 31, 2004. Interpretation No. 46 did not have a material impact on the Company's consolidated financial position or results of operations. In December 2004, FASB revised SFAS 123 to Share-Based Payment ("SFAS 123(R)"). SFAS 123(R) provides additional guidance on determining whether certain financial instruments awarded in share-based payment transactions are liabilities. SFAS 123(R) also requires that the cost of all share-based transactions be recorded in the financial statements. The revised pronouncement must be adopted by the Company by July 1, 2005. Implementation of SFAS 123(R) will not have a significant impact on the Company's consolidated financial statements in the period of implementation. However, any future stock options granted could have a significant impact on the Company's consolidated financial statements. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 2) Investments The Company's investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2004 are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- --------- ---------- --------- December 31, 2004: Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $15,033,673 $ 194,811 $ (43,407) $15,185,077 Obligations of states and political subdivisions 492,290 30,274 (2,765) 519,799 Corporate securities including public utilities 50,572,235 2,261,608 (33,151) 52,800,692 Mortgage-backed securities 3,865,680 34,075 (115,578) 3,784,177 Redeemable preferred stock 20,883 20,250 -- 41,133 ----------- ---------- --------- ----------- Total fixed maturity securities held to maturity $69,984,761 $2,541,018 $(194,901) $72,330,878 =========== ========== ========= =========== Securities available for sale: Bonds U.S. Treasury securities and obligations of U.S. Government agencies $ 596,898 $59,626 $ -- $ 656,524 Corporate securities including public utilities 9,889,411 520,090 -- 10,409,501 Non-redeemable preferred stock 56,031 49,063 (3,431) 101,663 Common stock 1,981,218 2,564,992 (481,104) 4,065,106 ----------- ---------- --------- ----------- Total securities available for sale $12,523,558 $ 3,193,771 $ (484,535) $15,232,794 =========== ========== ========= ===========
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 2) Investments (Continued) The Company's investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2003, are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- --------- ---------- --------- December 31, 2003: Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S . Government agencies $ 3,080,471 $ 180,125 $ -- $ 3,260,596 Obligations of states and political subdivisions 261,360 25,091 (693) 285,758 Corporate securities including public utilities 30,289,401 1,176,618 (110,514) 31,355,505 Mortgage-backed securities 3,634,752 78,663 (28,654) 3,684,761 Redeemable preferred stock 28,005 17,400 (7,047) 38,358 ----------- ---------- --------- ----------- Total fixed maturity securities held to maturity $37,293,989 $1,477,897 $(146,908) $38,624,978 =========== ========== ========= =========== Securities available for sale: Bonds U.S. Treasury securities and obligations of U.S. Government agencies $ 595,177 $ 81,604 $ -- $ 676,781 Corporate securities including public utilities 12,618,880 974,376 -- 13,593,256 Non-redeemable preferred stock 56,030 42,688 (4,006) 94,712 Common stock 1,925,431 1,958,319 (525,018) 3,358,732 ----------- ---------- --------- ----------- Total securities available for sale $15,195,518 $3,056,987 $(529,024) $17,723,481 =========== ========== ========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 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, 2004, 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 2005 $ 1,687,683 $ 1,709,558 Due in 2006 through 2009 5,209,521 5,600,338 Due in 2010 through 2014 11,252,266 11,767,372 Due after 2014 43,538,491 44,989,369 Mortgage-backed securities 8,275,917 8,223,108 Redeemable preferred stock 20,883 41,133 ----------- ----------- Total held to maturity $69,984,761 $72,330,878 =========== =========== Amortized Estimated Fair Available for Sale: Cost Value ---------- -------------- Due in 2005 $ 4,014,336 $ 4,091,321 Due in 2006 through 2009 5,212,933 5,557,089 Due in 2010 through 2014 1,161,101 1,300,541 Due after 2014 97,939 117,074 Non-redeemable preferred stock 56,031 101,663 Common stock 1,981,218 4,065,106 ----------- ----------- Total available for sale $12,523,558 $15,232,794 =========== =========== SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 2) Investments (Continued) The Company's realized gains and losses in investments and other assets are summarized as follows: 2004 2003 2002 ---- ---- ---- Fixed maturity securities held to maturity: Gross realized gains $36,933 $ 3,549 $ 37,172 Gross realized losses (26,355) (5,665) (557) Securities available for sale: Gross realized gains 3,310 1 354 Gross realized losses (6,364) (40) (1,424) Other assets 66,907 -- 985,275 ------- ------- ---------- Total $74,431 $(2,155) $1,020,820 ======= ======= ========== 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 3.625% to 21%, maturity dates range from three months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction 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 76% of its mortgage loans in the state of Utah. The mortgage loans on real estate balances on the consolidated balance sheet are reflected net of an allowance for bad debt $254,893 and $14,893 at December 31, 2004 and 2003, respectively. There were no 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, 2004, other than investments issued or guaranteed by the United States Government. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 2) Investments (Continued) Major categories of net investment income are as follows: 2004 2003 2002 ---- ---- ---- Fixed maturity securities $ 4,438,808 $ 3,407,177 $ 3,228,042 Equity securities 67,120 54,481 53,889 Mortgage loans on real estate 3,403,110 1,931,358 1,350,882 Real estate 1,322,796 1,509,932 1,501,534 Policy loans 673,404 676,201 663,554 Short-term investments and other 7,276,009 10,918,563 6,691,657 ----------- ----------- ----------- Gross investment income 17,181,247 18,497,712 13,489,558 Investment expenses (1,242,071) (1,195,115) (950,128) ----------- ----------- ----------- Net investment income $15,939,176 $17,302,597 $12,539,430 =========== =========== =========== Net investment income includes net investment income earned by the restricted assets of the cemeteries and mortuaries of approximately $781,000, $848,000 and $924,000 for 2004, 2003, and 2002, 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 $9,710,534 at December 31, 2004 and $8,850,755 at December 31, 2003. 3) Cost of Insurance Acquired Information with regard to cost of insurance acquired is as follows: 2004 2003 2002 ---- ---- ---- Balance at beginning of year $14,980,763 $16,408,849 $ 8,081,223 ----------- ----------- ----------- Cost of insurance acquired 304,042 (110,754) 9,106,309 ----------- ----------- ----------- Imputed interest at 7% 1,016,199 1,098,636 857,153 Amortization (2,247,507) (2,415,968) (1,635,836) ----------- ----------- ----------- Net amortization charged to income (1,231,308) (1,317,332) (778,683) ----------- ----------- ----------- Balance at end of year $14,053,497 $14,980,763 $16,408,849 ============ =========== =========== Presuming no additional acquisitions, net amortization charged to income is expected to approximate $1,130,151, $1,031,605, $962,386, $899,312, and $860,501 for the years 2005 through 2009. 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, 2004, 2003, and 2002 4) Property and Equipment The cost of property and equipment is summarized below: December 31, 2004 2003 ---- ---- Land and buildings $11,310,114 $11,140,690 Furniture and equipment 11,066,917 10,288,299 ----------- ----------- 22,377,031 21,428,989 Less accumulated depreciation (11,856,366) (10,419,573) ----------- ----------- Total $10,520,665 $11,009,416 =========== =========== 5) Bank Loans Payable Bank loans payable are summarized as follows: December 31, 2004 2003 ---- ---- 6.59% note payable in monthly installments of $34,680 including principal and interest, collateralized by 15,000 shares of Security National Life stock, due December 2004. $ -- $ 391,363 6% note payable in monthly installments of $5,693 including principal and interest, collateralized by real property, with a book value of approximately $850,000, due September 2010. 633,596 662,944 6.93% note payable in monthly installments of $14,175 including principal and interest, collateralized by real property with a book value of approximately $860,000, due November 2007. 1,476,813 1,519,198 $1,153,572 in 2004 and $2,230,016 in 2003 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. 445,811 2,178,075 Bank prime rate plus 1/2% (5.75% at December 31, 2004) note payable in monthly installments of $7,235 including principal and interest, collateralized by real property, with a book value of approximately $678,000, due August 2004. -- 60,683 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 5) Bank Loans Payable (Continued) December 31, 2004 2003 ---- ---- Bank prime rate less 1.35% (3.90% at December 31, 2004) 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. $ 68,562 98,880 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. 333,145 482,394 5.87% note payable, interest only to July 1, 2003, thereafter, interest and monthly principal payments of $134,000, collateralized by 15,000 shares of Security National Life Insurance Company Stock, due January 2010. 7,206,641 8,413,993 Mark to market adjustment (see note 17) 36,810 303,029 Other collateralized bank loans payable 240,728 312,111 ---------- --------- Total bank loans 10,442,106 14,422,670 Less current installments 2,136,957 3,688,647 ------------ ----------- Bank loans, excluding current installments $ 8,305,149 $10,734,023 ============ =========== In addition to the lines of credit described above, the Company has line of credit agreements with a bank for $2,500,000, of which none were outstanding at December 31, 2004 or 2003. The lines of credit are for general operating purposes and bear interest at the bank's prime rate and must be repaid every 30 days. 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, 2004 2003 ---- ---- Unsecured note payable 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. $520,477 $545,921 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 6) Notes and Contracts Payable (Continued) December 31, 2004 2003 ---- ---- 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. 20,655 98,319 9% note payable in monthly installments of $10,000 including principal and interest, collateralized by real property, with a book value of approximately $2,908,000, due July 2008. 397,133 459,138 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, with a book value of approximately $780,000, due March 2030. 932,924 954,475 Unsecured note payable due to former shareholder of Southern Security Life Insurance Company resulting from the acquisition of such entity. 6.5% note payable in five annual installments with principal payments of $158,840, due April 2005. 158,840 317,680 Due to shareholder of Security National Financial Corporation, 6.0% note payable in annual installments of $100,000 including principal and interest, due July 2005, secured by Company stock held in escrow. 100,000 200,000 Due to shareholder of Security National Financial Corporation, 4.0% note payable in annual installments of $160,873 including principal and interest, due January 2006, secured by Company stock held in escrow 321,747 482,620 Other notes payable 436,763 382,541 ---------- ---------- Total notes and contracts payable 2,888,539 3,440,694 Less current installments 700,321 732,715 ---------- ---------- Notes and contracts, excluding current installments $2,188,218 $2,707,979 ========== ========== SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 6) Notes and Contracts Payable (Continued) The following tabulation shows the combined maturities of bank loans payable, lines of credit and notes and contracts payable: 2005 $ 2,837,278 2006 2,197,709 2007 1,825,997 2008 1,895,911 2009 1,874,575 Thereafter 2,699,175 ----------- Total $13,330,645 =========== Interest paid approximated interest expense in 2004, 2003 and 2002. 7) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds The Company owns and operates several endowment care cemeteries, for which it has established and maintains an endowment care fund. The Company records a liability to the fund for each space sold at current statutory rates. As of December 31, 2003 the Company owed the fund $41,335 in excess of the required contribution to the fund, and as of December 31, 2004, the Company owed the fund $26,587, which is recorded in other liabilities. The Company has established and maintains certain restricted asset accounts to provide for future merchandise and service 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, 2004 2003 ---- ---- Cash and cash equivalents $ 776,997 $ 617,142 Mutual funds 273,258 188,732 Fixed maturity securities -- 108,554 Equity securities 86,555 77,778 Participation in mortgage loans with Security National Life 4,005,957 3,719,807 Time certificate of deposit 33,696 33,696 ---------- ---------- Total $5,176,463 $4,745,709 ========== ========== SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 8) Income Taxes The Company's income tax liability at December 31 is summarized as follows: December 31, 2004 2003 ---- ---- Current $ 18,585 $ 18,585 Deferred 11,479,382 10,896,260 ----------- ----------- Total $11,497,967 $10,914,845 =========== =========== Significant components of the Company's deferred tax (assets) and liabilities at December 31 are approximately as follows: December 31, 2004 2003 ---- ---- Assets Future policy benefits $(1,917,789) $(1,676,881) Unearned premium (1,524,191) (1,635,912) Difference between book and tax basis of bonds (73,964) (27,951) Other (337,038) (605,932) ----------- ----------- Total deferred tax assets (3,852,982) (3,946,676) ----------- ----------- Liabilities Deferred policy acquisition costs 5,056,822 4,889,696 Cost of insurance acquired 2,317,477 2,486,035 Installment sales 2,940,268 2,367,510 Depreciation 824,718 891,725 Trusts 1,155,566 1,054,323 Tax on unrealized appreciation 689,478 568,944 Reinsurance 2,084,117 1,974,996 Other 263,918 609,707 ----------- ----------- Total deferred tax liabilities 15,332,364 14,842,936 ----------- ----------- Net deferred tax liability $11,479,382 $10,896,260 =========== =========== The Company paid $126,894, $55,442 and $462,983 in income taxes for 2004, 2003 and 2002, respectively. The Company's income tax expense (benefit) is summarized as follows: 2004 2003 2002 ---- ---- ---- Current $ 15,106 $ 28,326 $ 595,254 Deferred 636,430 2,862,343 970,139 -------- ---------- ---------- Total $651,536 $2,890,669 $1,565,393 ======== ========== ========== 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, 2004, 2003, and 2002 8) Income Taxes (Continued) 2004 2003 2002 ---- ---- ---- Computed expense at statutory rate $903,899 $3,218,056 $1,883,255 Special deductions allowed small life insurance companies (243,873) (285,991) (315,923) Dividends received deduction (5,619) (5,611) (737) Minority interest taxes 47,376 13,469 7,429 Other, net (50,247) (49,254) (8,631) -------- ---------- ---------- Tax expense $651,536 $2,890,669 $1,565,393 ======== ========== ========== 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, 2004, the policyholders' surplus accounts approximated $4,500,000. Management does not intend to take actions nor does management expect any events to occur that would cause federal income taxes to become payable on that amount. However, if such taxes were accrued, the amount of taxes payable would be approximately $1,500,000. The Company has a net operating loss carry forward of approximately $3,024,000, as of December 31, 2004. These carry forward amounts begin expiring in ten years and range up to 20 years. 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 during the years 2004 and 2003. 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 $815,445,000 at December 31, 2004 and $940,050,000 at December 31, 2003. As part of the acquisition of Southern Security, the Company has a co-insurance agreement with The Mega Life and Health Insurance Company ("MEGA"). On December 31, 1992 Southern Security ceded to MEGA 18% of all universal life policies in force at that date. MEGA is entitled to 18% of all future premiums, claims, policyholder loans and surrenders relating to the ceded policies. In addition, Southern Security receives certain commission and expense reimbursement. Mortgage loans originated and sold to unaffiliated investors are sold subject to certain recourse provisions. On December 26, 2003, the Company entered into a partially Coinsurance and a partially Modified Coinsurance Agreement (CoModco Agreement) with Guaranty Income Life Insurance Company (Guaranty) effective September 30, 2003. The Company has reinsured 100% of certain blocks of Guaranty's traditional life, universal life and annuity businesses. The total liabilities reinsured for these blocks of businesses on October 1, 2003 were $60,527,887. The Company paid a ceding commission to Guaranty of $3,400,000 and will receive from Guaranty a risk charge of 1% of the outstanding Coinsurance per calendar quarter. Guaranty put into a bank trust investment grade bonds, which equal the outstanding liabilities assumed by the Company. The Company is named as a beneficiary of the trust and the terms of the trust are such that Guaranty will maintain investment grade bonds in the trust to equal the outstanding liabilities assumed by the Company. Under the CoModco Agreement the Coinsurance and the increase in reserves are equal. Under U. S. GAAP the Coinsurance and the reserve increases SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 9) Reinsurance, Commitments and Contingencies (Continued) are netted since these are non-cash items, and the Company expects to recapture the Coinsurance from future profits of the reinsured business. Guaranty has the right to recapture the business at any time after December 31, 2004 upon 90 days advance notice. As of December 31, 2004 and 2003, the outstanding Coinsurance amount was $2,545,763 and $3,345,765, respectively. The Company recorded as income the risk charge for the years ended December 31, 2004 and 2003, of $121,831 and $34,000, respectively. In the event that the Company believes it will not recover the Coinsurance it will have to record as an expense and a future liability for the amount of such impairment. Effective January 1, 2005, Guaranty recaptured the reinsurance under this agreement and the agreement was cancelled between the Company and Guaranty. The recapture did not result in recognition of a gain or loss in the consolidated financial statements. The Company leases office space and equipment under various non-cancelable agreements, with remaining terms up to five years. Minimum lease payments under these non-cancelable operating leases as of December 31, 2004, are approximately as follows: Years Ending December 31: 2005 $ 588,000 2006 381,000 2007 97,000 2008 90,000 2009 49,000 ---------- Total $1,205,000 ========== Total rent expense related to these non-cancelable operating leases for the years ended December 31, 2004, 2003 and 2002 was approximately $734,000, $396,000, and $200,000, respectively. An action was brought against the Company in May 2001 by Glenna Brown Thomas, individually and as personal representative of the Estate of Lynn W. Brown, in the Third Judicial Court, Salt Lake County, Utah. The action asserts that Memorial Estates, Inc. delivered to Lynn W. Brown six stock certificates totaling 2,000 shares of its common stock in 1970 and 1971. Mr. Brown died in 1972. It is also asserted that at the time the 2,000 shares were issued and outstanding, the shares represented a 2% ownership of Memorial Estates. It is further alleged that Mr. Brown was entitled to preemptive rights and, 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 of his right to purchase more stock. It is further asserted that Thomas has the right to the transfer of Brown's shares on the books of Security National Financial Corporation as well as Memorial Estates, and to the restoration of Brown's proportion of share ownership in Memorial Estates at the time of his death by issuance and delivery to Thomas of sufficient shares of the Company's publicly traded and unrestricted stock in exchange for the 2,000 shares of Memorial Estates stock, including payment of all dividends from the date of Thomas's demand. The formal discovery cutoff was January 15, 2004. The Company has been verbally informed that Thomas will dismiss the case but such dismissal has not been communicated in writing. Until the case is actually dismissed, the Company intends to vigorously defend the matter, including the assertion that the statute of limitations bars the claims in their entirety. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 9) Reinsurance, Commitments and Contingencies (Continued) The Company received a letter dated November 9, 2004 on behalf of Charles Hood, who worked at Singing Hills Memorial Park in El Cajon, California. He was hired in April 2003 as a groundskeeper with his work concluding on October 30, 2003. Mr. Hood claims that he wrote a letter to the Company outlining his concerns regarding the operation of the cemetery, and that the next day he was terminated. Even though he recognizes his relationship was as an at-will employee. Mr. Hood's claims against the Company also include, but are not limited to, violation of labor laws, whistleblower retaliation and inflection of emotional distress. The letter proposes a settlement in the amount of $275,000. No lawsuit has been filed in the matter. The Company has been engaged in a review of the claims made in the letter. Based on its investigation, the Company believes that Mr. Hood voluntarily quit and was not terminated. Counsel for the Company and counsel for Mr. Hood have been in discussion concerning the matter. At this stage of the investigation, the Company does not believe there is any justification for the claims being made. If a resolution of the dispute is not achieved and litigation ensues, the Company is prepared to vigorously defend the action. The Company also received a letter dated November 29, 2004 on behalf of Roger Gornichec, who the Company recognizes as having been an independent contractor. The attorney who wrote the letter on behalf of Mr. Hood also wrote the letter on behalf of Mr. Gornichec. Mr. Gornichec concluded his services as an agent selling insurance in the spring of 2003 and his license to sell cemetery plots was not renewed in the summer of 2004. Mr. Gornichec asserts that he was an employee contrary to the Company's position. The claims made on behalf of Mr. Gornichec include, but are not limited to, wrongful termination in violation of public policy, misrepresentation, age discrimination, whistle-blower retaliation, interference with economic advantage, breach of contract, breach of the covenant of good faith and fair dealing, and infliction of emotional distress. Mr. Gornichec also claims that he is owed a certain amount from a retirement plan. The letter proposes a settlement in the amount of $420,000. Based on its investigation, the Company believes that Mr. Gornichec was an independent contractor, not an employee, and that the claims and the settlement amount sought are not justified. If the matter is not resolved and litigation ensues, the Company is prepared to vigorously defend the action. 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. Based on management's assessment and legal counsel's representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above claims in the consolidated financial statements. 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 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 10) Retirement Plans (Continued) employee's compensation to total compensation for all eligible employees during each year. ESOP contribution expense totaled $105,196, $98,588, and $99,612 for 2004, 2003, and 2002, respectively. At December 31, 2004 the ESOP held 577,183 shares of Class A and 1,553,041 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 1% 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 2004, 2003, and 2002 were $5,746, $4,493, and $7,975, 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 2004, 2003 and 2002 were $128,949, $110,081, and $142,218, 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 contributions for 2004, 2003 and 2002 were $123,249, $95,485, and $100,577, 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 annual installments (10 years) or in a lump sum settlement, if approved by the Board of Directors. The amount payable is $65,839 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 2004 and 2003, the Company increased its liability for these future obligations by $10,000 and $2,000, respectively. The current balance as of December 31, 2004 is $714,000. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 10) Retirement Plans (Continued) On July 16, 2004, the Company entered into an employment agreement with Scott M. Quist, its President and Chief Operating Officer. The agreement is effective as of December 4, 2003 and has a five-year term, but the Company has agreed to renew the agreement on December 4, 2008 and 2013 for additional five-year terms, provided Mr. Quist performs his duties with usual and customary care and diligence. 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. The Company also agrees to maintain a group term life insurance policy of not less than $1,000,000 on Mr. Quist's life and a whole life insurance policy in the amount of $500,000 on Mr. Quist's life. In the event of disability, Mr. Quist's salary would be continued for up to five years at 75% of its current level. In the event of a sale or merger of the Company and Mr. Quist is 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. The agreement further provides that Mr. Quist is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 65), (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of ten years in annual installments in the amount equal to 75% of his then current rate of compensation. However, in the event that Mr. Quist dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company expensed $31,500 and $328,000 in fiscal 2004 and 2003, respectively, to cover the present value of anticipated retirement benefits under the employment agreement. The liability accrued is $359,500 and $328,000 as of December 31, 2004 and 2003, respectively. On December 4, 2003, the Company, through its subsidiary SecurityNational Mortgage Company, entered into an employment agreement with J. Lynn Beckstead, Jr., Vice President of Mortgage Operations and President of SecurityNational Mortgage Company. The agreement has a five-year term, but the Company has agreed to renew the agreement on December 4, 2008 and 2013 for additional five-year terms, provided Mr. Beckstead performs his duties with usual and customary care and diligence. Under the terms of the agreement, Mr. Beckstead is to devote his full time to the Company serving as President of SecurityNational Mortgage Company at not less than his current salary and benefits, and to include $350,000 of life insurance protection. In the event of disability, Mr. Beckstead's salary would be continued for up to five years at 50% of its current level. In the event of a sale or merger of the Company, and Mr. Beckstead were not retained in his current position, the Company would be obligated to continue Mr. Beckstead's current compensation and benefits for five years following the merger or sale. The agreement further provides that Mr. Beckstead is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 62 1/2) (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of ten years in annual installments in the amount equal to one-half of his then current annual salary. However, in the event that Mr. Beckstead dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company expensed in 2004 and 2003 approximately $18,500 and $172,000, respectively, to cover the present value of the retirement benefit of the agreement. The liability accrued is $190,500 and $172,000, as of December 31, 2004 and 2003, respectively. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 11) Capital Stock The following table summarizes the activity in shares of capital stock for the three-year period ended December 31, 2004: Class A Class C Balance at January 1, 2002 5,363,591 6,113,430 Exercise of stock options 132,371 -- Stock Dividends 276,012 294,419 Conversion of Class C to Class A 22,518 (225,180) ---------- ---------- Balance at December 31, 2002 5,794,492 6,182,669 ---------- ---------- Exercise of stock options 176,725 -- Stock Dividends 301,774 308,086 Conversion of Class C to Class A 2,113 (21,117) ---------- ---------- Balance at December 31, 2003 6,275,104 6,469,638 ---------- ---------- Exercise of stock options 127,888 -- Stock Dividends 321,932 308,007 Conversion of Class C to Class A 30,946 (309,446) ---------- ---------- Balance at December 31, 2004 6,755,870 6,468,199 ========== ========== 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 1990 through 2004, 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, 2004, 2003, and 2002 11) Capital Stock (Continued) Earnings per share amounts have been adjusted for the effect of annual stock dividends. In accordance with SFAS 128, the basic and diluted earnings per share amounts were calculated as follows: 2004 2003 2002 ---- ---- ---- Numerator: Net income $2,122,272 $6,596,497 $3,991,280 ========== ========== ========== Denominator: Denominator for basic earnings per share-weighted-average shares 6,001,861 5,851,814 5,572,783 ---------- ---------- ---------- Effect of dilutive securities: Employee stock options 214,462 149,952 169,543 Stock appreciation rights 1,628 2,007 1,828 ---------- ---------- ---------- Dilutive potential common shares 216,090 151,959 171,371 ---------- ---------- ---------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 6,217,951 6,003,773 5,744,154 ========== ========== ========== Basic earnings per share $.35 $1.13 $.72 ==== ===== ==== Diluted earnings per share $.34 $1.10 $.69 ==== ===== ==== 12) Stock Compensation Plans In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987 Plan). The 1987 Plan provides that shares of the Class A Common Stock of the Company may be optioned to certain officers and key employees of the Company. The 1987 Plan establishes a Stock Option Plan Committee which selects the employees to whom the options will be granted and determines the price of the stock. The 1987 Plan establishes the minimum purchase price of the stock at an amount which is not less than 100% of the fair market value of the stock (110% for employees owning more than 10% of the total combined voting power of all classes of stock). The 1987 Plan provides that if additional shares of Class A Common Stock are issued pursuant to a stock split or a stock dividend, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be increased proportionately with no increase in the total purchase price of the shares then covered, and the number of shares of Class A Common Stock reserved for the purpose of the 1987 Plan shall be increased by the same proportion. In the event that the shares of Class A Common Stock of the Company from time to time issued and outstanding are reduced by a combination of shares, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be reduced proportionately with no reduction in the total price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purposes of the 1987 Plan shall be reduced by the same proportion. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 12) Stock Compensation Plans (Continued) The 1987 Plan terminated in 1997 and options granted are non-transferable. Options granted and outstanding under the 1987 Plan include Stock Appreciation Rights which permit the holder of the option to elect to receive cash, amounting to the difference between the option price and the fair market value of the stock at the time of the exercise, or a lesser amount of stock without payment, upon exercise of the option. Activity of the 1987 Plan is summarized as follows: Number of Class A Shares Option Price -------------- -------------- Outstanding at January 1, 2002 188,890 $3.53 - $3.88 Dividend 576 Exercised (119,974) Expired (58,773) --------- Outstanding at December 31, 2002 10,719 $3.36 --------- Dividend 201 Exercised (6,700) -------- Outstanding at December 31, 2003 4,220 $3.20 -------- Dividend 158 Exercised (1,055) -------- Outstanding at December 31, 2004 3,323 $3.05 ======== Exercisable at end of year 3,323 $3.05 ======== 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, SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 12) Stock Compensation Plans (Continued) including a requirement that the option exercise price be not less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors. The options were granted to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company. The 1993 Plan is administered by the Board of Directors or by a committee designated by the Board. The 1993 Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. No options may be exercised for a term of more than ten years from the date of grant. 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. The Plan had a term of ten years and was terminated in 2003 and options granted thereunder are non-transferable. Activity of the 1993 Plan is summarized as follows: Number of Class A Shares Option Price --------------- -------------- Outstanding at January 1, 2002 772,063 $2.02 - $3.59 Dividend 21,077 Granted 185,250 Cancelled (190,018) Exercised (283,703) --------- Outstanding at December 31, 2002 504,669 $2.02 - $4.46 Dividend 30,609 Granted 371,000 Exercised (263,496) --------- SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 12) Stock Compensation Plans (Continued) Number of Class A Shares Option Price Outstanding at December 31, 2003 642,782 $2.07 - $6.18 Dividend 16,176 Granted -- Exercised (310,341) Cancelled (8,925) --------- Outstanding at December 31, 2004 339,692 $1.97 - $5.35 ========= Exercisable at end of year 339,692 $1.97 - $5.35 ========= Available options for future grant 1993 Stock Incentive Plan -- ========= 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 is five years. Activity of the 2000 Plan is summarized as follows: Number of Class A Shares Option Price -------------- Outstanding at January 1, 2002 8,610 $2.04 - $2.43 Dividend 631 Granted 4,000 ------- Outstanding at December 31, 2002 13,241 $1.94 - $2.86 Dividend 697 Granted 4,000 Exercised (3,311) ------- SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 12) Stock Compensation Plans (Continued) Number of Class A Shares Option Price -------------- ------------ Outstanding at December 31, 2003 14,627 $1.85 - $5.72 Dividend 931 Granted 4,000 Exercised -- -------- Outstanding at December 31, 2004 19,558 $1.76 - $5.45 ======== Exercisable at end of year 15,358 $1.76 - $5.45 ======== Available options for future grant 2000 Director Plan 40,606 ======== On July 11, 2003, the Company adopted the Security National Financial Corporation 2003 Stock Option Plan (the "2003 Plan"), which reserved 500,000 shares of Class A Common Stock and 1,000,000 shares of Class C Common Stock for issuance thereunder. The 2003 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress. The 2003 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both "incentive stock options", as defined under Section 422A of the Internal Revenue Code of 1986 (the "Code") and "non-qualified options" may be granted under the 2003 Plan. The 2003 Plan is to be administered by the Board of Directors or by a committee designated by the Board. The terms of options granted or stock awards or sales affected under the 2003 Plan are to be determined by the Board of Directors or its committee. No options may be exercised for a term of more than ten years from the date of the grant. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the code, including a requirement that the option exercise price be no less than the fair market value of the option shares on the date of grant. The 2003 Plan provides that the exercise price for non-qualified options will not be less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors. The 2003 Plan has a term of ten years. The Board of Directors may amend or terminate the 2003 Plan at any time, from time to time, subject to approval of certain modifications to the 2003 Plan by the shareholders of the Company as may be required by law or the 2003 Plan. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 12) Stock Compensation Plans (Continued) Activity of the 2003 Plan is summarized as follows: Number of Number of Option Class A Shares Class C Shares(1) Price(1) Outstanding at December 31, 2003 -0- -0- -- -- Outstanding at January 1, 2004 -0- -0- Dividend 7,675 50,000 Granted 153,500 1,000,000 Exercised -0- -0- -------- ---------- Outstanding at December 31, 2004 161,175 1,050,000 $3.77 - $3.08 ======== ========== Exercisable at end of year 161,175 1,050,000 $3.77 - $3.08 ======== ========== Available options for future grant 2003 Stock Incentive Plan 390,075 52,500 ======== ========= (1) Class "C" shares are converted to Class "A" shares on a 10 to 1 ratio. The Option Price is based on Class A Common shares. 13) Statutory-Basis Financial Information The Company's life insurance subsidiaries are domiciled in Utah, Florida and Louisiana and prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Utah, Florida and Louisiana 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 permitted practices by the States of Utah, Florida and Louisiana. Statutory net income and statutory stockholder's equity for the life subsidiaries as reported to state regulatory authorities, are presented below: Statutory Net Income (Loss) for the year ended December 31, 2004 2003 2002 ---- ---- ---- Security National Life $65,724 $(5,404,687) $1,547,253 Southern Security Life (525,237) 2,431,499 (427,439) Security National Life of Louisiana 50,341 N/A N/A Statutory Stockholders' Equity December 31, 2004 2003 2002 ---- ---- ---- Security National Life $15,183,712 $15,069,057 $14,381,257 Southern Security Life 10,877,112 11,443,488 8,582,968 Security National Life of Louisiana 1,147,492 N/A N/A SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 13) Statutory-Basis Financial Information (Continued) Generally, the net assets of the life insurance subsidiaries available for transfer to the Company are limited to the amounts that the life insurance subsidiaries net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements; however, payments of such amounts as dividends are subject to approval by regulatory authorities. The Utah, Florida and Louisiana 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 combined weighted Ratio that is greater than 432% of the first level of regulatory action. 14) Business Segment Information Description of Products and Services by Segment The Company has three reportable business 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, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net investment income from investing segment surplus funds. The Company's mortgage loan segment consists of loan originations fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing pre-sold loans before the funds are received from financial institutional investors. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 14) Business Segment Information (Continued) Measurement of Segment Profit or Loss and Segment Assets The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit. Factors Management Used to Identify the Enterprise's Reportable Segments The Company's reportable segments are business units that offer different products and are managed separately due to the different products and the need to report to the various regulatory jurisdictions.
2004 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Items Consolidated ------------ ------------ --------- ----------- ------------ Revenues: From external sources: Revenue from customers $ 25,979,341 $11,661,053 $62,689,391 $ -- $100,329,785 Net investment income 9,062,991 812,659 6,063,526 -- 15,939,176 Realized gains on Investments and other assets 7,523 66,908 -- -- 74,431 Other revenues 311,316 184,712 358,397 -- 854,425 Intersegment revenues: Net investment income 7,478,350 85,337 265,470 (7,829,157) -- ----------- ----------- ----------- ----------- ------------ 42,839,521 12,810,669 69,376,784 (7,829,157) 117,197,817 ----------- ----------- ----------- ----------- ------------ Expenses: Death and other policy benefits 14,540,581 -- -- -- 14,540,581 Increase in future policy benefits 8,821,497 -- -- -- 8,821,497 Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired 4,349,371 252,701 -- -- 4,602,072 Depreciation 426,432 768,882 469,703 -- 1,665,017 General, administration and other costs: Intersegment -- 36,672 284,982 (321,654) -- Other 11,771,056 9,963,065 61,002,224 -- 82,736,345 Interest expense: Intersegment 348,797 163,297 6,995,409 (7,507,503) -- Other 647,823 339,182 1,186,773 -- 2,173,778 ----------- ----------- ------------ ------------ ------------ 40,905,557 11,523,799 69,939,091 (7,829,157) 114,539,290 ----------- ----------- ------------ ------------ ------------ Earnings (losses) before income taxes $ 1,933,964 $ 1,286,870 $ (562,307) $ -- $ 2,658,527 ============ =========== =========== ============ ============ Identifiable assets $305,970,161 $47,358,587 $14,236,837 $(51,091,825) $316,473,760 ============ =========== =========== ============ ============ Expenditures for long-lived assets $ 283,655 $ 487,118 $ 471,125 $ -- $ 1,241,898 ============ =========== =========== ============ ============
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 14) Business Segment Information (Continued) 2003 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Items Consolidated ----------- ------------ --------- ----------- ------------- Revenues: From external sources: Revenue from customers $ 23,294,373 $10,944,365 $ 92,955,165 $ -- $127,193,903 Net investment income 6,571,404 936,118 9,795,075 -- 17,302,597 Realized gains (losses) on investments and other assets (2,155) -- -- -- (2,155) Other revenues 254,974 94,907 200,183 -- 550,064 Intersegment revenues: Net investment income 10,028,748 47,651 -- (10,076,399) -- ------------ ----------- ------------ ------------ ------------ 40,147,344 12,023,041 102,950,423 (10,076,399) 145,044,409 ------------ ----------- ------------ ------------- ------------ Expenses: Death and other policy benefits 15,041,541 -- -- -- 15,041,541 Increase in future policy benefits 6,712,961 -- -- -- 6,712,961 Amortization of deferred policy acquisition costs and cost of insurance acquired 4,683,556 245,450 -- -- 4,929,006 Depreciation 464,844 760,091 310,595 -- 1,535,530 General, administrative and other costs: Intersegment -- 84,323 208,362 (292,685) -- Other 10,398,872 9,807,357 83,512,224 -- 103,718,453 Interest expense: Intersegment 90,001 179,803 9,513,910 (9,783,714) -- Other 743,884 436,828 2,461,334 -- 3,642,046 ------------ ----------- ------------ ------------- ------------- 38,135,659 11,513,852 96,006,425 (10,076,399) 135,579,537 ------------ ----------- ----------- ------------ ------------ Earnings (losses) before income taxes $ 2,011,685 $ 509,189 $ 6,943,998 $ -- $ 9,464,872 ============ =========== ============ ============ ============ Identifiable assets $302,319,614 $44,018,131 $ 16,938,151 $(49,792,560) $313,483,336 ============ =========== ============ ============ ============ Expenditures for long-lived assets $ 235,631 $ 559,435 $ 828,244 $ -- $ 1,623,310 ============ =========== ============ ============= ============
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 14) Business Segment Information (Continued) 2002 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Items Consolidated ------------ -------------- ---------- ------------- -------------- Revenues: From external sources: Revenue from customers $ 14,076,652 $10,638,754 $57,008,283 $ -- $ 81,723,689 Net investment income 6,065,652 1,011,786 5,461,992 -- 12,539,430 Realized gains on investments and other assets 311,365 709,455 -- -- 1,020,820 Other revenues 69,741 85,146 324,537 -- 479,424 Intersegment revenues: Net investment income 4,741,338 -- -- (4,741,338) -- ------------ ----------- ----------- ------------ ------------ 25,264,748 12,445,141 62,794,812 (4,741,338) 95,763,363 ------------ ----------- ----------- ------------ ------------ Expenses: Death and other policy benefits 7,724,046 -- -- -- 7,724,046 Increase in future policy benefits 6,031,685 -- -- -- 6,031,685 Amortization of deferred Policy acquisition costs and cost of insurance acquired 3,718,627 274,766 -- -- 3,993,393 Depreciation 383,139 678,851 167,513 -- 1,229,503 General, administrative and other costs: Intersegment (900,000) 486,672 623,872 (210,544) -- Other 6,570,217 9,537,374 53,167,818 -- 69,275,409 Interest expense: Intersegment 90,000 201,118 4,239,676 (4,530,794) -- Other 321,896 428,498 1,219,948 -- 1,970,342 ------------ ----------- ----------- -------------- ------------ 23,939,610 11,607,279 59,418,827 (4,741,338) 90,224,378 ------------ ----------- ----------- ------------- ------------ Earnings (losses) before income taxes $ 1,325,138 $ 837,862 $ 3,375,985 $ -- $ 5,538,985 ============ =========== =========== ============== ============= Identifiable assets $295,177,565 $42,255,381 $14,960,638 $ (44,331,241) $308,062,343 ============ =========== =========== ============= ============ Expenditures for long- lived assets $ 189,156 $ 677,561 $ 482,035 $ -- $ 1,348,752 ============ =========== =========== ============= ============
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 15) Related Party Transactions On December 19, 2001, the Company entered into an option agreement with Monument Title, LLC, a Utah limited liability company ("Monument Title") in which the Company made available a $100,000 line of credit to Monument Title at an interest rate of 8% per annum. The line of credit is secured by the assets of Monument Title. From December 28, 2001 to June 14, 2002, the Company advanced Monument Title a total of $77,953 under the line of credit. The amount advanced under the line of credit plus accrued interest are payable upon demand. This receivable was fully allowed for in 2003. The owners of Monument Title are brothers-in-law of the President and Chief Operating Officer of the Company. The Company has the right under the option agreement for a period of five years from the date thereof to acquire 100% of the outstanding common shares of Monument Title for the sum of $10. The purpose of the transaction, which was approved by the Company's board of directors, is to insure that the title and escrow work performed for SecurityNational 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. On November 1, 2004, the Company entered into an Agreement to Repay Indebtedness and to Convey Option with Monument Title and its principal owner. Under the terms of the agreement, Monument Title agreed to pay the Company a total of $94,177, representing the total of $77,953 that the Company advanced to Monument Title under the line of credit, plus interest thereon, within seven days from the date of the agreement. Monument Title paid the $94,177 to the Company pursuant to the agreement. In addition, the Company agreed to release its interest in the option agreement to acquire 100% of the outstanding common shares of Monument Title, in consideration for the payment of an additional $94,177. Monument Title is to pay the additional $94,177 to the Company in minimum payments of $500 per month for the first twelve months following the date of the agreement, with additional payments of $1,000 per month for the second twelve months following the date of the agreement. After the 24th month following the date of the agreement, the outstanding balance is to bear interest at the three year treasury rate plus one percent. The minimum payment for the third year is $1,500 per month, the minimum payment for the fourth year is $2,000 per month and the minimum payment for the fifth year is $2,500 per month. Any remaining unpaid balance, including interest, shall be due and payable at the conclusion of the 60th month from the date of the agreement. 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 $1,500 and $38,000 at December 31, 2004 and 2003, 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 consolidated balance sheet for these financial instruments approximate their fair values. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2004, 2003, and 2002 16) Disclosure about Fair Value of Financial Instruments 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 consolidated balance sheet 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, 2004 and December 31, 2003, were approximately $82,592,000 and $86,389,000, 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, 2004, 2003, and 2002 17) Accumulated Other Comprehensive Income (Loss), and Other Items The following summarizes accumulated other comprehensive income: December 31, 2004 2003 2002 ---- ---- ---- Unrealized gains on available for-sale securities $226,464 $ 638,540 $ 84,263 Reclassification adjustment for net realized gains (losses) in net income 7,524 (2,155) (35,544) -------- ---------- -------- Net unrealized gains (losses) 233,988 636,385 48,719 Potential unrealized gains (losses) for derivative bank loans (interest rate swaps) 266,219 (303,029) -- Tax (expense) benefit on net unrealized gain (losses) (73,586) 19,428 (80,786) -------- ---------- -------- Other comprehensive income (loss) $426,621 $ 352,784 $(32,067) ======== ========= ======== Other items: Acquisition of Company Stock held in escrow $ -- (1,982,620) $ -- ======== ========== ======== The "Acquisition of Company Stock held in Escrow" above is held in escrow and voted by trustee until the balances shown under Note 6 "Notes and Contracts Payable" in the amounts of $100,000 and $321,747, as of December 31, 2004 and 2003, respectively, are paid per terms of the agreement and promissory note. The Company considers its interest rate swap instruments (swaps) effective cash flow hedges against the variable interest rates of certain bank loans. The swaps expire on the maturity dates of the bank loans they hedge. In the event a swap is terminated, any resulting gain or loss would be deferred and amortized to interest expense over the remaining life of the bank loan it hedged. In the event of early extinguishment of a hedged bank loan, any realized or unrealized gain or loss from the hedging swap would be recognized in income coincident with the extinguishment. Information regarding the swaps is as follows as of December 31, 2004: Weighted average variable interest rate of the hedged bank loans (prime less .5%) 4.75% Weighted average fixed interest rate of the swaps 6.1% Market value of the swaps- potential unrealized loss position $(36,810) The respective market values of the swaps are derived from proprietary models of the financial institution with whom the Company purchased the swaps and from whom the Company obtained the hedged bank loans.
Schedule I SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Summary of Investments Other than Investments in Related Parties As of December 31, 2004 Amount at Which Shown Estimated in the Type of Investment Amortized Cost Fair Value Balance Sheet Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $ 15,033,673 $15,185,077 $ 15,033,673 Obligations of states and political subdivisions 492,290 519,799 492,290 Corporate securities including public utilities 50,572,235 52,800,693 50,572,236 Mortgage backed securities 3,865,680 3,784,176 3,865,679 Redeemable preferred stocks 20,883 41,133 20,883 ------------ ----------- ------------ Total fixed securities held to maturity 69,984,761 72,330,878 69,984,761 ------------ ----------- ------------ Securities available for sale: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies 596,898 656,524 656,524 Corporate securities including public utilities 9,889,411 10,409,501 10,409,501 Nonredeemable preferred stock 56,031 101,663 101,663 Common stock: Public utilities 323,719 547,608 547,608 Banks, trusts and insurance companies 520,683 1,200,586 1,200,586 Industrial, miscellaneous and all other 1,136,816 2,316,912 2,316,912 ------------ ----------- ------------ Total securities available for sale 12,523,558 15,232,794 15,232,794 ------------ ----------- ------------ Mortgage loans on real estate: Residential 24,203,576 24,203,576 Commercial 21,872,148 21,872,148 Residential construction 19,755,862 19,755,862 Real estate 9,709,129 9,709,129 Policy, student and other loans 13,312,471 13,312,471 Other short-term investments 4,628,999 4,628,999 ------------ ------------ Total investments $175,990,504 $178,699,740 ============ ============
Schedule I (Continued) SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Summary of Investments Other than Investments in Related Parties As of December 31, 2003: Amount at Which Shown Estimated in the Type of Investment Amortized Cost Fair Value Balance Sheet Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $ 3,080,471 $ 3,260,596 $ 3,080,471 Obligations of states and political subdivisions 261,360 285,758 261,360 Corporate securities including public utilities 30,289,401 31,355,505 30,289,401 Mortgage backed securities 3,634,752 3,684,761 3,634,752 Redeemable preferred stocks 28,005 38,358 28,005 ------------ ----------- ------------ Total fixed securities held to maturity 37,293,989 38,624,978 37,293,989 ------------ ----------- ------------ Securities available for sale: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies 595,177 676,781 676,781 Corporate securities including public utilities 12,618,880 13,593,256 13,593,256 Non-redeemable preferred stock 56,031 94,712 94,712 Common stock: Public utilities 314,014 447,172 447,172 Banks, trusts and insurance companies 520,683 989,305 989,305 Industrial, miscellaneous and all other 1,090,733 1,922,255 1,922,255 ------------ ----------- ------------ Total securities available for sale 15,195,518 17,723,481 17,723,481 ------------ ----------- ------------ Mortgage loans on real estate: Residential 6,119,912 6,119,912 Commercial 12,894,894 12,894,894 Residential construction 10,899,939 10,899,939 Real estate 8,519,680 8,519,680 Policy, student and other loans 11,753,617 11,753,617 Short-term investments 2,054,248 2,054,248 ------------ ------------ Total investments $104,731,797 $107,259,760 ============ ============
Schedule II SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Condensed Balance Sheet December 31, 2004 2003 ---- ---- Assets Cash $ (635,394) $ (791,521) Investment in subsidiaries (equity method) 57,988,720 56,188,527 Receivables: Receivable from Affiliates 9,147,416 10,734,307 Allowance for doubtful accounts (16,528) (161,528) ----------- ----------- Total receivables 9,130,888 10,572,779 ----------- ----------- Property and equipment, at cost, net of accumulated depreciation of $896,060 for 2004 and $730,230 for 2003 142,170 300,744 Other assets 66,828 79,504 ----------- ----------- Total assets $66,693,212 $66,350,033 =========== =========== See accompanying notes to parent company only financial statements. Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Condensed Balance Sheet (Continued) December 31, 2004 2003 ---- ---- Liabilities: - ----------- Bank loans payable: Current installments $ 1,886,570 $ 2,995,831 Long-term 6,059,926 8,641,418 Notes and contracts payable: Current installments 261,834 261,835 Long-term 160,873 421,746 Advances from affiliated companies 10,227,106 8,868,497 Other liabilities and accrued expenses 955,832 1,060,083 Income taxes 5,476,231 4,925,192 ----------- ----------- Total liabilities 25,028,372 27,174,602 ----------- ----------- Stockholders' equity: Common Stock: Class A: $2 par value, authorized 10,000,000 shares, issued 6,755,870 shares in 2004 and 6,275,104 shares in 2003 13,511,740 12,550,208 Class C: convertible, $0.20 par value, authorized 7,500,000 shares, issued 6,468,199 shares in 2004 and 6,469,638 shares in 2003 1,293,641 1,293,927 ------------ ----------- Total common stock 14,805,381 13,844,135 Additional paid-in capital 14,922,851 13,569,582 Accumulated other comprehensive income (loss), and other items (11,352) (437,973) Retained earnings 15,365,259 15,414,681 Treasury stock at cost (1,315,075 Class A shares and 79,103 Class C shares in 2004; 1,276,518 Class A shares and 75,336 Class C shares in 2003, held by affiliated companies) (3,417,299) (3,214,994) ----------- ----------- Total stockholders' equity 41,664,840 39,175,431 ----------- ----------- Total liabilities and stockholders' equity $66,693,212 $66,350,033 =========== =========== See accompanying notes to parent company only financial statements. Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Condensed Statements of Earnings Year Ended December 31, ----------------------- 2004 2003 2002 ---- ---- ---- Revenue: Net investment income $ 35 $ 52 $ 34,053 Fees from affiliates 4,249,430 4,200,683 3,772,293 ---------- ---------- ---------- Total revenue 4,249,465 4,200,735 3,806,346 ---------- ---------- ---------- Expenses: General and administrative Expenses 2,277,933 2,326,526 3,174,550 Interest expense 634,783 719,894 278,013 Expenses to affiliates 180,446 156,327 186,719 ---------- ----------- ---------- Total expenses 3,093,162 3,202,747 3,639,282 ---------- ----------- ---------- Earnings before income taxes, and earnings of subsidiaries 1,156,303 997,988 167,064 Income tax expense (606,355) (2,841,738) (1,045,791) Equity in earnings (loss) of subsidiaries 1,572,324 8,440,247 4,870,007 ---------- ---------- ---------- Net earnings $2,122,272 $6,596,497 $3,991,280 ========== ========== ========== See accompanying notes to parent company only financial statements. Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Condensed Statements of Cash Flow Year Ended December 31, 2004 2003 2002 ---- ---- ---- Cash flows from operating activities: Net earnings $2,122,272 $6,596,497 $3,991,280 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 165,830 154,506 118,386 Undistributed (earnings) losses of affiliates (1,572,324) (8,440,247) (4,870,007) Provision for income taxes 606,355 2,841,738 1,045,791 Change in assets and liabilities: Accounts receivable 36,000 (128,778) 31,909 Other assets 12,676 (12,589) (45,549) Other liabilities (230,824) 94,529 (30,673) ---------- ---------- ---------- Net cash provided by operating activities 1,139,985 1,105,656 241,137 ---------- ---------- ---------- Cash flows from investing activities: Dividends received from subsidiaries -- 1,150,000 2,381,687 Purchase of equipment (7,256) (40,106) (106,185) Investment in subsidiaries -- -- (900,000) ---------- ---------- ---------- Net cash (used in) provided by investing activities (7,256) 1,109,894 1,375,502 ---------- ---------- ---------- Cash flows from financing activities: Advances from (to) affiliates 2,764,500 (1,019,660) (9,396,773) Payments of notes and contracts payable (3,741,102) (2,116,541) (1,224,801) Stock options exercised -- 133,000 -- Proceeds from borrowings on notes and contracts payable -- -- 9,000,000 ---------- ---------- ---------- Net cash used in financing activities (976,602) (3,003,201) (1,621,574) ---------- ----------- ---------- Net change in cash 156,127 (787,651) (4,935) Cash at beginning of year (791,521) (3,870) 1,065 ---------- ---------- ---------- Cash at end of year $ (635,394) $ (791,521) $ (3,870) ========== ========== ========== See accompanying notes to parent company only financial statements. Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION Notes to Parent Company Only Condensed Financial Statements 1) Bank Loans Payable Bank loans payable are summarized as follows: December 31, 2004 2003 $1,153,572 in 2004 and $2,230,016 in 2003 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. $ 445,811 $2,178,075 6.59% note payable in monthly installments of $34,680 including principal and interest, collateralized by 15,000 shares of Security National Life stock, due December 2004. -- 391,363 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. 333,145 482,394 5.87% note payable interest only to July 1, 2003, thereafter, interest plus monthly principal payment of $134,000, collateralized by 15,000 shares of Security National Life Insurance Company stock, due January 2010. 7,206,641 8,413,993 Mark-to-market adjustment (39,101) 171,424 ---------- ---------- Total bank loans 7,946,496 11,637,249 Less current installments 1,886,570 2,995,831 ---------- ---------- Bank loans, excluding current Installments $6,059,926 $8,641,418 ========== ========== 2) Notes and Contracts Payable Notes and contracts are summarized as follows: December 31, 2004 2003 Due to shareholders of Security National Financial Corporation, 6.0% note payable in annual installments of $100,000 including principal and interest, due July 2005, secured by Company stock held in escrow $ 100,000 $ 200,000 Due to shareholders of Security National Financial Corporation, 4.0% note payable in annual installments of $160,873 including principal and interest, due January 2006, secured by Company stock held in escrow 321,747 482,620 Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION Notes to Parent Company Only Condensed Financial Statements 2) Notes and Contracts Payable (Continued) December 31, 2004 2003 ---- ---- Other 960 961 -------- -------- Total notes and contracts 422,707 683,581 Less current installments 261,834 261,835 -------- -------- Notes and contracts, excluding current installments $160,873 $421,746 ======== ======== The following tabulation shows the combined maturities of bank loans payable and notes and contracts payable: 2005 $2,148,404 2006 1,651,684 2007 1,439,220 2008 1,526,011 2009 1,603,884 Thereafter -- ---------- Total $8,369,203 ========== 3) Advances from Affiliated Companies December 31, 2004 2003 Non-interest bearing advances from affiliates: Cemetery and Mortuary subsidiary $ 1,459,841 $1,366,930 Life Insurance subsidiary 8,723,282 7,491,567 Mortgage subsidiary 43,983 10,000 ------------ ---------- $10,227,106 $8,868,497 4) Dividends In 2004, 2003 and 2002, Security National Life Insurance Company, a wholly owned subsidiary of the Registrant, paid to the registrant cash dividends of $-0-, $1,150,000, and $2,381,687, respectively.
Schedule IV SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Reinsurance Percentage Ceded to Assumed of Amount Direct Other from other Net Assumed Amount Companies Companies Amount to Net 2004 Life Insurance in force ($000) $2,098,690 $188,542 $815,445 $2,725,593 29.9% =========== ======== =========== =========== ==== Premiums: Life Insurance $25,554,908 $916,511 $1,031,961 $25,670,358 4.0% Accident and Health Insurance 308,049 12 946 308,983 .3% ----------- -------- ---------- ----------- ---- Total premiums $25,862,957 $916,523 $1,032,907 $25,979,341 4.0% =========== ======== ========== =========== ==== 2003 Life Insurance in force ($000) $1,974,388 $213,515 $ 940,050 $ 2,700,923 34.8% =========== ======== ========== =========== ==== Premiums: Life Insurance $22,944,221 $973,632 $972,174 $22,942,763 4.2% Accident and Health Insurance 350,371 -- 1,239 351,610 .4% ----------- -------- ---------- ----------- ---- Total premiums $23,294,592 $973,632 $ 973,413 $23,294,373 4.2% =========== ======== ========== =========== ==== 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% =========== ======== ========== =========== ====
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, 2004 Accumulated depreciation on real estate $ 4,059,934 $ 348,096 $ -- $ 4,408,030 Allowance for losses on mortgage loans on real estate and construction loans 14,893 240,000 -- 254,893 Accumulated depreciation on property and equipment 10,419,573 1,665,018 (228,225) 11,856,366 Allowance for doubtful accounts 1,706,678 24,000 (428,310) 1,302,368 For the Year Ended December 31, 2003 Accumulated depreciation on real estate $3,728,539 $331,395 $ -- $ 4,059,934 Allowance for losses on mortgage loans on real estate and construction loans 14,893 -- -- 14,893 Accumulated depreciation on property and equipment 8,903,197 1,535,529 (19,153) 10,419,573 Allowance for doubtful accounts 1,479,728 472,897 (245,947) 1,706,678 For the Year Ended December 31, 2002 Accumulated depreciation on real estate $ 3,404,644 $323,895 $ -- $ 3,728,539 Allowance for losses on mortgage loans on real estate and construction loans 14,893 -- -- 14,893 Accumulated depreciation on property and equipment 7,685,613 1,229,504 (11,920) 8,903,197 Allowance for doubtful accounts 1,778,592 90,357 (389,221) 1,479,728 Allowance for real estate losses 119,269 -- (119,269) --
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures (a) Evaluation of disclosure controls and procedures - The Company's principal executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as of the end of the period covered by this annual report. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company's disclosure controls and procedures are effective, providing them with material information relating to the Company as required to be disclosed in the reports the Company files or submits under the Exchange Act on a timely basis. (b) Changes in internal controls - There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect the Company's internal controls and procedures subsequent to the date of their most recent evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken. PART III Item 10. Directors and Executive Officers The Company's Board of Directors consists of seven persons, four of whom are not employees of the Company. There are no family relationships between or among any of the directors and executive officers, except that Scott M. Quist and G. Robert Quist are the sons of George R. Quist and Christie Q. Overbaugh is the daughter 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 84 Chairman of the Board and Chief Executive Officer Scott M. Quist 51 President, Chief Operating Officer and Director Stephen M. Sill 59 Vice President, Treasurer and Chief Financial Officer G. Robert Quist 53 First Vice President and Secretary J. Lynn Beckstead, Jr. 51 Vice President Mortgage Operations and Director Christie Q. Overbaugh 56 Senior Vice President of Internal Operations of Southern Security Life Insurance Company Charles L. Crittenden 84 Director Robert G. Hunter 45 Director H. Craig Moody 53 Director Norman G. Wilbur 66 Director Committees of the Board of Directors include an executive committee, on which Messrs. George Quist, Scott Quist, and Moody serve; an audit committee, on which Messrs. Crittenden, Moody, and Wilbur serve; and a compensation committee, on which Messrs. Crittenden, Wilbur, and George Quist serve. The audit committee is composed of directors who are, in the opinion of the Board of Directors, free from any relationship which would interfere with the exercise of independent judgment and who possess an understanding of financial statements and generally accepted accounting principles. Thus, each member is an "independent" director as that term is defined by the regulations of the Securities Exchange Act of 1934. The Board of Directors has determined that Norman G. Wilbur, who currently serves as a director and a member of the audit committee, is an independent financial expert of the audit committee. Directors The following is a description of the business experience of each of the Company's directors. George R. Quist has been Chairman of the Board and Chief Executive Officer of the Company since October 1979. Mr. Quist served as President of the Company from 1979 until July 2002. From 1960 to 1964, Mr. Quist 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 a director since May 1986. Mr. Quist served as First Vice President of the Company from May 1986 to July 2002. From 1980 to 1982, Mr. Quist was a tax specialist with Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to 1991, he was Treasurer and a director of The National Association of Life Companies, a trade association of 642 insurance companies until its merger with the American Council of Life Companies. Mr. Quist has been a member of the Board of Governors of the Forum 500 Section (representing small insurance companies) of the American Council of Life Insurance. He has also served as a regional director of Key Bank of Utah since November 1993. Mr. Quist is currently a director and past president of the National Alliance of Life Companies, a trade association of over 200 life companies. J. Lynn Beckstead Jr. has been Vice President of Mortgage Operations and a director of the Company since March 2002. In addition, Mr. Beckstead is President of SecurityNational Mortgage Company, an affiliate of the Company, having served in this position since July 1993. From 1980 to 1993, Mr. Beckstead was Vice President and a director of Republic Mortgage Corporation. From 1983 to 1990, Mr. Beckstead was Vice President and a director of Richards Woodbury Mortgage Corporation. From 1980 to 1983, he was a principal broker for Boardwalk Properties. From 1978 to 1980, Mr. Beckstead was a residential loan officer for Medallion Mortgage Company. From 1977 to 1978, he was a residential construction loan manager of Citizens Bank. Charles L. Crittenden has been a director of the Company since October 1979. Mr. Crittenden 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 currently a practicing physician in private practice. Dr. Hunter created the statewide E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member of the Executive Committee. He is also Chairman of Surgery at Cottonwood Hospital, a delegate to the Utah Medical Association and a delegate representing the State of Utah to the American Medical Association, and a member of several medical advisory boards. H. Craig Moody has been a director of the Company since September 1995. Mr. Moody is 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 worked for J.C. Penny's regional offices in budget and analysis. His final position was Manager of Planning and Reporting for J.C. Penney's stores. After 36 years with J.C. Penny's, he took an option of an early retirement in 1997. Mr. Wilbur is a past board member of a homeless organization in Plano, Texas. Executive Officers Stephen M. Sill has been Vice President, Treasurer and Chief Financial Officer of the Company since March 2002. From 1997 to March 2002, Mr. Sill was Vice President and Controller of the Company. From 1994 to 1997, Mr. Sill was Vice President and Controller of Security National Life Insurance Company. From 1989 to 1993, he was Controller of Flying J. Inc. From 1978 to 1989, Mr. Sill was Senior Vice President and Controller of Surety Life Insurance Company. From 1975 to 1978, he was Vice President and Controller of Sambo's Restaurant, Inc. From 1974 to 1975, Mr. Sill was Director of Reporting for Northwest Pipeline Corporation. From 1970 to 1974, he was an auditor with Arthur Andersen & Co. Mr. Sill is the Immediate Past President and a director of the Insurance Accounting and Systems Association (IASA), a national association of over 1,300 insurance companies and associate members. G. Robert Quist has been First Vice President and Secretary of the Company since March 2002. Mr. Quist has also served as First Vice President of Singing Hills Memorial Park since 1996. Mr. Quist has served as Vice President of Memorial Estates since 1982; he began working for Memorial Estates in 1978. Also since 1987, Mr. Quist has served as President and a director of Big Willow Water Company and as Secretary-Treasurer and a director of the Utah Cemetery Association. From 1987 to 1988, he was a director of Investors Equity Life Insurance Company of Hawaii. Christie Q. Overbaugh has been Senior Vice President of Internal Operations for Southern Security Life Insurance Company since June 2002, and Vice President of Underwriting of Security National Life Insurance Company since October 1998. Ms. Overbaugh has also served as Vice President of the Company from October 1999 to June 2002, and as Vice President of Underwriting for Southern Security Life Insurance Company from October 1998 to June 2002. From 1985 to 1990, she was Chief Underwriter for Investors Equity Life Insurance Company of Hawaii and Security National Life Insurance Company. From 1990 to 1991, Ms. Overbaugh was President of the Utah Home Office Underwriters Association. Ms. Overbaugh is currently a member of the Utah Home Office Underwriters Association and an Associate Member of LOMA (Life Office Management Association). The Board of Directors of the Company has a written procedure, which requires disclosure to the board of any material interest or any affiliation on the part of any of its officers, directors or employees that is in conflict or may be in conflict with the interests of the Company. No director, officer or 5% stockholder of the Company or any subsidiary or affiliate thereof has had any transactions with the Company or its subsidiaries during 2004 or 2003. All directors of the Company hold office until the next Annual Meeting of Stockholders and until their successors have been elected and qualified. Pursuant to Item 406 of Regulation S-K under the Securities Exchange Act of 1934, the Company has not yet adopted a code of ethics that applies to its principal executive officer, principal financial officer, controller or persons performing similar functions. The Company is still in the process of studying this issue and may adopt a code of ethics in the near future. Item 11. Executive Officer Compensation The following table sets forth, for each of the last three fiscal years, the compensation received by George R. Quist, the Company's Chairman of the Board and Chief Executive Officer, and all other executive officers (collectively, the "Named Executive Officers") at December 31, 2004 whose salary and bonus for all services in all capacities exceed $100,000 for the fiscal year ended December 31, 2004.
Summary Compensation Table Annual Compensation Long-Term Compensation Other Annual Restricted Securities Long-Term All Other Name and Compen- Stock Underlying Incentive Compen- Principal Position Year Salary($) Bonus($) sation($)(2) Awards($) Options/SARs(#) Payout($) sation($)(3) - ------------------ ---- --------- -------- ------------ --------- --------------------------- ------------ George R. Quist (1) 2004 $165,600 $ 50,000 $2,400 $0 100,000 $0 $26,002 Chairman of the 2003 165,600 50,000 2,400 0 100,000 0 23,273 Board and Chief 2002 165,600 25,000 2,400 0 80,000 0 31,186 Executive Officer Scott M. Quist (1) 2004 $215,900 $ 75,000 $7,200 $0 1,000,000(4) $0 $34,773 President, Chief 2003 205,400 60,000 7,200 0 70,000 0 29,531 Operating Officer 2002 179,400 35,000 7,200 0 40,000 0 24,066 and Director J. Lynn Beckstead, Jr. 2004 $195,796 $ 85,000 $0 $0 5,000 $0 $25,750 Vice President of 2003 158,500 255,675 0 0 15,000 0 16,104 Mortgage Operations 2002 150,000 120,401 0 0 10,000 0 15,101 and Director G. Robert Quist (1) 2004 $104,814$ 0 $2,400 $0 10,000 $0 $10,711 First Vice President and Secretary 2003 87,175 16,599 2,400 0 35,000 0 9,748 Stephen M. Sill 2004 $102,855 $ 6,000 $3,600 $0 5,000 $0 $11,684 Vice President, Treasurer and Chief Financial Officer
(1) George R. Quist is the father of Scott M. Quist and G. Robert 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, Scott M. Quist, J. Lynn Beckstead Jr., and G. Robert 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 2004, 2003, and 2002, such amounts were George R. Quist, $21,341, $18,590 and $16,207, respectively; and Scott M. Quist, $23,001, $23,000 and $19,219, respectively; J. Lynn Beckstead, Jr., $21,000, $12,750 and $0, respectively; G. Robert Quist, $10,161 and $9,394 for 2004 and 2003, respectively; Stephen M. Sill $11,134 for 2004); (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 2004, 2003 and 2002, such amounts were for George R. Quist $17, $39 and $125, respectively; for Scott M. Quist, G. Robert Quist, Stephen M. Sill and J. Lynn Beckstead, Jr., $550, $354, and $642 each, 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 2004, 2003 and 2002); Scott M. Quist ($11,222 for the year 2004, $6,177 for the year 2003, $4,205 for 2002); J. Lynn Beckstead, Jr. ($4,200 for 2004); (d) compensation paid for the cashless exercise of 50,000 shares of Company stock exercised by George R. Quist ($10,210) for the year 2002; (e) amounts contributed by the Company into a trust for the benefit of the Named Executive Officers under the Security National Financial Corporation's Employer Stock Ownership Plan (ESOP) (for the years 2003 and 2002, such amounts were J. Lynn Beckstead Jr., $3,000 and $2,754, respectively; and (f) amounts contributed by the Company into a trust for the benefit of the Named Executive Officers under the Security National Financial Corporation Tax-Favored Retirement Savings Plan (401-k) Plan) (for the years 2003 and 2002, such amounts were J. Lynn Beckstead Jr., $0 and $11,705, respectively). 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 granted to him. The loan has been fully paid as of March 31, 2005. (4) Options to purchase 1,000,000 shares of Class C common stock. The Class C common shares are convertible to Class A common shares on the basis of ten shares of Class C common stock to one share of Class A common stock. 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, 2004, as well as the aggregate number and value of unexercised options held by the Named Executive Officers on December 31, 2004. 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 2004(#) 2004 Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable - ---- -------- -------- ----------- ------------- ----------- ------------- George R. Quist 68,298 $560,040 153,620 -0- $ 27,233 $-0- Scott M. Quist -0- -0- 1,082,175(1) -0- -0- -0- J. Lynn Beckstead, Jr. 8,355 62,243 21,788 -0- -0- -0- G. Robert Quist 6,862 51,455 49,088 -0- -0- -0- Stephen M. Sill 3,718 32,350 5,250 -0- 1,228 -0-
(1) Includes options to purchase 1,000,000 shares of Class C common stock. The Class C common shares are convertible to Class A common shares on the basis of ten shares of Class C common stock to one share of Class A common stock. Retirement Plans On December 8, 1988, the Company entered into a deferred compensation plan with George R. Quist, the Chairman and Chief Executive officer of the Company. The plan was later amended on three occasions with the third amendment effective February 1, 2001. Under the terms of the plan as amended, upon the retirement of Mr. Quist, the Company is required to pay him ten annual installments in the amount of $60,000. Retirement is defined in the plan as the age of 70, or a later retirement age, as specified by the Board of Directors. The $60,000 annual payments are to be adjusted for inflation in accordance with the United States Consumer Price Index for each year after January 1, 2002. If Mr. Quist's employment is terminated by reason of disability or death before he reaches retirement age, the Company is to make the ten annual payments to Mr. Quist, in the event of disability, or to his designated beneficiary, in the event of death. The plan also provides that the Board of Directors may, in its discretion, pay the amounts due under the plan in a single, lump-sum payment. In the event that Mr. Quist dies before the ten annual payments are made, the unpaid balance will continue to be paid to his designated beneficiary. The plan further requires the Company to furnish an automobile for Mr. Quist's use and to pay all reasonable expenses incurred in connection with its use for a ten year period, and to provide Mr. Quist with a hospitalization policy with similar benefits to those provided to him the day before his retirement or disability. However, in the event Mr. Quist's employment with the Company is terminated for any reason other than retirement, death, or disability, the entire amount of deferred compensation payments under the plan shall be forfeited by him. Employment Agreements On July 16, 2004, the Company entered into an employment agreement with Scott M. Quist, its President and Chief Operating Officer. The agreement is effective as of December 4, 2003 and has a five-year term, but the Company has agreed to renew the agreement on December 4, 2008 and 2013 for additional five-year terms, provided Mr. Quist performs his duties with usual and customary care and diligence. 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. The Company also agrees to maintain a group term life insurance policy of not less than $1,000,000 on Mr. Quist's life and a whole life insurance policy in the amount of $500,000 on Mr. Quist's life. In the event of disability, Mr. Quist's salary would be continued for up to five years at 75% of its current level. In the event of a sale or merger of the Company and Mr. Quist is 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. The agreement further provides that Mr. Quist is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 65), (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of ten years in annual installments in the amount equal to 75% of his then current rate of compensation. However, in the event that Mr. Quist dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company accrued $31,500 and $328,000 in fiscal 2004 and 2003, respectively, to cover the present value of anticipated retirement benefits under the employment agreement. On December 4, 2003, the Company, through its subsidiary SecurityNational Mortgage Company, entered into an employment agreement with J. Lynn Beckstead, Jr., Vice President of Mortgage Operations and President of SecurityNational Mortgage Company. The agreement has a five-year term, but the Company has agreed to renew the agreement on December 4, 2008 and 2013 for additional five-year terms, provided Mr. Beckstead performs his duties with usual and customary care and diligence. Under the terms of the agreement, Mr. Beckstead is to devote his full time to the Company serving as President of SecurityNational Mortgage Company at not less than his current salary and benefits, and to include $350,000 of life insurance protection. In the event of disability, Mr. Beckstead's salary would be continued for up to five years at 50% of its current level. In the event of a sale or merger of the Company, and Mr. Beckstead were not retained in his current position, the Company would be obligated to continue Mr. Beckstead's current compensation and benefits for five years following the merger or sale. The agreement further provides that Mr. Beckstead is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 62 1/2) (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of ten years in annual installments in the amount equal to one-half of his then current annual salary. However, in the event that Mr. Beckstead dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company accrued in 2004 and 2003 approximately $18,500 and $172,000, respectively, to cover the present value of the retirement benefit of the agreement. 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 2004, 2003 and 2002 were approximately $5,746, $4,493 and $7,975, 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 2004, 2003 and 2002, were $128,949, $110,081 and $142,218, 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 234 participants and had $105,196 contributions payable to the Plan in 2004. 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 2004, 2003 and 2002 was $123,249, $95,485 and $100,577, respectively. 1993 Stock Option Plan On June 21, 1993, the Company adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves shares of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at the annual meeting of the stockholders held on June 21, 1993. The 1993 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress. The 1993 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both "incentive stock options," as defined under Section 422A of the Internal Revenue Code of 1986 (the "Code"), and "non-qualified options" may be granted pursuant to the 1993 Plan. The exercise prices for the options granted are equal to or greater than the fair market value of the stock subject to such options as of the date of grant, as determined by the Company's Board of Directors. The options granted under the 1993 Plan, were to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company. The 1993 Plan is to be administered by the Board of Directors or by a committee designated by the Board. The terms of options granted or stock awards or sales effected under the 1993 Plan are to be determined by the Board of Directors or its committee. The Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. In addition, the number of shares of Common Stock reserved for purposes of the Plan shall be adjusted by the same proportion. No options may be exercised for a term of more than ten years from the date of grant. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the code, including a requirement that the option exercise price be no less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors. The 1993 Plan has a term of ten years. The Board of Directors may amend or terminate the 1993 Plan at any time, subject to approval of certain modifications to the 1993 Plan by the shareholders of the Company as may be required by law or the 1993 Plan. On November 7, 1996, the Company amended the 1993 Plan as follows: (i) to increase the number of shares of Class A Common Stock reserved for issuance under the 1993 Plan from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide that the stock subject to options, awards and purchases may include Class C common stock. On October 14, 1999, the Company amended the 1993 Plan to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 746,126 Class A shares to 1,046,126 Class A shares. The Plan terminated in 2003 and options granted thereunder are non-transferable. 2000 Director Stock Option Plan On October 16, 2000, the Company adopted the 2000 Directors Stock Option Plan (the "Director Plan") effective November 1, 2000. The Director Plan provides for the grant by the Company of options to purchase up to an aggregate of 50,000 shares of Class A Common Stock for issuance thereunder. The Director Plan provides that each member of the Company's Board of Directors who is not an employee or paid consultant of the Company automatically is eligible to receive options to purchase the Company's Class A Common Stock under the Director Plan. Effective as of November 1, 2000, and on each anniversary date thereof during the term of the Director Plan, each outside director shall automatically receive an option to purchase 1,000 shares of Class A Common Stock. In addition, each new outside director who shall first join the Board after the effective date shall be granted an option to purchase 1,000 shares upon the date which such person first becomes an outside director and an annual grant of an option to purchase 1,000 shares on each anniversary date thereof during the term of the Director Plan. The options granted to outside directors shall vest in their entirety on the first anniversary date of the grant. The primary purposes of the Director Plan are to enhance the Company's ability to attract and retain well-qualified persons for service as directors and to provide incentives to such directors to continue their association with the Company. In the event of a merger of the Company with or into another company, or a consolidation, acquisition of stock or assets or other change in control transaction involving the Company, each option becomes exercisable in full, unless such option is assumed by the successor corporation. In the event the transaction is not approved by a majority of the "Continuing Directors" (as defined in the Director Plan), each option becomes fully vested and exercisable in full immediately prior to the consummation of such transaction, whether or not assumed by the successor corporation. 2003 Stock Option Plan On July 11, 2003, the Company adopted the Security National Financial Corporation 2003 Stock Incentive Plan (the "2003 Plan"), which reserved 500,000 shares of Class A common stock and 1,000,000 shares of Class C common stock for issuance thereunder. The 2003 Plan was approved by the Board of Directors on May 9, 2003, and by the stockholders at the annual meeting of the stockholders held on July 11, 2003. The 2003 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress. The 2003 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both "incentive stock options", as defined under Section 422A of the Internal Revenue Code of 1986 (the "Code") and "non-qualified options" may be granted under the 2003 Plan. The 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 2003 Plan are 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 2003 Plan is to be administered by the Board of Directors or by a committee designated by the board. The terms of options granted or stock awards or sales affected under the 2003 Plan are to be determined by the Board of Directors or its committee. 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 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 then fair market value of the option shares on the date of grant. The 2003 Plan provides that the exercise price for non-qualified options will not be less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors. The 2003 Plan has a term of ten years. The Board of Directors may amend or terminate the 2003 Plan at any time, subject to approval of certain modifications to the 2003 Plan by the shareholders of the Company as may be required by law or the 2003 Plan. Item 12 - Security Ownership of Certain Beneficial Owners and Management The following table sets forth security ownership information of the Company's Class A and Class C common stock as of March 31, 2005, (i) for persons who own beneficially more than 5% of the Company's outstanding Class A or Class C common stock, (ii) each director of the Company, and (iii) for all executive officers, and directors of the Company as a group.
Class A and Class A Class C Class C Common Stock Common Stock Common Stock ------------ ------------ ------------ Amount Amount Amount Beneficially Percent Beneficially Percent Beneficially Percent Name and Address (1) Owned of Class Owned of Class Owned of Class - ----------------- ------- -------- ----- -------- ----- -------- George R. and Shirley C. Quist Family Partnership, Ltd. (2) 426,375 7.0% 3,358,687 52.6% 3,785,062 28.1% Employee Stock Ownership Plan (3) 577,183 9.5% 1,553,041 24.3% 2,130,224 15.8% George R. Quist (4)(5)(7)(8) 449,945 7.4% 470,581 7.4% 920,526 6.8% Scott M. Quist (4)(7)(9) 347,885 5.7% 1,307,079 20.5% 1,654,964 12.3% Associated Investors (10) 92,798 1.5% 655,610 10.3% 748,408 5.5% G. Robert Quist (6)(11) 112,300 1.9% 244,052 3.8% 356,352 2.6% J. Lynn Beckstead, Jr., (6)(12) 104,193 1.7% -- * 104,193 * Stephen M. Sill (6)(13) 58,087 1.0% -- * 58,087 * Christie Q. Overbaugh (14) 56,979 * 105,501 1.7% 162,480 1.2% Robert G. Hunter, M.D., (4)(15) 7,296 * -- * 7,296 * Norman G. Wilbur (16) 5,962 * -- * 5,962 * Charles L. Crittenden (17) 5,921 * -- * 5,921 * H. Craig Moody (18) 5,678 * -- * 5,678 * All directors and executive officers (10 persons) (4)(5)(6)(7) 1,580,621 26.1% 5,485,500 86.0% 7,066,521 52.4%
* Less than 1% (1) Unless otherwise indicated, the address of each listed stockholder is c/o Security National Financial Corporation, 5300 South 360 West, Suite 250, Salt Lake City, Utah 84123. (2) This stock is owned by the George R. and Shirley C. Quist Family Partnership, Ltd., of which George R. Quist is the general partner. (3) 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. Item 12 - Security Ownership of Certain Beneficial Owners and Management (Continued) (4) Does not include 577,183 shares of Class A common stock and 1,553,041 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. (5) Does not include 92,798 shares of Class A common stock and 655,611 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 sole voting and investment powers with respect to such shares. (6) Does not include 252,757 shares of Class A common stock owned by the Company's 401(k) Retirement Savings Plan, of which G. Robert Quist, J. Lynn Beckstead, and Stephen M. Sill are members of the Investment Committee and, accordingly, exercise shared voting and investment powers with respect to such shares. (7) Does not include 140,573 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. (8) Includes options to purchase 153,620 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, 2005. (9) Includes options to purchase 77,175 shares of Class A common stock and 1,050,000 shares of Class C Common Stock granted to Scott M. Quist that are currently exercisable or will become exercisable within 60 days of March 31, 2005. (10) The managing partner of Associated Investors is George R. Quist, who exercises sole voting and investment powers. (11) Includes options to purchase 49,088 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, 2005. (12) Includes options to purchase 21,788 shares of Class A common stock granted to Mr. Beckstead that are currently exercisable or will become exercisable within 60 days of March 31, 2005. (13) 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, 2005. (14) Includes options to purchase 7,875 shares of Class A common stock granted to Ms. Overbaugh that are currently exercisable or will become exercisable within 60 days of March 31, 2005. (15) Includes options to purchase 4,753 shares of Class A common stock granted to Mr. Hunter that are currently exercisable or will become exercisable within 60 days of March 31, 2005. (16) Includes options to purchase 4,753 shares of Class A common stock granted to Mr. Wilbur that are currently exercisable or will become exercisable within 60 days of March 31, 2005. (17) Includes options to purchase 1,103 shares of Class A common stock granted to Mr. Crittenden that are currently exercisable or will become exercisable within 60 days of March 31, 2005. Item 12 - Security Ownership of Certain Beneficial Owners and Management (Continued) (18) Includes options to purchase 4,753 shares of Class A common stock granted to Mr. Moody that are currently exercisable or will become exercisable within 60 days of March 31, 2005. The Company's executive officers and directors, as a group, own beneficially approximately 52.4% of the outstanding shares of the Company's Class A and Class C common stock. Item 13. Certain Relationships and Related Transactions On December 19, 2001, the Company entered into an option agreement with Monument Title, LLC, a Utah limited liability company in which the Company made available a $100,000 line of credit to Monument Title at an interest rate of 8% per annum. The line of credit is secured by the assets of Monument Title. From December 28, 2001 to June 14, 2002, the Company advanced Monument Title a total of $77,953 under the line of credit. The amount advanced under the line of credit plus accrued interest are payable upon demand. Ron Motzkus and Troy Lashley, who own 90% and 10% of the outstanding shares of Monument Title, respectively, are brother-in-laws of Scott M. Quist, President and Chief Operating Officer of the Company. The Company has the right under the option agreement for a period of five years from the date thereof to acquire 100% of the outstanding common shares of Monument Title for the sum of $10. The purpose of the transaction, which was approved by the Company's Board of Directors, is to insure that the title and escrow work performed for Security National Mortgage Company in connection with its mortgage loans are completed as accurately as possible by Monument Title to avoid any economic losses to the Company. On November 1, 2004, the Company entered into an Agreement to Repay Indebtedness and to Convey Option with Monument Title and Mr. Motzkus. Under the terms of the agreement, Monument Title agreed to pay the Company a total of $94,177, representing the total of $77,953 that the Company advanced to Monument Title under the line of credit, plus interest thereon, within seven days from the date of the agreement. Monument Title paid the $94,177 to the Company pursuant to the agreement. In addition, the Company agreed to release its interest in the option agreement to acquire 100% of the outstanding common shares of Monument Title, in consideration for the payment of an additional $94,177. Monument Title is to pay the additional $94,177 to the Company in minimum payments of $500 per month for the first twelve months following the date of the agreement, with additional payments of $1,000 per month for the second twelve months following the date of the agreement. After the 24th month following the date of the agreement, the outstanding balance is to bear interest at the three year treasury rate plus one percent. The minimum payment for the third year is $1,500 per month, the minimum payment for the fourth year is $2,000 per month and the minimum payment for the fifth year is $2,500 per month. Any remaining unpaid balance, including interest, shall be due and payable at the conclusion of the 60th month from the date of the agreement. On December 26, 2003, Security National Life entered into a coinsurance agreement and a modified coinsurance agreement with Southern Security Life Insurance Company, effective September 30, 2003. Under the terms of these agreements, Southern Security Life Insurance Company ceded 50% of certain blocks of its universal life business to Security National Life. The total liabilities reinsured for this business on October 1, 2003 were $22,195,259. Southern Security Life Insurance Company received a ceding commission from Security National Life of $3,200,000 and will pay a risk charge to Security National Life of 1% of the outstanding coinsurance per calendar quarter. Southern Security Life Insurance Company placed investment grade bonds in a bank trust, the value of which equal the outstanding liabilities ceded to Security National Life. Security National Life is named as a beneficiary of the trust, and the terms of the trust are such that Southern Security Life Insurance Company will maintain investment grade bonds in the trust to equal the outstanding liabilities ceded to Security National Life. Under the coinsurance agreement and the modified coinsurance agreement, the coinsurance and the decrease in reserves are equal in amount. Under U. S. GAAP the coinsurance and the reserve decreases are netted since these are non-cash items, and Southern Security Life Insurance Company expects to recapture the coinsurance from future profits of the reinsured business. Southern Security Life Insurance Company has the right to recapture the business at any time after September 30, 2004, upon 90 days advance notice. As of December 31, 2004, the outstanding coinsurance amount was $2,426,107. Southern Security Life Insurance Company recorded as an expense the risk charge of $112,315 for 2004. The coinsurance agreements have remained in effect following completion of the merger of SSLIC Holding Company into Southern Security Life Insurance Company. As a result, the coinsurance agreements have not been impacted or affected by the completion of such merger. On December 28, 2004, Security National Life entered into a coinsurance agreement and a modified coinsurance agreement with Southern Security Life Insurance Company, effective October 1, 2004. Under the terms of these agreements, Southern Security Life Insurance Company ceded 25% of certain blocks of its universal life business to Security National Life. The total liabilities reinsured for this business on October 1, 2004 were $11,010,599. Southern Security Life Insurance Company received a ceding commission from Security National Life of $1,200,000 and will pay a risk charge to Security National Life of 1% of the outstanding coinsurance per calendar quarter. Southern Security Life Insurance Company placed investment grade bonds in a bank trust, the value of which equal the outstanding liabilities ceded to Security National Life. Security National Life is named as a beneficiary of the trust, and the terms of the trust are such that Southern Security Life Insurance Company will maintain investment grade bonds in the trust to equal the outstanding liabilities ceded to Security National Life. Under the coinsurance agreement and the modified coinsurance agreement, the coinsurance and the decrease in reserves are equal in amount. Under U. S. GAAP the coinsurance and the reserve decreases are netted since these are non-cash items, and Southern Security Life Insurance Company expects to recapture the coinsurance from future profits of the reinsured business. Southern Security Life Insurance Company has the right to recapture the business at any time after September 30, 2005, upon 120 days advance notice. As of December 31, 2004 the outstanding coinsurance amount was $1,157,886. Southern Security Life Insurance Company recorded as an expense the risk charge of $12,000 for 2004. The coinsurance agreements have remained in effect following completion of the merger of SSLIC Holding Company into Southern Security Life Insurance Company. As a result, the coinsurance agreements have not been impacted or affected by the completion of such merger. The Company's Board of Directors has a written procedure, which requires disclosure to the Board of any material interest or any affiliation on the part of any of its officers, directors or employees which is in conflict or may be in conflict with the interests of the Company. Item 14. Principle Accounting Fees and Services Fees incurred in 2004 for annual audit services pertaining to the financial statements and employee benefit plans and related quarterly reviews were approximately $262,000. There were $19,000 in other fees during 2004. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1)(2) Financial Statements and Schedules See "Index to Consolidated Financial Statements and Supplemental Schedules" under Item 8 above. (3) Exhibits The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or are incorporated by reference to previous filings. 3.1 Articles of Restatement of Articles of Incorporation (7) 3.2 Amended Bylaws (10) 4.1 Specimen Class A Stock Certificate (1) 4.2 Specimen Class C Stock Certificate (1) 4.3 Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1) 10.1 Restated and Amended Employee Stock Ownership Plan and Trust Agreement (1) 10.2 1993 Stock Option Plan (3) 10.3 2000 Director Stock Option Plan (4) 10.4 2003 Stock Option Plan (9) 10.5 Deferred Compensation Agreement with George R. Quist (2) 10.6 Promissory Note with George R. Quist (5) 10.7 Deferred Compensation Plan (6) 10.8 Coinsurance Agreement between Security National Life and Acadian (7) 10.9 Assumption Agreement among Acadian, Acadian Financial Group, Inc., Security National Life and the Company (7) 10.10 Asset Purchase Agreement between Acadian, Acadian Financial Group, Inc., Security National Life and the Company (7) 10.11 Promissory Note with Key Bank of Utah (8) 10.12 Loan and Security Agreement with Key Bank of Utah (8) 10.13 Stock Purchase and Sale Agreement with Ault Glazer & Co. Investment Management LLC (10) 10.14 Stock Purchase Agreement with Paramount Security Life Insurance Company (11) 10.15 Reinsurance Agreement between Security National Life Insurance Company and Guaranty Income Life Insurance Company(12) 10.16 Employment agreement with J. Lynn Beckstead, Jr.(12) 10.17 Employment agreement with Scott M. Quist (13) 10.18 Agreement and Plan of Reorganization among Security National Life Insurance Company, SSLIC Holding Company, and Southern Security Life Insurance Company (14) 10.19 Agreement and Plan of Merger, among Security National Life Insurance Company, SSLIC Holding Company, and Southern Security Life Insurance Company 10.20 Agreement to repay indebtedness and to convey option with Monument Title, LLC. 10.21 Subsidiaries of the Registrant 31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987 (2) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1989 (3) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1994 (4) Incorporated by reference from Schedule 14A Definitive Proxy Statement, filed August 29, 2000, relating to the Company's Annual Meeting of Shareholders (5) Incorporated by reference from Annual Report on Form 10-K, as filed on April 16, 2001 (6) Incorporated by reference from Annual Report on Form 10-K, as filed on April 3, 2002 (7) Incorporated by reference from Report on Form 8-K/A as filed on January 8, 2003 (8) Incorporated by reference from Annual Report on Form 10-K, as filed on April 15, 2003 (9) Incorporated by reference from Schedule 14A Definitive Proxy Statement, Filed on June 5, 2003, relating to the Company's Annual Meeting of Shareholders (10) Incorporated by reference from Report on Form 10-Q, as filed on November 14, 2003 (11) Incorporated by reference from Report on Form 8-K, as filed March 30, 2004 (12) Incorporated by reference from Report on Form 10-K, as filed on March 30, 2004 (13) Incorporated by reference from Report on Form 10-Q, as filed on August 13, 2004 (14) Incorporated by reference from Report on Form 8-K as filed on August 30, 2004 (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the quarter ended December 31, 2004. 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, 2005 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, 2005 Board and Chief Executive Officer (Principal Executive Officer) Scott M. Quist President, Chief Operating April 15, 2005 Officer and Director Stephen M. Sill Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) April 15, 2005 J. Lynn Beckstead, Jr. Vice President and Director April 15, 2005 Charles L. Crittenden Director April 15, 2005 H. Craig Moody Director March 30, 2005 Norman G. Wilbur Director April 15, 2005 Robert G. Hunter Director April 15, 2005 Exhibit 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ENACTED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, George R. Quist, certify that: 1. I have reviewed this annual report on Form 10-K of Security National Financial Corporation. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period covered in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 15, 2005 By: George R. Quist Chairman of the Board and Chief Executive Officer Exhibit 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ENACTED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen M. Sill, certify that: 1. I have reviewed this annual report on Form 10-K of Security National Financial Corporation. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period covered in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 15, 2005 By: Stephen M. Sill Vice President, Treasurer and Chief Financial Officer EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Security National Financial Corporation (the "Company") on Form 10-K for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George R. Quist, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By: George R. Quist Chairman of the Board and Chief Executive Officer April 15, 2005 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Security National Financial Corporation (the "Company") on Form 10-K for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen M. Sill, Vice President, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By: Stephen M. Sill Vice President, Treasurer and Chief Financial Officer April 15, 2005 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Year Ended December 31, 2004 SECURITY NATIONAL FINANCIAL CORPORATION Commission File No. 0-9341 E X H I B I T S Exhibit Index Exhibit No. Document Name 10.19 Agreement Plan of Merger, among Security National Life Insurance Company, SSLIC Holding Company and Southern Security Life Insurance Company 10.20 Agreement to repay indebtedness and to convey option with Monument Title, LLC. 10.21 Subsidiaries of the Registrant 31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EXHIBIT 10.21 Subsidiaries of Security National Financial Corporation as of March 31, 2005 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. Sunset Funeral Home, Inc. Greer-Wilson Funeral Home, Inc. Crystal Rose Funeral Home, Inc. Hawaiian Land Holdings SSLIC Holding Company Insuradyne Corporation Southern Security Life Insurance Company Security National Funding Company Security National Life Insurance Company of Louisiana (Formerly Paramount Security Life Insurance Company) Security National Capital, Inc. Security National Funding
               AGREEMENT TO REPAY INDEBETNESS AND TO CONVEY OPTION

     WHEREAS,  Security  National  Financial  Corporation  and its wholly  owned
subsidiaries  entered into those  certain  agreements  referred to as "Option to
Acquire" and "Memorandum of Understanding"  (hereinafter the "Agreements")  with
Ronald Motzkus on or about December 19, 2001;

     WHEREAS,  pursuant to the  Agreements  certain  monies were advanced in the
form of a loan to  Monument  Title  totaling  an  amount  to  $77,952.50,  which
including interest to November 1, 2004, totals $94,177.27.

     WHEREAS, also according to the Agreements, Security National had the option
to acquire 100% of the common stock of Monument Title (the Option to Acquire);

     WHEREAS,  pursuant to the lending  transaction  whereby  Security  National
advanced to Monument Title the $77,952.50,  it caused a Uniform  Commercial Code
Filing (the "Filing") to be placed upon all assets of Monument Title;

     NOW THEREFORE, as of the 1st day of November 2004, the parties hereby agree
as follows:

1.   That the loan in the current amount of $94,177.27 be repaid within 7 (seven
     days) from the date hereof with interest in cash.

2.   Upon receipt of the loan  repayment  Security  National  shall  release its
     Filing upon the assets of Monument Title.

3.   That Security  National  shall convey its interest in the Option to Acquire
     in return for the payment of an additional  $94,177.27 to be paid under the
     following terms and conditions:

     a.   A minimum payment of $500 per month for the first 12 months  following
          the date of execution hereof;

     b.   A minimum payment of $1,000 per month for the 13th through 24th months
          following the date of execution hereof;

     c.   After the 24th month the then outstanding  balance shall bear interest
          at the 3-year Treasury Rate plus one percent (1%). The minimum payment
          for the 25th month  through 36th month shall be $1,500 per month,  the
          minimum  payment for the 37th month through 48th month shall be $2,000
          per month.  The minimum  payment for the 48th month through 60th month
          shall be $2,500 and any remaining unpaid balance,  including interest,
          shall be due and payable at the  conclusion of the 60th month from the
          date hereof.



Monument Title by Ronald Motzkus        Date       Ronald Motzkus, Individually



Security National Financial Corporation     Date
By:  Scott M. Quist
                          AGREEMENT AND PLAN OF MERGER


THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") dated effective as of
January 1, 2005,  is made and entered into by and among  SECURITY  NATIONAL LIFE
INSURANCE COMPANY, a Utah corporation  ("Security National Life"), SSLIC HOLDING
CORPORATION,  a Florida  corporation  and wholly  owned  subsidiary  of Security
National Life ("SSLIC Holding") and SOUTHERN SECURITY LIFE INSURANCE  COMPANY, a
Florida corporation  ("SSLIC") (Security National Life, SSLIC Holding, and SSLIC
collectively, the "Parties").

                              W I T N E S S E T H:

WHEREAS,  prior to the  execution of this Merger  Agreement,  Security  National
Life,   SSLIC   Holding  and  SSLIC  entered  into  an  Agreement  and  Plan  of
Reorganization dated as of August 25, 2004, and amended on December 7, 2004 (the
"Plan of Reorganization") providing for certain representations, warranties, and
agreements in connection with the transaction contemplated; and

WHEREAS,  the Boards of Directors of Security  National Life,  SSLIC Holding and
SSLIC  approved the merger of SSLIC  Holding  Company into SSLIC (the  "Merger")
upon the terms and subject to the conditions set forth herein and in the Plan of
Reorganization and pursuant to which SSLIC will become a wholly owned subsidiary
of Security National Life; and

WHEREAS,  for federal income tax purposes,  it is intended that the Merger shall
qualify as a reorganization within the meeting of Section 368(a) of the Internal
Revenue Code of 1986,as amended (the "Code");

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:


                                    ARTICLE 1

                                   DEFINITIONS

1.1 Certain Terms Defined. The terms defined in the Plan of Reorganization shall
for all purposes of this Merger  Agreement  have the  meanings  specified in the
Plan of Reorganization, unless the context expressly or by necessary implication
otherwise requires.


                                    ARTICLE 2

                               AGREEMENT TO MERGE

2.1 Agreement to Merge. In accordance with the provisions of Section 607.1105 of
the Florida Business Corporation Act, at the Effective Time of the Merger, SSLIC
Holding  shall be merged  with and into SSLIC upon the terms and  conditions  of
this Merger Agreement and the Plan of Reorganization. Pursuant to such Merger:

     (a) The separate  existence of SSLIC Holding shall cease in accordance with
the provisions of Section 607.0101 et seq. of the Florida  Business  Corporation
Act.

     (b) SSLIC will be the surviving corporation in the Merger and will continue
to be governed by the laws of the State of Florida,  and the separate  corporate
existence of SSLIC and all of its rights, privileges, immunities and franchises,
public or  private,  and all of its  duties  and  liabilities  as a  corporation
organized  under the laws of the State of Florida,  will continue  unaffected by
the Merger.

     (c) SSLIC will become a privately-held company and wholly-owned  subsidiary
of Security National Life.

     (d) The unaffiliated stockholders of SSLIC, holding an aggregate of 490,816
shares of SSLIC Common,  will become  entitled to receive $3.84 in cash for each
issued  and  outstanding  share  of  their  SSLIC  Common,  or an  aggregate  of
$1,884.733.

2.2      Exchange of SSLIC Common for Cash

     (a) Upon  completion  of the Merger,  each share of SSLIC Common held by an
unaffiliated stockholder of SSLIC immediately prior to the Effective Time of the
Merger  will,  by virtue of the Merger and without any action on the part of the
stockholder  thereof,  automatically be canceled and converted into the right to
receive  cash in the  amount  equal  to  $3.84  per  share.  In  addition,  each
unaffiliated stockholder of SSLIC immediately prior to the effective time of the
Merger will,  by virtue of the Merger and without any action on the part of such
stockholder,  cease being a stockholder of SSLIC and automatically  receive cash
in an amount  equal to the  number of shares of SSLIC  Common  held of record by
such stockholder at such time multiplied by $3.84 per share.

     (b)  The  Merger  Consideration  shall  be  delivered  to the  unaffiliated
stockholders of SSLIC as follows:

          (i) No later than 10:00 a.m.  (Mountain  Standard Time) on the Closing
     Date,  Security  National  Life and SSLIC  Holding shall deliver the Merger
     Consideration to Security National Life.

          (ii)  Promptly  after  the  Effective  Time  of  the  Merger,  and  in
     accordance with Section 2.3 hereof,  the Disbursing  Agent shall deliver to
     the unaffiliated  stockholders of SSLIC Common at the Effective Time of the
     Merger,  the Merger  Consideration  in the  proportion set forth in Section
     2.2(a) hereof.

2.3 Delivery of Cash for SSLIC Common and  Surrender of  Certificates  for SSLIC
Common.  All deliveries of Merger  Consideration  to be made to the unaffiliated
stockholders  of SSLIC  Common  shall be made by delivery of cash payment by the
Disbursing  Agent  to and in the name of each  holder  of  SSLIC  Common  or its
designated  agent or transferee.  After the Effective Time of the Merger,  there
shall be no further  registry of transfers in respect of SSLIC Common.  Promptly
after the Effective  Time of the Merger,  Security  National Life will cause the
Disbursing  Agent to send a notice and a transmittal  form to each  unaffiliated
holder of record of SSLIC Common  immediately prior to the Effective Time of the
Merger  advising  such  holders of the terms of the Merger  Consideration  to be
effected  in  connection  with  the  Merger,   the  procedure  for  surrendering
certificates  for SSLIC Common to Security  National Life, and the procedure for
delivery to such stockholder of the cash amount to which such holder is entitled
pursuant to the terms  hereof and the Plan of  Reorganization.  If any such cash
payment  is to be  delivered  to a name  other  than  that in  which  the  stock
certificate is  registered,  the  certificate  so surrendered  shall be properly
endorsed and otherwise in proper form for transfer.

2.4 Dissenting  Shareholders.  The duties and rights of a dissenting stockholder
of SSLIC Common, as well as the duties and rights of the surviving  corporation,
shall be as  provided  in the  Florida  Business  Corporation  Act.  If any such
stockholder  shall not  perfect  his rights as a  dissenting  shareholder  under
Section  607.1301  et seq.  of the  Florida  Business  Corporation  Act, or such
stockholder shall thereafter withdraw such election or otherwise become bound by
the provisions of the Plan of  Reorganization  pursuant to the Florida  Business
Corporation Act, the amount of cash payment to such dissenting stockholder shall
be  entitled  to be paid shall be the amount  such  stockholder  would have been
entitled under the Plan of  Reorganization  had such  stockholder  not perfected
such rights.

2.5  Surviving  Corporation.  Except  as  provided  otherwise  in  the  Plan  of
Reorganization:

     (a) The Articles of Incorporation of SSLIC as in effect  immediately  prior
to the Effective  Time of the Merger shall be the Articles of  Incorporation  of
the Surviving Corporation after the Effective Time.

     (b) The  Bylaws of SSLIC as in effect  immediately  prior to the  Effective
Time of the Merger shall be the Bylaws of the  Surviving  Corporation  after the
Effective Time.

2.6 Effectiveness of Merger.  The Merger shall become effective at the Effective
Time of the Merger as defined in the Plan of Reorganization.


                                    ARTICLE 3

                                  MISCELLANEOUS

3.1 Termination.  This Merger Agreement shall terminate in the event of and upon
termination of the Plan of Reorganization.

3.2 Prior  Agreements;  Modifications.  This  Merger  Agreement  and the Plan of
Reorganization  constitute the entire agreement between the parties with respect
to the  subject  matter  hereof,  and  shall  supersede  all  prior  agreements,
documents, or other instruments with respect to the matters covered hereby. This
Agreement may be amended by an  instrument  in writing  signed by each of SSLIC,
SSLIC  Holding and  Security  National  Life;  provided,  however,  that no such
amendment  entered into without the written consent of the shareholders of SSLIC
may decrease the Merger Consideration.

3.3 Captions  and Table of Contents.  The captions and table of contents in this
Merger  Agreement are for convenience only and shall not be considered a part of
or affect the  construction  or  interpretation  of any provision of this Merger
Agreement.

3.4 Governing Law. The terms of this Merger  Agreement shall be governed by, and
interpreted  and construed in accordance  with the provisions of the laws of the
State of Florida without regard to its conflicts of law principles.

3.5  Counterparts.  This  Merger  Agreement  may be  executed  in any  number of
counterparts, each of which, when so executed, shall constitute an original copy
hereof.

3.6 Severability.  If any clause, provision, or section of this Merger Agreement
is  ruled  illegal,   invalid,  or  unenforceable  by  any  court  of  competent
jurisdiction,  the invalidity or unenforceability of such clause,  provision, or
section shall not affect any of the remaining provisions hereof.

3.7 Notices.  Any notice,  request  instruction,  or other  document to be given
hereunder  shall  be in  writing  and  shall  be  transmitted  by  certified  or
registered mail, postage prepaid,  by reputable express courier, or by facsimile
transmission.  The  addresses  or  facsimile  telephone  numbers  to which  such
communications shall be sent are as follows:

If to SSLIC:

                  Southern Security Life Insurance Company
                  755 Rinehart Road
                  Lake Mary, Florida 32746
                  Attention: Scott M. Quist, President and
                      Chief Operating Officer
                  Facsimile Number: (407) 321-7113

                  With a copy to:

                  Mackey Price Thompson & Ostler
                  57 West 200 South, Suite 350
                  Salt Lake City, Utah 84101-3663
                  Attention: Randall A. Mackey, Esq.
                  Facsimile Number: (801) 575-5006

If to Security National Life:

                  Security National Life Insurance Company
                  5300 South 360 West, Suite 250
                  Salt Lake City, Utah 84123
                  Attention: Scott M. Quist, President and
                      Chief Operating Officer
                  Facsimile Number: (801) 265-9882

or to such other  address or  facsimile  telephone  number as any party may from
time to time designate to the others in writing.

3.8 Waiver.  The  performance of any covenant or agreement or the fulfillment of
any condition of this Merger Agreement by Security  National Life, SSLIC Holding
and SSLIC may be  expressly  waived  only in writing by the other  parties.  Any
waiver  hereunder  shall be effective only in the specific  instance and for the
purpose for which  given.  No failure or delay on the part of Security  National
Life, SSLIC Holding and SSLIC in exercising any right, power, or privilege under
this Merger Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right,  power, or privilege hereunder preclude any other
or further  exercise  thereof or the  exercise  of any other  right,  power,  or
privilege.

     IN WITNESS  WHEREOF,  each of the parties  hereto,  intending to be legally
bound  hereby,  has duly  executed  this Merger  Agreement  as of the date first
written above.

                                   SOUTHERN SECURITY LIFE
                                   INSURANCE COMPANY



                                By:______________________________
                                   Scott M. Quist, President and
                                   Chief Operating Officer

                                   SECURITY NATIONAL LIFE
                                   INSURANCE COMPANY



                                By:______________________________
                                   Scott M. Quist, President and
                                   Chief Operating Officer

                                   SSLIC HOLDING CORPORATION



                                By:______________________________
                                   Scott M. Quist, President and
                                   Chief Operating Officer