SECURITY NATIONAL FINANCIAL CORPORATION
5300 South 360 West, Suite 250
Salt Lake City, Utah 84123
June 7, 2005
Dear Stockholder:
On behalf of the Board of Directors, it is my pleasure to invite you to
attend the Annual Meeting of Stockholders of Security National Financial
Corporation (the "Company") to be held on Friday, July 8, 2005, at 10:00 a.m.,
Mountain Daylight Time, at 5300 South 360 West, Suite 250, Salt Lake City, Utah.
The formal notice of the Annual Meeting and the Proxy Statement have been
made a part of this invitation. Also enclosed is a copy of the Company's Annual
Report for the year ended December 31, 2004.
The matters to be addressed at the meeting will include the election of
seven directors and the ratification of the appointment of Hansen, Barnett &
Maxwell, P.C. as the Company's registered public independent accountants for the
fiscal year ending December 31, 2005. I will also report on the Company's
business activities and answer any stockholder questions. The Board of Directors
recommends that you vote FOR election of the director nominees and FOR
ratification of appointment of the registered public independent accountants.
Please refer to the Proxy Statement for detailed information on each of the
proposals and the Annual Meeting.
Your vote is very important. We hope you will take a few minutes to review
the Proxy Statement and complete, sign, and return your Proxy Card in the
envelope provided, even if you plan to attend the meeting. Please note that
sending us your Proxy will not prevent you from voting in person at the meeting,
should you wish to do so.
Thank you for your support of Security National Financial Corporation. We
look forward to seeing you at the Annual Meeting.
Sincerely yours,
George R. Quist
Chairman of the Board and
Chief Executive Officer
SECURITY NATIONAL FINANCIAL CORPORATION
5300 South 360 West, Suite 250
Salt Lake City, Utah 84123
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 8, 2005
Dear Stockholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Security
National Financial Corporation (the "Company"), a Utah corporation, will be held
on Friday, July 8, 2005, at 5300 South 360 West, Suite 250, Salt Lake City,
Utah, at 10:00 a.m., Mountain Daylight Time, to consider and act upon the
following:
1. To elect a Board of Directors consisting of seven directors (two directors
to be elected exclusively by the Class A common stockholders voting
separately as a class and the remaining five directors to be elected by the
Class A and Class C common stockholders voting together) to serve until the
next Annual Meeting of Stockholders and until their successors are elected
and qualified;
2. To ratify the appointment of Hansen, Barnett & Maxwell, P.C. as the
Company's registered public independent accountants for the fiscal year
ending December 31, 2005; and
3. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on May 24, 2005, as
the record date for determining stockholders entitled to notice of and to vote
at the Annual Meeting and any adjournment thereof. A list of such stockholders
will be available for examination by a stockholder for any purpose relevant to
the meeting during ordinary business hours at the offices of the Company at 5300
South 360 West, Suite 250, Salt Lake City, Utah during the 20 days prior to the
meeting.
If you do not expect to attend the meeting in person, it is important that
your shares be represented. Please use the enclosed proxy card to vote on the
matters to be considered at the meeting, sign and date the proxy card and mail
it promptly in the enclosed envelope, which requires no postage if mailed in the
United States. You may revoke your proxy at any time before the meeting by
written notice to such effect, by submitting a subsequently dated proxy or by
attending the meeting and voting in person. If your shares are held in "street
name," you should instruct your broker how to vote in accordance with your
voting instruction form.
By order of the Board of Directors,
G. Robert Quist
First Vice President and Secretary
June 7, 2005
Salt Lake City, Utah
SECURITY NATIONAL FINANCIAL CORPORATION
5300 South 360 West, Suite 250
Salt Lake City, Utah 84123
PROXY STATEMENT
For Annual Meeting of Stockholders
To Be Held on July 8, 2005
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Security National Financial Corporation
(the "Company") for use at the Annual Meeting of Stockholders to be held on
Friday, July 8, 2005, at 5300 South 360 West, Suite 250, Salt Lake City, Utah,
at 10:00 a.m., Mountain Daylight Time, or at any adjournment or postponements
thereof (the "Annual Meeting"). The shares covered by the enclosed Proxy, if
such is properly executed and received by the Board of Directors prior to the
meeting, will be voted in favor of the proposals to be considered at the Annual
Meeting, and in favor of the election of the nominees to the Board of Directors
(two nominees to be elected by the Class A common stockholders voting separately
as a class and five nominees to be elected by the Class A and Class C common
stockholders voting together) as listed unless such Proxy specifies otherwise,
or the authority to vote in the election of directors is withheld.
A Proxy may be revoked at any time before it is exercised by giving written
notice to the Secretary of the Company at 5300 South 360 West, Suite 250, Salt
Lake City, Utah 84123, Attention: G. Robert Quist, by submitting in writing a
Proxy bearing a later date, or by attending the Annual Meeting and voting in
person. Stockholders may vote their shares in person if they attend the Annual
Meeting, even if they have executed and returned a Proxy. This Proxy Statement
and accompanying Proxy Card are being mailed to stockholders on or about June 7,
2005.
If a stockholder wishes to assign a proxy to someone other than the
Directors' Proxy Committee, all three names appearing on the Proxy Card must be
crossed out and the name(s) of another person or persons (not more than three)
inserted. The signed card must be presented at the meeting by the person(s)
representing the shareholder.
The cost of this solicitation will be borne by the Company. The Company may
reimburse brokerage firms and other persons representing beneficial owners of
shares for their expenses in forwarding solicitation materials to such
beneficial owners. Proxies may also be solicited by certain of the Company's
directors, officers, and regular employees, without additional compensation.
The matters to be brought before the Annual Meeting are (1) to elect
directors to serve for the ensuing year; (2) to ratify the appointment of
Hansen, Barnett & Maxwell, P.C. as the Company's registered public independent
accountants for the fiscal year ending December 31, 2005; and (3) to transact
such other business as may properly come before the Annual Meeting.
RECORD DATE AND VOTING INFORMATION
Only holders of record of common stock at the close of business on May 24,
2005, will be entitled to vote at the Annual Meeting. As of May 24, 2005, there
were issued and outstanding 5,441,713 shares of Class A common stock, $2.00 par
value per share and 6,380,197 shares of Class C common stock, $.20 par value per
share, resulting in a total of 11,821,910 shares of both Class A and Class C
common shares. A majority of the outstanding shares (or 5,910,956 shares) of
common stock will constitute a quorum for the transaction of business at the
meeting. A list of our stockholders will be available for review at the
Company's executive offices during regular business hours for a period of 20
days before the Annual Meeting.
The holders of each class of common stock of the Company are entitled to
one vote per share. Cumulative voting is not permitted in the election of
directors.
After carefully reading and considering the information contained in this
Proxy Statement, each holder of the Company's common stock should complete, date
and sign the Proxy Card and mail the Proxy Card in the enclosed return envelope
as soon as possible so that those shares of the Company's common stock can be
voted at the Annual Meeting, even if the holders plan to attend the Annual
Meeting in person.
Proxies received at any time before the Annual Meeting, and not revoked or
superseded before being voted, will be voted at the Annual Meeting. If a Proxy
indicates a specification, it will be in accordance with the specification. If
no specification is indicated, the Proxy will be voted for approval of the
election of the seven directors recommended by the Board of Directors, for the
ratification of the appointment of Hansen, Barnett & Maxwell, P.C. as the
Company's registered public independent accountants for the fiscal year ending
December 31, 2005, and in the discretion of the persons named in the Proxy with
respect to the other business that may properly come before the meeting or any
adjournments of the meeting. You may also vote in person by ballot at the Annual
Meeting.
The Company's Articles of Incorporation provide that the Class A common
stockholders and Class C common stockholders have different voting rights in the
election of directors. The Class A common stockholders voting separately as a
class will be entitled to vote for two of the seven directors to be elected (the
nominees to be voted upon by the Class A common stockholders separately consist
of Messrs. J. Lynn Beckstead, Jr. and H. Craig Moody).
The remaining five directors will be elected by the Class A and Class C
common stockholders voting together (the nominees to be so voted upon consist of
Messrs. Charles L. Crittenden, Robert G. Hunter, M.D., George R. Quist, Scott M.
Quist, and Norman G. Wilbur). For the other business to be conducted at the
Annual Meeting, the Class A and Class C common stockholders will vote together,
one vote per share. Class A common stockholders will receive a different form of
Proxy than the Class C common stockholders.
Your vote is important. Please complete and return the Proxy Card so your
shares can be represented at the Annual Meeting, even if you plan to attend in
person.
ELECTION OF DIRECTORS
PROPOSAL 1
The Nominees
The Company's Board of Directors consists of seven directors. All directors
are elected annually to serve until the next annual meeting of stockholders and
until their respective successors are duly elected and qualified, or until their
earlier resignation or removal. The nominees for the upcoming election of
directors include four independent directors, as defined in the applicable rules
for companies traded on The Nasdaq Stock Market, and three members of the
Company's senior management. All of the nominees for director have served as
directors since the 2004 Annual Meeting.
The nominees to be elected by the holders of Class A common stock are as
follows:
Name Age Director Since Position(s) with the Company
---- --- -------------- ----------------------------
J. Lynn Beckstead, Jr. 51 March 2002 Vice President of
Mortgage Operations
and Director
H. Craig Moody 53 September 1995 Director
The nominees for election by the holders of Class A and Class C common
stock, voting together, are as follows:
Name Age Director Since Position(s) with the Company
---- --- -------------- ----------------------------
Charles L. Crittenden 85 October 1979 Director
Robert G. Hunter, M.D. 45 October 1998 Director
George R. Quist 84 October 1979 Chairman of the Board
and Chief Executive Officer
Scott M. Quist 52 May 1986 President, Chief Operating
Officer and Director
Norman G. Wilbur 66 October 1998 Director
The following is a description of the business experience of each of the
nominees and 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 1990 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.
The Board of Directors recommends that stockholders vote "FOR" the election
of each of the director nominees.
The Board of Directors, Board Committees and Meetings
The Company's Bylaws provide that the Board of Directors shall consist of
not less than three nor more than eleven members. The term of office of each
director is for a period of one year or until the election and qualification of
his successor. A director is not required to be a resident of the State of Utah
but must be a stockholder of the Company. The Board of Directors held a total of
five meetings during the fiscal year ended December 31, 2004. No directors
attended fewer than 75% of all meetings of the Board of Directors during the
2004 fiscal year.
The size of the Board of Directors of the Company for the coming year is
seven members. Four of the directors, or a majority of the Board of Directors,
are independent directors. The independent directors have regularly scheduled
meetings at which only independent directors are present.
Unless authority is withheld by your Proxy, it is intended that the common
stock represented by your Proxy will be voted for the respective nominees listed
above. If any nominee should not serve for any reason, the Proxy will be voted
for such person as shall be designated by the Board of Directors to replace such
nominee. The Board of Directors has no reason to expect that any nominee will be
unable to serve. There is no arrangement between any of the nominees and any
other person or persons pursuant to which he was or is to be selected as a
director. There is no family relationship between or among any of the nominees,
except that Scott M. Quist is the son of George R. Quist.
There are four committees of the Board of Directors, which meet
periodically during the year: the Audit Committee, the Compensation Committee,
the Executive Committee, and the Nominating and Corporate Governance Committee.
The Compensation Committee is responsible for recommending to the Board of
Directors for approval the annual compensation of each executive officer of the
Company and the executive officers of the Company's subsidiaries, developing
policy in the areas of compensation and fringe benefits, contributions under the
Employee Stock Ownership Plan, contribution under the 401(k) Retirement Savings
Plan, Deferred Compensation Plan, granting of options under the stock option
plans, and creating other employee compensation plans. The Compensation
Committee consists of Messrs. Charles L. Crittenden (Chairman of the Committee),
H. Craig Moody, Robert G. Hunter, M.D. and Norman G. Wilbur. During 2004, the
Compensation Committee met on two occasions.
The Audit Committee directs the auditing activities of the Company's
internal auditors and outside public accounting firm and approves the services
of the outside public accounting firm. The Audit Committee consists of Messrs.
Charles L. Crittenden, H. Craig Moody and Norman G. Wilbur (Chairman of the
Committee). During 2004, the Audit Committee met on four occasions.
The Executive Committee reviews Company policy, major investment activities
and other pertinent transactions of the Company. The Executive Committee
consists of Messrs. George R. Quist, Scott M. Quist, and H. Craig Moody. During
2004, the Executive Committee met on two occasions. During 2004, there were four
meetings of the Company's Board of Directors.
The Nominating and Corporate Governance Committee identifies individuals
qualified to become board members consistent with criteria approved by the
board, recommends to the board the persons to be nominated by the board for
election as directors at a meeting of stockholders, and develops and recommends
to the board a set of corporate governance principles. The Nominating and
Corporate Governance Committee consists of Messrs. Charles L. Crittenden, H.
Craig Moody (Chairman of the Committee), Robert G. Hunter, M.D. and Norman G.
Wilbur. The Nominating and Corporate Governance Committee is composed solely of
independent directors, as defined in the listing standards of The Nasdaq Stock
Market, Inc.
Director Nominating Process
The process for identifying and evaluating nominees for directors include
the following steps: (1) the Nominating and Corporate Governance Committee,
Chairman of the Board or other board members identify a need to fill vacancies
or add newly created directorships; (2) the Chairman of the Nominating and
Corporate Governance Committee initiates a search and seeks input from board
members and senior management and, if necessary, obtains advice from legal or
other advisors (but does not hire an outside search firm); (3) director
candidates, including any candidates properly proposed by stockholders in
accordance with the Company's bylaws, are identified and presented to the
Nominating and Corporate Governance Committee; (4) initial interviews with
candidates are conducted by the Chairman of the Nominating and Corporate
Governance Committee; (5) the Nominating and Corporate Governance Committee
meets to consider and approve final candidate(s) and conduct further interviews
as necessary; and (6) the Nominating and Corporate Governance Committee makes
recommendations to the board for inclusion in the slate of directors at the
annual meeting. The evaluation process will be the same whether the nominee is
recommended by a stockholder or by a member of the Board of Directors.
The Nominating and Corporate Governance Committee will consider nominees
proposed by stockholders. To recommend a perspective nominee for the Nominating
and Corporate Governance Committee's consideration, stockholders may submit the
candidate's name and qualifications to: G. Robert Quist, First Vice President
and Secretary, Security National Financial Corporation, 5300 South 360 West,
Suite 250, Salt Lake City, Utah 84123. Recommendations from stockholders for
nominees must be received by Mr. Quist not later than the date set forth under
"Deadline for Receipt of Stockholder's Proposals for Annual Meeting to be Held
in July 2006"; below.
The Nominating and Corporate Governance Committee operates pursuant to a
written charter. The full text of the charter is published on the Company's
website at www.securitynational.com. Stockholders may also obtain a copy of the
charter without charge by writing to: G. Robert Quist, First Vice President and
Secretary, Security National Financial Corporation, 5300 South 360 West, Suite
250, Salt Lake City, Utah 84123.
Meetings of Non-Management Directors
The Company's non-management directors regularly meet without management
participation. In addition, an executive session including only the independent
directors is held at least annually.
Stockholder Communications with the Board of Directors
Stockholders who wish to communicate with the Board of Directors or a
particular director may send a letter to G. Robert Quist, First Vice President
and Secretary, Security National Financial Corporation, 5300 South 360 West,
Suite 250, Salt Lake City, Utah 84123. The mailing envelope must contain a clear
notation indicating that the enclosed letter is a "Stockholder-Board
Communication" or "Stockholder-Director Communication." All such letters must
identify the author as a stockholder and clearly state whether the intended
recipients are all members of the board or just certain specified individual
directors. The Secretary will make copies of all such letters and circulate them
to the appropriate director or directors.
Executive Officers
The following table sets forth certain information with respect to the
executive officers of the Company (the business biographies for the first two
individuals are set forth above):
Name Age Title
------------------ --- ------------------
George R. Quist(1) 84 Chairman of the Board and
Chief Executive Officer
Scott M. Quist(1) 52 President, Chief Operating Officer
and Director
G. Robert Quist(1) 53 First Vice President and Secretary
Stephen M. Sill 59 Vice President, Treasurer and
Chief Financial Officer
J. Lynn Beckstead, Jr. 51 Vice President of Mortgage Operations
and Director
Christie Q. Overbaugh(1) 56 Senior Vice President of Internal
Operations of Southern Security Life
Insurance Company
(1) George R. Quist is the father of Scott M. Quist, G. Robert Quist and
Christie Q. Overbaugh
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 a past president and a former 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, Mr. Quist 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 its subsidiaries,
or any affiliate thereof has had any transactions with the Company or its
subsidiaries during 2004 or 2003.
Corporate Governance
Corporate Governance Guidelines. The board has adopted the Security
National Financial Corporation Corporate Governance Guidelines. These guidelines
outline the functions of the board, director qualifications and
responsibilities, and various processes and procedures designed to insure
effective and responsive governance. The guidelines are reviewed from time to
time in response to regulatory requirements and best practices and are revised
accordingly. The full text of the guidelines is published on the Company's
website at www.securitynational.com. A copy of the Corporate Governance
Guidelines may also be obtained at no charge by written request to the attention
of G. Robert Quist, First Vice President and Secretary, Security National
Financial Corporation, 5300 South 360 West, Suite 250, Salt Lake City, Utah
84123.
Code of Business Conduct. All of the Company's officers, employees and
directors are required to comply with the Company's Code of Business Conduct and
Ethics to help insure that the Company's business is conducted in accordance
with appropriate standards of ethical behavior. The Company's Code of Business
Conduct and Ethics covers all areas of professional conduct, including customer
relationships, conflicts of interest, insider trading, financial disclosures,
intellectual property and confidential information, as well as requiring
adherence to all laws and regulations applicable to the Company's business.
Employees are required to report any violations or suspected violations of the
Code. The Code includes an anti-retaliation statement. The full text of the Code
of Business Conduct and Ethics is published on the Company's website at
www.securitynational.com. A copy of the Code of Business Conduct and Ethics may
also be obtained at no charge by written request to the attention of G. Robert
Quist, First Vice President and Secretary, Security National Financial
Corporation, 5300 South 360 West, Suite 250, Salt Lake City, Utah 84123.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
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 2003 87,175 16,599 2,400 0 35,000 0 9,748
and Secretary
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; 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 the years 2004
and 2003, respectively; and Stephen M. Sill $11,134 for the year
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; and 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 the
year 2002); and J. Lynn Beckstead, Jr. ($4,200 for the year 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 Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares December 31, December 31,
Acquired on 2004(#) 2004
Exercise Value ------- ------
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, 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 $13,200 per year by the Company for their services
and are reimbursed for their expenses in attending board and committee meetings.
No additional fees are paid by the Company for committee participation or
special assignments. However, each director is provided with an annual grant of
stock options to purchase 1,000 shares of Class A Common Stock under the 2000
Director Stock Option Plan.
Employee 401(k) Retirement Savings Plan
In 1995, the Company's Board of Directors adopted a 401(k) Retirement
Savings Plan. Under the terms of the 401(k) plan, effective as of January 1,
1995, the Company may make discretionary employer matching contributions to its
employees who choose to participate in the plan. The plan allows the board to
determine the amount of the contribution at the end of each year. The Board
adopted a contribution formula specifying that such discretionary employer
matching contributions would equal 50% of the participating employee's
contribution to the plan to purchase Company stock up to a maximum discretionary
employee contribution of 1/2% of a participating employee's compensation, as
defined by the plan.
All persons who have completed at least one year's service with the Company
and satisfy other plan requirements are eligible to participate in the 401(k)
plan. All Company matching contributions are invested in the Company's Class A
Common Stock. The Company's matching contributions for 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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who own more than 10% of any class of
the Company's common stock to file reports of ownership and periodic changes in
ownership of the Company's common stock with the Securities and Exchange
Commission. Such persons are also required to furnish the Company with copies of
all Section 16(a) reports they file.
Based solely on its review of the copies of stock reports received by it
with respect to fiscal 2004, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
directors, officers and greater than 10% beneficial owners were compiled with,
except that George R. Quist, Chairman and Chief Executive Officer of the
Company, through an oversight, filed one late Form 4 report reporting the
purchase of shares of Class A common stock in one transaction.
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.
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.
(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.
The Company's 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.
REPORT OF THE COMPENSATION COMMITTEE
Under rules established by the Securities and Exchange Commission (the
"Commission"), the Company is required to provide certain data and information
in regard to the compensation and benefits provided to the Company's Chairman of
the Board of Directors and Chief Executive Officer and the five other most
highly compensated executive officers. In fulfillment of this requirement, the
Compensation Committee, at the direction of the Board of Directors, has prepared
the following report for inclusion in this Proxy Statement.
Executive Compensation Philosophy. The Compensation Committee of the Board
of Directors is composed of four directors, all of whom are independent, outside
directors. The Compensation Committee is responsible for setting and
administering the policies and programs that govern both annual compensation and
stock ownership programs for the executive officers of the Company. The
Company's executive compensation policy is based on principles designed to
ensure that an appropriate relationship exists between executive pay and
corporate performance, while at the same time motivating and retaining executive
officers.
Executive Compensation Components. The key components of the Company's
compensation program are base salary, an annual incentive award, and equity
participation. These components are administered with the goal of providing
total compensation that is competitive in the marketplace, rewards successful
financial performance and aligns executive officers' interests with those of
stockholders. The Compensation Committee reviews each component of executive
compensation on an annual basis.
Base Salary. Base salaries for executive officers are set at levels
believed by the Compensation Committee to be sufficient to attract and retain
qualified executive officers. Base pay increases are provided to executive
officers based on an evaluation of each executive's performance, as well as the
performance of the Company as a whole. In establishing base salaries, the
Compensation Committee not only considers the financial performance of the
Company, but also the success of the executive officers in developing and
executing the Company's strategic plans, developing management employees and
exercising leadership. The Compensation Committee believes that executive
officer base salaries for 2004 were reasonable as compared to amounts paid by
companies of similar size.
Annual Incentive. The Compensation Committee believes that a significant
proportion of total cash compensation for executive officers should be subject
to attainment of specific Company financial performance. This approach creates a
direct incentive for executive officers to achieve desired performance goals and
places a significant percentage of each executive officer's compensation at
risk. Consequently, each year the Compensation Committee establishes potential
bonuses for executive officers based on the Company's achievement of certain
financial performance. The Compensation Committee believes that executive
officer annual bonuses for 2004 were reasonable as compared to amounts paid by
companies of similar size.
Stock Options. The Compensation Committee believes that equity
participation is a key component of its executive compensation program. Stock
options are granted to executive officers primarily based on the officer's
actual and potential contribution to the Company's growth and profitability and
competitive marketplace practices. Option grants are designed to retain
executive officers and motivate them to enhance stockholder value by aligning
the financial interests of executive officers with those of stockholders. Stock
options also provide an effective incentive for management to create stockholder
value over the long term since the full benefit of the compensation package
cannot be realized unless an appreciation in the price of the Company's Class A
common stock occurs over a number of years.
Compensation of Chief Executive Officer. Consistent with the executive
compensation policy and components described above, the Compensation Committee
determined the salary, bonus and stock options received by George R. Quist, the
Chairman of the Board and Chief Executive Officer of the Company, for services
rendered in 2004. Mr. Quist received a base salary of $165,600 for 2004. He also
received an annual bonus of $50,000 and stock options to purchase 100,000 shares
of the Company's Class A common stock, of which 50,000 shares are exercisable at
$3.96 per share and 50,000 shares are exercisable at $3.55 per share. Under the
Compensation Committee's rules, the Chief Executive Officer may not be present
during voting or deliberations related to his compensation.
COMPENSATION COMMITTEE
Charles L. Crittenden, Chairman
Robert G. Hunter, M.D.
H. Craig Moody
Norman G. Wilbur
REPORT OF THE AUDIT COMMITTEE
The Company has an Audit Committee consisting of three non-management
directors, Charles L. Crittenden, H. Craig Moody, and Norman G. Wilbur. Each
member of the Audit Committee is considered independent and qualified in
accordance with applicable independent director and audit committee listing
standards. The Company's Board of Directors has adopted a written charter for
the Audit Committee.
During the year 2004, the Audit Committee met four times. The Audit
Committee has met with management and discussed the Company's internal controls,
the quality of the Company's financial reporting, the results of internal and
external audit examinations, and the audited financial statements. In addition,
the Audit Committee met with the Company's former independent auditors, Tanner
LC, and discussed all matters required to be discussed by the auditors with the
Audit Committee under Statement on Auditing Standards No. 61 (communication with
audit committees). The Audit Committee reviewed and discussed with the auditors
their annual written report on their independence from the Company and its
management, which is made under Independence Standards Board Standard No. 1
(independence discussions with audit committees), and considered with the
auditors whether the provision of financial information systems design and
implementation and other non-audit services provided by them to the Company
during 2004 was compatible with the auditors' independence.
In performing these functions, the Audit Committee acts only in an
oversight capacity. In its oversight role, the Audit Committee relies on the
work and assurances of the Company's management, which is responsible for the
integrity of the Company's internal controls and its financial statements and
reports, and the Company's independent auditors, who are responsible for
performing an independent audit of the Company's financial statements in
accordance with generally accepted auditing standards and for issuing a report
on these financial statements.
Pursuant to the reviews and discussions described above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004, for filing with the Securities and Exchange
Commission.
AUDIT COMMITTEE
Norman G. Wilbur, Chairman
Charles L. Crittenden
H. Craig Moody
COMPANY STOCK PRICE PERFORMANCE
This graph below compares the cumulative total stockholder return of the
Company's Class A common stock with the cumulative total return on the Standard
& Poor's 500 Stock Index and the Standard & Poor's Insurance Index for the
period from December 31, 1999 through December 31, 2004. The graph assumes that
the value of the investment in the Company's Class A common stock and in each of
the indexes was 100 at December 31, 1999, and that all dividends were
reinvested.
The comparisons in the graph below are based on historical data and are not
intended to forecast the possible future performance of the Company's Class A
common stock.
December 31, December 31, December 31, December 31, December 31, December 31,
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
Security National
Financial Corporation 100 70 81 216 262 117
S&P 500 100 90 78 60 76 82
S&P Insurance Index 100 133 116 91 108 115
The graph set forth above is required by the Securities and Exchange
Commission and shall not be deemed to be incorporated by reference by any
general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933, as amended, or under the Securities
Exchange Act of 1934, as amended, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed soliciting material or filed under such acts.
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
PROPOSAL 2
The independent public accounting firm of Hansen, Barnett & Maxwell, P.C.
has been the Company's registered public independent accountants since May 20,
2005. The Audit Committee has recommended and the Board of Directors has
appointed Hansen, Barnett & Maxwell for purposes of auditing the consolidated
financial statements of the Company for the fiscal year ending December 31,
2005. It is anticipated that representatives of Hansen, Barnett & Maxwell will
be present at the Annual Meeting and will be provided an opportunity to make a
statement if they desire, and to be available to respond to appropriate
questions.
The Board of Directors recommends that stockholders vote "FOR" ratification
of the appointment of Hansen, Barnett & Maxwell, P.C. as the Company's
registered public independent accountants for fiscal year ending December 31,
2005.
AUDIT FEES, FINANCIAL INFORMATION SYSTEMS DESIGN
AND IMPLEMENTATION FEES AND ALL OTHER FEES
Fees for the year 2004 for the annual audit of the financial statements and
employee benefit plans and related quarterly reviews by Tanner L.C., the
Company's former registered public independent accountants, were approximately
$262,000. There were $19,000 in other fees during 2004.
OTHER MATTERS
The Company knows of no other matters to be brought before the Annual
Meeting, but if other matters properly come before the meeting, it is the
intention of the persons named in the enclosed form of Proxy to vote the shares
they represent in accordance with their judgment.
ANNUAL REPORT AND FINANCIAL STATEMENTS
Stockholders are referred to the Company's annual report, including
financial statements, for the fiscal year ended December 31, 2004. The annual
report is incorporated in this Proxy Statement and is not to be considered part
of the soliciting material. The Company will provide, without charge to each
stockholder upon written request, a copy of the Company's Annual Report Form
10-K as filed with the Securities and Exchange Commission for the fiscal year
ended December 31, 2004. Such requests should be directed to G. Robert Quist,
First Vice President and Secretary, at P.O. Box 57250, Salt Lake City, Utah
84157-0250.
DEADLINE FOR RECEIPT OF STOCKHOLDER'S PROPOSALS
FOR ANNUAL MEETING TO BE HELD IN JULY 2006
Any proposal by a stockholder to be presented at the Company's next Annual
Meeting of Stockholders expected to be held in July 2006 must be received at the
offices of the Company, P.O. Box 57250, Salt Lake City, Utah 84157-0250, no
later than March 31, 2006.
By order of the Board of Directors,
G. Robert Quist
First Vice President and Secretary
June 7, 2005
Salt Lake City, Utah
PROXY - SECURITY NATIONAL FINANCIAL CORPORATION - PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
CLASS C COMMON STOCK
The undersigned Class C common stockholder of Security National Financial
Corporation (the "Company") acknowledges receipt of the Notice of Annual Meeting
of the Stockholders to be held on Friday, July 8, 2005, at 5300 South 360 West,
Suite 250, Salt Lake City, Utah, at 10:00 a.m. Mountain Daylight Time, and
hereby appoints Messrs. George R. Quist, Scott M. Quist and G. Robert Quist, or
any of them, each with full power of substitution, as attorneys and proxies to
vote all the shares of the undersigned at said Annual Meeting of Stockholders
and at all adjournments or postponements thereof, hereby ratify and confirm all
that said attorneys and proxies may do or cause to be done by virtue hereof. The
above-named attorneys and proxies are instructed to vote all of the
undersigned's shares as follows:
1. To elect five of the seven directors to be voted upon by Class A and Class
C common stockholders together:
[ ] FOR all nominees listed below (except as marked to the contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
(INSTRUCTION: to withhold authority to vote for any individual nominee, strike a
line through that nominee's name in the list below.)
Charles L. Crittenden, Robert G. Hunter, M.D., Scott M. Quist
George R. Quist and Norman G. Wilbur
2. To ratify the appointment of Hansen, Barnett & Maxwell, P.C. as the
Company's registered public independent accountants for the fiscal year
ending December 31, 2005;
[ ] FOR [ ] AGAINST
3. To transact such other business as may properly come before the meeting or
any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
THE NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2 and 3.
Dated , 2005
------------------------------------------------------
- -----------------------------------------
Signature of Stockholder
- ------------------------------------------
Signature of Stockholder
Please sign your name exactly as it appears on your share certificate. If
shares are held jointly, each holder should sign. Executors, trustees, and other
fiduciaries should so indicate when signing. Please sign, date, and return this
Proxy Card immediately.
NOTE: Securities dealers or other representatives please state the number of
shares voted by this Proxy.
PROXY - SECURITY NATIONAL FINANCIAL CORPORATION - PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
CLASS A COMMON STOCK
The undersigned Class A common stockholder of Security National Financial
Corporation (the "Company") acknowledges receipt of the Notice of Annual Meeting
of the Stockholders to be held on Friday, July 8, 2005, at 5300 South 360 West,
Suite 250, Salt Lake City, Utah, at 10:00 a.m., Mountain Daylight Time, and
hereby appoints Messrs. George R. Quist, Scott M. Quist and G. Robert Quist, or
any of them, each with full power of substitution, as attorneys and proxies to
vote all the shares of the undersigned at said Annual Meeting of Stockholders
and at all adjournments or postponements thereof, hereby ratify and confirming
all that said attorneys and proxies may do or cause to be done by virtue hereof.
The above-named attorneys and proxies are instructed to vote all of the
undersigned's shares as follows:
1. To elect two directors to be voted upon by Class A common stockholders
voting separately as a class:
[ ] FOR all nominees listed below (except as marked to the contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
(INSTRUCTION: to withhold authority to vote for any individual nominee, strike a
line through that nominee's name in the list below.)
J. Lynn Beckstead, Jr. and H. Craig Moody
2. To elect the remaining five directors to be voted upon by Class A and Class
C common stockholders together:
[ ] FOR all nominees listed below (except as marked to the contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
(INSTRUCTION: to withhold authority to vote for any individual nominee, strike a
line through that nominee's name in the list below.)
Charles L. Crittenden, Robert G. Hunter, M.D., George R. Quist
Scott M. Quist, and Norman G. Wilbur
3. To ratify the appointment of Hansen, Barnett & Maxwell, P.C. as the
Company's registered public independent accountants for the fiscal year
ending December 31, 2005;
[ ] FOR [ ] AGAINST
4. To transact such other business as may properly come before the meeting or
any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
THE NOMINEES LISTED IN PROPOSALS 1 AND 2 ABOVE AND FOR PROPOSAL 3 and 4.
Dated , 2005
----------------------------------------------------------------
- -----------------------------------------
Signature of Stockholder
- -----------------------------------------
Signature of Stockholder
Please sign your name exactly as it appears on your share certificate. If
shares are held jointly, each holder should sign. Executors, trustees, and other
fiduciaries should so indicate when signing. Please sign, date, and return this
Proxy Card immediately.
NOTE: Securities dealers or other representatives please state the number of
shares voted by this Proxy.
My Fellow Shareholders:
I am pleased to report to you on the affairs of the Company for the year
ended December 31, 2004 and invite you to attend the annual stockholders meeting
to be held on July 8, 2005 at the Company's home office in Salt Lake City, Utah.
2004 was a year marked by transition for our Company. Some selected
statistics are instructive: In 2004 Cemetery and Mortuary profitability
increased 152% to $1,286,000 on a 6.55% revenue increase to $11,661,000; Life
insurance profitability decreased 4% to $1,933,000 on a revenue increase of
11.5% to $25,979,000; Mortgage operations resulted in a loss of $562,000, versus
a profit of $6,943,000 in 2003, on a 32% revenue decrease to $62,689,000. Cash
flow was sufficient that we reduced our outside indebtedness by 32% paying off
some $4,600,000 in debt.
The results in our memorial operations reflect the profitability
initiatives of the past several years. That segment still faces considerable
challenges in the market transition from in ground burial to cremation.
Cremation is neither more nor less profitable than traditional dispositions
depending upon the level of services requested. Our continuing challenge is to
train our staff to be attuned to the service needs of the cremation customer.
Our life insurance segment has done very well marketing its products
recording significant gains in year over year first year premium sales. This has
occurred in both our funeral planning and higher education markets. A
considerable factor in profitability has been the persistent low interest rate
environment. The current low interest rates are approaching our policy
contractual minimums, which has reduced our interest rate spreads thus
negatively impacting profitability. We have undertaken a number of initiatives
to increase our earned interest rates including opening a construction lending
operation, increasing our commercial real estate lending activities and our
"Fast Funding" insurance policy factoring program. Still, the low interest rates
remain problematical.
The interest rate environment also continues to impact our mortgage
operations. As interest rates have leveled off we have seen our origination
volumes decrease by 40%. This has been in line with industry experience.
Correspondingly, we have seen a decrease in the margins we are able to attain in
our secondary operations as we sell our completed loans. Our current strategy is
to maintain our existing 18 branches and bring each to profitability by
increasing their respective sales forces. This strategy to date has met mixed
results, however, we believe that over the longer term this strategy will yield
positive results.
Thank you for your continued confidence in our Company.
SECURITY NATIONAL FINANCIAL CORPORATION
MANAGEMENT REPORT AND FINANCIAL INFORMATION
The consolidated financial statements of Security National Financial Corporation
and all information in the annual report are the responsibility of management.
The statements have been prepared in conformity with generally accepted
accounting principles generally accepted in the United States. Financial
information elsewhere in this report is consistent with that in the consolidated
financial statements. The consolidated financial statements have been audited by
the independent registered public accounting firm of Tanner LC. Its role is to
render an independent professional opinion on Security National Financial
Corporation's financial statements.
Management maintains a system of internal controls designed to meet its
responsibilities for reliable financial statements. This system is designed to
provide reasonable assurance, at appropriate costs, that assets are safeguarded
and that transactions are properly recorded and executed in accordance with
management's authorization. Judgment is required to assess and balance the
relative costs and expected benefits of those controls.
The Board of Directors selects an Audit Committee from among its members. No
member of the Audit Committee is an employee of the Company. The Audit Committee
is responsible to the Board for reviewing the accounting and auditing procedures
and financial practices of the Company and for recommending the appointment of
the independent accountants. The Audit Committee meets periodically with
management and the independent accountants to review the work of each and
satisfy itself that they are properly discharging their responsibilities. The
independent accountants have free access to the Committee, without the presence
of management, to discuss their opinions on the adequacy of internal controls
and to review the quality of financial reporting.
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
(1) Earnings per share amounts have been adjusted for the effect of annual stock
dividends.
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Accumulated
Other
Additional Comprehensive
Class Class Paid-in Income (loss), Retained Treasury
A C Capital and Other Items Earnings Stock Total
-------- ------- --------- --------------- -------- ----- -----
Balance 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 gains -- -- -- 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003, and 2002
1) Significant Accounting Principles (Continued)
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 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003, and 2002
1) Significant Accounting Principles (Continued)
Reinsurance premiums, commissions, expense reimbursements, and reserves related
to reinsured business are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Expense allowances received in connection with reinsurance ceded are
accounted for as a reduction of the related policy acquisition costs and are
deferred and amortized accordingly.
Cemetery and Mortuary Operations
Pre-need sales of funeral services and caskets - revenue and costs associated
with the sales of pre-need funeral services and caskets are deferred until the
services are performed or the caskets are delivered.
Pre-need sales of cemetery interment rights (cemetery burial property) - revenue
and costs associated with the sales of pre-need cemetery interment rights are
recognized in accordance with the retail land sales provisions of Statement of
Financial Accounting Standards No. 66, "Accounting for the Sales of Real Estate"
(FAS No. 66). Under FAS 66, recognition of revenue and associated costs from
constructed cemetery property must be deferred until a minimum percentage of the
sales price has been collected. Revenues related to the pre-need sale of
unconstructed cemetery property will be deferred until such property is
constructed and meets the criteria of FAS No. 66 described above.
Pre-need sales of cemetery merchandise (primarily markers and vaults) - revenue
and costs associated with the sales of pre-need cemetery merchandise are
deferred until the merchandise is delivered.
Pre-need sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees) - revenue and costs
associated with the sales of pre-need cemetery services are deferred until the
services are performed.
Prearranged funeral and pre-need cemetery customer obtaining costs - costs
incurred related to obtaining new pre-need cemetery and prearranged funeral
business are accounted for under the guidance of the provisions of Statement of
Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance
Enterprises" (FAS No. 60). Obtaining costs, which include only costs that vary
with and are primarily related to the acquisition of new pre-need cemetery and
prearranged funeral business, are deferred until the merchandise is delivered or
services are performed.
Revenues and costs for at-need sales are recorded when a valid contract exists,
the services are performed, collection reasonably assured and there are no
significant obligations remaining.
The Company, through its mortuary and cemetery operations, provides a guaranteed
funeral arrangement wherein a prospective customer can receive future goods and
services at guaranteed prices. To accomplish this, the Company, through its life
insurance operations, sells to the customer an increasing benefit life insurance
policy that is assigned to the mortuaries. If, at the time of need, the
policyholder/potential mortuary customer utilizes one of the Company's
facilities, the guaranteed funeral arrangement contract that has been assigned
will provide the funeral goods and services at the contracted price. The
increasing life insurance policy will cover the difference between the original
contract prices and current prices. Risks may arise if the difference cannot be
fully met by the life insurance policy. However, management believes that given
current inflation rates and related price increases of goods and services, the
risk of exposure is minimal.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003, and 2002
1) Significant Accounting Principles (Continued)
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.
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003, and 2002
1) Significant Accounting Principles (Continued)
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 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003, and 2002
1) Significant Accounting Principles (Continued)
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.
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003, and 2002
1) Significant Accounting Principles (Continued)
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 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
Market 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
are netted
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)
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.
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003, and 2002
14) Business Segment Information (Continued)
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
================ ============= ============== ============= =============
65
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:
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
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.
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.
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.
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 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial Data
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,
Revenue 2004 2003(1) 2002 2001 2000
- ------- ---- ------- ---- ---- ----
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
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial Data (Continued)
Year Ended 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 interment rights (cemetery burial property) - revenue
and costs associated with the sales of pre-need cemetery interment rights are
recognized in accordance with the retail land sales provisions of Statement of
Financial Accounting Standards No. 66, "Accounting for the Sales of Real Estate"
(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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 (ten 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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").
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 of 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial ConditioN
and Results of Operations (Continued)
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
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.
SECURITY NATIONAL FINANCIAL CORPORATION
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.