SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): December 29, 2005
SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in this Charter)
Utah 0-9341 87-0345941 (State or other jurisdiction of incorporation)
(Commission File Number) (IRS Employer Identification No.)
5300 South 360 West, Salt Lake City, Utah 84123
- ------------------------------------------ -------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (801) 264-1060
--------------
Does Not Apply
(Former name or former address, if changed since last report)
ITEM 2.01. Acquisition of Memorial Insurance Company of America.
On December 29, 2005, Security National Financial Corporation (the
"Company"), through its subsidiaries, Security National Life Insurance Company,
a Utah domiciled insurance company and wholly owned subsidiary of the Company,
and Southern Security Life Insurance Company, a Florida domiciled insurance
company and wholly owned subsidiary of Security National Life Insurance Company,
completed a stock purchase transaction with Memorial Insurance Company of
America, an Arkansas domiciled insurance company ("Memorial Insurance Company"),
to purchase all of the outstanding shares of common stock of Memorial Insurance
Company. Under the terms of the transaction, the shareholders of Memorial
Insurance Company received a total purchase consideration of $13,500,000 for all
of the outstanding common shares of Memorial Insurance Company, with each
shareholder having received a pro rata share of the total amount of the purchase
consideration based upon the number of shares such shareholder owns.
The shareholders of Memorial Insurance Company received payment for their
shares by means of distributions, with Security National Life Insurance Company
and Southern Security Life Insurance Company simultaneously contributing
sufficient capital and surplus to Memorial Insurance Company to maintain its
status as an admitted insurer in good standing in the state of Arkansas. The
transaction is to be treated, for federal and state tax purposes, as a part
sale, part redemption of the Memorial Insurance Company stock. At the closing of
the transaction, the shareholders of Memorial Insurance Company sold all of
their shares of Memorial Insurance Company stock to Southern Security Life
Insurance Company, such shares representing all of the issued and outstanding
stock of Memorial Insurance Company. As a result, Memorial Insurance Company
became a wholly owned subsidiary of Southern Security Life Insurance Company.
As of December 31, 2005, Memorial Insurance Company had 116,116 policies in
force and 50 agents. For the year ended December 31, 2005, Memorial Insurance
Company had revenues and net income of $3,659,000 and $837,000, respectively. As
of December 31, 2005, the total assets and capital and surplus of Memorial
Insurance Company were $65,909,000 and $2,505,000, respectively.
Under the terms of the transaction, as set forth in the Stock Purchase
Agreement dated September 23, 2005 among Security National Life Insurance
Company, Southern Security Life Insurance Company, and Memorial Insurance
Company, the shareholders agree, where applicable following the closing of the
transaction, to maintain any existing policies from Memorial Insurance Company
that were previously sold through such shareholders' funeral and mortuary
businesses and to avoid replacing any of such policies with the policies of
other insurance companies. The shareholders further agree to use their
reasonable best efforts to support the business and operations of Memorial
Insurance Company, including, where applicable, to maintain a business
relationship with Memorial Insurance Company to the extent such a business
relationship existed prior to such closing.
2
Moreover, Security National Life Insurance Company and Southern Security
Life Insurance Company agree, pursuant to the terms of the Stock Purchase
Agreement, to maintain the corporate offices of Memorial Insurance Company at
its current location in Blytheville, Arkansas. Furthermore, Security National
Life Insurance Company and Southern Security Life Insurance Company agree to use
their best efforts, following the closing of the transaction, to assist Memorial
Insurance Company in retaining the sales agents and brokers in its business and
operations. The obligations to complete the transaction were contingent upon
approval of the transaction by the Arkansas Insurance Department. A hearing was
held on December 9, 2005 with the Commissioner of the Arkansas Insurance
Department to consider the request to approve the transaction, and the
Commissioner issued an order dated December 21, 2005 approving the transaction.
At the closing of the transaction, Security National Life Insurance Company
and Memorial Insurance Company entered into a reinsurance agreement to reinsure
the majority of the in force business of Memorial Insurance Company to Security
National Life Insurance Company, as reinsurer, to the extent permitted by the
Arkansas Insurance Department. The assets and liabilities to be reinsured under
the reinsurance agreement will be deposited into a trust account, in which Zions
First National Bank agrees to act as trustee. Under the terms of the reinsurance
agreement, in the event of the insolvency of Security National Life Insurance
Company, Zions First National Bank agrees to hold the assets and liabilities in
trust for purposes of the administration of the assets and liabilities with
respect to such insolvency.
As a result of the execution of the reinsurance agreement, certain
insurance business and operations of Memorial Insurance Company will be
transferred to Security National Life Insurance Company, including all policies
in force as of the effective date thereof, except for certain policies to be
retained by Memorial Insurance Company. Any future insurance business by
Memorial Insurance Company will be covered by this reinsurance agreement. All of
the business and operations of Memorial Insurance Company are to be transferred
to Security National Life Insurance Company under the terms of the reinsurance
agreement, except for capital and surplus of approximately $1,000,000. Thus,
approximately $30,026,000 in assets and liabilities will be transferred from
Memorial Insurance Company to Security National Life Insurance Company pursuant
to the reinsurance agreement.
At the closing of the stock purchase transaction, Memorial Insurance
Company issued a $30,025,777 note to Security National Life Insurance Company
payable, together with accrued interest, within 30 days from the date of
issuance. The note is to be repaid in cash or in assets to be transferred to
Security National Life Insurance Company. The note is secured by the assets
owned by Memorial Insurance Company. In addition, Southern Security Life
Insurance Company contributed $2,200,000 to Memorial Insurance Company at
closing in consideration for the surplus note. Memorial Insurance Company
intends to repay the surplus note in early 2006 using the proceeds from the sale
of the investments in common stock that it currently holds in its investment
portfolio.
3
On December 31, 2005, Memorial Insurance Company entered into a reinsurance
agreement with Security National Life Insurance Company for certain accident and
health insurance policies of Security National Life Insurance Company. Under the
terms of the reinsurance agreement, Memorial Insurance Company assumed 100% of
the liabilities of these policies. In addition, pursuant to the agreement,
Security National Life Insurance Company transferred $96,345 in statutory
reserves and assets to Memorial Insurance Company as of December 31, 2005. There
was no additional consideration paid for these policies under the agreement.
ITEM 9.01. Financial Statements and Exhibits
(a) The following financial statements of Memorial Insurance Company of
America:
Independent Auditor's Report
Balance Sheets as of December 31, 2005 and 2004
Statements of Operations for the years ended December 31, 2005, 2004
and 2003
Statements of Stockholders' Equity for the years ended December 31,
2005, 2004 and 2003
Statements of Cash Flow for the years ended December 31, 2005, 2004
and 2003
Notes to Financial Statements
(b) The following pro forma statements of Security National Financial
Corporation are included herein:
Pro Forma Consolidated Balance Sheet as of September 30, 2005
(unaudited)
Pro Forma Consolidated Statement of Income for the nine months ended
September 30, 2005 (unaudited)
Pro Forma Consolidated Statement of Income for the year ended December
31, 2004 (unaudited)
Notes to Pro Forma Consolidated Financial Statements (unaudited)
4
(c) Exhibits
10.1 Stock Purchase Agreement among Security National Life Insurance
Company, Southern Security Life Insurance Company, Memorial Insurance
Company of America, and the shareholders of Memorial Insurance Company
that have executed the Agreement by Shareholders of Memorial Insurance
Company of America to Sell Shares in Stock Purchase Transaction.*
10.2 Reinsurance Agreement between Security National Life Insurance Company
and Memorial Insurance Company of America.**
10.3 Trust Agreement between Security National Life Insurance Company and
Memorial Insurance Company of America.**
10.4 Promissory Note between Memorial Insurance Company as Maker and
Security National Life Insurance Company as Payee.**
10.5 Security Agreement between Memorial Insurance Company as Debtor and
Security National Life Insurance Company as Secured Party.**
10.6 Surplus Contribution Note between Memorial Insurance Company of
America as Maker and Southern Security Life Insurance Company as
Payee.**
10.7 Guaranty Agreement by Security National Life Insurance Company and
Southern Security Life Insurance Company as Guarantors.**
10.8 Administrative Services Agreement between Security National Life
Insurance Company and Memorial Insurance Company of America.**
* Incorporated by reference from Report on Form 8-K, as filed on September
27, 2005.
** Incorporated by reference from Report on Form 8-K, as filed on January
5, 2006.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SECURITY NATIONAL FINANCIAL CORPORATION
(Registrant)
Date: March 17, 2006 By: /s/ Scott M. Quist
-------------------
Scott M. Quist
President and Chief Operating Officer
5
Item 901(a)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Memorial Life Insurance Company of America
We have audited the accompanying balance sheets of Memorial Life Insurance
Company of America as of December 31, 2005 and 2004, and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining on a test basis evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of Memorial Life Insurance
Company of America as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.
Larson & Company
Salt Lake City, Utah
March 17, 2006
6
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEETS
ASSETS
December 31,
2005 2004
------ ----
INVESTMENTS:
Equity securities available for sale $8,768,742 $8,886,113
Fixed securities held to maturity 20,484,697 33,190,369
Policy loans 34,575 24,538
----------- -----------
29,288,014 42,101,020
----------- -----------
CASH AND CASH EQUIVALENTS 3,922,238 1,632,935
----------- -----------
RECEIVABLES:
Premiums due and deferred 6,045 197,221
Receivable from affiliated reinsurer 30,225,054 --
Other receivables 112,058 59,795
Accrued investment income 302,923 442,665
----------- -----------
30,646,080 699,681
----------- -----------
PROPERTY AND IMPROVEMENTS:
Furniture, office equipment
and building 440,350 440,350
Less accumulated depreciation 284,347 275,886
----------- -----------
156,003 164,464
----------- -----------
GOODWILL 701,517 701,517
----------- -----------
DEFERRED POLICY ACQUISITION COSTS 1,194,770 1,197,364
----------- -----------
$65,908,622 $46,496,981
=========== ===========
The accompanying notes are an integral part of these financial statements.
7
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2005 2004
---- ----
FUTURE LIFE, ANNUITY AND
OTHER BENEFITS: $30,326,086 $29,800,976
----------- -----------
OTHER LIABILITIES:
Policy claims 5,000 130,503
Premiums received in advance 2,692 60,239
Accrued expenses and other liabilities 1,590 123,640
Surplus note due affiliate 2,200,000 --
Reinsurance note due affiliate 29,929,432 --
----------- -----------
32,138,714 314,382
----------- -----------
DEFERRED INCOME TAXES 939,152 870,866
----------- -----------
TOTAL LIABILITIES 63,403,952 30,986,224
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $50 par value,
27,000 shares authorized
4,681 shares issued in 2005
and 5,100 shares issued in 2004 234,050 255,000
Additional paid-in capital 120,886 391,866
Retained earnings -- 13,460,562
Accumulated other comprehensive income,
net of taxes 2,149,734 1,403,329
----------- -----------
2,504,670 15,510,757
----------- -----------
$65,908,622 $46,496,981
=========== ===========
The accompanying notes are an integral part of these financial statements.
8
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS
Years Ended December 31,
2005 2004 2003
---- ---- ----
PREMIUMS EARNED $837,478 $1,005,162 $1,259,401
INVESTMENT INCOME, including
realized gains and losses 2,756,266 3,797,292 3,039,287
MISCELLANEOUS INCOME 65,174 -- 1,155
---------- ---------- ----------
3,658,918 4,802,454 4,299,843
---------- ---------- ----------
BENEFITS AND EXPENSES:
Increase in policy benefit reserves 433,765 450,822 332,793
Benefits, claims and losses 1,002,999 992,484 1,094,299
Policy acquisition costs, net 113,658 111,066 104,623
General and administrative expenses 870,491 688,901 742,820
---------- ---------- ----------
2,420,913 2,243,273 2,274,535
INCOME BEFORE TAXES 1,238,005 2,559,181 2,025,308
PROVISION FOR INCOME
TAXES 400,678 398,526 336,348
---------- ---------- ----------
NET INCOME $837,327 $2,160,655 $1,688,960
========== ========== ==========
The accompanying notes are an integral part of these financial statements
9
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Additional Other
Common Paid-in Comprehensive Retained
Stock Capital Income Earnings Total
BALANCE, January 1, 2003 $781,189 $389,975 $104,033 $29,010,596 $30,285,793
Comprehensive Income:
Change in unrealized gain
on investments -- -- 1,318,863 -- 1,318,863
Net income -- -- -- 1,688,960 1,688,960
----------- ------------ ------------ ------------ ------------
Total comprehensive income -- -- 1,318,863 1,688,960 3,007,823
Retirement of stock (758) (26,267) (27,025)
Other capital received -- -- -- 243,419 243,419
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2003 780,431 389,975 1,422,896 30,916,708 33,510,010
------------ ------------ ------------ ------------ ------------
Comprehensive Income:
Change in unrealized (loss)
on investments -- -- (19,567) -- (19,567)
Net income -- -- -- 2,160,655 2,160,655
------------ ------------ ------------ ------------ ------------
Total comprehensive income -- -- (19,567) 2,160,655 2,141,088
Retirement of stock (525,481) (19,875,565) (20,401,046)
Issuance of stock 50 1,891 1,941
Other capital received -- -- -- 258,764 258,764
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2004 255,000 391,866 1,403,329 13,460,562 15,510,757
------------ ------------ ------------ ------------ ------------
Comprehensive Income:
Change in unrealized gain
on investments -- -- 746,405 -- 746,405
Net income -- -- -- 837,327 837,327
------------ ------------ ------------ ------------ ------------
Total comprehensive income -- -- 746,405 837,327 1,583,732
Retirement of stock (20,950) -- (1,080,848) (1,101,798)
Other capital received -- -- -- 11,979 11,979
Cash dividends -- (270,980) -- (13,229,020) (13,500,000)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2005 $234,050 $120,886 $2,149,734 $ -- $2,504,670
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
10
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
Years Ended December 31,
2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net Income $837,327 $2,160,655 $1,688,960
Depreciation 8,461 10,411 33,225
Net (gain) loss on sale of investments (491,563) (1,146,517) 102,261
Decrease in:
Receivables and other assets 278,655 226,913 836,765
Deferred policy acquisition costs (293,028) 7,698 10,595
Increase (decrease) in:
Policy benefit reserves 342,060 385,856 268,224
Accrued expenses and other liabilities (122,050) (76,118) 185,556
------------ ------------ ------------
Net cash provided by
operating activities 559,862 1,568,898 3,125,586
------------ ------------ ------------
Cash flows from investing activities:
Net proceeds from sales and purchases of
investments 14,119,260 15,360,491 (171,505)
------------ ------------ ------------
Net cash provided by (used in)
Investing activities 14,119,260 15,360,491 (171,505)
------------ ------------ ------------
Cash flows from financing activities:
Dividends and distributions paid
to stockholders (13,500,000) -- --
Other capital received 11,979 258,764 243,419
Retirement of stock (1,101,798) (20,401,046) (27,025)
Issuance of common stock -- 1,941 --
Borrowing from affiliated entities 2,200,000 -- --
------------ ------------ ------------
Net cash provided by (used in)
financing activities (12,389,819) (20,140,341) 216,394
------------ ------------ ------------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,289,303 (3,210,952) 3,170,475
CASH AND CASH EQUIVALENTS,
Beginning of year 1,632,935 4,843,887 1,673,412
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
End of year $3,922,238 $1,632,935 $4,843,887
============ ============ ============
11
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS (Continued)
Disclosure of non-cash investing and financing activities:
Reinsurance with affiliated reinsurer resulted in the issuance of a reinsurance
note to Security National Life as follows:
2005 2004 2003
---- ---- ----
Receivable from affiliated insurer $30,225,054 -- --
Premiums due and deferred (173,926) -- --
Amount due from affiliate (96,345) -- --
Deferred acquisition costs (251,086) -- --
Unearned premium 59,209 -- --
Unpaid claims 166,526 -- --
------------ -- --
Reinsurance note due affiliate $29,929,432 -- --
============ == ==
The accompanying notes are an integral part of these financial statements.
12
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Memorial Insurance Company of America is a corporation chartered in the
State of Arkansas whose primary line of business is the issuance of life and
annuity policies.
Method of Accounting
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America (GAAP).
Business Risk and Uncertainties
The development of liabilities for future policy benefits for the Company's
products requires management to make estimates and assumptions regarding
mortality, morbidity, lapse, expense, and investment experience. Such estimates
are primarily based on historical experience and future expectations of
mortality, morbidity, expense, persistency, and investment assumptions. Actual
results could differ materially from those estimates. Management monitors actual
experience, and where circumstances warrant, revises its assumptions and the
related future policy benefit estimates.
The company's investments are primarily comprised of fixed maturity
securities and equity securities. The Company regularly invests in
mortgage-backed securities and other securities subject to prepayment and call
risk. Significant changes in prevailing interest rates may adversely affect the
timing and amount of cash flows on such securities. In addition, the
amortization of market premium and accretion of market discount for
mortgage-backed securities is based on historical experience and estimates of
future payments on the underlying mortgage loans. Actual prepayment experience
will differ from original estimates and may result in material adjustments to
amortization or accretion recorded in future periods.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers cash,
money markets, and investments with original maturities of three months or less
to be cash and cash equivalents. All other investment securities are classified
as investments.
13
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recognition of Premium Revenue
Benefits and expenses associated with premium revenue are recognized over
the lives of the contracts through changes in policy reserves and deferred
policy acquisitions costs, which are established as policies are placed in
force.
During 2005, 2004, and 2003, the Company earned the following premiums:
2005 2004 2003
---- ---- ----
Life $ 837,478 $1,005,162 $1,259,401
========= ========== ==========
Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions and other
direct expenses of issuing new policies, have been deferred. These deferred
policy acquisition costs are being amortized in proportion to the ratio of
annual premium revenue to the total premium revenue over the life of the policy.
The Company considers the impact of product profitability in determining the
recoverability of the deferred policy acquisition costs.
Policy Benefit Reserves
The aggregate reserve for insurance policies has been actuarially
determined using primarily the net level premium method based on estimated
future investment yield, mortality and withdrawals. Estimated mortality has been
established using the scaled valuation mortality tables. Investment yields have
been estimated at 6% grading to 5% over 20 years. Withdrawals are estimated
based upon the previous corporate experience. The increase in policy benefit
reserves is as follows:
2005 2004 2003
---- ---- ----
Increase in policy benefit reserves $ 433,765 $ 450,822 $ 332,793
========= ========= =========
In force policies at end of year 116,116 100,710 99,817
========== ========= =========
Policy Claims
Policy claims represent the estimated liabilities on claims reported plus
provision for claims incurred but not yet reported. The liabilities of unpaid
claims are determined using both evaluations of each claim and statistical
analysis and represent the estimated ultimate cost of all claims incurred
through the end of the year.
14
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities
Management determined the appropriate classification of securities at the
time of purchase. All equity securities were classified as available-for-sale
and were carried at market value as of December 31, 2005. The Company had the
intent and the ability at the time of purchase to hold all debt securities until
maturity. Therefore, they were classified as investments held-to-maturity and
carried at amortized cost as of that date.
Realized gains and losses on dispositions were based on the net proceeds
and the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on investment securities
available for sale were based on the difference between book value and fair
value of each security. These gains and losses are credited or charged to
stockholders' equity, whereas realized gains and losses were recognized in the
Company's operations.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable through undiscounted future cash flows. If it is determined that
an impairment loss has occurred based on expected cash flows, such loss is
recognized in the statement of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
15
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
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 Company will adopt
SFAS 123(R) using the modified prospective application approach effective
January 1, 2006. 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.
In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary
Assets. SFAS No. 153 amends APB Opinion No. 29, Accounting for Non-monetary
Transactions, to eliminate the exception for non-monetary exchanges of similar
productive assets. The Company will be required to apply this statement to
non-monetary exchanges after December 31, 2005. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement
154 applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. Statement 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. It is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made occurring in
fiscal years beginning after June 1, 2005. The Company expects that the adoption
of SFAS 154 will not have a material impact on its financial statements.
In June 2005, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements." The guidance requires that leasehold improvements acquired in a
business combination or purchased subsequent to the inception of a lease be
amortized over the lesser of the useful life of the assets or a term that
includes renewals that are reasonably assured at the date of the business
combination or purchase. The guidance is effective for periods beginning after
June 29, 2005. The adoption of EITF No. 05-6 is not expected to have a material
effect on the Company's financial position or results of operations.
16
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 2- INVESTMENTS IN SECURITIES
The carrying amounts and approximate market value of investment
securities to be held-to-maturity at December 31, 2005 were:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
Public utilities $1,712,641 $55,206 $3,191 $1,764,656
U.S. Government 3,109,146 26,396 58,053 3,077,489
securities
State and Municipal 677,221 98,626 -- 775,847
securities
Corporate Debt securities 14,985,689 565,993 303,956 15,247,726
----------- ----------- ----------- -----------
Total $20,484,697 $746,221 $365,200 $20,865,718
=========== =========== =========== ===========
The maturities of investment securities and their approximate market value
at December 31, 2005, were as follows:
Amortized Market
Cost Value
Due in one year or less $75,014 $75,785
Due after one year through five years 1,892,652 1,938,952
Due after five years through ten years 4,833,135 4,821,022
Due after ten years 13,683,896 14,029,959
----------- -----------
Total $20,484,697 $20,865,718
=========== ===========
17
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 2- INVESTMENTS IN SECURITIES (CONTINUED)
During 2005, 2004 and 2003, amortized cost and gross realized gains and
losses on sales of investment securities were:
2005 2004 2003
---- ---- ----
Amortized cost $21,232,118 $18,183,511 $11,807,815
=========== =========== ===========
Gross realized losses $561,803 $431,776 $485,409
=========== =========== ===========
Gross realized gains $1,053,366 $1,578,293 $383,148
=========== =========== ===========
NOTE 3- INVESTMENT IN REAL ESTATE
Real estate investments are valued at the lower of cost or fair market
value. Cost is determined by purchase price if purchased, market value if
contributed, or loan value (not to exceed market value) if acquired by
foreclosure. The Company owns the following real estate:
Home Office
634 West Main
Blytheville, AR
Land and improvements $ 267,684
Less: Accumulated depreciation 113,844
----------
Net land and improvements $ 153,840
=========
NOTE 4-DEFERRED POLICY ACQUISITION COSTS
The costs of writing an insurance policy, including agents' commissions and
other direct expenses of issuing new policies are called policy acquisition
costs. These costs are incurred when a policy is issued, but they are deferred
and capitalized as an asset. The Company's method of calculating deferred policy
acquisition costs for long duration contracts was the factor method.
18
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 5- PROVISION FOR INCOME TAXES
The company's income tax liability at December 31, is summarized as
follows:
2005 2004
----- ----
Current $ -- $ 84,736
Deferred 939,152 870,866
--------- ---------
$ 939,152 $ 955,602
========= =========
The provision for income taxes of $400,678 for 2005 (effective rate of
36.2%), $398,526 for 2004 (effective rate of 19.1%) and $336,348 for 2003
(effective rate of 20.6%).
2005 2004 2003
---- ---- ----
Computed expected tax provision $ 400,678 $ 398,526 $ 336,348
--------- --------- ---------
Increases (decreases) in deferred taxes:
Deferred tax assets -- -- --
Deferred tax liabilities 68,286 137,859 733,007
---------- ---------- ---------
$ 68,286 $ 137,859 $ 733,007
========= ========= =========
NOTE 6- RELATED PARTY TRANSACTIONS
On December 29, 2005, Southern Security Life Insurance Company ("Southern
Security"), a wholly owned subsidiary of Security National Life Insurance
Company, completed a stock purchase transaction with the Company to purchase all
of the outstanding shares of common stock of the Company. Under the terms of the
transaction, the shareholders of the Company received $13,500,000 in
considerations for all of the common shares of the Company, with each
shareholder having received a pro rata share of the total amount of the purchase
considerations based upon the number of shares such shareholder owns.
The Company's shareholders received a total of $13,500,000 for their shares
by means of a distribution from the Company's capital and surplus with Southern
Security simultaneously contributing a Surplus Note in the amount of $2,200,000
to the Company to maintain its status as an admitted insurer in good standing in
the state of Arkansas. The Surplus Note bears interest at 6% and is to be paid
quarterly. The outstanding principal and interest can be repaid only if such
payment would not reduce the capital and surplus of the Company below $1,000,000
and the prior approval of the Arkansas Insurance Department.
19
MEMORIAL LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
NOTE 6- RELATED PARTY TRANSACTIONS (CONTINUED)
On December 29, 2005 Security National Life Insurance Company (Security
National Life) entered into a reinsurance agreement to reinsure the majority of
the in force business of the Company to Security National Life. The assets and
liabilities to be reinsured under the reinsurance agreement will be deposited
into a trust account in which Zion's First National Bank has agreed to act as
trustee. Any future insurance business by the Company will be covered by this
reinsurance agreement.
At the closing of the stock purchase agreement, Memorial Insurance issued a
$30,025,777 note to Security National Life payable, together with accrued
interest, within 30 days from the date of issuance. The note is to be repaid in
cash or in assets to be transferred to Security National Life in conjunction
with the reinsurance.
The Arkansas and Florida Insurance Departments approved the stock purchase,
reinsurance agreements and surplus note.
On December 31, 2005, the Company entered into a reinsurance agreement with
Security National Life for certain accident and health policies of Security
National Life. The Company assumed 100% of the liability for these policies.
Security National Life transferred on December 31, 2005, $96,345 in policy
benefit reserves and a reinsurance receivable from this affiliate. There was not
any additional consideration paid for these policies.
NOTE 7- COMMITMENTS AND CONTINGENCIES
The Company knows of no material contingent liabilities and has not
committed any surplus funds to reserves for contingent liabilities. The Company
also has no material lease obligations as of December 31, 2005.
NOTE 8- RETIREMENT PLAN
The Company maintains a non-contributory profit sharing plan covering all
employees who have worked at least 1,000 hours in the first twelve months of
employment and are at least 21 years old. Contributions to the plan are made at
the discretion of the Company. Benefit payments are based on the participant's
account balance, which is composed of the employer contributions and net earning
or losses from invested assets. For the years ended December 31, 2005 and 2004,
the Company contributed $64,477 and $10,160, respectively.
20
Item 9.01 Pro Forma Financial Information
The accompanying audited pro forma financial statements give effect to the
acquisition of the insurance business of Memorial Life Insurance Company of
America by Southern Security Life Insurance Company, a wholly owned subsidiary
of Security National Financial Corporation. The adjustments to the pro forma
balance sheets assume that the acquisition took place on January 1, 2004. The
pro forma adjustments and the assumptions on which they are based are described
in the accompanying notes to pro forma financial statements.
The pro forma information for Security National Financial Corporation was
taken from the Form 10-Q and Form 10-K as filed with the Securities and Exchange
Commission for the third quarter ended September 30, 2005, and year ended
December 31, 2004. The pro forma information for Memorial Insurance Company of
America is obtained from the financial statements presented elsewhere in this
Form 8-K filing. Adjustments have been made to the Memorial Insurance Company of
America financial statements for the year ended December 31, 2005 to reflect the
nine months ended September 30, 2005 pro forma presentation.
The pro forma financial statements are not necessarily indicative of the
results that actually would have occurred if the acquisition had been in effect
as of and for the period presented or that may be achieved in the period
subsequent to the acquisition.
21
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2005 (unaudited)
(in thousands)
Security National Memorial Life
Financial Insurance Company Pro Forma Pro Forma
Corporation of America Adjustments Consolidation
Fixed maturities securities
held to maturity at amortized cost $ 67,989 $ 20,485 $ 381 (a) $ 88,855
Securities available for sale at market 12,947 8,769 181 (a) 21,897
Mortgage loans on real estate,
net of allowances 67,563 -- -- 67,563
Real estate 9,852 -- -- 9,852
Other invested assets 14,872 34 -- 14,906
-------- ---------- -------- -----------
Total investments 173,223 29,288 562 203,073
Restricted assets of cemeteries
and mortuaries 5,414 -- -- 5,414
Cash 11,018 3,922 (2,200)(b) 12,740
Receivables, net 68,271 421 270 (d) 68,962
Land and improvements 8,453 -- -- 8,453
Receivable from affiliated reinsurer -- 30,225 (62,354)(e) --
Notes receivable from affiliate -- -- 2,200 (b) --
29,929 (d) --
Deferred acquisition costs and
cost of insurance acquired 35,652 1,195 (1,195)(a) --
-- -- 251 (d) 35,903
Property, plant and equipment, net 10,569 156 -- 10,725
Other assets 11,978 702 (702)(a) 11,978
-------- --------- --------- ---------
Total assets $324,578 $ 65,909 $ (33,239) $ 357,248
======== ========= ========= =========
Future, life, annuity and
other benefits $229,331 $ 30,326 $ (30,225)(d) --
30,225 (e) $ 259,657
Bank loans payable 9,175 -- -- 9,175
Notes and contracts payable 2,295 -- -- 2,295
Deferred pre-need cemetery and
funeral contract revenue 10,827 -- -- 10,827
Other liabilities 27,577 949 1,170 (a) --
225 (d) 29,921
Amounts due affiliates -- 32,129 (32,129)(e) --
--------- --------- ---------- ---------
Total liabilities 279,205 63,404 (30,734) 311,875
--------- --------- ----------- ---------
Common stock 14,807 234 (234)(a) 14,807
Additional paid-in additional capital 15,003 121 (121)(a) 15,003
Accumulated other comprehensive
income, net of deferred taxes 1,123 2,150 (2,150)(a) 1,123
Retained earnings 17,523 -- -- (a) 17,523
Treasury stock at cost (3,083) -- -- (3,083)
--------- ---------- ---------- -----------
Total stockholders' equity 45,373 2,505 (2,505) 45,373
--------- ---------- ----------- ----------
Total liabilities and
stockholders' equity $324,578 $ 65,909 $ (33,239) $ 357,248
======== ========== ========== ==========
See notes to pro forma condensed consolidated financial statements.
22
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Pro Forma
Condensed Consolidated Statement of Income (unaudited) For the Nine Months
Ended September 30, 2005
(in thousands)
Security
National Memorial Life
Financial Insurance Company Pro Forma Pro Forma
Corporation of America Adjustments Consolidation
Revenues: ----------- ----------------- ----------- -------------
Premiums $20,330 $837 $(125)(c) $21,042
Investment income 14,918 2,562 (546)(c) 16,934
Realized gains 39 -- -- 39
Mortuary and cemetery income 8,203 -- -- 8,203
Mortgage fee income 51,322 -- -- 51,322
Other 415 260 (22)(c) 653
-------- -------- -------- --------
Total revenues 95,227 3,659 (693) 98,193
-------- -------- -------- --------
Benefit and expenses:
Death and policy benefits 9,811 1,003 (161)(c) 10,653
Increase in future policy benefits 7,304 434 (101)(c) 7,637
Amortization of DPAC 2,276 114 (22)(c) 2,368
General and administrative expenses 68,149 871 (205)(c) 68,815
Interest expense 3,172 -- -- 3,172
Cost of goods and services of
mortuaries and cemeteries 1,595 -- -- 1,595
-------- -------- -------- --------
Total benefits and expenses 92,307 2,422 (489) 94,240
-------- -------- -------- --------
Earnings before income taxes 2,920 1,237 (204) 3,953
Income taxes (762) (400) (5)(c) (1,167)
-------- -------- -------- --------
Net income $2,158 $837 $(209) $2,786
======== ======== ======== ========
See notes to pro forma consolidated financial statements.
23
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Pro Forma
Condensed Consolidated Statement of Income (unaudited) For the Twelve
Months Ended December 31, 2004
(in thousands)
Security
National Memorial Life
Financial Insurance Company Pro Forma Pro Forma
Corporation of America Adjustments Consolidation
----------- ----------------- ----------- -------------
Revenues:
Premiums $25,979 $1,005 $ -- $26,984
Premiums ceded under
reinsurance treaty -- -- -- --
Investment income 15,939 3,829 -- 19,768
Realized gains 75 -- -- 75
Mortuary and cemetery income 11,661 -- -- 11,661
Mortgage fee income 62,689 -- -- 62,689
Other 855 (32) -- 823
--------- --------- ------------- ---------
Total revenues 117,198 4,802 -- 122,000
--------- --------- ------------- ---------
Benefit and expenses:
Death and policy benefits 14,541 992 -- 15,533
Increase in future policy benefits 8,821 451 -- 9,272
Amortization of DPAC 4,602 111 -- 4,713
General and administrative expenses 82,098 689 -- 82,787
Interest expense 2,173 -- -- 2,173
Cost of goods and services of
mortuaries and cemeteries 2,304 -- -- 2,304
--------- --------- ------------- ---------
Total benefits and expenses 114,539 2,243 -- 116,782
--------- --------- ------------- ---------
Earnings before income taxes 2,659 2,559 -- 5,218
Income taxes (652) (398) -- (1,050)
Minority interest 115 -- -- 115
--------- --------- ------------- ---------
Net income $2,122 $2,161 $ -- $4,283
========= ========= ============= =========
See notes to pro forma consolidated financial statements
24
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Pro Forma
Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying audited pro forma consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
pro forma financial information and with the instructions to Form 8-K and
Article 11 of Regulation S-X. The acquisition will be accounted for as a
purchase by Security National. The pro forma adjustments presented are estimates
as of the periods presented and do not necessarily reflect the actual amounts
that will be booked on the actual purchase date and subsequent adjustments
required for an appropriate pro forma presentation have been included.
On December 29, 2005, Southern Security Life Insurance Company ("Southern
Security"), a wholly owned subsidiary of Security National Life Insurance
Company, completed a stock purchase transaction with Memorial Insurance Company
of America (Memorial Insurance), an Arkansas domiciled insurance company to
purchase all of the outstanding shares of common stock of Memorial Insurance.
Under the terms of the transaction, the shareholders of Memorial Insurance
received $13,500,000 in considerations for all of the common shares of Memorial
Insurance, with each shareholder having received a pro rata share of the total
amount of the purchase considerations based upon the number of shares such
shareholder owns.
The shareholders received a total of $13,500,000 for their shares by means
of a distribution from Memorial Insurance capital and surplus with Southern
Security simultaneously contributing a Surplus Note in the amount of $2,200,000
to Memorial Insurance to maintain its status as an admitted insurer in good
standing in the state of Arkansas. The Surplus Note bears interest at 6% and is
to be paid quarterly. The outstanding principal and interest can be repaid only
if such payment would not reduce the capital and surplus of Memorial Insurance
below $1,000,000 and the prior approval of the Arkansas Insurance Department.
On December 29, 2005 Security National Life Insurance Company (Security
National Life) entered into a reinsurance agreement to reinsure the majority of
the in force business of Memorial Insurance to Security National Life. The
assets and liabilities to be reinsured under the reinsurance agreement will be
deposited into a trust account in which Zion's First National Bank has agreed to
act as trustee. Any future insurance business by Memorial Insurance will be
covered by this reinsurance agreement.
At the closing of the stock purchase agreement, Memorial Insurance issued a
$30,025,777 note to Security National Life payable, together with accrued
interest, within 30 days from the date of issuance. The note is to be repaid in
cash or in assets to be transferred to Security National Life in conjunction
with the reinsurance.
The Arkansas and Florida Insurance Departments approved the stock purchase,
reinsurance agreements and surplus note.
25
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Pro Forma
Consolidated Financial Statements
Note 2. Pro Forma Adjustments
The following pro forma adjustments are made to the audited consolidated
balanced sheet as if the acquisition and related transactions occurred January
1, 2004. Reference numbers correspond to those on the statement.
a. To adjust net assets acquired to reflect their fair value as of the
purchase date.
b. To record the issuance of a $2,200,000 note to Southern Security Life
Insurance Company for cash.
c. To adjust Memorial's twelve-month earnings to a nine-month estimate.
d. To record the reinsurance of the in force business of Memorial
Insurance Company to Security National Life in exchange for a
promissory note payable to Security National Life in the net amount of
$29,929,423.
e. To eliminate intercompany receivable from affiliated reinsurer and
note payable due to affiliate and benefit obligations.
26