UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 0-9341
Security National Financial Corporation
(Exact name of registrant as specified in its charter)
UTAH 87-0345941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5300 South 360 West, Suite 250 Salt Lake City, Utah 84123
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 264-1060
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Class A Common Stock, $2.00 Par Value Nasdaq National Market
Class C Common Stock, $0.20 Par Value None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
the Exchange Act Rule 12b-2). Yes No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the last business day of Registrant's most recently completed
second fiscal quarter was $17,049,000, based upon the closing price on that date
on the Nasdaq National Market.
As of March 31, 2006, there were 5,847,249 shares of Class A Common Stock, $2.00
par value per share, and 6,642,929 shares of Class C Common Stock, $.20 par
value per share, outstanding.
Documents Incorporated by Reference Portions of the definitive Proxy Statement
for the registrant's 2006 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
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Item 1. Business
Security National Financial Corporation (the "Company") operates in three main
business segments: life insurance, cemetery and mortuary, and mortgage loans.
The life insurance segment is engaged in the business of selling and servicing
selected lines of life insurance, annuity products and accident and health
insurance. These products are marketed in 38 states through a commissioned sales
force of independent licensed insurance agents who may also sell insurance
products of other companies. The cemetery and mortuary segment of the Company
consists of five cemeteries in the state of Utah and one in the state of
California and eight mortuaries in the state of Utah and four in the state of
Arizona. The Company also engages in pre-need selling of funeral, cemetery and
cremation services through its Utah, Arizona and California operations. Many of
the insurance agents also sell pre-need funeral, cemetery and cremation
services. The mortgage loan segment is an approved governmental and conventional
lender that originates and underwrites residential and commercial loans for new
construction and existing homes and real estate projects. The mortgage loan
segment operates through 21 wholesale and retail offices in ten states, and is
an approved mortgage lender in several states.
The design and structure of the Company is that each business segment is related
to the other business segments and contributes to the profitability of the other
segments. Because of the Company's cemetery and mortuary operations in Utah,
California and Arizona, the Company enjoys a level of public awareness that
assists in the sales and marketing of insurance and pre-need cemetery and
funeral products. The Company's insurance subsidiaries invest their assets
(representing in part the pre-paid funerals) in investments authorized by the
respective insurance departments of their states of domicile. One such
investment authorized by the insurance departments is high quality mortgage
loans. Thus, while each business segment is a profit center on a stand-alone
basis, this horizontal integration of each segment is planned to lead to
improved profitability of the Company. The Company also pursues growth through
acquisitions of both life insurance companies and cemeteries and mortuaries. The
Company's acquisition business strategy is based on reducing the overhead cost
of the acquired company by utilizing existing personnel, management, and
technology while still providing quality service to customers and policyholders.
The Company was organized as a holding company in 1979, when Security National
Life Insurance Company ("Security National Life") became a wholly owned
subsidiary of the Company and the former stockholders of Security National Life
became stockholders of the Company. Security National Life was formed in 1965
and has grown through the direct sale of life insurance and annuities and
through the acquisition of other insurance companies, including the acquisitions
of Capital Investors Life Insurance Company in 1994 and Civil Service Employees
Life Insurance Company in 1995, a stock purchase transaction with Southern
Security Life Insurance Company ("Southern Security Life") in 1998 (involving
the purchase of 57.4% of the outstanding common shares of Southern Security
Life), an asset purchase transaction with Acadian Life Insurance Company
("Acadian") in December 2002, the acquisition of Paramount Security Life
Insurance Company ("Paramount"), now Security National Life Insurance Company of
Louisiana ("Security National Life of Louisiana") in March 2004, a merger
transaction involving the purchase of the remaining outstanding shares of
Southern Security Life in January 2005, which resulted in Southern Security Life
Insurance Company becoming a wholly-owned subsidiary of Security National Life,
and the acquisition of Memorial Insurance Company of America ("Memorial
Insurance Company") in December 2005.
The cemetery and mortuary operations have also grown through the acquisition of
other cemetery and mortuary companies, including the acquisitions of Paradise
Chapel Funeral Home, Inc. in 1989, Holladay Memorial Park, Inc., Cottonwood
Mortuary, Inc. and Deseret Memorial, Inc. in 1991, Sunset Funeral Home in 1994,
Greer-Wilson Funeral Home, Inc. in 1995 and Crystal Rose Funeral Home in 1997.
In 1993, the Company formed SecurityNational Mortgage Company ("SecurityNational
Mortgage") to originate and refinance mortgage loans. Since 1993,
SecurityNational Mortgage has opened 21 branches in ten states. See Notes to
Consolidated Financial Statements for additional disclosure and discussion
regarding segments of the business.
Life Insurance
Products
The Company, through its insurance subsidiaries, Security National Life,
Southern Security Life, Security National Life of Louisiana and Memorial
Insurance Company, issues and distributes selected lines of life insurance and
annuities. The Company's life insurance business includes funeral plans,
interest-sensitive whole life insurance, as well as other traditional life and
accident and health insurance products. The Company places specific marketing
emphasis on funeral plans and traditional whole life products sold in
association with the funding of higher education costs.
A funeral plan is a small face value life insurance policy that generally has
face coverage of up to $15,000. The Company believes that funeral plans
represent a marketing niche that has lower competition since most insurance
companies do not offer similar coverages. The purpose of the funeral plan policy
is to pay the costs and expenses incurred at the time of a person's death. On a
per thousand dollar cost of insurance basis, these policies can be more
expensive to the policyholder than many types of non-burial insurance due to
their low face amount, requiring the fixed cost of the policy administration to
be distributed over a smaller policy size, and the simplified underwriting
practices that result in higher mortality costs.
Through the Company's higher education funding division, the Company markets
strategies for savings for college and repayment of loans a child may have after
college. Pursuant to those strategies the Company conducts scholarship searches
and originates and funds government guaranteed student loans. The traditional
whole life product marketed in conjunction with funding of higher education
costs is a 10-Pay Whole Life Policy with an annuity rider. Both the paid-up
aspect of the whole life policy and the savings aspect of the annuity rider are
marketed as a tool for parents to help save for, fund or repay loans incurred
during college. The product is offered to parents who have children generally
under the age of 25.
Markets and Distribution
The Company is licensed to sell insurance in 38 states. The Company, in
marketing its life insurance products, seeks to locate, develop and service
specific "niche" markets. A "niche" market is an identifiable market, which the
Company believes is not emphasized by most insurers. Funeral plan policies are
sold primarily to persons who range in age from 45 to 75. Even though people of
all ages and income levels purchase funeral plans, the Company believes that the
highest percentage of funeral plan purchasers are individuals who are older than
45 and have low to moderate income.
Higher education funding is for families that desire to prepare for their
children's higher education needs. Such preparation can include searches for
scholarships, grant applications, guaranteed student loan applications, and the
purchase of life insurance and annuities. In 1965, the Higher Education Act
created the guaranteed student loan programs participated in by the Company.
Federal Family Education Loan (FFEL) Program, which now comprises Federal
Stafford Loans (formerly Guaranteed Student Loans), Federal PLUS Loans, and
Federal Consolidation Loans. The FFEL Program makes these long-term loans
available to students attending institutions of higher education, vocation,
technical, business and trade schools and some foreign schools.
State or private nonprofit guaranty agencies insure FFEL's and the Federal
Government reimburses these agencies for all or part of the insurance loans they
pay to lenders. The federal guaranty on a FFEL replaces the security
(collateral) usually required for a long-term consumer loan. These government
programs have numerous rules for qualification and have limits on how much you
can borrow. The Company's whole life product has an annuity rider that can
provide a way for families to save additional funds for their children's
education. The Company has a student loan resource department, which is
available to policyholders to help parents and students apply for various
scholarships, grants and loans.
A majority of the Company's funeral plan premiums come from the states of
Arizona, Arkansas, Colorado, Idaho, Kansas, Mississippi, Oklahoma, Texas and
Utah. A majority of the Company's non-funeral plan life insurance premiums come
from the states of Alabama, California, Florida, Georgia, Louisiana, New Mexico,
South Carolina and Utah.
The Company sells its life insurance products through direct agents, brokers and
independent licensed agents who may also sell insurance products of other
companies. The commissions on life insurance products range from approximately
10% to 100% of first year premiums. In those cases where the Company utilizes
its direct agents in selling such policies, those agents customarily receive
advances against future commissions.
In some instances, funeral plan insurance is marketed in conjunction with the
Company's cemetery and mortuary sales force. When it is marketed by that group,
the beneficiary is usually the Company's cemeteries and mortuaries. Thus, death
benefits that become payable under the policy are paid to the Company's cemetery
and mortuary subsidiaries to the extent of services performed and products
purchased.
In marketing the funeral plan insurance, the Company also seeks and obtains
third-party endorsements from other cemeteries and mortuaries within its
marketing areas. Typically, these cemeteries and mortuaries will provide letters
of endorsement and may share in mailing and other lead-generating costs. The
incentive for such businesses to share the costs is that these businesses are
usually made the beneficiary of the policy. The following table summarizes the
life insurance business for the five years ended December 31, 2005:
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Life Insurance
Policy/Cert. Count
as of December 31 417,957(1((3)(4) 357,767(1)(2)(3) 353,017(1)(2) 341,909(1) 74,335
Insurance in force as of
December 31
(omitted 000) $3,350,140(1)(3)(4) $2,914,135(1)(2)(3) $2,914,438(1)(2) $2,635,436(1) $2,425,557
Premiums Collected
(omitted 000) $ 27,275(1)(2)(3)(4) $ 30,560(1)(2)(3) $ 28,598(1)(2) $ 14,699 $ 14,860
(1) Includes the purchase of assets from Acadian Life Insurance Company on
December 23, 2002.
(2) Includes reinsurance assumed on October 1, 2003, under agreement with
Guaranty Income Life Insurance Company. This agreement was cancelled on
January 1, 2005.
(3) Includes the purchase of Paramount Security Life Insurance Company, now
known as Security National Life Insurance Company of Louisiana, on March
16, 2004.
(4) Includes the purchase of Memorial Insurance Company of America on December
29, 2005.
Underwriting
The Factors considered in evaluating an application for ordinary life insurance
coverage can include the applicant's age, occupation, general health and medical
history. Upon receipt of a satisfactory (non-funeral plan insurance)
application, which contains pertinent medical questions, the Company writes
insurance based upon its medical limits and requirements subject to the
following general non-medical limits:
Age Nearest Non-Medical
Birthday Limits
------------ -----------
0-50 $75,000
51-up Medical information
required (APS or exam)
When underwriting life insurance, the Company will sometimes issue policies with
higher premium rates for substandard risks.
The Company also sells funeral plan insurance. This insurance is a small face
amount, with a maximum policy size of $15,000. It is written on a simplified
medical application with underwriting requirements being a completed
application, a phone inspection on selected applicant and a Medical Information
Bureau inquiry. There are several underwriting classes in which an applicant can
be placed.
Annuities
Products
The Company's annuity business includes single premium deferred annuities,
flexible premium deferred annuities and immediate annuities. A single premium
deferred annuity is a contract where the individual remits a sum of money to the
Company, which is retained on deposit until such time as the individual may wish
to annuitize or surrender the contract for cash. A flexible premium deferred
annuity gives the contract holder the right to make premium payments of varying
amounts or to make no further premium payments after his initial payment. These
single and flexible premium deferred annuities can have initial surrender
charges. The surrender charges act as a deterrent to individuals who may wish to
surrender their annuity contracts.
Annuities have guaranteed interest rates of 3% to 6.5% per annum. Above that,
the interest rate credited is periodically determined by the Board of Directors
at their discretion. An immediate annuity is a contract in which the individual
remits to the Company a sum of money in return for the Company's obligation to
pay a series of payments on a periodic basis over a designated period of time,
such as an individual's life, or for such other period as may be designated.
Holders of annuities generally enjoy a significant benefit under the current
federal income tax law in that interest accretions that are credited to the
annuities do not incur current income tax expense on the part of the contract
holder. Instead, the interest income is tax deferred until such time as it is
paid out to the contract holder. In order for the Company to realize a profit on
an annuity product, the Company must maintain an interest rate spread between
its investment income and the interest rate credited to the annuities. From that
spread must be deducted commissions, issuance expenses and general and
administrative expenses. The Company's annuities currently have credited
interest rates ranging from 3% to 6.5%.
Markets and Distribution
The general market for the Company's annuities is middle to older age
individuals who wish to save or invest their money in a tax-deferred
environment, having relatively high yields. The major source of annuity
considerations comes from direct agents. Annuities are also sold in conjunction
with other insurance sales. This is true in both the funeral planning and higher
education planning areas. If an individual does not qualify for a funeral plan
due to health considerations, the agent will often sell that individual an
annuity to fund those final expenses. In the higher education planning area,
most life insurance sales have as part of the transaction an annuity portion
that is used to accumulate funds. The commission rates on annuities are up to
10%.
The following table summarizes the annuity business for the five years ended
December 31, 2005:
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Annuities
Policy/Cert.
Count as of December 31 20,119(1) 7,365 7,206 7,711 8,021
Deposits Collected (omitted 000 $2,416 $1,972 $2,026 $3,215 $2,550
(1) Includes the purchase of Memorial Insurance Company of America on December
29, 2005.
Accident and Health
Products
Prior to the acquisition of Capital Investors Life in 1994, the Company did not
actively market accident and health products. With the acquisition of Capital
Investors Life, the Company acquired a block of accident and health policies
which pay limited benefits to policyholders. The Company is currently offering a
low-cost comprehensive diver's accident policy. The diver's policy provides
worldwide coverage for medical expense reimbursement in the event of diving or
water sports accidents.
Markets and Distribution
The Company currently markets its diver's policy through web marketing.
The following table summarizes the accident and health business for the five
years ended December 31, 2005:
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Accident and Health
Policy/Cert.
Count as of December 31 14,934 15,778 17,391 18,921 19,343
Premiums Collected (omitted 000) $285 $308 $352 $365 $413
Reinsurance
When a given policy exceeds the Company's retention limits, the Company
reinsures with other companies that portion of the individual life insurance and
accident and health policies it has underwritten. The primary purpose of
reinsurance is to enable an insurance company to write a policy in an amount
larger than the risk it is willing to assume for itself. The Company remains
obligated for amounts ceded in the event the reinsurers do not meet their
obligations.
The Company's policy is to retain no more than $75,000 of ordinary insurance per
insured life. Excess risk is reinsured. The total amount of life insurance in
force at December 31, 2005, reinsured by other companies aggregated
$185,364,000, representing approximately 5.8% of the Company's life insurance in
force on that date.
The Company currently cedes and assumes certain risks with various authorized
unaffiliated reinsurers pursuant to reinsurance treaties which are renewable
annually. The premiums paid by the Company are based on a number of factors,
primarily including the age of the insured and the risk ceded to the reinsurer.
Investments
The investments that support the Company's life insurance and annuity
obligations are determined by the Investment Committee of the Board of Directors
of the various subsidiaries and ratified by the full Board of Directors of the
respective subsidiaries. A significant portion of the investments must meet
statutory requirements governing the nature and quality of permitted investments
by insurance companies. The Company's interest-sensitive type products,
primarily annuities and interest-sensitive whole life, compete with other
financial products such as bank
certificates of deposit, brokerage sponsored money market funds as well as
competing life insurance company products. While it is not the Company's policy
to offer the highest yield in this climate, in order to offer what the Company
considers to be a competitive yield, it maintains a diversified portfolio
consisting of common stocks, preferred stocks, municipal bonds, investment and
non-investment grade bonds including high-yield issues, mortgage loans, real
estate, short-term investments and other securities and investments.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Notes to Consolidated Financial Statements" for additional
disclosure and discussion regarding investments.
Cemetery and Mortuary
Products
The Company has six wholly-owned cemeteries and 12 wholly owned mortuaries. The
cemeteries are non-denominational. Through its cemetery and mortuary operations,
the Company markets a variety of products and services both on a pre-need basis
(prior to death) and an at-need basis (at the time of death). The products
include grave spaces, interment vaults, mausoleum crypts and niches, markers,
caskets, flowers and other related products. The services include professional
services of funeral directors, opening and closing of graves, use of chapels and
viewing rooms, and use of automobiles and clothing. The Company has a funeral
chapel at each of its cemeteries, other than Holladay Memorial Park and Singing
Hills Memorial Park, and has eight separate stand-alone mortuary facilities.
Markets and Distribution
The Company's pre-need cemetery and mortuary sales are marketed to persons of
all ages but are generally purchased by persons 45 years of age and older. The
Company also markets its mortuary and cemetery products on an at-need basis. The
Company is limited in its geographic distribution of these products to areas
lying within an approximate 20-mile radius of its mortuaries and cemeteries. The
Company's at-need sales are similarly limited in geographic area.
The Company actively seeks to sell its cemetery and funeral products to
customers on a pre-need basis. The Company employs cemetery sales
representatives on a commission basis to sell these products. Many of these
pre-need cemetery and mortuary sales representatives are also licensed insurance
salesmen and sell funeral plan insurance. In many instances, the Company's
cemetery and mortuary facilities are the named beneficiary of the funeral plan
policies.
The sales representatives of the Company's cemetery and mortuary operations are
commissioned and receive no salary. The sales commissions range from 4% to 25%
for cemetery products and services and 10% to 100% of first year premiums for
funeral plan insurance. Potential customers are located via telephone sales
prospecting, responses to letters mailed by the sales representatives, newspaper
inserts, referrals, contacts made at funeral services, and door-to-door
canvassing. The Company trains its sales representatives and generates leads for
them. If a customer comes to one of the Company's cemeteries on an at-need
basis, the sales representatives are compensated on a commission basis.
Mortgage Loans
Products
Beginning in 1993, the Company, through its subsidiary, SecurityNational
Mortgage Company has been active in both the residential as well as commercial
real estate markets. The Company has current approvals through HUD, Fannie Mae,
Freddie Mac and other substantial secondary market investors, which enable it to
originate a wide
variety of residential mortgage loan products that are subsequently sold to
these investors. The Company uses internal funding sources as well as
maintaining external warehouse lines of credit with unaffiliated financial
institutions. The Company also originates residential construction loans.
Security National Capital, a subsidiary of SecurityNational Mortgage Company,
originates commercial real estate loans both for internal investment as well as
for sale to unaffiliated investors.
Markets and Distribution
The Company's residential mortgage lending services are marketed primarily to
mortgage originators. SecurityNational Mortgage Company maintains a retail
origination presence in the Salt Lake City market in addition to 21 wholesale
and retail branch offices located in Arizona, California, Colorado, Florida,
Hawaii, Nevada, Oregon, Texas, Utah and Virginia, with sales representatives in
other states.
Recent Acquisitions and Other Business Activities
Memorial Insurance Company of America
On December 29, 2005, Security National Life and Southern Security Life
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 and Southern Security
Life 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, 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.
As of December 31, 2005, Memorial Insurance Company had 116,116 policies in
force and approximately 50 agents. For the year ended December 31, 2005,
Memorial Insurance Company had revenues of $3,659,000 and net income of
$837,000. As of December 31, 2005, the assets and the 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, Southern Security Life,
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.
Moreover, Security National Life and Southern Security Life 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 and Southern Security Life 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 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, as
reinsurer, to the extent permitted by the Arkansas Insurance Department. The
assets and liabilities to be reinsured under the reinsurance agreement were
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, 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 was transferred to Security National Life under the
terms of the reinsurance agreement, except for capital and surplus of
approximately $1,000,000. Thus, $30,025,777 in assets and liabilities was
transferred from Memorial Insurance Company to Security National Life 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 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. The
note is secured by the assets owned by Memorial Insurance Company. In addition,
Southern Security Life contributed $2,200,000 in cash to Memorial Insurance
Company at closing in consideration for the surplus note. Memorial Insurance
Company repaid 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.
On December 31, 2005, Memorial Insurance Company entered into a reinsurance
agreement with Security National Life for certain accident and health insurance
policies of Security National Life. 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
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.
Southern Security Life Insurance Company
On 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. 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, which
resulted in (i) Southern Security Life Insurance Company becoming a wholly owned
subsidiary of Security National Life, and (ii) the unaffiliated stockholders of
Southern Security Life, 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, 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 became the surviving corporation of the merger.
Southern Security Life continues to be governed by the laws of the State of
Florida, and its separate corporate existence and operations continue 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.
The Company, through its affiliates, Security National Life and SSLIC Holding
Company, owned 76.7% of the Company's outstanding common shares prior to the
merger.
The purpose of the merger was to terminate the registration of the common stock
of Southern Security Life 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 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 31, 2005, Southern Security Life and Security National Life entered
into a reinsurance agreement to reinsure the remaining in force business of
Southern Security Life to Security National Life to the extent permitted by the
Florida Office of Insurance Regulation. The assets and liabilities 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,
Zions First National Bank will hold the assets and liabilities in trust for
purposes of administration of the assets and liabilities with respect to such
insolvency.
The Florida Office of Insurance Regulation approved the reinsurance agreement on
December 28, 2005. As a result of the execution of the reinsurance agreement,
all of the insurance business and operations of Southern Security Life will be
transferred to Security National Life, as reinsurer, as of December 31, 2005,
the effective date of the agreement. Any future insurance business by Southern
Security Life will be covered by this reinsurance agreement. All of the
insurance business and operations of Southern Security Life, including its
assets and liabilities, will be transferred to Security National Life under the
terms of the reinsurance agreement, except for $3,500,000 in capital and surplus
that Southern Security Life will continue to hold in order to remain qualified
as a life insurance company for federal income tax purposes. Thus, approximately
$48,528,000 in assets and liabilities will be transferred from Southern Security
Life to Security National Life pursuant to the reinsurance agreement.
In addition, on December 31, 2005, Southern Security Life declared a dividend to
Security National Life in the amount of $7,181,000. Following the payment of the
dividend, the remaining capital and surplus of Southern Security Life will be
$3,500,000, which is a sufficient amount in order for Southern Security Life to
maintain its status as an admitted insurer in good standing in the state of
Florida. On December 28, 2005, the Florida Office of Insurance Regulation
approved the request by Security National Life Insurance Company and Southern
Security Life for the dividend payment.
Security National Life anticipates that Southern Security Life will either be
sold to an unrelated business entity or merged with Security National Life
during fiscal 2006. On December 12, 2005, a plan of liquidation was approved by
the Board of Directors of the Company in anticipation of such sale or merger.
The Company expects the sale or merger to be completed prior to December 31,
2006.
Security National Life Insurance Company of Louisiana, formerly Paramount
Security Life Insurance Company
On March 16, 2004, Security National Life completed the purchase of all 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 total purchase consideration
was $4,398,000 and the transaction was effective on January 26, 2004.
Security National Life of Louisiana is licensed in the State of Louisiana and is
permitted to appoint agents who do not have a full life insurance license. These
agents are limited to selling small life insurance policies in the final expense
market. The Company anticipates that with this license it will be able to expand
its operations in Louisiana. The Company is servicing the policyholders of
Security National Life of Louisiana out of its Jackson, Mississippi office and
has closed the Shreveport office.
Regulation
The Company's insurance subsidiaries, Security National Life, Southern Security
Life, Security National Life of Louisiana, and Memorial Insurance Company are
subject to comprehensive regulation in the jurisdictions in which they do
business under statutes and regulations administered by state insurance
commissioners. Such regulation relates to, among other things, prior approval of
the acquisition of a controlling interest in an insurance company; standards of
solvency which must be met and maintained; licensing of insurers and their
agents; nature of and limitations on investments; deposits of securities for the
benefit of policyholders; approval of policy forms and premium rates; periodic
examinations of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of insurers or for other
purposes; and requirements regarding aggregate reserves for life policies and
annuity contracts, policy claims, unearned premiums, and other matters. The
Company's insurance subsidiaries are subject to this type of regulation in any
state in which they are licensed to do business. Such regulation could involve
additional costs, restrict operations or delay implementation of the Company's
business plans.
The Company is currently subject to regulation in Utah, Florida, Louisiana and
Arkansas under insurance holding company legislation, and other states where
applicable. Generally, intercorporate transfers of assets and dividend payments
from its insurance subsidiaries are subject to prior notice of approval from the
State Insurance Department, if they are deemed "extraordinary" under these
statutes. The insurance subsidiaries are required, under state insurance laws,
to file detailed annual reports with the supervisory agencies in each of the
states in which they do business. Their business and accounts are also subject
to examination by these agencies.
The Company's cemetery and mortuary subsidiaries are subject to the Federal
Trade Commission's comprehensive funeral industry rules and are subject to state
regulations in the various states where such operations are domiciled. The
morticians must be licensed by the respective state in which they provide their
services. Similarly, the mortuaries and cemeteries are governed and licensed by
state statutes and city ordinances in Utah, Arizona and California. Reports are
required to be kept on file on a yearly basis which include financial
information concerning the number of spaces sold and, where applicable, funds
provided to the Endowment Care Trust Fund. Licenses are issued annually on the
basis of such reports. The cemeteries maintain city or county licenses where
they conduct business.
The Company's mortgage loan subsidiary, SecurityNational Mortgage, is subject to
the rules and regulations of the U.S. Department of Housing and Urban
Development and to various state licensing acts and regulations. These
regulations, among other things, specify minimum capital requirements, the
procedures for the origination, the underwriting, the licensing of wholesale
brokers, quality review audits and the amounts that can be charged to borrowers
for all FHA and VA loans. Each year, the Company must have an audit by an
independent CPA firm to verify compliance under these regulations. In addition
to the government regulations, the Company must meet loan requirements of
various investors who purchase the loans.
Income Taxes
The Company's insurance subsidiaries, Security National Life, Southern Security
Life, Security National Life of Louisiana and Memorial Insurance Company are
taxed under the Life Insurance Company Tax Act of 1984. Under the act, life
insurance companies are taxed at standard corporate rates on life insurance
company taxable income. Life insurance company taxable income is gross income
less general business deductions, reserves for future policyholder benefits
(with modifications), and a small life insurance company deduction (up to 60% of
life insurance company taxable income). The Company may be subject to the
corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a
result of the small life insurance company deduction. Also, under the Tax Reform
Act of 1986, distributions in excess of stockholder's surplus account or a
significant decrease in life reserves will result in taxable income.
Security National Life, Southern Security Life, Security National Life of
Louisiana and Memorial Insurance Company may continue to receive the benefit of
the small life insurance company deduction. In order to qualify for the small
company deduction, the combined assets of the Company must be less than
$500,000,000 and the taxable income of the life insurance companies must be less
than $3,000,000. To the extent that the net income limitation is exceeded, then
the small life insurance company deduction is phased out over the next
$12,000,000 of life insurance company taxable income.
Since 1990 Security National Life, Southern Security Life, Security National
Life of Louisiana and Memorial Insurance Company have computed their life
insurance taxable income after establishing a provision representing a portion
of the costs of acquisition of such life insurance business. The effect of the
provision is that a certain percentage of the Company's premium income is
characterized as deferred expenses and recognized over a five to ten year
period.
The Company's non-life insurance company subsidiaries are taxed in general under
the regular corporate tax provisions. For taxable years beginning January 1,
1987, the Company may be subject to the Corporate Alternative Minimum Tax and
the proportionate disallowance rules for installment sales under the Tax Reform
Act of 1986.
Competition
The life insurance industry is highly competitive. There are approximately 2,000
legal reserve life insurance companies in business in the United States. These
insurance companies differentiate themselves through marketing techniques,
product features, price and customer service. The Company's insurance
subsidiaries compete with a large number of insurance companies, many of which
have greater financial resources, a longer business history, and more
diversified line of insurance coverage than the Company. In addition, such
companies generally have a larger sales force. Further, many of the companies
with which the Company competes are mutual companies which may have a
competitive advantage because all profits accrue to policyholders. Because the
Company is small by industry standards and lacks broad diversification of risk,
it may be more vulnerable to losses than larger, better-established companies.
The Company believes that its policies and rates for the markets it serves are
generally competitive.
The cemetery and mortuary industry is also highly competitive. In the Salt Lake
City, Phoenix and San Diego areas in which the Company competes, there are a
number of cemeteries and mortuaries which have longer business histories, more
established positions in the community and stronger financial positions than the
Company. In
addition, some of the cemeteries with which the Company must compete for sales
are owned by municipalities and, as a result, can offer lower prices than can
the Company. The Company bears the cost of a pre-need sales program that is not
incurred by those competitors that do not have a pre-need sales force. The
Company believes that its products and prices are generally competitive with
those in the industry.
The mortgage loan industry is highly competitive with a number of mortgage
companies and banks in the same geographic area in which the Company is
operating. The mortgage market in general is sensitive to changes in interest
rates and the refinancing market is particularly vulnerable to changes in
interest rates.
Employees
As of December 31, 2005, the Company employed 426 full-time and 74 part-time
employees.
Item 2. Properties
The following table sets forth the location of the Company's office facilities
and certain other information relating to these properties.
Approximate
Owned Square
Location Function Leased Footage
-------- -------- ------ -------
5300 So. 360 West Corporate Headquarters Owned (1) 33,200
Salt Lake City, Utah
755 Rinehart Road Insurance Operations/ Owned (2) 27,000
Lake Mary, Florida Mortgage Sales
3935 I-55 South, Frontage Road Insurance Operations Owned (3) 12,000
Jackson, Mississippi
2800 Youree Drive Bld. 1, Suite 207 Insurance Operations Leased (4) 200
Shreveport, Louisiana
634 West Main Street Insurance Operations Owned 3,000
Blytheville, Arkansas
410 North 44th Street, Suite 190 Mortgage Sales Leased (5) 1,800
Phoenix, Arizona
12150 Tributary Point Dr., Suite160 Mortgage Sales Leased (6) 2,000
Gold River, California
7676 Hazard Center Drive, Suite 625 Mortgage Sales Leased (7) 1,300
San Diego, California
27433 Tourney Road, Suite 220 Mortgage Sales Leased (8) 2,500
Santa Clarita, California
6208 Lehman Drive, Suite 201 Mortgage Sales Leased (9) 2,200
Colorado Springs, Colorado
14001 East Lliff Ave., Suite 120 Mortgage Sales Leased (10) 1,800
Aurora, Colorado
7785 Baymeadows Way, Suite 101 Mortgage Sales Leased (11) 1,800
Jacksonville, Florida
1617 Santa Barbara Blvd Mortgage Sales Leased (12) 700
Cape Coral, Florida
5620 Tara Blvd., Suite 103 Mortgage Sales Leased (13) 1,200
Bradenton, Florida
30 Aulike Street, Suite 308 Mortgage Sales Leased (14) 4,300
Kailua, Hawaii
Item 2. Properties (Continued)
- --------------------
Approximate
Owned Square
Location Function Leased Footage
-------- -------- ------ -------
6655 W. Sahara, Suite B-110 Mortgage Sales Leased (15) 1,400
Las Vegas, Nevada
999 Southwest Disk Drive, Suite 104 Mortgage Sales Leased (16) 1,800
Bend, Oregon
12750 Merit Drive, Suite 1212 Mortgage Sales Leased (17) 2,600
Dallas, Texas
820 Gessner, Suite 800 Mortgage Sales Leased (18) 2,400
Houston, Texas
613 Northwest Loop 410, Suite 685 Mortgage Sales Leased (19) 1,100
San Antonio, Texas
6975 South Union Park, Suite 150 Mortgage Sales Leased (20) 4,300
Midvale, Utah
5219 & 5249 Greenpine Drive Insurance Operations Owned (21) 6,600
Murray, Utah
5258 Pinemont Dr., Suite B230 Peace Mausoleum Owned 800
Murray, Utah
5251 Green Street, Suite 350 Mortgage Sales Owned (22) 5,000
Salt Lake City, Utah
970 East Murray-Holladay Rd., Mortgage Sales Leased (23) 6,400
Suite 4A
Salt Lake City, Utah
474 West 800 North, Suite 102 Mortgage Sales Leased (24) 2,000
Orem, Utah
6767 Forrest Hill Avenue, Mortgage Sales Leased (25) 500
Third Floor
Richmond, Virginia
(1) The Company leases an additional 5,376 square feet of the facility to
unrelated third parties for approximately $83,000 per year, under
leases expiring at various date after 2005.
(2) The Company leases an additional 9,903 square feet of the facility to
unrelated third parties for approximately $182,200 per year, under
leases expiring at various dates after 2005.
(3) The building is located on 104 undeveloped acres.
(4) The Company leases this facility for $1,900 per year. The lease
expires April 2006.
(5) The Company leases this facility for $35,300 per year. The lease
expires in October 2006.
(6) The Company leases this facility for $47,000 per year. The lease
expires in July 2009.
(7) The Company leases this facility for $45,300 per year. The lease
expires in June 2008.
(8) The Company leases this facility for $78,000 per year. The lease
expires in February 2009.
(9) The Company leases this facility for $28,800 per year. The lease
expires in June 2006.
(10) The Company leases this facility for $28,800 per year. The lease
expires in June 2006.
(11) The Company leases this facility for $27,200 per year. The lease
expires in September 2006.
(12) The Company leases this facility for $8,400 per year, with a
month-to-month lease.
(13) The Company leases this facility for $17,800 per year. The lease
expires in July 2006.
(14) The Company leases this facility for $6,200 per year. The lease
expires in July 2006.
(15) The Company leases this facility for $49,100 per year. The lease
expires in April 2007.
(16) The Company leases this facility for $37,400 per year. The lease
expires in December 2008.
(17) The Company leases this facility for $40,500 per year. The lease
expires in January 2009.
(18) The Company leases this facility for $51,300 per year. The lease
expires in January 2011.
(19) The Company leases this facility for $7,200 per year with a
month-to-month lease.
(20) The Company leases this facility for $98,000 per year. The lease
expires in January 2010.
(21) The Company leases an additional 128,300 square feet of the facility
to unrelated third parties for approximately $825,000 per year, under
leases expiring at various dates after 2005.
(22) The Company leases an additional 25,000 square feet of the facility to
unrelated third parties for approximately $442,500 per year, under
leases expiring at various dates after 2005.
(23) The Company leases this facility for $75,000 per year. The lease
expires in January 2006.
(24) The Company leases this facility for $31,000 per year. The lease
expires in February 2007.
(25) The Company leases this facility for $13,200 per year. The lease
expires in July 2006.
The Company believes the office facilities it occupies are in good operating
condition, are adequate for current operations and has no plans to build or
acquire additional office facilities. The Company believes its office facilities
are adequate for handling its business in the foreseeable future. As leases
expire the Company will either renew or find comparable leases or acquire
additional office space.
The following table summarizes the location and acreage of the six Company owned
cemeteries, each of which includes one or more mausoleums:
Net Saleable Acreage
Acres
Sold as Total
Name of Date Developed Total Cemetery Available
Cemetery Location Acquired Acreage(1) Acreage(1) Spaces(2) Acreage(1)
- ------------ -------- -------- ---------- ---------- --------- ----------
Memorial Estates, Inc.:
Lakeview
Cemetery(3) 1640 East Lakeview Dr.
Bountiful, Utah 1973 7 40 6 34
Mountain View
Cemetery(3) 3115 East 7800 South
Salt Lake City, Utah 1973 15 54 13 41
Redwood
Cemetery(3)(5) 6500 South Redwood Rd.
West Jordan, Utah 1973 27 78 27 51
Holladay Memorial
Park(4)(5) 4900 So. Memory Lane
Holladay, Utah 1991 5 14 3 11
Lakehills Cemetery(4)
10055 So. State Street
Sandy, Utah 1991 9 41 3 38
Singing Hills Memorial
Park(6) 2800 Dehesa Road
El Cajon, California 1995 8 35 3 32
(1) The acreage represents estimates of acres that are based upon survey
reports, title reports, appraisal reports or the Company's inspection
of the cemeteries.
(2) Includes spaces sold for cash and installment contract sales.
(3) As of December 31, 2005, there were mortgages of approximately
$16,000, collateralized by the property and facilities at Memorial
Estates Lakeview, Mountain View and Redwood Cemeteries.
(4) As of December 31, 2005, there were mortgages of approximately
$1,465,000, collateralized by the property and facilities at Deseret
Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills
Cemetery and Colonial Mortuary.
(5) These cemeteries include two granite mausoleums.
(6) As of December 31, 2005, there was a mortgage of approximately
$307,000, collateralized by the property
The following table summarizes the location, square footage and the number of
viewing rooms and chapels of the twelve Company owned mortuaries:
Name of Date Viewing Square
Mortuary Location Acquired Room(s) Chapel(s) Footage
- ------------- ---------- --------- -------- --------- --------
Memorial Mortuary 5850 South 900 East
Murray, Utah 1973 3 1 20,000
Memorial Estates, Inc.:
Redwood Mortuary(3) 6500 South Redwood Rd.
West Jordan, Utah 1973 2 1 10,000
Mountain View Mortuary(3) 3115 East 7800 South
Salt Lake City, Utah 1973 2 1 16,000
Lakeview Mortuary(3) 1640 East Lakeview Dr.
Bountiful, Utah 1973 0 1 5,500
Paradise Chapel 3934 East Indian
Funeral Home School Road
Phoenix, Arizona 1989 2 1 9,800
Deseret Memorial, Inc.:
Colonial Mortuary(1) 2128 South State St.
Salt Lake City, Utah 1991 1 1 14,500
Deseret Mortuary(1) 36 East 700 South
Salt Lake City, Utah 1991 2 2 36,300
Lakehills Mortuary(3) 10055 South State St.
Sandy, Utah 1991 2 1 18,000
Cottonwood Mortuary(1)(3) 4670 South Highland Dr.
Holladay, Utah 1991 2 1 14,500
Greer-Wilson
Funeral Home 5921 West Thomas Road
Phoenix, Arizona 1995 2 2 25,000
Adobe Funeral Home(4) 218 North Central
Avondale, Arizona 1995 1 1 1,850
Crystal Rose Funeral Home(2) 9155 W. VanBuren
Tolleson, Arizona 1997 0 1 9,000
(1) As of December 31, 2005, there were mortgages of approximately
$1,465,000, collateralized by the property and facilities at Deseret
Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills
Cemetery and Colonial Mortuary.
(2) As of December 31, 2005, there was a mortgage of approximately
$109,000, collateralized by the property and facilities of Crystal
Rose Funeral Home.
(3) These funeral homes also provide burial niches at their respective
locations.
(4) As of December 31, 2005, there was a mortgage of approximately
$134,000, collateralized by the property and facilities of Adobe
Chapel Funeral Home.
Item 3. Legal Proceedings
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.
Hood claims that he wrote a letter to the Company expressing 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. Hood's claims against the Company also include, but are not limited
to, violation of labor laws, whistleblower retaliation and infliction of
emotional distress. The letter proposed a settlement in the amount of $275,000.
On November 23, 2005, Hood filed a complaint in the Superior Court of the State
of California for the County for San Diego (Case No. GIE 028978) against Singing
Hills Memorial Park and California Memorial Estates, Inc, wholly owned
subsidiaries of the Company. The claims in the complaint include wrongful
termination in violation of public policy, retaliation in violation of public
policy, race discrimination in violation of the California Fair Employment and
Housing Act, retaliation in violation of the California Fair Employment and
Housing Act, intentional infliction of emotional distress, plus punitive
damages, attorney's fees and costs of the lawsuit. There are no specific amounts
requested in the complaint, but damages are in an amount to be proven at a jury
trial. The Company contends that Hood voluntarily quit and was not terminated.
The Company intends to vigorously defend the action. An answer was filed. The
case is in the discovery stage.
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 Gornichec also wrote the letter
on behalf of Hood. 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. Gornichec asserts that he was an employee
contrary to the Company's position.
The claims made on behalf of 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. 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
Gornichec was an independent contractor, not an employee, and that the claims
and the settlement amount sought are not justified. If the matter is not
resolved and litigation ensues, the Company is prepared to vigorously defend the
action.
The Company is a defendant in various other legal actions arising from the
normal conduct of business. Management believes that none of the actions will
have a material effect on the Company's financial position or results of
operations. Based on management's assessment and legal counsel's representations
concerning the likelihood of unfavorable outcomes, no amounts have been accrued
for the above claims in the consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 2005.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's Class A Common Stock trades on the Nasdaq National Market under
the symbol "SNFCA." Prior to August 13, 1987, there was no active public market
for the Class A and Class C Common Stock. As of March 29, 2006, the closing
sales price of the Class A Common Stock was $4.35 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, 2004:
Period (Calendar Year) Price Range
High Low
2004
First Quarter $8.06 $6.06
Second Quarter 6.20 3.54
Third Quarter 3.70 2.93
Fourth Quarter 3.63 2.76
2005
First Quarter $4.09 $2.85
Second Quarter 3.52 2.86
Third Quarter 3.15 2.92
Fourth Quarter 3.82 2.96
2006
First Quarter $4.79 $3.30
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 2005.
As of December 31, 2005, there were 4,385 record holders of Class A Common Stock
and 129 record holders of Class C Common Stock.
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)
The following selected financial data for each of the five years in the period
ended December 31, 2005, are derived from the audited consolidated financial
statements. The data as of December 31, 2005 and 2004, and for the three years
ended December 31, 2005, 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,
2005 2004 2003(3) 2002 2001
---- ---- ------- ---- ----
Revenue
Premiums $27,170,000 $25,979,000 $23,295,000 $14,077,000 $13,151,000
Net investment income 19,387,000 15,939,000 17,303,000 12,540,000 12,947,000
Net mortuary and cemetery sales 10,839,000 11,661,000 10,944,000 10,638,000 9,881,000
Realized (losses) gains on investments 74,000 74,000 (2,000) 1,021,000 10,000
Mortgage fee income 71,859,000 62,690,000 92,955,000 57,008,000 40,086,000
Other 621,000 855,000 550,000 479,000 152,000
------------- ------------- ------------- ------------- -------------
Total revenue 129,950,000 117,198,000 145,045,000 95,763,000 76,227,000
------------- ------------- ------------- ------------- -------------
Expenses
Policyholder benefits 24,477,000 23,362,000 21,755,000 13,756,000 11,775,000
Amortization of deferred
policy acquisition costs 3,031,000 4,602,000 4,929,000 3,994,000 3,870,000
General and administrative expenses 90,690,000 82,097,000 102,926,000 68,459,000 52,247,000
Interest expense 4,921,000 2,174,000 3,642,000 1,970,000 2,791,000
Cost of goods and services of
the mortuaries and cemeteries 2,103,000 2,304,000 2,328,000 2,045,000 1,772,000
------------- ------------- ------------- ------------- -------------
Total benefits and expenses 125,222,000 114,539,000 135,580,000 90,224,000 72,455,000
------------- ------------- ------------- ------------- -------------
Income before income tax expense 4,728,000 2,659,000 9,465,000 5,539,000 3,772,000
Income tax expense (1,240,000) (652,000) (2,891,000) (1,565,000) (913,000)
Minority interest in (income)
loss of subsidiary -- 115,000 22,000 18,000 (18,000)
------------- ------------- ------------- ------------- -------------
Net earnings $3,488,000 $2,122,000 $6,596,000 $3,992,000 $2,841,000
============= ============= ============= ============= =============
Net earnings per common share(4) $.54 $.34 $1.07 $.68 $.49
==== ==== ===== ==== ====
Weighted average outstanding
common shares (4) 6,450,000 6,312,000 6,162,000 5,883,000 5,795,000
Net earnings per common
share-assuming dilution(4) $.54 $.32 $1.04 $.66 $.49
==== ==== ===== ==== ====
Weighted average outstanding
common shares-assuming dilution (4) 6,480,000 6,539,000 6,321,000 6,062,000 5,796,000
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)
(Continued)
Balance Sheet Data:
December 31,
2005(1) 2004(2) 2003 2002(3) 2001
------- ------- ---- ------- ----
Assets
Investments and restricted assets $212,922,000 $183,876,000 $112,006,000 $106,161,000 $ 94,514,000
Cash 16,633,000 15,334,000 19,704,000 38,199,000 8,757,000
Receivables 61,464,000 53,737,000 120,698,000 102,590,000 59,210,000
Other assets 68,626,000 64,516,000 62,033,000 61,907,000 51,903,000
------------ ------------ ------------ ------------ ------------
Total assets $359,645,000 $317,463,000 $314,441,000 $308,857,000 $214,384,000
============ ============ ============ ============ ============
Liabilities
Policyholder benefits $263,981,000 226,785,000 $220,739,000 $217,895,000 $142,291,000
Notes & contracts payable 10,273,000 12,263,000 16,909,000 18,321,000 11,236,000
Cemetery & mortuary liabilities 10,829,000 10,762,000 10,562,000 10,076,000 9,344,000
Other liabilities 26,691,000 20,091,000 21,146,000 21,934,000 15,625,000
------------ ------------ ------------- ------------- ------------
Total liabilities 311,774,000 269,901,000 269,356,000 268,226,000 178,496,000
------------ ------------ ------------- ------------- ------------
Minority interest -- 3,813,000 3,957,000 4,298,000 4,237,000
Non-controlling interest
perpetual care trusts 2,173,000 2,084,000 1,953,000 1,820,000 1,682,000
Stockholders' equity 45,698,000 41,665,000 39,175,000 34,513,000 29,969,000
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $359,645,000 $317,463,000 $314,441,000 $308,857,000 $214,384,000
============ ============ ============ ============ ============
(1) Includes the purchase of Memorial Insurance Company of America on
December 29, 2005.
(2) Includes the purchase of Paramount Security Life Insurance Company,
now Security National Life Insurance Company of Louisiana, on March
16, 2004.
(3) Includes the purchase of assets from Acadian Life Insurance Company on
December 23, 2002. (4) Earnings per share amounts have been adjusted
for the effect of annual stock dividends.
(4) Earnings per share amounts have been adjusted for the effect of annual
stock dividends.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's operations over the last several years generally reflect three
trends or events which the Company expects to continue: (i) increased attention
to "niche" insurance products, such as the Company's funeral plan policies and
traditional whole life products; (ii) emphasis on cemetery and mortuary
business; and (iii) capitalizing on lower interest rates by originating and
refinancing mortgage loans and other "niche" mortgage products.
SecurityNational Mortgage Company ("SNMC") is a mortgage lender incorporated
under the laws of the State of Utah. SNMC is approved and regulated by the
Federal Housing Administration (FHA), a department of the U.S. Department of
Housing and Urban Development (HUD), to originate mortgage loans that qualify
for government insurance in the event of default by the borrower. SNMC obtains
loans primarily from independent brokers and correspondents. SNMC funds the
loans from internal cash flows and lines of credit from financial institutions,
including the Company's insurance subsidiaries. SNMC receives fees from the
borrowers and other secondary fees from third party investors who purchased the
loans from SNMC. SNMC pays the brokers and correspondents a commission for loans
that are brokered through SNMC.
As of December 31, 2005, SNMC had 21 branches in ten states. 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 in
Cape Coral, Florida. In 2005, SNMC opened offices in Kailua, Hawaii; Bend,
Oregon; Midvale, Utah; and Richmond, Virginia. SNMC originated and sold 12,786
loans ($2,085,000,000 loan amount), 11,567 loans ($1,781,000,000 loan amount),
and 17,494 loans ($2,560,000,000 loan amount) in 2005, 2004 and 2003,
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 common shares
of SSLIC Holding Company, formerly Consolidare Enterprises, Inc., and Insuradyne
Corporation for a total cost of $12,248,194. At the time the transaction was
completed, Consolidare owned 57.4% of the outstanding shares of Southern
Security Life. Following the acquisition of Consolidare, Security National Life
and its wholly owned subsidiary, SSLIC Holding Company, increased their
ownership of the outstanding shares of Southern Security Life through the
purchase of shares traded on the Nasdaq SmallCap Market and stock purchase
transactions with then current stockholders of Southern Security Life. As of
December 31, 2004, Security National Life and SSLIC Holding Company held 76.7%
of the outstanding common shares of Southern Security Life.
On January 1, 2005, Security National Life and SSLIC Holding Company completed a
merger transaction with Southern Security Life in which SSLIC Holding Company
was merged with Southern Security Life, which resulted in Southern Security Life
becoming a wholly owned subsidiary of Security National Life and the
unaffiliated stockholders of Southern Security Life 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,
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 the insurance policies
of Gulf National Life Insurance Company in force and in effect on June 1, 2001.
On March 16, 2004, Security National Life purchased all of the outstanding
common shares 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 the transaction 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.
On December 29, 2005, Security National Life and Southern Security Life
purchased all of the outstanding common shares of Memorial Insurance Company of
America, an Arkansas domiciled insurance company located in Blytheville,
Arkansas. As of December 31, 2005, Memorial Insurance Company had 116,116
policies in force and approximately 50 agents. The purchased consideration was
$13,500,000.
Significant Accounting Policies
The following is a brief summary of our significant accounting policies and a
review of our most critical accounting estimates. Please also refer to Note 1 of
our consolidated financial statements.
Insurance Operations
In accordance with accounting principles generally accepted in the United States
of America (GAAP), premiums and considerations received for interest sensitive
products such as universal life insurance and ordinary annuities are reflected
as increases in liabilities for policyholder account balances and not as
revenues. Revenues reported for these products consist of policy charges for the
cost of insurance, administration charges, amortization of policy initiation
fees and surrender charges assessed against policyholder account balances.
Surrender benefits paid relating to these products are reflected as decreases in
liabilities for policyholder account balances and not as expenses. The Company
receives investment income earned from the funds deposited into account
balances, a portion of which is passed through to the policyholders in the form
of interest credited. Interest credited to policyholder account balances and
benefit claims in excess of policyholder account balances are reported as
expenses in the consolidated financial statements.
Premium revenues reported for traditional life insurance products are recognized
as revenues when due. Future policy benefits are recognized as expenses over the
life of the policy by means of the provision for future policy benefits.
The costs related to acquiring new business, including certain costs of issuing
policies and other variable selling expenses (principally commissions), defined
as deferred policy acquisition costs, are capitalized and amortized into
expense. For nonparticipating traditional life products, these costs are
amortized over the premium paying period of the related policies, in proportion
to the ratio of annual premium revenues to total anticipated premium revenues.
Such anticipated premium revenues are estimated using the same assumption used
for computing liabilities for future policy benefits and are generally "locked
in" at the date the policies are issued. For interest sensitive products, these
costs are amortized generally in proportion to expected gross profits from
surrender charges and investment, mortality and expense margins. This
amortization is adjusted when the Company revises the estimate of current or
future gross profits or margins. For example, deferred policy acquisition costs
are amortized earlier than originally estimated when policy terminations are
higher than originally estimated or when investments backing the related
policyholder liabilities are sold at a gain prior to their anticipated maturity.
Death and other policyholder benefits reflect exposure to mortality risk and
fluctuate from year to year on the level of claims incurred under insurance
retention limits. The profitability of the Company is primarily affected by
fluctuations in mortality, other policyholder benefits, expense levels, interest
spreads (i.e., the difference between interest earned on investments and
interest credited to policyholders) and persistency. The Company has the ability
to mitigate adverse experience through sound underwriting, asset/liability
duration matching, sound actuarial practices, adjustments to credited interest
rates, policyholder dividends or cost of insurance charges.
Cemetery and Mortuary Operations
Pre-need sales of funeral services and caskets, including 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.
Use of Significant Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect reported amounts and
disclosures. It is reasonably possible that actual experience could differ from
the estimates and assumptions utilized which could have a material impact on the
financial statements. The following is a summary of our significant accounting
estimates, and critical issues that impact them:
Fixed Maturities Available for Sale
Securities available-for-sale are carried at fair value, with unrealized holding
gains and losses reported in accumulated other comprehensive income which is
included in stockholders' equity after adjustment for deferred income taxes and
deferred acquisition costs related to universal life products.
The Company is required to exercise judgment to determine when a decline in the
value of a security is other than temporary. When the value of a security
declines and the decline is determined to be other than temporary, the carrying
value of the investment is reduced to its fair value and a realized loss is
recorded to the extent of the decline.
Deferred Acquisition Costs
Amortization of deferred policy acquisition costs for interest sensitive
products is dependent upon estimates of current and future gross profits or
margins on this business. Key assumptions used include the following: yield on
investments supporting the liabilities, amount of interest or dividends credited
to the policies, amount of policy fees and charges, amount of expenses necessary
to maintain the policies, and amount of death and surrender benefits and the
length of time the policies will stay in force.
For nonparticipating traditional life products, these costs are amortized over
the premium paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumption used for computing
liabilities for future policy benefits and are generally "locked in" at the date
the policies are issued.
Cost of Insurance Acquired
Cost of insurance acquired is the present value of estimated future profits of
the acquired business and is amortized similar to deferred acquisition costs.
The critical issues explained for deferred acquisition costs would also apply
for cost of insurance acquired.
Allowance for Doubtful Accounts
The Company accrues an estimate of potential losses for the collection of
receivables. The significant receivables are the result of receivables due on
mortgage loans sold to investors, cemetery and mortuary operations, mortgage
loan operations and other receivables. The allowance is based upon the Company's
experience. The critical issues that would impact recovery of the cemetery and
mortuary receivables is the overall economy. The critical issues that would
impact recovery of mortgage loan operations would be interest rate risk and loan
underwriting.
Future Policy Benefits
Reserves for future policy benefits for traditional life insurance products
requires the use of many assumptions, including the duration of the policies,
mortality experience, expenses, investment yield, lapse rates, surrender rates,
and dividend crediting rates.
These assumptions are made based upon historical experience, industry standards
and a best estimate of future results and, for traditional life products,
include a provision for adverse deviation. For traditional life insurance, once
established for a particular series of products, these assumptions are generally
held constant.
Unearned Revenue
The universal life products the Company sells have 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.
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
2005 Compared to 2004
Total revenues increased by $12,752,000, or 10.9%, from $117,198,000 for fiscal
year 2004 to $129,950,000 for fiscal year 2005. Contributing to this increase in
total revenues was a $9,169,000 increase in mortgage fee income, a $1,191,000
increase in insurance premium and other considerations, and a $3,448,000
increase in net investment income. This increase was partially offset by a
$822,000 decrease in mortuary and cemetery sales, and a $234,000 decrease in
other revenues.
Insurance premiums and other considerations increased by $1,191,000, from
$25,979,000 in 2004 to $27,170,000 in 2005. This increase was primarily due to
the additional insurance premiums that were realized on new insurance sales.
Net investment income increased by $3,448,000, from $15,939,000 in 2004 to
$19,387,000 in 2005. This increase was primarily attributable to additional
borrower interest income from increased long-term bond purchases and mortgage
loans over the comparable period in 2005.
Net mortuary and cemetery sales decreased by $822,000, from $11,661,000 in 2004
to $10,839,000 in 2005. This reduction in mortuary sales was primarily due to a
reduction in pre-need property sales and the loss of sales from the Camelback
Funeral Home as a result of the city of Phoenix having commenced condemnation
proceedings for purposes of constructing a light rail facility on the funeral
home property.
Other revenues decreased by $234,000, from $855,000 in 2004 to $621,000 in 2005.
Other revenue decreased in 2005 due in part to a one-time recovery of funds in
2004 from a member of management who made restitution of $111,000 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 increased by $9,169,000, from $62,690,000 in 2004 to
$71,859,000 in 2005. This increase was primarily attributable to an increase in
the number of loan originations during 2005 due to the opening of new offices
and increased production from existing offices, which resulted in financing a
greater number of mortgage loans.
Total benefits and expenses were $125,222,000 for 2005, which constituted 96.4%
of the Company's total revenues, as compared to $114,539,000, or 97.7% of the
Company's total revenues for 2004.
During 2005, there was a net increase of $1,115,000 in death benefits,
surrenders and other policy benefits, and increase in future policy benefits
from $23,362,000 in 2004 to $24,477,000 in 2005. This net increase was primarily
the result of an increase in reserves for policyholders.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired decreased by $1,571,000 from $4,602,000 in 2004 to $3,031,000
in 2005. This decrease was primarily due to recognition of improvements in
persistency.
General and administrative expenses increased by $8,593,000, from $82,097,000 in
2004 to $90,690,000 in 2005. Contributing to this increase was a $5,117,000
increase in commission expenses, from $48,690,000 in 2004 to $53,807,000 in 2005
due to higher mortgage loan originations made by SecurityNational Mortgage
Company during 2005. Salaries increased by $1,325,000 from $14,392,000 in 2004
to $15,717,000 in 2005, primarily due to merit increases in the salaries of
existing employees and an increase in the number of employees. Other expenses
increased by $2,151,000, from $19,015,000 in 2004 to $21,166,000 in 2005. The
increase in other expenses primarily resulted from loan costs at
SecurityNational Mortgage Company during 2005 due to a greater number of loan
originations.
Interest expense increased by $2,747,000, from $2,174,000 in 2004 to $4,921,00
in 2005. This increase was primarily due to the increased use of warehouse lines
of credit required for the funding of mortgage loans by SecurityNational
Mortgage Company during 2005.
Cost of goods and services sold of the mortuaries and cemeteries decreased by
$201,000, from $2,304,000 in 2004 to $2,103,000 in 2005. This reduction in the
cost of goods and services sold of the mortuaries and cemeteries was due to the
reduced costs of at-need merchandise at the Company's mortuaries and cemeteries
and the loss of sales from the Camelback Funeral Home as a result of the City of
Phoenix having commenced condemnation proceedings for purposes of constructing a
light rail facility on the funeral home property.
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
the inclusion of 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 revenues increased by $305,000, from $550,000 in 2003 to $855,000 in 2004.
Other revenues increased in part from the recovery of funds from a member of
management who was found to have fraudulently obtained expense reimbursements
over a period of several years. The total amount of payments that the employee
fraudulently obtained was $111,000. The employee was terminated and the Company
demanded and received full restitution. The employee made restitution by
transferring to the Company shares of the Company's common stock that the
employee owned at the time he was terminated.
Mortgage fee income decreased by $30,265,000, from $92,955,000 in 2003 to
$62,690,000 in 2004. This decrease was primarily attributable to a decrease in
the number of loan originations during 2004 due to an increase in interest rates
resulting in fewer borrowers refinancing mortgage loans.
Total benefits and expenses were $114,539,000 for 2004, which constituted 97.7%
of the Company's total revenues, as compared to $135,580,000, or 93.5% of the
Company's total revenues for 2003.
During 2004, there was a net increase of $1,607,000 in death benefits,
surrenders and other policy benefits, and in future policy benefits from
$21,755,000 in 2003 to $23,362,000 in 2004. This net increase was the result of
an increase in reserves for policyholders offset by decreases in death benefits,
and surrenders and other policy benefits.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired decreased by $327,000, from $4,929,000 in 2003 to $4,602,000
in 2004. This decrease was primarily due to reduced amortization of deferred
policy acquisition costs and cost of insurance acquired, which is in line with
actuarial assumptions.
General and administrative expenses decreased by $20,829,000, from $102,926,000
in 2003 to $82,097,000 in 2004. Contributing to this decrease was an $18,846,000
decrease in commission expenses, from $67,537,000 in 2003 to $48,691,000 in 2004
due to fewer mortgage loan originations made by SecurityNational Mortgage
Company during 2004. Salaries increased $312,000, from $14,080,000 in 2003 to
$14,392,000 in 2004, primarily due to merit increases in the salaries of
existing employees and the increase in the number of employees. 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.
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and to meet operating expenses.
The Company attempts to match the duration of invested assets with its
policyholder and cemetery and mortuary liabilities. The Company may sell
investments other than those held-to-maturity in the portfolio to help in this
timing; however, to date, that has not been necessary. The Company purchases
short-term investments on a temporary basis to meet the expectations of
short-term requirements of the Company's products.
The Company's investment philosophy is intended to provide a rate of return
which will persist during the expected duration of policyholder and cemetery and
mortuary liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominately in fixed maturity
securities, mortgage loans, and the warehousing of mortgage loans on a
short-term basis before selling the loans to investors in accordance with the
requirements and laws governing the life insurance subsidiaries. Bonds owned by
the insurance subsidiaries amounted to $96,378,000 as of December 31, 2005
compared to $81,051,000 as of December 31, 2004. This represents 46% of the
total insurance related investments in 2005 as compared to 45% in 2004.
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, 2005, 4%
(or $3,431,000) and at December 31, 2004, 2% (or $1,659,000) 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 (of approximately $170,845,000) 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 $20,593 $9,444 $(9,982) $(18,134)
(in thousands)
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, 2005
and 2004, the life subsidiaries exceeded the regulatory criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $55,971,000 and $53,928,000 as of December 31, 2005 and 2004,
respectively. Stockholders' equity as a percent of total capitalization was 82%
and 77% as of December 31, 2005 and 2004, respectively.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2005 was 7.9%, as
compared to a rate of 9.0% in 2004.
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. Prior to completion of
the acquisition, Consolidare owned 52.4% of the outstanding shares of common
stock of Southern Security Life. The Company also acquired all of the
outstanding shares of stock of Insuradyne Corp., a Florida corporation
("Insuradyne").
As consideration for the purchase of the shares of Consolidare, the Company paid
to the stockholders of Consolidare at closing an aggregate of $12,248,194. In
order to pay the purchase consideration, the Company obtained $6,250,000 from
bank financing, with the balance of $5,998,194 obtained from funds then
currently held by the Company. In addition to the purchase consideration, the
Company caused Southern Security Life to pay, on the closing date, $1,050,000 to
George Pihakis, the President and Chief Executive Officer of Southern Security
Life prior to closing, as a lump sum settlement of the executive compensation
agreement between Southern Security Life and Mr. Pihakis.
In connection with the acquiring of Consolidare, the Company entered into an
Administrative Services Agreement dated December 17, 1998 with Southern Security
Life. Under the terms of the agreement, the Company agreed to provide Southern
Security Life 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, Southern Security
Life 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 Southern Security Life is less than or equal to
$6,000,000, unless Southern Security Life 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 additional one-year terms expiring December 16, 2004 and 2005. The
agreement may be automatically extended for additional one-year terms unless
either the Company or Southern Security Life 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 Southern Security Life
provided written notice prior to September 30, 2005, 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, 2006.
On 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. 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, which resulted in (i) Southern Security Life
becoming a wholly-owned subsidiary of Security National Life, and (ii) the
unaffiliated stockholders of Southern Security Life, 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, 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 became the surviving corporation of the merger.
Southern Security Life 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. The
Company, through its affiliates, Security National Life and SSLIC Holding
Company, owned 76.7% of the Company's outstanding common shares prior to the
merger.
The purpose of the merger was to terminate the registration of the common stock
of Southern Security Life 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 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 the transaction 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.
On December 29, 2005, Security National Life and Southern Security Life
purchased all of the outstanding common shares of Memorial Insurance Company of
America, an Arkansas domiciled insurance company located in Blytheville,
Arkansas. As of December 31, 2005, Memorial Insurance Company had 116,116
policies in force and approximately 50 agents. The purchase consideration was
$13,500,000.
At December 31, 2005, $21,818,751 of the Company's consolidated stockholders'
equity represents the statutory stockholders' equity of the Company's insurance
subsidiaries. The life insurance subsidiaries need to comply with applicable
state regulations before a dividend can be paid to their parent company.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements to encourage companies to provide prospective
information about their businesses without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in such statements. The
Company desires to take advantage of the "safe harbor" provisions of the act.
Forward-Looking Statements
This Annual Report of Form 10-K contains forward-looking statements, together
with related data and projections, about the Company's projected financial
results and its future plans and strategies. However, actual results and needs
of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets, which may involve a high degree of risk, and
there can be no assurance that forward-looking statements and projections will
prove accurate.
Factors that may cause the Company's actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
heightened competition, including the intensification of price competition, the
entry of new competitors, and the introduction of new products by new and
existing competitors; (ii) adverse state and federal legislation or regulation,
including decreases in rates, limitations on premium levels, increases in
minimum capital and reserve requirements, benefit mandates and tax treatment of
insurance products; (iii) fluctuations in interest rates causing a reduction of
investment income or increase in interest expense and in the market value of
interest rate sensitive investment; (iv) failure to obtain new customer, retain
existing customers or reductions in policies in force by existing customers; (v)
higher service, administrative, or general expense due to the need for
additional advertising, marketing, administrative or management information
systems expenditures; (vi) loss or retirement of key executives or employees;
(vii) increases in medical costs; (viii) changes in the Company's liquidity due
to changes in asset and liability matching; (ix) restrictions on insurance
underwriting based on genetic testing and other criteria; (x) adverse changes in
the ratings obtained by independent rating agencies; (xi) failure to maintain
adequate reinsurance; (xii) possible claims relating to sales practices for
insurance products and claim denials and (xiii) adverse trends in mortality and
morbidity.
Off-Balance Sheet Agreements
The Company's off-balance sheet arrangements consist of operating leases for
rental of office space and equipment.
The Company leases office space and equipment under various non-cancelable
agreements, with remaining terms up to five years. Minimum lease payments under
these non-cancelable operating leases as of December 31, 2005, are approximately
as follows:
Years Ending December 31:
2006 $580,000
2007 296,000
2008 225,000
2009 130,000
2010 60,000
----------
Total $1,291,000
==========
Total rent expense related to these non-cancelable operating leases for the
years ended December 31, 2005, 2004 and 2003 was approximately $828,000,
$734,000 and $396,000, respectively.
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.
In September 2005, the AICPA issued Statement of Position 05-1, Accounting by
Insurance Enterprises for Deferred Acquisition Costs ("DAC") in Connection with
Modifications or Exchanges of Insurance Contracts, ("SOP 05-1"). SOP 05-1
provides guidance on accounting by insurance enterprises for DAC on internal
replacements of insurance and investment contracts. An internal replacement is a
modification in product benefits, features, rights or coverages that occurs by
the exchange of a contract for a new contract, or by amendment, endorsement, or
rider to a contract, or by the election of a feature or coverage within a
contract. Modifications that result in a replacement contract that is
substantially changed from the replaced contract should be accounted for as an
extinguishment of the replaced contract. Unamortized DAC, unearned revenue
liabilities and deferred sales inducements from the replaced contract must be
written-off. Modifications that result in a contract that is substantially
unchanged from the replaced contract should be accounted for as a continuation
of the replaced contract. SOP 05-1 is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006, with earlier
adoption encouraged. Initial application of SOP 05-1 should be as of the
beginning of the entity's fiscal year. The Company is expected to adopt SOP 05-1
effective January 1, 2007. Adoption of this statement is expected to have an
impact on the Company's consolidated financial statements; however, the impact
has not yet been determined.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company has no activities in derivative financial or commodity instruments
other than those recorded and disclosed in the financial statements. See note 17
of the consolidated financial statements included elsewhere in this Form 10-K.
The Company's exposure to market risks (i.e., interest rate risk, foreign
currency exchange rate risk and equity price risk) through other financial
instruments, including cash equivalents, accounts receivable and lines of
credit, is not material.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Financial Statements:
Report of Independent Registered Public Accounting Firm
Hansen, Barnett & Maxwell.............................................37
Report of Independent Registered Public Accounting Firm
Tanner LC.............................................................38
Consolidated Balance Sheets, December 31,
2005 and 2004.........................................................39
Consolidated Statements of Earnings,
Years Ended December 31, 2005, 2004,
and 2003..............................................................41
Consolidated Statements of Stockholders'
Equity, Years Ended December 31, 2005, 2004
and 2003. ............................................................42
Consolidated Statements of Cash Flows,
Years Ended December 31, 2005, 2004 and
2003 ..............................................................43
Notes to Consolidated Financial Statements............................45
HANSEN, BARNETT & MAXWELL Registered with the Public Company
A Professional Corporation Accounting Oversight Board
CERTIFIED PUBLIC ACCOUNTANTS
AND
BUSINESS CONSULTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Security National Financial Corporation
We have audited the accompanying consolidated balance sheet of Security National
Financial Corporation and subsidiaries as of December 31, 2005, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated 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 financial statement presentation.
We believe that our audit provides 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,
2005, and the consolidated results of their operations and their cash flows for
the year in the period ended December 31, 2005, 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.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 23, 2006
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Security National Financial Corporation
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Security National
Financial Corporation and subsidiaries as of December 31, 2004, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
the years ended December 31, 2004 and 2003. In connection with our audits of the
consolidated financial statements, we have also audited the 2004 and 2003
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 the consolidated results of their operations and their cash flows for
the years ended December 31, 2004 and 2003, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related consolidated financial statement schedules for 2004 and
2003, 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 Sheets
December 31,
Assets: 2005 2004
- ------- ---- ----
Insurance-related investments:
Fixed maturity securities
held to maturity, at amortized cost $89,780,942 $69,984,761
Fixed maturity securities, available
for sale, at estimated fair value 6,597,161 11,066,025
Equity securities, available for sale,
at estimated fair value 12,346,939 4,166,769
Mortgage loans on real estate and construction
loans, net of allowances for losses of
$240,000 and $254,893 for 2005 and 2004 72,793,811 65,831,586
Real estate, net of accumulated
depreciation and allowances for
losses of $4,784,979 and $4,408,030
for 2005 and 2004 10,559,887 9,709,129
Policy, student and other loans net of allowance
for doubtful accounts of $339,218
and $140,580 for 2005 and 2004 12,391,569 13,312,471
Short-term investments 3,211,590 4,628,999
----------- ------------
Total insurance-related investments 207,681,899 178,699,740
------------ ------------
Restricted assets of cemeteries and mortuaries 5,240,099 5,176,463
------------ ------------
Cash and cash equivalents 16,632,966 15,333,668
------------ ------------
Receivables:
Trade contracts 5,733,142 5,333,891
Mortgage loans sold to investors 53,970,231 47,167,150
Receivable from agents 1,992,877 1,416,211
Receivable from officers -- 1,540
Other 958,851 1,120,157
------------ -----------
Total receivables 62,655,101 55,038,949
Allowance for loan losses and
doubtful accounts (1,191,106) (1,302,368)
------------ -------------
Net receivables 61,463,995 53,736,581
------------ -------------
Policyholder accounts on deposit
with reinsurer 6,572,756 6,689,422
Cemetery land and improvements held for sale 8,498,227 8,547,764
Accrued investment income 2,197,576 1,743,721
Deferred policy and pre-need
contract acquisition costs 24,048,638 20,181,818
Property and equipment, net 11,199,788 10,520,665
Cost of insurance acquired 12,663,221 14,053,497
Cemetery perpetual care trust investments 1,152,493 989,239
Goodwill 683,191 683,191
Other 1,610,624 1,107,230
------------ ------------
Total assets $359,645,473 $317,462,999
============= =============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
December 31,
2005 2004
---- ----
Liabilities:
Future life, annuity, and other benefits $260,822,803 $224,529,539
Unearned premium reserve 3,157,918 2,254,991
Bank loans payable 8,946,321 10,442,106
Notes and contracts payable 1,326,284 1,820,615
Deferred pre-need cemetery and mortuary
contract revenues 10,828,994 10,762,357
Accounts payable 1,533,065 1,064,269
Funds held under reinsurance treaties 1,129,747 1,184,463
Other liabilities and accrued expenses 9,427,644 6,344,756
Income taxes 14,601,029 11,497,967
------------ ------------
Total liabilities 311,773,805 269,901,063
------------ ------------
Commitments and contingencies -- --
------------ ------------
Minority interest -- 3,813,346
------------ ------------
Non-controlling interest in
perpetual care trusts 2,173,250 2,083,750
----------- ------------
Stockholders' Equity:
Common stock:
Class A: $2.00 par value, authorized
10,000,000 shares, issued 7,098,363
shares in 2005 and 6,755,870 shares
in 2004 14,196,726 13,511,740
Class C: convertible, $0.20 par value,
authorized 7,500,000 shares, issued
6,781,060 shares in 2005 and 6,468,199
shares in 2004 1,356,212 1,293,641
------------ ------------
Total common stock 15,552,938 14,805,381
Additional paid-in capital 15,650,344 14,922,851
Accumulated other comprehensive income
(loss) and other items, net of deferred
taxes of $411,286 and $369,879 for 2005
and 2004, respectively 117,647 (11,352)
Retained earnings 17,460,024 15,365,259
Treasury stock at cost (1,251,104
Class A shares and 138,138 Class C
shares in 2005; 1,315,075 Class A
shares and 79,103 Class C shares in 2004,
held by affiliated companies) (3,082,535) (3,417,299)
------------ ------------
Total stockholders' equity 45,698,418 41,664,840
------------ ------------
Total liabilities and
stockholders' equity $359,645,473 $317,462,999
============ ============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Revenues:
Insurance premiums and other considerations $ 27,170,109 $ 25,979,341 $ 23,294,373
Net investment income 19,386,571 15,939,176 17,302,597
Net cemetery and mortuary sales 10,838,878 11,661,053 10,944,365
Realized gains (losses) on investments
and other assets 74,246 74,431 (2,155)
Mortgage fee income 71,859,272 62,689,391 92,955,165
Other 620,751 854,425 550,064
------------ ------------ ------------
Total revenues 129,949,827 117,197,817 145,044,409
------------ ------------ ------------
Benefits and expenses:
Death benefits 13,250,080 13,248,960 13,315,266
Surrenders and other policy benefits 1,484,284 1,291,621 1,726,275
Increase in future policy benefits 9,742,218 8,821,497 6,712,961
Amortization of deferred
policy and pre-need acquisition
costs and cost of insurance acquired 3,030,734 4,602,072 4,929,006
General and administrative expenses:
Commissions 53,807,368 48,690,807 67,536,703
Salaries 15,716,813 14,391,958 14,079,908
Other 21,166,024 19,014,776 21,309,897
Interest expense 4,921,238 2,173,778 3,642,046
Cost of goods and services sold of the
mortuaries and cemeteries 2,103,432 2,303,821 2,327,475
------------ ------------ ------------
Total benefits and expenses 125,222,191 114,539,290 135,579,537
------------ ------------ ------------
Earnings before income taxes 4,727,636 2,658,527 9,464,872
Income tax expense (1,239,756) (651,536) (2,890,669)
Minority interest -- 115,281 22,294
------------ ------------ ------------
Net earnings $ 3,487,880 $ 2,122,272 $ 6,596,497
============ ============ ============
Net basic earnings per common share (1) $.54 $.34 $1.07
==== ==== =====
Weighted average
outstanding common shares (1) 6,450,057 6,311,974 6,161,927
Net earnings per common share
assuming dilution (1) $.54 $.32 $1.04
==== ==== =====
Weighted average outstanding common
shares assuming dilution (1) 6,480,016 6,538,869 6,321,484
(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 Statements 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, 2003 $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 gai ns -- -- -- 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
----------- ---------- ----------- ------------ ----------- ---------- ----------
Comprehensive income:
Net earnings -- -- -- -- 3,487,880 -- 3,487,880
Unrealized gains -- -- -- 128,999 -- -- 128,999
-----------
Total comprehensive income -- -- -- -- -- -- 3,616,879
----------
Exercise of stock options 6,892 -- 3,926 -- (8,084) -- 2,734
Purchase of Treasury stock -- -- -- -- -- -- --
Sale of Treasury stock -- -- 79,201 -- -- 334,764 413,965
Stock dividends 676,084 64,581 644,366 -- (1,385,031) -- --
Conversion Class C to Class A 2,010 (2,010) -- -- -- -- --
----------- ---------- ----------- -------- ----------- ----------- -----------
Balance at December 31, 2005 $14,196,726 $1,356,212 $15,650,344 $117,647 $17,460,024 $(3,082,535) $45,698,418
=========== ========== =========== ======== =========== =========== ===========
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net earnings $3,487,880 $2,122,272 $6,596,497
Adjustments to reconcile net earnings
to net cash provided by (used in) operating
activities:
Realized (gains) losses on investments
and other assets (74,246) (74,431) 2,155
Depreciation 2,094,022 2,013,113 1,866,924
Provision for losses on real estate
accounts and loans receivable 87,376 (165,781) 225,072
Amortization of premiums and discounts 36,637 (2,489) 44,092
Provision for deferred income taxes 862,024 636,430 2,862,343
Policy and pre-need acquisition costs deferred (6,499,180) (6,051,793) (4,527,546)
Policy and pre-need acquisition costs amortized 1,667,813 3,370,763 3,611,674
Cost of insurance acquired amortized 1,097,609 1,231,308 1,317,332
Change in assets and liabilities net of effects
from purchases and disposals of subsidiaries:
Land and improvements held for sale 49,537 (160,703) 42,154
Future life and other benefits 10,824,347 9,000,715 7,426,761
Receivables for mortgage loans sold (6,803,081) 67,621,035 (25,333,080)
Other operating assets and liabilities 1,771,798 (2,609,762) 3,434,187
----------- ------------ ------------
Net cash provided by (used in)
operating activities 8,602,536 76,930,677 (2,431,435)
----------- ------------ ------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (5,984,347) (37,371,166) (15,396,993)
Calls and maturities - fixed maturity securities 7,781,126 6,293,614 11,147,744
Securities available for sale:
Purchases - equity securities (139,383) (21,993) (51,921)
Sales - equity securities 4,183,108 2,675,301 3,860,000
Purchases of short-term investments (13,700,353) (29,893,323) (19,065,874)
Sales of short-term investments 15,117,762 26,731,711 22,347,104
Purchases of restricted assets (57,453) (262,195) 610,155
Purchase of assets for perpetual care trusts (163,254) (31,959) (161,898)
Amount received for perpetual care trusts 89,500 130,660 132,750
Mortgage, policy, and other loans made (76,034,805) (78,437,965) (30,192,467)
Payments received for mortgage, policy, and
other loans 69,804,347 41,116,662 20,479,056
Purchases of propert and equipment (2,236,732) (1,241,898) (1,623,310)
Cash received from sale of property and equipment -- 149,040 --
Purchases of real estate (5,138,795) (1,856,931) (1,807,658)
Cash (paid) received for purchase of subsidiary 1,722,238 (304,042) --
Sale of real estate 3,898,980 352,054 2,287,831
------------ ------------ ------------
Net cash used in investing activities (858,061) (71,972,430) (7,435,481)
------------ ------------ ------------
See accompanying notes to the consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Cash flows from financing activities:
Annuity contract receipts 5,547,795 5,387,393 5,785,310
Annuity contract withdrawals (9,655,951) (10,276,576) (10,410,247)
Repayment of bank loans and notes and
contracts payable (2,463,116) (4,379,949) (3,698,189)
Proceeds from borrowing on notes and contracts 672,439 -- --
Purchase of minority shareholder stock of subsidiary (960,309) -- --
Stock options exercised -- -- 133,000
Purchase of treasury stock -- (422,946) (437,641)
Sale of treasury stock 413,965 363,141 --
------------ ------------ ------------
Net cash used in financing activities (6,445,177) (9,328,937) (8,627,767)
------------ ------------ ------------
Net change in cash and cash equivalents 1,299,298 (4,370,690) (18,494,683)
------------ ------------ ------------
Cash and cash equivalents at beginning of year 15,333,668 19,704,358 38,199,041
------------ ------------ ------------
Cash and cash equivalents at end of year $16,632,966 $15,333,668 $19,704,358
============ ============ ============
Supplemental Schedule of Cash Flow Information:
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 and Memorial Insurance Company of America on December 29, 2005:
2005 2004
---- ----
Liabilities assumed:
Future life, annuity and other
policy benefits $30,326,086 $1,865,038
Policy and contract claims 171,526 --
Unearned premiums 61,901 --
Other liabilities 184,390 --
Deferred income taxes 1,928,137 --
Less non-cash items
Cost of insurance acquired (251,086) (304,042)
Bonds received (20,865,718) (1,537,801)
Common stock received (8,130,046) (326,325)
Redeemable preferred stock (821,077) --
Mortgage loans received -- (471,593)
Real estate received -- (32,668)
Policy loans received (34,575) (28,180)
Short-term investments -- 586,601
Receivables (388,374) (13,589)
Accrued investment income (302,923) (24,983)
Property, plant and equipment (156,003) (16,500)
----------- -----------
Cash (paid) received $ 1,722,238 $ (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, 2005, 2004, and 2003
1) Significant Accounting Policies
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, Alabama, Arkansas, California, Florida, Georgia, Louisiana,
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, Hawaii,
Nevada, Oregon, Texas, Utah, and Virginia.
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 2005 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, 2005, 2004, and 2003
1) Significant Accounting Policies (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
These consolidated financial statements include the financial statement of
Security National Financial Corporation and its majority owned subsidiaries. All
intercompany transactions and accounts have been eliminated in consolidation
except for restricted assets of cemeteries and mortuaries that are invested in
participations in mortgage loans payable by Security National Life, a wholly
owned subsidiary.
All significant intercompany transactions and accounts have been eliminated in
consolidation.
Investments
The Company's management determines the appropriate classifications of
investments in fixed maturity securities and equity securities at the
acquisition date and re-evaluates the classifications at each balance sheet
date.
Held-to-maturity investments are carried at amortized cost, reflecting the
Company's intent and ability to hold the securities to maturity.
Available-for-sale securities are stated at estimated fair value with net
unrealized gains or losses reported as a component of accumulated other
comprehensive income.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
1) Significant Accounting Policies (Continued)
Investment gains and losses arise when investments are sold (as determined on a
specific identification basis) or are other-than-temporarily impaired. If in
management's judgment a decline in the value of an investment below cost is
other than temporary, the cost of the investment is written down to fair value
with a corresponding charge to earnings. Factors considered in judging whether
an impairment is other than temporary include: the financial condition, business
prospects and creditworthiness of the issuer, the length of time that fair value
has been less than cost, the relative amount of the decline, and the Company's
ability and intent to hold the investment until the fair value recovers.
Fixed maturity securities held to maturity are carried 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 are carried 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 are carried at unpaid principal balances, adjusted
for amortization of premium or accretion of discount, less allowance for
possible losses.
Real estate is carried at cost, less accumulated depreciation provided on a
straight-line basis over the estimated useful lives of the properties, or is
adjusted to a new basis from impairment in value, if any.
Policy, student, and other loans are carried at the aggregate unpaid balances,
less allowances for possible losses.
Short-term investments are carried at cost and consist of certificates of
deposit and commercial paper with maturities of up to one year.
Restricted assets of cemeteries and mortuaries are assets held in a 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 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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
1) Significant Accounting Policies (Continued)
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) are recognized when earned and consist
of policy charges for the cost of insurance, policy administration charges, and
surrender charges assessed against policyholder account balances during the
period.
Deferred Policy Acquisition Costs and Cost of Insurance Acquired
Commissions and other costs, net of commission and expense allowances for
reinsurance ceded, that vary with and are primarily related to the production of
new insurance business have been deferred. Deferred policy acquisition costs for
traditional life insurance are amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For interest-sensitive insurance products, deferred
policy acquisition costs are amortized generally in proportion to the present
value of expected gross profits from surrender charges, investment, mortality
and expense margins. This amortization is adjusted when estimates of current or
future gross profits to be realized from a group of products are reevaluated.
Deferred acquisition costs are written off when policies lapse or are
surrendered.
Cost of insurance acquired is the present value of estimated future profits of
the acquired business and is amortized similar to deferred policy acquisition
costs.
Allowance for Doubtful Accounts
The Company accrues an estimate of potential losses for the collection of
receivables. The significant receivables are the result of receivables due on
mortgage loans sold to investors, cemetery and mortuary operations, mortgage
loan operations and other receivables. The allowance is based upon the Company's
experience. The critical issues that impact recovery of the cemetery and
mortuary receivables is the overall economy. The critical issues that 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
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
1) Significant Accounting Policies (Continued)
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. Increases in future policy benefits are charged to
expense.
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 constituted 3%, 2%, and 2% of insurance in force for
2005, 2004 and 2003, 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 to allow management to control
exposure to potential losses arising from large risks, and provide additional
capacity for growth. The Company remains liable for amounts ceded in the event
the reinsurers are unable to meet their obligations.
The Company has entered into coinsurance agreements with unaffiliated insurance
companies under which the Company assumed 100% of the risk for certain life
insurance policies and certain other policy-related liabilities of the insurance
company.
Reinsurance premiums, commissions, expense reimbursements, and reserves related
to reinsured business are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Expense allowances received in connection with reinsurance ceded are
accounted for as a reduction of the related policy acquisition costs and are
deferred and amortized accordingly.
Cemetery and Mortuary Operations
Pre-need contract sales of funeral services and caskets - revenue and costs
associated with the sales of pre-need funeral services and caskets are deferred
until the services are performed or the caskets are delivered.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
1) Significant Accounting Policies (Continued)
Sales of cemetery interment rights (cemetery burial property) - revenue and
costs associated with the sale of 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 sale of unconstructed cemetery
property is deferred until such property has been constructed and meets the
criteria of FAS No. 66 described above.
Pre-need contract sales of cemetery merchandise (primarily markers and vaults) -
revenue and costs associated with the sale of pre-need cemetery merchandise is
deferred until the merchandise is delivered.
Pre-need contract sales of cemetery services (primarily merchandise delivery,
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 acquisition costs - costs
incurred related to obtaining new pre-need contract cemetery and prearranged
funeral services 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 services, 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 guaranteed
funeral arrangements wherein a prospective customer can receive future goods and
services at guaranteed prices. To accomplish this, the Company, through its life
insurance operations, sells to the customer an increasing benefit life insurance
policy that is assigned to the mortuaries. If, at the time of need, the
policyholder/potential mortuary customer utilizes one of the Company's
facilities, the guaranteed funeral arrangement contract that has been assigned
will provide the funeral goods and services at the contracted price. The
increasing life insurance policy will cover the difference between the original
contract prices and current prices. Risks may arise if the difference cannot be
fully met by the life insurance policy. However, management believes that given
current inflation rates and related price increases of goods and services, the
risk of exposure is minimal.
Mortgage Operations
Mortgage fee income consists of origination fees, processing fees and certain
other income related to the origination of mortgages. For mortgages sold to
third party investors, 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. Certain loans funded are transferred to unrelated financial
institutions under purchase commitments. All rights and title to the mortgage
loans are assigned to the unrelated financial institutions, including any
investor commitments for these loans prior to their purchasing these loans under
the purchase commitments. These are sold with recourse to the Company. The
Company has commitment agreements from these financial institutions whereby the
financial institutions have agreed to purchase mortgage loans and hold up to
$180,000,000 of mortgage loans, as of December 31, 2005, until these loans are
purchased by third party investors. As of December 31, 2005, mortgage loans
totaling $122,762,000 have been sold and were outstanding under these
commitments.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
1) Significant Accounting Policies (Continued)
The majority of loans originated are sold to third party investors. Receivables
for mortgages 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 allowance for loan losses. The estimates are
based upon historical experience and best estimate of future losses. At December
31, 2005 and 2004 the reserve for loan losses was $538,000 and $557,000,
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. At
December 31, 2005 and 2004 the reserve for future loan losses was $2,183,000 and
$1,432,000, respectively.
Goodwill
Previous acquisitions have been accounted for as purchases under which assets
acquired and liabilities assumed were recorded at their fair values with the
excess purchase price recognized as goodwill. The Company evaluates annually or
when changes in circumstances warrant the recoverability of goodwill and if
there is a decrease in value the related impairment is recognized as a charge
against income.
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. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to the temporary differences in the financial reporting basis and
tax basis of assets and liabilities and operating loss carry-forwards. Deferred
tax assets are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled.
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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
1) Significant Accounting Policies (Continued)
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 earning and basic
and diluted earnings per share would have been reduced as follows:
Years Ended December 31,
2005 2004 2003
---- ---- ----
Net earnings, as reported $3,487,880 $2,122,272 $6,596,497
Total stock-based employee
compensation recognized -- -- --
Total stock-based employee compensation
expense determined under fair value
based method for all awards (676,920) (1,090,458) (490,145)
---------- ----------- -----------
Pro forma net earnings $2,810,960 $1,031,814 $6,106,352
========== ========== ==========
Basic earnings per share, as reported $0.54 $0.34 $1.07
Diluted earnings per share as reported $0.54 $0.32 $1.04
Basic earnings per share, pro forma $0.44 $0.16 $0.99
Diluted earnings per share, pro forma $0.44 $0.14 $0.96
The weighted average fair value of options granted in 2005 under the 2003 Plan
is estimated at $1.92 as of the grant date using the Black Scholes
option-pricing model with the following assumptions: dividend yield of 5%,
volatility of 39%, risk-free interest rate of 3.4%, and an expected life of five
to ten years.
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 36%, 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 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 this plan 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, 2005, 2004, and 2003
1) Significant Accounting Policies (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 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 likely have a significant
impact on the Company's consolidated financial statements in future periods and
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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
1) Significant Accounting Policies (Continued)
In September 2005, the AICPA issued Statement of Position 05-1, Accounting by
Insurance Enterprises for Deferred Acquisition Costs ("DAC") in Connection with
Modifications or Exchanges of Insurance Contracts, ("SOP 05-1"). SOP 05-1
provides guidance on accounting by insurance enterprises for DAC on internal
replacements of insurance and investment contracts. An internal replacement is a
modification in product benefits, features, rights or coverages that occurs by
the exchange of a contract for a new contract, or by amendment, endorsement, or
rider to a contract, or by the election of a feature or coverage within a
contract. Modifications that result in a replacement contract that is
substantially changed from the replaced contract should be accounted for as an
extinguishment of the replaced contract. Unamortized DAC, unearned revenue
liabilities and deferred sales inducements from the replaced contract must be
written-off. Modifications that result in a contract that is substantially
unchanged from the replaced contract should be accounted for as a continuation
of the replaced contract. SOP 05-1 is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006, with earlier
adoption encouraged. Initial application of SOP 05-1 should be as of the
beginning of the entity's fiscal year. The Company is expected to adopt SOP 05-1
effective January 1, 2007. Adoption of this statement is expected to have an
impact on the Company's consolidated financial statements; however, the impact
has not yet been determined.
2) Acquisitions
Southern Security Life
As of December 31, 2004, the Company's wholly owned subsidiary, Security
National Life Insurance Company ("Security National Life"), and its wholly owned
subsidiary, SSLIC Holding, owned approximately 77% of the outstanding shares of
common stock of Southern Security Life.
On January 1, 2005, Security National Life and SSLIC Holding Company completed a
merger transaction with Southern Security Life. 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, ("Southern
Security Life"), which resulted in (i) Southern Security Life becoming a wholly
owned subsidiary of Security National Life, and (ii) the unaffiliated
stockholders of Southern Security Life, 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, or an
aggregate of $1,884,733, which was primarily paid to those unaffiliated
stockholders during 2005.
As a result of the merger, the separate existence of SSLIC Holding Company
ceased as Southern Security Life became the surviving corporation of the merger.
Southern Security Life 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.
The purpose of the merger was 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
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
2) Acquisitions (Continued)
with such registration and listing, and provide the stockholders an opportunity
to sell their shares in an illiquid trading market without incurring brokerage
commissions.
Paramount Security Life Insurance Company
On March 16, 2004, Security National Life completed the purchase of 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 total purchase consideration
was $4,398,000 and the transaction was effective, January 26, 2004.
Security National Life of Louisiana is licensed in the State of Louisiana and is
permitted to appoint agents who do not have a full life insurance license. These
agents are limited to selling small life insurance policies in the final expense
market.
Memorial Insurance Company of America
On December 29, 2005, Security National Life and Southern Security Life
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 and Southern Security
Life 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, 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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
2) Acquisitions (Continued)
The unaudited consolidated pro forma results of operations assuming consummation
of the purchase of Memorial Insurance Company as of January 1, 2004, are
summarized as follows:
Unaudited Pro Forma
Years Ended December 31,
2005 2004
---- ----
in thousands except earnings per share
Total revenue $133,609 $122,000
Net earnings 4,325 4,283
Basic earnings per share $.67 $.68
Diluted earnings per share $.67 $.66
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition of Security National Life
Insurance Company of Louisiana on March 16, 2004 and Memorial Insurance Company
of America on December 29, 2005:
2005 2004
---- ----
Assets:
Cash received $1,722,238 $ --
Cost of insurance acquired 251,086 304,042
Investments 29,816,841 1,864,126
Mortgage loans -- 471,593
Real estate -- 32,668
Policy loans 34,575 28,180
Receivables 388,374 13,589
Accrued investment income 302,923 24,983
Property and equipment 156,003 16,500
----------- -----------
Total assets acquired 32,672,040 2,755,681
----------- -----------
Liabilities:
Future life, annuity and other benefits 30,326,086 1,865,038
Other liabilities 417,817 586,601
Deferred income taxes 1,928,137 --
----------- -----------
Total liabilities assumed 32,672,040 2,451,639
----------- -----------
Net assets acquired $ -- $ 304,042
=========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
3) Investments
The Company's investments in fixed maturity securities held to maturity and
equity securities available for sale as of December 31, 2005 are summarized as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2005:
Fixed maturity securities held to maturity
carried at amortized cost:
Bonds:
U.S. Treasury securities
and obligations of U.S
Government agencies $15,135,496 $161,384 $(185,916) $15,110,964
Obligations of states and
political subdivisions 1,276,511 24,143 (3,335) 1,297,319
Corporate securities including
public utilities 70,022,086 1,945,973 (420,407) 71,547,652
Mortgage-backed securities 2,497,872 24,543 (136,089) 2,386,326
Redeemable preferred stock 848,977 22,688 -- 871,665
------------ ---------- --------- -----------
Total fixed maturity
securities held to maturity $ 89,780,942 $2,178,731 $(745,747) $91,213,926
============ ========== ========= ===========
Securities available for sale carried
at estimated fair value:
Fixed maturity securities available
for sale:
U.S. Treasury securities and
obligations of U.S. Government
agencies $ 597,399 $ 35,315 $ -- $ 632,714
Corporate securities including
public utilities 5,846,721 122,715 (4,989) 5,964,447
------------ ---------- ---------- -----------
Total fixed maturity securities
available for sale $ 6,444,120 $ 158,030 $ (4,989) $ 6,597,161
=========== ========== ========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
3) Investments (Continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ---------- ---------- ---------
December 31, 2005:
Equity securities available for sale:
Non-redeemable preferred stock $ 37,781 $ 21,125 $ (3,436) $ 55,470
Common stock:
Public utilities 1,533,349 262,451 (15,357) 1,780,443
Banks, trusts and insurance companies 520,684 604,681 (12,915) 1,112,450
Industrial, miscellaneous and all other 8,080,838 1,801,463 (483,725) 9,398,576
----------- ---------- ---------- -----------
Total equity securities available for sale $10,172,652 $2,689,720 $ (515,433) $12,346,939
=========== ========== ========== ===========
Total securities available for sale
carried at estimated fair value $16,616,772 $2,847,750 $ (520,422) $18,944,100
=========== ========== ========== ===========
Mortgage loans on real estate and construction loans:
Residential $11,121,810
Residential construction 17,278,209
Commercial 43,504,500
Commercial construction 1,129,292
Allowance for bad debts (240,000)
-----------
Total mortgage loans on real estate
and construction loans $72,793,811
===========
Real estate $10,559,887
===========
Policy, student and other loans $12,391,569
===========
Short-term investments $3,211,590
===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
3) Investments (Continued)
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
at amortized cost:
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 carried
at estimated fair value:
Fixed maturity securities available
for sale:
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
----------- ---------- --------- ------------
Total fixed maturity securities
available for sale: $10,486,309 $ 579,716 $ -- $11,066,025
=========== ========== ========== ============
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
3) Investments (Continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ----------
December 31, 2004:
Equity securities available for sale:
Non-redeemable preferred stock $ 56,031 $ 49,063 $ (3,431) $ 101,663
Common stock:
Public utilities 323,719 245,841 (21,952) 547,608
Banks, trusts, and insurance companies 520,683 680,569 (666) 1,200,586
Industrial, miscellaneous and all other 1,136,816 1,638,582 (458,486) 2,316,912
----------- ---------- --------- -----------
Total equity securities available for sale $ 2,037,249 $2,614,055 $(484,535) $ 4,166,769
=========== ========== ========= ===========
Total securities available for sale
carried at estimated fair value $12,523,558 $3,193,771 $(484,535) $15,232,794
=========== =========== ========= ===========
Mortgage loans on real estate:
Residential 24,203,576
Commercial 21,872,148
Residential construction 19,755,862
-----------
Total mortgage loans on real estate
and construction loans $65,831,586
===========
Real estate $9,709,129
===========
Policy, student and other loans $13,312,471
===========
Other short-term investments $4,628,999
===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
3) 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, 2005, 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 2006 $1,527,503 $1,524,206
Due in 2007 through 2010 6,691,927 6,761,022
Due in 2011 through 2015 19,307,189 19,408,343
Due after 2015 54,710,943 56,180,317
Mortgage-backed securities 6,694,403 6,468,373
Redeemable preferred stock 848,977 871,665
----------- -----------
Total held to maturity $89,780,942 $91,213,926
=========== ===========
Amortized Estimated Fair
Available for Sale: Cost Value
---------- -------
Due in 2006 $2,700,645 $2,707,038
Due in 2007 through 2010 3,645,476 3,770,709
Due in 2011 through 2015 -- --
Due after 2015 97,999 119,414
Non-redeemable preferred stock 37,781 55,470
Common stock 10,134,871 12,291,469
----------- -----------
Total available for sale $16,616,772 $18,944,100
=========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
3) Investments (Continued)
The Company's realized gains and losses in investments and other assets are
summarized as follows:
2005 2004 2003
---- ---- ----
Fixed maturity securities held
to maturity:
Gross realized gains $ 2,593 $36,933 $ 3,549
Gross realized losses -- (26,355) (5,665)
Securities available for sale:
Gross realized gains 56,651 3,310 1
Gross realized losses (561) (6,364) (40)
Other assets 15,563 66,907 --
------- ------- -------
Total $74,246 $74,431 $(2,155)
======= ======= =======
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 3.25% to 21.0%, 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
$240,000 and $254,893 at December 31, 2005 and 2004, 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, 2005, 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, 2005, 2004, and 2003
3) Investments (Continued)
Major categories of net investment income are as follows:
2005 2004 2003
---- ---- ----
Fixed maturity securities $ 4,602,518 $ 4,438,808 $ 3,407,177
Equity securities 84,611 67,120 54,481
Mortgage loans on real estate 5,267,027 3,403,110 1,931,358
Real estate 1,636,413 1,322,796 1,509,932
Policy loans 674,826 673,404 676,201
Short-term investments, principally
gains on sale of mortgage loans
and other 8,642,669 7,276,009 10,918,563
----------- ----------- -----------
Gross investment income 20,908,064 17,181,247 18,497,712
Investment expenses (1,521,493) (1,242,071) (1,195,115)
----------- ----------- -----------
Net investment income $19,386,571 $15,939,176 $17,302,597
=========== =========== ===========
Net investment income includes net investment income earned by the restricted
assets of the cemeteries and mortuaries of approximately $904,000, $781,000 and
$848,000 for 2005, 2004, and 2003, 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
$9,439,648 at December 31, 2005 and $9,710,534 at December 31, 2004.
4) Cost of Insurance Acquired
Information with regard to cost of insurance acquired is as follows:
2005 2004 2003
---- ---- ----
Balance at
beginning of year $14,053,497 $14,980,763 $16,408,849
------------ ------------ ------------
Cost of insurance acquired (292,667) 304,042 (110,754)
------------ ------------ ------------
Imputed interest at 7% 935,085 1,016,199 1,098,636
Amortization (2,032,694) (2,247,507) (2,415,968)
------------ ------------ ------------
Net amortization
charged to income (1,097,609) (1,231,308) (1,317,332)
------------ ------------ ------------
Balance at end
of year $12,663,221 $14,053,497 $14,980,763
============ ============ ============
Presuming no additional acquisitions, net amortization charged to income is
expected to approximate $1,003,000, $935,000, $875,000, $839,000, and $805,000
for the years 2006 through 2010. 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, 2005, 2004, and 2003
5) Property and Equipment
The cost of property and equipment is summarized below:
December 31,
2005 2004
---- ----
Land and buildings $11,276,393 $11,310,114
Furniture and equipment 12,142,351 11,066,917
------------ ------------
23,418,744 22,377,031
Less accumulated depreciation (12,897,855) (11,856,366)
------------ ------------
Subtotal 10,520,889 10,520,665
Land and buildings held for sale 678,899 --
------------ ------------
Total $11,199,788 $10,520,665
============ ============
6) Bank Loans Payable
Bank loans payable are summarized as follows:
December 31,
2005 2004
---- ----
6% note payable in monthly installments
of $5,693 including principal and
interest, collateralized by real property,
with a book value of approximately
$831,000, due September 2010. $ 597,221 $ 633,596
6.93% note payable in monthly installments
of $14,175 including principal and
interest, collateralized by real property
with a book value of approximately
$850,000, due November 2007. 1,426,515 1,476,813
$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
Bank prime rate less 1.35% (5.90% at December 31, 2005)
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 2006. 38,589 68,562
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
6) Bank Loans Payable (Continued)
December 31,
2005 2004
---- ----
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. 172,549 333,145
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. 5,926,478 7,206,641
Mark to market adjustment (see note 17) (162,629) 36,810
Other collateralized bank loans payable 947,598 240,728
---------- ----------
Total bank loans 8,946,321 10,442,106
Less current installments 2,291,439 2,136,957
----------- -----------
Bank loans, excluding current installments $ 6,654,882 $ 8,305,149
=========== ============
The Company has line of credit agreements with a bank for $2,500,000, of which
$350,000 and $-0- were outstanding at December 31, 2005 and 2004, respectively.
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 7 for summary of maturities in subsequent years.
7) Notes and Contracts Payable
Notes and contracts payable are summarized as follows:
December 31,
2005 2004
---- ----
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 of $5,900, due September 2011. $ 501,598 $ 520,477
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
7) Notes and Contracts Payable (Continued)
December 31,
2005 2004
---- ----
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
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. 307,434 397,133
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
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
Due to shareholder of Security National
Financial Corporation, 4.0% note payable
in annual installments of $160,873 including
principal and interest, due and paid in
January 2006, secured by Company stock
held in escrow 160,873 321,747
Other notes payable 356,379 301,763
---------- ----------
Total notes and contracts payable 1,326,284 1,820,615
Less current installments 449,878 700,321
---------- ----------
Notes and contracts, excluding
current installments $ 876,406 $1,120,294
========== ==========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
7) Notes and Contracts Payable (Continued)
The following tabulation shows the combined maturities of bank loans payable,
lines of credit and notes and contracts payable:
2006 $ 2,724,284
2007 3,076,448
2008 1,803,841
2009 1,776,199
2010 575,868
Thereafter 315,965
-----------
Total $10,272,605
===========
Interest paid approximated interest expense in 2005, 2004 and 2003.
8) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds
The Company has, historically, presented its perpetual care trusts, associated
with its pre-need funeral and cemetery activities, on a net basis in the
consolidated financial statements. In accordance with its adoption of FIN 46R,
the assets and liabilities of the perpetual care trusts have been presented on a
gross basis. Although FIN 46R requires the consolidation of the merchandise and
service trusts, it does not change the legal relationships among the trusts, the
Company and its customers. The customers are the legal beneficiaries of these
merchandise and service trusts, and therefore, their interest in these trusts
has been represented as non-controlling interest in perpetual care trusts in the
accompanying consolidated financial statements.
The components of the non-controlling interests in perpetual care trusts are as
follows:
December 31,
2005 2004
---- ----
Trust investments, at market value $1,152,493 $989,239
Note receivables from Cottonwood Mortuary
and Singing Hills Cemetery eliminated
in consolidation 1,051,978 1,067,924
Other (31,221) 26,587
---------- ----------
Non-controlling interest $2,173,250 $2,083,750
========== ==========
The Company has established and maintains certain restricted trust investments
to provide for future merchandise and service obligations incurred in connection
with its pre-need sales. Such amounts are reported as pre-need funeral and
cemetery trust investments of cemeteries and mortuaries in the accompanying
consolidated balance sheet.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
8) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds
(Continued)
Assets in the restricted asset account are summarized as follows:
December 31,
2005 2004
---- ----
Cash and cash equivalents $ 747,281 $ 776,997
Mutual funds 332,960 273,258
Fixed maturity securities 8,775 --
Equity securities 77,778 86,555
Participation in mortgage loans
with Security National Life 4,039,609 4,005,957
Time certificate of deposit 33,696 33,696
---------- ----------
Total $5,240,099 $5,176,463
========== ==========
9) Income Taxes
The Company's income tax liability at December 31 is summarized as follows:
December 31,
2005 2004
---- ----
Current $ 358,357 $ 18,585
Deferred 14,242,672 11,479,382
----------- -----------
Total $14,601,029 $11,497,967
=========== ===========
Significant components of the Company's deferred tax (assets) and liabilities at
December 31 are approximately as follows:
December 31,
2005 2004
---- ----
Assets
Future policy benefits $(1,424,759) $(1,917,789)
Unearned premium (1,736,217) (1,524,191)
Other (299,209) (565,440)
----------- -----------
Total deferred tax assets (3,460,185) (4,007,420)
----------- -----------
Liabilities
Deferred policy acquisition costs 6,694,963 5,056,822
Cost of insurance acquired 2,150,799 2,317,477
Installment sales 3,262,577 2,940,268
Depreciation 602,875 824,718
Trusts 1,766,590 1,155,566
Tax on unrealized appreciation 584,879 689,478
Reinsurance 1,416,283 2,084,117
Difference between book and
tax basis of other
assets and liabilities 1,221,394 418,356
Other 2,497 --
----------- -----------
Total deferred tax liabilities 17,702,857 15,486,802
----------- -----------
Net deferred tax liability $14,242,672 $11,479,382
=========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
9) Income Taxes (Continued)
The Company paid $37,960, $126,894 and $55,442 in income taxes for 2005, 2004
and 2003, respectively. The Company's income tax expense (benefit) is summarized
as follows:
2005 2004 2003
---- ---- ----
Current $ 377,732 $ 15,106 $ 28,326
Deferred 862,024 636,430 2,862,343
---------- -------- ----------
Total $1,239,756 $651,536 $2,890,669
========== ======== ==========
The reconciliation of income tax expense at the U.S. federal statutory rates is
as follows:
2005 2004 2003
---- ---- ----
Computed expense at statutory rate $1,607,396 $903,899 $3,218,056
Special deductions allowed
small life insurance companies (399,820) (243,873) (285,991)
Dividends received deduction (5,780) (5,619) (5,611)
Minority interest taxes -- 47,376 13,469
Other, net 37,960 (50,247) (49,254)
----------- ----------- -----------
Tax expense $1,239,756 $651,536 $2,890,669
=========== =========== ===========
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, 2005, the
policyholders' surplus accounts approximated $4,152,000. Congress recently
passed changes to the tax code, which exempts distributions from tax if such
distributions are made in the years 2005 through 2007. Management expects to
take action during this period to use this recent change in the tax code. If
Management does not make the distributions during this period the amount of tax
that would accrue and become payable in the advent of any distributions would be
approximately $1,412,000.
The Company has a net operating loss carry forward of approximately $1,333,000,
as of December 31, 2005. These carry forward amounts begin expiring in ten years
and range up to 20 years.
10) 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 2005 and 2004. 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 $942,080,000 at December
31, 2005 and $815,445,000 at December 31, 2004.
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
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
10) Reinsurance, Commitments and Contingencies (Continued)
expense reimbursement. Effective January 1, 2006, Southern Security entered into
a Reinsurance Recapture Agreement with MEGA wherein the policies reinsured under
the Reinsurance Agreement between the Company and MEGA dated December 31, 1992,
as amended was recaptured. During February 2006 MEGA transferred assets and
liabilities of approximately $6,582,000 to Southern Security. Consideration paid
by Southern Security to MEGA was $200,000.
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 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, 2005 and 2004, the outstanding Coinsurance
amount was $-0- and $2,545,763, respectively. The Company recorded as income the
risk charge for the years ended December 31, 2005 and 2004, of $10,000 and
$121,831, 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 City of Phoenix, Arizona has commenced condemnation proceedings on the
property where the Camelback Funeral Home was located for purposes of
constructing a light rail facility. The city has placed $1,200,000 in escrow to
pay the Company for the property that was condemned. The carrying amount for the
land and building of the Camelback Funeral Home at December 31, 2005 is $678,889
and has been shown separately in Note 4. Currently the Company has had an
independent appraisal and is negotiating the sales price with the city.
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, 2005, are approximately
as follows:
Years Ending
December 31:
2006 $ 580,000
2007 296,000
2008 225,000
2009 130,000
2010 60,000
----------
Total $1,291,000
==========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
10) Reinsurance, Commitments and Contingencies (Continued)
Total rent expense related to these non-cancelable operating leases for the
years ended December 31, 2005, 2004, and 2003 was approximately $828,000,
$734,000 and $396,000, respectively.
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.
Hood claims that he wrote a letter to the Company expressing 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. Hood's claims against the Company also include, but are not limited
to, violation of labor laws, whistleblower retaliation and infliction of
emotional distress. The letter proposed a settlement in the amount of $275,000.
On November 23, 2005, Hood filed a complaint in the Superior Court of the State
of California for the County for San Diego (Case No 028978) against Singing
Hills Memorial Park and California Memorial Estates, Inc, wholly owned
subsidiaries of the Company. The claims in the complaint include wrongful
termination in violation of public policy, retaliation in violation of public
policy, race discrimination in violation of the California Fair Employment and
Housing Act, retaliation in violation of the California Fair Employment and
Housing Act; intentional infliction of emotional distress plus punitive damages,
attorney's fees and costs of the law suits. There are no specific amounts
requested in the complaint, but damages are in an amount to be proven at trial,
a jury trial having been requested. The Company contends that Hood voluntarily
quit and was not terminated. The Company intends to vigorously defend the
action. An answer was filed. The case is in the discovery stage.
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 Gornichec also wrote the letter
on behalf of Hood. 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. Gornichec asserts that he was an employee
contrary to the Company's position.
The claims made on behalf of 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. 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
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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
11) Retirement Plans
The Company and its subsidiaries have a noncontributory Employee Stock Ownership
Plan (ESOP) for all eligible employees. Eligible employees are primarily those
with more than one year of service, who work in excess of 1,040 hours per year.
Contributions, which may be in cash or stock of the Company, are determined
annually by the Board of Directors. The Company's contributions are allocated to
eligible employees based on the ratio of each eligible employee's compensation
to total compensation for all eligible employees during each year. ESOP
contribution expense totaled $131,524, $105,196, and $98,588 for 2005, 2004 and
2003, respectively. At December 31, 2005 the ESOP held 592,120 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 2005, 2004, and 2003 were $5,142, $5,746, and $4,493,
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 2005, 2004,
and 2003 were $135,589, $128,949, and $110,081, 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 2005, 2004 and 2003 were $141,710, $123,249, and
$95,485, 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
over 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 provide that any
remaining balance will be payable to their heirs in the event of their death. In
addition, the agreements provide that the Company will pay the Group Health
coverages for these individuals and/or their spouses. In 2005 and 2004, the
Company increased its liability for these future obligations by $10,000 and
$10,000, respectively. The current balance as of December 31, 2005 is $724,000.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
11) 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 $37,800
and $31,500 in fiscal 2005 and 2004, respectively, to cover the present value of
anticipated retirement benefits under the employment agreement. The liability
accrued is $397,300 and $359,500 as of December 31, 2005 and 2004, 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 2005 and 2004 approximately $46,300 and $18,500,
respectively, to cover the present value of the retirement benefit of the
agreement. The liability accrued is $236,800 and $190,500, as of December 31,
2005 and 2004, respectively.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
12) Capital Stock
The following table summarizes the activity in shares of capital stock for the
three-year period ended December 31, 2005:
Class A Class C
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
---------- ----------
New shares issued 896 --
Exercise of stock options 2,550 --
Stock Dividends 338,042 322,908
Conversion of Class C to Class A 1,005 (10,047)
---------- ----------
Balance at December 31, 2005 7,098,363 6,781,060
========== ==========
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, 2005, 2004, and 2003
12) 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:
2005 2004 2003
---- ---- ----
Numerator:
Net income $3,487,880 $2,122,272 $6,596,497
========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted-average shares 6,450,057 6,311,974 6,161,927
---------- ---------- ----------
Effect of dilutive securities:
Employee stock options 29,388 225,185 157,450
Stock appreciation rights 571 1,710 2,107
---------- ---------- ----------
Dilutive potential common shares 29,959 226,895 159,557
---------- ---------- ----------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 6,480,016 6,538,869 6,321,484
========== ========== ==========
Basic earnings per share $.54 $.34 $1.07
========== ========== ==========
Diluted earnings per share $.54 $.32 $1.04
========== ========== ==========
13) 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, 2005, 2004, and 2003
13) 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 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
-----
Dividend 166
Exercised --
-----
Outstanding at December 31, 2005 3,489 $2.90
=====
Exercisable at end of year 3,489 $2.90
=====
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, 2005, 2004, and 2003
13) 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 December 31, 2002 504,669 $2.02 - $4.46
Dividend 30,609
Granted 371,000
Exercised (263,496)
---------
Outstanding at December 31, 2003 642,782 $2.07 - $6.18
Dividend 16,176
Granted --
Exercised (310,341)
Cancelled (8,925)
--------
Outstanding at December, 2004 339,692 $1.97 - $5.35
Dividend 16,664
Granted --
Exercised (2,980)
Cancelled (3,421)
--------
Outstanding at December 31, 2005 349,955 $1.88 - $5.10
========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
13) Stock Compensation Plans (Continued)
Number of Class A Shares Option Price
Exercisable at end of year 349,955 $1.88 - $5.10
=======
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 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, 2005, 2004, and 2003
13) 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
Dividend 986
Granted 4,000
Exercised (3,828)
-------
Outstanding at December 31, 2005 20,716 $2.00 - $5.19
=======
Exercisable at end of year 16,516 $2.00 - $5.19
=======
Available options for future 38,437
=======
grant 2000 Director Plan
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, 2005, 2004, and 2003
13) 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 -- --
------- ----------
Outstanding at January 1, 2004 -- --
Dividend 7,675 50,000
Granted 153,500 1,000,000
Exercised -- --
-------- ----------
Outstanding at December 31, 2004 161,175 1,050,000 $3.77 - $3.08
-------- ----------
Dividend 25,404 52,500
Granted 349,000 --
Exercised -- --
Cancelled (2,100) --
--------- -----------
Outstanding at December 31, 2005 533,479 1,102,500 $2.93 - $3.68
======== ===========
Exercisable at end of year 533,479 1,102,500 $2.93 - $3.68
======== ==========
Available options for future grant
2003 Stock Incentive Plan 45,334 55,125
======== ==========
(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.
14) Statutory-Basis Financial Information
The Company's life insurance subsidiaries are domiciled in Utah, Florida,
Louisiana and Arkansas and prepare their statutory-basis financial statements in
accordance with accounting practices prescribed or permitted by the Utah,
Florida, Louisiana and Arkansas 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, Louisiana and Arkansas.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
14) Statutory-Basis Financial Information (Continued)
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,
2005 2004 2003
---- ---- ----
Security National Life $1,205,668 $ 65,724 $(5,404,687)
Southern Security Life (583,633) (525,237) 2,431,499
Security National Life of Louisiana 29,257 50,341 N/A
Memorial Insurance Company of America N/A N/A N/A
Statutory Stockholders' Equity
December 31,
2005 2004 2003
---- ---- ----
Security National Life $14,938,685 $15,183,712 $15,069,057
Southern Security Life 3,500,000 10,877,112 11,443,488
Security National Life of Louisiana 1,242,185 1,147,492 N/A
Memorial Insurance Company of America 2,137,881 N/A N/A
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, Louisiana and Arkansas 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.
15) Business Segment Information
Description of Products and Services by Segment
The Company has three reportable business segments: life insurance, cemetery and
mortuary, and mortgage loans. The Company's life insurance segment consists of
life insurance premiums and operating expenses from the sale of insurance
products sold by the Company's independent agency force and net investment
income derived from investing policyholder and segment surplus funds. The
Company's cemetery and mortuary segment consists of revenues and operating
expenses from the sale of at-need cemetery and mortuary merchandise and services
at its mortuaries and cemeteries, pre-need sales of cemetery spaces after
collection of 10% or more of the purchase price and the net investment income
from investing segment surplus funds. The Company's mortgage loan segment
consists of loan originations fee income and expenses from the originations of
residential mortgage loans and interest earned and interest expenses from
warehousing pre-sold loans before the funds are received from financial
institutional investors.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
15) Business Segment Information (Continued)
Measurement of Segment Profit or Loss and Segment Assets
The accounting policies of the reportable segments are the same as those
described in the Significant Accounting Principles. Intersegment revenues are
recorded at cost plus an agreed upon intercompany profit.
Factors Management Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that offer different
products and are managed separately due to the different products and the need
to report to the various regulatory jurisdictions.
2005
Life Cemetery/ Reconciling
Revenues: Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
From external sources:
Revenue from customers $ 27,170,109 $10,838,878 $71,859,272 $ -- $109,868,259
Net investment income 11,080,324 967,740 7,338,507 -- 19,386,571
Realized gains on investments
and other assets 74,246 -- -- -- 74,246
Other revenues 293,151 162,078 165,522 -- 620,751
Intersegment revenues:
Net investment income 5,015,356 92,004 349,027 (5,456,387) --
------------ ----------- ----------- ------------ ------------
43,633,186 12,060,700 79,712,328 (5,456,387) 129,949,827
------------ ----------- ----------- ------------ ------------
Expenses:
Death and other policy benefits 14,734,364 -- -- -- 14,734,364
Increase in future policy benefits 9,742,218 -- -- -- 9,742,218
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 2,765,422 265,312 -- -- 3,030,734
Depreciation 438,423 699,236 566,495 -- 1,704,154
General, administrative and
other costs:
Intersegment -- 36,672 296,664 (333,336) --
Other 12,278,778 10,147,421 68,663,284 -- 91,089,483
Interest expense:
Intersegment 422,199 172,557 4,528,295 (5,123,051) --
Other 460,708 317,292 4,143,238 -- 4,921,238
------------ ----------- ----------- ----------- ------------
40,842,112 11,638,490 78,197,976 (5,456,387) 125,222,191
----------- ----------- ----------- ------------ ------------
Earnings before
income taxes $ 2,791,074 $ 422,210 $ 1,514,352 $ -- $ 4,727,636
============ =========== =========== ============ ============
Identifiable assets $345,029,159 $51,281,466 $18,193,773 $(54,858,925) $359,645,473
============ =========== =========== ============ ============
Expenditures for
long-lived assets $ 758,688 $ 1,155,673 $ 322,371 $ -- $ 2,236,732
=========== =========== ============== ============= ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
15) Business Segment Information (Continued)
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 $48,347,826 $ 14,236,837 $(51,091,825) $317,462,999
============ =========== ============ ============ ============
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, 2005, 2004, and 2003
15) 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 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 before
income taxes $ 2,011,685 $ 509,189 $ 6,943,998 $ -- $ 9,464,872
============ =========== ============ ============ ============
Identifiable assets $302,319,614 $44,975,411 $ 16,938,151 $(49,792,560) $314,440,616
============ =========== ============ ============ ============
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, 2005, 2004, and 2003
16) 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. During 2005
Monument Title paid $7,000 and the balance on the note at December 31, 2005 was
$87,177.
The Company had a non-interest bearing note receivable from the Chairman of the
Board and Chief Executive Officer which was paid in full during 2005. The
outstanding balance of the note was $1,500 at December 31, 2004.
17) 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, 2005, 2004, and 2003
17) Disclosure about Fair Value of Financial Instruments (Continued)
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, 2005 and
December 31, 2004, were approximately $93,859,000 and $82,592,000, 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.
18) Accumulated Other Comprehensive Income and Other Items
The following summarizes accumulated other comprehensive income:
December 31,
2005 2004 2003
---- ---- ----
Unrealized gains (losses)
on available for-sale securities $(343,234) $226,464 $ 638,540
Reclassification
adjustment for net realized
gains (losses) in net income 56,508 7,524 (2,155)
--------- -------- ----------
Net unrealized gains (losses) (286,726) 233,988 636,385
Potential unrealized gains (losses) for
derivative bank loans
(interest rate swaps) 199,439 266,219 (303,029)
Potential unrealized gains for
derivative mortgage loans 257,694 -- --
Tax (expense) benefit on net unrealized
gains (losses) (41,408) (73,586) 19,428
-------- -------- ----------
Other comprehensive income $128,999 $426,621 $ 352,784
======== ======== ==========
Other items:
Acquisition of Company Stock
held in escrow $ -- $ -- $(1,982,620)
======== ======= ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
18) Accumulated Other Comprehensive Income and Other Items (Continued)
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 $160,873 and $421,747, as of December 31, 2005 and
2004, respectively, are paid per terms of the agreement and promissory note.
The Company considers its interest rate swap instruments (swaps) effective cash
flow hedges against the variable interest rates of certain bank loans. The swaps
expire on the maturity dates of the bank loans they hedge. In the event a swap
is terminated, any resulting gain or loss would be deferred and amortized to
interest expense over the remaining life of the bank loan it hedged. In the
event of early extinguishment of a hedged bank loan, any realized or unrealized
gain or loss from the hedging swap would be recognized in income coincident with
the extinguishment.
Information regarding the swaps is as follows as of December 31, 2005:
Weighted average variable interest rate of
the hedged bank loans (prime less .5%) 6.75%
Weighted average fixed interest rate of the swaps 6.10
Market value of the swaps- potential unrealized
gain position $162,629
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.
19) Derivative Loan Commitments
During 2005, the Company's mortgage banking activities implemented new practices
relating to mortgage loan commitments, including interest rate lock commitments
and forward commitments to sell loans to third-party investors. The Company also
implemented a hedging strategy for these transactions. A mortgage loan
commitment binds the Company to lend funds to a qualified borrower at a
specified interest rate and within a specified period of time, generally up to
30 days after inception of the rate lock. Mortgage loan commitments are
derivatives under Statement of Financial Accounting Standards No. 133 ("SFAS
133"), Accounting for Derivative Instruments and Hedging Activities, as amended
by Statement of Financial Accounting Standards No. 149 ("SFAS 149"), Amendment
of Statement 133 on Derivative Instruments and Hedging Activities and must be
recognized at fair value on the consolidated balance sheet with changes in their
fair values recorded as part of other comprehensive income from mortgage banking
operations.
The Company is exposed to price risk due to the potential impact of changes in
interest rates on the values of mortgage loan commitments from the time a
derivative loan commitment is made to an applicant to the time the loan that
would result from the exercise of that loan commitment is funded. Managing price
risk is complicated by the fact that the ultimate percentage of derivative loan
commitments that will be exercised (i.e., the number of loan commitments that
will be funded) fluctuates. The probability that a loan will not be funded
within the terms of the commitment is driven by a number of factors,
particularly the change, if any, in mortgage rates following the inception of
the interest rate lock. However, many borrowers continue to exercise derivative
loan commitments even when interest rates have fallen.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004, and 2003
19) Derivative Loan Commitments (Continued)
In general, the probability of funding increases if mortgage rates rise and
decreases if mortgage rates fall. This is due primarily to the relative
attractiveness of current mortgage rates compared to the applicant's committed
rate. The probability that a loan will not be funded within the terms of the
mortgage loan commitment also is influenced by the source of the applications
(retail, broker or correspondent channels), proximity to rate lock expiration,
purpose for the loan (purchase or refinance) product type and the application
approval status. The Company has developed fallout estimates using historical
observed data that take into account all of the variables, as well as
renegotiations of rate and point commitments that tend to occur when mortgage
rates fall. These fallout estimates are used to estimate the number of loans
that the Company expects to be funded within the terms of the mortgage loan
commitments and are updated periodically to reflect the most current data. Once
a loan is closed, it is classified as a loan receivable-held for sale.
The Company estimates the fair value of a mortgage loan commitment based on the
change in estimated fair valued of the underlying mortgage loan and the
probability that the mortgage loan will fund within the terms of the commitment.
The change in fair value of the underlying mortgage loan is measured from the
date the mortgage loan commitment is issued. Therefore, at the time of the
issuance, the estimated fair value is zero. Following the issuance, the value of
a mortgage loan commitment can be either positive or negative depending upon the
change in value of the underlying mortgage loans. Fallout rates derived from the
Company's recent historical empirical data are used to estimate the quantity of
mortgage loans that will fund within the terms of the commitments.
The Company utilizes various derivative instruments to economically hedge the
price risk associated with its outstanding mortgage loan commitments. Management
expects these derivatives will experience changes in fair value opposite to
changes in fair value of the derivative loan commitments, thereby reducing
earnings volatility related to the recognition in earnings of changes in the
values of the commitments. A forward loan sales commitment protects the Company
from losses on sales of the loans arising from exercise of the loan commitments
by securing the ultimate sales price and delivery date of the loans. For
mortgage loan commitments not protected by a forward sales commitment, the
instruments used to economically hedge the fair value of the mortgage loan
commitments include other freestanding derivatives such as mortgage backed
securities, options and U.S. Treasury futures. The Company takes into account
various factors and strategies in determining the portion of the mortgage loan
commitments it wants to hedge economically.
The significant components of other comprehensive income during the year ended
December 31, 2005 are as follows:
Loss forward loan sale commitments $(317,304)
Gain on derivative loan commitments 487,382
---------
Total $170,078
========
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures - The Company's
principal executive officer and principal financial officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act") as of the end of the period covered by this annual
report. Based on that evaluation, the principal executive officer and the
principal financial officer have concluded that the Company's disclosure
controls and procedures are effective, providing them with material information
relating to the Company as required to be disclosed in the reports the Company
files or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls - There were no significant changes in the
Company's internal controls over financial reporting or in other factors that
could significantly affect the Company's internal controls and procedures
subsequent to the date of their most recent evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
PART III
Item 10. Directors and Executive Officers
The Company's Board of Directors consists of seven persons, four of whom are not
employees of the Company. There are no family relationships between or among any
of the directors and executive officers, except that Scott M. Quist and G.
Robert Quist are the sons of George R. Quist and Christie Q. Overbaugh is the
daughter of George R. Quist. The following table sets forth certain information
with respect to the directors and executive officers of the Company.
Name Age Position with the Company
George R. Quist 85 Chairman of the Board and Chief Executive Officer
Scott M. Quist 52 President, Chief Operating Officer and Director
Stephen M. Sill 60 Vice President, Treasurer and Chief Financial
Officer
G. Robert Quist 54 First Vice President and Secretary
J. Lynn Beckstead, Jr. 52 Vice President Mortgage Operations and Director
Christie Q. Overbaugh 57 Senior Vice President of Internal Operations
of Southern Security Life Insurance Company
Charles L. Crittenden 85 Director
Robert G. Hunter 46 Director
H. Craig Moody 54 Director
Norman G. Wilbur 67 Director
Committees of the Board of Directors include an executive committee, on which
Messrs. George Quist, Scott Quist, and Moody serve; an audit committee, on which
Messrs. Crittenden, Moody, and Wilbur serve; and a compensation committee, on
which Messrs. Crittenden, Wilbur, and George Quist serve.
The audit committee is composed of directors who are, in the opinion of the
Board of Directors, free from any relationship which would interfere with the
exercise of independent judgment and who possess an understanding of financial
statements and generally accepted accounting principles. Thus, each member is an
"independent" director as that term is defined by the regulations of the
Securities Exchange Act of 1934. The Board of Directors has determined that
Norman G. Wilbur, who currently serves as a director and a member of the audit
committee, is an independent financial expert of the audit committee.
Directors
The following is a description of the business experience of each of the
Company's directors.
George R. Quist has been Chairman of the Board and Chief Executive Officer
of the Company since October 1979. Mr. Quist served as President of the Company
from 1979 until July 2002. From 1960 to 1964, Mr. Quist was Executive Vice
President and Treasurer of Pacific Guardian Life Insurance Company. From 1946 to
1960, he was an agent, District Manager and Associate General Agent for various
insurance companies. Mr. Quist also served from 1981 to 1982 as the President of
The National Association of Life Companies, a trade association of 642 life
insurance companies, and from 1982 to 1983 as its Chairman of the Board.
Scott M. Quist has been President of the Company since July 2002, its Chief
Operating Officer since October 2001, and a director since May 1986. Mr. Quist
served as First Vice President of the Company from May 1986 to July 2002. From
1980 to 1982, Mr. Quist was a tax specialist with Peat, Marwick, Mitchell, &
Co., in Dallas, Texas. From 1986 to 1991, he was Treasurer and a director of The
National Association of Life Companies, a trade association of 642 insurance
companies until its merger with the American Council of Life Companies. Mr.
Quist has been a member of the Board of Governors of the Forum 500 Section
(representing small insurance companies) of the American Council of Life
Insurance. He has also served as a regional director of Key Bank of Utah since
November 1993. Mr. Quist is currently a director and past president of the
National Alliance of Life Companies, a trade association of over 200 life
companies.
J. Lynn Beckstead Jr. has been Vice President of Mortgage Operations and a
director of the Company since March 2002. In addition, Mr. Beckstead is
President of SecurityNational Mortgage Company, an affiliate of the Company,
having served in this position since July 1993. From 1980 to 1993, Mr. Beckstead
was Vice President and a director of Republic Mortgage Corporation. From 1983 to
1990, Mr. Beckstead was Vice President and a director of Richards Woodbury
Mortgage Corporation. From 1980 to 1983, he was a principal broker for Boardwalk
Properties. From 1978 to 1980, Mr. Beckstead was a residential loan officer for
Medallion Mortgage Company. From 1977 to 1978, he was a residential construction
loan manager of Citizens Bank.
Charles L. Crittenden has been a director of the Company since October
1979. Mr. Crittenden has been sole stockholder of Crittenden Paint & Glass
Company since 1958. He is also an owner of Crittenden Enterprises, a real estate
development company, and Chairman of the Board of Linco, Inc.
Robert G. Hunter, M.D. has been a director of the Company since October
1998. Dr. Hunter is currently a practicing physician in private practice. Dr.
Hunter created the statewide E.N.T. Organization (Rocky Mountain E.N.T., Inc.)
where he is currently a member of the Executive Committee. He is also Chairman
of Surgery at Cottonwood Hospital, a delegate to the Utah Medical Association
and a delegate representing the State of Utah to the American Medical
Association, and a member of several medical advisory boards.
H. Craig Moody has been a director of the Company since September 1995. Mr.
Moody is owner of Moody & Associates, a political consulting and real estate
company. He is a former Speaker and House Majority Leader of the House of
Representatives of the State of Utah.
Norman G. Wilbur has been a director of the Company since October 1998. Mr.
Wilbur worked for J.C. Penney'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. Penney's, he took an option of an early retirement in
1997. Mr. Wilbur is a past board member of a homeless organization in Plano,
Texas.
Executive Officers
Stephen M. Sill has been Vice President, Treasurer and Chief Financial
Officer of the Company since March 2002. From 1997 to March 2002, Mr. Sill was
Vice President and Controller of the Company. From 1994 to 1997, Mr. Sill was
Vice President and Controller of Security National Life Insurance Company. From
1989 to 1993, he was Controller of Flying J. Inc. From 1978 to 1989, Mr. Sill
was Senior Vice President and Controller of Surety Life Insurance Company. From
1975 to 1978, he was Vice President and Controller of Sambo's Restaurant, Inc.
From 1974 to 1975, Mr. Sill was Director of Reporting for Northwest Pipeline
Corporation. From 1970 to 1974, he was an auditor with Arthur Andersen & Co. Mr.
Sill is a Past President 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 served as President of Memorial Estates since
June 2005 and its Vice President from 1982 to June 2005; he began working for
Memorial Estates in 1978. Mr. Quist has also served as First Vice President of
Singing Hills Memorial Park since 1996. In addition, since 1987 Mr. Quist has
served as President and a director of Big Willow Water Company and as
Secretary-Treasurer and a director of the Utah Cemetery Association. From 1987
to 1988, he was a director of Investors Equity Life Insurance Company of Hawaii.
Christie Q. Overbaugh has been Senior Vice President of Internal Operations
for Southern Security Life Insurance Company since June 2002, and Vice President
of Underwriting of Security National Life Insurance Company since October 1998.
Ms. Overbaugh has also served as Vice President of the Company from October 1999
to June 2002, and as Vice President of Underwriting for Southern Security Life
Insurance Company from December 1998 to June 2002. From 1986 to 1991, she was
Chief Underwriter for Investors Equity Life Insurance Company of Hawaii and
Security National Life Insurance Company. From 1990 to 1991, Ms. Overbaugh was
President of the Utah Home Office Underwriters Association. Ms. Overbaugh is
currently a member of the Utah Home Office Underwriters Association and an
Associate Member of LOMA (Life Office Management Association).
The Board of Directors of the Company has a written procedure, which requires
disclosure to the board of any material interest or any affiliation on the part
of any of its officers, directors or employees that is in conflict or may be in
conflict with the interests of the Company.
No director, officer or 5% stockholder of the Company or any subsidiary or
affiliate thereof has had any transactions with the Company or its subsidiaries
during 2005 or 2004.
All directors of the Company hold office until the next Annual Meeting of
Stockholders and until their successors have been elected and qualified.
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.
Item 11. Executive Officer Compensation
The following table sets forth, for each of the last three fiscal years, the
compensation received by George R. Quist, the Company's Chairman of the Board
and Chief Executive Officer, and all other executive officers (collectively, the
"Named Executive Officers") at December 31, 2005 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 2005.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Other
Annual Restricted Securities Long-Term All Other
Name and Compen- Stock Underlying Incentive Compen-
Principal Position Year Salary($) Bonus($) sation($)(2) Awards($) Options/SARs(#) Payout($) sation($)(3)
- ------------------ ---- --------- -------- ------------ --------- --------------------------- ------------
George R. Quist (1) 2005 186,300 35,000 2,400 0 70,000 0 25,993
Chairman of the 2004 165,600 50,000 2,400 0 100,000 0 26,002
Board and Chief 2003 165,600 50,000 2,400 0 100,000 0 23,273
Executive Officer
Scott M. Quist (1) 2005 246,900 75,000 7,200 0 70,000 0 44,489
President, Chief 2004 215,900 75,000 7,200 0 1,000,000(4) 0 34,773
Operating Officer 2003 205,400 60,000 7,200 0 70,000 0 29,531
and Director
J. Lynn Beckstead, Jr. 2005 220,306 24,000 0 0 35,000 0 26,176
Vice President of 2004 195,796 85,000 0 0 5,000 0 25,750
Mortgage Operations 2003 158,500 255,675 0 0 15,000 0 16,104
and Director
G. Robert Quist (1) 2005 115,029 8,000 2,400 0 30,000 0 13,044
First Vice President and2004 104,814 0 2,400 0 10,000 0 10,711
Secretary 2003 87,175 16,599 2,400 0 35,000 0 9,748
Stephen M. Sill 2005 115,063 6,000 3,600 0 15,000 0 16,402
Vice President, 2004 102,855 6,000 3,600 0 5,000 0 11,684
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 2005, 2004, and
2003, such amounts were George R. Quist, $21,340, $21,341 and $18,590,
respectively; Scott M. Quist, $23,978, $23,001 and $23,000,
respectively; J. Lynn Beckstead, Jr., $21,735, $21,000 and $12,750,
respectively; G. Robert Quist, $10,205, $10,161 and $9,394
respectively;
Stephen M. Sill $12,518 and $11,134 for the years 2005 and 2004,
respectively); (b) insurance premiums paid by the Company with respect
to a group life insurance plan for the benefit of the Named Executive
Officers (for the years 2005, 2004 and 2003, such amounts were for
George R. Quist $9, $17 and $39, respectively; for Scott M. Quist, G.
Robert Quist, Stephen M. Sill and J. Lynn Beckstead, Jr., $241, $550,
and $354 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 2005, 2004 and 2003); Scott M. Quist ($20,270 for
the year 2005, $11,222 for the year 2004, $6,177 for 2003); J. Lynn
Beckstead, Jr. ($4,200 for 2005 and $4,200 for 2004); G. Robert Quist,
$2,598 for 2005; and Stephen M. Sill $3,643, respectively; (d) 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 year 2003, such amount
was J. Lynn Beckstead Jr., $3,000. 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, 2005, as well as the aggregate number
and value of unexercised options held by the Named Executive Officers on
December 31, 2005.
Aggregated Option/SAR Exercised in Last Fiscal Year and Fiscal Year-End
Option/SAR Values:
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs In-the-Money
Shares at Options/SARs at
Acquired on December 31, December 31,
Exercise Value 2005(#) 2005
------- ------
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
George R. Quist -- -- 234,801 -- 140,795 --
Scott M. Quist -- -- 1,257,034(1) -- 5,978 --
J. Lynn Beckstead, Jr. -- -- 59,627 -- -- --
G. Robert Quist -- -- 83,042 -- -- --
Stephen M. Sill -- -- 21,263 -- 11,998 --
(1) Includes options to purchase 1,102,500 shares of Class C common stock. The
Class C common shares are convertible to Class A common shares on the basis of
ten shares of Class C common stock to one share of Class A common stock.
Retirement Plans
On December 8, 1988, the Company entered into a deferred compensation plan with
George R. Quist, the Chairman and Chief Executive officer of the Company. The
plan was later amended on three occasions with the third amendment effective
February 1, 2001. Under the terms of the plan as amended, upon the retirement of
Mr. Quist, the Company is required to pay him ten annual installments in the
amount of $60,000. Retirement is defined in the plan as the age of 70, or a
later retirement age, as specified by the Board of Directors. The $60,000 annual
payments are to be adjusted for inflation in accordance with the United States
Consumer Price Index for each year after January 1, 2002. If Mr. Quist's
employment is terminated by reason of disability or death before he reaches
retirement age, the Company is to make the ten annual payments to Mr. Quist, in
the event of disability, or to his designated beneficiary, in the event of
death.
The plan also provides that the Board of Directors may, in its discretion, pay
the amounts due under the plan in a single, lump-sum payment. In the event that
Mr. Quist dies before the ten annual payments are made, the unpaid balance will
continue to be paid to his designated beneficiary. The plan further requires the
Company to furnish an automobile for Mr. Quist's use and to pay all reasonable
expenses incurred in connection with its use for a ten year period, and to
provide Mr. Quist with a hospitalization policy with similar benefits to those
provided to him the day before his retirement or disability. However, in the
event Mr. Quist's employment with the Company is terminated for any reason other
than retirement, death, or disability, the entire amount of deferred
compensation payments under the plan shall be forfeited by him.
Employment Agreements
On July 16, 2004, the Company entered into an employment agreement with Scott M.
Quist, its President and Chief Operating Officer. The agreement is effective as
of December 4, 2003 and has a five-year term, but the Company has agreed to
renew the agreement on December 4, 2008 and 2013 for additional five-year terms,
provided Mr. Quist performs his duties with usual and customary care and
diligence. Under the terms of the agreement, Mr. Quist is to devote his full
time to the Company serving as its President, General Counsel and Chief
Operating Officer at not less than his current salary and benefits. The Company
also agrees to maintain a group term life insurance policy of not less than
$1,000,000 on Mr. Quist's life and a whole life insurance policy in the amount
of $500,000 on Mr. Quist's life. In the event of disability, Mr. Quist's salary
would be continued for up to five years at 75% of its current level.
In the event of a sale or merger of the Company and Mr. Quist is not retained in
his current position, the Company would be obligated to continue Mr. Quist's
current compensation and benefits for seven years following the merger or sale.
The agreement further provides that Mr. Quist is entitled to receive annual
retirement benefits beginning (i) one month from the date of his retirement (to
commence no sooner than age 65), (ii) five years following complete disability,
or (iii) upon termination of his employment without cause. These retirement
benefits are to be paid for a period of ten years in annual installments in the
amount equal to 75% of his then current rate of compensation. However, in the
event that Mr. Quist dies prior to receiving all retirement benefits thereunder,
the remaining benefits are to be paid to his heirs. The Company accrued $37,800
and $31,500 in fiscal 2005 and 2004, 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 2005 and 2004 approximately $46,300 and $18,500,
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
currently 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 were paid by the Company for committee
participation or special assignments in 2005. 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 2005, 2004 and 2003 were
approximately $5,142, $5,746 and $4,493, 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 2005, 2004 and
2003, were $135,589, $128,949 and $110,081, 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 297 participants and had $131,524
contributions payable to the Plan in 2005. 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 2005, 2004 and 2003
was $141,710, $123,249 and $95,485, respectively.
1993 Stock Option Plan
On June 21, 1993, the Company adopted the Security National Financial
Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves shares
of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at
the annual meeting of the stockholders held on June 21, 1993. The 1993 Plan
allows the Company to grant options and issue shares as a means of providing
equity incentives to key personnel, giving them a proprietary interest in the
Company and its success and progress.
The 1993 Plan provides for the grant of options and the award or sale of stock
to officers, directors, and employees of the Company. Both "incentive stock
options," as defined under Section 422A of the Internal Revenue Code of 1986
(the "Code"), and "non-qualified options" may be granted pursuant to the 1993
Plan. The exercise prices for the options granted are equal to or greater than
the fair market value of the stock subject to such options as of the date of
grant, as determined by the Company's Board of Directors. The options granted
under the 1993 Plan, were to reward certain officers and key employees who have
been employed by the Company for a number of years and to help the Company
retain these officers by providing them with an additional incentive to
contribute to the success of the Company.
The 1993 Plan is to be administered by the Board of Directors or by a committee
designated by the Board. The terms of options granted or stock awards or sales
effected under the 1993 Plan are to be determined by the Board of Directors or
its committee. The Plan provides that if the shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend. In addition, the number of
shares of Common Stock reserved for purposes of the Plan shall be adjusted by
the same proportion. No options may be exercised for a term of more than ten
years from the date of grant.
Options intended as incentive stock options may be issued only to employees, and
must meet certain conditions imposed by the code, including a requirement that
the option exercise price be no less than the fair market value of the option
shares on the date of grant. The 1993 Plan provides that the exercise price for
non-qualified options will be not less than at least 50% of the fair market
value of the stock subject to such option as of the date of grant of such
options, as determined by the Company's Board of Directors.
The 1993 Plan has a term of ten years. The Board of Directors may amend or
terminate the 1993 Plan at any time, subject to approval of certain
modifications to the 1993 Plan by the shareholders of the Company as may be
required by law or the 1993 Plan. On November 7, 1996, the Company amended the
1993 Plan as follows: (i) to increase the number of shares of Class A Common
Stock reserved for issuance under the 1993 Plan from 300,000 Class A shares to
600,000 Class A shares; and (ii) to provide that the stock subject to options,
awards and purchases may include Class C common stock. On October 14, 1999, the
Company amended the 1993 Plan to increase the number of shares of Class A Common
Stock reserved for issuance under the plan from 746,126 Class A shares to
1,046,126 Class A shares. The Plan terminated in 2003 and options granted
thereunder are non-transferable.
2000 Director Stock Option Plan
On October 16, 2000, the Company adopted the 2000 Directors Stock Option Plan
(the "Director Plan") effective November 1, 2000. The Director Plan provides for
the grant by the Company of options to purchase up to an aggregate of 50,000
shares of Class A Common Stock for issuance thereunder. The Director Plan
provides that each member of the Company's Board of Directors who is not an
employee or paid consultant of the Company automatically is eligible to receive
options to purchase the Company's Class A Common Stock under the Director Plan.
Effective as of November 1, 2000, and on each anniversary date thereof during
the term of the Director Plan, each outside director shall automatically receive
an option to purchase 1,000 shares of Class A Common Stock. In addition, each
new outside director who shall first join the Board after the effective date
shall be granted an option to purchase 1,000 shares upon the date which such
person first becomes an outside director and an annual grant of an option to
purchase 1,000 shares on each anniversary date thereof during the term of the
Director Plan. The options granted to outside directors shall vest in their
entirety on the first anniversary date of the grant. The primary purposes of the
Director Plan are to enhance the Company's ability to attract and retain
well-qualified persons for service as directors and to provide incentives to
such directors to continue their association with the Company.
In the event of a merger of the Company with or into another company, or a
consolidation, acquisition of stock or assets or other change in control
transaction involving the Company, each option becomes exercisable in full,
unless such option is assumed by the successor corporation. In the event the
transaction is not approved by a majority of the "Continuing Directors" (as
defined in the Director Plan), each option becomes fully vested and exercisable
in full immediately prior to the consummation of such transaction, whether or
not assumed by the successor corporation.
2003 Stock Option Plan
On July 11, 2003, the Company adopted the Security National Financial
Corporation 2003 Stock Incentive Plan (the "2003 Plan"), which reserved 500,000
shares of Class A common stock and 1,000,000 shares of Class C common stock for
issuance thereunder. The 2003 Plan was approved by the Board of Directors on May
9, 2003, and by the stockholders at the annual meeting of the stockholders held
on July 11, 2003. The 2003 Plan allows the Company to grant options and issue
shares as a means of providing equity incentives to key personnel, giving them a
proprietary interest in the Company and its success and progress.
The 2003 Plan provides for the grant of options and the award or sale of stock
to officers, directors, and employees of the Company. Both "incentive stock
options", as defined under Section 422A of the Internal Revenue Code of 1986
(the "Code") and "non-qualified options" may be granted under the 2003 Plan. The
exercise prices for the options granted are equal to or greater than the fair
market value of the stock subject to such options as of the date of grant, as
determined by the Company's Board of Directors. The options granted under the
2003 Plan are to reward certain officers and key employees who have been
employed by the Company for a number of years and to help the Company retain
these officers by providing them with an additional incentive to contribute to
the success of the Company.
The 2003 Plan is to be administered by the Board of Directors or by a committee
designated by the board. The terms of options granted or stock awards or sales
affected under the 2003 Plan are to be determined by the Board of Directors or
its committee. The Plan provides that if the shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price to reflect such
subdivision, combination or stock dividend. In addition, the number of shares of
Common Stock reserved for purposes of the Plan shall be adjusted by the same
proportion. No options may be exercised for a term of more than ten years from
the date of grant.
Options intended as incentive stock options may be issued only to employees, and
must meet certain conditions imposed by the code, including a requirement that
the option exercise price be no less than then fair market value of the option
shares on the date of grant. The 2003 Plan provides that the exercise price for
non-qualified options will not be less than at least 50% of the fair market
value of the stock subject to such option as of the date of grant of such
options, as determined by the Company's Board of Directors.
The 2003 Plan has a term of ten years. The Board of Directors may amend or
terminate the 2003 Plan at any time, subject to approval of certain
modifications to the 2003 Plan by the shareholders of the Company as may be
required by law or the 2003 Plan.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth security ownership information of the Company's
Class A and Class C common stock as of March 31, 2006, (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) 450,203 6.6% 3,526,622 45.5% 3,976,825 27.3%
Employee Stock
Ownership Plan (3) 621,726 9.1% 1,630,693 21.1% 2,252,419 15.4%
George R. Quist (4)(5)(7)(8) 550,730 8.1% 494,110 6.3% 1,044,840 7.2%
Scott M. Quist (4)(7)(9) 450,385 6.6% 1,372,433 17.7% 1,822,818 12.5%
Associated Investors (10) 97,438 1.4% 688,392 8.9% 785,830 5.4%
G. Robert Quist (6)(11) 153,888 2.2% 256,256 3.3% 410,144 2.8%
J. Lynn Beckstead, Jr., (6)(12) 158,722 2.3% -- -- 158,722 1.1%
Stephen M. Sill (6)(13) 82,004 1.2% -- -- 82,004 1.0%
Christie Q. Overbaugh (14) 87,313 1.3% 110,776 1.4% 198,089 1.4%
Robert G. Hunter, M.D., (4)(15) 7,984 * -- -- 7,984 *
Norman G. Wilbur (16) 6,603 * -- -- 6,603 *
Charles L. Crittenden (17) 7,320 * -- -- 7,320 *
H. Craig Moody (18) 6,314 * -- -- 6,314 *
All directors and executive officers
(10 persons) (4)(5)(6)(7) 1,961,466 28.7% 5,760,197 74.4% 7,721,663 52.9%
* Less than 1%
(1) Unless otherwise indicated, the address of each listed stockholder is c/o
Security National Financial Corporation, 5300 South 360 West, Suite 250, Salt
Lake City, Utah 84123.
(2) This stock is owned by the George R. and Shirley C. Quist Family
Partnership, Ltd., of which George R. Quist is the general partner.
(3) The trustees of the Employee Stock Ownership Plan (ESOP) are George R.
Quist, Scott M. Quist, and Robert G. Hunter who exercise shared voting and
investment powers.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
(Continued)
(4) Does not include 621,726 shares of Class A common stock and 1,630,693 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 97,438 shares of Class A common stock and 688,392 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 322,357 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 194,838 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 234,801 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, 2006.
(9) Includes options to purchase 154,534 shares of Class A common stock and
1,102,500 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,
2006.
(10) The managing partner of Associated Investors is George R. Quist, who
exercises sole voting and investment powers.
(11) Includes options to purchase 83,042 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, 2006.
(12) Includes options to purchase 59,627 shares of Class A common stock granted
to Mr. Beckstead that are currently exercisable or will become exercisable
within 60 days of March 31, 2006.
(13) Includes options to purchase 21,263 shares of Class A common stock granted
to Mr. Sill that are currently exercisable or will become exercisable within 60
days of March 31, 2006.
(14) Includes options to purchase 29,629 shares of Class A common stock granted
to Ms. Overbaugh that are currently exercisable or will become exercisable
within 60 days of March 31, 2006.
(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, 2006.
(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, 2006.
(17) Includes options to purchase 2,261 shares of Class A common stock granted
to Mr. Crittenden that are currently exercisable or will become exercisable
within 60 days of March 31, 2006.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
(Continued)
(18) Includes options to purchase 4,753 shares of Class A common stock granted
to Mr. Moody that are currently exercisable or will become exercisable within 60
days of March 31, 2006.
The Company's executive officers and directors, as a group, own beneficially
approximately 52.9% of the outstanding shares of the Company's Class A and Class
C common stock.
Item 13. Certain Relationships and Related Transactions
On December 19, 2001, the Company entered into an option agreement with Monument
Title, LLC, a Utah limited liability company, in which the Company made
available a $100,000 line of credit to Monument Title at an interest rate of 8%
per annum. The line of credit is secured by the assets of Monument Title. From
December 28, 2001 to June 14, 2002, the Company advanced Monument Title a total
of $77,953 under the line of credit. The amount advanced under the line of
credit plus accrued interest are payable upon demand. This receivable was fully
allowed for in 2003. Ronald Motzkus and Troy Lashley, who owned 90% and 10%,
respectively, of the outstanding shares of Monument Title are brothers-in-law 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 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 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 1%.
The minimum payment for the third, fourth and firth years is $1,500, $2,000 and
$2,500 per month, respectively. Any remaining unpaid balance, including
interest, shall be due and payable at the conclusion of the 60th month from the
date of the agreement. During 2005 Monument Title paid a total of $7,000 under
the agreement and the balance on the note at December 31, 2005 was $87,177.
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 equals 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 in an amount equal to the outstanding
liabilities ceded to Security National Life.
Item 13. Certain Relationships and Related Transactions (Continued)
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, 2005, the
outstanding coinsurance amount was $958,968. Southern Security Life Insurance
Company recorded as an expense the risk charge of $33,121 for 2005. 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 1, 2005, Security National Life entered into a coinsurance agreement
and a modified coinsurance agreement with Southern Security Life Insurance
Company, effective October 1, 2005. Under the terms of these agreements,
Southern Security Life Insurance Company ceded the remaining 25% of its
universal life business to Security National Life. The total liabilities
reinsured for this business on October 1, 2005 were $11,001,332. Southern
Security Life Insurance Company received a ceding commission from Security
National Life of $1,000,000 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 equals 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 in an amount equal to 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, 2005, the
outstanding coinsurance amount was $911,656. Southern Security Life Insurance
Company recorded as an expense the risk charge of $10,000 for 2005. 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 31, 2005, Security National Life and Southern Security Life
Insurance Company entered into a reinsurance agreement to reinsure the remaining
in force business of Southern Security Life Insurance Company to Security
National Life to the extent permitted by the Florida Office of Insurance
Regulation. The assets and liabilities 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, Zions First National Bank
will hold the assets and liabilities in trust for purposes of administration of
the assets and liabilities with respect to such insolvency.
The Florida Office of Insurance Regulation approved the reinsurance agreement on
December 28, 2005. As a result of the execution of the reinsurance agreement,
all of the insurance business and operations of Southern Security Life Insurance
Company will be transferred to Security National Life, as reinsurer, as of
December 31, 2005, the effective date of the agreement. Any future insurance
business by Southern Security Life Insurance Company will be covered by this
reinsurance agreement. All of the insurance business and operations of Southern
Security Life Insurance Company, including its assets and liabilities, will be
transferred to Security National Life under the terms of the reinsurance
agreement, except for $3,500,000 in capital and surplus that Southern Security
Life Insurance Company will continue to hold in order to remain qualified as a
life insurance company for federal income tax purposes. Thus, $48,528,000 in
assets and liabilities will be transferred from Southern Security Life Insurance
Company to Security National Life pursuant to the reinsurance agreement.
Item 13. Certain Relationships and Related Transactions( Continued)
The Company's Board of Directors has a written procedure, which requires
disclosure to the Board of any material interest or any affiliation on the part
of any of its officers, directors or employees which is in conflict or may be in
conflict with the interests of the Company.
Item 14. Principal Accounting Fees and Services
Fees incurred in 2005 for annual audit services pertaining to the financial
statements and employee benefit plans and related quarterly reviews were
approximately $326,000. There were $35,000 in other fees during 2005.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See "Index to Consolidated Financial Statements" under Item 8 above.
(a)(2) Financial Statement Schedules
II. Condensed Balance Sheets as of December 31, 2005 and 2004 and
Condensed Statement of Earnings and Cash Flows for the years ended
2005, 2004 and 2003
IV. Reinsurance
V. Valuation and Qualifying Accounts
All other schedules to the consolidated financial statements required by Article
7 of Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-K or are incorporated by reference to previous filings.
3.1 Articles of Restatement of Articles of Incorporation (7)
3.2 Amended Bylaws (9)
4.1 Specimen Class A Stock Certificate (1)
4.2 Specimen Class C Stock Certificate (1)
4.3 Specimen Preferred Stock Certificate and Certificate of Designation
of Preferred Stock (1)
10.1 Restated and Amended Employee Stock Ownership Plan and Trust Agreement
(1)
10.2 1993 Stock Option Plan (3)
10.3 2000 Director Stock Option Plan (4)
10.4 2003 Stock Option Plan (8)
10.5 Deferred Compensation Agreement with George R. Quist (2)
10.6 Promissory Note with George R. Quist (5)
10.7 Deferred Compensation Plan (6)
10.8 Stock Purchase Agreement with Paramount Security Life Insurance
Company (10)
10.9 Reinsurance Agreement between Security National Life Insurance Company
and Guaranty Income Life Insurance Company(11)
10.10 Employment agreement with J. Lynn Beckstead, Jr.(11)
10.11 Employment agreement with Scott M. Quist (12)
10.12 Agreement and Plan of Reorganization among Security National Life
Insurance Company, SSLIC Holding Company, and Southern Security
Life Insurance Company (13)
10.13 Agreement and Plan of Merger, among Security National Life Insurance
Company, SSLIC Holding Company, and Southern Security Life
Insurance Company(14)
10.14 Agreement to repay indebtedness and to convey option with Monument
Title, LLC. (14)
10.15 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(15)
10.16 Reinsurance Agreement between Security National Life Insurance
Company and Memorial Insurance Company of America(16)
10.17 Trust Agreement between Security National Life Insurance Company and
Memorial Insurance Company of America(16)
10.18 Promissory Note between Memorial Insurance Company as Maker and
Security National Life Insurance Company as Payee(16)
10.19 Security Agreement between Memorial Insurance Company as Debtor
and Security National Life Insurance Company as Secured Party(16)
10.20 Surplus Contribution Note between Memorial Insurance Company of
America as Maker and Southern Security Life Insurance Company as
Payee(16)
10.21 Guaranty Agreement by Security National Life Insurance Company and
Southern Security Life Insurance Company as Guarantors(16)
10.22 Administrative Services Agreement between Security National Life
Insurance Company and Memorial Insurance Company of America(16)
10.23 Reinsurance Agreement between Security National Life Insurance
Company and Southern Security Life Insurance Company(17)
10.24 Trust Agreement among Security National Life Insurance Company,
Southern Security Life Insurance Company and Zions First National
Bank(17) 10.25
10.25 Subsidiaries of the Registrant
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted
by Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted
by Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference from Registration Statement on Form
S-1, as filed on June 29, 1987
(2) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1989
(3) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1994
(4) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's
Annual Meeting of Shareholders
(5) Incorporated by reference from Annual Report on Form 10-K, as
filed on April 16, 2001
(6) Incorporated by reference from Annual Report on Form 10-K, as
filed on April 3, 2002
(7) Incorporated by reference from Report on Form 8-K/A as filed on
January 8, 2003
(8) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, Filed on June 5, 2003, relating to the Company's
Annual Meeting of Shareholders
(9) Incorporated by reference from Report on Form 10-Q, as filed on
November 14, 2003
(10) Incorporated by reference from Report on Form 8-K, as filed March
30, 2004
(11) Incorporated by reference from Report on Form 10-K, as filed on
March 30, 2004
(12) Incorporated by reference from Report on Form 10-Q, as filed on
August 13, 2004
(13) Incorporated by reference from Report on Form 8-K, as filed on
August 30, 2004
(14) Incorporated by reference from Report on Form 10-K, as filed on
March 31, 2005
(15) Incorporated by reference from Report on Form 8-K, as filed on
September 27, 2005
(16) Incorporated by reference from Report on Form 8-K, as filed on
January 5, 2006
(17) Incorporated by reference from Report on Form 8-K, as filed on
January 11, 2006
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2005.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SECURITY NATIONAL FINANCIAL CORPORATION
Dated: March 31, 2006 By: George R. Quist,
---------------
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
George R. Quist Chairman of the March 31, 2006
Board and Chief Executive
Officer (Principal
Executive Officer)
Scott M. Quist President, Chief Operating March 31, 2006
Officer and Director
Stephen M. Sill Vice President,
Treasurer and Chief
Financial Officer (Principal
Financial and Accounting
Officer) March 31, 2006
J. Lynn Beckstead, Jr. Vice President and Director March 31, 2006
Charles L. Crittenden Director March 31, 2006
H. Craig Moody Director March 31, 2006
Norman G. Wilbur Director March 31, 2006
Robert G. Hunter Director March 31, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
Security National Financial Corporation:
We have audited the consolidated financial statements of Security National
Financial Corporation and subsidiaries (the "Company") as of December 31, 2005,
and have issued our report thereon dated March 23, 2006; such consolidated
financial statements and report are included elsewhere in this Form 10-K. Our
audit also included the condensed financial information as of December 31, 2005
and for the year then ended included in the financial statement schedules of the
Company listed in Item 15(a)(2). These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such 2005 financial information
included in the 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.
HANSEN BARNETT & MAXWELL
Salt Lake City, Utah
March 23, 2006
Schedule II
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information
Condensed Balance Sheets
December 31,
2005 2004
---- ----
Assets
Investment in subsidiaries
(equity method) $61,626,274 $57,988,720
Receivables:
Receivable from
Affiliates 8,390,411 9,147,416
Allowance for doubtful accounts (16,528) (16,528)
---------- -----------
Total receivables 8,373,883 9,130,888
---------- -----------
Property and equipment, at cost,
net of accumulated depreciation
of $1,089,580 for 2005 and $896,060
for 2004 419,746 142,170
Other assets 61,950 66,828
----------- -----------
Total assets $70,481,853 $67,328,606
=========== ===========
See accompanying notes to condensed financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information
Condensed Balance Sheets (Continued)
December 31,
2005 2004
---- ----
Liabilities:
Checks written in excess of cash in bank $ 143,165 $ 635,394
Bank loans payable:
Current installments 2,129,911 1,886,570
Long-term 4,389,025 6,059,926
Notes and contracts payable:
Current installments 161,834 261,834
Long-term -- 160,873
Advances from affiliated companies 10,394,210 10,227,106
Other liabilities and accrued expenses 1,095,602 955,832
Income taxes 6,469,688 5,476,231
----------- -----------
Total liabilities 24,783,435 25,663,766
----------- -----------
Stockholders' equity:
Common Stock:
Class A: $2 par value, authorized
10,000,000 shares, issued 7,098,363
shares in 2005 and 6,755,870 shares
in 2004 14,196,726 13,511,740
Class C: convertible, $0.20 par value,
authorized 7,500,000 shares, issued
6,781,060 shares in 2005 and 6,468,199
shares in 2004 1,356,212 1,293,641
----------- -----------
Total common stock 15,552,938 14,805,381
Additional paid-in capital 15,650,344 14,922,851
Accumulated other comprehensive
income (loss), and other items 117,647 (11,352)
Retained earnings 17,460,024 15,365,259
Treasury stock at cost
(1,251,104 Class A shares and 138,138
Class C shares in 2005; 1,315,075
Class A shares and 79,103 Class C shares
in 2004, held by affiliated companies) (3,082,535) (3,417,299)
----------- -----------
Total stockholders' equity 45,698,418 41,664,840
----------- -----------
Total liabilities and stockholders' equity $70,481,853 $67,328,606
=========== ===========
See accompanying notes to condensed financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information
Condensed Statements of Earnings
Year Ended December 31,
-----------------------
2005 2004 2003
---- ---- ----
Revenue:
Net investment income $ 7 $ 35 $ 52
Fees from affiliates 4,217,198 4,249,430 4,200,683
----------- ----------- -----------
Total revenue 4,217,205 4,249,465 4,200,735
----------- ----------- -----------
Expenses:
General and administrative
expenses 2,298,886 2,277,933 2,326,526
Interest expense 457,413 634,783 719,894
Expenses to affiliates 200,516 180,446 156,327
----------- ----------- -----------
Total expenses 2,956,815 3,093,162 3,202,747
----------- ----------- -----------
Earnings before income
taxes, and earnings of
subsidiaries 1,260,390 1,156,303 997,988
Income tax expense (960,153) (606,355) (2,841,738)
Equity in earnings
of subsidiaries 3,187,643 1,572,324 8,440,247
----------- ----------- -----------
Net earnings $3,487,880 $2,122,272 $6,596,497
=========== =========== ===========
See accompanying notes to condensed financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information
Condensed Statements of Cash Flow
Year Ended December 31,
2005 2004 2003
----- ----- ----
Cash flows from operating activities:
Net earnings $3,487,880 $2,122,272 $6,596,497
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 193,520 165,830 154,506
Undistributed earnings
of affiliates (3,187,643) (1,572,324) (8,440,247)
Provision for income taxes 960,153 606,355 2,841,738
Change in assets and liabilities:
Accounts receivable 1,540 36,000 (128,778)
Other assets 4,878 12,676 (12,589)
Other liabilities 127,871 (230,824) 94,529
----------- ----------- -----------
Net cash provided by operating activities 1,588,199 1,139,985 1,105,656
----------- ----------- -----------
Cash flows from investing activities:
Dividends received from subsidiaries -- -- 1,150,000
Purchase of equipment (471,096) (7,256) (40,106)
----------- ----------- -----------
Net cash (used in) provided by
investing activities (471,096) (7,256) 1,109,894
----------- ----------- -----------
Cash flows from financing activities:
Checks written in excess of cash in bank (492,229) (156,127) 787,651
Advances from (to) affiliates 922,569 2,764,500 (1,019,660)
Payments of notes and contracts payable (1,897,443) (3,741,102) (2,116,541)
Stock options exercised -- -- 133,000
Proceeds from borrowings on notes and
contracts payable 350,000 -- --
----------- ----------- -----------
Net cash used in financing activities (1,117,103) (1,132,729) (2,215,550)
----------- ----------- -----------
Net change in cash -- -- --
Cash at beginning of year -- -- --
Cash at end of year $ -- $ -- $ --
=========== =========== ===========
See accompanying notes to condensed financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information
Notes to Condensed Financial Statements
1) Bank Loans Payable
Bank loans payable are summarized as follows:
December 31,
2005 2004
---- ----
$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
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. 172,549 333,145
5.87% note payable interest only to July 1, 2003,
thereafter, interest plus monthly principal
payment of $134,000, collateralized by 15,000
shares of Security National Life Insurance
Company stock, due January 2010. 5,926,478 7,206,641
Mark-to-market adjustment (180,091) (39,101)
Other collateralized bank loans payable 600,000 --
----------- ---------
Total bank loans 6,518,936 7,946,496
Less current installments 2,129,911 1,886,570
----------- ----------
Bank loans, excluding current
Installments $4,389,025 $6,059,926
========== ==========
2) Notes and Contracts Payable
Notes and contracts are summarized as follows:
December 31,
2005 2004
---- ----
Due to shareholders of Security National
Financial Corporation, 6.0% note
payable in annual installments of
$100,000 including principal and
interest, due July 2005, secured by
Company stock held in escrow. $ -- $ 100,000
Due to shareholders of Security
National Financial Corporation, 4.0% note
payable in annual installments of
$160,873 including principal and interest,
due January 2006, secured by Company
stock held in escrow. 160,873 321,747
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information
Notes to Condensed Financial Statements
2) Notes and Contracts Payable (Continued)
December 31,
2005 2004
---- ----
Other 961 960
------ -------
Total notes and contracts 161,834 422,707
Less current installments 161,834 261,834
--------- ---------
Notes and contracts, excluding
current installments $ -- $160,873
========= ========
The following tabulation shows the combined maturities of bank loans payable and
notes and contracts payable:
2006 $2,111,654
2007 1,439,220
2008 1,526,011
2009 1,603,885
Thereafter --
----------
Total $6,680,770
==========
3) Advances from Affiliated Companies
----------------------------------
December 31,
2005 2004
Non-interest bearing advances from affiliates:
Cemetery and Mortuary
subsidiary $1,459,841 $ 1,459,841
Life insurance subsidiaries 8,890,386 8,723,282
Mortgage subsidiary 43,983 43,983
----------- -----------
$10,394,210 $10,227,106
=========== ===========
4) Dividends
In 2005, 2004 and 2003, Security National Life Insurance Company, a wholly owned
subsidiary of the Registrant, paid to the registrant cash dividends of $-0-,
$-0-, and $1,150,000, respectively.
Schedule IV
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Reinsurance
Percentage
Ceded to Assumed of Amount
Direct Other from Other Net Assumed
Amount Companies Companies Amount to Net
2005
Life Insurance
in force ($000) $2,571,516 $185,364 $778,624 $3,164,776 24.6%
=========== =========== =========== =========== ======
Premiums:
Life Insurance $26,795,343 $853,088 $942,080 $26,884,335 3.5%
Accident and
Health Insurance 285,190 -- 584 285,774 .2%
----------- ----------- ----------- ----------- ------
Total premiums $27,080,533 $853,088 $942,664 $27,170,109 3.5%
=========== =========== =========== =========== ======
2004
Life Insurance
in force ($000) $2,098,690 $188,542 $815,445 $2,725,593 29.9%
=========== =========== =========== =========== ======
Premiums:
Life Insurance $25,554,908 $916,511 $1,031,961 $25,670,358 4.0%
Accident and
Health Insurance 308,049 12 946 308,983 .3%
----------- ----------- ----------- ----------- ------
Total premiums $25,862,957 $916,523 $1,032,907 $25,979,341 4.0%
=========== =========== =========== =========== ======
2003
Life Insurance
in force ($000) $1,974,388 $213,515 $940,050 $2,700,923 34.8%
=========== =========== =========== =========== ======
Premiums:
Life Insurance $22,944,221 $973,632 $972,174 $22,942,763 4.2%
Accident and
Health Insurance 350,371 -- 1,239 351,610 .4%
----------- ----------- ----------- ----------- ------
Total premiums $23,294,592 $973,632 $973,413 $23,294,373 4.2%
=========== =========== =========== =========== ======
Schedule V
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Balance at Additions Charged Deductions Balance
Beginning to Costs Disposals and at End of
of Year and Expenses Write-offs Year
---------- -------------- ----------- -----------
For the Year Ended December 31, 2005
- ------------------------------------
Accumulated depreciation on real estate $4,408,030 $389,868 $(12,919) $4,784,979
Allowance for losses on mortgage loans
on real estate and construction loans 254,893 -- (14,893) 240,000
Accumulated depreciation
on property and equipment 11,856,366 1,704,154 (205,834) 13,354,686
Allowance for doubtful accounts 1,302,368 80,748 (192,010) 1,191,106
Allowance for doubtful accounts on
collateral loans 140,580 200,000 (1,362) 339,218
For the Year Ended December 31, 2004
- ------------------------------------
Accumulated depreciation on real estate $4,059,934 $348,096 $ -- $4,408,030
Allowance for losses on mortgage loans
on real estate and construction loans 14,893 240,000 -- 254,893
Accumulated depreciation
on property and equipment 10,419,573 1,665,018 (228,225) 11,856,366
Allowance for doubtful accounts 1,706,678 24,000 (428,310) 1,302,368
Allowance for doubtful accounts
on collateral loans 142,051 -- (1,471) 140,580
For the Year Ended December 31, 2003
- ------------------------------------
Accumulated depreciation on real estate $3,728,539 $331,395 $ -- $4,059,934
Allowance for losses on mortgage loans
on real estate and construction loans 14,893 -- -- 14,893
Accumulated depreciation
on property and equipment 8,903,197 1,535,529 (19,153) 10,419,573
Allowance for doubtful accounts 1,479,728 472,897 (245,947) 1,706,678
Allowance for doubtful accounts
on collateral loans 143,929 -- (1,878) 142,051
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACTED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, George R. Quist, certify that:
1. I have reviewed this annual report on Form 10-K of Security National
Financial Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period
covered in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 31, 2006
By: George R. Quist
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen M. Sill, certify that:
1. I have reviewed this annual report on Form 10-K of Security National
Financial Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period
covered in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 31, 2006
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Security National Financial Corporation
(the "Company") on Form 10-K for the period ending December 31, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, George R. Quist, Chairman of the Board and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and
belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
By: George R. Quist
Chairman of the Board and
Chief Executive Officer
March 31, 2006
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Security National Financial Corporation
(the "Company") on Form 10-K for the period ending December 31, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stephen M. Sill, Vice President, Treasurer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and
belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
By: Stephen M. Sill
Vice President, Treasurer
and Chief Financial Officer
March 31, 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Year Ended December 31, 2005
SECURITY NATIONAL FINANCIAL CORPORATION
Commission File No. 0-9341
E X H I B I T S
Exhibit Index
Exhibit No. Document Name
10.31 Subsidiaries of the Registrant
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 10.31
Subsidiaries of Security National
Financial Corporation
as of March 31, 2006
Security National Life Insurance Company
Security National Mortgage Company
Memorial Estates, Inc.
Memorial Mortuary
Paradise Chapel Funeral Home, Inc.
California Memorial Estates, Inc.
Cottonwood Mortuary, Inc.
Deseret Memorial, Inc.
Holladay Cottonwood Memorial Foundation
Holladay Memorial Park, Inc.
Sunset Funeral Home, Inc.
Greer-Wilson Funeral Home, Inc.
Crystal Rose Funeral Home, Inc.
Insuradyne Corporation
Southern Security Life Insurance Company
Security National Funding Company
Security National Life Insurance Company of Louisiana (Formerly
Paramount Security Life Insurance Company)
Security National Capital, Inc.
Security National Funding
Memorial Insurance Company of America