Approximate Owned Square Location Function Leased Footage -------- -------- ------ -------
5300 So. 360 West Corporate Salt Lake City, UT Headquarters Owned(1) 33,000
(2) The Company leases an additional 8,459 square feet of the facility to unrelated third parties for approximately $33,000 per year, under leases which expire at various dates after 2001.
(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, 2001, there were mortgages of approximately $52,000 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries. (4) As of December 31, 2001, there were mortgages of approximately $1,747,000 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, 2001, there was a mortgage of approximately $603,000 collateralized by the property.
Deseret Mortuary(2) 36 East 700 South Salt Lake City, UT 1991 2 2 36,300
Lakehills Mortuary 10055 South State St. Sandy, UT 1991 2 1 18,000
Cottonwood Mortuary(2) 4670 South Highland Dr. Salt Lake City, UT 1991 2 1 14,500
Name of Date Viewing Square Mortuary Location Acquired Room(s) Chapel(s) Footage - --------- ---------- ---------- --------- --------- --------- Greer-Wilson:
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated) - ------------------------------------------------------------------------------
(1) Reflects the acquisition of Crystal Rose Funeral Home as of February 1997.
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 interest sensitive products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on lower interest rates by originating and refinancing mortgage loans.
Insurance premiums and other considerations increased by $275,000, from $12,876,000 in 2000 to $13,151,000 in 2001. This increase was primarily due to the additional premiums from increased sales of the Company's traditional life products.
Total benefits and expenses were $73,177,000 for 2001, which constituted 95.1% of the Company's total revenues, as compared to $56,832,000, or 97.9% of the Company's total revenues for 2000.
Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired increased by $681,000, from $3,189,000 in 2000 to $3,870,000 in 2001. This increase was reasonable based on the underlying actuarial assumptions.
General and administrative expenses increased by $16,288,000, from $35,959,000 in 2000 to $52,247,000 in 2001. Contributing to this increase was an $11,458,000 increase in commission expenses, from $18,401,000 in 2000 to $29,859,000 in 2001. Salaries increased $1,360,000, from $7,667,000 in 2000 to $9,028,000 in 2001. Other expenses increased $3,470,000, from $9,890,000 in 2000 to $13,360,000 in 2001. These increases were primarily the result of an increased number of loan originations made by the Company's mortgage subsidiary in 2001.
Interest expense increased by $665,000, from $2,126,000 in 2000 to $2,791,000 in 2001. This increase was primarily due to more loan originations from the Company's mortgage subsidiary being funded by third parties in 2001.
Net mortuary and cemetery sales decreased by $761,000 from $10,178,000 in 1999 to $9,417,000 in 2000. This decrease was primarily due to the change in accounting principles for pre-need funeral and cemetery contract revenues. See Note 1 "Recent Accounting Pronouncements".
Mortgage fee income increased by $8,418,000, from $14,504,000 in 1999 to $22,922,000 in 2000. This increase was primarily the result of an increased number of loan originations made by the Company's mortgage subsidiary in 2000.
Other revenue decreased by $551,000, from $856,000 in 1999 to $305,000 in 2000. This reduction was primarily the result of having received proceeds in 1999 from insurance claims filed for the recovery of the costs to litigate a case against a former officer of the Company's insurance subsidiary, Southern Security.
Total benefits and expenses were $56,833,000 for 2000, which constituted 97.9% of the Company's total revenues, as compared to $48,207,000, or 97.1% of the Company's total revenues for 1999.
Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired decreased by $1,669,000 from $4,858,000 in 1999 to $3,189,000 in 2000. This decrease was primarily due to adjusting the amortization rate to current assumptions at the Company's insurance subsidiary, Southern Security.
General and administrative expenses increased by $9,000,000, from $26,959,000 in 1999 to $35,959,000 in 2000. Contributing to this increase was a $6,550,000 increase in commission expenses from $11,851,000 in 1999 to $18,401,000 in 2000. Salaries increased $258,000 from $7,409,000 in 1999 to $7,667,000 in 2000. Other expenses increased $2,191,000, from $7,699,000 in 1999 to $9,890,000 in 2000. These increases were primarily the result of an increased number of loan originations made by the Company's mortgage subsidiary in 2000.
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, 2001 and 2000, the life subsidiaries exceeded the regulatory criteria.
The Company's total capitalization of stockholders' equity and bank debt and notes payable was $42,067,000 and $40,787,000 as of December 31, 2001 and 2000, respectively. Stockholders' equity as a percent of total capitalization was 71% and 66% as of December 31, 2001 and 2000, respectively.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2001 was 13.2%, as compared to a rate of 15% in 2000.
As consideration for the purchase of the shares of Consolidare, the Company paid to the stockholders of Consolidare at closing an aggregate of $12,248,194. In order to pay the purchase consideration, the Company obtained $6,250,000 from bank financing, with the balance of $5,998,194 obtained from funds then currently held by the Company. In addition to the purchase consideration, the Company caused SSLIC to pay, on the closing date, $1,050,000 to George Pihakis, the President and Chief Executive Officer of SSLIC prior to closing, as a lump sum settlement of the executive compensation agreement between SSLIC and Mr. Pihakis.
The administrative services fee 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. The Administrative Services Agreement shall remain in effect for an initial term expiring on December 16, 2003. The term of the agreement may be automatically extended for additional one-year terms unless either the Company or SSLIC shall deliver a written notice on or before September 30 of any year stating to the other its desire not to extend the term of the agreement. However, in no event can the agreement be terminated prior to December 16, 2003.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and No. 142, "Goodwill and Other Intangibles SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The statement also establishes specific criteria for recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The statement requires that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least annually. The amortization period of intangible assets with finite lives will no longer be limited to forty years.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment of long- lived assets and for long-lived assets to be disposed of. This Statement supersedes FASB Statement 121 and APB Opinion No. 30. However, this Statement retains certain fundamental provisions of Statement 121, namely; recognition and measurement of the impairment of long-lived assets to be held and used, and measurement of long-lived assets to be disposed of by sale. The Statement also retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations. This Statement also Amends ARB No. 51 to eliminate the exception of consolidation for a temporarily controlled subsidiary. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001.
The Company is evaluating the possible effects the adoption of these statements may have on the Company's consolidated financial statements.
Consolidated Statement of Earnings, Years Ended December 31, 2001, 2000, and 1999.......................................................29
To The Board of Directors and Shareholders of Security National Financial Corporation
Liabilities: - ------------ Future life, annuity, and other policy benefits $140,504,866 $140,000,344 Unearned premium reserve 1,785,977 1,754,980 Bank loans payable 8,461,900 9,805,118 Notes and contracts payable 3,635,776 4,240,830 Deferred pre-need cemetery and funeral contracts revenues and estimated future cost of pre-need sales 9,338,353 8,679,199 Accounts payable 1,319,319 1,242,407 Funds held under reinsurance treaties 1,379,640 1,417,216 Other liabilities and accrued expenses 5,552,799 4,115,920 Income taxes 6,874,597 6,124,512 ------------- ------------- Total liabilities 178,853,227 177,380,526
Net earnings per common share- assuming dilution $.63 $.21 $.22 ============ ============ ============
Security National Financial Corporation and its wholly-owned subsidiaries (the "Company") operates in three main business segments; life insurance, cemetery and mortuary, and mortgage loans. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance marketed primarily in the intermountain west, California, Florida, Oklahoma, and Texas. The cemetery and mortuary segment of the Company consists of five cemeteries in Utah, one cemetery in California, eight mortuaries in Utah and five mortuaries in Arizona. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction, existing homes and real estate projects primarily in California, Colorado, Florida, Utah, Arizona and Texas.
Credit Risk - the risk that issuers of securities owned by the Company or mortgagors of mortgage loans on real estate owned by the Company will default or that other parties, including reinsurers and holders of cemetery/ mortuary contracts which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible.
Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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.
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% in 2001, 2000 and 1999.
Participating business constitutes 6%, 6%, and 5% of insurance in force for 2001, 2000 and 1999, 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.
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.
Mortgage fee income is generated through the origination and refinancing of mortgage loans and is deferred until such loans are determined to be sold in accordance with FAS No. 140.
The Company has two fixed option plans (the "1993 Plan" and the "2000 Plan"). In accordance with APB Opinion No. 25, no compensation cost has been recognized for these plans. Had compensation cost for these plans been determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123, the Company's net income would have been reduced by approximately $3,143, $0, and $203,000 in 2001, 2000, and 1999, respectively. As a result, basic and diluted earnings per share would have been reduced by $0, $0, and $0.05 in 2001, 2000, and 1999 respectively.
The change in the Company's accounting policies resulting from implementation of SAB No. 101 has been treated as a change in accounting principle effective as of January 1, 2000. The cumulative effect of the accounting change through December 31, 1999 was negligible. The following table shows the unaudited proforma effects of retroactive application using the newly adopted accounting policies compared to historical results for the year ended December 31, 1999. There were no changes in net earnings or net earnings per common share for this period since the Company's previous accounting practice did not recognize any significant profits on pre-need sales. The Company's previous accounting practice recorded pre-need sales as revenue but also recorded approximately an equal amount for the sum of the future merchandise cost and sales expense. Implementing SAB 101 changed this practice to defer these pre-need sales and costs to when the merchandise is delivered or the services are performed.
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, 2001, 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.
The Company's realized gains and losses in investments are summarized as follows:
Securities available for sale: Gross realized gains 6 884,199 14,138 Gross realized losses (111) (463,466) (12)
Other assets (9,130) -- 212,923 --------- --------- --------- Total $10,428 $423,805 $313,013 ========= ========= =========
Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential and commercial loans and requires collateral on all real estate exposures, a substantial portion of its debtors' ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. The Company has 65% of its mortgage loans in the state of Utah.
Carrying Amount --------------- Dean Witter Discover $4,352,714 Philip Morris, Inc. 6,013,232
Fixed maturity securities $3,776,132 $4,629,916 $4,720,838 Equity securities 49,281 235,491 226,857 Mortgage loans on real estate 1,570,478 1,735,590 1,451,214 Real estate 1,548,507 1,507,239 1,711,771 Policy loans 630,352 641,272 725,383 Short-term investments 379,562 402,350 650,035 Other 5,973,092 3,962,362 2,142,527 ------------ ------------ ------------ Gross investment income 13,927,404 13,114,220 11,628,625 Investment expenses (980,905) (978,148) (997,323) ------------ ------------ ------------ Net investment income $12,946,499 $12,136,072 $10,631,302 ============ ============ ============
Land and Buildings $10,930,790 $10,828,916 Furniture and equipment 7,557,210 6,694,925 ------------ ------------ 18,488,000 17,523,841 Less accumulated depreciation (7,685,613) (6,699,141) ------------ ------------ Total $10,802,387 $10,824,700 ============ ============
December 31, ------------ 2001 2000 ---- ---- One year treasury constant maturity plus 2.75% (8.03% at December 31, 2001) note payable in monthly installments of $6,000, including principal and interest, collateralized by real property, which book value is approximately $332,000, due October 2002 $48,971 $120,824
6.93% note payable in monthly installments of $20,836, including principal and interest, collateralized by real property, which book value is approximately $991,000, due November 2007 1,590,487 1,662,768
Bank prime rate less 1.35% (3.40% at December 31, 2001) note payable in monthly installments of $2,736 including principal and interest, collateralized by 15,000 shares of Security National Life Insurance Company stock, due December 2005 156,549 180,893
Less current installments 1,677,683 1,596,600 ---------- ---------- Bank loans, excluding current installments $6,784,217 $8,208,518 ========== ==========
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 232,259 289,865
9% note payable in monthly installments of $10,000 including principal and interest collateralized by real property, which book value is approximately $2,908,000, due July 2008 602,653 665,318
Due to Memorial Estates Endowment Care Trust Fund for the remodel of the Cottonwood Funeral Home. 6% note payable in monthly installments of $5,339 including principal and interest collateralized by the Funeral Home, which book value is approximately $937,000 due March 2030 861,748 899,500
Due to former shareholders of Southern Security Life Insurance Company resulting from the acquisition of such entity. 6.5% note payable in five annual installments with principal payments of $158,840 due April 2005 $635,361 $794,202
7) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds -------------------------------------------------------------------
Cash and cash equivalents $475,712 $385,659 Mutual funds 188,732 169,865 Fixed maturity securities 348,737 297,331 Equity securities 77,778 77,778 Participation in mortgage loans with Security National Life 4,214,781 3,877,490 Time certificate of deposit 33,696 33,696 ---------- ---------- Total $5,339,436 $4,841,819 ========== ==========
The Company's income tax liability at December 31 is summarized as follows:
Liabilities Deferred policy acquisition costs $5,140,228 $5,213,517 Cost of insurance acquired 1,553,301 1,714,724 Installment sales 1,838,465 1,658,016 Depreciation 643,243 653,192 Trusts 1,162,077 1,051,602 Tax on unrealized appreciation 583,213 214,337 Other 356,789 415,827 ------------ ------------ Total deferred tax liabilities 11,277,316 10,921,215 ------------ ------------ Net deferred tax liability $6,961,166 $6,067,041 ============ ============
2001 2000 1999 ---- ---- ---- Current $391,492 $ 44,688 $2,052 Deferred 522,047 259,952 228,464 --------- --------- --------- Total $913,539 $304,640 $230,516 ========= ========= =========
The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranged from $30,000 to $75,000 at December 31, 2001 and 2000. 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 $838,421,000 at December 31, 2001 and $580,287,000 at December 31, 2000.
As part of the acquisition of Southern Security, the Company has a co-insurance agreement with The Mega Life and Health Insurance Company ("MEGA"). On December 31, 1992 Southern Security ceded to MEGA 18% of all universal life policies in force at that date. MEGA is entitled to 18% of all future premiums, claims, policyholder loans and surrenders relating to the ceded policies. In addition, Southern Security receives certain commission and expense reimbursements. The funds held related to reinsurance treaties of $1,379,640 and policyholders' account balances on deposit with reinsurer of $7,148,068 represent the 18% share of policy loans and policyholder account balances ceded to MEGA as of December 31, 2001.
The Company has Deferred Compensation Agreements with its Chief Executive Officer and its recent Senior Vice President. The Deferred Compensation is payable on the retirement or death of these individuals either in monthly installments (120 months) or in a lump sum settlement, if approved by the Board of Directors. The amount payable is $60,000 per year with cost of living adjustments each anniversary. The Compensation Agreements also provides that any remaining balance will be payable to their heirs in the event of their death. In addition the Agreement provides that the Company will pay the Group Health coverages for these individuals and/or their spouses. In 2001 the Company increased its liability for these future obligations by $483,080. The current balance as of December 31, 2001 is $671,000.
The following table summarizes the activity in shares of capital stock for the three year period ended December 31, 2001:
Stock Dividends 231,672 264,550 Conversion of Class C to Class A 15,580 (155,795) Stock Issued (canceled) (851) -- ---------- ----------
Stockholders of both classes of common stock have received 5% stock dividends in the years 1989 through 2001, as authorized by the Company's Board of Directors.
Denominator: Denominator for basic earnings per share- weighted-average shares 4,506,476 4,317,779 4,397,141
Effect of dilutive securities: Employee stock options 382 17,265 -- Stock appreciation rights -- -- -- ---------- ---------- ----------
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.
Number Option of Shares Price ----------- ------------- Outstanding at December 31, 1998 407,339 $2.34 - $4.16
Outstanding at December 31, 2000 4,200 $2.14 Dividend 410 Granted 4,000 -----
The Company's life insurance subsidiaries are domiciled in Utah and Florida and prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Utah and Florida Insurance Departments. "Prescribed" or "Permitted" statutory accounting practices are interspersed throughout state insurance laws and regulations. The National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual version effective January 1, 2001, has been adopted as a prescribed or permitted practices by the States of Utah and Florida.
Statutory Stockholders' Equity December 31, 2001 2000 1999 ---- ---- ----
Security National Life $16,316,605 $14,309,515 $12,089,618 Southern Security Life 8,459,700 8,405,211 8,976,516
The fair values of investments in fixed maturity and equity securities along with methods used to estimate such values are disclosed in Note 2. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures related to other significant financial instruments:
Securities available for sale: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies 594,568 652,983 652,983 Corporate securities including public utilities 19,971,265 20,817,746 20,817,746 Mortgage-backed securities -- -- -- Nonredeemable preferred stock 56,031 81,250 81,250 Common stock: Public utilities 315,068 504,243 504,243 Banks, trusts and insurance companies 195,983 389,210 389,210 Industrial, miscellaneous and all other 1,038,898 1,666,846 1,666,846 ----------- ----------- -----------
Total Securities available for sale 22,171,813 24,112,278 24,112,278 ----------- ----------- -----------
Mortgage loans on real estate 15,479,305 15,479,305 Real estate 9,051,691 9,051,691 Policy loans 11,277,975 11,277,975 Other investments 1,453,644 1,453,644 ----------- -----------
December 31, ------------ 2001 2000 ---- ---- Assets Cash$ 1,065 $(29,690)
Receivables: Receivable from affiliates 1,664,955 1,731,480 Other (42,743) 18,008 ------------ ------------ Total receivables 1,622,212 1,749,488
December 31, ------------ 2001 2000 ---- ---- Liabilities: - ------------ Bank loans payable: Current installments $ 1,386,857 $ 1,035,585 Long-term 4,168,453 5,294,808
Notes and contracts payable: Current installments 152,818 152,818 Long-term -- 151,857
Income taxes 1,095,947 764,676 ------------ ------------ Total liabilities 18,231,534 16,517,617 ------------ ------------
Stockholders' equity: Common Stock: Class A: $2 par value, authorized 10,000,000 shares, issued 5,363,591 shares in 2001 and 5,107,631 shares in 2000 10,727,182 10,215,262 Class C: $0.20 par value, authorized 7,500,000 shares, issued 6,113,430 shares in 2001 and 5,827,805 shares in 2000 1,222,686 1,165,561 ------------ ------------ Total common stock 11,949,868 11,380,823
Revenue: Net investment income $ 188 $ 96 $ 39,694 Fees from affiliates 3,824,259 3,878,458 3,838,704 ----------- ----------- ----------- Total revenue 3,824,447 3,878,554 3,878,398 ----------- ----------- -----------
Equity in earnings (loss) of subsidiaries 4,003,856 (143,199) 412,604 ----------- ----------- ----------- Net earnings $ 2,840,779 $ 895,729 $ 975,895 =========== =========== ===========
Bank loans payable are summarized as follows: December 31, ------------ 2001 2000 ---- ---- $4,171,803 revolving line of credit at 6.15% interest payable monthly and a reduction in principal due in semi-annual installments collateralized by 15,000 shares of Security National Life Insurance Company stock, due December 2005 $3,703,767 $4,904,426
Less current installments 1,386,857 1,035,585 ---------- ---------- Bank loans, excluding current installments $4,168,453 $5,294,808 ========== ==========