The following table sets forth the location of the Company's office facilities and certain other information relating to these properties.
Approximate Owned Square Location Function Leased Footage - -------- -------- ------ ------- 5300 So. 360 West Corporate Headquarters Owned (1) 33,000 Salt Lake City, Utah
755 Rinehart Rd. Insurance Operations/ Owned (2) 27,000 Lake Mary, Florida Mortgage Sales
6522 Dogwood View Parkway Insurance Operations Leased (3) 5,300 Jackson, Mississippi
14001 East Lliff Ave. Ste. 120 Mortgage Sales Leased (9) 1,800 Aurora, Colorado
5620 Tara Blvd. Ste. 103 Mortgage Sales Leased (11) 1,200 Bradenton, Florida
6655 W. Sahara Ste. A-214 Mortgage Sales Leased (12) 2,300 Las Vegas, Nevada
12750 Merit Drive, Ste. 1212 Mortgage Sales Leased (13) 2,100 Dallas, Texas
10850 Richmond Ave., Ste. 270 Mortgage Sales Leased (14) 2,400 Houston, Texas
5258 Pinemont Dr. Ste. B280 Mortgage Sales Owned (16) 2,900 Murray, Utah
474 West 800 North, Ste. 102 Mortgage Sales Leased (18) 2,000 Orem, Utah
(2) The Company leases an additional 9,903 square feet of the facility to unrelated third parties for approximately $160,400 per year, under leases expiring at various dates after 2003.
(5) The Company leases this facility for $48,100 per year. The lease expires in July 2004.
(7) The Company leases this facility for $39,200 per year. The lease expires in November 2005.
(8) The Company leases this facility for $27,300 per year. The lease expires in June 2006.
(12) The Company leases this facility for $49,100 per year. The lease expires in October 2006.
(15) The Company leases this facility for $17,800 per year. The lease expires in October 2006.
(18) The Company leases this facility for $34,800 per year. The lease expires in February 2007.
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated) (Continued)
On December 23, 2002, the Company completed an asset purchase transaction with Acadian Life Insurance Company, a Louisiana domiciled life insurance company ("Acadian"), in which it acquired from Acadian $75,000,000 in assets and $75,000,000 in insurance reserves through its wholly owned subsidiary, Security National Life Insurance Company, a Utah domiciled life insurance company. The acquired assets consist primarily of approximately 275,000 funeral insurance policies in force in the state of Mississippi. The assets were originally acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June 6, 2001, consisting of all of GNLIC's insurance policies in force and in effect on June 1, 2001.
The following is a brief summary of our significant accounting policies and a review of our most critical accounting estimates. For a complete description of our significant accounting policies, see Note 1 to our 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.
Mortgage fee income is generated through the origination and refinancing of mortgage loans and is realized in accordance with FAS No. 140.
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.
The universal life products the Company sells have a significant policy initiation fees (front-end load), which are deferred and amortized into revenues over the estimated expected gross profits from surrender charges and investment, mortality and expense margins. The same issues that impact deferred acquisition costs would apply to unearned revenue.
Deferred Pre-need Cemetery and Funeral Contracts Revenues and Estimated Future Cost of Pre-need Sales
Total revenues increased by $49,282,000, or 50.5%, from $95,763,000 for fiscal year 2002 to $145,045,000 for fiscal year 2003. Contributing to this increase in total revenues was a $35,947,000 increase in mortgage fee income, a $4,763,000 increase in net investment income, and a $9,218,000 increase in insurance premiums and other considerations.
General and administrative expenses increased by $34,467,000, from $68,459,000 in 2002 to $102,926,000 in 2003. Contributing to this increase was a $25,422,000 increase in commission expenses, from $42,114,000 in 2002 to $67,537,000 in 2003. Salaries increased $3,666,000, from $10,414,000 in 2002 to $14,080,000 in 2003. Other expenses increased $5,379,000, from $15,931,000, in 2002 to $21,310,000 in 2003. These increases were primarily the result of additional expenses due to increased numbers of loan originations made by the Company's mortgage subsidiary in 2003 and to additional expenses associated with the asset purchase transaction with Acadian Life.
Total revenues increased by $19,536,000, or 25.6%, from $76,227,000 for fiscal year 2001 to $95,763,000 for fiscal year 2002. Contributing to this increase in total revenues was a $16,922,000 increase in mortgage fee income, a $757,000 increase in net mortuary and cemetery sales and a $926,000 increase in insurance premiums and other considerations.
Insurance premiums and other considerations increased by $926,000, from $13,151,000 in 2001 to $14,077,000 in 2002. This increase was primarily due to the additional premiums from increased sales of the Company's traditional life products.
Total benefits and expenses were $90,224,000 for 2002, which constituted 94.2% of the Company's total revenues, as compared to $72,455,000, or 95.1% of the Company's total revenues for 2001.
Cost of the mortuary and cemetery goods and services sold increased by $169,000, from $1,772,000 in 2001 to 2,045,000 in 2002. This increase was primarily due to greater at-need cemetery and mortuary sales.
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.
-200 bps -100 bps +100 bps +200 bps -------- ------- -------- -------- Change in Market Value (in thousands) $8,263 $5,456 $(7,221) $(17,089)
The Company has entered into an Administrative Services Agreement dated December 17, 1998 with SSLIC. Under the terms of the agreement, the Company has agreed to provide SSLIC with certain defined administrative and financial services, including accounting services, financial reports and statements, actuarial, policyholder services, underwriting, data processing, legal, building management, marketing advisory services and investment services. In consideration for the services to be provided by the Company, SSLIC shall pay the Company an administrative services fee of $250,000 per month, provided, however, that such fee shall be reduced to zero for so long as the capital and surplus of SSLIC is less than or equal to $6,000,000, unless SSLIC and the Company otherwise agree in writing and such agreement is approved by the Florida Department of Insurance.
On June 30, 1999 the Company entered into a Coinsurance and Assumption Agreement (the "Agreement") with Menlo Life Insurance Company ("Menlo Life"), wherein the Company has assumed 100% of the policies in force of Menlo Life. The Agreement was not in effect until it was approved by Menlo Life's domiciled state of Arizona and the state of California. These approvals were obtained on September 9, 1999 for the Arizona Insurance Department, and on December 9, 1999 for the California Insurance Department. Menlo Life paid consideration to the Company in the form of statutory admitted assets to equal the liabilities assumed. On September 25, 2001, Menlo Life paid to the Company $308,978 in policy loans and $2,269,403 in cash.
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 ("GNLIC") on June 6, 2001, which, at that time consisted of all of GNLIC's insurance policies in force and in effect on June 1, 2001 (the "Reinsured Business").
Under the terms of the Coinsurance Agreement, Security National Life agreed to assume all of the risks (including deaths, surrenders, disability, accidental deaths and dismemberment) on the reinsurance policies as of the effective date of the Agreement. Acadian represented and warranted that each of the reinsured policies was in force as of the effective date (including policies which may be lapsed subject to the right of reinstatement, policies not lapsed but in arrears, and policies in force and in effect as paid up and extended term policies) with premiums paid and its face amount, insured, and all other characteristics accurately reflected. Security National Life accepted liability for all the risks under the reinsured policies on eligible lives for all benefits occurring on or after the effective date of the agreement. The liability of Security National Life under the coinsurance treaty began as of September 30, 2002.
The Coinsurance Agreement further provided that Acadian was 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.
assumed subject to the terms, limitations and conditions of the insurance policies included in the Reinsured Business and all defenses, counterclaims and off-sets that are or might thereafter become available to Security National Life.
The Assumption Agreement further provided that as of January 1, 2003, Acadian was to transfer and assign to Security National Life all of its right, title and interest in the reinsured policies, including policies which may be lapsed subject to the right of reinstatement, and policies in force and in effect as paid up and extended term policies. Acadian further agreed to turn over to Security National Life, as of January 1, 2003, all policy owner service, underwriting and other files on hand that may be needed by Security National Life in the continuation of the Reinsured Business, and Acadian further agreed to turn over all such records and record books as may be necessary for carrying on the Reinsured Business, including all such permanent records of Acadian necessary for Security National Life to continue in force in effect the reinsured policies.
Years Ending December 31: 2004 $570,000 2005 460,000 2006 236,000 2007 6,000 -------------- $1,272,000
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Under historical guidance, all gains and losses resulting from the extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 rescinds that guidance and requires that gains and losses from extinguishments of debt be classified as extraordinary items only if they are both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases" for the required accounting treatment of certain lease modifications that have economic effects similar to sale-leaseback transactions. SFAS No. 145 requires that those lease modifications be accounted for in the same manner as sale-leaseback transactions. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not have a material impact on the Company's financial condition or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Action (including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than at the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company's financial condition or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be recorded at fair value and also requires a guarantor to make new disclosures, even when the likelihood of making payments under the guarantee is remote. In general, the Interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance may have been accounted for as equity, must now be accounted for as liabilities (or an asset in some circumstances). The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. This Statement is effective for all such financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company entered into an agreement with a stockholder in August 2003, wherein it purchased 124,000 shares of Class A Common Stock from this stockholder for $6.00 per share. The purchase of these shares is reflected in treasury stock. Also, under the terms of this agreement, the stockholder has agreed not to purchase or control, directly or indirectly, any additional shares of Class A or Class C Common Stock through August 2007, and on August 27, 2004, 2005, and 2006, the stockholder may request, but is not obligated to request, the Company to purchase an additional 100,000 shares of Class A Common Stock held by this stockholder for $6.00 per share. At December 31, 2003, the Company's stock had a closing price of $7.45 per share, which exceeds the stockholder's option and under SFAS No. 150 does not require the recording of a liability as of December 31, 2003.
Effective December 31, 2003, the Company adopted EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides guidance on the disclosure requirements for other-than-temporary Impairments of debt and marketable equity investments that are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of EITF 03-1 requires the Company to include
In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or receivable under certain reinsurance arrangements, and (ii) a debt instrument that incorporates credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the balance sheet and changes in fair value reported in income. Issue B36 became effective on October 1, 2003. The adoption of Issue No. B36 did not have a material impact on the Company's financial position or results of operations.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for the three years in the period ended December 31, 2003, 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.
December 31, Assets: 2003 2002 - ------- ---- ---- Insurance-related investments: Fixed maturity securities held to maturity, at amortized cost (market $38,624,978 and $33,927,051 for 2003 and 2002) $37,293,989 $33,015,097 Fixed maturity securities available for sale, at market (cost $13,214,057 in 2003 and $17,153, 223 in 2002) 14,270,037 18,514,943 Equity securities available for sale, at market (cost $1,981,461 and $1,929,540 for 2003 and 2002) 3,453,444 2,642,093 Mortgage loans on real estate 29,914,745 21,016,008 Real estate, net of accumulated depreciation and allowances for losses of $4,059,934 and $3,728,539 for 2003 and 2002 8,519,680 9,331,248 Policy, student and other loans 11,753,617 10,974,165 Short-term investments 2,054,248 5,335,478 ------------- ------------ Total insurance-related investments 107,259,760 100,829,032 ------------- ------------ Restricted assets of cemeteries and mortuaries 4,745,709 5,332,736 ------------- ------------ Cash 19,704,358 38,199,041 ------------- ------------ Receivables: Trade contracts 8,600,212 11,358,027 Mortgage loans sold to investors 114,788,185 89,455,105 Receivable from agents 1,318,958 2,054,071 Receivable from officers 37,540 70,290 Other 1,086,523 1,131,977 ------------- ------------ Total receivables 125,831,418 104,069,470 Allowance for doubtful accounts (1,706,678) (1,479,728) ------------- ------------ Net receivables 124,124,740 102,589,742 ------------- ------------ Policyholder accounts on deposit with reinsurer 6,795,983 6,955,691 Land and improvements held for sale 8,387,061 8,429,215 Accrued investment income 1,142,690 928,287 Deferred policy and pre-need acquisition costs 17,202,489 15,839,119 Property, plant and equipment, net 11,009,416 10,921,635 Cost of insurance acquired 14,980,763 16,408,849 Excess of cost over net assets of acquired subsidiaries 683,191 683,191 Other 873,424 945,805 ------------- ------------ Total assets $316,909,584 $308,062,343 ============= ============
Liabilities: - ------------ Future life, annuity, and other policy benefits $218,793,693 $215,980,207 Unearned premium reserve 1,945,203 1,914,700 Bank loans payable 14,422,670 16,113,227 Notes and contracts payable 3,440,694 3,160,009 Deferred pre-need cemetery and funeral contracts revenues and estimated future cost of pre-need sales 10,520,280 10,002,396 Accounts payable 1,274,183 1,553,777 Funds held under reinsurance treaties 1,294,589 1,334,964 Other liabilities and accrued expenses 11,171,368 11,089,763 Income taxes 10,914,845 8,103,882 ------------- ------------- Total liabilities 273,777,525 269,251,125 ------------- -------------
Stockholders' Equity: Common stock: Class A: $2 par value, authorized 10,000,000 shares, issued 6,275,104 shares in 2003 and 5,794,492 shares in 2002 12,550,208 11,588,984 Class C: $0.20 par value, authorized 7,500,000 shares, issued 6,469,638 shares in 2003 and 6,182,669 shares in 2002 1,293,927 1,236,533 ------------- ------------- Total common stock 13,844,135 12,825,517 Additional paid-in capital 13,569,582 11,280,842 Accumulated other comprehensive income (loss) and other items, net of deferred taxes of $274,091 and $293,519 for 2003 and 2002 (437,973) 1,191,863 Retained earnings 15,414,681 11,992,542 Treasury stock at cost (1,276,518 Class A shares and 75,336 Class C shares in 2003; 1,151,811 Class A shares and 71,749 Class C shares in 2002, held by affiliated companies) (3,214,994) (2,777,353) ------------- ------------- Total stockholders' equity 39,175,431 34,513,411 ------------- ------------- Total liabilities and stockholders' equity $316,909,584 $308,062,343 ============= =============
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.
On December 23, 2002, the Company, through its wholly-owned subsidiary Security National Life Insurance Company completed the asset purchase transaction with Acadian Life Insurance Company ("Acadian") from which it acquired from Acadian $75,000,000 in assets and $75,000,000 in statutory insurance reserves. Security National Life paid a ceding commission of $10,254,803. On January 1, 2003, Security National entered into an assumption agreement in which Acadian transferred and assigned to Security National Life all of its right, title and interest in the reinsured policies and Security National Life took over the operations of this block of business. The assets and liabilities acquired have been included in the Company's consolidated balance sheet as of December 31, 2002. Since the Company did not take over the operations from Acadian until January 1, 2003, nothing was included in the consolidated statement of earnings during 2002.
Short-term investments at cost - consists of certificates of deposit and commercial paper with maturities of up to one year.
Participating business constitutes 2%, 2%, and 2% of insurance in force for 2003, 2002 and 2001, 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.
The Company, through its mortuary and cemetery operations, provides a guaranteed funeral arrangement wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential mortuary customer utilizes one of the Company's facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. However, management believes that given current inflation rates and related price increases of goods and services, the risk of exposure is minimal.
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. Any impairment to sold loans or possible loan losses are included in a separate provision for loan losses. At December 31, 2003 and 2002 the provision for loan losses was $1,919,000 and $906,000, respectively.
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 $490,145, $533,520 and $3,143 in 2003, 2002 and 2001, respectively. As a result, basic and diluted earnings per share would have been reduced by $.09, $.11, and $0 in 2003, 2002 and 2001, respectively.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Action (including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than at the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure and Amendment to FASB No. 123", which provides three optional transition methods for entities that decide to voluntarily adopt the fair value recognition principles of SFAS No. 123, "Accounting for Stock Issued to Employees", and modifies the disclosure requirements of that Statement. Under the prospective method stock-based compensation expense is recognized for awards granted after the beginning of the fiscal year in which the change is made. The modified prospective method recognizes stock-based compensation expense related to new and unvested awards in the year of change equal to that which would have been recognized had SFAS No. 123 been adopted as of its effective date, fiscal years beginning after December 15, 1994. The retrospective restatement method recognizes stock compensation costs for the year of change and restates financial statements for all prior periods presented as though the fair value recognition provisions of SFAS No. 123 had been adopted as of its effective date. Since the Company does not intend to voluntarily adopt the fair value presentation for FASB 123, adoption of SFAS 148 would not have a material effect on the financial condition or results of operations of the Company. However, pro forma disclosures by SFAS 148 are included in the Company's interim financial statements, when necessary.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance may have been accounted for as equity, must now be accounted for as liabilities (or an asset in some circumstances). The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. This Statement is effective for all such financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company entered into an agreement with a stockholder in August
2003, wherein it purchased 124,000 shares of Class A Common Stock from this stockholder for $6.00 per share. The purchase of these shares is reflected in treasury stock. Also, under the terms of this agreement, this stockholder has agreed not to purchase or control, directly or indirectly, any additional shares of Class A or Class C Common Stock through August 2007, and on August 27, 2004, 2005, and 2006, this stockholder may request, but is not obligated to request, the Company to purchase an additional 100,000 shares of Class A Common Stock held by this stockholder for $6.00 per share. At December 31, 2003, the Company's stock had a closing price of $7.45 per share, which exceeds the stockholder's option and under SFAS No. 150 does not require the recording of a liability as of December 31, 2003.
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2003, 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.
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, 2003, other than investments issued or guaranteed by the United States Government, are as follows:
Net investment income includes net investment income earned by the restricted assets of the cemeteries and mortuaries of approximately $848,000, $924,000 and $872,000 for 2003, 2002, and 2001, respectively.
2003 2002 2001 ---- ---- ---- Balance at beginning of year $16,408,849 $8,081,223 $9,236,947 ------------ ------------ ------------ Cost of insurance acquired (110,754) 9,106,309 (289,754) ------------ ------------ ------------
Presuming no additional acquisitions, net amortization charged to income is expected to approximate $1,206,546, $1,111,526, $1,014,348, $946,593, and $884,330 for the years 2004 through 2008. Actual amortization may vary based on changes in assumptions or experience.
$2,230,016 in 2003 and $3,234,489 in 2002 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. 2,178,075 3,144,673
5) Bank Loans Payable and Lines of Credit (Continued) December 31, 2003 2002 ---- ---- Bank prime rate less 1.35% (2.65% at December 31, 2003) 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. 98,880 128,738
December 31, 2003 2002 ---- ---- Due to former stockholders of Deseret Memorial, Inc. resulting from the acquisition of such entity. Amount represents the present value discounted at 8% of monthly annuity payments ranging from $4,600 to $5,000 plus an index adjustment in the 7th through the 12th years, due September 2011. $545,921 $574,526
6) Notes and Contracts Payable (Continued) December 31, 2003 2002 ---- ---- 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. 98,319 168,621
Due to former stockholders of Crystal Rose Funeral Home resulting from the acquisition of such entity. Amount represents the present value discounted at 9% of monthly annuity payments of $2,675. -- 5,296
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 $828,000 due March 2030. 954,475 951,807
Due to shareholder of Security National Financial Corporation 4.0% note payable in annual installments of $160,873 including principal and interest due January 2006 482,620 --
2004 $4,421,362 2005 3,640,897 2006 2,325,645 2007 1,931,906 2008 1,826,064 Thereafter 3,717,490 ----------- Total $17,863,364 ===========
December 31, 2003 2002 ---- ---- Cash and cash equivalents $617,142 $378,388 Mutual funds 188,732 188,732 Fixed maturity securities 108,554 301,928 Equity securities 77,778 77,778 Participation in mortgage loans with Security National Life 3,719,807 4,352,214 Time certificate of deposit 33,696 33,696 ---------- ---------- Total $4,745,709 $5,332,736 ========== ==========
2003 2002 ---- ---- Assets Future policy benefits $(1,676,881 $(1,849,395) Unearned premium (1,635,912) (1,717,492) Difference between book and tax basis of bonds (27,951) (34,178) Net operating loss carryforwards -- (1,132,874) Other (605,932) (575,788) ------------ ------------ Total deferred tax assets (3,946,676) (5,309,727) ------------ ------------
8) Income Taxes (Continued) 2003 2002 2001 ---- ---- ---- Computed expense at statutory rate $3,218,056 $1,883,255 $1,282,517 Special deductions allowed small life insurance companies (285,991) (315,923) (356,734) Dividends received deduction (5,611) (737) (6,405) Minority interest taxes 13,469 7,429 (7,466) Other, net (49,254) (8,631) 1,627 ----------- ----------- ----------- Tax expense $2,890,669 $1,565,393 $913,539 =========== =========== ===========
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, 2003 the outstanding Coinsurance amount was $3,344,793. The Company recorded as income the risk charge of $34,000 for the fourth quarter. 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.
The Company leases office space and equipment under various non-cancelable agreements, with remaining terms up to four years. Minimum lease payments under these non-cancelable operating leases as of December 31, 2003, are approximately as follows:
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 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 2003, 2002, and 2001 were $4,493, $7,975, and $18,458 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 2003, 2002 and 2001 were $110,081, $142,218, and $260,350, respectively. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee.
The following table summarizes the activity in shares of capital stock for the three-year period ended December 31, 2003:
Stockholders of both classes of common stock have received 5% stock dividends in the years 1989 through 2003, as authorized by the Company's Board of Directors.
2003 2002 2001 ---- ---- ---- Numerator: Net income $6,596,497 $3,991,280 $2,840,780 ========== ========== ==========
Denominator: Denominator for basic earnings per share-weighted-average shares 5,358,503 4,823,914 4,506,476
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.
Activity of the 1993 Plan is summarized as follows: Number of Shares Option Price Outstanding at January 1, 2001 573,311 $2.12 - $3.77 Dividend 36,765 Granted 172,500 Expired (10,513) -------------
Available options for future grant 1993 Stock Incentive Plan -- =============
Number Option of Shares Price Outstanding at January 1, 2001 4,200 $2.14 Dividend 410 Granted 4,000 -----------
Dividend 697 Granted 4,000 Exercised (3,311) ---------- Outstanding at December 31, 2003 14,627 $1.85 - $5.72 ==========
Number of Number of Class A Shares Class C Shares Outstanding at December 31, 2003 -0- -0- === ===
Available options for future grant 2003 Stock Incentive Plan 525,000 1,050,000 ======= =========
2003 2002 2001 ---- ---- ---- Security National Life $(5,404,687) $1,547,253 $1,732,018 Southern Security Life 2,431,499 (427,439) (429,143)
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 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, 2003:
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.
Paramount is licensed in the State of Louisiana and is permitted to appoint agents who do not have a full life insurance license. These agents are limited to selling small life insurance policies in the final expense market. The Company believes that with this license it will be able to expand its operations in Louisiana. The Company is planning on servicing Paramount policyholders out of its Jackson Mississippi office and has closed the Shreveport office.
Property, plant and equipment, at cost, net of accumulated depreciation of $730,230 for 2003 and $575,724 for 2002 300,744 415,144
Other assets 79,504 66,915 ------------ ------------ Total assets $66,350,033 $61,135,999 ============ ============
December 31, 2003 2002 ---- ---- Liabilities: Bank loans payable: Current installments $2,995,831 $2,082,175 Long-term 8,641,418 11,400,191
Additional paid-in capital 13,569,582 11,280,842 Accumulated other comprehensive income, (loss), and other items (437,973) 1,191,863 Retained earnings 15,414,681 11,992,542 Treasury stock at cost (1,276,518 Class A shares and 75,336 Class C shares in 2003; 1,151,811 Class A shares and 71,749 Class C shares in 2002, held by affiliated companies) (3,214,994) (2,777,353) ------------ ------------ Total stockholders' equity 39,175,431 34,513,411 ------------ ------------ Total liabilities and stockholders' equity $66,350,033 $61,135,999 ============ ============
Earnings (loss)before income taxes, and earnings of subsidiaries 997,988 167,064 (631,806)
Equity in earnings (loss) of subsidiaries 8,440,247 4,870,007 4,003,856 ----------- ----------- ----------- Net earnings $6,596,497 $3,991,280 $2,840,780 =========== =========== ===========
Bank loans payable are summarized as follows: December 31, 2003 2002 $2,230,016 in 2003 and $3,234,489 in 2002 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. $ 2,178,075 $ 3,144,672
6.59% note payable in monthly installments of $34,680 including principal and interest, collateralized by 15,000 shares of Security National Life stock, due December 2004. 391,363 727,524
5.87% note payable interest only to July 2, 2003, thereafter interest plus monthly principal payment of $125,000, collateralized by 15,000 shares of Security National Life Insurance Company stock, due January 2010. 8,413,993 9,000,000
Less current installments 2,995,831 2,082,175 ------------ ------------- Bank loans, excluding current Installments $ 8,641,418 $11,400,191 =========== ===========
Due to shareholders of Security National Financial Corporation 4.0% note payable in annual installments of $160,873 including principal and interest due January 2005 482,620 --
Non-interest bearing advances from affiliates: Cemetery and Mortuary Subsidiary $1,366,930 $ 1,366,930 Life Insurance subsidiary 7,491,567 8,655,038 Mortgage subsidiary 10,000 10,000 ----------- ----------- $8,868,497 $10,031,968
In 2003, 2002 and 2001, Security National Life Insurance Company, a wholly owned subsidiary of the Registrant, paid to the registrant cash dividends of $1,150,000, $2,381,687, and $-0- respectively.