410 North 44th Street, Ste 190 Mortgage Sales Leased (4) 3,700 Phoenix, Arizona
12150 Tributary Point Dr. Ste.160 Mortgage Sales Leased (5) 1,800 Gold River, California
7676 Hazard Center Drive Ste. 625 Mortgage Sales Leased (6) 1,300 San Diego, California
27201 Tourney Road Ste. 125 Mortgage Sales Leased (7) 1,600 Valencia, California
Item 2. Properties (Continued) - -------------------- Approximate Owned Square Location Function Leased Footage - -------- -------- ------ ------- 6208 Lehman Drive Ste. 201 Mortgage Sales Leased (8) 2,200 Colorado Springs, Colorado
7785 Baymeadows Way, Ste. 101 Mortgage Sales Leased (10) 1,800 Jacksonville, Florida
970 East Murray-Holladay Rd. Mortgage Sales Leased (17) 6,600 Ste. 4A Salt Lake City, Utah
(3) The Company leases this facility for $84,000 per year. The lease expires in July 2005
(4) The Company leases this facility for $35,300 per year. The lease expires in August 2004.
(6) The Company leases this facility for $42,800 per year. The lease expires in June 2008.
(9) The Company leases this facility for $27,500 per year. The lease expires in June 2006.
(10) The Company leases this facility for $27,200 per year. The lease expires in September 2006.
(11) The Company leases this facility for $23,800 per year. The lease expires in July 2006.
(13) The Company leases this facility for $25,600 per year. The lease expires in January 2006.
(14) The Company leases this facility for $37,400 per year. The lease expires in November 2004.
(16) The Company leases an additional 113,839 square feet of the facility to unrelated third parties for approximately $931,600 per year, under leases expiring at various dates after 2003.
(17) The Company leases this facility for $103,800 per year. The lease expires in December 2004.
(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, 2003, there were mortgages of approximately $36,000 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries. (4) As of December 31, 2003, there were mortgages of approximately $1,600,000 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, 2003, there was a mortgage of approximately $459,000 collateralized by the property.
(1) Reflects the asset purchase transaction with Acadian Life Insurance Company on December 23, 2002. (2) Includes reinsurance assumed under agreement with Guaranty Income Life Insurance Company on October 1, 2003.
During the years ending December 31, 2003 and 2002, Security National Mortgage Company (SNMC) experienced increases in revenue and expenses due to the increase in loan volume of its operations. 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 purchase the loans from SNMC. SNMC pays the brokers and correspondents a commission for loans that are brokered through SNMC. In 2001, SNMC opened wholesale branches in Phoenix, Arizona and Houston, Texas. In 2002 SNMC opened an office in San Diego, California. In 2003 SNMC opened offices in Tampa and Jacksonville, Florida; Las Vegas, Nevada; Denver, Colorado; Bountiful, Utah; and Dallas, Texas. SNMC originated and sold 17,494 ($2,560,000,000 loan amount), 11,737 ($1,721,000,000 loan amount), and 8,738 ($1,268,000,000 loan amount) loans in 2003, 2002 and 2001, respectively.
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 financial statements.
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 adjustments to credited interest rates, policyholder dividends or cost of insurance charges.
Pre-need sales of cemetery interment rights (cemetery burial property) - revenue and costs associated with the sales of pre-need cemetery interment rights are recognized in accordance with the retail land sales provisions of Statement of Financial Accounting Standards No. 66, "Accounting for the Sales of Real Estate" (FAS No. 66). Under FAS 66, recognition of revenue and associated costs from constructed cemetery property must be deferred until a minimum percentage of the sales price has been collected. Revenues related to the pre-need sale of unconstructed cemetery property will be deferred until such property is constructed and meets the criteria of FAS No. 66 described above.
Pre-need sales of cemetery 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.
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.
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.
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.
Insurance premiums and other considerations increased by $9,218,000, from $14,077,000 in 2002 to $23,295,000 in 2003. This increase was primarily due to the additional premiums from policies acquired in the asset purchase transaction with Acadian Life.
Net investment income increased by $4,763,000, from $12,540,000 in 2002 to $17,303,000 in 2003. This increase was primarily attributable to the additional investment income from the assets acquired in the asset purchase transaction with Acadian Life.
Net mortuary and cemetery sales increased by $306,000, from $10,638,000 in 2002 to $10,944,000 in 2003. This increase was primarily due to additional at-need cemetery and mortuary sales.
Realized gains on investments and other assets decreased by $1,023,000, from a gain of $1,021,000 in 2002 to a loss of $2,000 in 2003. The realized gains on investment and other assets in 2002 was primarily from the sale of property at Lake Hills Cemetery.
Mortgage fee income increased by $35,947,000, from $57,008,000 in 2002 to $92,955,000 in 2003. This increase was primarily attributable to a greater number of loan originations during 2003 due to the opening of new offices and to lower interest rates resulting in additional borrowers refinancing their mortgage loans.
Total benefits and expenses were $135,580,000 for 2003, which constituted 93.5% of the Company's total revenues, as compared to $90,224,000, or 94.2% of the Company's total revenues for 2002.
During 2003, there was a net increase of $7,999,000 in death benefits, surrenders and other policy benefits, and in future policy benefits from $13,756,000 in 2002 to $21,755,000 in 2003. This net increase was primarily due to the additional death benefits, surrenders and other policy benefits acquired from the additional policies acquired in the asset purchase transaction with Acadian Life.
Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired increased by $935,000, from $3,994,000 in 2002 to $4,929,000 in 2003. This increase was primarily due to the additional amortization of deferred policy acquisition costs and cost of insurance acquired from the additional policies acquired in the asset purchase transaction with Acadian Life.
Interest expense increased by $1,672,000, from $1,970,000 in 2002 to $3,642,000 in 2003. This increase was primarily due to additional warehouse lines of credit required from the additional mortgage loan originations by the Company's mortgage subsidiary and bank borrowings for the asset purchase transaction with Acadian Life.
Cost of the mortuary and cemetery goods and services sold increased by $282,000, from $2,045,000 in 2002 to $2,327,000 in 2003. This increase was primarily due to increased at-need cemetery and mortuary sales.
Net mortuary and cemetery sales increased by $757,000, from $9,881,000 in 2001 to $10,638,000 in 2002. This increase was primarily due to additional at-need cemetery and mortuary sales.
The Company's investment policy is to invest predominately in fixed maturity securities, mortgage loans, and warehouse 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 $51,564,000 as of December 31, 2003 compared to $51,530,000 as of December 31, 2002. This represents 48% of the total insurance related investments in 2003 as compared to 51% in 2002. 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, 2003, 3% ($1,739,000) and at December 31, 2002, 4% ($1,903,000) of the Company's total bond investments were invested in bonds in rating categories three through six which are considered non-investment grade.
If market conditions were to cause interest rates to change, the market value of the fixed income portfolio (approximately $82, 810,000) 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):
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, 2003 and 2002, the life subsidiaries exceeded the regulatory criteria.
The Company's total capitalization of stockholders' equity and bank debt and notes payable was $57,039,000 and $53,787,000 as of December 31, 2003 and 2002, respectively. Stockholders' equity as a percent of total capitalization was 69% and 64% as of December 31, 2003 and 2002, respectively.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2003 was 8.6%, as compared to a rate of 10.7% in 2002.
On December 17, 1998, the Company completed the acquisition of Consolidare Enterprises, Inc., a Florida corporation ("Consolidare") pursuant to the terms of the Acquisition Agreement, which the Company entered into on April 17, 1998, with Consolidare and certain shareholders of Consolidare for the purchase of all of the outstanding shares of common stock of Consolidare. Consolidare owns approximately 77% of the outstanding shares of common stock of Southern Security Life Insurance Company, a Florida corporation ("SSLIC"). The Company also acquired all of the outstanding shares of stock of Insuradyne Corp., a Florida corporation ("Insuradyne").
The administrative services fee may be increased, beginning on January 1, 2002, to reflect increases in the Consumer Price Index, over the index amount as of January 1, 2001. 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. The agreement was automatically extended for an additional year.
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, subsequent to Acadian's recapture of the insurance in force from its reinsurer Scottish Re (U.S.) Inc. on September 30, 2002.
Subsequent to the coinsurance agreement, 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.
Under the Assumption Agreement Security National Life agreed to assume only those insurance risks in contractual obligations included within the Reinsured Business of Acadian. Security National Life did not agree to assume any extra contractual or other liability or obligations of Acadian. In addition, Security National Life did not agree to assume any policy issued to an insured whose death occurred prior to January 1, 2003, and for which a death claim had been received by Acadian prior to that date. However, Security National Life did agree to assume any valid claim of an insured whose death occurred prior to January 1, 2003, and for which a death claim was not received by Acadian prior to that date.
At December 31, 2003, $26,512,545 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to its parent company without the approval of insurance regulatory authorities.
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.
Total rent expense related to these non-cancelable operating leases for the years ended December 31, 2003 and 2002 was approximately $396,000 and $200,000 respectively.
the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. The recognition provisions of FIN 45 are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. The adoption of FIN 45 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 required by SFAS 148 are included in the Company's interim financial statements, when necessary.
certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The adoption of EITF 03-1 did not have a material impact on the Company's financial position or results of operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51", and subsequently issued a revision to this Interpretation in December 2003. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies to those variable interest entities considered to be special-purpose entities no later than December 31, 2003. The Interpretation must also be applied to all other variable interest entities no later March 31, 2004. The Company is evaluating this interpretation, but does not anticipate that it will have a material effect on the results of operations or financial position of the Company.
Consolidated Statement of Stockholders' Equity, Years Ended December 31, 2003, 2002 and 2001. ........................................................41
Consolidated Statement of Cash Flows, Years Ended December 31, 2003, 2002 and 2001 ..........................................................42
We have audited the accompanying consolidated balance sheet of Security National Financial Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the three years in the period ended December 31, 2003. In connection with our audits of the consolidated financial statements, we have also audited the amounts included in the consolidated financial statement schedules as listed in the accompanying index under Item 8. These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
Liabilities assumed $74,199,194 Less non-cash items: Cost of insurance acquired (9,106,309) Bonds received (9,032,818) Policy loans received (82,126) Premiums due and unpaid (150,148) ------------ Cash received $55,827,793 ===========
Security National Financial Corporation and its wholly owned subsidiaries (the "Company") operates in three main business segments; life insurance, cemetery and mortuary, and mortgage loans. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance marketed primarily in the intermountain west, California, Florida, Mississippi, Oklahoma and Texas. The cemetery and mortuary segment of the Company consists of five cemeteries in Utah, one cemetery in California, eight mortuaries in Utah and 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 Arizona, California, Colorado, Florida, Nevada, Texas and Utah.
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.
The accompanying consolidated financial statements include the accounts and operations of the Company. The Company's subsidiaries at December 31, 2003, are as follows:
Security National Life Insurance Company Security National Mortgage Company Memorial Estates, Inc. Memorial Mortuary Paradise Chapel Funeral Home Singing Hills Memorial Park Cottonwood Mortuary, Inc. Deseret Memorial, Inc. Holladay Cottonwood Memorial Foundation Holladay Memorial Park Camelback Sunset Funeral Home, Inc. Greer-Wilson Funeral Home Crystal Rose Funeral Home Hawaiian Land Holdings SSLIC Holding Company Insuradyne Corporation Southern Security Life Insurance Company (77%)
On December 17, 1998, the Company purchased all of the outstanding shares of common stock of SSLIC Holding Company (formerly Consolidare Enterprises, Inc.), (SSLIC Holding) and Insuradyne Corporation (Insuradyne) for a total cost of $12,248,194. SSLIC Holding owns approximately 77% of the outstanding shares of common stock of Southern Security Life Insurance Company (Southern Security). The acquisition was accounted for using the purchase method.
Pre-need sales of funeral services and caskets - revenue and costs associated with the sales of pre-need funeral services and caskets are deferred until the services are performed.
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.
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.
Mortgage fee income is generated through the origination and refinancing of mortgage loans and is recognized in accordance with FAS No. 140.
Previous acquisitions have been accounted for as purchases under which assets acquired and liabilities assumed were recorded at the fair values. The Company periodically evaluates the recoverability of amounts recorded. In accordance with FAS 142 the Company no longer amortizes excess of cost over net assets of acquired business ("goodwill"). Pro forma information related to the amortization of goodwill has not been presented since it is not material.
The weighted average fair value of options 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 3.4%, and an expected life of two years.
The weighted average fair value of each option granted in 2002 under the 1993 Plan and the 2000 Plan is estimated at $2.88 as of the grant date using the Black Scholes option-pricing model with the following assumptions: dividend yield of 5%, volatility of 74%, risk-free interest rate of 3.8%, and an expected life of five to ten years.
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 the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party. The recognition provisions of FIN 45 are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company's financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after September 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's results of operations and financial position.
Due in 2004 $ 2,048,933 $ 2,066,458 Due in 2005 through 2008 6,556,028 7,123,868 Due in 2009 through 2013 8,968,018 9,478,788 Due after 2013 12,336,094 12,424,625 Mortgage-backed securities 7,356,911 7,492,881 Redeemable preferred stock 28,005 38,358 ------------ ------------ $37,293,989 $38,624,978 =========== ===========
Due in 2004 $2,681,414 $2,747,175 Due in 2005 through 2008 9,249,570 10,051,451 Due in 2009 through 2013 1,185,251 1,357,501 Due after 2013 97,822 113,910 Mortgage-backed securities -- -- ----------- ------------ $13,214,057 $14,270,037 =========== ===========
2003 2002 2001 ---- ---- ---- Fixed maturity securities held to maturity:
Gross realized gains $3,549 $37,172 $20,228 Gross realized losses (5,665) (557) (565) Securities available for sale: Gross realized gains 1 354 6 Gross realized losses (40) (1,424) (111) Other assets -- 985,275 (9,130) ----------- ----------- ----------- Total $(2,155) $1,020,820 $10,428 =========== =========== ===========
Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 4.25% to 15%, 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 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 68% of its mortgage loans in the state of Utah.
Securities on deposit for regulatory authorities as required by law amounted to $8,850,755 at December 31, 2003 and $7,819,262 at December 31, 2002.
Imputed interest at 7% 1,098,636 857,153 606,136 Amortization (2,415,968) (1,635,836) (1,472,106) ------------ ------------ ------------ Net amortization charged to income (1,317,332) (778,683) (865,970) ------------ ------------ ------------ Balance at end of year $14,980,763 $16,408,849 $8,081,223 ============ ============ ============
December 31, 2003 2002 ---- ---- Land and Buildings $11,140,690 $11,098,907 Furniture and equipment 10,288,299 8,725,925 ------------ ------------ 21,428,989 19,824,832 Less accumulated depreciation (10,419,573) (8,903,197) ------------ ------------ Total $11,009,416 $10,921,635 ============ ============
Bank loans payable are summarized as follows: December 31, 2003 2002 ---- ---- 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
10% note payable in monthly installments of $8,444 including principal and interest, collateralized by real property, which book value is approximately $982,000, due January 2013. -- 645,124
6.93% note payable in monthly installments of $14,175 including principal and interest, collateralized by real property, which book value is approximately $915,000, due November 2007. 1,519,198 1,472,560
Bank prime rate plus 1/2% (4.50% at December 31, 2003) note payable in monthly installments of $7,235 including principal and interest, collateralized by real property, which book value is approximately $717,000, due August 2004. 60,683 150,564
5.87% note payable interest only to July 1, 2003, thereafter interest and monthly principal payments of $139,000, collateralized by 15,000 shares of Security National Life Insurance Company Stock, due January 2010. 8,413,993 9,000,000
Other collateralized bank loans payable 312,111 233,874 ------------- ------------- Total bank loans 14,422,670 16,113,227
Less current installments 3,688,647 2,282,575 ------------- ------------- Bank loans, excluding current installments $ 10,734,023 $ 13,830,652 ============= ============
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. 459,138 534,111
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 317,680 476,520
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 200,000 --
6) Notes and Contracts Payable (Continued) December 31, 2003 2002 ---- ----
Significant components of the Company's deferred tax (assets) and liabilities at December 31 are approximately as follows:
Liabilities Deferred policy acquisition costs 4,889,696 5,235,909 Cost of insurance acquired 2,486,035 2,643,596 Installment sales 2,367,510 1,997,256 Depreciation 891,725 883,667 Trusts 1,054,323 1,184,382 Tax on unrealized appreciation 568,944 644,148 Reinsurance 1,974,996 -- Other 609,707 778,949 ------------ ------------ Total deferred tax liabilities 14,842,936 13,367,907 ------------ ------------ Net deferred tax liability $10,896,260 $8,058,180 ============ ============
The Company paid $55,442, $462,983 and $564,327 in income taxes for 2003, 2002 and 2001, respectively. The Company's income tax expense (benefit) is summarized as follows:
2003 2002 2001 ---- ---- ---- Current $28,326 $595,254 $391,492 Deferred 2,862,343 970,139 522,047 ---------- ---------- ---------- Total $2,890,669 $1,565,393 $913,539 ========== ========== ==========
The Company does not have any loss carry forward as of December 31, 2003.
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, 2003 and 2002. 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 $940,050,000 at December 31, 2003 and $1,174,604,000 at December 31, 2002.
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
An action was brought against the Company in May 2001, by Glenna Brown Thomas individually and as personal representative of the Estate of Lynn W. Brown in the Third Judicial Court, Salt Lake County, Utah. The action asserts that Memorial Estates delivered to Lynn W. Brown six stock certificates representing 2,000 shares in 1970 and 1971. Mr. Brown died in 1972. It is asserted that at the time the 2,000 shares were issued and outstanding, such represented a 2% ownership of Memorial Estates. It is alleged Mr. Brown was entitled to preemptive rights and that after the issuance of the stock to Mr. Brown there were further issuances of stock without providing written notice to Mr. Brown or his estate with respect to an opportunity to purchase more stock.
It is also asserted among other things that Thomas "has the right to a transfer of Brown's shares to Thomas on defendants' (which includes Security National Financial Corporation as well as Memorial Estates, Inc.) books and to restoration of Brown's proportion of share ownership in Memorial at the time of his death by issuance and delivery to Thomas of sufficient shares of defendant's publicly traded and unrestricted stock in exchange for the 2,000 shares of Memorial stock and payment of all dividends from the date of Thomas's demand, as required by Article XV of the Articles of Incorporation." The formal discovery cutoff was January 15, 2004. The Company has been verbally informed that Thomas will dismiss the case but such has not been communicated in writing. Until the foregoing actually happens, the Company intends to vigorously defend the matter, including an assertion that the statute of limitations bars the claims.
An action was brought against Southern Security Life Insurance Company by National Group Underwriters, Inc. ("NGU") in state court in the State of Texas. The case was removed by the Company to the United States District Court for the Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E. An amended complaint was filed on or about July 18, 2001. The amended complaint asserted that NGU had a contract with the Company wherein NGU would submit applications for certain policies of insurance to be issued by the Company. It is alleged that disputes have arisen between NGU and the Company with regard to the calculation and payment of certain commissions as well as certain production bonuses.
NGU alleged that it had been damaged far in excess of the $75,000 minimum jurisdictional limits of the federal court. NGU also sought attorney's fees and costs as well as prejudgment and postjudgment interest. A second amended complaint and a third amended complaint, which included a fraud claim, were filed. A motion was filed by the Company to dismiss the third amended complaint, including the fraud claim. The court denied the motion. The Company counterclaimed for what it claimed to be a debit balance owing to it pursuant to the relationship between the parties (the amount subject to reduction as premiums are received). The Company also sought to recover attorney's fees and costs, as well as punitive damages on three of its causes of action.
Certain discovery took place. The federal case was dismissed by stipulation. The matter was refiled in Texas state court, Tarrant County, Case No. 348 195490 02. The claims of the respective parties are essentially the same as those in federal count, which claims include fraudulent inducement relative to entering into a contract, fraud, breach of contract, breach of duty of good faith and fair dealing, attorney's fees and exemplary damages as well as seeking an accounting and contesting the interest charges. Certain depositions have been taken since the filing again in state court and further discovery is anticipated. The Company filed a motion for partial summary judgment with respect to certain items. The court has yet to rule on the motion. A trial is presently set for October 2004. The Company intends to vigorously defend the matter as well as prosecute its counterclaim.
Subsequent to the year ended December 31, 2003, the Company entered a settlement agreement with one of its mortgage loan investors to resolve certain commitments under the investor agreement with the Company. The agreement requires a payment of $350,000 to be made to the investor with an additional $100,000 to be paid if the Company does not deliver a specified volume of loans during 2004. The amount of the settlement has been included in management's estimate in calculating the reserve for losses on contractual obligations.
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 $98,588, $99,612, and $191,557 for 2003, 2002, and 2001, respectively. At December 31, 2003 the ESOP held 546,344 shares of Class A and 1,479,087 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.
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 contribution for 2003, 2002 and 2001 were $95,485, $100,577, and $220,038, 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 monthly installments (120 months) or in a lump sum settlement, if approved by the Board of Directors. The amount payable is $62,667 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 2003 the Company increased its liability for these future obligations by $10,000. The current balance as of December 31, 2003 is $712,000.
During 2003 the Company entered into an employment agreement with the President of Security National Mortgage Company. The agreement has a five-year term, but the Company has agreed to renew the agreement in 2008 and 2013 for additional five-year terms, provided certain employee performs his duties with usual and customary care and diligence. Under the terms of the agreement certain employee is to devote his full time to the Company serving as President of Security National 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, certain employee'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 certain employee were not retained in his current position, the Company would be obligated to continue certain employee current compensation and benefits for five years following the merger or sale. The agreement further provides that certain employee is entitled to receive annual retirement benefits beginning one month from the date of his retirement and his having obtained the age of 62 1/2, five years following complete disability or 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 certain employee dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company accrued in 2003 approximately $172,000 to cover the present value of the retirement benefit of the agreement.
The Company has an employment agreement with its President, which was entered into in 1996 and renewed in 1997 and 2002. Under the agreement the President 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, and to include $500,000 of life insurance protection. In the event of disability, his 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 he is not retained in his current position, the Company would be obligated to continue his current compensation and benefits for seven years following the merger or sale. The Company is in the process of amending the agreement with its President to provide for retirement benefits. The Company accrued approximately $328,000 in 2003 to cover the present value of anticipated retirement benefits that would be owed once the agreement is amended.
Class A Class C Balance at January 1, 2001 5,107,631 5,827,805
Stock Dividends 255,413 291,104 Conversion of Class C to Class A 547 (5,479) ---------- ---------- Balance at December 31, 2001 5,363,591 6,113,430
Exercise of stock options 132,371 -- Stock Dividends 276,012 294,419 Conversion of Class C to Class A 22,518 (225,180) ---------- ---------- Balance at December 31, 2002 5,794,492 6,182,669 ---------- ----------
Exercise of stock options 176,725 -- Stock Dividends 301,774 308,086 Conversion of Class C to Class A 2,113 (21,117) ---------- ----------
Effect of dilutive securities: Employee stock options 149,952 169,543 382 Stock appreciation rights 2,007 1,828 -- ---------- ---------- ---------- Dilutive potential common shares 151,959 171,371 382 ---------- ---------- ----------
Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 5,510,462 4,995,285 4,506,858 ========== ========== ==========
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.
Number Option of Shares Price --------- ------- Outstanding at January 1, 2001 179,895 $3.70 - $4.07
Available options for future grant 1987 Stock Incentive Plan -- =====
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2003, 2002, and 2001
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 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 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, 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 Life $15,069,057 $14,381,257 $16,316,605 Southern Security Life 11,443,488 8,582,968 8,459,700
The Utah and Florida 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 Ratio that is greater than 73.0% of the first level of regulatory action.
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 Security National Mortgage Company in connection with its mortgage loans are completed as accurately as possible by Monument Title to avoid any economic losses to the Company.
The Company has a non-interest bearing note receivable from the Chairman of the Board and Chief Executive Officer. No installment payments are required under the terms of the note, but the note must be paid in full as of December 31, 2007. The outstanding balance of the note was approximately $38,000 and $70,000 at December 31, 2003 and 2002, respectively.
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, 2003 and December 31, 2002, were approximately $86,389,000 and $87,351,000, respectively.
2003 2002 2001 ---- ---- ---- Unrealized gains (losses) on available for-sale securities $638,540 $84,263 $769,684 Less: reclassification adjustment for net realized gains (losses) in net income (2,155) (35,544) (10,428) ----------- ----------- ----------- Net unrealized gains (losses) 636,385 48,719 759,256 Potential unrealized losses for derivative bank loans (303,029) -- -- Tax expense on net unrealized gain (losses) 19,428 (80,786) (372,077) ----------- ----------- ----------- Other comprehensive income (loss) $352,784 $(32,067) $387,179 =========== =========== ===========
Other items: Acquisition of Company Stock held in escrow (1,982,620) -- -- =========== =========== ===========
Weighted average variable interest rate of the hedged bank loans (prime less .5%) 3.5% Weighted average fixed interest rate of the swaps 6.1% Market value of the swaps- potential unrealized loss position $(303,029)
Notes and contracts payable: Current installments 261,835 961 Long-term 421,746 --
Income taxes 4,925,192 2,141,738 ------------ ------------ Total liabilities 27,174,602 26,622,588 ------------ ------------
Year Ended December 31, ----------------------- 2003 2002 2001 ---- ---- ----
Expenses: General and administrative Expenses 2,439,659 3,287,683 4,082,438 Interest expense 763,088 351,599 373,815 ----------- ----------- ----------- Total expenses 3,202,747 3,639,282 4,456,253 ----------- ----------- -----------
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. 482,394 610,170
Notes and contracts are summarized as follows: December 31, 2003 2002 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 $ 200,000 $ --
Total notes and contracts 683,581 961 -------- -------- Less current installments 261,835 961 -------- -------- Notes and contracts, excluding current installments $421,746 $ -- ======== ========
2004 $ 3,257,665 2005 2,803,263 2006 1,690,786 2007 1,439,220 2008 1,526,011 Thereafter 1,603,885 ------------- Total $12,320,830 ===========