-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M6RCAoNz6KTn929HEL9/tFezCdgUmIwgClDOEkjCapW1cQxbkKPsmknF9zGYa8gp zkc324AbIAKVib9nq1O3nw== 0000318673-02-000005.txt : 20020414 0000318673-02-000005.hdr.sgml : 20020414 ACCESSION NUMBER: 0000318673-02-000005 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20020213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY NATIONAL FINANCIAL CORP CENTRAL INDEX KEY: 0000318673 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 870345941 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-09341 FILM NUMBER: 02540259 BUSINESS ADDRESS: STREET 1: PO BOX 57220 CITY: SALT LAKE CITY STATE: UT ZIP: 84157 BUSINESS PHONE: 8012641060 MAIL ADDRESS: STREET 1: PO BOX 57220 CITY: SALT LAKE CITY STATE: UT ZIP: 84157 FORMER COMPANY: FORMER CONFORMED NAME: SNL FINANCIAL CORP DATE OF NAME CHANGE: 19910401 10-K/A 1 snl10ka.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number 0-9341 Security National Financial Corporation (Exact name of registrant as specified in its Charter) UTAH 87-0345941 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 5300 South 360 West, Suite 250 84123 Salt Lake City, Utah (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (801) 264-1060 Securities registered pursuant to Section 12(d) of the Act: Name of each exchange Title of each Class on which registered - ------------------- --------------------- None None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $2.00 Par Value (Title of Class) Class C Common Stock, $0.20 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 30, 2001 was approximately $10,014,000. As of March 30, 2001, registrant had issued and outstanding 3,874,567 shares of Class A Common Stock and 5,762,729 shares of Class C Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the registrant's 2001 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. PART I Item 1. Business Security National Financial Corporation (the "Company") operates in three main business segments: life insurance, cemetery and mortuary, and mortgage loans. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance. These products are marketed in 34 states through a commissioned sales force of independent licensed insurance agents who may also sell insurance products of other companies. The cemetery and mortuary segment of the Company consists of five cemeteries in the state of Utah and one in the state of California and eight mortuaries in the state of Utah and six in the state of Arizona. The Company also engages in pre-need selling of funeral, cemetery and cremation services through its Utah operations. Many of the insurance agents also sell pre-need funeral, cemetery and cremation services. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction and existing homes and real estate projects. The design and structure of the Company is that each segment is related to the others and contributes to the profitability of the other segments of the Company. Because of the increasing cemetery and mortuary operations in Utah and Arizona, the Company enjoys a level of public awareness that assists in the sales and marketing of insurance and pre-need cemetery and funeral products. Security National Life Insurance Company ("Security National Life") invests its assets (representing in part the pre-paid funerals) in investments authorized by the Insurance Departments of the States of Florida and Utah. One such investment authorized by the Insurance Departments is high quality mortgage loans. Thus, while each segment is a profit center on a stand-alone basis, this horizontal integration of each segment will lead to improved profitability of the Company. The Company is also pursuing growth through acquisitions of both life insurance companies and cemeteries and mortuaries. The Company's acquisition business plan is based on reducing overhead cost of the acquired company by utilizing existing personnel, management, and technology while still providing quality service to the customers and policyholders. The Company was organized as a holding company in 1979 when Security National Life became a wholly owned subsidiary of the Company and the former stockholders of Security National Life became stockholders of the Company. Security National Life was formed in 1965 and has grown through the direct sale of life insurance and annuities and through the acquisition of other insurance companies, including the acquisitions of Capital Investors Life Insurance Company in December 1994, Civil Service Employees Life Insurance Company in December 1995 and Southern Security Life Insurance Company in December 1998. Memorial Estates, Inc. and Memorial Mortuary became direct subsidiaries of the Company in the 1979 reorganization when the Company was formed. These companies were acquired by Security National Life in 1973. The cemetery and mortuary operations have also grown through the acquisition of other cemetery and mortuary companies, including the acquisitions of Paradise Chapel Funeral Home, Inc. in 1989, Holladay Memorial Park, Inc., Cottonwood Mortuary, Inc. and Deseret Memorial, Inc. in 1991, Sunset Funeral Home in January 1994, Greer-Wilson Funeral Home, Inc. in April 1995 and Crystal Rose Funeral Home in February 1997. In July 1993, the Company formed Security National Mortgage Company ("Security National Mortgage") to originate and refinance mortgage loans. See Notes to Consolidated Financial Statements for additional disclosure and discussion regarding segments of the business. Life Insurance Products The Company, through its insurance subsidiaries, Security National Life and Southern Security Life Insurance Company, issues and distributes selected lines of life insurance and annuities. The Company's life insurance business includes funeral plans and interest-sensitive whole life insurance, as well as other traditional life and accident and health insurance products but places specific marketing emphasis on funeral plans. 1 A funeral plan is a small face value life insurance policy that generally has a face coverage of up to $5,000. The Company believes that funeral plans represent a marketing niche that has lower competition since most insurance companies do not offer similar coverages. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person's death. On a per thousand dollar cost of insurance basis, these policies are more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy to be distributed over a smaller policy size, and due to the simplified underwriting practices resulting in higher mortality costs. Markets and Distribution The Company is licensed to sell insurance in 34 states. The Company, in marketing its life insurance products, seeks to locate, develop and service specific "niche" markets. A "niche" market is an identifiable market which the Company believes is not emphasized by most insurers. The Company generally sells its life insurance products to people of middle age who have a need for insurance to protect the income of the wage earner of the family, to pay off debts at the time of death and for other estate planning purposes. Funeral plan policies are sold primarily to persons who range in age from 45 to 75. Even though people of all ages and income levels purchase funeral plans, the Company believes that the highest percentage of funeral plan purchasers are individuals who are older than 45 and have low to moderate income. A majority of the Company's funeral plan premiums come from the states of Arizona, Colorado, Idaho, Nevada, Oklahoma, Texas and Utah, and a majority of the Company's non-funeral plan life insurance premiums come from the states of Alabama, California, Florida, Georgia, Louisiana, New Mexico, South Carolina and Utah. The Company sells its life insurance products through direct agents and brokers and independent licensed agents who may also sell insurance products of other companies. The commissions on life insurance products range from approximately 10% to 90% of first year premiums. In those cases where the Company utilizes its direct agents in selling such policies, those agents customarily receive advances against future commissions. In some instances, funeral plan insurance is marketed in conjunction with the Company's cemetery and mortuary sales force. When it is marketed by that group, the beneficiary is usually the Company. Thus, death benefits that become payable under the policy are paid to the Company's cemetery and mortuary subsidiaries to the extent of services performed and products purchased. In marketing the funeral plan insurance, the Company also seeks and obtains third-party endorsements from other cemeteries and mortuaries within its marketing areas. Typically, these cemeteries and mortuaries will provide letters of endorsement and may share in mailing and other lead-generating costs. The incentive for such businesses to share the costs is that these businesses are usually made the beneficiary of the policy. The following table summarizes the life insurance business for the five years ended December 31, 2000:
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Life Insurance Policy/Cert Count as of December 31 71,178(1) 75,808(1) 69,895(1) 43,213 42,034 Insurance in force as of December 31 (omitted 000) 2,049,789(1) 2,113,893(1) 2,123,734(1) 648,906 546,213 Premiums Collected (omitted 000) 14,959(1) 15,261(1) 5,718 5,732 5,765 (1) Includes acquisition of Southern Security Life Insurance Company on December 17, 1998.
2 Underwriting Factors considered in evaluating an application for insurance coverage include the applicant's age, occupation, general health and medical history. Upon receipt of a satisfactory application, which contains pertinent medical questions, the Company writes insurance that is based on its medical limits and requirements on a basis satisfactory to the reinsuring company (or companies, if submitted facultatively), subject to the following general non-medical limits: Age Nearest Non-Medical Birthday Limits 0-50 $75,000 51-up Exam Required When underwriting life insurance, the Company will sometimes issue policies with higher premium rates for substandard risks. In addition to the Company's ordinary life product line, the Company also sells final expense insurance. This insurance is a small face amount, with a maximum issue of $10,000. It is written on a simplified medical application with underwriting requirements being a completed application, a phone inspection on each applicant and a Medical Information Bureau inquiry. There are several underwriting classes in which an applicant can be placed. If the Company receives conflicting or incomplete underwriting information, an attending physician's statement can be ordered to insure the applicant is placed in the correct underwriting class. Annuities Products The Company's annuity business includes single premium deferred annuities, flexible premium deferred annuities and immediate annuities. A single premium deferred annuity is a contract where the individual remits a sum of money to the Company, which is retained on deposit until such time as the individual may wish to purchase an immediate annuity or surrender the contract for cash. A flexible premium deferred annuity gives the contract holder the right to make premium payments of varying amounts or to make no further premium payments after his initial payment. These single and flexible premium deferred annuities can have initial surrender charges. The surrender charges act as a deterrent to individuals who may wish to surrender their annuity contracts. These types of annuities have guaranteed interest rates of 4% to 4 1/2% per annum. Above that, the interest rate credited is periodically determined by the Board of Directors at their discretion. An immediate annuity is a contract in which the individual remits to the Company a sum of money in return for the Company's obligation to pay a series of payments on a periodic basis over a designated period of time, such as an individual's life, or for such other period as may be designated. Holders of annuities enjoy a significant benefit under the current federal income tax law in that interest accretions that are credited to the annuities do not incur current income tax expense on the part of the contract holder. Instead, the interest income is tax deferred until such time as it is paid out to the contract holder. In order for the Company to realize a profit on an annuity product, the Company must maintain an interest rate spread between its investment income and the interest rate credited to the annuities. From that spread must be deducted commissions, issuance expenses and general and administrative expenses. The Company's annuities currently have credited interest rates ranging from 4% to 6 1/2%. 3 Markets and Distribution The general market for all of the Company's annuities is middle to older age individuals who wish to save or invest their money in a tax deferred environment, having relatively high yields. The Company currently markets its annuities primarily in the states of Arizona, New Mexico, Oklahoma, Texas and Utah. The major source of annuity considerations comes from direct agents. Annuities can be sold as a by-product of other insurance sales. This is particularly true in the funeral planning area. If an individual does not qualify for a funeral plan due to health considerations, the agent will often sell that individual an annuity to take care of those final expenses. The commission rates on annuities range from 2% to 10%. The following table summarizes the annuity business for the five years ended December 31, 2000: 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Annuities Policy/Cert Count as of December 31 8,443(1) 8,369(1) 7,890(1) 7,434 7,049 Deposits Collected (omitted 000) 3,039(1) 3,906(1) 2,770 2,521 2,859 (1) Includes acquisition of Southern Security Life Insurance Company on December 17, 1998. Accident and Health Products Prior to the acquisition of Capital Investors Life in December 1994, the Company did not actively market accident and health products. With the acquisition of Capital Investors Life, the Company acquired a block of accident and health policies which pay limited benefits to policyholders. The Company is currently offering a low-cost comprehensive diver's accident policy and a limited cancer benefit policy. The diver's policy provides world-wide coverage for medical expense reimbursement and life insurance in the event of diving or water sports accidents. The cancer policy provides a lump sum payment for the occurrence of cancer. Markets and Distribution The Company currently markets its diver's policy through water sports magazine advertising and dive shops throughout the world. The Company pays direct commissions ranging from 15% to 30% for new business generated. The following table summarizes the accident and health business for the five years ended December 31, 2000: 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Accident and Health Policy/Cert. Count as of December 31 21,454(1) 24,078(1) 27,201(1) 30,250 33,639 Premiums Collected omitted 000) 464(1) 549(1) 375 430 493 (1) Includes acquisition of Southern Security Life Insurance Company on December 17, 1998. 4 Reinsurance The Company reinsures with other companies portions of the individual life insurance and accident and health policies it has underwritten. The primary purpose of reinsurance is to enable an insurance company to write a policy in an amount larger than the risk it is willing to assume for itself. No other liabilities or guarantees by the Company exist on business ceded through reinsurance treaties; however, the Company remains obligated for amounts ceded in the event the reinsurers do not meet their obligations. There is no assurance that the reinsurer will be able to meet the obligations assumed by it under the reinsurance agreement. The Company's policy is to retain no more than $50,000 of ordinary insurance per insured life. Excess risk is reinsured. The total amount of life insurance in force at December 31, 2000, reinsured by other companies aggregated $253,698,000, representing approximately 12.4% of the Company's life insurance in force on that date. The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties which are renewable annually. The premiums paid by the Company are based on a number of factors, primarily including the age of the insured and the risk ceded to the reinsurer. Investments The investments that support the Company's life insurance and annuity obligations are determined by the Investment Committee of the Board of Directors of the various subsidiaries and ratified by the full Board of Directors of the respective subsidiaries. A significant portion of the investments must meet statutory requirements governing the nature and quality of permitted investments by insurance companies. The Company's interest-sensitive type products, primarily annuities and interest-sensitive whole life, compete with other financial products such as bank certificates of deposit, brokerage sponsored money market funds as well as competing life insurance company products. While it is not the Company's policy to offer the highest yield in this climate, in order to offer what the Company considers to be a competitive yield, it maintains a diversified portfolio consisting of common stocks, preferred stocks, municipal bonds, investment and non-investment grade bonds including high-yield issues, mortgage loans, real estate, short-term and other securities and investments. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Notes to Consolidated Financial Statements" for additional disclosure and discussion regarding investments. Cemetery and Mortuary Products The Company has six wholly-owned cemeteries and fourteen wholly-owned mortuaries. The cemeteries are non-denominational. Through its cemetery and mortuary operations, the Company markets a variety of products and services both on a pre-need basis (prior to death) and an at-need basis (at the time of death). The products include grave spaces, interment vaults, mausoleum crypts and niches, markers, caskets, flowers and other related products. The services include professional services of funeral directors, opening and closing of graves, use of chapels and viewing rooms, and use of automobiles and clothing. The Company has a funeral chapel at each of its cemeteries other than Holladay Memorial Park and Singing Hills Memorial Park and has ten separate stand-alone mortuary facilities. The Company's cemetery and mortuary business increased with the acquisition of Holladay Memorial Park, Inc., Cottonwood Mortuary, Inc. and Deseret Memorial, Inc. in September 1991, the acquisition of Sunset Funeral Home, Inc. in January 1994, the acquisition of Greer-Wilson Funeral Home, Inc. in April 1995, and the acquisition of Crystal Rose Funeral Home in February 1997. 5 Markets and Distribution The Company's pre-need cemetery and mortuary sales are marketed to persons of all ages but are generally purchased by persons 45 years of age and older. The Company also markets its mortuary and cemetery products on an at-need basis. The Company is limited in its geographic distribution of these products to areas lying within an approximate 20 mile radius of its mortuaries and cemeteries. The Company's at-need sales are similarly limited in geographic area. The Company actively seeks to sell its cemetery and funeral products to customers on a pre-need basis. The Company employs cemetery sales representatives on a commission basis to sell these products. Many of these pre-need cemetery and mortuary sales representatives are also licensed insurance salesmen and sell funeral plan insurance. In many instances, the Company's cemetery and mortuary facilities are the named beneficiary of the funeral plan policies. The sales representatives of the Company's cemetery and mortuary operations are commissioned and receive no salary. The sales commissions range from 10% to 22% for cemetery products and services and 10% to 90% of first year premiums for funeral plan insurance. Potential customers are located via telephone sales prospecting, responses to letters mailed by the sales representatives, newspaper inserts, referrals, contacts made at funeral services, and door to door canvassing. The Company trains its sales representatives and generates leads for them. If a customer comes to one of the Company's cemeteries on an at-need basis, the sales representatives are compensated on a commission basis. Mortgage Loans Products The Company, through its mortgage subsidiary, Security National Mortgage Company, originates and underwrites residential and commercial loans for new construction and existing homes and real estate projects. The Company is an approved government guaranteed and conventional lender and processes government guaranteed and conventional loans. Most of the loans are sold directly to investors. The Company has available warehouse lines of credit with affiliated companies and an unaffiliated financial institution to fund mortgage loans prior to the purchase by investors. Markets and Distribution The Company's mortgage lending services are marketed primarily to individual homeowners and businesses who are located in the area known as the "Wasatch Front," covering approximately 100 miles between Provo, Salt Lake City and Ogden, Utah, with the greatest concentration of sales being in the greater Salt Lake City area and in Valencia and Sacramento, California, Orlando, Florida and Colorado Springs, Colorado. The typical loan size for residential loans ranges from $40,000 to $150,000, and for commercial loans from $200,000 to $750,000. The Company's mortgage loan originations are through full time mortgage loan officers and wholesale brokers who are paid a sales commission ranging between .40% to 3.0% of the loan amount. Prospective customers are located through contacts with builders, real estate agents, and door-to-door canvassing. Recent Acquisitions and Other Business Activities Menlo Life Insurance Company 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. 6 SSLIC Holding Company On December 17, 1998, the Company completed the acquisition of SSLIC Holding Company, (formerly Consolidare Enterprises, Inc.), a Florida corporation ("SSLIC Holding") pursuant to the terms of the Acquisition Agreement which the Company entered into on April 17, 1998 with SSLIC Holding and certain shareholders of SSLIC Holding for the purchase of all of the outstanding shares of common stock of SSLIC Holding and all of the outstanding shares of stock of Insuradyne Corp., a Florida Corporation ("Insuradyne"). As of December 31, 2000, SSLIC Holding owns approximately 71.5% of the outstanding shares of common stock of Southern Security Life Insurance Company, a Florida corporation ("Southern Security"). Southern Security is a Florida domiciled insurance company with total assets as of December 31, 2000, of approximately $77.1 million. Southern Security is currently licensed to transact business in 14 states. Southern Security is also a reporting company under Section 13 of the Securities Exchange Act of 1934. Reference is made to Southern Security's annual report on Form 10-K for the year ended December 31, 2000, which was filed with the Securities Exchange Commission on April 12, 2001, Commission File No. 2-35669. Crystal Rose Funeral Home In February 1997, the Company purchased all of the outstanding shares of common stock of Crystal Rose Funeral Home, Inc. ("Crystal Rose"), an Arizona corporation. In connection with this transaction, the Company also acquired certain real estate and other assets related to the business of Crystal Rose from the sole stockholder of Crystal Rose. The Company continues to operate Crystal Rose, which is located in Tolleson, Arizona, as a funeral home and mortuary. Regulation The Company's insurance subsidiaries, Security National Life and Southern Security, are subject to comprehensive regulation in the jurisdictions in which it does business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding aggregate reserves for life policies and annuity contracts, policy claims, unearned premiums, and other matters. The Company's insurance subsidiaries are subject to this type of regulation in any state in which they are licensed to do business. Such regulation could involve additional costs, restrict operations or delay implementation of the Company's business plans. The Company is currently subject to regulation in Utah under insurance holding company legislation, and other states where applicable. Intercorporate transfers of assets and dividend payments from its insurance subsidiaries are subject to prior notice of approval from the State Insurance Department, if they are deemed "extraordinary" under these statutes. The insurance subsidiaries are required, under state insurance laws, to file detailed annual reports with the supervisory agencies in each of the states in which it does business. Their business and accounts are also subject to examination by these agencies. The Company's cemetery and mortuary subsidiaries are subject to the Federal Trade Commission's comprehensive funeral industry rules and are subject to state regulations in the various states where such operations are domiciled. The morticians must be licensed by the respective state in which they provide their services. Similarly, the mortuaries are governed by state statutes and city 7 ordinances in both Utah and Arizona. Reports are required to be kept on file on a yearly basis which include financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually on the basis of such reports. The cemeteries maintain city or county licenses where they conduct business. The Company's mortgage loan subsidiary, Security National Mortgage, is subject to the rules and regulations of the U.S. Department of Housing and Urban Development. These regulations among other things specify the procedures for the origination, the underwriting, the licensing of wholesale brokers, quality review audits and the amounts that can be charged to borrowers for all FHA and VA loans. Each year the Company must have an audit by an independent CPA firm to verify compliance under these regulations. In addition to the government regulations, the Company must meet loan requirements of various investors who purchase the loans before the loans can be sold to the investors. Income Taxes The Company's insurance subsidiaries, Security National Life and Southern Security, are taxed under the Life Insurance Company Tax Act of 1984. Pursuant thereto, life insurance companies are taxed at standard corporate rates on life insurance company taxable income. Life insurance company taxable income is gross income less general business deductions, reserves for future policyholder benefits (with modifications), and a small life insurance company deduction (up to 60% of life insurance company taxable income). The Company may be subject to the corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a result of the small life insurance company deduction. Also, under the Tax Reform Act of 1986, distributions in excess of stockholder's surplus account or significant decrease in life reserves will result in taxable income. Security National Life and Southern Security may continue to receive the benefit of the small life insurance company deduction. In order to qualify for the small company deduction, the combined assets of the Company must be less than $500,000,000 and the taxable income of the life insurance companies must be less than $3,000,000. To the extent that the net income limitation is exceeded, then the small life insurance company deduction is phased out over the next $12,000,000 of life insurance company taxable income. Since 1990, Security National Life and Southern Security have computed their life insurance taxable income after establishing a provision representing a portion of the costs of acquisition of such life insurance business. The effect of the provision is that a certain percentage of the Company's premium income is characterized as deferred expenses and recognized over a five to ten year period. The Company's non-life insurance company subsidiaries are taxed in general under the regular corporate tax provisions. For taxable years beginning January 1, 1987, the Company may be subject to the Corporate Alternative Minimum Tax and the proportionate disallowance rules for installment sales under the Tax Reform Act of 1986. Competition The life insurance industry is highly competitive. There are approximately 2,000 legal reserve life insurance companies in business in the United States. These insurance companies differentiate themselves through marketing techniques, product features, price and customer service. The Company's insurance subsidiaries compete with a large number of insurance companies, many of which have greater financial resources, a longer business history, and a more diversified line of insurance coverage than the Company. In addition, such companies generally have a larger sales force. Further, many of the companies with which the Company competes are mutual companies which may have a competitive advantage because all profits accrue to policyholders. Because the Company is 8 small by industry standards and lacks broad diversification of risk, it may be more vulnerable to losses than larger, better established companies. The Company believes that its policies and rates for the markets it serves are generally competitive. The cemetery and mortuary industry is also highly competitive. In the Salt Lake City, Phoenix and San Diego areas in which the Company competes, there are a number of cemeteries and mortuaries which have longer business histories, more established positions in the community and stronger financial positions than the Company. In addition, some of the cemeteries with which the Company must compete for sales are owned by municipalities and, as a result, can offer lower prices than can the Company. The Company bears the cost of a pre-need sales program that is not incurred by those competitors that do not have a pre-need sales force. The Company believes that its products and prices are generally competitive with those in the industry. The mortgage loan industry is highly competitive with several mortgage companies and banks in the same geographic area in which the Company is operating which have longer business histories and more established positions in the community. The refinancing market is particularly vulnerable to changes in interest rates. Employees As of December 31, 2000, the Company employed 240 full-time and 28 part-time employees. Item 2. Properties The following table sets forth the location of the Company's office facilities and certain other information relating to these properties. Approximate Owned Square Location Function Leased Footage -------- -------- ------ ------- 5300 So. 360 West Corporate Salt Lake City, UT Headquarters Owned(1) 33,000 1603 Thirteenth St. District Lubbock, TX Sales Office Owned(2) 5,000 755 Rinehart Rd. Subsidiary Lake Mary, FL Headquarters Owned(3) 27,000 (1) The Company leases an additional 8,800 square feet of the facility to unrelated third parties for approximately $136,000 per year, under leases which expire at various dates after 2000. (2) The Company leases an additional 2,766 square feet of the facility to unrelated third parties for approximately $15,000 per year, under leases which expire at various dates after 2000. (3) The Company leases an additional 5,747 square feet of the facility to unrelated third parties for approximately $109,000 per year, under leases which expire at various dates after 2000. The Company believes the office facilities it occupies are in good operating condition, are adequate for current operations and has no plan to build or acquire additional office facilities. The Company believes its office facilities are adequate for handling business in the foreseeable future. 9 The following table summarizes the location and acreage of the six Company owned cemeteries:
Net Saleable Acreage Acres Sold as Total Name of Date Developed Total Cemetery Available Cemetery Location Acquired Acreage(1) Acreage(1) Spaces(2) Acreage(1) - ------------ -------- --------- ---------- ---------- --------- ---------- Memorial Estates, Inc.: Lakeview Cemetery(3) 1700 E. Lakeview Dr. Bountiful, UT 1973 6 40 7 33 Mountain View Cemetery(3) 3115 E. 7800 So. Salt Lake City, UT 1973 26 54 16 38 Redwood Cemetery(3)(5) 6500 So. Redwood Rd. West Jordan, UT 1973 40 78 34 44 Holladay Memorial Park(4)(5) 4800 So. Memory Lane Holladay, UT 1991 6 14 5 9 Lakehills Cemetery(4) 10055 So. State Sandy, UT 1991 12 44 6 38 Singing Hills Memorial Park(6) 2798 Dehesa Rd. El Cajon, CA 1995 6 35 2 33 10
(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, 2000, there were mortgages of approximately $62,100 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries. (4) As of December 31, 2000, there were mortgages of approximately $1,862,000 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, 2000, there was a mortgage of approximately $665,300 collateralized by the property. 11 The following table summarizes the location, square footage and the number of viewing rooms and chapels of the fourteen Company owned mortuaries:
Name of Date Viewing Square Mortuary Location Acquired Room(s) Chapel(s) Footage - ----------- --------- -------- -------- ------- --------- Memorial Mortuary 5850 South 900 East Salt Lake City, UT 1973 3 1 20,000 Memorial Estates, Inc.: Redwood Mortuary 6500 South Redwood Rd. West Jordan, UT 1973 2 1 10,000 Mountain View Mortuary 3115 East 7800 South Salt Lake City, UT 1973 2 1 16,000 Lakeview Mortuary 1700 East Lakeview Dr. Bountiful, UT 1973 0 1 5,500 Paradise Chapel Funeral Home 3934 East Indian School Road Phoenix, AZ 1989 2 1 9,800 Deseret Memorial, Inc.: Colonial Mortuary(2) 2128 South State St. Salt Lake City, UT 1991 1 1 14,500 Deseret Mortuary(2) 36 East 700 South Salt Lake City, UT 1991 2 2 36,300 Lakehills Mortuary 10055 South State St. Sandy, UT 1991 2 1 18,000 Cottonwood Mortuary(2) 4670 South Highland Dr. Salt Lake City, UT 1991 2 1 14,500 Camelback Sunset Funeral Home(1) 301 West Camelback Rd. Phoenix, AZ 1994 2 1 11,000 12
Name of Date Viewing Square Mortuary Location Acquired Room(s) Chapel(s) Footage - ---------- ---------- -------- --------- --------- -------- Greer-Wilson: - ------------ Greer-Wilson Funeral Home 5921 West Thomas Road Phoenix, AZ 1995 2 2 25,000 Tolleson Funeral Home 9386 West VanBuren Tolleson, AZ 1995 0 1 3,460 Avondale Funeral Home 218 North Central Avondale, AZ 1995 1 1 1,850 Crystal Rose Funeral Home(3) 9155 W. VanBuren Tolleson, AZ 1997 0 1 9,000 13
(1) As of December 31, 2000 there were mortgages of approximately $301,500 collateralized by the property and facilities of Camelback Sunset Funeral Home. (2) As of December 31, 2000, there were mortgages of approximately $1,862,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary. (3) As of December 31, 2000, there was a mortgage of approximately $214,600, collateralized by the property and facilities of Crystal Rose Funeral Home. Item 3. Legal Proceedings The Company is not a party to any legal proceedings outside the ordinary course of the Company's business or to any legal proceedings which, if adversely determined, would have a material adverse effect on the Company or its business. 14 Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The Company's Class A Common Stock trades on the Nasdaq National Market under the symbol "SNFCA." Prior to August 13, 1987, there was no active public market for the Class A and Class C Common Stock. During recent years there has been occasional trading of Class A and Class C Common Stock by brokerage firms in the over-the-counter market. The following are the high and low sales prices for Class A Common Stock as reported by Nasdaq: Period (Calendar Year) Price Range - ---------------------- ----------------- High Low ------ ----- 1999 First Quarter................................3.24 2.38 Second Quarter...............................2.95 2.49 Third Quarter................................3.29 2.66 Fourth Quarter...............................3.52 2.72 2000 First Quarter................................4.29 2.74 Second Quarter...............................3.33 2.56 Third Quarter................................3.10 2.41 Fourth Quarter...............................2.86 2.02 2001 First Quarter................................2.56 2.00 The above sales prices have been adjusted for the effect of annual stock dividends. The Class C Common Stock is not actively traded, although there are occasional transactions in such stock by brokerage firms. (See Note 11 to the Consolidated Financial Statements.) The Company has never paid a cash dividend on its Class A or Class C Common Stock. The Company currently anticipates that all of its earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Class A or Class C Common Stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate. A 5% stock dividend on Class A and Class C Common Stock has been paid each year from 1989 through 2000. As of December 31, 2000, there were 4,658 record holders of Class A Common Stock and 141 record holders of Class C Common Stock. 15 Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated) - ------------------------------------------------------------------------------ The following selected financial data for each of the five years in the period ended December 31, 2000, are derived from the audited consolidated financial statements. The data as of December 31, 2000 and 1999, and for the three years ended December 31, 2000, should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. Consolidated Statement of Earnings Data:
Year Ended December 31, ---------------------------------------------------------------------- 2000 1999(3) 1998 1997(1) 1996 ---- ---- ---- ------ ---- Revenue Premiums $ 12,876,000 $ 13,176,000 $ 5,916,000 $ 6,141,000 $ 5,666,000 Net investment income 12,136,000 10,631,000 7,459,000 7,140,000 7,517,000 Net mortuary and cemetery income 9,417,000 10,178,000 9,226,000 9,231,000 8,138,000 Realized gains on investments 424,000 313,000 74,000 253,000 290,000 Mortgage fee income 22,922,000 14,503,000 10,082,000 5,662,000 8,237,000 Other 305,000 856,000 63,000 48,000 75,000 ------------ ------------ ------------ ------------ ------------ Total revenue 58,080,000 49,657,000 32,820,000 28,475,000 29,923,000 ------------ ------------ ------------ ------------ ------------ Expenses Policyholder benefits 12,931,000 11,976,000 6,932,000 6,669,000 6,341,000 Amortization of deferred policy acquisition costs 3,189,000 4,858,000 1,274,000 1,132,000 1,240,000 General and administrative expenses 35,959,000 26,959,000 19,649,000 15,361,000 17,292,000 Interest expense 2,126,000 1,119,000 999,000 948,000 1,318,000 Cost of goods & services of the mortuaries & cemeteries 2,628,000 3,295,000 2,940,000 2,696,000 2,355,000 ------------ ------------ ------------ ------------ ------------ Total benefits & expenses 56,833,000 48,207,000 31,794,000 26,806,000 28,546,000 ------------ ------------ ------------ ------------ ------------ Income before income tax expense 1,247,000 1,450,000 1,026,000 1,669,000 1,377,000 Income tax expense (305,000) (230,000) (255,000) (360,000) (139,000) Minority interest in (income) loss of subsidiary (46,000) (244,000) -- -- -- ------------ ------------ ------------ ------------ ------------ Net earnings $ 896,000 $ 976,000 $ 771,000 $ 1,309,000 $ 1,238,000 ============ ============ ============ ============ ============ Net earnings per common share(3) $ 0.21 $ 0.22 $ 0.18 $ 0.33 $ 0.33 ============ ============ ============ ============ ============ Weighted average outstanding common shares 4,317,779 4,397,000 4,273,000 3,988,000 3,750,000 Net earnings per common share-assuming dilution(3) $ 0.21 $ 0.22 $ 0.18 $ 0.32 $ 0.32 ============ ============ ============ ============ ============ Weighted average outstanding common shares-assuming dilution 4,335,044 4,397,000 4,273,000 4,093,000 3,856,000
16 Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated) - ------------------------------------------------------------------------------ Balance Sheet Data:
Year Ended December 31, -------------------------------------------------------------------------- 2000 1999 1998(3) 1997(1) 1996 ---- ---- ---- ------ ---- Assets Investments and restricted assets $108,810,000 $113,208,000 $126,332,000 $ 81,039,000 $ 78,638,000 Cash 11,275,000 12,423,000 6,671,000 3,408,000 3,301,000 Receivables 36,413,000 38,074,000 28,309,000 15,224,000 17,070,000 Other assets 52,249,000 50,593,000 51,953,000 25,781,000 25,701,000 ------------ ------------ ------------ ------------ ------------ Total assets $208,747,000 $214,298,000 $213,265,000 $125,452,000 $124,710,000 ============ ============ ============ ============ ============ Liabilities Policyholder benefits $141,755,000 $140,368,000 137,466,000 $ 77,890,000 $ 76,962,000 Notes & contracts payable 14,046,000 23,341,000 22,887,000 9,981,000 12,490,000 Cemetery & mortuary liabilities 8,659,000 6,638,000 6,917,000 6,116,000 5,946,000 Other liabilities 12,921,000 11,415,000 12,536,000 6,070,000 5,844,000 ------------ ------------ ------------ ------------ ------------ Total liabilities 177,381,000 181,762,000 179,806,000 100,057,000 101,242,000 ------------ ------------ ------------ ------------ ------------ Minority interest 4,625,000 6,046,000 6,779,000 -- -- Stockholders' equity 26,741,000 26,490,000 26,680,000 25,395,000 23,468,000 ------------ ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity $208,747,000 $214,298,000 $213,265,000 $125,452,000 $124,710,000 ============ ============ ============ ============ ============
(1) Reflects the acquisition of Crystal Rose Funeral Home as of February 1997. (2) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the audited consolidated financial statements. (3) Reflects the acquisition of SSLIC Holding Company and subsidiaries as of December 17, 1998. 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- Overview The Company's operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to "niche" insurance products, such as the Company's funeral plan policies and interest sensitive products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on lower interest rates by originating and refinancing mortgage loans. During the years ending December 31, 2000 and 1999, 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. SNMC receives fees from origination points paid by the borrowers and service and release premiums received from third party investors who purchase the loans from SNMC. SNMC sales all of its loans to third party investors and does not retain servicing to these loans. SNMC pays the brokers and correspondents a commission for loans that are brokered through SNMC. In 1999 SNMC opened new wholesale branches in Sacramento, California and Valencia, California. In 2000 SNMC opened new wholesale branches in Orlando, Florida, Colorado Springs, Colorado and Provo, Utah. SNMC originated and sold 4,845 ($652,000,000) and 3,526 ($453,000,000)loans respectively in 2000 and 1999. On December 17, 1998, the Company purchased all of the outstanding shares of common stock of SSLIC Holding Company ("SSLIC Holding") (formerly "Consolidare Enterprises, Inc.") and Insuradyne Corporation ("Insuradyne") for a total cost of $12,248,194. As of December 31, 2000, SSLIC Holding owns approximately 71.5% of the outstanding shares of common stock of Southern Security Life Insurance Company ("Southern Security"). 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- The purchase of SSLIC Holding, including Insuradyne, was accounted for using the purchase method of accounting. Thus the results of operations of the Company for the twelve months ended December 31, 1998 do not include the results of SSLIC Holding and Insuradyne. In the Management's Discussion and Analysis of the Results of Operations, the results of SSLIC Holding and Insuradyne for the twelve months ended December 31, 1999 have been excluded. The following Consolidated Statements of Earnings shows the effect of excluding the results of SSLIC Holding and Insuradyne for the twelve months ended December 31, 1999.
Without SSLIC Variance SSLIC Holding Holding without Southern Southern SSLIC Holding Security Security Southern Security Insuradyne Insuradyne Insuradyne REVENUES: 1999 1998 1999 1999 Amount Percent ---- ---- ----- ------------ ------ ------- Insurance premiums and other considerations $ 13,175,825 $ 5,915,659 $ 6,901,546 $ 6,274,279 $ 358,620 6.1% Net investment income 10,631,302 7,458,743 2,938,745 7,692,557 233,814 3.1 Net mortuary and cemetery income 10,178,246 9,225,801 -- 10,178,246 952,445 10.3 Realized gains on investments and other assets 313,013 74,121 -- 313,013 238,892 322.3 Mortgage fee income 14,503,388 10,082,330 -- 14,503,388 4,421,058 43.8 Other 855,604 62,949 715,128 140,476 77,527 123.2 ------------ ------------ ------------ ------------ ------------ ------- Total Revenues 49,657,378 32,819,603 10,555,419 39,101,959 6,282,356 19.1 ------------ ------------ ------------ ------------ ------------ ------- BENEFITS AND EXPENSES: Death benefits 4,780,063 2,432,822 1,917,134 2,862,929 430,107 17.7 Surrenders and other policy benefits 1,494,863 1,145,812 88,208 1,406,655 260,843 22.8 Increase in future policy benefits 5,700,784 3,353,287 2,448,222 3,252,562 (100,725) (3.0) Amortization of deferred policy acquisition costs and cost of insurance acquired 4,857,662 1,273,394 3,592,217 1,265,445 (7,949) (0.6) General and administrative expenses: Commissions 11,850,763 7,618,335 364,848 11,485,915 3,867,580 50.8 Salaries 7,409,298 5,358,743 1,063,533 6,345,765 987,022 18.4 Other 7,698,779 6,671,823 550,282 7,148,497 476,674 7.1 BENEFITS AND EXPENSES: Interest expense 1,119,402 999,123 116,977 1,002,425 3,302 0.3 Cost of mortuaries and cemeteries goods and services sold 3,294,983 2,940,220 -- 3,294,983 354,763 12.1 ------------ ------------ ------------ ------------ ------------ ------- Total benefits and expenses 48,206,597 31,793,559 10,141,421 38,065,176 6,271,617 19.7 ------------ ------------ ------------ ------------ ------------ ------- Earnings before income taxes 1,450,781 1,026,044 413,998 1,036,783 10,739 1.0 Income tax expense (230,516) (254,815) (25,803) (204,713) 50,102 19.7 Minority interest in income of subsidiary (244,370) -- (244,370) -- -- -- ------------ ------------ ------------ ------------ ------------ ------- Net earnings $ 975,895 $ 771,229 $ 143,825 $ 832,070 $ 60,841 7.9% ============ ============ ============ ============ ============ =======
19 Results of Operations 2000 Compared to 1999 Total revenues increased by $8,422,000, or 17.0%, from $49,657,000 for fiscal year 1999 to $58,079,000 for fiscal year 2000. Contributing to this increase in total revenues was a $1,505,000 increase in net investment income, an $8,418,000 increase in mortgage fee income, and a $111,000 increase in realized gains on investments and other assets. Insurance premiums and other considerations decreased by $300,000, from $13,176,000 in 1999 to $12,876,000 in 2000. This reduction was primarily the result of a change in the sales mix of the Company's insurance subsidiary, Southern Security. Since March 1998, Southern Security has sold more final expense policies, which have lower face amounts, than universal life products, which have larger face amounts. Consequently, the insurance revenues from final expense products were less than those from universal life products. Net investment income increased by $1,505,000 from $10,631,000 in 1999 to $12,136,000 in 2000. This increase was primarily attributable to more loan originations made by the Company's mortgage subsidiary in 2000 due to the expansion of business activities in new geographic markets. Net mortuary and cemetery sales decreased by $761,000 from $10,178,000 in 1999 to $9,417,000 in 2000. This decrease was primarily due to the change in accounting principles for pre-need funeral and cemetery contract revenues. See Note 1 "Recent Accounting Pronouncements". Mortgage fee income increased by $8,418,000, from $14,504,000 in 1999 to $22,922,000 in 2000. This increase was primarily the result of an increased number of loan originations made by the Company's mortgage subsidiary in 2000. Other revenue decreased by $551,000 from $856,000 in 1999 to $305,000 in 2000. This reduction was primarily the result of having received proceeds in 1999 from insurance claims filed for the recovery of the costs to litigate a case against a former officer of the Company's insurance subsidiary, Southern Security. Total benefits and expenses were $56,833,000 for 2000, which constituted 97.9% of the Company's total revenues, as compared to $48,207,000, or 97.1 of the Company's total revenues for 1999. During 2000, there was a net increase of $955,000 in death benefits, surrender and other policy benefits, and an increase in future policy benefits from $11,976,000 in 1999 to $12,931,000 in 2000. This increase was primarily due to additional interest credited on annuities and reserve increases on traditional products. This increase was reasonable based on the underlying actuarial assumptions. Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $1,669,000 from $4,858,000 in 1999 to $3,189,000 in 2000. This decrease was primarily due to adjusting the amortization rate to current assumptions at the Company's insurance subsidiary, Southern Security. General and administrative expenses increased by $9,000,000, from $26,959,000 in 1999 to $35,959,000 in 2000. Contributing to this increase was a $6,550,000 increase in commission expenses from $11,851,000 in 1999 to $18,401,000 in 2000. Salaries increased $258,000 from $7,409,000 in 1999 to $7,667,000 in 2000. Other expenses increased $2,191,000, from $7,699,000 in 1999 to $9,890,000 in 2000. These increases were primarily the result of an increased number of loan originations made by the Company's mortgage subsidiary in 2000. Interest expense increased by $1,007,000, from $1,119,000 in 1999 to $2,126,000 in 2000. This increase was primarily due to more loan originations from the Company's mortgage subsidiary being funded by third parties in 2000. Cost of the mortuary and cemetery goods and services sold decreased by $667,000, from $3,295,000 in 1999 to $2,628,000 in 2000. This decrease was primarily due to the change in accounting principles for pre-need funeral and cemetery contract revenues. See Note 1, "Recent Accounting Pronouncements". 20 1999 Compared to 1998 (See Overview for an explanation of this comparison. SSLIC Holding Company, Southern Security and Insuradyne results from operations for 1999 have been excluded) Total revenues increased by $6,282,000, or 19.1%, from $32,820,000 for fiscal year 1998 to $39,102,000 for fiscal year 1999. Contributing to this increase in total revenues was a $359,000 increase in insurance premiums and other considerations, a $234,000 increase in net investment income, a $952,000 increase in net mortuary and cemetery sales, a $4,421,000 increase in mortgage fee income, and a $239,000 increase in realized gains on investments and other assets. Insurance premiums and other considerations increased by $359,000, from $5,915,000 in 1998 to $6,274,000 in 1999. This increase was primarily attributed to additional new business. Net investment income increased by $234,000, from $7,459,000 in 1998 to $7,693,000 in 1999. This increase was primarily the result of the reinvestment of the Company's bonds which matured or were called in 1999 into mortgage loans having higher long-term rates. Net mortuary and cemetery sales increased by $952,000, from $9,226,000 in 1998 to $10,178,000 in 1999. This increase was primarily from additional pre-need and at-need sales. Mortgage fee income increased by $4,421,000, from $10,082,000 in 1998 to $14,503,000 in 1999. This increase was primarily attributable to more loan originations made by the Company's mortgage subsidiary in 1999 due to the expansion of business activities in new geographic markets. Total benefits and expenses were $38,065,000 for 1999, which constituted 97% of the Company's total revenues, as compared to $31,794,000, or 97% of the Company's total revenues for 1998. During 1999, there was a net increase of $590,000 in death benefits, surrender and other policy benefits, and an increase in future policy benefits from $6,932,000 in 1998 to $7,522,000 in 1999. This increase was primarily due to additional interest credited on annuities and reserve increases on traditional products and additional death claims. These increases were reasonable based on the underlying actuarial assumptions. Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $8,000, from $1,273,000 in 1998 to $1,265,000 in 1999. This decrease was reasonable based on the underlying actuarial assumptions. General and administrative expenses increased by $5,331,000, from $19,649,000 in 1998 to $24,980,000 in 1999. Commission expenses increased by $3,868,000, from $7,618,000 in 1998 to $11,486,000 in 1999. Salaries increased $987,000 from $5,359,000 in 1998 to $6,346,000 in 1999. Other expenses increased $477,000, from $6,671,000 in 1998 to $7,148,000 in 1999. These increases were primarily the result of an increased number of loan originations made by the Company's mortgage subsidiary in 1999. Interest expense increased by $3,000, from $999,000 in 1998 to $1,002,000 in 1999. This increase was primarily due to more loan originations from the Company's mortgage subsidiary being funded by third parties in 1999. Cost of the mortuary and cemetery goods and services sold increased by $355,000, from $2,940,000 in 1998 to $3,295,000 in 1999. This increase was primarily due to the increase in pre-need and at-need sales. Liquidity and Capital Resources The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity of held-to-maturity investments or sale 21 of other investments. The mortgage subsidiary realizes cash flow from fees generated by originating and refinancing mortgage loans and interest earned on mortgages sold to investors. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses on the issuance of new policies, the maintenance of existing policies, debt service, and to meet operating expenses. The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held-to-maturity in the portfolio to help in this timing; however, to date, that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company's products. The Company's investment philosophy is intended to provide a rate of return which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements. The Company's investment policy is to invest predominately in fixed maturity securities, mortgage loans, and 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 $62,889,000 as of December 31, 2000 compared to $63,749,000 as of December 31, 1999. This represents 60% of the total insurance related investments in 2000 as compared to 59% in 1999. 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, 2000, .68% ($429,000) and at December 31, 1999, 1.56% ($994,000) 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 $80,263,000) could change by the following amounts based on the respective basis point swing (the change in the market values were calculated using a modeling technique): -200 bps -100 bps +100 bps +200 bps Change in Market Value (in thousands) $4,441 $2,932 $(3,881) $(9,184) The Company has classified certain of its fixed income securities, including high-yield securities, in its portfolio as available for sale, with the remainder classified as held to maturity. However, in accordance with Company policy, any such securities purchased in the future will be classified as held to maturity. Business conditions, however, may develop in the future which may indicate a need for a higher level of liquidity in the investment portfolio. In that event the Company believes it could sell short-term investment grade securities before liquidating higher-yielding longer term securities. The Company is subject to risk based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At December 31, 2000 and 1999, the life subsidiaries exceeded the regulatory criteria. The Company's total capitalization of stockholders' equity and bank debt and notes payable was $40,787,000 and $41,143,000 as of December 31, 2000 and 1999, respectively. Stockholders' equity as a percent of total capitalization was 66% and 64% as of December 31, 2000 and 1999, respectively. Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2000 was 15%, as compared to a rate of 10% in 1999. In February 1997, the Company purchased all of the outstanding shares of common stock of Crystal Rose Funeral Home, Inc. for a total consideration of $382,000, which included a note to the former owner in the amount of $297,000. 22 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 71.5% of the outstanding shares of common stock of Southern Security Life Insurance Company, a Florida corporation ("SSLIC"), and all of the outstanding shares of stock of Insuradyne Corp., a Florida corporation ("Insuradyne"). As consideration for the purchase of the shares of Consolidare, the Company paid to the stockholders of Consolidare at closing an aggregate of $12,248,194. In order to pay the purchase consideration, the Company obtained $6,250,000 from bank financing, with the balance of $5,998,194 obtained from funds then currently held by the Company. In addition to the purchase consideration, the Company caused SSLIC to pay, on the closing date, $1,050,000 to George Pihakis, the President and Chief Executive Officer of SSLIC prior to closing, as a lump sum settlement of the executive compensation agreement between SSLIC and Mr. Pihakis. In connection with the acquisition of Consolidare, the Company 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. The administrative services fee may be increased, beginning on January 1, 2001, to reflect increases in the Consumer Price Index, over the index amount as of January 1, 2000. The Administrative Services Agreement shall remain in effect for an initial term expiring on December 16, 2003. The term of the agreement may be automatically extended for additional one-year terms unless either the Company or SSLIC shall deliver a written notice on or before September 30 of any year stating to the other its desire not to extend the term of the agreement. However, in no event can the agreement be terminated prior to December 16, 2003. 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 will pay consideration to the Company in the form of statutory admitted assets to equal the liabilities assumed. The consideration will be paid when the policies in force have been converted onto the Company's computer system. It is anticipated that the conversion will take place during the third quarter of 2001. Until then the policies will be administered by Menlo Life. The net amount to be paid at December 31, 2000, is $2,711,329. At December 31, 2000, $22,715,000 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. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and amended by SFAS No. 138, issued in June 2000. The requirements of SFAS No. 133, as amended, will be effective for the Company in the first quarter of the fiscal year beginning January 1, 2001. The standard establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. Under the standard, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has determined SFAS 133 to have no impact on the Company's financial position and results of operations because the Company has no derivative activity. 23 SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000. SFAS No. 140 is a replacement of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Most of the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the Financial Accounting Standards Board (FASB), and some were changed only in minor ways. In issuing SFAS No. 140, the FASB included issues and decisions that had been addressed and determined since the original publication of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001. Management does not expect the adoption of SFAS No. 140 to have a significant impact on the financial position or results of operations of the Company. 24 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES Page No. Financial Statements: Report of Independent Auditors.................................26 Consolidated Balance Sheet, December 31, 2000 and 1999..................................................28 Consolidated Statement of Earnings, Years Ended December 31, 2000, 1999, and 1998.......................................................30 Consolidated Statement of Stockholders' Equity, Years Ended December 31, 2000, 1999 and 1998. .....................................................31 Consolidated Statement of Cash Flow, Years Ended December 31, 2000, 1999 and 1998 .......................................................32 Notes to Consolidated Financial Statements.....................................................34 Financial Statement Schedules: I. Summary of Investments -- Other than Investments in Related Parties...............................63 II. Condensed Financial Information of Registrant...................................................64 IV. Reinsurance..................................................70 V. Valuation and Qualifying Accounts............................71 All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. 25 REPORT OF INDEPENDENT AUDITORS To The Board of Directors and Shareholders of Security National Financial Corporation We have audited the accompanying consolidated balance sheet of Security National Financial Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years then ended. In connection with our audit of the financial statements, we have also audited the amounts included in the financial statement schedules as listed in the accompanying index under Item 8. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit 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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security National Financial Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years ended December 31, 2000 and 1999, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 2000 and 1999 financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. TANNER + CO. Salt Lake City, Utah March 23, 2001 26 REPORT OF INDEPENDENT AUDITORS Board of Directors Security National Financial Corporation We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also include the financial statement schedules listed in the Index at Item 8. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security National Financial Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP Salt Lake City, Utah March 22, 1999 27 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet December 31, Assets: 2000 1999 - ------- ---- ---- Insurance-related investments: Fixed maturity securities held to maturity, at amortized cost (market $39,283,266 and $39,453,452 for 2000 and 1999) $ 39,384,168 $ 39,629,851 Fixed maturity securities available for sale, at market (cost $23,556,864 in 2000 and 24,957,347 in 1999) 23,504,989 24,119,190 Equity securities available for sale, at market (cost $1,617,363 and $4,350,139 for 2000 and 1999) 2,774,077 5,745,213 Mortgage loans on real estate 17,435,178 18,926,628 Real estate, net of accumulated depreciation of $3,088,761 and $2,722,024 for 2000 and 1999 8,564,395 7,629,952 Policy, student and other loans 11,277,742 11,607,993 Short-term investments 1,027,927 1,290,310 ------------- ------------- Total insurance-related investments 103,968,476 108,949,137 Restricted assets of cemeteries and mortuaries 4,841,819 4,258,987 Cash 11,275,030 12,422,864 Receivables: Trade contracts 5,342,380 4,232,030 Mortgage loans sold to investors 26,886,162 29,071,913 Receivable from agents 2,225,784 2,272,624 Receivable from officers 111,500 118,400 Other 3,503,320 3,847,079 ------------- ------------- Total receivables 38,069,146 39,542,046 Allowance for doubtful accounts (1,656,223) (1,467,954) ------------- ------------- Net receivables 36,412,923 38,074,092 Policyholder accounts on deposit with reinsurer 7,434,750 7,806,866 Land and improvements held for sale 8,485,523 8,522,687 Accrued investment income 1,302,552 1,493,013 Deferred policy acquisition costs and pre-need deferred charges 13,603,182 10,630,086 Property, plant and equipment, net 10,824,700 10,566,508 Cost of insurance acquired 8,729,264 9,597,306 Excess of cost over net assets of acquired subsidiaries 1,172,599 1,305,333 Other 695,683 671,558 ------------- ------------- Total assets $ 208,746,501 $ 214,298,437 ============= ============= See accompanying notes to consolidated financial statements. 28 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet (Continued) December 31, ------------ 2000 1999 ---- ---- Liabilities: - ------------ Future life, annuity, and other policy benefits $ 140,000,344 $ 138,501,316 Unearned premium reserve 1,754,980 1,866,523 Line of credit for financing of mortgage loans -- 8,687,023 Bank loans payable 9,805,118 10,768,098 Notes and contracts payable 4,240,830 3,885,684 Deferred pre-need cemetery and funeral contracts revenues and estimated future cost of pre-need sales 8,679,199 6,817,685 Accounts payable 1,242,407 804,133 Funds held under reinsurance treaties 1,417,216 1,475,512 Other liabilities and accrued expenses 4,115,920 3,219,166 Income taxes 6,124,512 5,736,860 ------------- ------------- Total liabilities 177,380,526 181,762,000 Commitments and contingencies -- -- Minority interest 4,624,614 6,046,744 Stockholders' Equity: - -------------------- Common stock: Class A: $2 par value, authorized 10,000,000 shares, issued 5,107,631 shares in 2000 and 4,863,731 shares in 1999 10,215,262 9,727,462 Class C: $0.20 par value, authorized 7,500,000 shares, issued 5,827,805 shares in 2000 and 5,555,350 shares in 1999 1,165,561 1,111,070 ------------- ------------- Total common stock 11,380,823 10,838,532 Additional paid-in capital 10,054,714 10,015,942 Accumulated other comprehensive income, net of deferred taxes (benefit) of $66,043 and and $(71,899) for 2000 and 1999 836,751 665,691 Retained earnings 7,831,306 7,516,640 Treasury stock at cost (1,233,064 Class A shares and 65,078 Class C shares in 2000; 966,139 Class A shares and 61,979 Class C shares in 1999, held by affiliated companies) (3,362,233) (2,547,112) ------------- ------------- Total stockholders' equity 26,741,361 26,489,693 ------------- ------------- Total liabilities and stockholders' equity $ 208,746,501 $ 214,298,437 ============= ============= See accompanying notes to consolidated financial statements. 29 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Earnings
Year Ended December 31, 2000 1999 1998 ---- ---- ---- Revenues: - -------- Insurance premiums and other considerations $ 12,875,585 $ 13,175,825 $ 5,915,659 Net investment income 12,136,072 10,631,302 7,458,743 Net mortuary and cemetery sales 9,416,927 10,178,246 9,225,801 Realized gains on investments and other assets 423,805 313,013 74,121 Mortgage fee income 22,921,585 14,503,388 10,082,330 Other 304,886 855,604 62,949 ------------ ------------ ------------ Total revenue 58,078,860 49,657,378 32,819,603 Benefits and expenses: - ------------ Death benefits 3,959,811 4,780,063 2,432,822 Surrenders and other policy benefits 1,702,251 1,494,863 1,145,812 Increase in future policy benefits 7,268,720 5,700,784 3,353,287 Amortization of deferred policy acquisition costs and cost of insurance acquired 3,188,752 4,857,662 1,273,394 General and administrative expenses: Commissions 18,401,314 11,850,763 7,618,335 Salaries 7,667,263 7,409,298 5,358,743 Other 9,890,197 7,698,779 6,671,823 Interest expense 2,126,169 1,119,402 999,123 Cost of goods and services sold of the mortuaries and cemeteries 2,628,260 3,294,983 2,940,220 ------------ ------------ ------------ Total benefits and expenses 56,832,737 48,206,597 31,793,559 ------------ ------------ ------------ Earnings before income taxes 1,246,123 1,450,781 1,026,044 Income tax expense (304,640) (230,516) (254,815) Minority income (45,754) (244,370) -- ------------ ------------ ------------ Net earnings $ 895,729 $ 975,895 $ 771,229 ============ ============ ============ Net earnings per common share $ 0.21 $ 0.22 $ 0.18 ============ ============ ============ Weighted average outstanding common shares 4,317,779 4,397,141 4,272,516 Net earnings per common share- assuming dilution $ 0.21 $ 0.22 $ 0.18 ============ ============ ============ Weighted average outstanding common shares assuming-dilution 4,335,044 4,397,141 4,272,516
See accompanying notes to consolidated financial statements. 30
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Accumulated Additional Other Class Class Paid-in Comprehensive Retained Treasury A C Capital Income Earnings Stock Total -------- ------- --------- ------ -------- ----- ----- Balance at December 31, 1997 $8,653,176 $1,040,162 $ 9,133,454 $ 830,939 $7,533,259 $(1,796,060) $25,394,930 Comprehensive income: Net earnings 771,229 771,229 Unrealized gain on securities 250,174 250,174 ---------- Total comprehensive income 1,021,403 ---------- Stock dividends 439,784 51,875 338,046 (829,705) -- Conversion Class C to Class A 2,672 (2,672) -- Stock issued 139,028 (46) 124,944 263,926 ---------- ---------- ----------- ---------- ----------- ------------ ----------- Balance at December 31, 1998 9,234,660 1,089,319 9,596,444 1,081,113 7,474,783 (1,796,060) 26,680,259 Comprehensive income: Net earnings 975,895 975,895 Unrealized gain on securities (415,422) (415,422) ----------- Total comprehensive income 560,473 ----------- Stock dividends 463,344 52,910 419,456 (935,710) -- Conversion Class C to Class A 31,160 (31,159) (1) -- Stock issued (canceled) (1,702) 43 1,672 13 Purchase of treasury stock (751,052) (751,052) ----------- ----------- ----------- ---------- ------------ ----------- ----------- Balance at December 31, 1999 9,727,462 1,111,070 10,015,942 665,691 7,516,640 (2,547,112) 26,489,693 Comprehensive income: Net earnings 895,729 895,729 Unrealized gain on securities 171,060 171,060 ----------- Total comprehensive income 1,066,789 ----------- Stock dividends 486,786 55,503 38,774 (581,063) -- Conversion Class C to Class A 1,014 (1,012) (2) -- Purchase of treasury stock (815,121) (815,121) ---------- ---------- ---------- --------- ---------- ---------- ----------- Balance at December 31, 2000 $10,215,262 $1,165,561 $10,054,714 $836,751 $7,831,306 $(3,362,233) $26,741,361 =========== ========== =========== ======== ========== =========== ===========
See accompanying notes to consolidated financial statements. 31 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flow
Years Ended December 31, 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net earnings $ 895,729 $ 975,895 $ 771,229 Adjustments to reconcile net earnings to net cash provided by operating activities: Realized gains on investments and other assets (423,805) (313,013) (74,121) Depreciation 1,202,158 1,187,426 917,166 Provision for losses on accounts and loans receivable 219,269 150,981 175,750 Amortization of goodwill, premiums, and discounts 214,355 263,572 90,622 Provision for deferred income taxes (182,291) 228,464 339,763 Policy and pre-need acquisition costs deferred (5,365,417) (3,886,279) (1,310,170) Policy acquisition costs amortized 2,320,710 3,992,522 976,482 Cost of insurance acquired amortized 868,042 865,140 296,912 Change in assets and liabilities net of effects from purchases and disposals of subsidiaries: Land and improvements held for sale 37,164 (116,962) 61,161 Future life and other benefits 7,023,493 5,012,923 3,349,196 Receivables for mortgage loans sold 2,185,751 (7,890,885) (5,841,576) Other operating assets and liabilities 1,471,135 (959,832) 836,210 ------------ ------------ ------------ Net cash provided by (used in) operating activities 10,466,293 (490,048) 588,624 Cash flows from investing activities: Securities held to maturity: Purchase - fixed maturity securities (4,801,309) (1,207,177) (524,562) Calls and maturities - fixed maturity securities 5,137,323 6,658,968 10,482,673 Securities available for sale: Purchases - equity securities (418,365) (507,404) (22,183) Sales - equity securities 4,797,396 2,906,278 114,608 Purchases of short-term investments (7,523,432) (9,131,204) (11,453,095) Sales of short-term investments 7,785,815 19,384,434 11,102,460 Purchases of restricted assets (604,345) (119,479) (15,820) Mortgage, policy, and other loans made (3,016,125) (10,891,562) (6,974,351) Payments received for mortgage, policy, and other loans 4,782,778 4,770,423 2,811,841 Purchases of property, plant, and equipment (1,719,120) (767,383) (2,040,023) Disposal of property and equipment 625,507 190,000 -- Purchases of real estate (1,329,347) (421,230) (755,581) Sale of real estate -- 334,500 -- Purchases of subsidiaries net of cash acquired -- -- (11,764,823) ------------ ------------ ------------ Net cash (used in) provided by investing activities 3,716,776 11,199,164 (9,038,856)
32 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flow (Continued)
Year Ended December 31, 2000 1999 1998 ---- ---- ---- Cash flows from financing activities: Annuity receipts 8,714,642 10,522,726 2,770,045 Annuity withdrawals (13,935,567) (15,183,240) (3,962,579) Repayment of bank loans and notes and contracts payable (1,652,036) (1,545,957) (918,065) Proceeds from borrowings on bank loans and notes and contracts payable 1,044,202 890,500 6,246,400 Purchase of treasury stock (815,121) (751,052) -- Net change in line of credit for financing of mortgage loans (8,687,023) 1,109,775 7,577,248 ------------ ------------ ------------ Net cash (used in) provided by financing activities (15,330,903) (4,957,248) 11,713,049 ------------ ------------ ------------ Net change in cash (1,147,834) 5,751,868 3,262,817 Cash at beginning of year 12,422,864 6,670,996 3,408,179 ------------ ------------ ------------ Cash at end of year $ 11,275,030 $ 12,422,864 $ 6,670,996 ============ ============ ============
See accompanying notes to the financial statements. 33 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 1) Significant Accounting Principles General Overview of Business Security National Financial Corporation and its wholly-owned subsidiaries (the "Company") operates in three main business segments; life insurance, cemetery and mortuary, and mortgage loans. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance marketed primarily in the intermountain west, California, Florida, Oklahoma, and Texas. The cemetery and mortuary segment of the Company consists of five cemeteries in Utah, one cemetery in California, eight mortuaries in Utah and six mortuaries in Arizona. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction, existing homes and real estate projects primarily in California, Colorado, Florida and Utah. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, for the life insurance subsidiaries, differ from statutory accounting principles prescribed or permitted by regulatory authorities. Risks The following is a description of the most significant risks facing the Company and how it mitigates those risks: Legal/Regulatory Risk - the risk that changes in the legal or regulatory environment in which the Company operates will create additional expenses and/or risks not anticipated by the Company in developing and pricing its products. That is, regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the consolidated financial statements. In addition, changes in tax law with respect to mortgage interest deductions or other public policy or legislative changes may affect the Company's mortgage sales. Also, the Company may be subject to further regulations in the cemetery/mortuary business. The Company mitigates this risk by offering a wide range of products and by diversifying its operations, thus reducing its exposure to any single product or jurisdiction, and also by employing underwriting practices which identify and minimize the adverse impact of such risk. Credit Risk - the risk that issuers of securities owned by the Company or mortgagors of mortgage loans on real estate owned by the Company will default or that other parties, including reinsurers and holders of cemetery/ mortuary contracts which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible. Interest Rate Risk - the risk that interest rates will change which may cause a decrease in the value of the Company's investments or impair the ability of the Company to market its mortgage and cemetery/mortuary products. This change in rates may cause certain interest- sensitive products to become uncompetitive or may cause disintermediation. The Company mitigates this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and/or by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, the Company might have to borrow funds or sell assets prior to maturity and potentially recognize a gain or loss. 34 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 1) Significant Accounting Principles (Continued) -------------------------------------------- Mortality/Morbidity Risk - the risk that the Company's actuarial assumptions may differ from actual mortality/morbidity experience may cause the Company's products to be underpriced, may cause the Company to liquidate insurance or other claims earlier than anticipated and other potentially adverse consequences to the business. The Company minimizes this risk through sound underwriting practices, asset/liability duration matching, and sound actuarial practices. Estimates The preparation of financial statements in conformity with 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. The estimates susceptible to significant change are those used in determining the liability for future policy benefits and claims, those used in determining valuation allowances for mortgage loans on real estate, and those used in determining the estimated future costs for pre-need sales. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. Principles of Consolidation The accompanying consolidated financial statements include the accounts and operations of the Company. The Company's subsidiaries at December 31, 2000, 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 (71.5%) All significant intercompany transactions and accounts have been eliminated in consolidation. 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 71.5% of the outstanding shares of common stock of Southern Security Life Insurance Company (Southern Security). The acquisition was accounted for using the purchase method. The assets and liabilities of SSLIC Holding and Insuradyne have been included in the Company's balance sheet at December 31, 1998. The results of operations of SSLIC Holding and Insuradyne were not material to the financial statements of the Company from the date of acquisition through December 31, 1998 and, consequently, have not been included in the Consolidated Statements of Earnings for the year then ended. 35 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 1) Significant Accounting Principles (Continued) --------------------------------- Investments Investments are shown on the following basis: Fixed maturity securities held to maturity - at cost, adjusted for amortization of premium or accretion of discount. Although the Company has the ability and intent to hold these investments to maturity, infrequent and unusual conditions could occur under which it would sell certain of these securities. Those conditions include unforeseen changes in asset quality, significant changes in tax laws, and changes in regulatory capital requirements or permissible investments. Fixed maturity and equity securities available for sale - at fair value, which is based upon quoted trading prices. Changes in fair values net of income taxes are reported as unrealized appreciation or depreciation and recorded as an adjustment directly to stockholders' equity and, accordingly, have no effect on net income. Mortgage loans on real estate - at unpaid principal balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses. Real estate - at cost, less accumulated depreciation provided on a straight-line basis over the estimated useful lives of the properties, and net of allowance for impairment in value, if any. Policy, student, and other loans - at the aggregate unpaid balances. Short-term investments - consists of certificates of deposit and commercial paper with maturities of up to one year. Restricted assets of cemeteries and mortuaries - consists of cash, participations in mortgage loans with Security National Life Insurance Company, and mutual funds carried at cost; fixed maturity securities carried at cost adjusted for amortization of premium or accretion of discount; and equity securities carried at fair market value. Realized gains and losses on investments - realized gains and losses on investments and declines in value considered to be other than temporary, are recognized in operations on the specific identification basis. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is calculated principally on the straight-line method over the estimated useful lives of the assets which range from three to thirty years. Leasehold improvements are amortized over the lesser of the useful life or remaining lease terms. Recognition of Insurance Premiums and Other Considerations Premiums for traditional life insurance products (which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, limited-payment life insurance policies, and certain annuities with life contingencies) are recognized as revenues when due from policyholders. Revenues for interest-sensitive insurance policies (which include universal life policies, interest-sensitive life policies, deferred annuities, and annuities without life contingencies) consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the period. 36 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 1) Significant Accounting Principles (Continued) --------------------------------- Deferred Policy Acquisition Costs and Cost of Insurance Acquired Commissions and other costs, net of commission and expense allowances for reinsurance ceded, that vary with and are primarily related to the production of new insurance business have been deferred. Deferred policy acquisition costs for traditional life insurance are amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For interest-sensitive insurance products, deferred policy acquisition costs are amortized generally in proportion to the present value of expected gross profits from surrender charges, investment, mortality and expense margins. This amortization is adjusted when estimates of current or future gross profits to be realized from a group of products are reevaluated. Deferred acquisition costs are written off when policies lapse or are surrendered. Cost of insurance acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred policy acquisition costs. Future Life, Annuity and Other Policy Benefits Future policy benefit reserves for traditional life insurance are computed using a net level method, including assumptions as to investment yields, mortality, morbidity, withdrawals, and other assumptions based on the life insurance subsidiaries experience, modified as necessary to give effect to anticipated trends and to include provisions for possible unfavorable deviations. Such liabilities are, for some plans, graded to equal statutory values or cash values at or prior to maturity. The range of assumed interest rates for all traditional life insurance policy reserves was 4.5% to 10.0% in 2000, 1999, and 1998. Benefit reserves for traditional limited-payment life insurance policies include the deferred portion of the premiums received during the premium-paying period. Deferred premiums are recognized as income over the life of the policies. Policy benefit claims are charged to expense in the period the claims are incurred. Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 4% to 6.5% in 2000, 1999 and 1998. Participating Insurance Participating business constitutes 6%, 5%, and 4% of insurance in force for 2000, 1999 and 1998, respectively. The provision for policyholders' dividends included in policyholder obligations is based on dividend scales anticipated by management. Amounts to be paid are determined by the Board of Directors. Reinsurance The Company follows the procedure of reinsuring risks in excess of $50,000 to provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. The Company remains liable for amounts ceded in the event the reinsurers are unable to meet their obligations. The Company has entered into coinsurance agreements with unaffiliated insurance companies under which the Company assumed 100% of the risk for certain life insurance policies and certain other policy-related liabilities of the insurance company. 37 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 1) Significant Accounting Principles (Continued) --------------------------------- Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Expense allowances received in connection with reinsurance ceded are accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. Cemetery and Mortuary Operations Pre-need 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 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 merchandise (primarily markers and vaults) - revenue and costs associated with the sales of pre-need cemetery merchandise are deferred until the merchandise is delivered. Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees) - revenue and costs associated with the sales of pre-need cemetery services are deferred until the services are performed. Prearranged funeral and pre-need cemetery customer obtaining costs - costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of Statement of Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance Enterprises" (FAS No. 60). Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre- need cemetery and prearranged funeral business, are deferred. Cemetery merchandise and services trust investment earnings - investment earnings generated by assets included in merchandise and services trusts are deferred until the associated merchandise is delivered or services performed. The Company is required to place specified amounts into restricted asset accounts for products sold on a pre-need basis. Income from assets placed in these restricted asset accounts are used to offset required increases to the estimated future liability. 38 Revenues and costs for at-need sales are recorded when the services are performed. The Company, through its mortuary and cemetery operations, provides a guaranteed funeral arrangement wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential mortuary customer utilizes one of the Company's facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. However, management believes that given current inflation rates and related price increases of goods and services, the risk of exposure is minimal. Mortgage Operations Mortgage fee income is generated through the origination and refinancing of mortgage loans and is deferred until such loans are sold. All loans are sold to third party investors and the Company does not retain servicing rights. The amounts sold to investors are shown on the balance sheet as Mortgage loans sold to investors and are shown on the basis of the amount due from the each investor. Any impairment to sold loans or possible loan losses are included in the provision for doubtful accounts. At December 31, 2000 and 1999 there was not any provision for doubtful loan losses needed. Excess of Cost Over Net Assets of Acquired Businesses Previous acquisitions have been accounted for as purchases under which assets acquired and liabilities assumed were recorded at their fair values. The excess of cost over net assets of acquired businesses is being amortized over a range of fifteen to twenty years using the straight-line method. The Company periodically evaluates the recoverability of amounts recorded. Accumulated amortization was $1,162,262 and $1,029,528 at December 31, 2000 and 1999, respectively. Income Taxes Income taxes include taxes currently payable plus deferred taxes related to the tax effect of temporary differences in the financial reporting basis and tax basis of assets and liabilities. Such temporary differences are related principally to the deferral of policy acquisition costs and the provision for future policy benefits in the insurance operations, and unrealized gains on fixed maturity and equity securities available for sale. Earnings Per Common Share The Company computes earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This Standard requires presentation of two new amounts, basic and diluted earnings per share. Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented, after the effect of the assumed conversion of Class C Common Stock to Class A Common Stock, the acquisition of treasury stock, and the retroactive effect of stock dividends declared. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the year plus the incremental shares that would have been outstanding under certain deferred compensation plans. Stock Compensation The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation". In accordance with the provisions of SFAS 123, the Company has elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and related interpretations in accounting for its stock option plans. 39 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 1) Significant Accounting Principles (Continued) --------------------------------- 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 $0, $203,000, and $110,000 in 2000, 1999, and 1998, respectively. As a result, basic and diluted earnings per share would have been reduced by $0, $0.05, and $0.03 in 2000, 1999, and 1998, respectively. The weighted average fair value of options granted in 2000 under the 1993 Plan and the 2000 Plan is estimated at $1.50 as of the grant date using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 0%, volatility of 30.8%, risk-free interest rate of 6.6%, and an expected life of five to ten years. The weighted average fair value of each option granted in 1999 under the 1993 Plan is estimated at $1.61 as of the grant date using the Black Scholes option-pricing model with the following assumptions: dividend yield of 0%, volatility of 28.83%, risk-free interest rate of 6.0%, and an expected life of ten years. The Company also has one variable option plan (the "1987 Plan"). In accordance with APB Opinion No. 25, compensation cost related to options granted and outstanding under these plans is estimated and recognized over the period of the award based on changes in the current market price of the Company's stock over the vesting period. Options granted under the 1987 Plan are exercisable for a period of ten years from the date of grant. Pending Accounting Change SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and amended by SFAS No. 138, issued in June 2000. The requirements of SFAS No. 133, as amended, will be effective for the Company in the first quarter of the fiscal year beginning January 1, 2001. The standard establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. Under the standard, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has determined SFAS 133 to have no impact on the Company's financial position and results of operations because the Company has no derivative activity. SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000. SFAS No. 140 is a replacement of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Most of the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the Financial Accounting Standards Board (FASB), and some were changed only in minor ways. In issuing SFAS No. 140, the FASB included issues and decisions that had been addressed and determined since the original publication of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001. Management does not expect the adoption of SFAS No. 140 to have a significant impact on the financial position or results of operations of the Company. Recent Accounting Pronouncement Interpretation No. 44 In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of Opinion No. 25 for (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 became effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. FIN 44 had no effect on the Company's financial position or results of operations. 40 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 1) Significant Accounting Principles (Continued) --------------------------------- SAB 101 The Company has adopted Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101) which changes the Company's accounting policies regarding the manner in which the Company records pre-need sales activities. The implementation of SAB No. 101 did not have a material effect on the consolidated financial condition, results of operations or cash flows of the Company. The change in the Company's accounting policies resulting from implementation of SAB No. 101 has been treated as a change in accounting principle effective as of January 1, 2000. The cumulative effect of the accounting change through December 31, 1999 was negligible. The following table shows the unaudited proforma effects of retroactive application using the newly adopted accounting policies compared to historical results for the years ended December 31, 1999 and 1998. There were no changes in net earnings or net earnings per common share for those periods since the Company's previous accounting practice did not recognize any significant profits on pre-need sales. The Company's previous accounting practice recorded pre-need sales as revenue but also recorded approximately an equal amount for the sum of the future merchandise cost and sales expense. Implementing SAB 101 changed this practice to defer these pre-need sales and costs to when the merchandise is delivered or the services are performed. 1999 1998 Proforma Historical Proforma Historical Revenues $48,631,818 $49,657,378 $31,938,532 $32,819,603 Total benefits and expenses 47,181,037 48,206,597 30,912,488 31,793,559 Reclassifications Certain amounts in prior years have been reclassified to conform with the 2000 presentation. 41
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 2) Investments The Company's investments in fixed maturity securities held to maturity and equity securities available for sale are summarized as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- --------- ---------- --------- December 31, 2000: Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $12,900,371 $ 182,637 $ (4,809) $13,078,199 Obligations of states and political subdivisions 183,399 12,829 (7,903) 188,325 Corporate securities including public utilities 20,951,532 322,660 (584,886) 20,689,306 Mortgage-backed securities 5,320,861 30,737 (55,620) 5,295,978 Redeemable preferred stock 28,005 10,500 (7,047) 31,458 ----------- ----------- ----------- ----------- Total fixed maturity securities held to maturity $39,384,168 $ 559,363 $ (660,265) $39,283,266 =========== =========== =========== =========== Securities available for sale: Bonds U.S. Treasury securities and obligations of U.S. Government agencies $ 3,367,096 $ 45,003 $ (648) $ 3,411,451 Corporate securities including public utilities 20,124,932 91,913 (188,214) 20,028,631 Mortgage-backed securities 64,836 71 -- 64,907 Nonredeemable preferred stock 56,031 29,750 (9,044) 76,737 Common stock 1,561,332 1,596,254 (460,246) 2,697,340 ----------- ----------- ----------- ----------- Total securities available for sale $25,174,227 $ 1,762,991 $ (658,152) $26,279,066 =========== =========== =========== =========== Restricted equity securities (note 7) $ 172,391 $ 215,410 $ (3,019) $ 384,782 =========== =========== =========== ===========
42
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- --------- ---------- --------- December 31, 1999: Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $12,822,025 $ 90,415 $ (225,797) $12,686,643 Obligations of states and political subdivisions 176,499 6,345 (15,728) 167,116 Corporate securities including public utilities 20,594,306 594,303 (428,752) 20,759,857 Mortgage-backed securities 6,009,010 14,095 (223,291) 5,799,814 Redeemable preferred stock 28,011 19,011 (7,000) 40,022 ----------- ----------- ----------- ----------- Total fixed maturity securities held to maturity $39,629,851 $ 724,169 $ (900,568) $39,453,452 =========== =========== =========== =========== Securities available for sale: Bonds U.S. Treasury securities and obligations of U.S. Government agencies $ 4,596,294 $ 4,599 $ (21,561) $ 4,579,332 Corporate securities including public utilities 20,270,712 -- (820,966) 19,449,746 Mortgage-backed securities 90,341 -- (229) 90,112 Nonredeemable preferred stock 70,431 43,163 (7,144) 106,450 Common stock 4,279,708 2,248,436 (889,381) 5,638,763 ----------- ----------- ----------- ----------- Total securities available for sale $29,307,486 $ 2,296,198 $(1,739,281) $29,864,403 =========== =========== =========== =========== Restricted equity securities (note 7) $ 172,391 $ 234,872 $ (968) $ 406,295 =========== =========== =========== ===========
43 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 2) Investments (Continued) ----------- The fair values for fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. The fair values for equity securities are based on quoted market prices. The amortized cost and estimated fair value of fixed maturity securities at December 31, 2000, 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. Estimated Amortized Fair Held to Maturity: Cost Value ---------- --------- Due in 2001 $ 8,276,712 $ 8,298,094 Due in 2002 through 2005 17,348,014 17,496,854 Due in 2006 through 2010 6,050,499 5,691,138 Due after 2010 2,360,077 2,469,744 Mortgage-backed securities 5,320,861 5,295,978 Redeemable preferred stock 28,005 31,458 ----------- ----------- $39,384,168 $39,283,266 Estimated Amortized Fair Available for Sale: Cost Value ---------- --------- Due in 2001 $ 2,773,071 $ 2,774,159 Due in 2002 through 2005 14,149,826 14,088,461 Due in 2006 through 2010 6,471,463 6,469,372 Due after 2010 97,669 108,090 Mortgage-backed securities 64,835 64,907 ----------- ----------- $23,556,864 $23,504,989 The Company's realized gains and losses in investments are summarized as follows: 2000 1999 1998 ---- ---- ---- Fixed maturity securities held to maturity: Gross realized gains $ 3,125 $ 87,859 $ 43,154 Gross realized losses (53) (1,895) (26,470) Securities available for sale: Gross realized gains 884,199 14,138 66,589 Gross realized losses (463,466) (12) (3,887) Other assets -- 212,923 (5,265) --------- --------- --------- Total $ 423,805 $ 313,013 $ 74,121 ========= ========= ========= 44 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 2) Investments (Continued) ----------- Generally gains and losses from held to maturity securities are a result of early calls and related amortization of premiums or discounts. 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 83% of its mortgage loans in the state of Utah. 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, 2000, other than investments issued or guaranteed by the United States Government, are as follows: Carrying Amount Dean Witter Discover $4,274,338 Philip Morris, Inc. 5,653,514 Major categories of net investment income are as follows: 2000 1999 1998 ---- ---- ---- Fixed maturity securities $ 4,629,916 $ 4,720,838 $ 3,293,949 Equity securities 235,491 226,857 219,785 Mortgage loans on real estate 1,735,590 1,451,214 1,036,132 Real estate 1,507,239 1,711,771 1,384,311 Policy loans 641,272 725,383 170,752 Short-term investments 402,350 650,035 405,848 Other 3,962,362 2,142,527 1,899,643 ------------ ------------ ------------ Gross investment income 13,114,220 11,628,625 8,410,420 Investment expenses (978,148) (997,323) (951,677) ------------ ------------ ------------ Net investment income $ 12,136,072 $ 10,631,302 $ 7,458,743 ============ ============ ============ Net investment income includes net investment income earned by the restricted assets of the cemeteries and mortuaries of approximately $717,000, $733,000 and $683,000 for 2000, 1999, and 1998, respectively. Investment expenses consist primarily of depreciation, property taxes and an estimated portion of administrative expenses relating to investment activities. Securities on deposit for regulatory authorities as required by law amounted to $8,815,733 at December 31, 2000 and $9,632,937 at December 31, 1999. 45 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 3) Cost of Insurance Acquired Information with regard to cost of insurance acquired is as follows: 2000 1999 1998 ---- ---- ---- Balance at beginning of year $ 9,597,306 $ 10,462,446 $ 3,370,018 Cost of insurance acquired -- -- 7,389,340 Imputed interest at 7% 641,325 732,371 235,901 Amortization (1,509,367) (1,597,511) (532,813) ------------ ------------ ------------ Net amortization charged to income (868,042) (865,140) (296,912) ------------ ------------ ------------ Balance at end of year $ 8,729,264 $ 9,597,306 $ 10,462,446 ============ ============ ============ Presuming no additional acquisitions, net amortization charged to income is expected to approximate $824,000, $759,000, $702,000, $649,000, and $587,000 for the years 2001 through 2005. Actual amortization may vary based on changes in assumptions or experience. 4) Property, Plant and Equipment The cost of property, plant and equipment is summarized below: December 31, ------------ 2000 1999 ---- ---- Land and Buildings $ 10,828,916 $ 10,171,943 Furniture and equipment 6,694,925 6,384,208 ------------ ------------ 17,523,841 16,556,151 Less accumulated depreciation (6,699,141) (5,989,643) ------------ ------------ Total $ 10,824,700 $ 10,566,508 ============ ============ 5) Bank Loans Payable and Lines of Credit Bank loans payable are summarized as follows: December 31, ------------ 2000 1999 ---- ---- Bank prime rate plus 1/2% (10.0% at December 31, 2000) note payable in monthly installments of $36,420 including principal and interest, collateralized by 15,000 shares of Security National Life stock, due December 2004 $1,425,967 $1,697,397 10% note payable in monthly installments of $8,444 including principal and interest, collateralized by real property, which book value is approximately $1,045,000, due January 2013 711,608 740,202 46 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 5) Bank Loans Payable and Lines of Credit (Continued) -------------------------------------- December 31, ------------ 2000 1999 ---- ---- One year treasury constant maturity plus 2.75% 8.03% at December 31, 2000) note payable in monthly installments of $6,000, including principal and interest, collateralized by real property, which book value is approximately $359,000, due October 2002 120,824 182,089 Bank prime rate less 1.35% (8.15% at December 31, 2000) note payable in monthly installments of $20,836, including principal and interest, collateralized by real property, which book value is approximately $1,033,000, due November 2007 1,662,768 1,703,915 $5,046,448 revolving line of credit at bank prime rate less 1%, (8.5% at December 31, 2000) interest only to December 1999 thereafter interest and principal, collateralized by 15,000 shares of Security National Life Insurance Company stock, due December 2005 4,904,426 5,610,111 Bank prime rate plus 1/2% (10.0% at December 31, 2000) note payable in monthly installments of $7,235 including principal and interest, collateralized by real property, which book value is approximately $852,000, due August 2004 301,516 370,748 Bank prime rate less 1.35% (8.15% at December 31, 2000) 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 180,893 199,461 Other collateralized bank loans payable 497,116 264,175 ----------- ----------- Total bank loans 9,805,118 10,768,098 Less current installments 1,596,600 1,143,823 ----------- ----------- Bank loans, excluding current installments $ 8,208,518 $ 9,624,275 =========== =========== $15 million revolving line of credit at LIBOR plus 1.50% (7.32% at December 31, 1999), payable within 30 days collateralized by receivable from mortgage loans sold to investors $ -- $ 8,687,023 =========== =========== 47 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 5) Bank Loans Payable and Lines of Credit (Continued) -------------------------------------- In addition to the lines of credit described above, the Company has line of credit agreements with banks for $2,000,000 and $5,000,000, of which none were outstanding at December 31, 2000 or 1999. The lines of credit are for general operating purposes. The $2,000,000 line of credit bears interest at the bank's prime rate and must be repaid every 30 days. The $5,000,000 line of credit bears interest at a variable rate with interest payable monthly and is collateralized by student loans equaling 115% of the unpaid principal balance. See Note 6 for summary of maturities in subsequent years. 6) Notes and Contracts Payable Notes and contracts payable are summarized as follows: December 31, ------------ 2000 1999 ---- ---- 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. $ 628,802 $ 646,294 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. 289,865 344,860 Due to former stockholders of Civil Service Employees Life Insurance Company resulting from the acquisition of such entity. 7% note payable in seven annual installments with principal payments of $151,857, due December 2003. 303,714 455,571 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 $5,350 due February 2007. 62,892 177,246 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 665,318 727,847 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 $1,348,000 due March 2030 899,500 890,500 48 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 6) Notes and Contracts Payable (Continued) --------------------------- December 31, ------------ 2000 1999 ---- ---- Due to former shareholders of Southern Security Life Insurance Company resulting from the acquisition of such entity. 6.5% note payable in five annual installments with principal payments of $158,840 due April 2005 794,202 -- Other notes payable 596,537 643,366 ---------- ---------- Total notes and contracts payable 4,240,830 3,885,684 Less current installments 615,291 414,421 ---------- ---------- Notes and contracts, excluding current installments $3,625,539 $3,471,263 ========== ========== The following tabulation shows the combined maturities of bank loans payable, lines of credit and notes and contracts payable: 2001 $ 2,211,891 2002 2,198,823 2003 2,118,151 2004 2,270,124 2005 1,813,758 Thereafter 3,433,201 ----------- Total $14,045,948 =========== Interest paid approximated interest expense in 2000, 1999 and 1998. 7) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds ------------------------------------------------------------------- The Company owns and operates several endowment care cemeteries, for which it has established and maintains an endowment care fund. The Company records a liability to the fund for each space sold at current statutory rates. The Company is not required to transfer assets to the fund until the spaces are fully paid for. As of December 31, 2000 and 1999 the Company had transferred $20,373 and $179,939, respectively in excess of the required contribution to the fund. The Company has established and maintains certain restricted asset accounts to provide for future merchandise obligations incurred in connection with its pre-need sales. Such amounts are reported as restricted assets of cemeteries and mortuaries in the accompanying balance sheet. Assets in the restricted asset account are summarized as follows: December 31, ------------ 2000 1999 ---- ---- Cash and cash equivalents $ 385,659 $2,361,597 Mutual funds 169,865 132,945 Fixed maturity securities 297,331 295,771 Equity securities 77,778 77,778 Participation in mortgage loans with Security National Life 3,877,490 1,357,200 Time certificate of deposit 33,696 33,696 ---------- ---------- Total $4,841,819 $4,258,987 ========== ========== 49 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 8) Income Taxes The Company's income tax liability at December 31 is summarized as follows: December 31, ------------ 2000 1999 ---- ---- Current $ 499,714 $ 142,002 Deferred 5,624,798 5,594,858 ---------- ---------- Total $6,124,512 $5,736,860 ========== ========== Significant components of the Company's deferred tax assets and liabilities at December 31 are approximately as follows: 2000 1999 ---- ---- Assets Future policy benefits $ (2,021,798) $ (1,740,203) Unearned premium (1,939,023) (1,950,587) Difference between book and tax basis of bonds (49,498) (56,489) Net operating loss carryforwards expiring in the years 2001 through 2010 (210,848) (219,249) Other (633,007) (329,361) ------------ ------------ Total deferred tax assets (4,854,174) (4,295,889) Liabilities Deferred policy acquisition costs $ 5,213,517 $ 4,485,047 Cost of insurance acquired 1,714,724 1,884,547 Installment sales 1,215,773 1,323,994 Depreciation 653,192 660,369 Trusts 1,051,602 821,165 Tax on unrealized appreciation 214,337 (9,299) Other 415,827 724,924 ------------ ------------ Total deferred tax liabilities 10,478,972 9,890,747 ------------ ------------ Net deferred tax liability $ 5,624,798 $ 5,594,858 ============ ============ The Company paid $94,365 in income taxes for 2000 and did not pay any income taxes for 1999 and 1998. The Company's income tax expense (benefit) is summarized as follows: 2000 1999 1998 ---- ---- ---- Current $ 486,931 $ 2,052 $ (84,948) Deferred (182,291) 228,464 339,763 --------- --------- --------- Total $ 304,640 $ 230,516 $ 254,815 ========= ========= ========= 50 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 8) Income Taxes (Continued) ------------ The reconciliation of income tax expense at the U.S. federal statutory rates is as follows: 2000 1999 1998 ---- ---- ---- Computed expense at statutory rate $ 423,682 $ 493,266 $ 348,855 Special deductions allowed small life insurance companies (68,769) (122,204) (88,658) Dividends received deduction (24,418) (24,401) (26,691) Minority interest taxes (19,222) (102,828) -- Other, net (6,633) (13,317) 21,309 --------- --------- --------- Tax expense $ 304,640 $ 230,516 $ 254,815 ========= ========= ========= A portion of the life insurance income earned prior to 1984 was not subject to current taxation but was accumulated for tax purposes, in a "policyholders' surplus account." Under provisions of the Internal Revenue Code, the policyholders' surplus account was frozen at its December 31, 1983 balance and will be taxed generally only when distributed. As of December 31, 2000, the policyholders' surplus accounts approximated $4,500,000. Management does not intend to take actions nor does management expect any events to occur that would cause federal income taxes to become payable on that amount. However, if such taxes were accrued, the amount of taxes payable would be approximately $1,500,000. The insurance companies have remaining loss carry forwards for tax purposes of approximately $1,679,000, approximately $286,000 of which is subject to an annual limitation of approximately $300,000. 9) Reinsurance, Commitments and Contingencies The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranged from $30,000 to $75,000 at December 31, 2000 and 1999. 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 $580,287,000 at December 31, 2000 and $581,296,000 at December 31, 1999. As part of the acquisition of Southern Security, the Company has a co-insurance agreement with The Mega Life and Health Insurance Company ("MEGA"). On December 31, 1992 Southern Security ceded to MEGA 18% of all universal life policies in force at that date. MEGA is entitled to 18% of all future premiums, claims, policyholder loans and surrenders relating to the ceded policies. In addition, Southern Security receives certain commission and expense reimbursements. The funds held related to reinsurance treaties of $1,417,216 and policyholders' account balances on deposit with reinsurer of $7,434,750 represent the 18% share of policy loans and policyholder account balances ceded to MEGA as of December 31, 2000. Mortgage loans originated and sold to unaffiliated investors are sold subject to certain recourse provisions. The Company is a defendant in various other legal actions arising from the normal conduct of business. Management believes that none of the actions will have a material effect on the Company's financial position or results of operations. 51 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 10) Retirement Plans The Company and its subsidiaries have a noncontributory Employee Stock Ownership Plan (ESOP) for all eligible employees. Eligible employees are primarily those with more than one year of service, who work in excess of 1,040 hours per year. Contributions, which may be in cash or stock of the Company, are determined annually by the Board of Directors. The Company's contributions are allocated to eligible employees based on the ratio of each eligible employee's compensation to total compensation for all eligible employees during each year. ESOP contribution expense totaled $0, $56,277, and $59,613 for 2000, 1999, and 1998, respectively. At December 31, 2000 the ESOP held 553,322 shares of Class A and 1,277,690 shares of Class C common stock of the Company. All shares held by the ESOP have been allocated to the participating employees and all shares held by the ESOP are considered outstanding for purposes of computing earnings per share. The Company has a 401(k) savings plan covering all eligible employees, as defined above, which includes employer participation in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan allows participants to make pretax contributions up to the lesser of 15% of total annual compensation or the statutory limits. The Company may match up to 50% of each employee's investment in Company stock, up to 1/2% of 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 2000, 1999, and 1998 were approximately $0, $3,858, and $7,000 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 contribution for 2000, 1999 and 1998 were $0, $130,958, and $0, respectively. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee. 11) Capital Stock The following table summarizes the activity in shares of capital stock for the three year period ended December 31, 2000: Class A Class C ------- ------- Balance at December 31, 1997 4,326,588 5,200,811 Stock Dividends 219,892 259,374 Conversion of Class C to Class A 1,336 (13,352) Stock Issued (canceled) 69,514 (238) ---------- ---------- Balance at December 31, 1998 4,617,330 5,446,595 Stock Dividends 231,672 264,550 Conversion of Class C to Class A 15,580 (155,795) Stock Issued (canceled) (851) -- ---------- ---------- Balance at December 31, 1999 4,863,731 5,555,350 Stock Dividends 243,393 277,515 Conversion of Class C to Class A 507 (5,060) ---------- ---------- Balance at December 31, 2000 5,107,631 5,827,805 ========== ========== 52 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 11) Capital Stock (Continued) ------------- The Company has two classes of common stock with shares outstanding, Class A and Class C. Class C shares vote share for share with the Class A shares on all matters except election of one-third of the directors who are elected solely by the Class A shares, but generally are entitled to a lower dividend participation rate. Class C shares are convertible into Class A shares at any time on a ten to one ratio. Also Class A shares can be converted into Class C shares, but the conversion rights have numerous restrictions. Stockholders of both classes of common stock have received 5% stock dividends in the years 1989 through 2000, as authorized by the Company's Board of Directors. The Company has Class B Common Stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. Class B shares are non-voting stock except to any proposed amendment to the Articles of Incorporation which would affect Class B Common Stock. In accordance with SFAS 128, the basic and diluted earnings per share amounts were calculated as follows: 2000 1999 1998 ---- ---- ---- Numerator: Net income $ 895,729 $ 975,895 $ 771,229 ========== =========== ========== Denominator: Denominator for basic earnings per share- weighted-average shares 4,317,779 4,397,141 4,272,516 Effect of dilutive securities: Employee stock options 17,265 -- -- Stock appreciation rights -- -- -- ---------- ----------- ---------- Dilutive potential common shares 17,265 -- -- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 4,335,044 4,397,141 4,272,516 ========== =========== ========== Basic earnings per share $ 0.21 $ 0.22 $ 0.18 ========== =========== ========== Diluted earnings per share $ 0.21 $ 0.22 $ 0.18 ========== =========== ========== There are no dilutive effects on net income for purpose of this calculation. 53 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 12) Deferred Compensation Plans In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987 Plan). The 1987 Plan provides that shares of the Class A Common Stock of the Company may be optioned to certain officers and key employees of the Company. The 1987 Plan establishes a Stock Option Plan Committee which selects the employees to whom the options will be granted and determines the price of the stock. The 1987 Plan establishes the minimum purchase price of the stock at an amount which is not less than 100% of the fair market value of the stock (110% for employees owning more than 10% of the total combined voting power of all classes of stock). The 1987 Plan provides that if additional shares of Class A Common Stock are issued pursuant to a stock split or a stock dividend, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be increased proportionately with no increase in the total purchase price of the shares then covered, and the number of shares of Class A Common Stock reserved for the purpose of the 1987 Plan shall be increased by the same proportion. In the event that the shares of Class A Common Stock of the Company from time to time issued and outstanding are reduced by a combination of shares, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be reduced proportionately with no reduction in the total price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purposes of the 1987 Plan shall be reduced by the same proportion. The 1987 Plan terminated in 1997 and options granted are non-transferable. Options granted and outstanding under the 1987 Plan include Stock Appreciation Rights which permit the holder of the option to elect to receive cash, amounting to the difference between the option price and the fair market value of the stock at the time of the exercise, or a lesser amount of stock without payment, upon exercise of the option. Activity of the 1987 Plan is summarized as follows: Number Option of Shares Price Outstanding at December 31, 1997 155,400 $4.29 - $4.71 Dividend 7,770 Exercised -- ------------- Outstanding at December 31, 1998 163,170 $4.08 - $4.49 Dividend 8,159 Exercised -- ------------- Outstanding at December 31, 1999 171,329 $3.89 - $4.28 Dividend 8,566 Exercised -- ------------- Outstanding at December 31, 2000 179,895 $3.70 - $4.07 ============= Exercisable at end of year 179,895 ============= Available options for future grant 1987 Stock Incentive Plan -0- ============= 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 54 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 12) Deferred Compensation Plans (Continued) --------------------------- Stock for issuance thereunder. The 1993 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress. The 1993 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both "incentive stock options," as defined under Section 422A of the Internal Revenue Code of 1986 (the "Code"), and "non- qualified options" may be granted pursuant to the 1993 Plan. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the Code, including a requirement that the option exercise price be not less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors. The options were granted to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company. The 1993 Plan is administered by the Board of Directors or by a committee designated by the Board. The 1993 Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. No options may be exercised for a term of more than ten years from the date of grant. The 1993 Plan has a term of ten years. The Board of Directors may amend or terminate the 1993 Plan at any time, subject to approval of certain modifications to the 1993 Plan by the shareholders of the Company as may be required by law or the 1993 Plan. On November 7, 1996 the Company amended the Articles of Incorporation as follows: (i) to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide that the stock subject to options, awards and purchases may include Class C common stock. On October 14, 1999, the Company amended the 1993 Plan to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 746,126 Class A shares to 1,046,126 Class A shares. 55 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 12) Deferred Compensation Plans (Continued) --------------------------- Activity of the 1993 Plan is summarized as follows: Number Option of Shares Price Outstanding at December 31, 1997 292,284 $2.58 - $4.31 Dividend 30,869 Granted 148,000 Exercised (63,814) ------------- Outstanding at December 31, 1998 407,339 $2.34 - $4.16 Dividend 24,762 Granted 190,000 Expired (102,103) ------------- Outstanding at December 31, 1999 519,998 $2.22 - $3.96 Dividend 27,313 Granted 26,000 ------------- Outstanding at December 31, 2000 573,311 $2.12 - $3.77 ============= Exercisable at end of year 573,311 ============= Available options for future grant 1993 Stock Incentive Plan 509,701 ============= On October 16, 2000, the Company adopted the Security National Financial Corporation 2000 Director Stock Option Plan (the "2000 Plan"), which reserved 50,000 shares of Class A Common Stock for issuance thereunder. Effective November 1, 2000, and on each anniversary date thereof during the term of the 2000 Plan, each outside Director who shall first join the Board after the effective date shall be granted an option to purchase 1,000 shares upon the date which such person first becomes an outside Director and an annual grant of an option to purchase 1,000 shares on each anniversary date thereof during the term of the 2000 Plan. The options granted to outside Directors shall vest in their entirety on the first anniversary date of the grant. The primary purposes of the 2000 Plan are to enhance the Company's ability to attract and retain well-qualified persons for service as directors and to provide incentives to such directors to continue their association with the Company. The 2000 Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivisions, combination or stock dividend. 56 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 12) Deferred Compensation Plans (Continued) --------------------------- The term of the 2000 Plan will be five years. Activity of the 2000 Plan is summarized as follows: Number Option of Shares Price --------- -------- Outstanding at December 31, 199 0 Dividend 200 Granted 4,000 ----- Outstanding at December 31, 2000 4,200 $ 2.14 ===== Exercisable at end of year 0 ===== Available options for future grant 2000 Director Plan 48,300 ====== 13) Statutory-Basis Financial Information The Company's life insurance subsidiaries are domiciled in Utah and Florida and prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Utah and Florida Insurance Departments. "Prescribed" statutory accounting practices are interspersed throughout state insurance laws and regulations, the National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual and a variety of other NAIC publications. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The National Association of Insurance Commissioners has adopted the Codification of Statutory Accounting Principles ("Codification"). Codification changes current statutory accounting rules in several areas and is effective January 1, 2001. Although the Company has not estimated the potential effect, it does not believe Codificaiton will have a material effect on the financial position, results of operation, or liquidity of the Company. Statutory net income and statutory stockholder's equity for the life subsidiaries as reported to state regulatory authorities, is presented below: Statutory Net Income (Loss) December 31, 2000 1999 1998 ---- ---- ---- Security National Life $796,047 $628,538 346,659 Southern Security Life 80,477 533,233 (486,825) Statutory Stockholders' Equity December 31, 2000 1999 1998 ---- ---- ---- Security National Life $14,309,515 $12,089,618 12,083,747 Southern Security Life 8,405,211 8,976,516 8,627,252 57 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 13) Statutory-Basis Financial Information (Continued) ------------------------------------- Generally, the net assets of the life insurance subsidiaries available for transfer to the Company are limited to the amounts that the life insurance subsidiaries net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements; however, payments of such amounts as dividends are subject to approval by regulatory authorities. The Utah 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 300% of the first level of regulatory action. 14) Business Segment Information Description of Products and Services by Segment The Company has three reportable segments: life insurance, cemetery and mortuary, and mortgage loans. The Company's life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company's independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company's cemetery and mortuary segment consists of revenues and operating expenses from the sale of pre-need and at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries and the net investment income from investing segment surplus funds. The Company's mortgage loan segment consists of loan originations fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing pre-sold loans before the funds are received from financial institutional investors. In addition, the Company has a corporate segment which provides administrative and marketing services to the reportable segments described above. Measurement of Segment Profit or Loss and Segment Assets The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit. Factors Management Used to Identify the Enterprise's Reportable Segments The Company's reportable segments are business units that offer different products and are managed separately due to the different products and the need to report to the various regulatory jurisdictions. 58 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 14) Business Segment Information
2000 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Corporate Items Consolidated --------- -------- -------- --------- ----- ------------ Revenues: From external sources: Revenue from customers $ 12,875,585 $ 9,416,927 $ 22,921,585 $ -- $ -- $ 45,214,097 Net investment income 8,222,658 716,813 3,196,571 30 -- 12,136,072 Realized gains on investments 423,805 -- -- -- -- 423,805 Other revenues 85,861 23,479 195,480 66 -- 304,886 Intersegment revenues: Net investment income 2,955,958 -- -- 309,658 (3,265,616) -- Other revenues 180,941 -- -- 3,568,800 (3,749,741) -- ------------ ------------ ------------ ------------ ------------ ------------ 24,744,808 10,157,219 26,313,636 3,878,554 (7,015,357) 58,078,860 ------------ ------------ ------------ ------------ ------------ ------------ Expenses: Death and other policy benefits 5,662,062 -- -- -- -- 5,662,062 Increase in future policy benefits 7,268,720 -- -- -- -- 7,268,720 Amortization of deferred policy acquisition costs and cost of insurance acquired 3,188,752 -- -- -- -- 3,188,752 Depreciation 322,514 451,259 61,744 29,904 -- 865,421 General, administrative and other costs: Intersegment 3,717,341 69,072 101,288 166,408 (4,054,109) -- Other 3,878,167 9,369,839 22,796,596 1,677,011 -- 37,725,613 Interest expense: Intersegment 309,658 210,984 2,202,700 237,906 (2,961,248) -- Other 39,546 518,845 1,212,456 355,322 -- 2,126,169 ------------ ------------ ------------ ------------ ------------ ------------ 24,386,760 10,619,999 26,374,784 2,466,551 (7,015,357) 56,832,737 ------------ ============ ------------ ------------ ------------ ------------ Earnings (losses) before income taxes $ 358,048 $ (462,780) $ (61,148) $ 1,412,003 $ -- $ 1,246,123 ============ ============ ============ ============ ============ ============ Identifiable assets $196,390,736 $ 37,344,781 $ 3,495,907 $ 3,304,235 $(31,148,813) $209,386,846 ============ ============ ============ ============ ============ ============ Expenditures for long-lived assets $ 260,836 $ 680,626 $ 220,856 $ 556,802 $ -- $ 1,719,120 ============ ============ ============ ============ ============ ============
59 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 14) Business Segment Information (Continued) ----------------------------
1999 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Corporate Items Consolidated --------- -------- -------- --------- ----- ------------ Revenues: From external sources: Revenue from customers $ 13,175,825 $ 10,178,246 $ 14,503,388 $ -- $ -- $ 37,857,459 Net investment income 8,305,723 733,377 1,558,166 34,036 -- 10,631,302 Realized gains on investments 313,013 -- -- -- -- 313,013 Other revenues 812,973 22,856 14,117 5,658 -- 855,604 Intersegment revenues: Net investment income 2,275,916 -- -- 269,904 (2,545,820) -- Other revenues 175,409 -- -- 3,568,800 (3,744,209) -- ------------ ------------ ------------ ------------ ------------ ------------ 25,058,859 10,934,479 16,075,671 3,878,398 (6,290,029) 49,657,378 ------------ ------------ ------------ ------------ ------------ ------------ Expenses: Death and other policy benefits 6,274,926 -- -- -- -- 6,274,926 Increase in future policy benefits 5,700,784 -- -- -- -- 5,700,784 Amortization of deferred policy acquisition costs and cost of insurance acquired 4,857,662 -- -- -- -- 4,857,662 Depreciation 179,461 452,225 44,633 533 -- 676,852 General, administrative and other costs: Intersegment 3,711,809 69,072 85,719 219,684 (4,086,284) -- Other 3,307,063 9,886,187 14,207,923 2,175,798 -- 29,576,971 Interest expense: Intersegment 269,904 181,972 1,484,726 267,143 (2,203,745) -- Other 3,236 540,051 201,976 374,139 -- 1,119,402 ------------ ------------ ------------ ------------ ------------ ------------ 24,304,845 11,129,507 16,024,977 3,037,297 (6,290,029) 48,206,597 ------------ ------------ ------------ ------------ ------------ ------------ Earnings (losses) before income taxes $ 754,014 $ (195,028) $ 50,694 $ 841,101 $ -- $ 1,450,781 ============ ============ ============ ============ ============ ============ Identifiable assets $196,056,087 $ 34,013,032 $ 11,020,380 $ 2,716,069 $(29,507,131) $214,298,437 ============ ============ ============ ============ ============ ============ Expenditures for long-lived assets $ 266 $ 527,658 $ 90,819 $ 11,002 $ -- $ 629,745 ============ ============ ============ ============ ============ ============
60 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 14) Business Segment Information (Continued) ----------------------------
1998 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Corporate Items Consolidated --------- -------- -------- --------- ----- ------------ Revenues: From external sources: Revenue from customers $ 5,915,659 $ 9,225,801 $ 10,082,330 $ -- $ -- $ 25,223,790 Net investment income 5,553,486 682,915 1,206,578 15,764 -- 7,458,743 Realized gains on investments 74,121 -- -- -- -- 74,121 Other revenues 22,078 32,456 6,034 2,381 -- 62,949 Intersegment revenues: Net investment income 1,360,877 -- -- 187,151 (1,548,028) -- Other revenues 109,887 -- -- 568,800 (678,687) -- ------------ ------------ ------------ ------------ ------------ ------------ 13,036,108 9,941,172 11,294,942 774,096 (2,226,715) 32,819,603 ------------ ------------ ------------ ------------ ------------ ------------ Expenses: Death and other policy benefits 3,578,634 -- -- -- -- 3,578,634 Increase in future policy benefits 3,353,287 -- -- -- -- 3,353,287 Amortization of deferred policy acquisition costs and cost of insurance acquired 1,273,394 -- -- -- -- 1,273,394 Depreciation 85,557 455,418 39,125 4,655 -- 584,755 General, administrative and other costs: Intersegment 536,400 70,656 71,631 -- (678,687) -- Other 3,497,140 8,775,932 9,540,801 190,493 -- 22,004,366 Interest expense: Intersegment 187,151 183,908 1,176,969 -- (1,548,028) -- Other 11,587 554,283 176,091 257,162 999,123 ------------ ------------ ------------ ------------ ------------ ------------ $ 12,523,150 $ 10,040,197 $ 11,004,617 $ 452,310 $ (2,226,715) $ 31,793,559 ------------ ------------ ------------ ------------ ------------ ------------ Earnings (losses) before income taxes $ 512,958 $ (99,025) $ 290,325 $ 321,786 $ -- $ 1,026,044 ============ ============ ============ ============ ============ ============ Identifiable assets $183,340,180 $ 33,539,827 $ 9,010,581 $ 3,070,453 $(15,695,894) $213,265,147 ============ ============ ============ ============ ============ ============ Expenditures for long-lived assets $ 761,246 $ 1,202,056 $ 76,721 $ -- $ -- $ 2,040,023 ============ ============ ============ ============ ============ ============ 61
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999, and 1998 15) Disclosure about Fair Value of Financial Instruments The fair values of investments in fixed maturity and equity securities along with methods used to estimate such values are disclosed in Note 2. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures related to other significant financial instruments: Cash, Receivables, Short-term Investments, and Restricted Assets of the Cemeteries and Mortuaries: The carrying amounts reported in the accompanying balance sheets for these financial instruments approximate their fair values. Mortgage, Policy, Student, and Collateral Loans: The fair values are estimated using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying amounts reported in the accompanying balance sheets for these financial instruments approximate their fair values. Investment Contracts: The fair values for the Company's liabilities under investment- type insurance contracts are estimated based on the contracts' cash surrender values. The carrying amount and fair value as of December 31, 2000 were approximately $88,189,000 and $83,919,000, respectively. The fair values for the Company's insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. 16) Other Comprehensive Income The following summarizes other comprehensive income: 2000 1999 1998 ---- ---- ---- Unrealized gains (losses) on available for-sale securities $ 736,803 $(696,162) $ 405,047 Less: reclassification adjustment for net realized gains in net income (420,739) (14,126) (62,702) --------- --------- --------- Net unrealized gains (losses) 316,064 (710,288) 342,345 Tax expense on net unrealized gain (losses) (145,004) 294,866 (92,171) --------- --------- --------- Other comprehensive income (loss) $ 171,060 $(415,422) $ 250,174 ========= ========= ========= 62 Schedule I SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Summary of Investments Other than Investments in Related Parties As of December 31, 2000: Amount at Which Shown Estimated in the Type of Investment Amortized Fair Balance - ------------------ Cost Value Sheet -------- --------- --------- Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $ 12,900,371 $ 13,078,200 $ 12,900,371 Obligations of states and political subdivisions 183,399 188,325 183,399 Corporate securities including public utilities 20,951,532 20,689,306 20,591,532 Mortgage backed securities 5,320,861 5,295,978 5,320,861 Redeemable preferred stocks 28,005 31,458 28,005 ------------ ------------ ------------ Total Fixed Securities held to maturity 39,384,168 39,283,267 39,384,168 ------------ ------------ ------------ Securities available for sale: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies 3,367,097 3,411,451 3,411,451 Corporate securities including public utilities 20,124,932 20,028,631 20,028,631 Mortgage-backed securities 64,836 64,907 64,907 Nonredeemable preferred stock 56,031 76,738 76,738 Common stock: Public utilities 315,068 617,311 617,311 Banks, trusts and insurance companies 195,983 489,282 489,282 Industrial, miscellaneous and all other 1,050,280 1,590,747 1,590,747 ------------ ------------ ------------ Total Securities available for sale 25,174,227 26,279,067 26,279,067 ------------ ------------ ------------ Mortgage loans on real estate 17,435,178 17,435,178 Real estate 8,564,395 8,564,395 Policy loans 11,277,742 11,277,742 Other investments 1,027,927 1,027,927 ------------ ------------ Total investments $102,863,636 $103,968,476 ============ ============ 63 Schedule II SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Balance Sheets December 31, ------------ 2000 1999 ---- ---- Assets Cash$ (29,690) $ (15,639) Investment in subsidiaries (equity method) 40,954,743 41,742,002 Receivables: Receivable from affiliates 1,731,480 1,629,966 Other 18,008 18,566 ------------ ------------ Total receivables 1,749,488 1,648,532 Property, plant and equipment, at cost, net of accumulated depreciation of $344,296 for 2000 and $314,392 for 1999 537,433 10,535 Other assets 47,004 72,641 ------------ ------------ Total assets $ 43,258,978 $ 43,458,071 ============ ============ See accompanying notes to parent company only financial statements. 64 Schedule II Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Balance Sheets (Continued) December 31, ------------ 2000 1999 ---- ---- Liabilities: - ------------ Bank loans payable: Current installments $ 1,035,585 $ 841,767 Long-term 5,294,808 6,465,741 Notes and contracts payable: Current installments 152,818 152,818 Long-term 151,857 303,713 Advances from affiliated companies 8,603,996 8,290,697 Other liabilities and accrued expenses 513,877 512,041 Income taxes 764,676 401,601 ------------ ------------ Total liabilities 16,517,617 16,968,378 ------------ ------------ Stockholders' equity: Common Stock: Class A: $2 par value, authorized 10,000,000 shares, issued 5,107,631 shares in 2000 and 4,863,731 shares in 1999 10,215,262 9,727,462 Class C: $0.20 par value, authorized 7,500,000 shares, issued 5,827,805 shares in 2000 and 5,555,350 shares in 1999 1,165,561 1,111,070 ------------ ------------ Total common stock 11,380,823 10,838,532 Additional paid-in capital 10,054,714 10,015,942 Accumulated other comprehensive income 836,751 665,691 Retained earnings 7,831,306 7,516,640 Treasury stock at cost (1,233,064 Class A shares and 65,078 Class C shares in 2000; 966,139 Class A shares and 61,979 Class C shares in 1999, held by affiliated companies) (3,362,233) (2,547,112) ------------ ------------ Total stockholders' equity 26,741,361 26,489,693 ------------ ------------ Total liabilities and stockholders' equity $ 43,258,978 $ 43,458,071 ============ ============ See accompanying notes to parent company only financial statements. 65 Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Statements of Earnings Year Ended December 31, ----------------------- 2000 1999 1998 ---- ---- ---- Revenue: Net investment income $ 96 $ 39,694 $ 18,145 Fees from affiliates 3,878,458 3,838,704 755,951 ----------- ----------- ----------- Total revenue 3,878,554 3,878,398 774,096 ----------- ----------- ----------- Expenses: General and administrative expenses 1,873,323 2,396,015 195,148 Interest expense 593,228 641,282 257,162 ----------- ----------- ----------- Total expenses 2,466,551 3,037,297 452,310 ----------- ----------- ----------- Earnings (loss) before income taxes, and earnings of subsidiaries 1,412,003 841,101 321,786 Income tax expense (373,075) (277,810) (114,346) Equity in earnings (loss) of subsidiaries (143,199) 412,604 563,789 ----------- ----------- ----------- Net earnings $ 895,729 $ 975,895 $ 771,229 =========== =========== =========== See accompanying notes to parent company only financial statements. 66
Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Statements of Cash Flow Year Ended December 31, ----------------------- 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net earnings $ 895,729 $ 975,895 $ 771,229 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 29,904 533 4,655 Undistributed (earnings) losses of affiliates 143,199 (412,604) (563,789) Provision for income taxes 373,075 277,810 114,346 Change in assets and liabilities: Accounts receivable 558 57,802 (90,600) Other assets 25,637 (72,245) (396) Accounts payable and accrued expenses -- -- 4,697 Other liabilities 1,836 17,687 263,926 ----------- ----------- ----------- Net cash provided by operating activities 1,469,938 844,878 504,068 Cash flows from investing activities: Purchase of short-term investments -- (11,045) (11,737) Proceeds from sale of short term investments -- 305,972 -- Note receivable from affiliate -- -- (1,000,000) Purchase of equipment (556,802) (11,002) -- Investment in subsidiaries -- (6,388,198) (5,250,000) ----------- ----------- ----------- Net cash used in investing activities (556,802) (6,104,273) (6,261,737) Cash flows from financing activities: Proceeds from advances from affiliates 303,299 6,388,198 200,000 Payments of advances to affiliates (101,514) (169,023) (200,000) Payments of notes and contracts payable (1,128,972) (1,094,150) (398,353) Purchase of treasury stock -- -- -- Sale of treasury stock -- -- -- Proceeds from borrowings on notes and contracts payable -- -- 6,246,400 ----------- ----------- ----------- Net cash provided (used) by financing activities (927,187) 5,125,025 5,848,047 ----------- ----------- ----------- Net change in cash (14,051) (134,370) 90,378 Cash at beginning of year (15,639) 118,731 28,353 ----------- ----------- ----------- Cash at end of year $ (29,690) $ (15,639) $ 118,731 =========== =========== ===========
See accompanying notes to parent company only financial statements. 67 Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION Notes to Parent Company Only Financial Statements 1) Bank Loans Payable Bank loans payable are summarized as follows: December 31, ------------ 2000 1999 ---- ---- $5,046,448 revolving line of credit at bank prime rate less 1%, (8.5% at December 31, 2000) interest only to December 2000 thereafter interest and principal, collateralized by 15,000 shares of Security National Life Insurance Company stock, due December 2005 $ 4,904,426 $5,610,111 Bank prime rate plus 1/2% (10.0% at December 31, 2000) note payable in monthly installments of $36,420 including principal and interest, collateralized by 15,000 shares of Security National Life stock, due December 2004. 1,425,967 1,697,397 ---------- ---------- Total bank loans 6,330,393 7,307,508 Less current installments 1,035,585 841,767 ---------- ---------- Bank loans, excluding current installments $5,294,808 $6,465,741 ========== ========== 2) Notes and Contracts Payable Notes and contracts are summarized as follows: December 31, ------------ 2000 1999 ---- ---- 10 year notes due April 16, 1999, 1% over U.S. Treasury 6 month bill rate $ 536 $ 535 Due to former stockholders of Civil Service Employees Life Insurance Company resulting from the acquisition of such entity. 7% note payable in seven annual principal payments of $151,857 due December 2003 303,714 455,571 Other 425 425 -------- --------- Total notes and contracts 304,675 456,531 -------- --------- Less current installments 152,818 152,818 -------- --------- Notes and contracts, excluding current installments $151,857 $303,713 ======== ======== 68 Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION Notes to Parent Company Only Financial Statements The following tabulation shows the combined maturities of bank loans payable and notes and contracts payable: 2001 1,188,403 2002 1,420,553 2003 1,366,940 2004 1,505,600 2005 1,153,572 Thereafter -- ---------- Total $6,635,068 ========== 3) Advances from Affiliated Companies December 31, 2000 1999 Non-interest bearing advances from affiliates: Cemetery and Mortuary subsidiary $1,366,930 $1,366,930 Life Insurance subsidiary 7,227,066 6,923,767 Mortgage subsidiary 10,000 -- ---------- ---------- $8,603,996 $8,290,697 ========== ========== 4) Dividends No dividends have been paid to the registrant for each of the last three years by any subsidiaries. 69 Schedule IV SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Reinsurance
Percentage Ceded to Assumed of Amount Direct Other from Other Net Assumed Amount Companies Companies Amount to Net ------ --------- --------- ------ ------ 2000 Life Insurance in force ($000) $ 1,469,502 $ 253,698 $ 580,287 $ 1,796,091 32.3% =========== =========== =========== =========== ======= Premiums: Life Insurance $12,742,016 $ 1,151,262 $ 634,899 $12,225,653 5.19% Accident and Health Insurance 454,656 427 3,018 457,247 .66% ----------- ----------- ----------- ----------- ------- Total premiums $13,196,672 $ 1,151,689 $ 637,917 $12,682,900 5.03% =========== =========== =========== =========== ======= 1999 Life Insurance in force ($000) $ 1,532,597 $ 296,936 $ 581,296 $ 1,816,957 32.00% =========== =========== =========== =========== ======= Premiums: Life Insurance $12,870,339 $ 1,063,696 $ 722,080 $12,528,723 5.76% Accident and Health Insurance 563,592 34,643 4,565 533,514 .85% ----------- ----------- ----------- ----------- ------- Total premiums $13,433,931 $ 1,098,339 $ 726,645 $13,062,237 5.56% =========== =========== =========== =========== ======= 1998 Life Insurance in force ($000) $ 1,554,286 $ 352,777 $ 569,448 $ 1,770,957 32.15% =========== =========== =========== =========== ======= Premiums: Life Insurance $ 5,544,015 $ 251,271 $ 161,562 $ 5,454,306 2.96% Accident and Health Insurance 371,585 22,924 4,905 353,566 1.39% ----------- ----------- ----------- ----------- ------- Total premiums $ 5,915,600 $ 274,195 $ 166,467 $ 5,807,872 2.87% =========== =========== =========== =========== =======
70
Schedule V SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Balance Additions Deductions, Balance at Charged Disposals at Beginning to Costs and End of of Year and Expenses Write-offs Year --------- ------------ ---------- -------- For the Year Ended December 31, 2000 Accumulated depreciation on real estate $2,722,024 $ 366,737 $ -- $3,088,761 Accumulated depreciation on property, plant and equipment 5,989,643 835,421 (125,923) 6,699,141 Allowance for doubtful accounts 1,467,954 190,930 (2,661) 1,656,223 For the Year Ended December 31, 1999 Accumulated depreciation on real estate $2,380,874 $ 369,557 $ (28,407) $2,722,024 Accumulated depreciation on property, plant and equipment 5,312,791 817,869 (141,017) 5,989,643 Allowance for doubtful accounts 1,576,668 150,981 (259,695) 1,467,954 For the Year Ended December 31, 1998 Accumulated depreciation on real estate $2,049,346 $ 332,411 $ (883) $2,380,874 Accumulated depreciation on property, plant and equipment 4,728,036 584,755 -- 5,312,791 Allowance for doubtful accounts 1,679,090 175,750 (278,172) 1,576,668
71 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Security National Financial Corporation (the "Company") retained Tanner + Co. as its independent auditors and replaced Ernst & Young LLP effective December 1, 1999. No report of Ernst & Young LLP on the financial statements of the Company for either of the past two years contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. Since the engagement of Ernst & Young LLP for the Company's two most recent fiscal years and through the date of replacement, there were no disagreements between the Company and Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The change in independent accountants was approved by the Company's Board of Directors and disclosed in a Form 8-K, which was filed with the Securities and Exchange Commission on December 21, 1999. PART III Item 10. Directors and Executive Officers - ----------------------------------------- The Company's Board of Directors consist of seven persons, four of whom are not employees of the Company. All the Directors of the Company are also directors of its subsidiaries. There is no family relationship between or among any of the directors, except that Scott M. Quist is the son of George R. Quist. The following table sets forth certain information with respect to the directors and executive officers of the Company. Position with the Name Age Director Since Company - ----------------- ----- -------------- ----------------------------- George R. Quist(1) 80 October 1979 Chairman of the Board, President and Chief Executive Officer William C. Sargent(2) 72 February 1980 Senior Vice President, Secretary and Director Scott M. Quist(2) 47 May 1986 First Vice President, General Counsel, Treasurer and Director Charles L. Crittenden(1) 81 October 1979 Director H. Craig Moody(2) 47 September 1995 Director Norman Wilbur(1) 62 October 1998 Director Robert G. Hunter, M.D.(2) 41 October 1998 Director (1) These directors were elected by the holders of Class A Common Stock voting as a class by themselves. (2) These directors were elected by the holders of Class A and Class C Common Stock voting together. Committees of the Board of Directors include an executive committee, on which Messrs. George Quist, Scott Quist, Sargent and Moody serve; an audit committee, on which Messrs. Crittenden, Moody, and Wilbur serve; and a compensation committee, on which Messrs. Crittenden, Wilbur, and George Quist serve. 72 The following is a description of the business experience of each of the directors. George R. Quist has been Chairman of the Board, President and Chief Executive Officer of the Company since October 1979. Mr. Quist is also Chairman of the Board, President and Chief Executive Officer of Southern Security Life Insurance Company and has served in this position since December 1998. From 1960 to 1964, he was Executive Vice President and Treasurer of Pacific Guardian Life Insurance Company. From 1946 to 1960, he was an agent, District Manager and Associate General Agent for various insurance companies. Mr. Quist also served from 1981 to 1982 as the President of The National Association of Life Companies, a trade association of 642 life insurance companies, and from 1982 to 1983 as its Chairman of the Board. William C. Sargent has been Senior Vice President of the Company since 1980, Secretary since October 1993, and a director since February 1980. Mr. Sargent is also Senior Vice President, Secretary and a director of Southern Security Life Insurance Company and has served in this position since December 1998. Prior to that time, he was employed by Security National as a salesman and agency superintendent. Scott M. Quist has been General Counsel of the Company since 1982, First Vice President since December 1990, Treasurer since October 1993, and a director since May 1986. Mr. Quist is also First Vice President, General Counsel and Treasurer and a director of Southern Security Life Insurance Company and has served in this position since December 1998. From 1980 to 1982, Mr. Quist was a tax specialist with Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to 1991, he was treasurer and director of The National Association of Life Companies, a trade association of 642 insurance companies until its merger with the American Council of Life Companies. Mr. Quist has been a member of the Board of Governors of the Forum 500 Section (representing small insurance companies) of the American Council of Life Insurance. Mr. Quist has also served as a regional director of Key Bank of Utah since November 1993. Mr. Quist is currently a director and immediate past president of the National Alliance of Life Companies, a trade association of over 200 life companies. Charles L. Crittenden has been a director of the Company since October 1979. Mr. Crittenden is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Mr. Crittenden has been sole stockholder of Crittenden Paint & Glass Company since 1958. He is also an owner of Crittenden Enterprises, a real estate development company and Chairman of the Board of Linco, Inc. H. Craig Moody has been a director of the Company since September 1995. Mr. Moody is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Mr. Moody is owner of Moody & Associates, a political consulting and real estate company. He is a former Speaker and House Majority Leader of the House of Representatives of the State of Utah. Norman Wilbur has been a director of the Company since October 1998. Mr. Wilbur is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Mr. Wilbur worked for J.C. Penny's regional offices in budget and analysis. His final position was Manager of Planning and Reporting for J.C. Penny's stores. After 36 years with J.C. Penny's he took an option of an early retirement in 1997. Mr. Wilbur is a past board member of a homeless organization in Plano, Texas. Robert G. Hunter, M.D. has been a director of the Company since October 1998. Dr. Hunter is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Dr. Hunter is currently a practicing physician in private practice. Dr. Hunter created the State Wide E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member of the Executive Committee. He is Chairman of Surgery at Cottonwood Hospital, a delegate to the Utah Medical Association and a delegate representing Utah to the American Medical Association, and a member of several medical advisory boards. 73 Executive Officers The following table sets forth certain information with respect to the executive officers of the Company (the business biographies set forth above): Name Age Title -------- --- ----- George R. Quist(1) 80 Chairman of the Board, President and Chief Executive Officer William C. Sargent 72 Senior Vice President and Secretary Scott M. Quist(1) 47 First Vice President, General Counsel and Treasurer (1)George R. Quist is the father of Scott M. Quist. The Board of Directors of the Company has a written procedure which requires disclosure to the board of any material interest or any affiliation on the part of any of its officers, directors or employees which is in conflict or may be in conflict with the interests of the Company. No director, officer or 5% stockholder of the Company or its subsidiaries, or any affiliate thereof has had any transactions with the Company or its subsidiaries during 2000 or 1999. Each of the Directors of the Company are directors of Southern Security Life Insurance Company, which has a class of equity securities registered under the Securities Exchange Act of 1934. In addition, Scott M. Quist is a director of Key Bank of Utah. All directors of the Company hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. 74 Item 11. Executive Officer Compensation The following table sets forth, for each of the last three fiscal years, the compensation received by George R. Quist, the Company's President and Chief Executive Officer, and all other executive officers (collectively, the "Named Executive Officers") at December 31, 2000 whose salary and bonus for all services in all capacities exceed $100,000 for the fiscal year ended December 31, 2000.
Summary Compensation Table Annual Compensation Long-Term Compensation Other Annual Restricted Securities Long-Term All Other Name and Compen- Stock Underlying Incentive Compen- Principal Position Year Salary($) Bonus($) sation($)(2) Awards($) Options/SARs(#) Payout($) sation($)(3) - ------------------ ---- --------- -------- ------------ --------- -------------- --------- ------------ George R. Quist (1) 2000 147,204 20,200 2,400 0 50,000 0 5,281 Chairman of the Board, 1999 147,204 20,200 2,400 0 50,000 0 20,247 President and Chief 1998 137,454 20,200 2,400 0 50,000 0 12,084 Executive Officer William C. Sargent 2000 147,798 17,325 4,500 0 45,000 0 637 Senior Vice President, 1999 148,058 17,325 4,500 0 45,000 0 16,879 Secretary and 1998 130,329 17,325 4,500 0 45,000 0 5,286 Director Scott M. Quist (1) 2000 140,400 18,770 7,200 0 35,000 0 637 First Vice President, 1999 129,400 18,770 7,200 0 35,000 0 15,201 General Counsel 1998 119,025 18,770 7,200 0 35,000 0 7,257 Treasurer and Director
75 (1) George R. Quist is the father of Scott M. Quist. (2) The amounts indicated under "Other Annual Compensation" consist of payments related to the operation of automobiles by the Named Executive Officers. However, such payments do not include the furnishing of an automobile by the Company to George R. Quist, William C. Sargent and Scott M. Quist nor the payment of insurance and property taxes with respect to the automobiles operated by the Named Executive Officers. (3) The amounts indicated under "All Other Compensation" consist of (a) amounts contributed by the Company into a trust for the benefit of the Named Executive Officers under the Employee Stock Ownership Plan (for fiscal 2000, such amounts were George R. Quist, $0; William C. Sargent, $0; and Scott M. Quist, $0); (b) matching contributions made by the Company pursuant to the 401(k) Retirement Savings Plan in which all matching contributions are invested in the Company's Class A Common Stock (for fiscal 2000, such amounts were George R. Quist, $-0-; William C. Sargent, $-0-; and Scott M. Quist, $-0-; (c) profit sharing contributions made by the Company pursuant to the 401(k) Retirement Savings Plan (for fiscal 2000, such amounts were George R. Quist, $0; William C. Sargent, $0; and Scott M. Quist, $0); (d) insurance premiums paid by the Company with respect to a group life insurance plan for the benefit of the Named Executive Officers (for fiscal 2000, $1,911 was paid for all Named Executive Officers as a group, or $637 each for George R. Quist, William C. Sargent and Scott M. Quist); and (e) life insurance premiums paid by the Company for the benefit of the family of George R. Quist ($4,644). The amounts under "All Other Compensation" do not include the no interest loan in the amount of $172,000 that the Company made to George R. Quist on April 29, 1998, to exercise stock options. See "Item 13 Certain Relationships and Related Transactions". The following table sets forth information concerning the exercise of options to acquire shares of the Company's Common Stock by the Named Executive Officers during the fiscal year ended December 31, 2000, as well as the aggregate number and value of unexercised options held by the Named Executive Officers on December 31, 2000. Aggregated Option/SAR Exercised in Last Fiscal Year and Fiscal Year-End Option/SAR Values:
Number of Securities Underlying Value of Unexercised Unexercised Options/SARs In-the-Money at Options/SARs at Shares December 31, December 31, Acquired on 2000(#) 2000 Exercise Value -------------- ------------------ Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable - ---- -------- -------- ----------- ------------- ----------- ------------- George R Quist 0 $0 173,781 0 $0 $0 William C Sargent 0 $0 248,850 0 $11,494 $0 Scott M Quist 0 $0 132,673 0 $0 $0
Retirement Plans George R. Quist, who has been Chairman, President and Chief Executive Officer of the Company since 1979, has a Deferred Compensation Agreement, dated December 8, 1988, with the Company (the "Compensation Agreement"). This Compensation Agreement provides upon Mr. Quist's retirement the Company shall pay him $50,000 per year as an annual retirement benefit for a period of 10 years from the date of retirement; and upon his death, the remainder of such annual payments shall be payable to his designated beneficiary. The Compensation Agreement further provides that the Board of Directors may elect to pay the entire amount of deferred compensation in the form of a single lump-sum payment or other installment payments, so long as the term of such payments do not exceed 10 years. However, in the event Mr. Quist's employment with the Company is terminated for any reason other than retirement, death or disability, the entire deferred compensation shall be forfeited by him. 76 William C. Sargent, who has been Senior Vice President of the Company since 1980, has a Deferred Compensation Agreement dated April 15, 1994, with the Company (the "Compensation Agreement"). This Compensation Agreement provides upon Mr. Sargent's retirement the Company shall pay him $50,000 per year as an annual retirement benefit for a period of 10 years from the date of retirement; and upon his death, the remainder of such annual payments shall be payable to his designated beneficiary. The Compensation Agreement further provides that the Board of Directors may elect to pay the entire amount of deferred compensation in the form of a single lump-sum payment or other installment payments, so long as the term of such payments do not exceed 10 years. However, in the event Mr. Sargent's employment with the Company is terminated for any reason other than retirement, death or disability, the entire deferred compensation shall be forfeited by him. Employment Agreement The Company maintains an employment agreement with Scott M. Quist. The agreement, which has a five year term, was entered into in 1996, and renewed in 1997. Under the terms of the agreement, Mr. Quist is to devote his full time to the Company serving as its Treasurer, First Vice President, and General Counsel at not less than his current salary and benefits, and to include $500,000 of life insurance protection. In the event of disability, Mr. Quist's salary would be continued for up to 5 years at 50% of its current level. In the event of a sale or merger of the Company, and Mr. Quist were not retained in his current position, the Company would be obligated to continue Mr. Quist's current compensation and benefits for seven years following the merger or sale. Director Compensation Directors of the Company (but not including directors who are employees) are paid a director's fee of $8,400 per year by the Company for their services and are reimbursed for their expenses in attending board and committee meetings. No additional fees are paid by the Company for committee participation or special assignments. However, each director is provided with an annual grant of stock options to purchase 1,000 shares of Class A Common Stock under the 2000 Director Stock Option Plan. Employee 401(k) Retirement Savings Plan In 1995, the Company's Board of Directors adopted a 401(k) Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of January 1, 1995, the Company may make discretionary employer matching contributions to its employees who choose to participate in the plan. The plan allows the board to determine the amount of the contribution at the end of each year. The Board adopted a contribution formula specifying that such discretionary employer matching contributions would equal 50% of the participating employee's contribution to the plan to purchase Company stock up to a maximum discretionary employee contribution of 1/2% of a participating employee's compensation, as defined by the plan. All persons who have completed at least one year's service with the Company and satisfy other plan requirements are eligible to participate in the 401(k) plan. All Company matching contributions are invested in the Company's Class A Common Stock. The Company's matching contributions for 2000, 1999, and 1998 were approximately $0, $3,858, and $7,000 respectively. Also, the Company may contribute at the discretion of the Company's Board of Directors an Employer Profit Sharing Contribution to the 401- K plan. The Employer Profit Sharing Contribution shall be divided among three different classes of participants in the plan based upon the participant's title in the Company. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee. The Company's contributions to the plan for 2000, 1999 and 1998, were $0, $130,958 and $0, respectively. Employee Stock Ownership Plan Effective January 1, 1980, the Company adopted an employee stock ownership plan (the "Ownership Plan") for the benefit of career employees of the Company and its subsidiaries. The following is a description of the Ownership Plan, and is qualified in its entirety by the Ownership Plan, a copy of which is available for inspection at the Company's offices. 77 Under the Ownership Plan, the Company has discretionary power to make contributions on behalf of all eligible employees into a trust created under the Ownership Plan. Employees become eligible to participate in the Ownership Plan when they have attained the age of 19 and have completed one year of service (a twelve-month period in which the Employee completes at least 1,040 hours of service). The Company's contributions under the Ownership Plan are allocated to eligible employees on the same ratio that each eligible employee's compensation bears to total compensation for all eligible employees during each year. To date, the Ownership Plan has approximately 107 participants and had no contributions payable to the Plan in 2000. Benefits under the Ownership Plan vest as follows: 20% after the third year of eligible service by an employee, an additional 20% in the fourth, fifth, sixth and seventh years of eligible service by an employee. Benefits under the Ownership Plan will be paid out in one lump sum or in installments in the event the employee becomes disabled, reaches the age of 65, or is terminated by the Company and demonstrates financial hardship. The Ownership Plan Committee, however, retains discretion to determine the final method of payment. Finally, the Company reserves the right to amend or terminate the Ownership Plan at any time. The trustees of the trust fund under the Ownership Plan are Messrs. George R. Quist, and William C. Sargent, all directors of the Company. 1987 Incentive Stock Option Plan In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987 Plan). The 1987 Plan provides that shares of the Class A Common Stock of the Company may be optioned to certain officers and key employees of the Company. The Plan establishes a Stock Option Plan Committee which selects the employees to whom the options will be granted and determines the price of the stock. The Plan establishes the minimum purchase price of the stock at an amount which is not less than 100% of the fair market value of the stock (110% for employees owning more than 10% of the total combined voting power of all classes of stock). The Plan provides that if additional shares of Class A Common Stock are issued pursuant to a stock split or a stock dividend, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be increased proportionately with no increase in the total purchase price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purpose of the Plan shall be increased by the same proportion. In the event that the shares of Class A Common Stock of the Company from time to time issued and outstanding are reduced by a combination of shares, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be reduced proportionately with no reduction in the total price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purposes of the Plan shall be reduced by the same proportion. The Plan terminated in 1997 and options granted are non-transferable. The Plan permits the holder of the option to elect to receive cash, amounting to the difference between the option price and the fair market value of the stock at the time of the exercise, or a lesser amount of stock without payment, upon exercise of the option. 1993 Stock Option Plan On June 21, 1993, the Company adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves shares of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at the annual meeting of the stockholders held on June 21, 1993. The 1993 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress. The 1993 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both "incentive stock options," as defined under Section 422A of the Internal Revenue Code of 1986 (the "Code"), and "non-qualified options" may be granted pursuant to the 1993 Plan. The exercise prices for the options granted are equal to or greater than the fair market value of the stock subject to such options as of the date of grant, as determined by the Company's Board of Directors. The options granted under the 1993 Plan, were to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company. 78 The 1993 Plan is to be administered by the Board of Directors or by a committee designated by the Board. The terms of options granted or stock awards or sales effected under the 1993 Plan are to be determined by the Board of Directors or its committee. The Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. In addition, the number of shares of Common Stock reserved for purposes of the Plan shall be adjusted by the same proportion. No options may be exercised for a term of more than ten years from the date of grant. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the code, including a requirement that the option exercise price be no less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors. The 1993 Plan has a term of ten years. The Board of Directors may amend or terminate the 1993 Plan at any time, subject to approval of certain modifications to the 1993 Plan by the shareholders of the Company as may be required by law or the 1993 Plan. On November 7, 1996 the Company amended the Articles of Incorporation as follows: (i) to increase the number of shares of Class A Common Stock reserved for issuance under the Plan from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide that the stock subject to options, awards and purchases may include Class C common stock. On October 14, 1999, the Company amended the 1993 Plan to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 746,126 Class A shares to 1,046,126 Class A shares. 2000 Director Stock Option Plan On October 16, 2000, the Company adopted the 2000 Directors Stock Option Plan (the "Director Plan") effective November 1, 2000. The Director Plan provides for the grant by the Company of options to purchase up to an aggregate of 50,000 shares of Class A Common Stock for issuance thereunder. The Director Plan provides that each member of the Company's Board of Directors who is not an employee or paid consultant of the Company automatically is eligible to receive options to purchase the Company's Class A Common Stock under the Director Plan. Effective as of November 1, 2000, and on each anniversary date thereof during the term of the Director Plan, each outside director shall automatically receive an option to purchase 1,000 shares of Class A Common Stock. In addition, each new outside director who shall first join the Board after the effective date shall be granted an option to purchase 1,000 shares upon the date which such person first becomes an outside director and an annual grant of an option to purchase 1,000 shares on each anniversary date thereof during the term of the Director Plan. The options granted to outside directors shall vest in their entirety on the first anniversary date of the grant. The primary purposes of the Director Plan are to enhance the Company's ability to attract and retain well-qualified persons for service as directors and to provide incentives to such directors to continue their association with the Company. In the event of a merger of the Company with or into another company, or a consolidation, acquisition of stock or assets or other change in control transaction involving the Company, each option becomes exercisable in full, unless such option is assumed by the successor corporation. In the event the transaction is not approved by a majority of the "Continuing Directors" (as defined in the Director Plan), each option becomes fully vested and exercisable in full immediately prior to the consummation of such transaction, whether or not assumed by the successor corporation. 79 Item 12 - Security Ownership of Certain Beneficial Owners and Management The following table sets forth security ownership information of the Company's Class A and Class C Common Stock as of March 20, 2001, (i) for persons who own beneficially more than 5% of the Company's outstanding Class A or Class C Common Stock, (ii) each director of the Company, and (iii) for all executive officers and directors of the Company as a group.
Class A Class A Class C and Class C Common Stock Common Stock Common Stock ------------ ------------ ------------ Amount Amount Amount Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent Beneficial Owner Owned of Class Owned of Class Owned of Class - ----------------- ------- -------- ----- -------- ----- -------- George R. Quist (1)(2) 4491 Wander Lane Salt Lake City, Utah 84124 148,710 3.8% 229,560 4.0% 378,270 3.9% George R. and Shirley C Quist Family Partnership, Ltd.(6) 4491 Wander Lane Salt Lake City, Utah 84124 343,740 8.9% 2,760,704 47.9% 3,104,444 32.2% Employee Stock Ownership Plan (4) 5300 S. 360 W., Suite 250 Salt Lake City, Utah 84123 553,322 14.3% 1,277,690 22.2% 1,831,012 19.0% William C. Sargent (1)(2)(3) 4974 Holladay Blvd Salt Lake City, Utah 84117 117,732 3.0% 168,934 2.9% 286,666 3.0% Scott M. Quist (3) 7 Wanderwood Way Sandy, Utah 84092 106,594 2.8% 73,156 1.3% 179,750 1.9% Charles L. Crittenden 2334 Fillmore Avenue Ogden, Utah 84401 1,725 * 197,140 3.4% 198,865 2.1%
80 Item 12 - Security Ownership of Certain Beneficial Owners and Management
Class A Class A Class C and Class C Common Stock Common Stock Common Stock ------------ ------------ ------------ Amount Amount Amount Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent Beneficial Owner Owned of Class Owned of Class Owned of Class - ----------------- ------- -------- ----- -------- ----- -------- H. Craig Moody 1782 East Faunsdale Dr. Sandy, Utah 84092 680 * -0- * 680 * Norman G. Wilbur 2520 Horseman Drive Plano, Texas 75025 994 * -0- * 994 * Robert G. Hunter, M.D 2 Ravenwood Lane Sandy, Utah 84092 1,837 * -0- * 1,837 * Associated Investors (5) 5300 S. 360 W. Suite 250 Salt Lake City, Utah 84123 87,375 2.3% 539,372 9.4% 626,747 6.5% All directors and executive officers (7 persons) 722,012 18.6% 3,429,494 59.5% 4,151,506 43.1% * Less than one percent
81 (1) Does not include 553,322 shares of Class A Common Stock and 1,277,690 shares of Class C Common Stock owned by the Company's Employee Stock Ownership Plan (ESOP), of which George R. Quist, and William C. Sargent are the trustees and accordingly, exercise shared voting and investment powers with respect to such shares. (2) Does not include 87,375 shares of Class A Common Stock and 539,372 shares of Class C Common Stock owned by Associated Investors, a Utah general partnership, of which these individuals are the managing partners and, accordingly, exercise shared voting and investment powers with respect to such shares. (3) Does not include 106,642 shares of Class A Common Stock owned by the Company's 401(k) Retirement Savings Plan, of which William C. Sargent, and Scott M. Quist are members of the Investment Committee and accordingly, exercise shared voting and investment powers with respect to such shares. (4) The trustees of the Employee Stock Ownership Plan (ESOP) are George R. Quist and William C. Sargent who exercise shared voting and investment powers. (5) The managing partners of Associated Investors are George R. Quist and William C. Sargent, who exercise shared voting and investment powers. (6) This stock is owned by the George R. and Shirley C. Quist Family Partnership, Ltd., of which Mr. Quist is the general partner. The Company's officers and directors, as a group, own beneficially approximately 43.1% of the outstanding shares of the Company's Class A and Class C Common Stock. Item 13. Certain Relationships and Related Transactions The Company has made a loan in the amount of $172,000 to George R. Quist, the Company's President and Chief Executive Officer, without requiring the payment of any interest. The loan was made under a Promissory Note dated April 29, 1998 in order for Mr. Quist to exercise stock options which were granted to him under the 1993 Plan. No installment payments are required under the terms of the note, but the note must be paid in full as of December 31, 2001. Mr. Quist has the right to make prepayments on the note at any time. As of March 31, 2001, the outstanding balance of the note was $109,700. The loan was approved by the Company's directors on March 12, 1999, with Mr. Quist abstaining, at a Special Meeting of the Board of Directors. The Company's Board of Directors has a written procedure which requires disclosure to the Board of any material interest or any affiliation on the part of any of its officers, directors or employees which is in conflict or may be in conflict with the interests of the Company. No director, officer or 5% stockholder of the Company or its subsidiaries, or any affiliate thereof, has engaged in any business transactions with the Company or its subsidiaries during 2000 or 1999 other than as described herein. 82 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a)(1)(2) Financial Statements and Schedules See "Index to Consolidated Financial Statements and Supplemental Schedules" under Item 8 above. (a)(3) Exhibits The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or are incorporated by reference to previous filings. Exhibit Table No Document (a)(3) Exhibits: 3.A. Articles of Restatement of Articles of Incorporation (8) B. Bylaws (1) 4.A. Specimen Class A Stock Certificate (1) B. Specimen Class C Stock Certificate (1) C. Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1) 10.A.Restated and Amended Employee Stock Ownership Plan and Trust Agreement (1) B. Deferred Compensation Agreement with George R. Quist (2) C. 1993 Stock Option Plan (3) D. Promissory Note with Key Bank of Utah (4) E. Loan and Security Agreement with Key Bank of Utah (4) F. General Pledge Agreement with Key Bank of Utah (4) G. Note Secured by Purchase Price Deed of Trust and Assignment of Rents with the Carter Family Trust and the Leonard M. Smith Family Trust (5) H. Deed of Trust and Assignment of Rents with the Carter Family Trust and the Leonard M. Smith Family Trust (5) I. Promissory Note with Page and Patricia Greer (6) J. Pledge Agreement with Page and Patricia Greer (6) K. Promissory Note with Civil Service Employees Insurance Company (7) L. Deferred Compensation Agreement with William C. Sargent (8) M. Employment Agreement with Scott M. Quist. (8) N. Acquisition Agreement with Consolidare Enterprises, Inc., and certain shareholders of Consolidare. (9) O. Agreement and Plan of Merger between Consolidare Enterprises, Inc and SSLIC Holding Company. (10) 83 P. Administrative Services Agreement with Southern Security Life Insurance Company. (11) Q. Promissory Note with George R. Quist. (1) Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987. (2) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1989. (3) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1994. (4) Incorporated by reference from Report on Form 8-K, as filed on February 24, 1995. (5) Incorporated by reference from Annual Report on Form 10K, as filed on March 31, 1995. (6) Incorporated by reference from Report on Form 8-K, as filed on May 1, 1995. (7) Incorporated by reference from Report on Form 8-K, as filed on January 16, 1996. (8) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1998. (9) Incorporated by reference from Report on Form 8-K, as filed on May 11, 1998. (10) Incorporated by reference from Report on Form 8-K, as filed on January 4, 1999. (11) Incorporated by reference from Report on Form 8-K, as filed on March 4, 1999. 21. Subsidiaries of the Registrant (b) Reports on Form 8-K: None 84 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SECURITY NATIONAL FINANCIAL CORPORATION Dated: February 5, 2002 By: George R. Quist, --------------- Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE - ---------- ------------ -------- George R. Quist Chairman of the February 5, 2002 Board, President and Chief Executive Officer (Principal Executive Officer) Scott M. Quist First Vice February 5, 2002 President, General Counsel, Treasurer and Secretary, Director (Principal Financial and Accounting Officer) Charles L. Crittenden Director February 5, 2002 H. Craig Moody Director February 5, 2002 Norman G. Wilbur Director February 5, 2002 Robert G. Hunter Director February 5, 2002 85 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Year Ended December 31, 2000 SECURITY NATIONAL FINANCIAL CORPORATION Commission File No. 0-9341 E X H I B I T S Exhibit Index Exhibit No. Document Name 10.Q. Promissory Note with George R. Quist 21. Subsidiaries of the Registrant Exhibit 10(Q) Promissory Note with George R. Quist Note $115,400.00 May 1, 2000 George R. Quist 4491 Wander Lane Salt Lake City, Utah 84124 1. Borrower's Promise to Pay. In return for the loan that I have received, I promise to pay the sum of One Hundred Fifteen Thousand Four Hundred Dollars ($115,400.00) (this amount is called the "principal") to the order of the Lender. The Lender is Security National Financial Corporation. I understand that the Lender may transfer this Note. The Lender or anyone who takes this Note by transfer and who is entitled to receive payments under this Note is called the "Note Holder". 2. Interest. There will be no interest for this loan. 3. Payments. No monthly payments will be required under this Note. If, on December 31, 2001, I still owe amounts under this Note, I will pay those amounts in full on that date, which is called the "Maturity Date". I will make my payments at 5300 South 360 West, Suite 200, Salt Lake City, Utah 84123, or at a different place if required by the Note Holder. Payments can be made through the United States mails. 4. Borrower's Right to Repay. I have the right to make payments of principal at any time before they are due. A payment of principal only is known as a "prepayment". When I make a prepayment, I will tell the Note Holder in writing that I am doing so. I may make a full prepayment or partial prepayments without paying any prepayment charge. The Note Holder will use all of my prepayments to reduce the amount of principal that I owe under this Note. If I make a partial prepayment, there will be no changes in the due date unless the Note Holder agrees in writing to those changes. 5. Loan Charges. If a law, which applies to this loan and which sets maximum loan charges, is finally interpreted so that the interest or other loan charges collected or to be collected in connection with this loan exceed the permitted limits, then: (i) any such loan charge shall be reduced by the amount necessary to reduce the charge to the permitted limit; and (ii) any sums already collected from me which exceeded permitted limits will be refunded to me. The Note Holder may choose to make this refund by reducing the principal I owe under this Note or by making a direct payment to me. If a refund reduces principal, the reduction will be treated as a partial prepayment. 6. Giving of Notices. Unless applicable law requires a different method, any notice that must be given to me under this Note will be given by delivering it or by mailing it by first class mail to me at the Property Address above or at a different address if I give the Note Holder a notice of my different address. Any notice that must be given to the Note Holder under this Note will be given by mailing it by first class mail to the Note Holder at the address stated in Section 3 above or at a different address if I am given a notice of that different address. 7. Waivers. I and any other person who has obligations under this Note waive the rights of presentment and notice of dishonor. "Presentment" means the right to require the Note Holder to demand payment of amounts due. "Notice of Dishonor" means the right to require the Note Holder to give notice to other persons that amounts due have not been paid. WITNESS THE HAND OF THE UNDERSIGNED. /s/ George R. Quist George R. Quist EXHIBIT 21 Subsidiaries of Security National Financial Corporation as of March 31, 2001 Exhibit 21 Subsidiaries of Security National Financial Corporation (as of March 31, 2001) Security National Life Insurance Company Security National Mortgage Company Memorial Estates, Inc. Memorial Mortuary Paradise Chapel Funeral Home, Inc. California Memorial Estates, Inc. Cottonwood Mortuary, Inc. Deseret Memorial, Inc. Holladay Cottonwood Memorial Foundation Holladay Memorial Park, Inc. Camelback Sunset Funeral Home, Inc. Greer-Wilson Funeral Home, Inc. Crystal Rose Funeral Home, Inc. Hawaiian Land Holdings SSLIC Holding Company Insuradyne Corporation Southern Security Life Insurance Company -----END PRIVACY-ENHANCED MESSAGE-----