SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): December 23, 2002
SECURITY NATIONAL FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in this Charter)
Utah 0-9341 87-0345941
- ------------------ ---------------------- ----------------
(State or other Commission File Number (IRS Employer
jurisdiction of incorporation) Identification No.)
5300 South 360 West, Salt Lake City, Utah 84123
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(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (801) 264-1060
--------------
Does Not Apply
------------------------------------------------------------
(Former name or former address, if changed since last report)
ITEM 2. Asset Purchase Transaction with Acadian Life Insurance Company
On December 23, 2002, Security National Financial Corporation, a Utah
corporation (the "Company") completed an asset purchase transaction with Acadian
Life Insurance Company, a Louisiana domiciled life insurance company
("Acadian"), in which it acquired from Acadian $75,000,000 in assets and
$75,000,000 in insurance reserves through its wholly owned subsidiary, Security
National Life Insurance Company, a Utah domiciled life insurance company
("Security National Life"). The acquired assets consist primarily of funeral
insurance policies in force from over 275,000 policyholders in the state of
Mississippi. The assets were originally acquired by Acadian from Gulf National
Life Insurance Company ("GNLIC") on June 6, 2001, consisting of all of GNLIC's
insurance policies in force and in effect on June 1, 2001 ("the GNLIC Reinsured
Business").
As part of the transaction, Security National Life entered into a
Coinsurance Agreement with Acadian, in which Security National Life agreed to
reinsure all the liabilities related to the policies held by the Mississippi
policyholders, including the payment of all legal liabilities, obligations,
claims and commissions of the acquired policies. The effective date of the
Coinsurance Agreement was September 30, 2002, at 11:59:59 p.m. (Central Daylight
Time) subsequent to Acadian's recapture of the insurance in force from Scottish
Re (U.S.) Inc. on September 30, 2002, at 11:59 p.m. (Central Daylight Time).
Under the terms of the Coinsurance Agreement, Security National Life agreed
to assume all of the risks (including deaths, surrenders, disability, accidental
deaths and dismemberment) on the reinsurance policies as of the effective date
of the Agreement. Acadian represented and warranted that each of the reinsured
policies was in force as of the effective date (including policies which may be
lapsed subject to the right of reinstatement, policies not lapsed but in
arrears, and policies in force and in effect as paid up and extended term
policies) with premiums paid and its face amount, insured, and all other
characteristics accurately reflected. Security National Life accepted liability
for all the risks under the reinsured policies on eligible lives for all
benefits occurring on or after the effective date of the agreement. The
liability of Security National Life began as of September 30, 2002.
The Coinsurance Agreement also provides that Security National Life
reserves the right to assume all right, title and interest to the reinsured
policies, as well as other similar policies written by Acadian under similar
terms and conditions in the state of Mississippi from September 30, 2002,
through termination of the Coinsurance Agreement, with an assumption agreement,
at any time but in any event not later than nine months subsequent to December
16, 2002, subject to all regulatory approvals as required by law. In the event
Acadian shall come under any supervision by a state regulator or in the event
Acadian shall apply for or consent in the appointment of, or the taking of
possession by, a receiver, custodian, regulator, trustee or liquidator of itself
or of all or a substantial part of its assets, make a general assignment for the
benefit of its creditors, commence a voluntary case under the Federal Bankruptcy
Code, file a petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization or winding up, Security National Life and
Acadian shall be deemed to have converted the Coinsurance Agreement to an
assumption agreement one day prior to such insolvency or other actions and
Security National Life shall be deemed to have assumed the reinsurance policies
as of one day prior to the date thereof.
The Coinsurance Agreement further provides that Acadian is required to pay
Security National Life an initial coinsurance premium in cash or assets
acceptable to Security National Life in an amount equal to the full coinsurance
reserves, including the Incurred But Not Reported (IBNR) reserve as of the
effective date. The ceding commission to be paid by Security National Life to
Acadian for the reinsured policies is to be the recapture amount to be paid by
Acadian to Scottish Re (U.S.), Inc., which is $10,254,083 pursuant to the
Automatic Coinsurance Agreement dated June 1, 2001, between Acadian and Scottish
Re (U.S.), Inc. The coinsurance premiums payable by Acadian to Security National
Life are to be equal to all of the premiums collected by Acadian on the
reinsurance policies subsequent to December 31, 2002.
Security National Life also entered into an Assumption Agreement effective
January 1, 2003, with Acadian, in which Security National Life agreed to assume
all of the liabilities related to the reinsurance policies. Under the terms of
the Assumption Agreement, Acadian agreed to cede to Security National Life, and
Security National Life agreed to assume,
reinsure and guaranty all of the insurance risks and contractual obligations of
Acadian relating to the GNLIC Reinsured Business, including the reinsured
policies. Security National Life agreed to pay all legal liabilities and
obligations, including claims and commissions, of Acadian with respect to the
GNLIC Reinsured Business arising on or after January 1, 2003, in accordance with
the terms and conditions of the reinsured policies. In addition, Security
National Life agreed to assume and carry out the obligations of Acadian
contained in the reinsured policies.
The Assumption Agreement also requires Security National Life to issue a
certificate of assumption for each policy in force included in the GNLIC
Reinsured Business, reinsuring such policies according to the terms thereof,
provided that Security National Life may be subrogated to and substituted for
all rights, privileges and interests accruing under such policies, and provided
further that all obligations and liabilities assumed by Security National Life
are assumed subject to the terms, limitations and conditions of the insurance
policies included in the GNLIC Reinsured Business and all defenses,
counterclaims and off-sets that are or might thereafter become available to
Security National Life.
Under the Assumption Agreement Security National Life agreed to assume only
those insurance risks in contractual obligations included within the GNLIC
Reinsured Business of Acadian. Security National Life did not agree to assume
any extra contractual or other liability or obligations of Acadian. In addition,
Security National Life did not agree to assume any policy issued to an insured
whose death occurred prior to January 1, 2003, and for which a death claim had
been received by Acadian prior to that date. However, Security National Life did
agree to assume any valid claim of an insured whose death occurred prior to
January 1, 2003, and for which a death claim was not received by Acadian prior
to that date.
The Assumption Agreement also provides that as of January 1, 2003, Acadian
agreed to transfer and assign to Security National Life all of its right, title
and interest in the reinsured policies, including policies which may be lapsed
subject to the right of reinstatement and policies in force and in effect as
paid up and extended term policies. Acadian agreed to turn over to Security
National Life, as of January 1, 2003, all policy owner service, underwriting and
other files on hand that may be needed by Security National Life in the
continuation of the GNLIC Reinsured Business, and Acadian further agreed to turn
over all such records and record books as may be necessary for carrying on the
GNLIC Reinsured Business, including all such permanent records of Acadian
necessary for Security National Life to continue in force in effect the
reinsured policies.
On December 23, 2002, Security National Life also entered into an Asset
Purchase Agreement with Acadian, in which Acadian agreed to transfer and convey
to Security National Life, and Security National Life agreed to purchase from
Acadian, all of Acadian's right, title and interest in and to the certain assets
of Acadian. The assets included the following: (i) computer hardware; (ii)
licensed software from International Business Machines, Inc. ("IBM") for
certain software utilized in the maintenance of Acadian's general ledger
accounting records, for use on Acadian's AS400 computer; (iii) owned software
developed by employees or contractors of Acadian or Gulf National Life Insurance
Company and utilized by Acadian in accounting for premiums received, reserve
computations, and for other purposes; (iv) certain furniture and equipment; (v)
the use of the name 'Gulf National Life Insurance Company' alone or as part of
any other tradename, as well as the logo "GNL"; (vi) the sublease of certain
real property located at 6522 Dogwood View Parkway in Jackson, Mississippi; and
(vii) the assignment and assumption of certain agreements and arrangements.
Following the closing of the asset purchase transaction with Acadian, Security
National Life intends to continue to operate the business it acquired from
Acadian in the state of Mississippi.
ITEM 7. Financial Statements
(a) The following financial statements of Gulf National Life Insurance Company
are included herein:
Independent Auditor's Report
Balance Sheets as of December 31, 2001 and 2000
Statements of Operations for the years ended December 31, 2001, 2000 and
1999
Statements of Stockholders' Equity for the years ended December 31, 2001,
2000 and 1999
Statements of Cash Flow for the years ended December 31, 2001, 2000 and
1999 Notes to Financial Statements
Condensed Balance Sheet as of September 30, 2002 (unaudited)
Condensed Statements of Operations for the nine months ended September 30,
2002 and 2001 (unaudited)
Condensed Statements of Stockholders' Equity for the nine months ended
September 30, 2002 (unaudited)
Condensed Statements of Cash Flows for the nine months ended September 30,
2002 and 2001 (unaudited)
Notes to Condensed Interim Financial Statements (unaudited)
(b) The following pro forma statements of Security National Financial
Corporation are included herein:
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2002
(unaudited)
Pro Forma Condensed Consolidated Statement of Income for the nine months
ended September 30, 2002 (unaudited)
Pro Forma Condensed Consolidated Statement of Income for the year ended
December 31, 2001 (unaudited)
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
(c) Exhibits *
10.1 Coinsurance Agreement between Security National Life and Acadian.
10.2 Assumption Agreement among Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company.
10.3 Asset Purchase Agreement among Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company.
* Incorporated by reference from Report on Form 8-K/A, as filed on
January 8, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SECURITY NATIONAL FINANCIAL CORPORATION
(Registrant)
Date: March 7, 2003 By: /s/ Scott M. Quist
-----------------------
Scott M. Quist, President
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Gulf National Life Insurance Company
We have audited the accompanying balance sheets of Gulf National Life
Insurance Company as of December 31, 2001 and 2000, and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatements. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Gulf National Life Insurance
Company as of December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
February 15, 2002 except as to
Note 14, which is as of February 28, 2003
GULF NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS
ASSETS
December 31,
2001 2000
INVESTMENTS:
Certificates of deposit $ -- $6,080,557
Mortgage loans -- 4,395,454
Common and preferred stock -- 2,014,135
Fixed income -- 61,653,447
Collateral loans -- 480,736
Policy loans 78,593 128,406
Assets ceded under reinsurance treaty-
Acadian Life Insurance Company 66,892,970 --
Real estate held for sale or lease,
at cost less accumulated depreciation of
$133,371 at December 31, 2000 -- 469,206
------------ -----------
66,971,563 75,221,941
----------- -----------
CASH AND CASH EQUIVALENTS -- 3,656,556
------------ -----------
RECEIVABLES:
Premiums due and deferred 100,077 264,297
Other receivables -- 93,303
Accrued investment income -- 996,202
Receivables from affiliates -- 5,371
------------ -----------
100,077 1,359,173
------------ -----------
PREPAID EXPENSES -- 598,656
------------ -----------
PROPERTY AND IMPROVEMENTS:
Furniture, office equipment
and automobile -- 53,512
Less accumulated depreciation -- 43,459
----------- -----------
-- 10,053
----------- -----------
DEFERRED POLICY ACQUISITION COSTS 6,624,506 6,576,653
----------- -----------
$73,696,146 $87,423,032
=========== ===========
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2001 2000
-------- -------
POLCY BENEFIT RESERVES
Life insurance $71,549,754 $70,867,396
Supplementary contracts 821,111 736,962
----------- -----------
72,370,865 71,604,358
----------- -----------
OTHER LIABILITIES
Policy claims 566,344 551,378
Premiums received in advance 652,215 672,937
Policyholder dividends accrued 106,722 145,507
Accrued expenses and other liabilities -- 432,589
Intercompany -- 401
----------- -----------
1,325,281 1,802,812
----------- -----------
DEFERRED INCOME TAXES -- 85,600
----------- -----------
73,696,146 73,492,770
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $1 par value,
5,000,000 shares authorized
400,000 shares issued and outstanding -- 400,000
Additional paid-in capital -- 3,739,082
Unrealized gain (loss) on investments -- (29,186)
Retained earnings -- 9,820,366
-- 13,930,262
----------- -----------
$73,696,146 $87,423,032
=========== ===========
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31,
2001 2000 1999
---- ---- ----
PREMIUMS EARNED $9,195,699 $9,934,777 $12,639,295
PREMIUMS CEDED UNDER
REINSURANCE TREATY (5,097,423) -- --
---------- ---------- -----------
NET PREMIUMS EARNED 4,098,276 9,934,777 12,639,295
INVESTMENT INCOME 1,922,566 4,604,210 4,115,073
GAIN (LOSS) ON SALE OF ASSETS (88,686) 47,678 (7,138)
MISCELLANEOUS INCOME 37,503 57,651 94,665
---------- ---------- -----------
5,969,659 14,644,316 16,841,895
---------- ---------- -----------
BENEFITS AND EXPENSES:
Increase in policy benefit reserves 1,152,861 1,158,452 2,768,176
Benefits, claims and losses 7,283,663 6,839,402 6,756,829
Policy acquisition costs, net 2,246,998 2,795,265 2,960,409
General and administrative expenses 2,656,351 3,480,866 3,532,344
Charitable donations -- 36,056 51,598
Interest expense -- 18,801 --
Depreciation and amortization 1,667 76,605 5,709
---------- ---------- -----------
13,341,540 14,405,447 16,075,065
BENEFITS AND EXPENSES CEDED UNDER
REINSURANCE TREATY (6,888,252) -- --
---------- ---------- -----------
6,453,288 14,405,447 16,075,065
---------- ---------- -----------
INCOME (LOSS) BEFORE TAXES (483,629) 238,869 766,830
PROVISION (BENEFIT) FOR INCOME
TAXES (95,000) 81,331 168,714
---------- ---------- -----------
NET INCOME (LOSS) $(388,629) $157,538 $598,116
========= ========== ===========
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Additional Paid-in Unrealized Gain Retained
Stock Capital Loss on Investments Earnings Total
-------- ----------------- ------------------- --------- --------
BALANCE, January 1, 1999 $400,000 $3,738,082 $(189,304) $9,803,510 $13,753,288
Comprehensive Income:
Change in unrealized gain (loss)
on investments -- -- 169,668 -- 169,668
Net income -- -- -- 598,116 598,116
-------- ---------- -------- ---------- -----------
Total comprehensive income -- -- 169,668 598,116 767,784
Cash dividends to common stockholders -- -- -- (520,798) (520,798)
-------- ---------- -------- ---------- -----------
BALANCE, December 31, 1999 $400,000 $3,739,082 $(19,636) $9,880,828 $14,000,274
-------- ---------- -------- ---------- -----------
Comprehensive Income:
Change in unrealized gain (loss)
on investments $ -- $ -- $(9,550) $ -- $(9,550)
Net income -- -- -- 157,538 157,538
Total comprehensive income -- -- (9,550) 157,538 147,988
Cash dividends to common stockholders -- -- -- (218,000) (218,000)
-------- ---------- -------- ---------- -----------
BALANCE, December 31, 2000 $400,000 $3,739,082 $(29,186) $9,820,366 $13,930,262
-------- ---------- -------- ---------- -----------
Comprehensive Income:
Change in unrealized gain (loss)
on investments $ -- $ -- $29,186 $ -- $29,186
Net income -- -- -- (388,629) (388,629)
--------- ---------- -------- ---------- -----------
Total comprehensive income -- -- 29,186 (388,629) (359,443)
Cash dividends to common
stockholders -- -- -- (461,000) (461,000)
Net assets distributed to parent (400,000) (3,739,082) -- (8,970,737) (13,109,819)
--------- ---------- -------- ---------- -----------
BALANCE, December 31, 2001 $ -- $ -- $ -- $ -- $ --
========= ============== ========== =========== =============
The accompanying notes are an integral part of these financial statements
GULF NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31,
2001 2000 1999
---- ---- ----
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
Cash flows from operating activities:
Cash received from premiums
and reinsurance treaties,
net of premiums ceded $4,098,276 $9,777,074 $12,651,591
Cash paid for benefits and expenses,
net of benefits and expenses ceded (5,590,899) (12,652,802) (12,821,084)
Investment and miscellaneous income
received 1,959,056 4,547,546 4,316,093
Interest paid (27,232) (18,801) --
Income taxes paid (177,331) (69,004) --
---------- ----------- ------------
Net cash provided (used) by operating
activities 261,870 1,584,013 4,146,600
---------- ----------- ------------
Cash flows from investing activities:
Proceeds from sales of investments 18,978,529 7,743,527 31,427,606
Purchases of investments (15,995,600) (11,652,181) (37,479,492)
Capital expenditures -- -- (7,480)
---------- ----------- ------------
Net cash provided (used) by investing
activities 2,982,929 (3,908,654) (6,059,366)
---------- ----------- ------------
Cash flows from financing activities:
Dividends paid to stockholders (461,000) (218,000) (520,798)
Distributions to parent (6,422,900) -- --
Increase (decrease) in receivables/
payables from affiliated entities, net (17,455) 129,600 (43,794)
---------- ----------- ------------
Net cash used by financing activities (6,901,355) (88,400) (564,592)
---------- ----------- ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (3,656,556) (2,413,041) (2,477,358)
CASH AND CASH EQUIVALENTS,
beginning of year 3,656,556 6,069,597 8,546,955
---------- ----------- ------------
CASH AND CASH EQUIVALENTS,
end of year $ -- $3,656,556 $6,069,597
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS - (Continued)
Years Ended December 31,
2001 2000 1999
---- ---- ----
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $(388,629) $157,538 $598,116
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,667 76,605 5,709
(Gain) loss on sale of assets 88,686 (47,678) 7,138
Deferred income taxes -- 19,300 113,300
(Increase) decrease in:
Receivables and other assets 257,351 (231,184) 99,213
Deferred policy acquisition costs (19,939) 306,041 444,950
Increase (decrease) in:
Policy benefit reserves 480,358 1,158,452 2,768,176
Accrued expenses and other liabilities (157,624) 144,939 109,998
-------- ---------- ----------
Net cash provided by operating activities $261,870 $1,584,013 $4,146,600
======== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Asset distributions to parent $6,686,919 -- --
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Note 1- Summary of Significant Accounting Policies
Nature of Business
Gulf National Life Insurance Company (GNLIC or the Company), formerly named
Selected Funeral Insurance Company (SFIC), was owned 100% by Gulf Holdings, Inc.
(GHI), an insurance holding company domiciled in the State of Mississippi. GHI
was an 87% owned subsidiary of The Gulf Group, Inc., an insurance holding
company domiciled in the State of Mississippi. GNLIC wrote funeral insurance
policies throughout the State of Mississippi. Effective June 1, 2001, the
Mississippi Insurance Department approved an Assumption Reinsurance Treaty in
which Acadian Life Insurance Company (Acadian), domiciled in the State of
Louisiana, assumed all (100%) of the inforce funeral insurance business of
GNLIC. Subsequent to this date but during 2001, GNLIC surrendered its
Mississippi license to write insurance, ceased operations and distributed its
net assets to its parent company in a corporate reorganization. (See Note 14).
Method of Accounting
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America (GAAP).
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers cash,
money markets, and investments with original maturities of three months or less
to be cash and cash equivalents. All other investment securities are classified
as investments.
Recognition of Premium Revenue
The Company was primarily in the funeral insurance business through May 31,
2001. Benefits and expenses associated with premium revenue are recognized over
the lives of the contracts through changes in policy reserves and deferred
policy acquisitions costs, which are established as policies are placed in
force.
During 2001, 2000, and 1999, the Company earned the following premiums:
2001 2000 1999
---- ---- ----
Life $9,195,699 $9,934,777 $12,639,295
========== ========== ===========
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Deferred Policy Acquisition Costs
The costs of acquiring new business (net of the costs ceded to reinsurers),
principally commissions and other direct expenses of issuing new policies, have
been deferred. These deferred policy acquisition costs were being amortized in
proportion to the ratio of annual premium revenue to the total premium revenue
over the life of the policy. The Company considers the impact of product
profitability in determining the recoverability of the deferred policy
acquisition costs.
Real Estate Held for Sale or Lease
Real estate held for sale or lease was stated at cost less accumulated
depreciation. Real estate acquired in settlement for loans is recorded at the
lower of fair market value or loan balance at acquisition. Additional valuation
adjustments to real estate were made when the carrying value exceeded fair
market value.
Policy Benefit Reserves
The aggregate reserve for funeral insurance policies has been actuarially
determined using primarily the net level premium method based on estimated
future investment yield, mortality and withdrawals. Estimated mortality has been
established using the 1961 CSI mortality tables and 1965-1970 SOA mortality
tables with appropriate modification. Investment yields have been estimated at
6% for three years and 5% thereafter. Withdrawals are estimated based upon the
Company's previous experience. The increase in policy benefit reserves is as
follows:
2001 2000 1999
---- ---- ----
In force policies at beginning
of year or issued during the year $1,152,861 $1,158,452 $2,768,176
========== ========== ==========
Policy Claims
Policy claims represent the estimated liabilities on claims reported plus
provision for claims incurred but not yet reported. The liabilities of unpaid
claims are determined using both evaluations of each claim and statistical
analysis and represent the estimated ultimate cost of all claims incurred
through the end of the year.
Reinsurance Ceded
Reinsurance premiums ceded, ceding commissions and reinsurance recoveries
on losses incurred are deducted from the respective income and expense accounts.
For reinsurance with companies other than Acadian, related ceded deferred
acquisition costs and policy liabilities are deducted from the asset and
liability accounts. For reinsurance with Acadian, such amounts are reflected at
gross.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Investment Securities
Management determined the appropriate classification of securities at the
time of purchase. All equity securities were classified as available-for-sale
and were carried at market value as of December 31, 2000. The Company had the
intent and the ability at the time of purchase to hold all debt securities until
maturity. Therefore, they were classified as investments held-to-maturity and
carried at amortized cost as of that date.
Realized gains and losses on dispositions were based on the net proceeds
and the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on investment securities
available for sale were based on the difference between book value and fair
value of each security. These gains and losses are credited or charged to
stockholders' equity, whereas realized gains and losses were recognized in the
Company's operations.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable through undiscounted future cash flows. If it is determined that
an impairment loss has occurred based on expected cash flows, such loss is
recognized in the statement of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 2- INVESTMENTS IN SECURITIES
At December 31, 2000, the Company classified investments with a cost of
$2,060,721 and market value of $2,014,135 as available-for-sale securities. This
classification resulted in net unrealized losses of $46,586 that are reported as
a separate component of stockholders' equity at $29,186, which is net of
deferred income taxes of $17,400.
The balance of the Company's securities was classified as investment
securities to be held-to-maturity.
The amortized cost and approximate market value of securities
available-for-sale at December 31, 2000 were:
Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- ---------- ---------
Equity Securities $2,060,721 $149,288 $195,874 $2,014,135
========== ======== ======== ==========
The carrying amounts and approximate market value of investment securities to be
held-to-maturity at December 31, 2000 were:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------------- --------------- ----------
Certificates of deposit $ 6,080,557 $ -- $ -- $ 6,080,557
Public utilities 1,255,892 16,185 85,824 1,186,253
U.S. Government 28,207,685 634,608 125,709 28,716,584
securities
State and Municipal 12,179,467 213,586 24,183 12,368,870
securities
Corporate Debt 13,243,627 300,534 57,539 13,486,622
securities
Mortgage-backed securities 6,766,776 127,507 38,663 6,855,620
----------- ---------- --------- -----------
Total $67,734,004 $1,292,420 $331,918 $68,694,506
=========== ========== ======== ===========
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The maturities of investment securities and their approximate market value at
December 31, 2000, were as follows:
Amortized Market
Cost Value
------------ -----------
Due in one year or less $ 8,881,858 $ 8,885,012
Due after one year through five years 29,138,536 29,395,394
Due after five years through ten years 15,404,280 15,835,075
Due after ten years 6,415,489 6,631,934
Due after twenty years 1,127,065 1,091,471
Mortgage-backed securities 6,766,776 6,855,620
----------- ----------
Total $67,734,004 $68,694,506
=========== ===========
There were no sales of available-for-sale securities during 2001. During
2000, gross gains and gross losses included in results of operations resulting
from sales of available for sale securities were $112,652 and $1,551,
respectively, with sales proceeds of $690,677. During 1999, gross gains and
gross losses included in results of operations resulting from sales of
available-for-sale securities were $698,657 and $1,298,637, respectively, with
sales proceeds of $12,598,742. During 2001, 2000 and 1999, amortized cost and
gross realized gains and losses on sales of investment securities classified as
held-to-maturity were:
2001 2000 1999
---- ---- ----
Amortized cost $19,067,215 $7,116,273 $18,236,022
=========== ========== ===========
Gross realized losses $ 289,982 $ 112,429 $ 133,305
============ ========== ===========
Gross realized gains $ 201,296 $ 49,006 $ 726,147
============ ========== ===========
NOTE 3- MORTGAGE LOANS
Mortgage loans purchased for investment were recorded at cost, with the
related premium or discount being amortized to income using the effective
interest method.
Mortgage loans were comprised of first lien owner occupied properties and
commercial land loans. The assets securing these mortgages are generally located
throughout Mississippi and Louisiana.
Included in mortgage loans were certain loans and loan participations with
officers, directors, and affiliates. In management's opinion, the terms of these
loans were comparable to terms, which would have been given to unrelated
entities. At December 31 2000, the balances of these loans were $308,976, with
interest rates ranging from 6.00% to 8.25%.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 4- COLLATERAL LOANS
Loans secured by stock, mortgages on real estate and assets other than real
estate were classified as collateral loans and were carried at the lower of cost
or fair market value.
NOTE 5- INVESTMENT IN REAL ESTATE
Real estate investments are valued at the lower of cost or fair market
value. Cost is determined by purchase price if purchased, market value if
contributed, or loan value (not to exceed market value) if acquired by
foreclosure. The Company owns the following real estate:
December 31,
2000
Friar House
611 Jackson Avenue
Ocean Springs, MS $602,577
Less: Accumulated depreciation 133,371
--------
$469,206
========
NOTE 6-DEFERRED POLICY ACQUISITION COSTS
The costs of writing an insurance policy, including agents' commissions and
other direct expenses of issuing new policies are called policy acquisition
costs. These costs are incurred when a policy is issued, but they are deferred
and capitalized as an asset. The Company's method of calculating deferred policy
acquisition costs for long duration contracts was the factor method.
NOTE 7-REINSURANCE
At December 31, 2001, the reserves for coverage and premiums in force are
stated gross of the deduction for reinsurance with Acadian but net of the
deduction for reinsurance with other companies. At December 31, 2000, the
reserves for coverage and premiums in force are stated net of the deduction for
reinsurance with other companies. A contingent liability exists with respect to
reinsurance, which could become a liability of the Company in the event that
such reinsurance companies are unable to meet their obligation under the
existing reinsurance agreements. As of December 31, 2001 and 2000, the Company
had funeral insurance coverage in force of approximately $330,309,000 and
$324,509,000, respectively.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
NOTE 8- PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes was comprised of the following:
Federal State Total
2001:
Current $ (95,000) $ -- $(95,000)
Deferred -- -- --
--------- -------- ---------
$(95,000) $ -- $(95,000)
======== ======== ========
2000:
Current $137,031 $(75,000) $ 62,031
Deferred 16,712 2,588 19,300
-------- -------- ----------
$153,743 $(72,412) $ 81,331
======== ======== ==========
1999:
Current $96,414 $(41,000) $55,414
Deferred 98,112 15,188 113,300
$194,526 $(25,812) $168,714
The provision (benefit) for income taxes of $(95,000) for 2001 (effective
rate of 19.6%, $81,331 for 2000 (effective rate of 34.1%) and $168,714 for 1999
(effective rate of 22.0%) differs from the expected amounts, computed by
applying the U.S. Federal corporate rate of 34% to pretax earnings, as follows:
2001 2000 1999
-------- --------- --------
Computed expected tax provision (benefit) $(164,434) $ 81,215 $ 260,722
Increases (decreases) resulting from:
State income taxes (net of Federal
income tax benefit -- (47,792) (17,036)
Small life insurance company
Federal deduction 137,362 (101,109) (40,282)
Nontaxable investment income (66,709) (233,057) (197,656)
Nondeductible expenses 2,767 32,204 27,487
Adjustments made by taxing
authority -- 248,709 --
Prior year underaccrual of
Federal tax -- 93,915 134,522
Other, net (3,986) 7,246 957
--------- --------- ---------
$ (95,000) $ 81,331 $ 168,714
========== ========= =========
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
NOTE 8- PROVISION FOR INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 2000 are presented below:
Deferred tax assets:
AMT credit carry forward $ 189,000
Policy reserves 981,000
Unrealized loss on investments 17,400
------------
1,187,400
------------
Deferred tax liabilities:
Deferred policy acquisition costs 1,273,000
------------
Net deferred tax liability $ (85,600)
============
The deferred tax assets and liabilities listed above were distributed to
the Company's parent in 2001.
The Tax Reform Act of 1984 (1984 Act) revised the laws affecting taxation
of life insurance companies. Special provisions of the 1984 Act include changes
in the methods used to compute life insurance reserves and special deductions
for life insurance companies. The difference in life insurance reserves at
January 1, 1984, as computed under the 1984 Act and as computed under prior law,
referred to in the 1984 Act as "the fresh start adjustment", is not required to
be included in taxable income until distributed to the stockholders. At December
31, 2000, the Company had aggregate undistributed earnings of approximately
$200,000 associated with the fresh start adjustment for which no deferred income
taxes were provided.
The Internal Revenue Service (IRS) and State of Mississippi (State) have
examined the corporate income tax returns of the Company for the year ended
December 31, 1996, and both taxing authorities have made additional income tax
assessments for 1996. The IRS and state did not agree with the income tax
reporting position the Company took with respect to a portion of the proceeds
received in settlement of litigation involving the Company. The Company did not
agree with these additional tax assessments and actively contested such
assessments. In November 2000, the Company settled those issues with the IRS for
the year ended December 31, 1996 in the amount of $76,132 including interest. In
March 2001, the Company settled with the State of Mississippi for $84,563,
including interest.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 9- COMMITMENTS AND CONTINGENCIES
The Company leases office space under a non-cancelable annual operating
lease. Rental payments under noncancelable operating leases for the years ended
December 31, 2001 2000 and 1999 were approximately $82,000, 138,000 and
$144,000, respectively.
The Company has committed no reserves to cover any contingent liabilities.
In the ordinary course of business, the Company and its management have
been named the defendants in certain lawsuits that are pending. In the opinion
of management, based on advice from legal counsel, the ultimate outcome of the
suits pending will not have a material adverse effect on the financial position
of the Company.
NOTE 10- TRANSACTIONS WITH AFFILIATES
The Company had various transactions with affiliated entities. The
following is a summary of income and expenses with these parties for the year
ended December 31:
Company Relationship 2001 2000 1999
Income: ------- ------------ ----- ------ ------
Interest Income The Gulf Group, Inc. Affiliate $ -- $ -- $217,606
Management fees Various Various $ 32,750 $ 90,600 $ 90,606
Rental Income Various Various $ -- $ 72,116 $ 66,000
Expenses:
Rent Various Various $ 75,845 $217,453 $222,575
Management fees Various Parent $ 217,750 $444,000 $374,000
The Company and affiliated entities shared common management, accounting
personnel, and computer equipment and office space. Management of the Company
and its affiliates have systematically allocated these common expenses.
NOTE 11- RETIREMENT PLAN
The Company provided for retirement benefits for its employees through a
qualified 401(k) plan. The Company matches 25% of each employee's annual
contributions subject to a maximum matching 12% of the contributing employee's
salary. The Company contributed $17,775 and $16,350 in matching funds in 2000
and 1999, respectively. In addition, the Company made contributions of $35,628
and $36,681 in 2000 and 1999, respectively, which were allocated to employees on
a pro rata basis based on their annual compensation. These amounts were
classified in general and administrative expenses in the accompanying statements
of operations.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 12- CONCENTRATION OF CREDIT
The Company sold its funeral insurance products to individuals residing in
the State of Mississippi. The Company performed ongoing credit evaluations and
generally did not require collateral on accounts receivable. The Company
reviewed the collectibility of its accounts receivable for potential losses,
which, historically, have been minimal.
The Company maintained its cash accounts primarily with banks. The total
cash balances were insured by the FDIC up to $100,000 per bank. The Company had
cash balances on deposit that exceeded the balance insured by the FDIC at
December 31, 2000.
NOTE 13-INVESTMENT AGENCY AGREEMENTS
In connection with the issuance in 1989 and 1990 of group life insurance
policies to certain funeral home trust accounts, the Company entered into
investment agency agreements with various financial institutions that were
acting as trustees of the funeral home trusts. The trusts directed the trustees
to invest the trust funds in life insurance policies on the lives of the
individuals who had delivered cash to the funeral home trusts to pre-pay their
funeral expenses. The investment agency agreements provide that the Company will
maintain investment balances with the financial institutions in an amount equal
to the amount of premiums received and dividends paid on the insurance policies
issued by the Company to the trustee for the benefit of the various individuals
who had delivered funds to the funeral home trusts. The investment agency
agreements also provide that in the event the Company was placed in the
liquidation, the financial institutions would deliver the funds in the
investment accounts as directed by the order of a court of competent
jurisdiction. Either party upon thirty days written notice may terminate these
agreements.
In connection with the issuance in 1998 and 1999 of group life insurance
policies to certain funeral home trusts, the Company entered into an agency
agreement with the funeral home and agreed, for a period of five years, to
invest the premium payments received from the trusts with a financial
institution selected by the funeral home trusts. The Company agreed that during
this period, it would withdraw from these funds only amounts equal to the claims
paid by the Company on the policies issued to the trusts. Income earned on the
investments is not subject to any withdrawal limitations. Either party upon
thirty days written notice may terminate these agreements.
The investment agency agreements discussed above, as well as the funeral
home trust cash accounts, were ceded to Acadian in the Assumption Reinsurance
Treaty as of June 1, 2001.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 14 - FINANCIAL STATEMENT PRESENTATION
As a result of the Assumption Reinsurance Treaty between GNLIC and Acadian
(See Note 1), the accompanying financial statements include the funeral
insurance activity from operations of GNLIC for the period January 1, 2001
through May 31, 2001. The accompanying financial statements also include the
results of funeral insurance activity from operations for the premiums earned
and the benefits and expenses ceded under the Assumption Reinsurance Treaty with
Acadian, for the period June 1, 2001 through December 31, 2001. The accompanying
balance sheet at December 31, 2001 presents the assets and policyholder
obligations ceded to Acadian under the Assumption Reinsurance Treaty.
GULF NATIONAL LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEET (UNAUDITED)
September 30, 2002
ASSETS
INVESTMENTS:
Policy loans $ 76,912
Assets ceded under reinsurance
Treaty - Security National Insurance Company 67,422,824
67,499,736
-----------
CASH AND CASH EQUIVALENTS --
-----------
RECEIVABLES:
Premiums due and deferred 104,352
DEFERRED POLICY ACQUISITION COSTS 6,190,975
-----------
Total assets $73,795,063
===========
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEET (Unaudited)
SEPTEMBER 30, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
POLICY BENEFIT RESERVES:
Life Insurance $71,669,830
Supplementary Contracts 813,376
-----------
72,483,206
-----------
OTHER LIABILITIES
Policy claims 558,853
Premiums received in advance 674,704
Policyholder dividends accrued 78,300
-----------
1,311,857
-----------
--
-----------
STOCKHOLDERS' EQUITY --
-----------
$73,795,063
===========
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended
September 30,
2002 2001
---------- ----------
PREMIUMS EARNED $6,712,943 $7,559,570
PREMIUMS CEDED UNDER REINSURANCE
TREATY (6,712,943) (3,461,294)
----------- -----------
NET PREMIUMS EARNED -- 4,098,276
INVESTMENT INCOME -- 1,922,566
GAIN (LOSS) ON SALE OF ASSETS -- (88,686)
MISCELLANEOUS INCOME -- 37,503
----------- ----------
-- 5,969,659
----------- ----------
BENEFITS AND EXPENSES:
Increase in policy benefit reserves 112,341 1,334,017
Benefits, claims and losses 5,319,249 5,763,716
Policy acquisition costs, net 2,186,090 1,411,195
General and administrative expenses 1,401,375 2,157,594
----------- -----------
9,019,055 10,666,522
----------- -----------
BENEFITS AND EXPENSES CEDED UNDER
REINSURANCE TREATY (9,019,055) (4,213,234)
----------- -----------
-- 6,453,288
----------- -----------
INCOME (LOSS) BEFORE TAXES -- (483,629)
PROVISION (BENEFIT) FOR
INCOME TAXES -- (95,000)
----------- ----------
NET INCOME (LOSS) $ -- $(388,629)
=========== ==========
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2002
Total
Stockholders' Equity
--------------------
BALANCE, December 31, 2001 $ --
----------
BALANCE, September 30, 2002 $ --
==========
The accompanying notes are an integral part of these financial statements
GULF NATIONAL LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
2002 2001
-------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
Cash flows from operating activities:
Cash received from premiums and reinsurance
treaties $6,731,156 $4,098,276
Premiums ceded (6,731,156) --
Cash paid for benefits and expenses (8,942,627) (5,590,899)
Benefits and expenses ceded 8,942,627 --
Investment and miscellaneous income received -- 1,959,056
Interest paid -- (27,232)
Income taxes paid -- (177,331)
---------- ----------
Net cash provided by operating activities -- 261,870
---------- ----------
Cash flows from investing activities:
Proceeds from sales of investments -- 18,978,529
Purchases of investments -- (15,995,600)
---------- -----------
Net cash provided by investing activities -- 2,982,929
---------- -----------
Cash flows from financing activities:
Dividends paid to stockholders -- (461,000)
Distributions to parent -- (6,422,900)
Increase (decrease) in receivables/
payables from affiliated entities, net -- (17,455)
----------- ----------
Net cash used by financing activities -- (6,901,355)
----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS -- (3,656,556)
CASH AND CASH EQUIVALENTS,
beginning of year -- 3,656,556
---------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ -- $ --
=========== ===========
The accompanying notes are an integral part of these financial statements
GULF NATIONAL LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) - Continued
Nine Months Ended
September 30,
2002 2001
------ -------
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATION ACTIVITIES:
Net income (loss) $ -- $(388,629)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization -- 1,667
Loss on sale of assets -- 88,686
(Increase) decrease in:
Receivables and other assets (532,448) 257,351
Deferred acquisition costs 433,531 (19,939)
Increase (decrease) in:
Policy benefit reserves 112,341 480,358
Accrued expenses and other liabilities (13,424) (157,624)
Net cash provided by
operating activities $ -- $261,870
---------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Asset distributions to parent $ -- $6.686,919
=========== ==========
The accompanying notes are an integral part of these financial statements.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
Note 1) Gulf National Life Insurance Company (GNLIC or the Company), formerly
named Selected Funeral Insurance Company (SFIC), was owned 100% by Gulf
Holdings, INC. (GHI), an insurance holding company domiciled in the State of
Mississippi. GHI was an 87% owned subsidiary of The Gulf Group, Inc., an
insurance holding company domiciled in the State of Mississippi. GNLIC wrote
funeral insurance business throughout the State of Mississippi. The accompanying
unaudited interim financial statements for the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, these financial statements reflect all adjustment
which are, in the opinion of management, necessary to a fair statement of the
results for the interim periods presented. The operating results are not
indicative of the results which might be expected for a twelve-month period.
Footnote disclosures which would substantially duplicate the footnotes included
in the 2001 audited financial statements have been omitted. Please refer to the
footnotes of the 2001 financial statements included elsewhere herein.
Note 2) Effective June 1, 2001, the Mississippi Insurance Department approved an
Assumption Reinsurance Treaty in which Acadian Life Insurance Company (Acadian),
domiciled in the State of Louisiana, assumed all (100%) of the inforce business
of GNLIC. Subsequent to this date but during 2001, GNLIC surrendered its
Mississippi license to write insurance, ceased operations and distributed its
net assets to its parent company.
As a result of the Assumption Reinsurance Treaty between GNLIC and Acadian,
the accompanying financial statements include the funeral insurance activity
from operations of GNLIC for the period January 1, 2001 through May 31, 2001.
The accompanying financial statements also include the results of funeral
insurance activity from operations for the premiums earned and the benefits and
expenses ceded under the Assumption Reinsurance Treaty with Acadian for the
period June 1, 2001 through September 30, 2001. The accompanying balance sheet
at September 30, 2002 represents the assets and policyholder obligations ceded
to Security National Life Insurance Company ("Security National Life") under the
Assumption Reinsurance Treaty (See Note 3).
Note 3) On December 23, 2002, Security National Life entered into a Coinsurance
and Assumption Agreement with Acadian, wherein Security National Life has
assumed 100% of Acadian's industrial and ordinary life policies in force in the
State of Mississippi, approximately 275,000 policies. The Coinsurance Agreement
is effective as of September 30, 2002 and the Assumption Agreement was effective
as of January 1, 2003. The Coinsurance and Assumption Agreements have been
approved by the Mississippi Insurance Department and Security National Life was
granted its Mississippi license on January 1, 2003.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS (Continued)
Note 4) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". Under SFAS No. 142, amortization of goodwill is
precluded, however, its recoverability must be periodically (at least annually)
reviewed and tested for impairment. Goodwill must be tested at the reporting
unit level for impairment in the year of adoption, including an initial test
performed within six months of adoption. If the initial test indicates a
potential impairment, then a more detailed analysis to determine the extent of
impairment must be completed within twelve months of adoption. SFAS No.-142 also
requires that useful lives for intangibles other than goodwill be reassessed and
remaining amortization periods be adjusted accordingly. The adoption of SFAS
No. 142 did not have a material impact on the Company's financial condition or
results of operations.
In August 2001, the FASB issued SFAS No.-144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS No.-144 establishes
an accounting model for long-lived assets to be disposed of by sale that applies
to all long-lived assets, including discontinued operations. SFAS No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. Adoption of SFAS No. 144 did not have a material impact on
the Company's financial condition or results of operations.
In April 2002, FASB
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections". Under historical guidance,
all gains and losses resulting from the extinguishment of debt were required to
be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. SFAS No. 145 rescinds that guidance and requires that
gains and losses from extinguishments of debt be classified as extraordinary
items only if they are both unusual and infrequent in occurrence. SFAS No. 145
also amends SFAS No. 13, "Accounting for Leases" for the required accounting
treatment of certain lease modifications that have economic effects similar to
sale-leaseback transactions. SFAS No. 145 requires that those lease
modifications be accounted for in the same manner as sale-leaseback
transactions. The provisions of SFAS No. 145 related to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. Adoption of the
provisions of SFAS No. 145 related to SFAS No. 13 did not have a material impact
on the Company's financial condition or results of operations.
In June 2002, the
FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Action (including Certain Costs Incurred in a Restructuring)" ("Issue
94-3"). The principal difference between SFAS No. 146 and Issue 94-3 is that
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, rather than at
the date of an entity's commitment to an exit plan. SFAS No. 146 is effective
for exit or disposal activities after December 31, 2002. Based upon a
preliminary review, adoption of SFAS No. 146 would not have a material impact on
the Company's financial condition or results of operations.
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS (Continued)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
guarantees to be recorded at fair value and also requires a guarantor to make
new disclosures, even when the likelihood of making payments under the guarantee
is remote. In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or an equity security of the guaranteed party.
The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002. See disclosures in Note 2(h), "Other
Investment and Risk Management Activities - Specific Strategies". Based upon a
preliminary review, adoption of SFAS No. 146 would not have a material impact on
the Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. Under the prospective method, stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. The modified prospective method
recognizes stock-based compensation expense related to new and unvested awards
in the year of change equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, fiscal years beginning after
December 15, 1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial statements for
all prior periods presented as though the fair value recognition provisions of
SFAS No. 123 had been adopted as of its effective date. Based on a preliminary
review, adoption of SFAS 148 would not have a material effect on the financial
condition or results of operations of the Company.
In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires an enterprise to assess
if consolidation of an entity is appropriate based upon its variable economic
interests in a variable interest entity (VIE). The initial determination of
whether an entity is a VIE shall be made on the date at which an enterprise
becomes involved with the entity. A VIE is an entity in which the equity
investors do not have the characteristics of a
GULF NATIONAL LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS (Continued)
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. An enterprise shall consolidate a VIE if it has a
variable interest that will absorb a majority of the VIE's expected losses if
they occur, receive a majority of the entity's expected residual returns if they
occur or both. A direct or indirect ability to make decisions that significantly
affect the results of the activities of a VIE is a strong indication that an
enterprise has one or both of the characteristics that would require
consolidation of the VIE.
FIN 46 is effective for new VIE's established subsequent to January 31,
2003 and for existing VIE's as of July 1, 2003. Based upon a preliminary review,
the adoption of FIN 46 would not have a material impact on the Company's
financial condition or results of operations as there were no material VIE's
identified which would require consolidation. FIN 46 further requires the
disclosure of certain information related to VIE's in which the Company holds a
significant variable interest. The Company does not believe that it owns any
such interests that require disclosure at this time.
Item 7 (b) Pro Forma Financial Information
The accompanying unaudited pro forma condensed financial statements give
effect to the acquisition of the funeral insurance business of Gulf National
Life Insurance Company (Gulf National) assumed from Acadian Life Insurance
Company by Security National Life Insurance Company. The adjustments to the pro
forma condensed balance sheets assume that the acquisition took place on
September 30, 2002, while the adjustments to the pro forma condensed
consolidated statements of income assume that the acquisition was consummated on
the first day of the year ended December 31, 2001. The pro forma adjustments and
the assumptions on which they are based are described in the accompanying notes
to pro forma condensed financial statements.
The pro forma information for Security National Financial Corporation was
taken from the Form 10-Q and Form 10-K as filed with the Securities and Exchange
Commission for the third quarter ended September 30, 2002, and year ended
December 31, 2001. The pro forma information for Gulf National is obtained from
the financial statements presented elsewhere in this Form 8-K filing. The pro
forma condensed financial statements are presented for illustrative purposes
only and should be read in conjunction with the financial statements referred to
in the two preceding sentences.
The pro forma condensed financial statements are not necessarily indicative
of the results that actually would have occurred if the acquisition had been in
effect as of and for the period presented or that may be achieved in period
subsequent to the acquisition.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2002 (Unaudited ) (in thousands)
Security National Gulf National Life
Financial Insurance Pro Forma Pro Forma
Corporation Company Adjustments Consolidation
Fixed maturities held to
maturity at amortized cost $24,808 $ -- $8,509 (b) $33,317
Securities available for sale at Market 20,671 -- -- 20,671
Mortgage loans 16,536 -- -- 16,536
Real estate 9,593 -- -- 9,593
Other invested assets 13,328 77 -- 13,405
------- ---------- -------- --------
Total investments 84,936 77 8,509 93,522
Cash 20,259 -- 66,475 (e) 85,479
-- -- (1,255) (a) --
------- ---------- -------- --------
Receivables, net 57,722 104 45 (h) 57,871
Land and improvements 8,080 -- -- 8,080
Deferred acquisition costs and
cost of insurance acquired 22,569 6,191 (6,191) (c) 31,351
8,782 (c) --
Property, plant and equipment, net 11,056 -- -- 11,056
Other assets 15,199 -- -- 15,199
Assets ceded under reinsurance treaty-SNLIC -- 67,423 (67,423) (d) --
------- ---------- -------- ---------
Total assets $219,821 $73,795 $8,942 $302,558
======== ========= ========= =========
Policyholder obligations $142,014 $72,483 $ -- $214,497
Bank loans payable 7,389 -- 9,000 (a) 16,389
Notes and contracts payable 3,236 -- -- 3,236
Deferred pre-need cemetery and
funeral contract revenue 9,719 -- -- 9,719
Other liabilities 20,799 1,312 500 (f) 22,053
-- -- (558) (g) --
------- ---------- -------- ---------
Total liabilities 183,157 73,795 8,942 265,894
------- ---------- -------- ---------
Minority interest 4,299 -- -- 4,299
------- ---------- -------- ---------
Common stock 11,950 -- -- 11,950
Paid in capital 10,168 -- -- 10,168
Accumulated other comprehensive
income, net of deferred taxes 1,038 -- -- 1,038
Retained earnings 12,533 -- -- 12,533
Treasury stock at cost (3,324) -- -- (3,324)
------- ---------- -------- ---------
Total stockholders' equity 32,365 -- -- 32,365
-------- --------- ------- ---------
Total liabilities and stockholders' equity $219,821 $73,795 $8,942 $302,558
======== ======== ======= =========
See notes to pro forma condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Income (Unaudited)
For the Nine Months Ended September 20, 2002 (In Thousands)
Security Gulf
National National Life
Financial Insurance Pro Forma Pro Forma
Corporation Company Adjustments Consolidation
Revenues:
Premiums $10,320 $6,713$ -- $17,033
Premiums ceded under reinsurance treaty (6,713) 6,713 (l) --
Investment income 8,504 -- (61) (j) 11,764
3,321 (i) --
Realized gains (losses) 746 -- -- 746
Mortuary and cemetery income 8,411 -- -- 8,411
Mortgage fee income 34,829 -- -- 34,829
Other 415 -- -- 415
------- -------- -------- ---------
Total revenues 63,225 -- 9,973 73,198
------- -------- -------- ---------
Benefit and expenses:
Death and policy benefits 5,741 5,319 -- 11,060
Increase in future policy benefits 3,629 112 -- 3,741
Amortization of DPAC 2,334 2,186 (859) (k) 4,113
452 (k) --
General and administrative expenses 45,183 1,402 (277) (m) 46,308
Interest expense 1,014 -- 268 (h) 1,282
Cost of goods and services of
mortuaries and cemeteries 1,972 -- -- 1,972
Benefits and expenses ceded under
reinsurance treaty -- 9,019 9,019 (l) --
------- -------- -------- ---------
Total benefits and expenses 59,873 -- 8,603 68,476
------- -------- -------- ---------
Earnings before income taxes 3,352 -- 1,370 4,722
Income taxes (826) -- (315) (n) (1,141)
Minority interest 18 -- -- 18
------- -------- -------- ---------
Net income $2,544 $ -- $1,055 $3,599
====== ========= ====== =======
See notes to pro forma condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Income (Unaudited)
For the Twelve Months Ended December 31, 2001
(In Thousands)
Security Gulf
National National Life
Financial Insurance Pro Forma Pro Forma
Corporation Company Adjustments Consolidation
Revenues:
Premiums $13,151 $ 9,196 $ -- $22,347
Premiums ceded under reinsurance treaty -- (5,098) 5,098 (i) --
Investment income 12,947 1,923 (82) (j) 17,371
-- -- 2,583 (i) --
Realized gains (losses) 10 (89) -- (79)
Mortuary and cemetery income 10,603 -- -- 10,603
Mortgage fee income 40,086 -- -- 40,086
Other 152 38 -- 190
-------- ---------- ----------- ---------
Total revenues 76,949 5,970 7,599 90,518
-------- ---------- ----------- ---------
Benefit and expenses:
Death and policy benefits 6,822 7,284 -- 14,106
Increase in future policy benefits 4,953 1,153 -- 6,106
Amortization of DPAC 3,870 2,247 (391) (k) 6,329
-- -- 603 (k) --
General and administrative expenses 52,247 2,658 (1,158) (m) 53,747
Interest expense 2,791 -- 357 (h) 3,148
Cost of goods and services of
mortuaries and cemeteries 2,494 -- -- 2,494
Benefits and expense ceded under
reinsurance treaty -- (6,888) 6,888 (l) --
-------- ---------- ----------- ---------
Total benefits and expenses 73,177 6,454 6,299 85,930
-------- ---------- ----------- ---------
Earnings before income taxes 3,772 (484) 1,300 4,588
Income taxes (913) 95 (299) (n) (1,117)
Minority interest (18) -- -- (18)
-------- ---------- ----------- ---------
Net income $ 2,841 $ (389) $ 1,001 $ 3,453
========
See notes to pro forma condensed consolidated financial statements
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Pro Forma Condensed
Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited pro forma condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for pro forma financial information and with the instructions to Form
8-K and Article II of Regulation S-X. The acquisition will be accounted for as a
purchase by Security National. The pro forma adjustments presented are estimates
as of the periods presented and do not necessarily reflect the actual amounts
that will be booked on the actual purchase date and subsequent adjustments
required for an appropriate pro forma presentation have been included.
On December 23, 2002, Security National Insurance Company (Security
National Life) entered into a Coinsurance and Assumption Agreement with Acadian
Life Insurance Company, wherein Security National Life has assumed 100% of
Acadian's funeral insurance policies in force in the State of Mississippi,
approximately 275,000 policies. The assets were originally acquired by Acadian
from Gulf National Life Insurance Company ("GNLIC") on June 6, 2001, consisting
of all of GNIC's insurance policies in force and in effect on June 1, 2001. The
Coinsurance Agreement is effective as of September 30, 2002 and the Assumption
Agreement was effective as of January 1, 2003. The Coinsurance and Assumption
Agreements have been approved by the Mississippi Insurance Department and
Security National Life was granted its Mississippi license on January 1, 2003.
Note 2. Pro Forma Adjustments
The following pro forma adjustments are made to the unaudited condensed
consolidated balanced sheet as if the acquisition and related transactions
occurred September 30, 2002. Reference numbers correspond to those on the
statement.
a. To reflect the decrease of $1,254,803 in cash and the borrowing of
$9,000,000 to acquire the business of the Company.
b. To reflect the market value of fixed maturities received from Acadian
Life.
c. To eliminate the Company's historical deferred policy acquisition
costs and establish a new asset representing the value of future
profits on the insurance contracts acquired.
d. To eliminate the assets ceded under the reinsurance treaty with
Security National Life.
e. To reflect the value of cash received from Acadian.
f. To reflect the accrual of acquisition costs.
g. To eliminate the IBNR which was not ceded until January 1, 2003.
The following pro forma adjustments are made to the unaudited condensed
consolidated statements of income as if the Company's acquisition and related
transactions occurred at the beginning of the periods presented. Reference
numbers correspond to those presented on the statements.
h. To reflect Security National's interest expense on the $9,000,000
borrowed to partially finance the Company acquisition.
i. To reflect the interest earned on assets acquired.
j. To reflect investment income lost on the $1,254,803 cash paid by
Security National for acquisition of the Company.
k. To eliminate the Company's amortization of deferred policy acquisition
costs and reflect the amortization of the new cost of insurance
acquired established by Security National.
l. To eliminate the premiums, benefits and expenses ceded under
reinsurance treaty.
m. To reflect decreases in operating expenses due to the consolidation of
administrative functions.
n. To reflect the tax effect for the pro forma adjustments.