(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 1997.
The following table summarizes the location and acreage of the six Company owned cemeteries:
(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, 1997, there were mortgages of approximately $170,000 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries, of which approximately $81,000 was held by Security National Life. (4) As of December 31, 1997, there were mortgages of approximately $2,050,000 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, 1997, there was a mortgage of approximately $829,000 collateralized by the property.
(1) As of December 31, 1997, there were mortgages of approximately $461,000 collateralized by the property and facilities of Camelback Sunset Funeral Home. (2) As of December 31, 1997, there were mortgages of approximately $2,050,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary. (3) As of December 31, 1997, there was a mortgage of approximately $130,000, collateralized by the property and facilities of Crystal Rose Funeral Home.
(2) Reflects the acquisition of Capital Investors Life as of December 31, 1994, and Camelback Sunset Funeral Home as of January 1, 1994.
(4) Reflects the acquisition of Crystal Rose Funeral Home as of February 1997.
During 1997, there was a net increase of $328,000 in death benefits, surrender and other policy benefits, and increase in future policy benefits from $6,341,000 in 1996 to $6,669,000 in 1997. 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.
Realized gains on investments and other assets decreased by $43,000, from a gain of $333,000 in 1995 to a gain of $290,000 in 1996. In 1995, an agreement was entered into in which the Company's remaining interest in Evergreen Memorial Park was sold to an Ogden based mortuary. The net gain on the sale of Evergreen Memorial Park was approximately $206,000.
During 1996, there was a net increase of $228,000 in death benefits, surrender and other policy benefits, and increase in future policy benefits from $6,112,000 in 1995 to $6,340,000 in 1996. This increase was primarily due to additional interest credited on annuities and reserve increases on traditional products. This increase is reasonable based on the underlying actuarial assumptions.
Cost of the mortuary and cemetery goods and services sold was consistent with the products sold during 1996.
The Company's investment policy is to invest predominately in fixed maturity securities 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 subsidiary. Bonds owned by the insurance subsidiary amounted to $49,697,000, at amortized cost as of December 31, 1997 compared to $47,906,000 at amortized cost as of December 31, 1996. This represents 64% of the total insurance related investments in 1997 as compared to 63% in 1996. Generally all bonds owned by the life insurance subsidiary 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, 1997, 4.06% ($2,018,000) and at December 31, 1996, 4.18% ($1,994,000) of the Company's total invested assets were invested in bonds in rating categories three through six which are considered non-investment grade.
The Company intends to hold its fixed income securities, including high-yield securities, in its portfolio 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, 1997 and 1996, the life subsidiary exceeded the regulatory criteria.
In February 1995, the Company purchased approximately 100 acres of real property (the "Property") located in San Diego, California, approximately 35 acres of which is being used for a cemetery. The purchase price of the property was $1,062,000, $100,000 of which was paid in cash and the balance of $962,000, together with interest thereon at the rate of 9% percent per annum, to be paid in 12 monthly payments of $5,000, thereafter in equal monthly payments of $10,000. However, interest did not accrue on any part of the principal balance until February 3, 1996. A principal payment of $100,000 was made in December 1995. The Company has obtained approval from the federal government and the California Cemetery Board to operate a cemetery on the property. The Company has completed development on six acres and is currently selling cemetery lots on a pre-need and at-need basis on the developed acreage.
In December 1995, the Company purchased all of the outstanding shares of common stock of Civil Service Employees Life Insurance Company ("CSE Life") from Civil Service Employees Insurance Company for a total cost of $5,200,000, which included a promissory note in the amount
Also, the Company is in the process of confirming with its major vendors and suppliers to determine compliance to the Year 2000.
Page No. -------- Financial Statements: Report of Independent Auditors . . . . . . . .. . . . . . . .30
Consolidated Balance Sheets, December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . .31
IV. Reinsurance . . . . . . . . . . . . . . . . . . . . . . .77
We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries as of December 31, 1997, and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flow for each of the three years in the period ended December 31, 1997. 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.
In December 1995, Security National Life Insurance Company and Civil Service Employees Life Insurance Company were merged into Capital Investors Life, with Capital Investors Life as the surviving corporation. In March 1996, the Company changed the name of the surviving corporation from Capital Investors Life to Security National Life Insurance Company.
In February 1997 the Company purchased all of the outstanding shares of common stock of Crystal Rose Funeral Home ("Crystal Rose") for total consideration of $382,208, which included a note to the former owner for $297,208. In addition, the Company entered into an employment agreement with the former owner for consideration of 40,000 shares of Class C Common Stock, payable in six equal installments over six years, beginning in January 1998. Payment of the shares is contingent upon the former owner's continued employment with the Company. The acquisition was accounted for using the purchase method. The assets and liabilities of Crystal Rose have been included in the Company's balance sheet at December 31, 1997. The results of operation of Crystal Rose for the eleven months ended December 31, 1997 were included in the consolidated statements of earnings of the Company. This acquisition resulted in an addition to excess of cost over net assets of acquired subsidiaries of approximately $258,320. The unaudited consolidated pro forma results of operations assuming consummation of these acquisitions as of January 1, 1996, would not materially affect total revenue, net earnings, nor earnings per share and, thus, have not been shown.
generally in proportion to the present value of expected gross profits from surrender charges, investment, mortality and expense margins. This amortization is adjusted when estimates of current or future gross profits to be realized from a group of products are reevaluated. Deferred acquisition costs are written off when policies lapse or are surrendered.
Future policy benefit reserves for 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 subsidiary's 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% in 1997, 1996, and 1995. 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 1997, 1996 and 1995.
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. Management believes amounts placed into these accounts are sufficient to fulfill all future pre-need contract obligations.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". The new Standard simplified the standards for computing earnings per share and requires presentation of two new amounts, basic and diluted earnings per share. The new Standard also requires additional informational disclosures and makes certain modifications to the previous standards defined in Accounting Principles Board ("APB") Opinion No. 15. The Company was required to retroactively adopt this Standard for each year presented.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996, and 1995
The Company has one fixed option plan (the "1993 Plan"). In accordance with APB Opinion No. 25, no compensation cost has been recognized for the 1993 plan. Had compensation cost for the 1993 plan 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 $10,000 and $7,000 in 1997 and 1996 respectively, which would have had no effect on earnings per share. The fair value of options granted in 1996 under the 1993 plan is estimated as $1.19 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 5%, volatility of 34.2%, risk free interest rate of 6.9%, and an expected life of five years. No options were granted in 1995 under the 1993 plan, and, therefore, there would have been no effect on net income or earnings per share had the Company applied the methodology prescribed under SFAS No. 123 in that year.
The amortized cost and estimated fair value of fixed maturity securities held to maturity at December 31, 1997, 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.
Net investment income includes net investment income earned by the restricted assets of the cemeteries and mortuaries of approximately $609,000, $655,000 and $574,000 for 1997, 1996, and 1995, respectively.
Information with regard to cost of insurance acquired is as follows:
Net amortization charged to income is expected to approximate $297,000, $280,000, $259,000, $245,000, and $233,000 for the years 1998 through 2002.
Assets in the restricted asset account, which are reported at cost, are summarized as follows:
The Company paid approximately $18,000 of income taxes in 1996, and paid no income taxes in 1997 and 1995. The Company's income tax expense is summarized as follows:
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, 1997, the policyholders' surplus accounts approximated $4,300,000. 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 $1,449,000.
The Company has been named as a party in connection with pending litigation brought by Garry Eckard & Co., Inc. ("Eckard") in the Federal District Court for the Southern District of Indiana. The complaint was filed on October 14, 1996 and alleges breach of contract and civil conversion pertaining to a finder's fee and seeks an unspecified amount of damages plus costs and attorneys' fees. In a prior letter to the Company from Eckard, it appears that the amount of the fee being sought is $152,000. The complaint, pursuant to the civil conversion claim, seeks treble damages under Indiana's civil conversion statute.
The complaint was initially filed in the Indiana Hamilton County Superior Court, but was subsequently removed by the Company to the Federal District Court for the Southern District of Indiana. The Company filed a motion to dismiss for lack of personal jurisdiction and Eckard filed a motion to amend its complaint and to add Security National Life Insurance Company, a subsidiary of the Company, as a party defendant. On March 18, 1997, the Company's motion was granted to dismiss the complaint against the Company for lack of personal jurisdiction and Eckard's motion was granted to amend the complaint by adding Security National Life Insurance Company as a party defendant. The Company's motion to dismiss the complaint against the Company was granted without prejudice, which allows the complaint to be refiled in an appropriate jurisdiction.
Security National Life Insurance Company then filed a motion to dismiss for lack of personal jurisdiction. On October 10, 1997, this motion to dismiss the complaint for lack of personal jurisdiction was granted thereby also dismissing the case against Security National Life Insurance Company. Thus, the case in Indiana was dismissed without prejudice against both the Company and Security National Life Insurance Company for lack of personal jurisdiction.
The complaint brought by the Mackays also alleges certain items of personal property were removed from their location, sold or destroyed, which it is alleged had a value of approximately $50,000, for which the Company is allegedly liable, and that the Company also should deliver to the Mackays 80 shares of Spring Creek Irrigation Company common stock, which allegedly has "substantial value." The Mackays have also included a claim for breach of the implied covenant of good faith and fair dealing with alleged damages "to be determined by the trier of fact and such punitive damages as the court determines." Although formal discovery is in process, a full evaluation has not been made of the matter at this point. Management has directed that the action be defended as well as having directed the filing of a counterclaim.
participants to make pretax contributions up to the lesser of 15% of total annual compensation or the statutory limits (currently $9,240). The Company may match up to 50% of each employee's investment in Company stock, up to 5% 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. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee. The Company's matching 401(k) contributions for 1997, 1996, and 1995 were approximately $-0-, $50,000, $21,000, respectively.
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
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 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 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.
The NAIC currently is in the process of codifying statutory accounting practices ("Codification"). Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company uses to prepare its statutory-basis financial statements. Codification, which is expected to be approved by the NAIC in 1998, will require adoption by the various states before it becomes the prescribed statutory basis of accounting for insurance companies domesticated within those states. Accordingly, before Codification becomes effective for the Company, the state of Utah must adopt Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results to the Utah Insurance Department. However, based on current draft guidance, management believes that the impact of codification will not be material to the Company's statutory-basis financial statements. Statutory net income and statutory stockholder's equity for the life subsidiary as reported to state regulatory authorities, is presented below:
The Utah Insurance Department imposes 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 subsidiary has a Ratio that is greater than 300% of the first level of regulatory action.
The Company is principally involved in three segments: Life insurance, cemetery/mortuary operations and mortgage operations. All intercompany transactions between the business segments have been eliminated in this presentation and therefore, the operations for each business segment do not reflect the interest income/expense from intercompany borrowings. The following schedules summarize segment information for the three segments and corporate activities for 1997, 1996, and 1995: