(1) The Company leases an additional 8,858 square feet of the facility to unrelated third parties for approximately $140,000 per year, under leases which expire at various dates after 1998.
(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 1998.
(1) Reflects the acquisition of Capital Investors Life as of December 31, 1994, and Camelback Sunset Funeral Home as of January 1, 1994.
(2) Only includes Evergreen Memorial Park for the first eleven months of 1995 and the assets and liabilities of Civil Service Employees Life Insurance Company as of December 31, 1995.
Total revenues increased by $4,345,000, or 15.3%, from $28,475,000 for fiscal year 1997 to $32,820,000 for fiscal year 1998. Net investment income increased $319,000 and mortgage fee income increased $4,420,000. These increases were offset by decreases in insurance premiums and other considerations of $225,000, net mortuary and cemetery sales of $5,000 and realized gains on investments and other assets of $179,000.
Total benefits and expenses were $31,794,000 for 1998, which constituted 97% of the Company's total revenues, as compared to $26,806,000, or 94% of the Company's total revenues for 1997.
Net mortuary and cemetery sales increased by $1,093,000, from $8,138,000 in 1996 to $9,231,000 in 1997. Of this increase in sales, $750,000 was the result of the acquisition of Crystal Rose Funeral Home. The balance of the increase in sales was due to the generation of additional sales of funeral services and cemetery products from existing facilities.
Mortgage fee income decreased by $2,575,000, from $8,237,000 in 1996 to $5,662,000 in 1997. This decrease was primarily due to fewer loan originations because there were fewer new home sales in 1997 in the Company's primary market, the intermountain region, compared to 1996 and the Company experienced increased competition from other mortgage companies and banks.
General and administrative expenses decreased by $1,931,000, from $17,292,000 in 1996 to $15,361,000 in 1997. This was primarily due to a decrease in commissions and other expenses. Commission expenses decreased by $1,117,000, from $6,000,000 in 1996 to $4,883,000 in 1997. Other expenses decreased $876,000, from $6,548,000 in 1996 to $5,672,000 in 1997. These decreases were primarily the result of fewer loan originations by the Company's mortgage subsidiary. Salaries increased by $61,000, from $4,745,000 in 1996 to $4,806,000 in 1997. However, the number of the Company's full time employees decreased by 10 from 165 employees in 1996 to 155 in 1997.
Interest expense decreased by $370,000, from $1,318,000 in 1996 to $948,000 in 1997. This decrease was primarily due to fewer loan originations from the Company's mortgage subsidiary and the payoff of bank debt in 1997.
The cost of the mortuary and cemetery goods and services sold was consistent with the products sold during 1997 and 1996.
timing; however, to date, that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company's products. The Company's investment philosophy is intended to provide a rate of return which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1998 was 6.0%, as compared to a rate of 11.7% in 1997.
In February 1997, the Company purchased all of the outstanding shares of common stock of Crystal Rose Funeral Home, Inc. for a total consideration of $382,000, which included a note to the former owner in the amount of $297,000.
On December 17, 1998, the Company completed the acquisition of Consolidare Enterprises, Inc., a Florida corporation ("Consolidare") pursuant to the terms of the Acquisition Agreement which the Company entered into on April 17, 1998 with Consolidare and certain shareholders of Consolidare for the purchase of all of the outstanding shares of common stock of Consolidare. Consolidare owns approximately 57.4% of the outstanding shares of common stock of Southern Security Life Insurance Company, a Florida corporation ("SSLIC"), and all of the outstanding shares of stock of Insuradyne Corp., a Florida corporation ("Insuradyne").
The Company's insurance operations have two different administrative systems for its insurance operations. The system used for Security National Life Insurance Company was converted to a Year 2000 compliant version in the fourth quarter of 1998. The Company expended approximately $52,000 for the conversion to this latest version. As part of the acquisition of Southern Security Life Insurance Company (Southern Security), the Company purchased a new system which is Year 2000 compliant. The Company successfully converted Southern Security's existing system to the new system on January 1, 1999. The Company paid in 1998 approximately $1 million for this new system.
The Company's mortgage subsidiary uses a Year 2000 compliant system. The Company's mortuary and cemetery operations converted to the latest version for Year 2000 software during March 1999. The Company's general accounting and payroll systems were converted to Year 2000 versions during March 1999. The cost for these conversions were not significant to consolidated net income.
Anticipated future costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Management believes that manual policy and claims administration could be performed in the unlikely event that one or more of its systems did not function.
Consolidated Statements of Cash Flow, Years Ended December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
II. Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 73
V. Valuation and Qualifying Accounts. . . . . . . . . . . . . . 80
Camelback Sunset Funeral Home, Inc. Greer-Wilson Funeral Home Crystal Rose Funeral Home Hawaiian Land Holdings Consolidare Enterprises, Inc. Insuradyne Southern Security Life Insurance Company (57.4%)
On December 17, 1998, the Company purchased all of the outstanding shares of common stock of Consolidare Enterprises, Inc., (Consolidare) for a total cost of $12,248,194. Consolidare owns approximately 57.4% of the outstanding shares of common stock of Southern Security Life Insurance Company (Southern Security) and all of the outstanding shares of stock of Insuradyne Corp. The acquisition was accounted for using the purchase method. The assets and liabilities of Consolidare and subsidiaries have been included in the Company's balance sheet at December 31, 1998. The results of operations of Consolidare and subsidiaries were not material to the financial statements of the Company from the date of acquisition through December 31, 1998 and, consequently, have not been included in the Consolidated Statements of Earnings for the year then ended.
reported as unrealized appreciation or depreciation and recorded as an adjustment directly to stockholders' equity and, accordingly, have no effect on net income.
Policy, student, and other loans - at the aggregate unpaid balances.
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 1998, 1997 and 1996.
Participating business constitutes 1%, 8%, and 5% of insurance in force for 1998, 1997 and 1996, respectively. The provision for policyholders' dividends included in policyholder obligations is based on dividend scales anticipated by management. Amounts to be paid are determined by the Board of Directors.
Revenues and costs for at-need sales are recorded when the services are performed.
prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential mortuary customer utilizes one of the Company's facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. However, management believes that given current inflation rates and related price increases of goods and services, the risk of exposure is minimal.
Income taxes include taxes currently payable plus deferred taxes related to the tax effect of temporary differences in the financial reporting basis and tax basis of assets and liabilities. Such temporary differences are related principally to the deferral of policy acquisition costs and the provision for future policy benefits in the insurance operations, and unrealized gains on fixed maturity and equity securities available for sale.
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 $110,000, $10,000, and $7,000 in 1998, 1997, and 1996, respectively. As a result, basic and diluted earnings per share would have been reduced in 1998 from $0.18 to $0.15. There would have been no measurable effect on earnings per share in 1997 or 1996.
equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130.
Certain amounts in prior years have been reclassified to conform with the 1998 presentation.
The change in unrealized appreciation of investments, as shown in the accompanying consolidated statements of stockholders' equity, relates entirely to equity securities for 1998, 1997, and 1996.
Presuming no additional acquisitions, net amortization charged to income is expected to approximate $664,000, $644,000, $629,000, $617,000, and $607,000 for the years 1999 through 2003.
In addition to the lines of credit described above, the Company has line of credit agreements with banks for $2,000,000 and $5,000,000, of which none were outstanding at December 31, 1998 or 1997. The lines of credit are for general operating purposes. The $2,000,000 line of credit bears interest at the bank's prime rate and must be repaid every 30 days. The $5,000,000 line of credit bears interest at a variable rate with interest payable monthly and is collateralized by student loans equaling 115% of the unpaid principal balance.
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, 1998, the policyholders' surplus accounts approximated $4,500,000. Management does not intend to take actions nor does management expect any events to occur that would cause federal income taxes to become payable on that amount. However, if such taxes were accrued, the amount of taxes payable would be approximately $1,500,000.
On March 13, 1998, a letter was sent by Eckard's counsel relative to a settlement proposal together with a draft complaint against the Company and Security National Life Insurance Company for filing in the United States District Court for the District of Utah. There appears to be no material difference between the complaint prepared for filing in Utah and the amended complaint which had been filed in Indiana. The complaint was filed in Utah on August 13, 1998. Since its filing (the claims being the same as in the Indiana action), the treble damage claim (conversion) has been dismissed with prejudice. The contract claim is the remaining claim. Formal discovery is in process. Eckard claims approximately $152,000 plus interest and attorney's fees. Although no prediction of outcome is given, management intends to vigorously defend the action. No amount has been accrued for this contingent liability.
The Company and its subsidiaries have a noncontributory Employee Stock Ownership Plan (ESOP) for all eligible employees. Eligible employees are primarily those with more than one year of service, who work in excess of 1,040 hours per year. Contributions, which may be in cash or stock of the Company, are determined annually by the Board of Directors. The Company's contributions are allocated to eligible employees based on the ratio of each eligible employee's compensation to total compensation for all eligible employees during each year. ESOP contribution expense totaled $59,613, $45,616, and $50,017 for 1998, 1997, and 1996, respectively. At December 31, 1998 the ESOP held 597,081 shares of Class A and 1,158,903 shares of Class C common stock of the Company. All shares held by the ESOP have been allocated to the participating employees and all shares held by the ESOP are considered outstanding for purposes of computing earnings per share.
increase in the total purchase price of the shares then covered, and the number of shares of Class A Common Stock reserved for the purpose of the 1987 Plan shall be increased by the same proportion. In the event that the shares of Class A Common Stock of the Company from time to time issued and outstanding are reduced by a combination of shares, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be reduced proportionately with no reduction in the total price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purposes of the 1987 Plan shall be reduced by the same proportion.
The 1987 Plan terminated in 1997 and options granted are non-transferable. Options granted and outstanding under the 1987 Plan include Stock Appreciation Rights which permit the holder of the option to elect to receive cash, amounting to the difference between the option price and the fair market value of the stock at the time of the exercise, or a lesser amount of stock without payment, upon exercise of the option.
The 1993 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both "incentive stock options," as defined under Section 422A of the Internal Revenue Code of 1986 (the "Code"), and "non-qualified options" may be granted pursuant to the 1993 Plan. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the Code, including a requirement that the option exercise price be not less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors.
The 1993 Plan is administered by the Board of Directors or by a committee designated by the Board. The 1993 Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. In addition, the number of shares of Common Stock reserved for the purpose of the Plan shall be adjusted by the same proportion. No options may be exercised for a term of more than ten years from the date of grant.
In 1998, the NAIC adopted codified statutory accounting principles ("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 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
Investment Contracts: The fair values for the Company's liabilities under investment-type insurance contracts are estimated based on the contracts' cash surrender values. The carrying amount and fair value as of December 31, 1998 were approximately $89,844,000 and $83,049,000, respectively.