(1) As of December 31, 1996, this facility was subject to a mortgage of approximately $845,000. The Company leases an additional 15,616 square feet of the facility to unrelated third parties for approximately $213,000 per year, under leases which expire at various dates after 1996.
(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 1996.
(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, 1996, there were mortgages of approximately $198,000 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries, of which approximately $101,400 was held by Security National Life. (4) As of December 31, 1996, there were mortgages of approximately $2,108,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary. (5) This cemetery includes two granite mausoleums. (6) As of December 31, 1996, there was a mortgage of approximately $873,000 collateralized by the property.
Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------- Overview
The Company's operations over the last three years generally reflect three trends or events which the Company expects to continue: (i) increased attention to "niche" insurance products, such as the Company's funeral plan policies, annuities, and limited pay accident policies; (ii) emphasis on high margin cemetery and mortuary business; and (iii) capitalizing on the strong economy in the intermountain west by originating and refinancing mortgage loans.
Net mortuary and cemetery sales decreased by $100,000, from $8,238,000 in 1995 to $8,138,000 in 1996. This decrease was the result of a $195,000 reduction in pre-need cemetery sales.
Mortgage fee income increased by $3,294,000, from $4,943,000 in 1995 to $8,237,000 in 1996. This increase was due to an increase in the aggregate amount of loans made by Security National Mortgage in 1996 from increased lending activities. Also in 1996, Security National Mortgage began offering home equity loans and non conforming loan products.
During 1996, there was a net increase of $228,000 in death benefits, surrender and other policy benefits, and an Increase in future policy benefits from $6,112,000 in 1995 to $6,340,000 in 1996. This increase was primarily due to tabular interest. This increase is reasonable based on the underlying actuarial assumptions.
General and administrative expenses increased by $4,274,000, from $13,018,000 in 1995 to $17,292,000 in 1996. This increase was primarily due to an increase in commissions, salaries, and other expenses. Commissions increased by $2,208,000, or 55%, from $3,792,000 in 1995 to $6,000,000 in 1996. This increase was due to an increased number of loans originated and processed by Security National Mortgage. Salaries increased by $1,133,000, from $3,612,000 in 1995 to $4,745,000 in 1996. The salaries of Security National Life increased by $103,000 primarily due to staff required to complete the conversion of Security National Life's computer software. The salaries of Security National Mortgage increased by $383,000, due to the additional staff required to process the increased number of loans originated during 1996. The cemeteries and mortuaries salaries increased by $247,000, which was primarily due to the addition of Greer-Wilson Funeral Home, Inc. ("Greer-Wilson"), which operated a full twelve months in 1996 as opposed to operating only nine months in 1995 and the opening in 1996 of Singing Hills Memorial Park in San Diego California. Other expenses have increased due primarily to the increased lending activities in the mortgage company.
Total revenues increased $4,925,000, or 30% from $16,661,000 for fiscal 1994, to $21,586,000 for fiscal 1995. Contributing to this increase in total revenues was a $613,000 increase in net investment income, an $832,000 increase in mortuary and cemetery sales, and a $3,773,000 increase in mortgage fee income.
Realized gains on investments and other assets decreased by $51,000, from $384,000 in 1994 to $333,000 for 1995. The 1994 amount included the results of the sale of 13.45 acres of land deemed not suitable for cemetery development at Lakeview Cemetery. The net gain on the sale of the land after deducting the original cost of the land and related fees was approximately $278,000. 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. The remaining decrease in realized gains on investments and other assets was a result of fewer bond redemptions during 1995.
Mortgage fee income was increased by $3,773,000 from $1,171,000 in 1994 to $4,944,000 in 1995. This increase was the result of lower interest rates during 1995 which increased the opportunity for refinancing and loan origination. In addition, a strong economy, and an increased demand for housing in the intermountain area has created activity for loan originations.
Amortization of deferred policy acquisition costs and cost of insurance acquired increased by $126,000, from $767,000 in 1994 to $893,000 in 1995. This increase was primarily due to the maturing of the policies in force.
Interest expense increased by $391,000, from $693,000 to $1,084,000. This increase was primarily due to the interest on the debt incurred as a result of the acquisition of Capital Investors Life which was completed in December 1994.
The Company's life insurance subsidiary and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business from interest and dividends on invested assets, and from the proceeds from the maturity of held-to-maturity investment, or sale of other investments. The mortgage subsidiary realizes cash flow from fees generated by originating and refinancing mortgage loans and interest earned on mortgages sold to investors. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities which generally are long-term and adequate to pay current policyholder claims, annuity payments, expenses on the issuance of new policies, the maintenance of existing policies, debt service, and to meet operating expenses.
The Company 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 high-yielding longer term securities.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1996 was 12%, as compared to a rate of 10.5% in 1995.
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 $1,062,000, 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
We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries as of December 31, 1996, and 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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.
Interest Rate Risk - the risk that interest rates will change which may cause a decrease in the value of the Company's investments or impair the ability of the Company to market its mortgage and cemetery/mortuary products. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company mitigates this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and/or by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, the Company might have to borrow funds or sell assets prior to maturity and potentially recognize a gain or loss.
The accompanying consolidated financial statements include the accounts and operations of the Company. The Company's wholly-owned subsidiaries at December 31, 1996, are as follows:
Mortgage loans on real estate - at unpaid principal balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses.
Real estate - at cost, less accumulated depreciation provided on a straight-line basis over the estimated useful lives of the properties, and net of allowance for impairment in value.
Premiums for traditional life insurance products (which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, limited-payment life insurance policies, and certain annuities, with life contingencies) are recognized as revenues when due from policyholders. Revenues for interest-sensitive insurance policies (which include universal life policies, interest-sensitive life policies, deferred annuities, and annuities without life contingencies) consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the period.
Commissions and other costs, net of commission and expense allowances for reinsurance ceded, that vary with and are primarily related to the production of new insurance business have been deferred. Deferred policy acquisition costs for traditional life insurance are amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For interest sensitive insurance products, deferred policy acquisition costs are amortized generally in proportion to the present value of expected gross profits from surrender charges, investment, mortality and expense margins. This amortization is adjusted when estimates of current or future gross profits to be realized from a group of products are reevaluated. Deferred acquisition costs are written off when policies lapse or are surrendered.
Participating business constitutes 5%, 5%, and 12% of the ordinary life insurance in force for 1996, 1995 and 1994, 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.
The Company follows the procedure of reinsuring risks in excess of $50,000. The Company is liable for those amounts in the event the reinsurers are unable to pay their portion of the claims.
Certain cemetery products are sold on a pre-need basis. Revenues from pre-need cemetery sales are recognized at the time of sale. Related costs required to establish the liability for estimated future costs of pre-need sales are also recorded at the time of sale. This liability relates to promised merchandise and funeral services and is increased or decreased each period as current costs change. A corresponding charge is made to operations. Certain mortuary products and services are also sold on a pre-need basis. Pre-need mortuary sales are fully reserved at the time of the sale. Revenue on pre-need mortuary services is recognized at the time the service is performed. Through 1990, these contracts were non-interest bearing and the related receivables were discounted using current market rates. Resulting discount amounts are amortized into operations as other income over the terms of the contracts. Beginning in 1991, all pre-need sales contracts bear interest at 8%.
Previous acquisitions have been accounted for as purchases under which assets acquired and liabilities assumed were recorded at their fair values. The excess of cost over net assets of acquired subsidiaries is being amortized over a range of fifteen to thirty years using the straight-line method. The Company periodically evaluates the recoverability of amounts recorded. Accumulated amortization was $705,833 and $590,495 at December 31, 1996 and 1995, respectively.
The Company also has one variable option plan (the "1987 Plan"). In accordance with APB 25, compensation cost related to this plan is estimated and recognized over the period of the award based on changes in the current market price of the Company's stock over the vesting period.
The amortized cost and estimated fair value of fixed maturity securities held to maturity at December 31, 1996, 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.
The change in unrealized appreciation of investments, as shown in the accompanying consolidated statements of stockholders' equity, relates entirely to equity securities for 1996, 1995, and 1994.
Net investment income includes net investment income earned by the restricted assets of the cemeteries and mortuaries of approximately $655,000, $574,000 and $515,000 for 1996, 1995, and 1994, respectively.
The following tabulation shows the combined maturities of bank loans payable, line of credit for financing of mortgage loans, and notes and contracts payable:
7) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds (Continued)
The Company paid approximately $18,000 of income taxes in 1996 and paid no income taxes in 1995 and 1994. 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, 1996, 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 the pending litigation involving Greer-Wilson Funeral Homes, Inc. The Complaint in this matter, which was filed
on June 6, 1995 in the Arizona Superior Court of Maricopa County, alleges breach of contract and breach of covenant of good faith and fair dealing and claims damages of at least $250,000 plus costs and attorneys' fees.
The Company has also 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's 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. The Company believes there is no basis to the treble damage conversion claim. The Company intends to vigorously defend against the action.
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 $50,017, $21,914, and $54,288 for 1996, 1995, and 1994, respectively. At December 31, 1996 the ESOP held 553,480 shares of Class A and 500,551 shares of Class C common stock of the Company. All shares held by the ESOP have been allocated to the participating employees and all shares held by the ESOP are considered outstanding for purposes of computing earnings per share.
The Company has two classes of common stock with shares outstanding, Class A and Class C. Class C shares vote share for share with the Class A shares on all matters except election of one-third of the directors who are elected solely by the Class A shares, but generally are entitled to a lower dividend participation rate. Class C is convertible into Class A at any time on a ten to one ratio, however, the conversion rights of Class A into Class C have numerous restrictions.
Stockholders of both classes of common stock have received 5% stock dividends in the years 1989 through 1996, as authorized by the Company's Board of Directors.
The Plan provides that if additional shares of Class A Common Stock are issued pursuant to a stock split or a stock dividend, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be increased proportionately with no increase in the total purchase price of the shares then covered, and the number of shares of Class A Common Stock reserved for the purpose of the Plan shall be increased by the same proportion. In the event that the shares of Class A Common Stock of the Company from time to time issued and outstanding are reduced by a combination of shares, the
number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be reduced proportionately with no reduction in the total price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purposes of the Plan shall be reduced by the same proportion.
On June 21, 1993, the Company adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserved 300,000 shares of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at the annual meeting of the stockholders held on June 21, 1993. The 1993 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress.
The options granted on April 29, 1993, were to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company.
The 1993 Plan is administered by the Board of Directors or by a committee designated by the Board. The terms of options granted or stock awards or sales effected under the 1993 Plan are to be determined by the Board of Directors or its committee. The 1993 Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. No options may be exercised for a term of more than ten years from the date of grant.
The Utah Insurance Department is in the process of completing an examination of the life insurance subsidiary as of December 31, 1995 and for the three year period then ended. The results of the examination are not final, however management believes it will not have a material impact upon the statutory stockholder's equity of the life insurance subsidiary.
Generally, the net assets of the life subsidiary available for transfer to the Company are limited to the amounts that the life subsidiary's net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements; however, payments of such amounts as dividends are subject to approval by regulatory authorities.
The Utah 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 and annuities, cemetery/mortuary operations and mortgage operations. The following schedules summarize segment information for the three segments and corporate activities for 1996, 1995, and 1994:
The fair values for the Company's insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.