Properties - ------------------- The following table sets forth the location of the Company's office facilities and certain other information relating to these properties.
The cemeteries and mortuaries that the Company owns through its subsidiaries, Memorial Estates, Inc., Memorial Mortuary, Inc., Paradise Chapel Funeral Home, Inc., Cottonwood Mortuary, Inc., Deseret Memorial, Inc., Holladay Memorial Park, Inc., Evergreen Memorial Park, and Camelback Sunset Funeral Home, are described with the heading "Item 1. Business - Cemetery and Funeral Services." The Company believes that its cemeteries and mortuaries are maintained in good condition.
The Company maintains a diversified investment portfolio consisting of common stock, preferred stock, municipal bonds, investment grade and non-investment grade bonds, mortgage loans, real estate, short term and other securities and investments. The Company's investment goals are to maintain safety and liquidity, enhance principal values and achieve increased rates of return consistent with regulatory restraints. The Company's interest sensitive type products, primarily annuities and interest sensitive whole life, compete with other financial products such as bank certificates of deposit, brokerage sponsored money market funds as well as competing life insurance company products.
The Company's total revenues increased by $164,000 (1.0%), from $16,496,000 in fiscal 1993, to $16,660,000 in fiscal 1994. Contributing to this increase in total revenues was a $648,000 increase in investment income and a $70,000 increase in mortgage fee income and other.
Mortgage fee income and other increased by $71,000, from $1,253,000 in 1993 to $1,324,000 in 1994. This increase was due to $382,000 in additional revenues that were generated by Security National Mortgage Company ("Security National Mortgage"), which was formed as a wholly-owned subsidiary of the Company on July 1, 1993, for the purpose of originating and refinancing mortgage loans. Partially offsetting the additional revenues that were realized in 1994 from Security National Mortgage was a $174,000 reduction in revenues from Bonneville Limousine. The higher level of revenues from Bonneville Limousine in 1993 reflected the increased limousine services from the NBA Allstar Game, which was held in Salt Lake City in 1993. There was also a $75,000 reduction in 1994 due to the termination of a computer services agreement. The Company had provided computer services to a third-party in 1993 under a computer services agreement but these services were not provided in 1994.
Interest expense increased by $18,000, from $675,000 in 1993 to $693,000 in 1994, due primarily to the debt assumed with the acquisition of Camelback Sunset Funeral Home.
Net investment income decreased by $94,000, from $3,567,000 in 1992 to $3,473,000 in 1993. This decrease was due to a higher percentage of invested assets in short term investments in 1993 yielding a lower rate of interest. In 1992, 19% of the invested assets were in short term investments whereas in 1993, 26% of the invested assets were in short term investments.
Mortuary and cemetery income increased by $344,000, from $5,741,000 in 1992 to $6,085,000 in 1993. This increase was primarily related to increases in mortuary services as Memorial Mortuary had a 25% increase in sales in 1993 and Paradise Chapel Funeral Home had an 8% increase in sales in 1993, and to an increase in at need cemetery sales. In addition, the amount written off in the cemetery operations deceased by approximately $200,000 in 1993 as compared to the previous year.
In addition to the foregoing, other revenues increased by $899,000, from $354,000 in 1992 to $1,253,000 in 1993. This increase was primarily due to $788,000 in additional revenues that were generated by Security National Mortgage Company, which was formed on July 1, 1993, as a wholly- owned subsidiary of the Company for the purpose of originating and refinancing mortgage loans.
Amortization of deferred policy acquisition costs increased by $214,000, from $729,000 in 1992 to $943,000 in 1993. This increase was primarily due to certain deferred policy acquisition costs which were determined unrecoverable and amortized against income in 1993. General administrative expenses increased by $469,000, from $6,629,000 in 1992 to $7,098,000 in 1993. This increase resulted from the Company's new subsidiary, Security National Mortgage Company, which incurred $687,000 in expenses in 1993.
Interest expense increased by $74,000, from $601,000 in 1992 to $675,000 in 1993. This additional increase in expense was the result of the $1,500,000 in additional debt
financing by the Company in 1993 to acquire Pinehill Business Park. Cost of mortuary and cemetery lots and products and services decreased by $17,000, from $1,907,000 in 1992 to $1,890,000 in 1993. This decrease was due to a decrease in pre-need cemetery sales.
The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing, however to date that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company's products. The Company's investment philosophy is intended to provide a rate of return which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominately in fixed maturity securities in accordance with the requirements and laws governing the life insurance subsidiary. Bonds owned by the insurance subsidiary amounted to $39,461,000, at amortized cost as of December 31, 1994. Generally all bonds owned by life insurance companies 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, 1994, 4.8% ($1,893,000) and at December 31, 1993, 7.4% ($898,000) 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's interest sensitive type products, primarily annuities and interest sensitive whole life, compete with other financial products such as bank certificates of deposit, brokerage sponsored money market funds as well as competing life insurance company products. Based on
On January 10, 1994, the Company acquired Sunset Funeral Home, Inc. ("Sunset"), which owns and operates a mortuary in Phoenix, Arizona, known as Camelback Sunset Funeral Home. As consideration for the purchase, the Company paid $140,000 in cash, issued 25,000 shares of Class A Common Stock, assumed an existing debt of $588,000, and entered into an agreement to pay the seller the sum of $3,500 in monthly installments during his lifetime up to a maximum of $560,000. In the event of the death of the seller prior to the payment of $560,000, the remaining unpaid balance of such amount would be paid to his daughter. Repairs and maintenance of approximately $80,000 will be required to bring the mortuary facility to a fully operating funeral home.
On December 21, 1994, the Company purchase all of the outstanding shares of common stock of Capital Investors Life Insurance Company ("Capital Investors Life") from Suncoast Financial Corporation ("Suncoast Financial"). As consideration for the purchase of the shares, the Company paid $5,231,000 in cash, issued 40,000 shares of its Class A Common Stock, and entered into a profit sharing agreement providing for 33-1/3% of the profits from new post-closing sales of existing Capital Investors Life plans of insurance to be paid as earned. An aggregate of $2,700,000 of the cash consideration was borrowed by the Company from Key
Bank, Crossroads Office, Salt Lake City, Utah, and is payable by the Company in accordance with the terms of a Promissory Note dated December 16, 1994, bearing interest at one-half percent per annum above the bank's prime rate, and payable in monthly payments in the amount of $36,420, with the unpaid principal balance, together with accrued interest and other charges, due and payable on December 16, 1999. The remainder of the purchase price came from the Company's internal funds.
On February 3, 1995, the Company purchased approximately 100 acres of real property (the "Property") located in San Diego, California, approximately 35 acres of which will be used for the development of a cemetery. The purchase price of the property was $1,172,000, $100,000 of which was paid in cash and the balance of $1,062,000, together with interest thereon at the rate of nine percent (9%) per annum, will be paid in 12 monthly payments of $5,000, thereafter in equal monthly payments of $10,000; however, interest shall not accrue on any part of the principal balance until February 3, 1996, and a principal payment of $100,000 is to be made 15 days after the date the California Cemetery Board approves the Company's application for Certificate of Authority, or February 3, 1996, whichever occurs first.
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 our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security National Financial Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As described in Note 1, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting of Certain Investments in Debt and Equity Securities", in 1994.
Significant accounting policies followed by the Company are summarized below. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, for the life insurance subsidiaries, differ from statutory accounting principles prescribed or permitted by regulatory authorities.
Security National Life Insurance Company Capital Investors Life Insurance Company ("Capital Investors Life") Memorial Estates, Inc. Memorial Mortuary Evergreen Memorial Park (66 2/3% owned) Paradise Chapel Funeral Home California Memorial Estates, Inc. Cottonwood Mortuary, Inc. Deseret Memorial Holladay Cottonwood Memorial Foundation Holladay Memorial Park Sunset Funeral Home, Inc. Security National Mortgage Company
The unaudited consolidated pro forma results of operations are not necessarily indicative of the results that would have occurred had the two companies been combined for the years presented nor of future results of operations.
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", was adopted by the Company as of January 1, 1994. In accordance with SFAS No. 115, the Company's prior-year financial statements have not been restated to reflect the change in accounting principle. Under SFAS No. 115, securities are classified as available-for-sale, held-to-maturity, or trading. The Company has the ability and intent to hold to maturity its fixed maturity investments and, accordingly, has classified all of its fixed maturities security portfolio as "held-to-maturity". Equity securities have been classified as "available for sale". Securities classified as available for sale are carried at fair value and unrealized gains and losses on such securities are reported as a separate component of stockholders' equity. Securities classified as held-to-maturity are carried at cost. Because the Company classified their entire fixed maturity portfolio as held to maturity there was no effect on stockholders' equity as a result of the adoption. With respect to 1992 and 1993, SFAS No. 115 was not adopted and, therefore, the investments were not actually "held-to-maturity", and "available for sale" but were rather held for investment and actively managed, respectively.
Fixed maturity securities held to maturity - at cost, - ------------------------------------------ adjusted for amortization of premium or accretion of discount. Although the Company has the ability and intent to hold these investments to maturity, there could occur infrequent and unusual conditions in which it would sell certain of these securities. Those conditions would include unforeseen changes in asset quality, significant changes in tax laws affecting the changes in regulatory capital requirements or permissible investments, at which time the carrying value is expected to be realized.
Equity securities available for sale - at fair value, - ------------------------------------ which is based upon quoted trading prices. Changes in face values net of deferred income taxes are reported as
Mortgage loans on real estate - at unpaid principal - ----------------------------- balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses.
Policy and other loans - at the aggregate unpaid - ---------------------- balances.
Short-term investments - consists of certificates of - ---------------------- deposit and commercial paper, carried at cost which approximates fair value.
Restricted Assets of the Cemeteries and Mortuaries - -------------------------------------------------- Consists of cash, mortgage loans, mutual funds which are carried at cost, fixed maturity securities at cost, adjusted for amortization of premium or accretion of discount and equity securities at fair value, which is based upon quoted trading prices.
Realized gains and losses on sales of investments - ------------------------------------------------- Realized gains and losses on sales of investments, and declines in value considered to be other than temporary, are recognized in operations on the specific identification basis.
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 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.
Cost of insurance acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred policy acquisition costs. These assets are stated at a cost of $3,488,383. The interest rate used to record the acquisition and to be used to amortize assets in future periods is approximately 9%. Amortization net of accrued interest is expected to approximate $502,000, $378,000, $377,000, $365,000, and $305,000 for the years 1995, 1996, 1997, 1998, and 1999, respectively.
Property, plant and equipment is recorded at cost. Depreciation is calculated principally on the straight-line method over the estimated useful lives of the assets.
The liabilities for future policy benefits 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 insurance subsidiaries' experience, modified as necessary to give effect to anticipated trends and to include provisions for possible unfavorable deviations. Reserve interest assumptions are graded and range from 4.5% to 10%. Such liabilities are, for some plans, graded to equal statutory values or cash values at or prior to maturity. The range of assumed interest rate for all traditional life and health insurance policy reserves was 4.5% to 9.1% in 1994, 4.5% to 9.2% in 1993, and 4.5% to 9.3% in 1992. Benefit reserves for traditional limited-payment life insurance policies include the deferred portion of the premiums received during the premium-paying period; those deferred premiums are recognized in income over the life of the policies. Policy benefit claims are charged to expense in the period that the claims are incurred. All insurance- related benefits and expenses are reported net of reinsurance ceded.
Policy liabilities 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 6.25% in 1994, 4% to 7% in 1993, and 4% to 7.5% in 1992.
Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies are reported as a reduction of premium income. Expense allowances received in connection with reinsurance ceded are accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly.
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 that amounts placed into these accounts are sufficient to fulfill all future pre-need contract obligations.
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. Accumulated amortization was $532,140 and $483,774 at December 31, 1994 and 1993.
Federal 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
The amortized cost and estimated fair value of fixed maturity securities held to maturity at December 31, 1994, 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.
3) Deferred Policy Acquisition Costs - ------------------------------------- Information with regard to deferred policy acquisition costs are as follows:
Memorial owns and operates several endowment care cemeteries, for which it has established and maintains an endowment care fund. Per statutory requirement, Memorial records a liability to the fund of $14 for each space sold after 1979, $42 for spaces sold after July 1, 1983 and $50 for spaces sold after May 1, 1993. For each space sold in the mausoleum, $30 is recognized as a liability. Memorial is not required to transfer assets to the fund until the spaces are paid for. Memorial is not liable for any maintenance costs exceeding the stipulated statutory rate.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBISDIARIES Notes to Consolidated Financial Statements
In addition to the above mentioned assets, $286,990 of accounts receivable have been pledged to the restricted asset accounts. Memorial transfers assets to the restricted asset accounts as merchandise payments are received.
8) Income Taxes - ---------------- Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" after previously following SFAS No. 96. Under SFAS No. 109 and SFAS No. 96, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. There were no changes to the accompanying financial statements by adopting SFAS No. 109.
The other benefit recorded in 1992 of $246,000 primarily results from the re-estimation of deferred tax liabilities based upon the accumulation of identified temporary differences and applying the current effective tax rates with the resulting reduction in such deferred tax amounts being recorded in 1992 operations.
SECURITY NATIONAL FINANCIAL CORPORATI0N AND SUBSIDIARIES Notes to Consolidated Financial Statements
The non-insurance affiliates have tax operating loss carryforwards available to offset future taxable income amounting to approximately $905,000. Such losses will begin to expire if unused by 2002.
The insurance companies have remaining loss carry forwards for tax purposes of approximately $280,000 for Security National Life and $449,000 for Capital Investors Life for a total of $729,000. Such losses will begin to expire if unused by 2008. Capital Investors Life's loss carryforward originated in a separate return limitation year.
The Company paid no income taxes in 1994, 1993, and 1992.
The Company has also assumed insurance from other companies (credit life and credit accident and health) having insurance in force amounting to $69,998,195 at December 31, 1994 and $135,558 at December 31, 1993.
The Company is a defendant in various legal actions arising from the normal conduct of business. Management believes that none of the actions will result in any liability materially in excess of the provisions that have been made.
The Company has committed to purchase cemetery property in the San Diego area. Acquisition of the property was completed subsequent to December 31, 1994.
Shareholders of both classes of common stock have received 5% stock dividends in 1994, 1993, 1992, 1991, and 1990, as authorized by the Company's Board of Directors. The Company has Class B Common Stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. Class B shares are non-voting stock except to any proposed amendment to the Articles of Incorporation which would affect Class B Common Stock.
In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987 Plan). The 1987 Plan provides that an aggregate of 285,000 shares of the Class A Common Stock of the Company may be optioned to certain officers and key employees of the Company. The Plan establishes a Stock Option Plan Committee which selects the employees to whom the options will be granted and determines the price of the stock. The Plan establishes the minimum purchase price of the stock at an amount which is not less than 100% of the fair market value of the stock (110% for employees owning more than 10% of the total combined voting power of all classes of stock). The Plan terminates ten years from its effective date and options granted are non-transferable. The Plan also includes a Stock Appreciation Right 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.
As of December 31, 1994, none of the options granted have been exercised or cancelled. All options are currently exercisable.
On June 21, 1993, the Board of Directors adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves 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 1993 Plan has a term of ten years. The Board of Directors may amend or terminate the 1993 Plan at any time.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
Generally, the net assets of Security National Life are available for transfer to the Company are limited to the amounts that Security National Life's net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements; however, payments of such amounts as dividends may be subject to approval by regulatory authorities.
The Utah Insurance Department imposes minimum risk-based capital requirements on insurance enterprises that were developed by the NAIC. The formulas for determining the amount of risk-based capital ("RBC") specify various weighting 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, RBC, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action.
Each of the Company's insurance subsidiaries has a Ratio that is greater than 300% of the minimum RBC requirements; accordingly, the Company's subsidiaries meet the RBC requirements.
The following schedules summarize segment information for the three segments and corporate activities for 1994, 1993, and 1992:
(2) Notes and Contracts Payable - -------------------------------- Notes and contracts are summarized as follows: