Item 6. Selected Finanial Data - The Company and Subsidiaries (Consolidated) (Continued)
Net investment income increased by $613,000 from $4,121,000 in 1994, to $4,734,000 in 1995. This increase was primarily attributed to the life insurance company and the mortuaries and cemeteries participation in warehousing many of the mortgage loans generated by Security National Mortgage Company ("Security National Mortgage").
Total benefits and expenses were $23,858,000 for 1995, which constituted 91% of the Company's total revenues, as compared to $15,326,000, or 92% of the Company's total revenues for 1994.
General and administrative expenses increased by $3,784,000, from $8,064,000 in 1994 to $11,848,000 in 1995.
This increase was primarily due to an increase in commission expenses and general operating expenses. Commission expenses increased $2,474,000, from $1,257,000 in 1994 to $3,731,000 in 1995. This increase is due to an increase in business activities of Security National Mortgage and the Company's cemetery operations. Other general and administrative expenses also increased $940,000, from $3,869,000 to $4,809,000. This increase was also due to the increased activity of Security National Mortgage. Salary expense increased $370,000 for the year 1995 as compared to 1994, primarily due to the additional administrative personnel required at the corporate level to meet the needs of the newly acquired companies, which include Capital Investors Life Insurance Company and Greer- Wilson Funeral Home, and the additional activities of Security National Mortgage.
Net investment income increased by $648,000, from $3,473,000 in 1993, to $4,121,000 in 1994. This increase was attributable to the Company's emphasis on investing its cash and short-term investments in high-yielding or longer term investments.
Net mortuary and cemetery income decreased by $197,000, from $6,085,000 in 1993 to $5,888,000 in 1994. This decrease was primarily related to a $299,000 reduction in pre-need sales at Holladay Cottonwood Memorial Foundation. This decrease was partially offset by the additional sales of the Company's other mortuaries, particularly Camelback Sunset Funeral Home, which was acquired in January 1994.
Total benefits and expenses were $15,326,000 for 1994, which constituted 92% of total revenue of the Company, as compared to $15,027,000, or 91% of total revenues for 1993.
Policy benefits decreased by $384,000, from $4,420,000 in 1993 to $4,027,000 in 1994. This decrease was primarily due to diminishing policies inforce from 1993 to 1994 and because a large block of business obtained paid-up status.
Amortization of deferred policy acquisition costs decreased by $176,000, from $943,000 in 1993 to $767,000 in 1994. This decrease was primarily due to certain deferred policy acquisition costs which were determined unrecoverable and amortized against income in 1993.
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 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 $51,143,000, at amortized cost as of December 31, 1995 compared to $39,398,000 at amortized cost as of December 31, 1994 This represents 66% of the total insurance related investments in 1995 as compared to 54% in 1994. Generally all bonds owned by the life insurance company 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, 1995, 3.61% ($1,851,000) and at December 31, 1994, 4.8% ($1,893,000) of the Company's total invested assets were invested in bonds in rating categories three through six which are considered non-investment grade.
In February 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 $1,062,000, $100,000 of which was paid in cash and the balance of $1,062,000, together with interest thereon at the rate of nine percent per annum, to be paid in 12 monthly payments of $5,000, thereafter in equal monthly payments of $10,000; however, interest does 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 development of the cemetery will be financed internally. Initial development of 35 acres to operate as a cemetery is estimated to cost approximately $560,000.
In November 1995, the Company entered into a purchase sale agreement with Myers Mortuary for the sale of the Company's 65% interest in Evergreen Memorial Partnership and the Company's 50% interest in Evergreen Management Corporation. As consideration for the sale of these entities, Myers Mortuary paid $746,123 in satisfaction of the indebtedness that Evergreen Memorial Partnership owes to the Company. Myers Mortuary has also agreed to pay $200,000 to the Company in four equal annual installments of $50,000, beginning as of October 31, 1996. In addition, Myers Mortuary will pay a $10.00 royalty to the Company for each adult space sold in Evergreen Memorial Park over the next ten years, beginning as of January 1, 1996.
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 of $1,063,000. Interest on the promissory note accrues at 7% per annum. Principal payments are to be made in seven equal annual installments of $151,857, beginning on December 29, 1996. Accrued interest will be payable annually beginning on December 29, 1996.
In March 1995, the Company purchased 97,800 shares of common stock of Greer-Wilson Funeral Home, Inc., ("Greer- Wilson") representing 97.8% of the total issued and outstanding shares of common stock of Greer-Wilson for a total consideration of $1,218,000, which included a note to the former owners for $588,000.
We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries as of December 31, 1995, and 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also include the financial statement schedules listed in the Index at
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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, for the life insurance subsidiary, differ from statutory accounting principles prescribed or permitted by regulatory authorities. The following is a description of the most significant risks facing the Company and how it mitigates those risks:
The estimates susceptible to significant change are those used in determining the liability for future policy benefits an claims, those used in determining valuation allowances for mortgage loans on real estate, and those used in determining the estimated future costs for pre-need sales. Although some variability is inherent in these estimates, management believes the amounts provided are adequate.
*Capital Investors Life Insurance Company ("Capital Investors Life") Security National Life Insurance Company Civil Service Employees Life Insurance Company Memorial Estates, Inc. Memorial Mortuary Paradise Chapel Funeral Home Singing Hills Memorial Park Cottonwood Mortuary, Inc. Deseret Memorial Holladay Cottonwood Memorial Foundation Holladay Memorial Park Camelback Sunset Funeral Home, Inc. Security National Mortgage Company Greer-Wilson Funeral Home
* 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 March 1995, the Company purchased 97,800 shares of common stock of Greer-Wilson Funeral Home, Inc., ("Greer- Wilson") representing 97.8% of the total issued and outstanding shares of common stock of Greer-Wilson for total consideration of $1,218,000, which included a note to the former owners for $588,000. The acquisition was accounted for using the purchase method. The assets and liabilities of Greer-Wilson have been included in the Company's balance sheet at December 31, 1995. The results of operation of Greer-Wilson for the nine months ended December 31, 1995, were included in the consolidated financial statements of the Company. This acquisition resulted in an addition to excess of cost over net assets acquired of approximately $800,000.
Securities on deposit for regulatory authorities as required by law amounted to $7,142,237 at December 31, 1995 and $3,907,432 at December 31, 1994.
Amortization is expected to approximate $302,000, $341,000, $320,000, $302,000, and $282,000 for the years 1996 through 2000.
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, 1995, the policyholders' surplus accounts approximated $4,262,000. 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 follows the procedure of reinsuring risks in excess of a specified limit, which was $50,000 at December 31, 1995. The Company is contingently liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. At December 31, 1995 and 1994, the contingent liabilities for such future policy benefits aggregated $264,547 and $122,096, respectively, all of which relate to life and accident and health insurance. These amounts pertain to insurance in force aggregating $80,261,274 in 1995 and $35,073,111 in 1994.
The Company and its subsidiaries have a noncontributory ESOP for all eligible employees. Eligible employees are primarily those with more than one year of service and 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 $21,914, $54,288, and $146,039 for 1995, 1994, and 1993, respectively. At December 31, 1995 the ESOP held 593,675 shares of Class A and 472,665 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 five to one ratio, however, the conversion rights of Class A into Class C have numerous restrictions.
Shareholders of both classes of common stock have received 5% stock dividends in the years 1989 through 1995, as authorized by the Company's Board of Directors.
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 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
On June 21, 1993, the Company adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves 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 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. The exercise prices for the options granted are equal to or greater than the fair market value of the stock subject to such options as of the date of grant, as determined by the Company's Board of Directors.
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 weighing 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. The life insurance subsidiary has a Ratio that is greater than 300% of the minimum RBC requirements.
(2) Notes and Contracts Payable Notes and contracts are summarized as follows:
(4) Dividends No dividends have been paid to the registrant for each of the last three years by any subsidiaries.