(1) The Company leases an additional 6,449 square feet of the facility to unrelated third parties for approximately $84,000 per year, under leases which expire at various dates after 1997.
The following selected financial data for each of the five years in the period ended December 31, 1997, are derived from the audited consolidated financial statements. The data as of December 31, 1997 and 1996, and for the three years ended December 31, 1997, should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
Total revenues decreased by $1,448,000, or 4.8%, from $29,923,000 for fiscal year 1996 to $28,475,000 for fiscal year 1997. Insurance premiums and other considerations increased $475,000 and net mortuary and cemetery sales increased $1,093,000. These increases were offset by decreases in net investment income of $377,000 and mortgage fee income of $2,575,000. Realized gains on investments and other assets were slightly less than the previous year.
Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $108,000, from $1,240,000 in 1996 to $1,132,000 in 1997. This decrease was reasonable based on the underlying actuarial assumptions.
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 Company's full time employee count decreased by 10 from 165 employees in 1996 to 155 in 1997.
Cost of the mortuary and cemetery goods and services sold was consistent with the products sold during 1997 and 1996.
Total revenues increased by $3,862,000, or 15%, from $26,061,000 for fiscal 1995 to $29,923,000 for fiscal 1996. Contributing to this increase in total revenues was an $837,000 increase in net investment income and a $3,294,000 increase in mortgage fee income.
Net investment income increased by $837,000, from $6,680,000 in 1995 to $7,517,000 in 1996. This increase was primarily attributed to the acquisition of CSE Life and the increased amount of funds invested in higher yielding mortgage loans originated by Security National Mortgage.
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.
Total benefits and expenses were $28,546,000 for 1996, which constituted 95% of the Company's total revenues, as compared to $23,801,000, or 91% of the Company's total revenues for 1995.
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.
Interest expense increased by $110,000, from $1,208,000 in 1995 to $1,318,000 in 1996. This increase was primarily due to the debt resulting from the acquisition of CSE Life and the acquisition of Greer-Wilson which was incurred for a full twelve months in 1996 opposed to nine months in 1995. Also in 1996, Security National Mortgage increased the number of loans funded through the use of the revolving line of credit.
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 investments 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's total capitalization of stockholders' equity and bank debt and notes payable was $35,276,000 and $34,746,000 as of December 31, 1997 and 1996, respectively. Stockholders' equity as a percent of total capitalization was 72% and 67% as of December 31, 1997 and 1996, respectively.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1997 was 11.7%, as compared to a rate of 12.0% in 1996.
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 owed to the Company. Myers Mortuary 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.
At December 31, 1997, $11,790,000 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's insurance subsidiary. The life insurance subsidiary cannot pay a dividend to its parent company without the approval of insurance regulatory authorities.
The Company's systems, which are presently in use, have been purchased from third party vendors. The Company is in the process of converting to the latest versions for these systems which are Year 2000 compliant ("Version 2000"). The Company plans to have the Version 2000 installed and in use for its insurance subsidiary in the third quarter of 1998 and the Version 2000 installed and in use for its cemetery and mortuary subsidiaries in the first quarter of 1999. The mortgage subsidiary is currently using a Version 2000 system. The total cost for the Version 2000 systems is approximately $50,000, of which $40,000 has been spent as of March 14, 1998.
Once installed the Company believes that the Year 2000 problem will not pose significant operational problems for the Company. However, if such conversions are not completed timely, the Year 2000 problem may have a material impact on the operations of the Company.
Consolidated Statements of Earnings, Years Ended December 31, 1997, 1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . .33
Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Cash Flow, Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . .. . . .37
I. Summary of Investments -- Other than Investments in Related Parties. . . . . . . . . . . . . .70
II. Condensed Financial Information of Registrant. . . . . . . . . . . . . . . . . . . . . . . .71
V. Valuation and Qualifying Accounts . . . . . . . . . . . . 78
Security National Financial Corporation and its wholly- owned subsidiaries (the "Company") operates in three main business segments; life insurance, cemetery and mortuary, and mortgage loans. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance marketed primarily in the intermountain west, California, Texas, and Oklahoma. The cemetery and mortuary segment of the Company consists of five cemeteries in Utah, one cemetery in California, eight mortuaries in Utah and six mortuaries in Arizona. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction, existing homes and real estate projects primarily in the intermountain west.
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 estimates susceptible to significant change are those used in determining the liability for future policy benefits and 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.
Security National Life Insurance Company Security National Mortgage Company Memorial Estates, Inc. Memorial Mortuary Paradise Chapel Funeral Home Singing Hills Memorial Park Cottonwood Mortuary, Inc. Deseret Memorial, Inc. Holladay Cottonwood Memorial Foundation Holladay Memorial Park Camelback Sunset Funeral Home, Inc. Greer-Wilson Funeral Home Crystal Rose Funeral Home
Restricted assets of cemeteries and mortuaries - consists of cash, participations in mortgage loans with Security National Life Insurance Company, equity securities and mutual funds carried at cost, and fixed maturity securities carried at cost adjusted for amortization of premium or accretion of discount. With respect to the equity securities, market value is not materially different than cost.
Participating business constitutes 8%, 5%, and 5% of the ordinary life insurance in force for 1997, 1996 and 1995, 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.
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 to reflect the change in costs. 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. All pre-need sales contracts bear interest at 8%.
The Company, through its mortuary and cemetery operations, provides a guaranteed funeral arrangement wherein a 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 arrang
ement 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.
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 twenty years using the straight-line method. The Company periodically evaluates the recoverability of amounts recorded. Accumulated amortization was $780,356 and $705,833 at December 31, 1997 and 1996, respectively.
earnings per share were computed by dividing net earnings by the weighted average number of common shares outstanding during the year plus the incremental shares that would have been outstanding under certain deferred compensation plans.
The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). In accordance with the provisions of SFAS 123, the Company has elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and related interpretations in accounting for its stock option plans.
The Company also has one variable option plan (the "1987 Plan"). In accordance with APB Opinion No. 25, compensation cost related to options granted and outstanding under the 1987 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.
Certain amounts in prior years have been reclassified to conform with the 1997 presentation.
In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements.
During 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which are effective for fiscal years beginning after December 15, 1997. The Company has not yet adopted these new standards; however, the effect on financial position, operations and stockholders' equity is not expected to be significant.
The change in unrealized appreciation of investments, as shown in the accompanying consolidated statements of stockholders' equity, relates entirely to equity securities for 1997, 1996, and 1995.
Securities on deposit for regulatory authorities as required by law amounted to $7,155,070 at December 31, 1997 and $7,295,953 at December 31, 1996.
Assets in the endowment care fund, at cost, are summarized as follows:
The insurance company has remaining loss carry forwards for tax purposes of approximately $1,600,000, approximately $586,000 of which is subject to an annual limitation of approximately $300,000.
The Company follows the procedure of reinsuring risks in excess of a specified limit, which was $50,000 at December 31, 1997 and 1996. The Company is liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. The Company has also assumed insurance from other companies having insurance in force amounting to $46,254,429 at December 31, 1997 and $52,508,120 at December 31, 1996.
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. Assuming that settlement will not immediately take place, and that the matter will be filed in Utah, the Company believes there is no basis to the claims in the draft complaint. The Company intends to vigorously defend against the action.
The Company has also been named as a party in the pending litigation brought by John and Donna Mackay (the "Mackays") in the Third Judicial Court, Salt Lake County, State of Utah. The complaint alleges that certain payments are due to the Mackays pursuant to a contract which at the date of filing was claimed to be in the amount of $25,000 plus interest with arrearages purportedly continuing to increase the principal claimed in the amount of approximately $600 per month.
The Company and its subsidiaries, Security National Life Insurance Company, Greer-Wilson Funeral Home, Inc., Crystal Rose Funeral Home, and Sunset Funeral Homes, Inc. have been named as parties in the pending litigation brought by York Products, Inc. ("York Products") in the Superior Court of the State of Arizona, Maricopa County. The litigation seeks collection of a total sum of $68,660 plus attorneys' fees and interest. The Company is presently disputing the amounts that York Products claims to be due and owing, and the court has ordered that the matter be submitted to compulsory non-binding arbitration under the Arizona Rules of Civil Procedure.
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 $45,616, $50,017, and $21,914 for 1997, 1996, and 1995, respectively. At December 31, 1997 the ESOP held 601,037 shares of Class A and 1,103,717 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 a 401(k) savings plan covering all eligible employees, as defined above, which includes employer participation in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan allows
The following table summarizes the activity in shares of capital stock for the three year period ended December 31, 1997:
On November 7, 1996, the Company amended the Articles of Incorporation concerning Class C stock as follows: (i) to provide for a two-for-one stock split involving only Class C Common Stock; (ii) to reduce the par value of Class C Common Stock from $.40 par value to $.20 par value; (iii) to reduce the exchange rate for converting Class C Common Stock to Class A Common Stock from five shares to ten shares of Class C Common Stock for each share of Class A Common Stock; (iv) to reduce the cash dividends received by Class C shares from 18% to 9% of the per share cash dividends received by Class A shares; (v) to reduce the distributions to Class C Shares in the event of a liquidation from 18% to 9% of the per share distributions received by Class A shares; and (vi) to provide for the issuance of shares of Class C Common Stock under a stock option plan.
Stockholders of both classes of common stock have received 5% stock dividends in the years 1989 through 1997, as authorized by the Company's Board of Directors.
Committee which selects the employees to whom the options will be granted and determines the price of the stock. The 1987 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).
Generally, the net assets of the life insurance subsidiary available for transfer to the Company are limited to the amounts that the life insurance 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.
Cash, Short-term Investments, and Restricted Assets of the Cemeteries and Mortuaries: The carrying amounts reported in the accompanying balance sheets for these financial instruments approximate their fair values.