(2) Includes spaces sold for cash and installment contract sales. (3) As of December 31, 1999, there were mortgages of approximately $71,600 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries.
(4) As of December 31, 1999, there were mortgages of approximately $1,925,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary.
(6) As of December 31, 1999, there was a mortgage of approximately $727,800 collateralized by the property.
(1) As of December 31, 1999 there were mortgages of approximately $370,700 collateralized by the property and facilities of Camelback Sunset Funeral Home.
(2) As of December 31, 1999, there were mortgages of approximately $1,925,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary.
(3) As of December 31, 1999, there was a mortgage of approximately $206,400, collateralized by the property and facilities of Crystal Rose Funeral Home.
(2) Reflects the acquisition of Crystal Rose Funeral Home as of February 1997.
(3) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the audited consolidated financial statements.
The purchase of SSLIC Holding, including Insuradyne, was accounted for using the purchase method of accounting. Thus the results of operations of the Company for the twelve months ended December 31, 1998 do not include the results of SSLIC Holding and Insuradyne. In the Management's Discussion and Analysis of the Results of Operations, the results of SSLIC Holding and Insuradyne for the twelve months ended December 31, 1999 have been excluded. The following Consolidated Statements of Earnings shows the effect of excluding the results of SSLIC Holding and Insuradyne for the twelve months ended December 31, 1999.
During 1999, there was a net increase of $590,000 in death benefits, surrender and other policy benefits, and an increase in future policy benefits from $6,932,000 in 1998 to $7,522,000 in 1999. This increase was primarily due to additional interest credited on annuities and reserve increases on traditional products and additional death claims. These increases were reasonable based on the underlying actuarial assumptions.
Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $8,000, from $1,273,000 in 1998 to $1,265,000 in 1999. This decrease was reasonable based on the underlying actuarial assumptions.
Insurance premiums and other considerations decreased by $225,000, from $6,141,000 in 1997 to $5,916,000 in 1998. This decrease was primarily attributed to a reduction in renewal premiums.
General and administrative expenses increased by $4,288,000, from $15,361,000 in 1997 to $19,649,000 in 1998. Commission expenses increased by $2,735,000, from $4,883,000 in 1997 to $7,618,000 in 1998. Salaries increased $553,000 from $4,806,000 in 1997 to $5,359,000 in 1998. Other expenses increased $999,000, from $5,672,000 in 1997 to $6,671,000 in 1998. These increases were primarily the result of the increased number of loan originations by the Company's mortgage subsidiary.
Interest expense increased by $51,000, from $948,000 in 1997 to $999,000 in 1998. This increase was primarily due to more loan originations from the Company's mortgage subsidiary that were funded by third parties.
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, mortgage loans, 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 subsidiaries. Bonds owned by the insurance subsidiaries amounted to $64,518,000 at amortized cost as of December 31, 1999 compared to $72,715,000 at amortized cost as of December 31, 1998. This represents 42% of the total insurance related investments in 1999 as compared to 48 % in 1998. Generally, all bonds owned by the life insurance subsidiaries 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, 1999, 1.54% ($994,000) and at December 31, 1998, .64% ($469,000) of the Company's total invested assets were invested in bonds in rating categories three through six which are considered non-investment grade.
If market conditions were to cause interest rates to change, the market value of the fixed income portfolio (approximately $82,499,000) could change by the following amounts based on the respective basis point swing (the change in the market values were calculated using a modeling technique):
The Company is subject to risk based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At December 31, 1999 and 1998, the life subsidiaries exceeded the regulatory criteria.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1999 was 10%, as compared to a rate of 15% in 1998.
In March 1995, the Company purchased 97,800 shares of common stock of Greer-Wilson Funeral Home, Inc., 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 in the amount of $588,000.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which the Company is required to adopt January 1, 2000. SFAS 133 will require the Company to include
Consolidated Statements of Cash Flow, Years Ended December 31, 1999, 1998 and 1997 .................................................................37
We have audited the accompanying consolidated balance sheet of Security National Financial Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year ended December 31, 1999. Our audit also included the 1999 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 audit.
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, 1999, and the consolidated results of their operations and their cash flows for the year ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related 1999 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.
We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries as of December 31, 1998, and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flow for each of the three years in the period ended December 31, 1998. 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.
December 31, Assets: 1999 1998 - ------- ---- ---- Insurance-related investments: Fixed maturity securities held to maturity, at amortized cost (market $39,453,452 and $46,897,819 for 1999 and 1998) $39,629,851 $44,984,882 Fixed maturity securities available for sale, at market (cost $24,957,347 in 1999 and 28,675,440 in 1998) 24,119,190 28,675,440 Equity securities available for sale, at market (cost $4,350,139 and $4,035,251 for 1999 and 1998) 5,745,213 5,146,059 Mortgage loans on real estate 18,926,628 12,523,395 Real estate, net of accumulated depreciation of $2,722,024 and $2,380,874 for 1999 and 1998 7,629,952 7,866,151 Policy, student and other loans 11,607,993 11,493,637 Short-term investments 1,290,310 11,543,540 ------------ ------------- Total insurance-related investments 108,949,137 122,233,104 Restricted assets of cemeteries and mortuaries 4,258,987 4,098,877 Cash 12,422,864 6,670,996 Receivables: Trade contracts 4,232,030 4,011,722 Mortgage loans sold to investors 29,071,913 21,181,028 Receivable from agents 2,272,624 1,944,449 Receivable from officers 118,400 145,600 Other 3,847,079 2,603,243 ------------ ------------ Total receivables 39,542,046 29,886,042 Allowance for doubtful accounts (1,467,954) (1,576,668) ------------ ------------ Net receivables 38,074,092 28,309,374 Policyholder accounts on deposit with reinsurer 7,806,866 8,518,571 Land and improvements held for sale 8,522,687 8,405,725 Accrued investment income 1,493,013 1,440,860 Deferred policy acquisition costs 10,630,086 10,501,281 Property, plant and equipment, net 10,566,508 10,682,085 Cost of insurance acquired 9,597,306 10,462,446 Excess of cost over net assets of acquired subsidiaries 1,305,333 1,414,910 Other 671,558 526,918 ------------ ------------ Total assets $214,298,437 $213,265,147 ============ ============
Stockholders' Equity: - ----------------- Common stock: Class A: $2 par value, authorized 10,000,000 shares, issued 4,863,731 shares in 1999 and 4,617,330 shares in 1998 9,727,462 9,234,660 Class C: $0.20 par value, authorized 7,500,000 shares, issued 5,555,350 shares in 1999 and 5,446,595 shares in 1998 1,111,070 1,089,319 ---------- ----------- Total common stock 10,838,532 10,323,979 Additional paid-in capital 10,015,942 9,596,444 Accumulated other comprehensive income, net of deferred taxes (benefit) of $(71,899) and $222,967 for 1999 and 1998 665,691 1,081,113 Retained earnings 7,516,640 7,474,783 Treasury stock at cost (966,139 Class A shares and 61,979 Class C shares in 1999; 692,993 Class A shares and 59,028 Class C shares in 1998, held by affiliated companies) (2,547,112) (1,796,060) ------------ -------------- Total stockholders' equity 26,489,693 26,680,259 ------------ -------------- Total liabilities and stockholders' equity $214,298,437 $ 213,265,147 ============ ==============
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, Florida, Oklahoma, and Texas. 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 include the accounts and operations of the Company. The Company's subsidiaries at December 31, 1999, are as follows:
Memorial Mortuary Paradise Chapel Funeral Home Singing Hills Memorial Park Cottonwood Mortuary, Inc. Deseret Memorial, Inc.
Camelback Sunset Funeral Home, Inc. Greer-Wilson Funeral Home Crystal Rose Funeral Home Hawaiian Land Holdings SSLIC Holding Company Insuradyne Corporation Southern Security Life Insurance Company (61.3%)
On December 17, 1998, the Company purchased all of the outstanding shares of common stock of SSLIC Holding Company (formerly Consolidare Enterprises, Inc.), (SSLIC Holding) and Insuradyne Corporation (Insuradyne) for a total cost of $12,248,194. SSLIC Holding owns approximately 61.3% of the outstanding shares of common stock of Southern Security Life Insurance Company (Southern Security). The acquisition was accounted for using the purchase method. The assets and liabilities of SSLIC Holding and Insuradyne have been included in the Company's balance sheet at December 31, 1998. The results of operations of SSLIC Holding and Insuradyne 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.
Fixed maturity and equity securities available for sale - at fair value, which is based upon quoted trading prices. Changes in fair values net of income taxes are reported as unrealized appreciation or depreciation and recorded as an adjustment directly to stockholders' equity and, accordingly, have no effect on net income.
Restricted assets of cemeteries and mortuaries - consists of cash, participations in mortgage loans with Security National Life Insurance Company, and mutual funds carried at cost; fixed maturity securities carried at cost adjusted for amortization of premium or accretion of discount; and equity securities carried at fair market value.
The Company follows the procedure of reinsuring risks in excess of $50,000 to provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. The Company remains liable for amounts ceded in the event the reinsurers are unable to meet their obligations.
Land and improvements used in cemetery operations are stated at cost and charged to operations when sold based on the number of spaces available for sale. Mausoleum costs are charged to operations when sold based on the number of niches available for sale. Perpetual care is maintained on sold spaces as discussed in Note 7.
Mortgage fee income is generated through the origination and refinancing of mortgage loans and is deferred until such loans are sold.
The amortized cost and estimated fair value of fixed maturity securities at December 31, 1999, 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.
Due in 2000 $ 1,199,855 $ 1,203,063 Due in 2001 through 2004 12,967,929 12,676,305 Due in 2005 through 2009 9,331,611 8,840,145 Due after 2009 1,367,611 1,309,565 Mortgage-backed securities 90,341 90,112 ----------- ----------- $24,957,347 $24,119,190
1999 1998 1997 ---- ---- ---- Fixed maturity securities held to maturity:
Gross realized gains $ 87,859 $ 43,154 $ 37,995 Gross realized losses (1,895) (26,470) (12,457)
Securities available for sale: Gross realized gains 14,138 66,589 242,714 Gross realized losses (12) (3,887) (15,617)
Fixed maturity securities $ 4,720,838 $ 3,293,949 $ 3,519,270 Equity securities 226,857 219,785 238,097 Mortgage loans on real estate 1,451,214 1,036,132 774,478 Real estate 1,711,771 1,384,311 1,375,996 Policy loans 725,383 170,752 170,726 Short-term investments 650,035 405,848 529,979 Other 2,142,527 1,899,643 1,310,246 ------------ ----------- ----------- Gross investment income 11,628,625 8,410,420 7,918,792 Investment expenses (997,323) (951,677) (779,212) ------------ ----------- ----------- Net investment income $ 10,631,302 $ 7,458,743 $ 7,139,580 ============ =========== ===========
Imputed interest at 7% 732,371 235,901 262,406 Amortization (1,597,511) (532,813) (641,042) ------------ ------------ ----------- Net amortization charged to income (865,140) (296,912) (378,636) ------------ ------------ ----------- Balance at end of year $ 9,597,306 $ 10,462,446 $ 3,370,018 ============ ============ ===========
Bank prime rate plus 1/2% (9.0% at December 31, 1999) note payable in monthly installments of $7,235 including principal and interest, collateralized by real property, which book value is approximately $893,128, due August 2004 370,748 412,116
Other collateralized bank loans payable 264,175 299,393 ----------- ---------- Total bank loans 10,768,098 11,909,980
Due to former stockholders of Greer Wilson resulting from the acquisition of such entity. Amountrepresents the present value discounted at 10% of monthly annuity payments of $7,000, due March 2005. 344,860 392,458
Due to former stockholders of Crystal Rose Funeral Home resulting from the acquisition of such entity. Amount represents the present value discounted at 9% of monthly annuity payments of $5,350 due February 2007. 177,246 221,587
9%note payable in monthly installments of $10,000 including principal and interest collateralized by real property, which book value is approximately $2,908,000, due July 2008 727,847 780,604
1999 1998 1997 ---- ---- ---- Computed expense at statutory rate $ 493,266 $ 348,855 $ 562,772 Special deductions allowed small life insurance companies (122,204) (88,658) (152,215) Dividends received deduction (24,401) (26,691) (32,343) Minority interest taxes (102,828) -- -- Other, net (13,317) 21,309 (18,106) --------- --------- --------- Tax expense $ 230,516 $ 254,815 $ 360,108 ========= ========= =========
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, 1999, 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.
The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranged from $30,000 to $75,000 at December 31, 1999 and 1998. 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 $581,297,000 at December 31, 1999 and $569,448,000 at December 31, 1998.
Concerning the administrative action by HUD relating to the above allegations, dependent upon the facts and circumstances, HUD asserts it has alternatives such as taking no action, issuing a letter of reprimand, placing Security National Mortgage on probation or even suspending or withdrawing Security National Mortgage's approval function as a HUD/FHA lender. With respect to any civil money penalty, which could be in addition to the foregoing, the letter from HUD states that the "amount of the civil penalty shall not exceed $5,500 for each such listed or described violation" and that a "continuing violation may constitute a separate violation for each day that violation continues".
Security National Mortgage is allowed to respond in writing to what is asserted by HUD and the procedure permits at a future time, if necessary, an evidentiary hearing. At this stage a complete evaluation of the matter has not been made. Management, however, recognizes the serious alternative sanctions claimed by HUD to be available to it including the sanction of the loss of the ability to do FHA lending work. Thus, management recognizes the great importance and need for an appropriate written response to the letter to be filed with HUD and the need to do what is necessary to see that Security National Mortgage's understanding of the matter is fairly and properly presented to HUD.
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 $56,277, $59,613, and $45,616 for 1999, 1998, and 1997, respectively. At December 31, 1999 the ESOP held 619,273 shares of Class A and 1,216,848 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.
Stock Dividends 219,892 259,374 Conversion of Class C to Class A 1,336 (13,352) Stock Issued (cancelled) 69,514 (238) ---------- ----------
Stock Dividends 231,672 264,550 Conversion of Class C to Class A 15,580 (155,795) Stock Issued (cancelled) (851) -- ---------- ----------
Denominator: Denominator for basic earnings per share- weighted-average shares 4,397,141 4,272,516 3,988,034
Effect of dilutive securities: Employee stock options -- -- 19,606 Stock appreciation rights -- -- 85,051 --------- ------------ ----------
Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 4,397,141 4,272,516 4,092,691 ========= ============ ========== Basic earnings per share $ 0.22 $ 0.18 $ 0.33 ========= ============ ========== Diluted earnings per share $ 0.22 $ 0.18 $ 0.32 ========= ============ ==========
The 1987 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
Available options for future grant 1987 Stock Incentive Plan -0- -----
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 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.
On October 14, 1999, the Company amended the 1993 Plan to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 746,126 Class A shares to 1,046,126 Class A shares.
Number Option of Shares Price ----------- --------- Outstanding at December 31, 1996 287,816 $2.70 - $4.52 Cancelled (9,450) Dividend 13,918 ---------
Outstanding at December 31, 1997 292,284 $2.58 - $4.31 Dividend 30,869 Granted 148,000 Exercised (63,814) ---------
Available options for future grant 1993 Stock Incentive Plan 404,221 ========
The Utah and Florida Insurance Departments impose 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 subsidiaries have a Ratio that is greater than 300% of the first level of regulatory action.
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, 1999 were approximately $90,251,000 and $84,923,000, respectively.
Total Fixed Securities held to maturity 39,629,851 39,453,452 39,629,851 ------------ ------------ -----------
Total Securities available for sale 29,307,486 29,864,403 29,864,403 ------------ ------------ -----------
Other assets 72,641 396 ----------- ----------- Total assets $43,458,071 $38,178,127 =========== ===========
1999 1998 ---- ---- Liabilities: - ------------ Bank loans payable: Current installments $ 841,767 $ 2,358,684 Long-term 6,465,741 5,862,614
Cash flows from investing activities: Purchase of short-term investments (11,045) (11,737) (96,039) Proceeds from sale of short term investments 305,972 -- 91,750 Note receivable from affiliate -- (1,000,000) -- Purchase of equipment (11,002) -- -- Investment in subsidiaries (6,388,198) (5,250,000) (75,000) ----------- ----------- ----------- Net cash used in investing activities (6,104,273) (6,261,737) (79,289)
SECURITY NATIONAL FINANCIAL CORPORATION Notes to Parent Company Only Financial Statements
Bank prime rate plus 1/2% (9.0% at December 31, 1999) note payable in monthly installments of $36,420 including principal and interest, collateralized by 15,000 shares of Security National Life stock, due December 2004. 1,697,397 1,974,898 ---------- ---------
Less current installments 841,767 2,358,684 ---------- ---------- Bank loans, excluding current installments $6,465,741 $5,862,614 ========== ==========
Due to former stockholders of Civil Service Employees Life Insurance Company resulting from the acquisition of such entity. 7% note payable in seven annual principal payments of $151,857 due December 2003 455,571 607,429
2000 $ 994,585 2001 1,329,464 2002 1,420,552 2003 1,366,940 2000 1,498,926 Thereafter 1,153,572 ---------- Total $7,764,039 ==========
Cemetery and Mortuary subsidiary $1,366,930 $1,126,527 Mortgage subsidiary -- -- Life Insurance subsidiary 6,923,767 654,591 ---------- ---------- $8,290,697 $1,781,118