The following selected financial data for each of the years in the five year period ended December 31, 1994, are derived from the audited consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
Management's Discussion and Analysis of Financial - ---------------------------------------------------------- Condition and Results of Operations - -----------------------------------
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) decreased general and administrative costs as a percentage of revenue through efforts to reduce operating costs and through eliminating unnecessary duplication of costs at acquired companies; and (iii) emphasis on high margin cemetery and mortuary business.
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 long term investments.
Realized gains on investments decreased by $396,000, from $780,000 in 1993 to $384,000 in 1994. The 1994 amount included the results of the sale of 13.45 acres of land deemed not suitable for cemetery development at Lake View Cemetery. On August 22, 1994, an agreement was reached for the sale of the land to Temple Ridge Development Company for $515,000. The net gain on the sale of the land, after deducting the original cost of the land and related fees, was approximately $278,000.
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 on January 10, 1994.
Cost of mortuary and cemetery lots and services decreased by $123,000, from $1,890,000 in 1993 to $1,767,000 in 1994. This decrease was primarily due to a reduction in pre-need sales at Holladay Cottonwood Memorial Foundation.
The Company's total revenues increased by $1,763,000 (12.0%), from $14,733,000 in fiscal 1992 to $16,496,000 in fiscal 1993. Contributing to this increase in total
revenues was a $284,000 increase in premiums, from $4,493,000 in 1992 to $4,777,000 in 1993. This increase was attributable to a greater premium per application issued in 1993 than the previous year. The number of policies issued in 1993 was about the same as in 1992.
Total benefits and expenses were $15,026,000 for fiscal 1993, which constituted 91.1% of total revenue of the Company, as compared to $13,767,000, or 93.4% of total revenue in fiscal 1992. Policyholder benefits increased by $519,000, from $3,901,000 in 1992 to $4,420,000 in 1993. This increase was primarily due to an increase in interest that was credited to annuity and other interest sensitive reserves.
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 or held to maturity investment, or sale of other investments. 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 and the maintenance of existing policies.
preliminary information, the Company plans 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 cash equivalents in investment grade securities before liquidating high-yield securities.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1994 was 8%, as compared to a rate of 9% in 1993. The Company's primary needs for liquidity are for debt service, maintenance of statutory capital and surplus for its life insurance subsidiary and administrative expenses and cost of cemetery and mortuary services to be rendered.
On February 12, 1993, Security National Life Insurance Company entered into a purchase and sale agreement for the Pinehill Business Park located in Murray, Utah. The purchase price was $2,150,000 with debt financing of $1,500,000 through a local bank. As of December 31, 1994, about 95% of the available space was occupied.
On July 31, 1993, the Company contributed assets of approximately $268,000 to its new wholly-owned subsidiary, Security National Mortgage Company. Security National Mortgage Company operates in two principal markets: refinancing of mortgage loans and origination of mortgage loans. These loans are sold on the secondary market to investors with servicing obligations released. Security National Life Insurance Company intends to act as a warehouse lender for the mortgage loans. By becoming a warehouse lender, Security National Life Insurance Company can obtain a long term interest rate on its assets without committing the funds for a long period of time.
At December 31, 1994, $8,570,000 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's insurance subsidiary Security National Life. Security National Life cannot pay a dividend to its parent company without the approval of insurance regulatory authorities.
We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries as of December 31, 1994, and 1993, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also include the financial statement schedules listed in the Index at
The accompanying consolidated financial statements include the accounts and operations of Security National Financial Corporation and its wholly-owned subsidiaries and their wholly-owned subsidiaries, except as noted, (the "Company") at December 31, 1994, as follows:
Effective December 21, 1994, the Company purchased all of the outstanding shares of common stock of Capital Investors Life for a total cost of $6,395,000 which included 40,000 shares of the Company's Class A Common Stock valued at $160,000. The acquisition was accounted for using the purchase method. As a result of the acquisition Capital Investors Life was redomesticated to Utah on December 28, 1994. The assets and liabilities of Capital Investors Life have been included in the Company's balance sheet at December 31, 1994. The results of operations of Capital Investors Life were not included in the financial statements of the Company for the year ended December 31, 1994, since the effective date for accounting purposes was Decemeber 31, 1994.
The unaudited consolidated pro forma results of operations assuming consummation of the purchase as of January 1, 1993 are summarized as follows:
Effective January 10, 1994, the Company purchased all of the outstanding shares of common stock of Camelback Sunset Funeral Home for a total cost of $78,427 which included 25,000 shares of the Company's Class A Common Stock valued at $75,000. The acquisition was accounted for using the purchase method. The assets, liabilities, and equity of Camelback Sunset Funeral Home have been included in the Company's balance sheet at December 31, 1994. The results of operations of Camelback Sunset Funeral Home for the twelve months ended December 31, 1994, were included in the consolidated financial statements of the Company.
unrealized appreciation or depreciation directly to stockholders' equity and, accordingly have no effect on net income.
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 decline in value.
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 and renewal insurance business have been deferred. Deferred policy acquisition costs for traditional life insurance are being amortized over the premium-paying period of the related policies using assumptions consistent with those
Participating business constitutes 12%, 11%, and 10% of the life insurance in force, for 1994, 1993 and 1992 respectively. The provision for policyholders' dividends included in policyholder obligations is based on dividend scales anticipated by management. Amounts to be paid are determined annually by the Board of Directors.
The Company has entered into a coinsurance agreement with an unaffiliated insurance company under which the Company assumed 100% of the risk for certain life insurance policies and certain other policy-related liabilities of the insurance company.
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. Sales contracts average 6 years in duration. 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%.
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 arrangement 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.
Mortgage company fee income is generated through the origination and refinancing of mortgage loans and is deferred until such loans are sold.
Included in land and improvements for sale are certain costs amounting to $859,116 and $721,988 at December 31, 1994 and 1993, incurred to pursue the acquisition and development of certain cemetery property in the San Diego area. Deferral of these costs have been made pending successful acquisition and development of the property. Acquisition of the property was completed subsequent to December 31, 1994.
differences are related principally to the deferral of policy acquisition costs and the provision for future policy benefits in the insurance operations.
Earnings per common share are based on the weighted average number of shares outstanding during the year after giving effect to the assumed conversion of Class C Common Stock to Class A Common Stock, the acquisition of treasury stock, and the retroactive effect of stock dividends declared for each year presented. Outstanding stock options are not included in the computation when the effect is antidilutive. The weighted average number of shares are 3,476,544 in 1994, 3,245,899 in 1993 and 3,092,284 in 1992.
During 1993, the FASB issued Statement 114, "Accounting by Creditors for Impairment of a Loan" as amended in October 1994 by Statement 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition" which are effective for fiscal years beginning after December 15, 1994. The Company has not yet adopted these new standards; however, the effect on operations and stockholders' equity is not considered 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 1994, 1993, and 1992.
Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential and commercial loans and requires collateral on all real estate exposures, a substantial portion of its debtors' ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. The Company has 95% of its mortgage loans in the state of Utah with one mortgage loan to Wasatch Land and Development which constitutes 26% of the total mortgage loan balance.
Investment expenses consist primarily of depreciation, property taxes and an estimated portion of administrative expenses relating to investment activities.
Securities on deposit for regulatory authorities as required by law amounted to $3,907,432 at December 31, 1994 and $3,805,985 at December 31, 1993.
4) Property, Plant and Equipment - ----------------------------------- The cost of property, plant and equipment and their corresponding estimated useful lives are summarized below:
7) Cemetery and Mortuary Endowment Care and Pre-need - ----------------------------------------------------- Merchandise Funds -----------------
Assets in the endowment care trust fund are summarized as follows:
Marketable equity securities of the fund are carried at the lower of aggregate cost or market.
9) Reinsurance, Commitments and Contingencies - -------------------------------------------- Security National Life follows the procedure of reinsuring risks in excess of a specified limit which was $50,000 at December 31, 1994. Security National Life is contingently liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. At December 31, 1994 and 1993, the contingent liabilities for such future policy benefits aggregated $5,798,680 and $82,030, respectively, all of which relate to life and accident and health insurance. These amounts pertain to insurance in force aggregating $35,073,111 and $16,396,117.
10) Employee Stock Ownership Plan (ESOP) - --------------------------------------- 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
As of December 31, 1994, options to purchase an aggregate of 132,000 shares of Class A Common Stock have been granted under the 1987 Plan at the exercise prices indicated in the following table.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Corporation
The 1993 Plan is to be 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. No options may be exercised for a term of more than ten years from the date of grant. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the code, including a requirement that the option exercise price be no less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors.
The Company's insurance subsidiaries are domiciled in Utah and prepare their statutory basis financial statements in accordance with accounting practices prescribed or permitted by the Utah Insurance Department. "Prescribed" statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ("NAIC"). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is expected to be completed in 1996, will likely change, to some extent, prescribed statutory accounting practices, and may result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. Statutory net income and statutory stockholders' equity for Security National Life, which includes its subsidiary Capital Investors Life, as reported to state regulatory authorities, is presented below:
The Company is principally involved in three segments: Life insurance and annuities, cemetery/mortuary operations and mortgages. The mortgage operations began in 1993.