(1) As of December 31, 1996, there were mortgages of approximately $503,000 collateralized by the property and facilities of Camelback Sunset Funeral Home. (2) As of December 31, 1996, there were mortgages of approximately $2,108,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary.
(1) Only includes Security National Mortgage Company for the five months ended December 31, 1993.
(3) Only includes Evergreen Memorial Park for the first eleven months of 1995 and the assets and liabilities of Civil Service Employees Life Insurance Company as of December 31, 1995.
Amortization of deferred policy acquisition costs and cost of insurance acquired increased by $90,000, from $1,150,000 in 1995 to $1,240,000 in 1996. This increase was primarily due to a reduction in the number of policies in force during 1996 and the associated deferred policy acquisition costs of these policies being amortized in 1996.
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 paid 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.
Net mortuary and cemetery income increased by $832,000, from $5,888,000 in 1994 to $6,720,000 in 1995. This increase was the result of a $242,000 increase in mortuary sales and $590,000 increase in cemetery sales for 1995.
Death benefits, surrenders and other policy benefits, and increase in future policy benefits increased by $622,000, from $4,036,000 in 1994 to $4,658,000 in 1995. This increase was due to primarily to three factors: the number of policies in force have increased from 1994 to 1995; the block of business continues to age; and the mix of policies issued has changed to limited pay policies over whole life policies.
General and administrative expenses increased by $3,814,000, from $8,064,000 in 1994 to $11,878,000 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 $970,000, from $3,869,000 to $4,839,000. 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.
Cost of the mortuary and cemetery goods and services sold in 1995 was consistent with the products sold during 1994.
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 $47,616,000, at amortized cost as of December 31, 1996 compared to $51,143,000 at amortized cost as of December 31, 1995. This represents 64% of the total insurance related investments in 1996 as compared to 66% in 1995. 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, 1996, 4.18% ($1,994,000) and at December 31, 1995, 3.61% ($1,851,000) 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 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, 1996 and 1995, the life subsidiary exceeded the regulatory criteria.
Stockholders' equity as a percent of assets is one measure of capital strength. At December 31, 1996 the Company's ratio increased to 18% up from 16% at December 31, 1995. This increase is primarily due to the mortgage company acting as a warehouse lender, by financing the mortgage loans through bank debt, and then selling them to investors within 45 days, and repaying the debt. This transaction results in a receivable for mortgage loans sold to investors which are offset by a bank loan payable. Computation of this ratio without this transaction results in the Company's equity to total assets increasing to 20% in 1996 from 18% in 1995, and debt to total assets decreasing to 10% in 1996 and 11% in 1995.
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 Company has completed development on five acres and is currently selling cemetery lots on a pre-need and at-need basis on the developed acreage.
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 for $588,000.
At December 31, 1996, $10,021,000 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's insurance subsidiary. The life subsidiary cannot pay a dividend to its parent company without the approval of insurance regulatory authorities.
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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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.
Security National Financial Corporation and its wholly- owned subsidiaries (the "Company") operates 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 five 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.
Security National 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, 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 total consideration of $5,200,000, which included a promissory note in the amount of $1,063,000. The acquisition was accounted for using the purchase method. Concurrent with the completion of the purchase of CSE Life, the Company merged CSE Life into Capital Investors Life. The assets and liabilities of CSE Life have been included in the Company's balance sheet at December 31, 1995. The results of operations of CSE Life were not included in the consolidated financial statements of the Company for the year ended December 31, 1995, as the effective date for accounting purposes was December 31, 1995.
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 statements of earnings of the Company. This acquisition resulted in an addition to excess of cost over net assets of acquired subsidiaries of approximately $800,000.
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, infrequent and unusual conditions could occur under which it would sell certain of these securities. Those conditions include unforeseen changes in asset quality and significant changes in tax laws affecting the changes in regulatory capital requirements or permissible investments.
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.
Realized gains and losses on Investments - realized gains and losses on investments and declines in value considered to be other than temporary, are recognized in operations on the specific identification basis.
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 which range from three to thirty years.
Future policy benefit reserves 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. Such liabilities are, for some plans, graded to equal statutory values or cash values at or prior to maturity. The range of assumed interest rates for all traditional life insurance policy reserves was 4.5% to 10% in 1996, 1995, and 1994. Benefit reserves for traditional limited-payment life insurance policies include the deferred portion of the premiums received during the premium-paying period. Deferred premiums are recognized as income over the life of the policies. Policy benefit claims are charged to expense in the period the claims are incurred.
Future policy benefit reserves 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 6.5% in 1996, 4% to 6.5% in 1995, and 4% to 6.25% in 1994.
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 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 the effect of 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 and related stock dividends that attach to outstanding options are not included in the computation when the effect is antidilutive.
The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 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 25"), and related interpretations in accounting for its stock option plans.
The Company has one fixed option plan (the "1993 Plan"). In accordance with APB 25, no compensation cost has been recognized for this plan. Had compensation cost for this plan been determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS 123, the Company's net income would have been reduced by less than $10,000 in 1996 which would have had no effect on earnings per share. The fair value of options granted in 1996 under this plan is estimated as $1.19 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 5%, volatility of 34.2%, risk free interest rate of 6.9%, and an expected life of five years. No options were granted in 1995 under this plan, and, therefore, there would have been no effect on net income or earnings per share had the Company applied the methodology prescribed under SFAS No. 123 in that year.
Certain amounts in prior years have been reclassified to conform with the 1996 presentation.
During 1996 and 1997, the Financial Accounting Standards Board issued Statement No. 125, "Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities", which is effective after December 31, 1996, and Statement No. 128, "Cash Flow", which is effective for fiscal years ending after December 15, 1997. The Company has not yet adopted these new standards; however, the effect on operations and stockholders' equity is not expected to be significant.
In February 1997 the Company purchased all of the outstanding shares of common stock of Crystal Rose Funeral Home, Inc, for a total consideration of $547,000 which included a note to the former owner in the amount of $297,000.
Securities on deposit for regulatory authorities as required by law amounted to $7,295,953 at December 31, 1996 and $7,142,237 at December 31, 1995.
Net amortization charged to income is expected to approximate $321,000, $299,000, $281,000, $261,000, and $246,000 for the years 1997 through 2001.
In addition to the line of credit described above, the Company has a line of credit agreement with a bank for $2,000,000 of which none was outstanding at December 31, 1996, or 1995. The line of credit is for general operating purposes and must be repaid every 30 days.
The Company owns and operates several endowment care cemeteries, for which it has established and maintains an endowment care fund. Per statutory requirement, the Company 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. The Company is not required to transfer assets to the fund until the spaces are paid for. The Company is not liable for any maintenance costs exceeding the stipulated statutory rate.
The insurance company has remaining loss carry forwards for tax purposes of approximately $1,300,000, approximately $886,000 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, 1996. 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, 1996 and 1995, the contingent liabilities for such future policy benefits aggregated $259,676 and $264,547, respectively, all of which relate to life insurance. These amounts pertain to insurance in force aggregating $73,821,939 in 1996 and $80,261,274 in 1995.
The Company has also assumed insurance from other companies having insurance in force amounting to $52,508,120 at December 31, 1996 and $58,916,837 at December 31, 1995.
The Company and the other named defendants have filed answers to the Complaint, made initial discovery disclosures, promulgated and responded to initial written discovery, and taken some depositions. No depositions have been taken or other discovery undertaken since June 1996. The Company believes that the Complaint against it is without merit and intends to vigorously defend against the action.
The following table summarizes capital stock activity for the three year period ended December 31, 1996:
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 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.
The Company's insurance subsidiary is domiciled in Utah and prepares its 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 1997, 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 stockholder's equity for the life subsidiary as reported to state regulatory authorities, is presented below:
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Summary of Investments Other than Investments in Related Parties