(1) The acreage represents estimates of acres that are based upon survey reports, title reports, appraisal reports or the Company's inspection of the cemeteries. (2) Includes spaces sold for cash and installment contract sales. (3) As of December 31, 1998, there were mortgages of approximately $138,000 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries, of which approximately $57,000 was held by Security National Life. (4) As of December 31, 1998, there were mortgages of approximately $1,972,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary. (5) These cemeteries include two granite mausoleums. (6) As of December 31, 1998, there was a mortgage of approximately $781,000 collateralized by the property.
(1) As of December 31, 1998, there were mortgages of approximately $412,000 collateralized by the property and facilities of Camelback Sunset Funeral Home. (2) As of December 31, 1998, there were mortgages of approximately $1,972,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary. (3) As of December 31, 1998, there was a mortgage of approximately $111,000, collateralized by the property and facilities of Crystal Rose Funeral Home.
The following selected financial data for each of the five years in the period ended December 31, 1998, are derived from the audited consolidated financial statements. The data as of December 31, 1998 and 1997, and for the three years ended December 31, 1998, should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
(3) Reflects the acquisition of Crystal Rose Funeral Home as of February 1997.
(4) 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.
(5) Reflects the acquisition of Consolidare Enterprises, Inc., and subsidiaries as of December 17, 1998.
The Company's life insurance subsidiaries 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 $41,990,000 and $35,276,000 as of December 31, 1998 and 1997, respectively. Stockholders' equity as a percent of total capitalization was 64% and 72% as of December 31, 1998 and 1997, respectively.
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 is payable annually beginning on December 29, 1996.
At December 31, 1998, $20,710,999 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to its parent company without the approval of insurance regulatory authorities. Year 2000 Issues
The Company has tested each personal computer being used for Year 2000 compliance and has installed or replaced the necessary software to meet compliance. The Company is monitoring the progress of third party vendors which the Company relies upon, i.e., telephone equipment and communication suppliers, electricity suppliers, natural gas suppliers, banks, brokers, U.S. Postal Service, express mail services, etc. The Company is not aware of any if its suppliers that will not be Year 2000 compliant and will continue to monitor and make the necessary contingency plans where needed. The Company is aware of the risks associated with any of its internal systems or those of its suppliers that are not Year 2000 compliant.
Report of Independent Auditors. . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
I. Summary of Investments -- Other than Investments in Related Parties . . . . . . . . . . . . . . . 72
IV. Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . 79
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 included 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.
The following is a description of the most significant risks facing the Company and how it mitigates those risks:
Credit Risk - the risk that issuers of securities owned by the Company or mortgagors on mortgage loans on real estate owned by the Company will default or that other parties, including reinsurers and holders of cemetery/ mortuary contracts which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible.
Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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
The unaudited consolidated pro forma results of operations assuming consummation of the purchase as of January 1, 1997 are summarized as follows:
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 life 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 1998, 1997, and 1996. 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.
The Company, through its mortuary and cemetery operations, provides a guaranteed funeral arrangement wherein a
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 businesses 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 $919,951 and $780,356 at December 31, 1998 and 1997, respectively.
The Company computes earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This Standard requires presentation of two new amounts, basic and diluted earnings per share. Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented, 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. Diluted
The fair value of each option granted in 1998 under the 1993 Plan is estimated at $0.81 as of the grant date using the Black Scholes option-pricing model with the following assumptions: dividend yield of 5%, volatility of 29.3%, risk-free interest rate of 5.7%, and an expected life of five years. The fair value of each option granted in 1996 under the 1993 Plan is estimated at $1.19 as of the grant date 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997, and 1996
(1) Fixed maturity securities available for sale were acquired as part of the SSLIC acquisition. As such, cost equaled fair value as of December 31, 1998.
The amortized cost and estimated fair value of fixed maturity securities at December 31, 1998, 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.
The following tabulation shows the combined maturities of bank loans payable, lines of credit and notes and contracts payable:
1999 11,175,257 2000 1,389,360 2001 1,466,177 2002 1,534,972 2003 1,432,800 Thereafter 5,887,934 ----------- Total $22,886,500 ===========
The Company owns and operates several endowment care cemeteries, for which it has established and maintains an endowment care fund. The Company records a liability to the fund for each space sold at current statutory rates. The Company is not required to transfer assets to the fund until the spaces are fully paid for. The liability to the endowment care fund is summarized as follows:
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, 1998 and 1997. 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 $569,448,000 at December 31, 1998 and $46,254,000 at December 31, 1997.
As part of the acquisition of Southern Security, the Company has a co-insurance agreement with The Mega Life and Health Insurance Company ("MEGA"). On December 31, 1992 Southern Security ceded to MEGA 18% of all universal life policies in force at that date. MEGA is entitled to 18% of all future premiums, claims, policyholder loans and surrenders relating to the ceded policies. In addition, Southern Security receives certain commission and expense reimbursements. The funds held related to reinsurance treaties of $1,419,357 and policyholders' account balances on deposit with reinsurer of $8,518,571 represent the 18% share of policy loans and policyholder account balances ceded to MEGA as of December 31, 1998.
The Company has been named as a party in a lawsuit brought by Robert L. Anderson ("Anderson") in the Superior Court of San Diego, North County Judicial District, State of California. The complaint was filed on January 28, 1999
and pertains to the creation of the San Diego Memorial Park Partnership and development of Singing Hills Memorial Park. Anderson was denominated as a partner in the 1989 partner- ship agreement. He asserts that the Company did not carry out the partnership agreement in developing the property as a cemetery and residential lots and that instead the property was later acquired by California Memorial Estates, Inc., a subsidiary of the Company, and developed. Anderson asserts a claim for lost profits because of alleged breach of the partnership agreement and further asserts breach of fiduciary duty, actual fraud, constructive fraud, asks for an accounting, and alleges conspiracy and declaratory relief. He seeks punitive damages, legal fees and costs. Formal discovery has not begun. At this stage, no complete evaluation has been made. Management, however, intends to vigorously defend the matter and believes that Anderson did not perform as required and that he has no bona fide basis to complain. No amount has been accrued for this contingent liability.
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 participants to make pretax contributions up to the lesser of 15% of total annual compensation or the statutory limits. The Company may match up to 50% of each employee's investment in Company stock, up to 5% of the employee's total annual compensation. The Company's match will be Company stock and the amount of the match will be at the discretion of the Company's Board of Directors. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee. The Company's matching 401(k) contributions for 1998, 1997, and 1996 were approximately $7,000, $-0-, and $50,000, respectively.
Stockholders of both classes of common stock have received 5% stock dividends in the years 1989 through 1998, as authorized by the Company's Board of Directors.
The Company has Class B Common Stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. Class B shares are non-voting stock except to any proposed amendment to the Articles of Incorporation which would affect Class B Common Stock.
There are no dilutive effects on net income for purpose of this calculation.
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 hereunder shall be increased proportionately with no
Cash, Receivables, 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.
1999 $2,540,003 2000 968,023 2001 1,026,502 2002 1,089,172 2003 1,004,473 Thereafter 2,230,016 ---------- Total $8,858,189 ==========