SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-9341
Security National Financial Corporation
(Exact name of registrant as specified in its Charter)
UTAH 87-0345941
- ---------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5300 South 360 West, Suite 250 84123
Salt Lake City, Utah -----------------
- ------------------------------------------ (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 264-1060
-----------------
Securities registered pursuant to Section 12(d) of the Act:
Name of each exchange
Title of each Class on which registered
- ------------------- --------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $2.00 Par Value
(Title of Class)
Class C Common Stock, $0.20 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non- affiliates of the
registrant as of March 31, 2000 was approximately $11,206,000.
As of March 31, 2000, registrant had issued and outstanding 3,897,592 shares of
Class A Common Stock and 5,493,372 shares of Class C Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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PART I
Item 1. Business
Security National Financial Corporation (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. These products are marketed in 34 states through a commissioned sales
force of independent licensed insurance agents who may also sell insurance
products of other companies. The cemetery and mortuary segment of the Company
consists of five cemeteries in the state of Utah and one in the state of
California and eight mortuaries in the state of Utah and six in the state of
Arizona. The Company also engages in pre-need selling of funeral, cemetery and
cremation services through its Utah operations. Many of the insurance agents
also sell pre-need funeral, cemetery and cremation services. The mortgage loan
segment is an approved governmental and conventional lender that originates and
underwrites residential and commercial loans for new construction and existing
homes and real estate projects.
The design and structure of the Company is that each segment is related to the
others and contributes to the profitability of the other segments of the
Company. Because of the increasing cemetery and mortuary operations in Utah and
Arizona, the Company enjoys a level of public awareness that assists in the
sales and marketing of insurance and pre-need cemetery and funeral products.
Security National Life Insurance Company ("Security National Life") invests its
assets (representing in part the pre-paid funerals) in investments authorized by
the Insurance Departments of the States of Florida and Utah. One such investment
authorized by the Insurance Departments is high quality mortgage loans. Thus,
while each segment is a profit center on a stand-alone basis, this horizontal
integration of each segment will lead to improved profitability of the Company.
The Company is also pursuing growth through acquisitions of both life insurance
companies and cemeteries and mortuaries. The Company's acquisition business plan
is based on reducing overhead cost of the acquired company by utilizing existing
personnel, management, and technology while still providing quality service to
the customers and policyholders.
The Company was organized as a holding company in 1979 when Security National
Life became a wholly owned subsidiary of the Company and the former stockholders
of Security National Life became stockholders of the Company. Security National
Life was formed in 1965 and has grown through the direct sale of life insurance
and annuities and through the acquisition of other insurance companies,
including the acquisitions of Capital Investors Life Insurance Company in
December 1994, Civil Service Employees Life Insurance Company in December 1995
and Southern Security Life Insurance Company in December 1998. Memorial Estates,
Inc. and Memorial Mortuary became direct subsidiaries of the Company in the 1979
reorganization when the Company was formed. These companies were acquired by
Security National Life in 1973. The cemetery and mortuary operations have also
grown through the acquisition of other cemetery and mortuary companies,
including the acquisitions of Paradise Chapel Funeral Home, Inc. in 1989,
Holladay Memorial Park, Inc., Cottonwood Mortuary, Inc. and Deseret Memorial,
Inc. in 1991, Sunset Funeral Home in January 1994, Greer-Wilson Funeral Home,
Inc. in April 1995 and Crystal Rose Funeral Home in February 1997. In July 1993,
the Company formed Security National Mortgage Company ("Security National
Mortgage") to originate and refinance mortgage loans. See Notes to Consolidated
Financial Statements for additional disclosure and discussion regarding segments
of the business.
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Life Insurance
Products
The Company, through its insurance subsidiaries, Security National Life and
Southern Security Life Insurance Company, issues and distributes selected lines
of life insurance and annuities. The Company's life insurance business includes
funeral plans and interest-sensitive whole life insurance, as well as other
traditional life and accident and health insurance products but places specific
marketing emphasis on funeral plans.
A funeral plan is a small face value life insurance policy that generally has a
face coverage of up to $5,000. The Company believes that funeral plans represent
a marketing niche that has lower competition since most insurance companies do
not offer similar coverages. The purpose of the funeral plan policy is to pay
the costs and expenses incurred at the time of a person's death. On a per
thousand dollar cost of insurance basis, these policies are more expensive to
the policyholder than many types of non-burial insurance due to their low face
amount, requiring the fixed cost of the policy to be distributed over a smaller
policy size, and due to the simplified underwriting practices resulting in
higher mortality costs.
Markets and Distribution
The Company is licensed to sell insurance in 34 states. The Company, in
marketing its life insurance products, seeks to locate, develop and service
specific "niche" markets. A "niche" market is an identifiable market which the
Company believes is not emphasized by most insurers. The Company generally sells
its life insurance products to people of middle age who have a need for
insurance to protect the income of the wage earner of the family, to pay off
debts at the time of death and for other estate planning purposes. Funeral plan
policies are sold primarily to persons who range in age from 45 to 75. Even
though people of all ages and income levels purchase funeral plans, the Company
believes that the highest percentage of funeral plan purchasers are individuals
who are older than 45 and have low to moderate income. A majority of the
Company's funeral plan premiums come from the states of Arizona, Colorado,
Idaho, Nevada, Oklahoma, Texas and Utah, and a majority of the Company's
non-funeral plan life insurance premiums come from the states of Alabama,
California, Florida, Georgia, Louisiana, New Mexico, South Carolina and Utah.
The Company sells its life insurance products through direct agents and brokers
and independent licensed agents who may also sell insurance products of other
companies. The commissions on life insurance products range from approximately
10% to 90% of first year premiums. In those cases where the Company utilizes its
direct agents in selling such policies, those agents customarily receive
advances against future commissions.
In some instances, funeral plan insurance is marketed in conjunction with the
Company's cemetery and mortuary sales force. When it is marketed by that group,
the beneficiary is usually the Company. Thus, death benefits that become payable
under the policy are paid to the Company's cemetery and mortuary subsidiaries to
the extent of services performed and products purchased.
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In marketing the funeral plan insurance, the Company also seeks and obtains
third-party endorsements from other cemeteries and mortuaries within its
marketing areas. Typically, these cemeteries and mortuaries will provide letters
of endorsement and may share in mailing and other lead-generating costs. The
incentive for such businesses to share the costs is that these businesses are
usually made the beneficiary of the policy. The following table summarizes the
life insurance business for the five years ended December 31, 1999:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Life
Insurance
Policy/Cert.
Count as of
December 31 75,808(1) 69,895(1) 43,213 42,034 42,711
Insurance
in force
as of December 31
(omitted 000) 2,113,893(1) 2,123,734(1) 648,906 546,213 530,688
Premiums
Collected (omitted
000) 15,261(1) 5,718 5,732 5,765 5,819
(1) Includes acquisition of Southern Security Life Insurance Company on
December 17, 1998.
Underwriting
Factors considered in evaluating an application for insurance coverage include
the applicant's age, occupation, general health and medical history. Upon
receipt of a satisfactory application, which contains pertinent medical
questions, the Company writes insurance that is based on its medical limits and
requirements on a basis satisfactory to the reinsuring company (or companies, if
submitted facultatively), subject to the following general non-medical limits:
Age Nearest Non-Medical
Birthday Limits
------------ -----------
0-50 $75,000
51-up Exam Required
When underwriting life insurance, the Company will sometimes issue policies with
higher premium rates for substandard risks.
In addition to the Company's ordinary life product line, the Company also sells
final expense insurance. This insurance is a small face amount, with a maximum
issue of $10,000. It is written on a simplified medical application with
underwriting requirements being a completed application, a phone inspection on
each applicant and a Medical Information Bureau inquiry. There are several
underwriting classes in which an applicant can be placed. If the Company
receives conflicting or incomplete underwriting information, an attending
physician's statement can be ordered to insure the applicant is placed in the
correct underwriting class.
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Annuities
Products
The Company's annuity business includes single premium deferred annuities,
flexible premium deferred annuities and immediate annuities. A single premium
deferred annuity is a contract where the individual remits a sum of money to the
Company, which is retained on deposit until such time as the individual may wish
to purchase an immediate annuity or surrender the contract for cash. A flexible
premium deferred annuity gives the contract holder the right to make premium
payments of varying amounts or to make no further premium payments after his
initial payment. These single and flexible premium deferred annuities can have
initial surrender charges. The surrender charges act as a deterrent to
individuals who may wish to surrender their annuity contracts. These types of
annuities have guaranteed interest rates of 4% to 4 1/2% per annum. Above that,
the interest rate credited is periodically determined by the Board of Directors
at their discretion. An immediate annuity is a contract in which the individual
remits to the Company a sum of money in return for the Company's obligation to
pay a series of payments on a periodic basis over a designated period of time,
such as an individual's life, or for such other period as may be designated.
Holders of annuities enjoy a significant benefit under the current federal
income tax law in that interest accretions that are credited to the annuities do
not incur current income tax expense on the part of the contract holder.
Instead, the interest income is tax deferred until such time as it is paid out
to the contract holder. In order for the Company to realize a profit on an
annuity product, the Company must maintain an interest rate spread between its
investment income and the interest rate credited to the annuities. From that
spread must be deducted commissions, issuance expenses and general and
administrative expenses. The Company's annuities currently have credited
interest rates ranging from 4% to 6 1/2%.
Markets and Distribution
The general market for all of the Company's annuities is middle to older age
individuals who wish to save or invest their money in a tax deferred
environment, having relatively high yields. The Company currently markets its
annuities primarily in the states of Arizona, New Mexico, Oklahoma, Texas and
Utah.
The major source of annuity considerations comes from direct agents. Annuities
can be sold as a by-product of other insurance sales. This is particularly true
in the funeral planning area. If an individual does not qualify for a funeral
plan due to health considerations, the agent will often sell that individual an
annuity to take care of those final expenses. The commission rates on annuities
range from 2% to 10%.
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The following table summarizes the annuity business for the five years ended
December 31, 1999:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Annuities
Policy/Cert.
Count as of
December 31 8,369(1) 7,890(1) 7,434 7,049 6,893
Deposits
Collected
(omitted 000) 3,906(1) 2,770 2,521 2,859 2,375
(1) Includes acquisition of Southern Security Life Insurance Company on
December 17, 1998.
Accident and Health
Products
Prior to the acquisition of Capital Investors Life in December 1994, the Company
did not actively market accident and health products. With the acquisition of
Capital Investors Life, the Company acquired a block of accident and health
policies which pay limited benefits to policyholders. The Company is currently
offering a low-cost comprehensive diver's accident policy and a limited cancer
benefit policy. The diver's policy provides world-wide coverage for medical
expense reimbursement and life insurance in the event of diving or water sports
accidents. The cancer policy provides a lump sum payment for the occurrence of
cancer.
Markets and Distribution
The Company currently markets its diver's policy through water sports magazine
advertising and dive shops throughout the world. The Company pays direct
commissions ranging from 15% to 30% for new business generated.
The following table summarizes the accident and health business for the five
years ended December 31, 1999:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Accident
and Health
Policy/Cert.
Count as of
December 31 24,078(1) 27,201(1) 30,250 33,639 37,302
Premiums
Collected
(omitted 000) 549(1) 375 430 493 569
(1) Includes acquisition of Southern Security Life Insurance Company on
December 17, 1998.
Reinsurance
The Company reinsures with other companies portions of the individual life
insurance and accident and health policies it has underwritten. The primary
purpose of reinsurance is to enable an insurance company to write a policy in an
amount larger than the risk it is willing to assume for itself. No other
liabilities or guarantees by the Company exist on business ceded through
reinsurance treaties, however, the Company remains obligated for
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amounts ceded in the event the reinsurers do not meet their obligations. There
is no assurance that the reinsurer will be able to meet the obligations assumed
by it under the reinsurance agreement.
The Company's policy is to retain no more than $50,000 of ordinary insurance per
insured life. Excess risk is reinsured. The total amount of life insurance in
force at December 31, 1999, reinsured by other companies aggregated
$296,936,000, representing approximately 14% of the Company's life insurance in
force on that date.
The Company currently cedes and assumes certain risks with various authorized
unaffiliated reinsurers pursuant to reinsurance treaties which are renewable
annually. The premiums paid by the Company are based on a number of factors,
primarily including the age of the insured and the risk ceded to the reinsurer.
Investments
The investments that support the Company's life insurance and annuity
obligations are determined by the Investment Committee of the Board of Directors
of the various subsidiaries and ratified by the full Board of Directors of the
respective subsidiaries. A significant portion of the investments must meet
statutory requirements governing the nature and quality of permitted investments
by insurance companies. The Company's interest-sensitive type products,
primarily annuities and interest-sensitive whole life, compete with other
financial products such as bank certificates of deposit, brokerage sponsored
money market funds as well as competing life insurance company products. While
it is not the Company's policy to offer the highest yield in this climate, in
order to offer what the Company considers to be a competitive yield, it
maintains a diversified portfolio consisting of common stocks, preferred stocks,
municipal bonds, investment and non-investment grade bonds including high-yield
issues, mortgage loans, real estate, short-term and other securities and
investments.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Notes to Consolidated Financial Statements" for additional
disclosure and discussion regarding investments.
Cemetery and Mortuary
Products
The Company has six wholly-owned cemeteries and fourteen wholly- owned
mortuaries. The cemeteries are non- denominational. Through its cemetery and
mortuary operations, the Company markets a variety of products and services both
on a pre-need basis (prior to death) and an at-need basis (at the time of
death). The products include grave spaces, interment vaults, mausoleum crypts
and niches, markers, caskets, flowers and other related products. The services
include professional services of funeral directors, opening and closing of
graves, use of chapels and viewing rooms, and use of automobiles and clothing.
The Company has a funeral chapel at each of its cemeteries other than Holladay
Memorial Park and Singing Hills Memorial Park and has ten separate stand-alone
mortuary facilities. The Company's cemetery and mortuary business increased with
the acquisition of Holladay Memorial Park, Inc., Cottonwood
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Mortuary, Inc. and Deseret Memorial, Inc. in September 1991, the acquisition of
Sunset Funeral Home, Inc. in January 1994, the acquisition of Greer-Wilson
Funeral Home, Inc. in April 1995, and the acquisition of Crystal Rose Funeral
Home in February 1997.
Markets and Distribution
The Company's pre-need cemetery and mortuary sales are marketed to persons of
all ages but are generally purchased by persons 45 years of age and older. The
Company also markets its mortuary and cemetery products on an at-need basis. The
Company is limited in its geographic distribution of these products to areas
lying within an approximate 20 mile radius of its mortuaries and cemeteries. The
Company's at-need sales are similarly limited in geographic area.
The Company actively seeks to sell its cemetery and funeral products to
customers on a pre-need basis. The Company employs cemetery sales
representatives on a commission basis to sell these products. Many of these
pre-need cemetery and mortuary sales representatives are also licensed insurance
salesmen and sell funeral plan insurance. In many instances, the Company's
cemetery and mortuary facilities are the named beneficiary of the funeral plan
policies.
The sales representatives of the Company's cemetery and mortuary operations are
commissioned and receive no salary. The sales commissions range from 10% to 22%
for cemetery products and services and 10% to 90% of first year premiums for
funeral plan insurance. Potential customers are located via telephone sales
prospecting, responses to letters mailed by the sales representatives, newspaper
inserts, referrals, contacts made at funeral services, and door to door
canvassing. The Company trains its sales representatives and generates leads for
them. If a customer comes to one of the Company's cemeteries on an at-need
basis, the sales representatives are compensated on a commission basis.
Mortgage Loans
Products
The Company, through its mortgage subsidiary, Security National Mortgage
Company, originates and underwrites residential and commercial loans for new
construction and existing homes and real estate projects. The Company is an
approved government guaranteed and conventional lender and processes government
guaranteed and conventional loans. Most of the loans are sold directly to
investors. The Company has available warehouse lines of credit with affiliated
companies and an unaffiliated financial institution to fund mortgage loans prior
to the purchase by investors.
Markets and Distribution
The Company's mortgage lending services are marketed primarily to individual
homeowners and businesses who are located in the area known as the "Wasatch
Front," covering approximately 100 miles between Provo, Salt Lake City and
Ogden, Utah, with the greatest concentration of sales being in the greater Salt
Lake City area and in Valencia and Sacramento, California, Orlando, Florida and
Colorado Springs, Colorado. The typical loan size for residential loans ranges
from $40,000 to $150,000, and for commercial loans from $200,000 to $750,000.
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The Company's mortgage loan originations are through full time mortgage loan
officers and wholesale brokers who are paid a sales commission ranging between
.40% to 3.0% of the loan amount. Prospective customers are located through
contacts with builders, real estate agents, and door-to-door canvassing.
Recent Acquisitions and Other Business Activities
California Memorial Estates
In February 1995, California Memorial Estates, Inc., a duly organized Utah
corporation and wholly-owned subsidiary of the Company, entered into a Purchase
and Sale Agreement and Escrow Instructions with the Carter Family Trust and the
Leonard M. Smith Family Trust to purchase approximately 100 acres of real
property located in San Diego County, California (the "Property"). The Company
has developed the property by designating approximately 35 acres for a cemetery
known as Singing Hills Memorial Park. 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 six acres and is
currently selling cemetery lots on a pre-need and at-need basis on the developed
acreage.
Greer-Wilson Funeral Home
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 after the
issuance of such shares. The Company continues to operate Greer-Wilson, which is
located in Phoenix, Arizona, as a funeral home and mortuary.
Evergreen Memorial Park
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 has 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 ten years, beginning as of January 1,
1996.
Security National Life Insurance Company
In December 1995, Security National Life Insurance Company ("Security National
Life") was merged into Capital Investors Life Insurance Company ("Capital
Investors Life") with Capital Investors Life as the surviving corporation. As a
result of the merger, Capital Investors Life has licenses to transact business
in 29 states. In March 1996, the Company changed the name of the surviving
corporation from Capital Investors Life to Security National Life.
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Civil Service Employees Life Insurance Company
In December 1995, the Company, through its wholly-owned subsidiary, Capital
Investors Life, completed the purchase of all of the outstanding shares of
Common Stock of Civil Service Employees Life Insurance Company ("CSE Life"), a
California corporation, from Civil Service Employees Insurance Company, and
prior to the closing of the transaction, the sole stockholder of CSE Life. At
the time of the transaction, CSE Life was a California domiciled insurance
company with total assets of approximately $16.7 million. At the time of the
acquisition, CSE Life was licensed to transact business in seven states,
including the state of California.
Following the completion of the purchase of CSE Life, the Company merged CSE
Life into Capital Investors Life. The Company continues to operate Capital
Investors Life as the surviving insurance company, which changed its name to
Security National Life in March 1996.
Crystal Rose Funeral Home
In February 1997, the Company purchased all of the outstanding shares of common
stock of Crystal Rose Funeral Home, Inc. ("Crystal Rose"), an Arizona
corporation. In connection with this transaction, the Company also acquired
certain real estate and other assets related to the business of Crystal Rose
from the sole stockholder of Crystal Rose. The Company continues to operate
Crystal Rose, which is located in Tolleson, Arizona, as a funeral home and
mortuary.
SSLIC Holding Company
On December 17, 1998, the Company completed the acquisition of SSLIC Holding
Company, (formerly Consolidare Enterprises, Inc.), a Florida corporation ("SSLIC
Holding") pursuant to the terms of the Acquisition Agreement which the Company
entered into on April 17, 1998 with SSLIC Holding and certain shareholders of
SSLIC Holding for the purchase of all of the outstanding shares of common stock
of SSLIC Holding and all of the outstanding shares of stock of Insurandyne
Corp., a Florida Corporation ("Insuradyne"). As of December 31, 1999, SSLIC
Holding owns approximately 61.3% of the outstanding shares of common stock of
Southern Security Life Insurance Company, a Florida corporation ("Southern
Security"). Southern Security is a Florida domiciled insurance company with
total assets as of December 31, 1999, of approximately $77.2 million. Southern
Security is currently licensed to transact business in 14 states. Southern
Security is also a reporting company under Section 13 of the Securities Exchange
Act of 1934. Reference is made to Southern Security's annual report on Form 10-K
for the year ended December 31, 1999, which was filed with the Securities
Exchange Commission on March 30, 2000, Commission File No. 2-35669.
Menlo Life Insurance Company
On June 30, 1999 the Company entered into a Coinsurance and Assumption Agreement
(the "Agreement") with Menlo Life Insurance Company ("Menlo Life"), wherein the
Company has assumed 100% of the policies in force of Menlo Life. The Agreement
was not in effect until it was approved by Menlo Life's domiciled state of
Arizona and
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the state of California. These approvals were obtained on September 9, 1999 for
the Arizona Insurance Department, and on December 9, 1999 for the California
Insurance Department.
Regulation
The Company's insurance subsidiaries, Security National Life and Southern
Security, are subject to comprehensive regulation in the jurisdictions in which
it does business under statutes and regulations administered by state insurance
commissioners. Such regulation relates to, among other things, prior approval of
the acquisition of a controlling interest in an insurance company; standards of
solvency which must be met and maintained; licensing of insurers and their
agents; nature of and limitations on investments; deposits of securities for the
benefit of policyholders; approval of policy forms and premium rates; periodic
examinations of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of insurers or for other
purposes; and requirements regarding aggregate reserves for life policies and
annuity contracts, policy claims, unearned premiums, and other matters. The
Company's insurance subsidiaries are subject to this type of regulation in any
state in which they are licensed to do business. Such regulation could involve
additional costs, restrict operations or delay implementation of the Company's
business plans.
The Company is currently subject to regulation in Utah under insurance holding
company legislation, and other states where applicable. Intercorporate transfers
of assets and dividend payments from its insurance subsidiaries are subject to
prior notice of approval from the State Insurance Department, if they are deemed
"extraordinary" under these statutes. The insurance subsidiaries are required,
under state insurance laws, to file detailed annual reports with the supervisory
agencies in each of the states in which it does business. Their business and
accounts are also subject to examination by these agencies.
The Company's cemetery and mortuary subsidiaries are subject to the Federal
Trade Commission's comprehensive funeral industry rules and are subject to state
regulations in the various states where such operations are domiciled. The
morticians must be licensed by the respective state in which they provide their
services. Similarly, the mortuaries are governed by state statutes and city
ordinances in both Utah and Arizona. Reports are required to be kept on file on
a yearly basis which include financial information concerning the number of
spaces sold and, where applicable, funds provided to the Endowment Care Trust
Fund. Licenses are issued annually on the basis of such reports. The cemeteries
maintain city or county licenses where they conduct business.
The Company's mortgage loan subsidiary, Security National Mortgage, is subject
to the rules and regulations of the U.S. Department of Housing and Urban
Development. These regulations among other things specify the procedures for the
origination, the underwriting, the licensing of wholesale brokers, quality
review audits and the amounts that can be charged to borrowers for all FHA and
VA loans. Each year the Company must have an audit by an independent CPA firm to
verify compliance under these regulations. In addition to the government
regulations, the Company must meet loan requirements of various investors who
purchase the loans before the loans can be sold to the investors.
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Income Taxes
The Company's insurance subsidiaries, Security National Life and Southern
Security, are taxed under the Life Insurance Company Tax Act of 1984. Pursuant
thereto, life insurance companies are taxed at standard corporate rates on life
insurance company taxable income. Life insurance company taxable income is gross
income less general business deductions, reserves for future policyholder
benefits (with modifications), and a small life insurance company deduction (up
to 60% of life insurance company taxable income). The Company may be subject to
the corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a
result of the small life insurance company deduction. Also, under the Tax Reform
Act of 1986, distributions in excess of stockholder's surplus account or
significant decrease in life reserves will result in taxable income.
Security National Life and Southern Security may continue to receive the benefit
of the small life insurance company deduction. In order to qualify for the small
company deduction, the combined assets of the Company must be less than
$500,000,000 and the taxable income of the life insurance companies must be less
than $3,000,000. To the extent that the net income limitation is exceeded, then
the small life insurance company deduction is phased out over the next
$12,000,000 of life insurance company taxable income.
Since 1990, Security National Life and Southern Security have computed their
life insurance taxable income after establishing a provision representing a
portion of the costs of acquisition of such life insurance business. The effect
of the provision is that a certain percentage of the Company's premium income is
characterized as deferred expenses and recognized over a five to ten year
period.
The Company's non-life insurance company subsidiaries are taxed in general under
the regular corporate tax provisions. For taxable years beginning January 1,
1987, the Company may be subject to the Corporate Alternative Minimum Tax and
the proportionate disallowance rules for installment sales under the Tax Reform
Act of 1986.
Competition
The life insurance industry is highly competitive. There are approximately 2,000
legal reserve life insurance companies in business in the United States. These
insurance companies differentiate themselves through marketing techniques,
product features, price and customer service. The Company's insurance
subsidiaries compete with a large number of insurance companies, many of which
have greater financial resources, a longer business history, and a more
diversified line of insurance coverage than the Company. In addition, such
companies generally have a larger sales force. Further, many of the companies
with which the Company competes are mutual companies which may have a
competitive advantage because all profits accrue to policyholders. Because the
Company is small by industry standards and lacks broad diversification of risk,
it may be more vulnerable to losses than larger, better established companies.
The Company believes that its policies and rates for the markets it serves are
generally competitive.
The cemetery and mortuary industry is also highly competitive. In the Salt Lake
City, Phoenix and San Diego areas in which the Company competes, there are a
number of cemeteries and mortuaries which have longer business histories, more
established positions in the community and stronger financial positions than the
Company. In
11
<PAGE>
addition, some of the cemeteries with which the Company must compete for sales
are owned by municipalities and, as a result, can offer lower prices than can
the Company. The Company bears the cost of a pre-need sales program that is not
incurred by those competitors that do not have a pre-need sales force. The
Company believes that its products and prices are generally competitive with
those in the industry.
The mortgage loan industry is highly competitive with several mortgage companies
and banks in the same geographic area in which the Company is operating which
have longer business histories and more established positions in the community.
The refinancing market is particularly vulnerable to changes in interest rates.
Employees
As of December 31, 1999, the Company employed 206 full-time and 34 part-time
employees.
Item 2. Properties
The following table sets forth the location of the Company's office facilities
and certain other information relating to these properties.
Approximate
Owned Square
Location Function Leased Footage
-------- -------- ------ -------
5300 So. 360 West Corporate
Salt Lake City, UT Headquarters Owned(1) 33,000
1603 Thirteenth St. District
Lubbock, TX Sales Office Owned(2) 5,000
755 Rinehart Rd. Subsidiary
Lake Mary, FL Headquarters Owned(3) 27,000
(1) The Company leases an additional 6,400 square feet of the facility to
unrelated third parties for approximately $98,000 per year, under leases
which expire at various dates after 1999.
(2) The Company leases an additional 2,766 square feet of the facility to
unrelated third parties for approximately $15,000 per year, under leases
which expire at various dates after 1999.
(3) The Company leases an additional 5,747 square feet of the facility to
unrelated third parties for approximately $109,000 per year, under
leases which expire at various dates after 1999.
The Company believes the office facilities it occupies are in good operating
condition, are adequate for current operations and has no plan to build or
acquire additional office facilities. The Company believes its office facilities
are adequate for handling business in the foreseeable future.
12
<PAGE>
The following table summarizes the location and acreage of the six Company owned
cemeteries:
<TABLE>
<CAPTION>
Net Saleable Acreage
Acres
Sold as Total
Name of Date Developed Total Cemetery Available
Cemetery Location Acquired Acreage(1) Acreage(1) Spaces(2) Acreage(1)
- ------------ -------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Memorial Estates, Inc.:
Lakeview
Cemetery(3) 1700 E. Lakeview Dr.
Bountiful, UT 1973 6 40 7 33
Mountain View
Cemetery(3) 3115 E. 7800 So.
Salt Lake City, UT 1973 26 54 16 38
Redwood
Cemetery(3)(5) 6500 So. Redwood Rd.
West Jordan, UT 1973 40 78 34 44
Holladay Memorial
Park(4)(5) 4800 So. Memory Lane
Holladay, UT 1991 6 14 5 9
Lakehills
Cemetery(4) 10055 So. State
Sandy, UT 1991 12 44 6 38
Singing Hills
Memorial
Park(6) 2798 Dehesa Rd.
El Cajon, CA 1995 6 35 1 34
13
</TABLE>
<PAGE>
(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, 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.
(5) These cemeteries include two granite mausoleums.
(6) As of December 31, 1999, there was a mortgage of approximately
$727,800 collateralized by the property.
14
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the location, square footage and the number of
viewing rooms and chapels of the fourteen Company owned mortuaries:
Name of Date Viewing Square
Mortuary Location Acquired Room(s) Chapel(s) Footage
- ----------------- ------------ ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Memorial Mortuary 5850 South 900 East
Salt Lake City, UT 1973 3 1 20,000
Memorial Estates, Inc.:
Redwood Mortuary 6500 South Redwood Rd.
West Jordan, UT 1973 2 1 10,000
Mountain View
Mortuary 3115 East 7800 South
Salt Lake City, UT 1973 2 1 16,000
Lakeview
Mortuary 1700 East Lakeview Dr.
Bountiful, UT 1973 0 1 5,500
Paradise Chapel
Funeral Home 3934 East Indian
School Road
Phoenix, AZ 1989 2 1 9,800
Deseret Memorial, Inc.:
Colonial
Mortuary(2) 2128 South State St.
Salt Lake City, UT 1991 1 1 14,500
Deseret
Mortuary(2) 36 East 700 South
Salt Lake City, UT 1991 2 2 36,300
Lakehills
Mortuary 10055 South State St.
Sandy, UT 1991 2 1 18,000
Cottonwood
Mortuary(2) 4670 South Highland Dr.
Salt Lake City, UT 1991 2 1 14,500
Camelback Sunset
Funeral Home(1) 301 West Camelback Rd.
Phoenix, AZ 1994 2 1 11,000
15
</TABLE>
<PAGE>
Name of Date Viewing Square
Mortuary Location Acquired Room(s) Chapel(s) Footage
- ------------ -------- -------- ------- --------- -------
Greer-Wilson:
Greer-Wilson
Funeral Home 5921 West Thomas Road
Phoenix, AZ 1995 2 2 25,000
Tolleson
Funeral Home 9386 West VanBuren
Tolleson, AZ 1995 0 1 3,460
Avondale
Funeral Home 218 North Central
Avondale, AZ 1995 1 1 1,850
Crystal Rose
Funeral Home(3) 9155 W. VanBuren
Tolleson, AZ 1997 0 1 9,000
16
<PAGE>
(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.
Item 3. Legal Proceedings
Security National Mortgage Company ("Security National Mortgage"), a
wholly-owned subsidiary of the Company, has been notified that it may be subject
to an administrative action by the U.S. Department of Housing and Urban
Development ("HUD"). By way of letter from HUD to Security National Mortgage
dated February 15, 2000 and received on February 25, 2000, Security National
Mortgage was advised "that the Mortgage Review Board" of HUD "is considering an
administrative action against Security National Mortgage .... pursuant to 24 CFR
Part 25 ... and a civil money penalty pursuant to 24 CFR part 30 ....". In the
letter, HUD set forth alleged violations of HUD/Federal Housing Administration
("FHA") requirements which included among such violations: (1) failure to comply
with Security National Mortgage's own policy and procedures outlined in a July
17, 1997 letter to HUD; (2) acceptance of loans originated by personnel not
employed by or not exclusively employed by Security National Mortgage; (3)
acceptance of loans originated by non-HUD approved entities; (4) payment of fees
and compensation to unauthorized entities or individuals in connection with FHA
insured mortgages; and (5) certification of inaccurate HUD's.
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 is not a party to any other legal proceedings outside the ordinary
course of the Company's business or to any other legal proceedings which,
adversely determined, would have a material adverse effect on the Company or its
business.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's Class A Common Stock trades on the Nasdaq National Market under
the symbol "SNFCA." Prior to August 13, 1987, there was no active public market
for the Class A and Class C Common Stock. During recent years there has been
occasional trading of Class A and Class C Common Stock by brokerage firms in the
over-the-counter market. The following are the high and low sales prices for
Class A Common Stock as reported by Nasdaq:
Period (Calendar Year) Price Range
High Low
------ ------
1998
First Quarter................................3.97 3.57
Second Quarter...............................4.29 3.57
Third Quarter................................3.99 3.10
Fourth Quarter...............................3.27 2.92
1999
First Quarter................................3.57 2.62
Second Quarter...............................3.25 2.75
Third Quarter................................3.63 2.94
Fourth Quarter...............................3.63 3.00
2000
First Quarter................................4.50 2.88
The above sales prices have been adjusted for the effect of annual stock
dividends.
18
<PAGE>
The Class C Common Stock is not actively traded, although there are occasional
transactions in such stock by brokerage firms. (See Note 11 to the Consolidated
Financial Statements.)
The Company has never paid a cash dividend on its Class A or Class C Common
Stock. The Company currently anticipates that all of its earnings will be
retained for use in the operation and expansion of its business and does not
intend to pay any cash dividends on its Class A or Class C Common Stock in the
foreseeable future. Any future determination as to cash dividends will depend
upon the earnings and financial position of the Company and such other factors
as the Board of Directors may deem appropriate. A 5% stock dividend on Class A
and Class C Common Stock was paid in the years 1989 through 1999.
As of March 31, 2000, there were 4,720 record holders of Class A Common Stock
and 141 record holders of Class C Common Stock.
19
<PAGE>
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)
- ------------------------------------------------------------------------------
The following selected financial data for each of the five years in the period
ended December 31, 1999, are derived from the audited consolidated financial
statements. The data as of December 31, 1999 and 1998, and for the three years
ended December 31, 1999, should be read in conjunction with the consolidated
financial statements, related notes and other financial information included
herein.
Consolidated Statement of Earnings Data:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999(4) 1998 1997(2) 1996 1995(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Revenue
Premiums $13,176,000 $ 5,916,000 $ 6,141,000 $ 5,666,000 $ 5,796,000
Net investment income 10,631,000 7,459,000 7,140,000 7,517,000 6,680,000
Net mortuary and
cemetery income 10,178,000 9,226,000 9,231,000 8,138,000 8,238,000
Realized gains on
investments 313,000 74,000 253,000 290,000 333,000
Mortgage fee income 14,503,000 10,082,000 5,662,000 8,237,000 4,943,000
Other 856,000 63,000 48,000 75,000 71,000
------------ ----------- ----------- ----------- -----------
Total revenue 49,657,000 32,820,000 28,475,000 29,923,000 26,061,000
------------ ----------- ----------- ----------- -----------
Expenses
Policyholder benefits 11,976,000 6,932,000 6,669,000 $ 6,341,000 $ 6,111,000
Amortization of deferred
policy acquisition costs 4,858,000 1,274,000 1,132,000 1,240,000 1,150,000
General and admini-
strative expenses 26,959,000 19,649,000 15,361,000 17,292,000 13,019,000
Interest expense 1,119,000 999,000 948,000 1,318,000 1,208,000
Cost of goods & services
of the mortuaries
& cemeteries 3,295,000 2,940,000 2,696,000 2,355,000 2,314,000
----------- ----------- ----------- ----------- -----------
Total benefits & expenses 48,207,000 31,794,000 26,806,000 28,546,000 23,802,000
----------- ----------- ----------- ----------- -----------
Income before
income tax expense 1,450,000 1,026,000 1,669,000 1,377,000 2,259,000
Income tax expense (230,000) (255,000) (360,000) (139,000) (728,000)
Minority interest in
(income) loss of
subsidiary (244,000) -- -- -- 20,000
----------- ----------- ---------- ------------ -----------
Net earnings $ 976,000 $ 771,000 $1,309,000 $ 1,238,000 $ 1,551,000
=========== =========== ========== ============ ===========
Net earnings per
common share(3) $0.22 $0.18 $0.33 $0.33 $0.44
===== ===== ===== ===== =====
Weighted average out-
standing common shares 4,397,000 4,273,000 3,988,000 3,750,000 3,508,000
Net earnings per common
share-assuming dilution(3) $0.22 $0.18 $0.32 $0.32 $0.43
===== ===== ===== ===== =====
Weighted average out-
standing common shares-
assuming dilution 4,397,000 4,273,000 4,093,000 3,856,000 3,576,000
20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data:
Year Ended December 31,
-----------------------------------------------------
1999 1998(4) 1997(2) 1996 1995(1)
---- ---- ------ ---- ----
<S> <C> <C> <C> <C> <C>
Assets
- --------
Investments and
restricted assets $ 113,208,000 $126,332,000 $ 81,039,000 $ 78,638,000 $ 80,815,000
Cash 12,423,000 6,671,000 3,408,000 3,301,000 7,710,000
Receivables 38,074,000 28,309,000 15,224,000 17,070,000 24,177,000
Other assets 50,593,000 51,953,000 25,781,000 25,701,000 25,511,000
------------ ------------ ------------ ------------ ------------
Total assets $214,298,000 $213,265,000 $125,452,000 $124,710,000 $138,213,000
============ ============ ============ ============ ============
Liabilities
- -----------
Policyholder
benefits $140,368,000 137,466,000 $ 77,890,000 $ 76,962,000 $ 76,868,000
Notes & contracts
payable 23,341,000 22,887,000 9,981,000 12,490,000 27,129,000
Cemetery & mortuary
liabilities 6,638,000 6,917,000 6,116,000 5,946,000 6,078,000
Other liabilities 11,415,000 12,536,000 6,070,000 5,844,000 6,219,000
------------ ------------ ------------ ------------ ------------
Total liabilities 181,762,000 179,806,000 100,057,000 101,242,000 116,294,000
------------ ------------ ------------ ------------ ------------
Minority interest 6,046,000 6,779,000 -- -- --
Stockholders' equity 26,490,000 26,680,000 25,395,000 23,468,000 21,919,000
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $214,298,000 $213,265,000 $125,452,000 $124,710,000 $138,213,000
============ ============ ============ ============ ============
</TABLE>
(1) 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.
(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.
(4) Reflects the acquisition of SSLIC Holding Company and subsidiaries as
of December 17, 1998.
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------
Overview
The Company's operations over the last several 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 and
interest sensitive products; (ii) emphasis on cemetery and mortuary business;
and (iii) capitalizing on the strong economy in the western United States by
originating and refinancing mortgage loans.
On December 17, 1998, the Company purchased all of the outstanding shares of
common stock of SSLIC Holding Company ("SSLIC Holding") (formerly "Consolidare
Enterprises, Inc.") and Insuradyne Corporation ("Insuradyne") for a total cost
of $12,248,194. As of December 31, 1999, SSLIC Holding owns approximately 61.3%
of the outstanding shares of common stock of Southern Security Life Insurance
Company ("Southern Security").
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.
<TABLE>
<CAPTION>
Without
SSLIC Variance
SSLIC Holding Holding without
Southern Southern SSLIC Holding
Security Security Southern Security
Insuradyne Insuradyne Insuradyne
REVENUES: 1999 1998 1999 1999 Amount Percent
- --------- ---- ---- ------------ ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Insurance premiums
and other considerations $ 13,175,825 $ 5,915,659 $ 6,901,546 $ 6,274,279 $ 358,620 6.1%
Net investment income 10,631,302 7,458,743 2,938,745 7,692,557 233,814 3.1
Net mortuary and cemetery income 10,178,246 9,225,801 -- 10,178,246 952,445 10.3
Realized gains on investments
and other assets 313,013 74,121 -- 313,013 238,892 322.3
Mortgage fee income 14,503,388 10,082,330 -- 14,503,388 4,421,058 43.8
Other 855,604 62,949 715,128 140,476 77,527 123.2
----------- ------------ ---------- ----------- ----------- ------
Total Revenues 49,657,378 32,819,603 10,555,419 39,101,959 6,282,356 19.1
----------- ------------ ---------- ----------- ----------- ------
BENEFITS AND EXPENSES:
- ---------------------
Death benefits 4,780,063 2,432,822 1,917,134 2,862,929 430,107 17.7
Surrenders and other
policy benefits 1,494,863 1,145,812 88,208 1,406,655 260,843 22.8
Increase in future policy benefits 5,700,784 3,353,287 2,448,222 3,252,562 (100,725) (3.0)
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 4,857,662 1,273,394 3,592,217 1,265,445 (7,949) (0.6)
General and administrative
expenses:
Commissions 11,850,763 7,618,335 364,848 11,485,915 3,867,580 50.8
Salaries 7,409,298 5,358,743 1,063,533 6,345,765 987,022 18.4
Other 7,698,779 6,671,823 550,282 7,148,497 476,674 7.1
22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
- ----------------------------------------------------------------------------------------------
Overview
Without
SSLIC Variance
SSLIC Holding Holding without
Southern Southern SSLIC Holding
Security Security Southern Security
Insuradyne Insuradyne Insuradyne
REVENUES: 1999 1998 1999 1999 Amount Percent
- ---------- ---- ---- ------------ ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Interest expense 1,119,402 999,123 116,977 1,002,425 3,302 0.3
Cost of mortuaries and cemeteries
goods and services sold 3,294,983 2,940,220 -- 3,294,983 354,763 12.1
----------- --------- ------------ ----------- ----------- -----
Total benefits and expenses 48,206,597 31,793,559 10,141,421 38,065,176 6,271,617 19.7
----------- ------------ ------------ ----------- ----------- -----
Earnings before income taxes 1,450,781 1,026,044 413,998 1,036,783 10,739 1.0
Income tax expense (230,516) (254,815) (25,803) (204,713) 50,102 19.7
Minority interest in income
of subsidiary (244,370) -- (244,370) -- -- --
----------- ----------- ---------- ----------- ----------- ------
Net earnings $ 975,895 $ 771,229 $ 143,825 $ 832,070 $ 60,841 7.9%
=========== =========== ========== =========== =========== =======
23
</TABLE>
<PAGE>
Results of Operations
1999 Compared to 1998
Total revenues increased by $6,282,000, or 19.1%, from $32,820,000 for fiscal
year 1998 to $39,102,000 for fiscal year 1999. Insurance premiums and other
considerations increased by $359,000, net investment income increased by
$234,000, net mortuary and cemetery sales increased by $952,000, mortgage fee
income increased by $4,421,000, and realized gains on investments and other
assets increased by $239,000.
Insurance premiums and other considerations increased by $359,000, from
$5,915,000 in 1998 to $6,274,000 in 1999. This increase was primarily attributed
to additional new business.
Net investment income increased by $234,000, from $7,459,000 in 1998 to
$7,693,000 in 1999. This increase was primarily the result of the reinvestment
of the Company's bonds which matured or were called in 1999 into mortgage loans
having higher long-term rates.
Net mortuary and cemetery sales increased by $952,000, from $9,226,000 in 1998
to $10,178,000 in 1999. This increase was primarily from additional pre-need and
at-need sales.
Mortgage fee income increased by $4,421,000, from $10,082,000 in 1998 to
$14,503,000 in 1999. This increase was primarily attributable to more loan
originations made by the Company's mortgage subsidiary in 1999 due to the
expansion of business activities in new geographic markets.
Total benefits and expenses were $38,065,000 for 1999, which constituted 97% of
the Company's total revenues, as compared to $31,794,000, or 97% of the
Company's total revenues for 1998.
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.
General and administrative expenses increased by $5,331,000, from $19,649,000 in
1998 to $24,980,000 in 1999. Commission expenses increased by $3,868,000, from
$7,618,000 in 1998 to $11,486,000 in 1999. Salaries increased $987,000 from
$5,359,000 in 1998 to $6,346,000 in 1999. Other expenses increased $477,000,
from $6,671,000 in 1998 to $7,148,000 in 1999. These increases were primarily
the result of an increased number of loan originations made by the Company's
mortgage subsidiary in 1999.
Interest expense increased by $3,000, from $999,000 in 1998 to $1,002,000 in
1999. This increase was primarily due to more loan originations from the
Company's mortgage subsidiary being funded by third parties in 1999.
Cost of the mortuary and cemetery goods and services sold increased by $355,000,
from $2,940,000 in 1998 to $3,295,000 in 1999. This increase was primarily due
to the increase in pre-need and at-need sales.
24
<PAGE>
1998 Compared to 1997
Total revenues increased by $4,345,000, or 15.3%, from $28,475,000 for fiscal
year 1997 to $32,820,000 for fiscal year 1998. Net investment income increased
$319,000 and mortgage fee income increased $4,420,000. These increases were
offset by decreases in insurance premiums and other considerations of $225,000,
net mortuary and cemetery sales of $5,000 and realized gains on investments and
other assets of $179,000.
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.
Net investment income increased by $319,000, from $7,140,000 in 1997 to
$7,459,000 in 1998. This increase was primarily the result of the reinvestment
of the Company's bond portfolio in 1998 into higher long-term rates in mortgage
loans.
Net mortuary and cemetery sales decreased by $5,000, from $9,231,000 in 1997 to
$9,226,000 in 1998. The increase in cemetery sales (primarily trusted
merchandise sales) was offset by a decrease in mortuary revenues.
Mortgage fee income increased by $4,420,000, from $5,662,000 in 1997 to
$10,082,000 in 1998. This increase was primarily due to the increased number of
loan originations in the Company's primary market, the intermountain region,
compared to 1997.
Total benefits and expenses were $31,794,000 for 1998, which constituted 97% of
the Company's total revenues, as compared to $26,806,000, or 94% of the
Company's total revenues for 1997.
During 1998, there was a net increase of $263,000 in death benefits, surrender
and other policy benefits, and an increase in future policy benefits from
$6,669,000 in 1997 to $6,932,000 in 1998. This increase was primarily due to
additional interest credited on annuities and reserve increases on traditional
products. This increase was reasonable based on the underlying actuarial
assumptions.
Amortization of deferred policy acquisition costs and cost of insurance acquired
increased by $141,000, from $1,132,000 in 1997 to $1,274,000 in 1998. This
increase was reasonable based on the underlying actuarial assumptions.
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.
Cost of the mortuary and cemetery goods and services sold increased by $244,000
from $2,696,000 in 1997 to $2,940,000 in 1998. This increase was primarily due
to the increase in trusted merchandise sales.
25
<PAGE>
Liquidity and Capital Resources
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 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):
-200 bps -100 bps +100 bps +200 bps
-----------------------------------------
Change in
Market Value
(in thousands) $11,361 $5,389 $(5,122) $(9,783)
The Company has classified certain of its fixed income securities, including
high-yield securities, in its portfolio as available for sale, with the
remainder classified as held to maturity. However, in accordance with Company
policy, any such securities purchased in the future will be classified as held
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 short-term investment grade
securities before liquidating higher-yielding longer term securities.
26
<PAGE>
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.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $41,144,000 and $41,989,000 as of December 31, 1999 and 1998,
respectively. Stockholders' equity as a percent of total capitalization was 64%
as of December 31, 1999 and 1998.
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 February 1995, the Company purchased approximately 100 acres of real property
(the "Property") located in San Diego, California, approximately 35 acres of
which is being used for a cemetery. The purchase price of the property was
$1,062,000, $100,000 of which was paid in cash and the balance of $962,000,
together with interest thereon at the rate of 9% percent per annum, to be paid
in 12 monthly payments of $5,000, thereafter in equal monthly payments of
$10,000. However, interest did not accrue on any part of the principal balance
until February 3, 1996. A principal 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 six 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 in the amount of
$588,000.
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.
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.
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 $382,000,
which included a note to the former owner in the amount of $297,000.
On December 17, 1998, the Company completed the acquisition of Consolidare
Enterprises, Inc., a Florida corporation ("Consolidare") pursuant to the terms
of the Acquisition Agreement which the Company entered into on April 17, 1998
with Consolidare and certain shareholders of Consolidare for the purchase of all
of the
27
<PAGE>
outstanding shares of common stock of Consolidare. Consolidare owns
approximately 61.3% of the outstanding shares of common stock of Southern
Security Life Insurance Company, a Florida corporation ("SSLIC"), and all of the
outstanding shares of stock of Insuradyne Corp., a Florida corporation
("Insuradyne").
As consideration for the purchase of the shares of Consolidare, the Company paid
to the stockholders of Consolidare at closing an aggregate of $12,248,194. In
order to pay the purchase consideration, the Company obtained $6,250,000 from
bank financing, with the balance of $5,998,194 obtained from funds then
currently held by the Company. In addition to the purchase consideration, the
Company caused SSLIC to pay, on the closing date, $1,050,000 to George Pihakis,
the President and Chief Executive Officer of SSLIC prior to closing, as a lump
sum settlement of the executive compensation agreement between SSLIC and Mr.
Pihakis.
In connection with the acquisition of Consolidare, the Company entered into an
Administrative Services Agreement dated December 17, 1998 with SSLIC. Under the
terms of the agreement, the Company has agreed to provide SSLIC with certain
defined administrative and financial services, including accounting services,
financial reports and statements, actuarial, policyholder services,
underwriting, data processing, legal, building management, marketing advisory
services and investment services. In consideration for the services to be
provided by the Company, SSLIC shall pay the Company an administrative services
fee of $250,000 per month, provided, however, that such fee shall be reduced to
zero for so long as the capital and surplus of SSLIC is less than or equal to
$6,000,000, unless SSLIC and the Company otherwise agree in writing and such
agreement is approved by the Florida Department of Insurance.
The administrative services fee may be increased, beginning on January 1, 2001,
to reflect increases in the Consumer Price Index, over the index amount as of
January 1, 2000. The Administrative Services Agreement shall remain in effect
for an initial term expiring on December 16, 2003. The term of the agreement may
be automatically extended for additional one-year terms unless either the
Company or SSLIC shall deliver a written notice on or before September 30 of any
year stating to the other its desire not to extend the term of the agreement.
However, in no event can the agreement be terminated prior to December 16, 2003.
On June 30, 1999 the Company entered into a Coinsurance and Assumption Agreement
(the "Agreement") with Menlo Life Insurance Company ("Menlo Life"), wherein the
Company has assumed 100% of the policies in force of Menlo Life. The Agreement
was not in effect until it was approved by Menlo Life's domiciled state of
Arizona and the state of California. These approvals were obtained on September
9, 1999 for the Arizona Insurance Department, and on December 9, 1999 for the
California Insurance Department. Menlo Life will pay consideration to the
Company in the form of statutory admitted assets to equal the liabilities
assumed. The liabilities assumed at December 31, 1999 was approximately
$3,120,000. The consideration will be paid in the second quarter of 2000.
At December 31, 1999, $21,066,134 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.
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
28
<PAGE>
all derivatives in the statement of financial position at fair value. Changes in
derivative fair values will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and firm commitments
or, for forecasted transactions, deferred and recorded as a component of equity
until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will be
immediately recognized in earnings. The impact of SFAS 133 on the Company's
financial statements will depend on a variety of factors, including future
interpretive guidance from the FASB, the future level of forecasted and actual
foreign currency transactions, the extent of the Company's hedging activities,
the types of hedging instruments used and the effectiveness of such instruments.
However, the Company does not believe the effect of adopting SFAS 133 will be
material to its financial position.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL
SCHEDULES
Page No.
Financial Statements:
Report of Independent Auditors...........................................31
Consolidated Balance Sheets, December 31,
1999 and 1998............................................................33
Consolidated Statements of Earnings,
Years Ended December 31, 1999, 1998,
and 1997.................................................................35
Consolidated Statements of Stockholders'
Equity, Years Ended December 31, 1999, 1998
and 1997. ...............................................................36
Consolidated Statements of Cash Flow,
Years Ended December 31, 1999, 1998 and
1997 .................................................................37
Notes to Consolidated Financial
Statements...............................................................39
Financial Statement Schedules:
I. Summary of Investments -- Other than
Investments in Related Parties.........................................73
II. Condensed Financial Information of
Registrant.............................................................74
IV. Reinsurance............................................................80
V. Valuation and Qualifying Accounts......................................81
All other schedules to the consolidated financial statements required by Article
7 of Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors of
Security National Financial Corporation
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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
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.
TANNER + CO.
Salt Lake City, Utah
March 30, 2000
31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Security National Financial Corporation
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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1998
and 1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, 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.
ERNST & YOUNG LLP
Salt Lake City, Utah
March 22, 1999
32
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
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
============ ============
See accompanying notes to consolidated financial statements.
33
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
December 31,
------------
1999 1998
---- ----
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $ 138,501,316 $ 134,899,870
Unearned premium reserve 1,866,523 2,565,968
Line of credit for financing
of mortgage loans 8,687,023 7,577,248
Bank loans payable 10,768,098 11,909,980
Notes and contracts payable 3,885,684 3,399,272
Estimated future costs of pre-need sales 6,817,685 6,376,651
Accounts payable 804,133 1,321,559
Funds held under reinsurance treaties 1,475,512 1,419,357
Other liabilities and accrued expenses 3,219,166 4,327,889
Income taxes 5,736,860 6,008,537
----------- -----------
Total liabilities 181,762,000 179,806,331
Commitments and contingencies --
Minority interest 6,046,744 6,778,557
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
============ ==============
See accompanying notes to consolidated financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings
Year Ended December 31,
1999 1998 1997
---- ---- ----
Revenues:
- --------
<S> <C> <C> <C>
Insurance premiums and
other considerations $ 13,175,825 $ 5,915,659 $ 6,140,783
Net investment income 10,631,302 7,458,743 7,139,580
Net mortuary and cemetery sales 10,178,246 9,225,801 9,230,864
Realized gains on investments
and other assets 313,013 74,121 252,635
Mortgage fee income 14,503,388 10,082,330 5,661,867
Other 855,604 62,949 48,893
------------ ------------ -----------
Total revenue 49,657,378 32,819,603 28,474,622
Benefits and expenses:
- ---------------------
Death benefits 4,780,063 2,432,822 2,407,931
Surrenders and other policy benefits 1,494,863 1,145,812 1,286,511
Increase in future policy benefits 5,700,784 3,353,287 2,974,915
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 4,857,662 1,273,394 1,132,298
General and administrative expenses:
Commissions 11,850,763 7,618,335 4,882,880
Salaries 7,409,298 5,358,743 4,805,571
Other 7,698,779 6,671,823 5,671,664
Interest expense 1,119,402 999,123 947,629
Cost of goods and services sold
of the mortuaries and cemeteries 3,294,983 2,940,220 2,696,174
------------ ----------- -----------
Total benefits and expenses 48,206,597 31,793,559 26,805,573
------------ ----------- -----------
Earnings before income taxes 1,450,781 1,026,044 1,669,049
Income tax expense (230,516) (254,815) (360,108)
Minority income (244,370) -- --
------------ ----------- --------
Net earnings $ 975,895 $ 771,229 $ 1,308,941
============ =========== ===========
Net earnings per common share $0.22 $0.18 $0.33
===== ===== =====
Weighted average outstanding
common shares 4,397,141 4,272,516 3,988,034
Net earnings per common share-
assuming dilution $0.22 $0.18 $0.32
===== ===== =====
Weighted average outstanding
common shares assuming-dilution 4,397,141 4,272,516 4,092,691
See accompanying notes to consolidated financial statements.
35
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Accumulated
Additional Other
Class Class Paid-in Comprehensive Retained Treasury
A C Capital Income Earnings Stock Total
-------- ------- --------- ------ -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 8,221,418 993,413 8,675,386 259,915 7,118,528 (1,800,632) 23,468,028
Comprehensive income:
Net earnings 1,308,941 1,308,941
Unrealized gain on securities 571,024 571,024
-----------
Total comprehensive income 1,879,965
-----------
Stock dividends 412,712 49,531 431,967 (894,210) --
Conversion Class C
to Class A 2,718 (2,718) --
Stock issued 16,328 (64) 26,101 43,520 85,885
Purchase of treasury stock (38,948) (38,948)
----------- ----------- ------------ ----------- ---------- ----------- ----------
Balance at
December 31, 1997 8,653,176 1,040,162 9,133,454 830,939 7,533,259 (1,796,060) 25,394,930
Comprehensive income:
Net earnings 771,229 771,229
Unrealized gain on securities 250,174 250,174
-----------
Total comprehensive income 1,021,403
-----------
Stock dividends 439,784 51,875 338,046 (829,705) --
Conversion Class C
to Class A 2,672 (2,672) --
Stock issued 139,028 (46) 124,944 263,926
----------- ----------- ------------ ----------- ---------- ----------- -----------
Balance at
December 31, 1998 $ 9,234,660 $ 1,089,319 $ 9,596,444 $ 1,081,113 $7,474,783 $(1,796,060) $26,680,259
Comprehensive income:
Net earnings 975,895 975,895
Unrealized gain on securities (415,422) (415,422)
-----------
Total comprehensive income 560,473
-----------
Stock dividends 463,344 52,910 419,456 (935,710) --
Conversion Class C
to Class A 31,160 (31,159) (1) --
Stock issued (cancelled) (1,702) 43 1,672 13
Purchase of treasury stock (751,052) (751,052)
----------- ----------- ------------ ----------- ---------- ----------- ----------
Balance at
December 31, 1999 $ 9,727,462 $ 1,111,070 $ 10,015,942 $ 665,691 $7,516,640 $(2,547,112)$26,489,693
=========== =========== ============ =========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 975,895 $ 771,229 $1,308,941
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Realized gains on investments
and other assets (313,013) (74,121) (252,635)
Depreciation 1,187,426 917,166 815,977
Provision for losses on accounts
and loans receivable 150,981 175,750 129,502
Amortization of goodwill, premiums,
and discounts 263,572 90,622 106,783
Provision for deferred income taxes 228,464 339,763 159,935
Policy acquisition costs deferred (3,886,279) (1,310,170) (909,943)
Policy acquisition costs amortized 3,992,522 976,482 753,662
Cost of insurance acquired amortized 865,140 296,912 378,636
Change in assets and liabilities net of
effects from purchases and disposals of
subsidiaries:
Land and improvements held for sale (116,962) 61,161 (10,584)
Future life and other benefits 5,012,923 3,349,196 2,879,911
Receivables for mortgage loans sold (7,890,885) (5,841,576) 2,056,691
Other operating assets and liabilities (959,832) 836,210 (333,984)
------------ ----------- ------------
Net cash provided by (used in)
operating activities (490,048) 588,624 7,082,892
Cash flows from investing activities: Securities held to maturity:
Purchase - fixed maturity securities (1,207,177) (524,562) (9,254,030)
Calls and maturities - fixed
maturity securities 6,658,968 10,482,673 7,561,598
Securities available for sale:
Purchases - equity securities (507,404) (22,183) (309,547)
Sales - equity securities 2,906,278 114,608 465,935
Purchases of short-term investments (9,131,204) (11,453,095) (5,008,706)
Sales of short-term investments 19,384,434 11,102,460 3,568,048
Purchases of restricted assets (119,479) (15,820) (329,379)
Mortgage, policy, and other loans made (10,891,562) (6,974,351) (1,337,456)
Payments received for mortgage,
policy, and other loans 4,770,423 2,811,841 3,066,889
Purchases of property, plant, and equipment (767,383) (2,040,023) (351,091)
Disposal of property and equipment 190,000 -- --
Purchases of real estate (421,230) (755,581) (97,013)
Sale of real estate 334,500 -- --
Purchases of subsidiaries
net of cash acquired -- (11,764,823) (60,602)
------------ ------------ -----------
Net cash (used in) provided by
investing activities 11,199,164 (9,038,856) (2,085,354)
37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flow (Continued)
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Cash flows from financing activities:
<S> <C> <C> <C>
Annuity receipts 10,522,726 2,770,045 2,521,025
Annuity withdrawals (15,183,240) (3,962,579) (4,472,918)
Repayment of bank loans and
notes and contracts payable (1,545,957) (918,065) (1,965,706)
Proceeds from borrowings on bank
loans and notes and contracts
payable 890,500 6,246,400 233,000
Sale of treasury stock -- -- 44,994
Purchase of treasury stock (751,052) -- (38,948)
Net change in line of credit
for financing of mortgage loans 1,109,775 7,577,248 (1,211,890)
------------ ------------ -----------
Net cash (used in) provided by
financing activities (4,957,248) 11,713,049 (4,890,443)
------------ ------------ -----------
Net change in cash 5,751,868 3,262,817 107,095
Cash at beginning of year 6,670,996 3,408,179 3,301,084
------------ ----------- -----------
Cash at end of year $ 12,422,864 $ 6,670,996 $ 3,408,179
============ =========== ===========
See accompanying notes to the financial statements.
38
</TABLE>
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles
General Overview of Business
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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which, for the life
insurance subsidiaries, differ from statutory accounting principles prescribed
or permitted by regulatory authorities.
Risks
The following is a description of the most significant risks facing the Company
and how it mitigates those risks:
Legal/Regulatory Risk - the risk that changes in the legal or regulatory
environment in which the Company operates will create additional expenses and/or
risks not anticipated by the Company in developing and pricing its products.
That is, regulatory initiatives designed to reduce insurer profits, new legal
theories or insurance company insolvencies through guaranty fund assessments may
create costs for the insurer beyond those recorded in the consolidated financial
statements. In addition, changes in tax law with respect to mortgage interest
deductions or other public policy or legislative changes may affect the
Company's mortgage sales. Also, the Company may be subject to further
regulations in the cemetery/mortuary business. The Company mitigates this risk
by offering a wide range of products and by diversifying its operations, thus
reducing its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the adverse impact
of such risk.
Credit Risk - the risk that issuers of securities owned by the Company or
mortgagors of 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.
39
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles (Continued)
---------------------------------
Interest Rate Risk - the risk that interest rates will change which may cause a
decrease in the value of the Company's investments or impair the ability of the
Company to market its mortgage and cemetery/mortuary products. This change in
rates may cause certain interest-sensitive products to become uncompetitive or
may cause disintermediation. The Company mitigates this risk by charging fees
for non-conformance with certain policy provisions, by offering products that
transfer this risk to the purchaser, and/or by attempting to match the maturity
schedule of its assets with the expected payouts of its liabilities. To the
extent that liabilities come due more quickly than assets mature, the Company
might have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
Mortality/Morbidity Risk - the risk that the Company's actuarial assumptions may
differ from actual mortality/morbidity experience may cause the Company's
products to be underpriced, may cause the Company to liquidate insurance or
other claims earlier than anticipated and other potentially adverse consequences
to the business. The Company minimizes this risk through sound underwriting
practices, asset/liability duration matching, and sound actuarial practices.
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.
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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company. The Company's subsidiaries at December 31, 1999, are
as follows:
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
40
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles (Continued)
---------------------------------
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%)
All significant intercompany transactions and accounts have been eliminated in
consolidation.
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.
Investments
Investments are shown on the following basis:
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, significant changes in
tax laws, and changes in regulatory capital requirements or permissible
investments.
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.
Mortgage loans on real estate - at unpaid principal balances, adjusted for
amortization of premium or accretion of discount, less allowance for possible
losses.
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 impairment in value, if any.
41
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles (Continued)
---------------------------------
Policy, student, and other loans - at the aggregate unpaid balances.
Short-term investments - consists of certificates of deposit and commercial
paper with maturities of up to one year.
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.
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.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Property, Plant and Equipment
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. Leasehold improvements are
amortized over the lesser of the useful life or remaining lease terms.
Recognition of Insurance Premiums and Other Considerations
Premiums for traditional life insurance products (which include those products
with fixed and guaranteed premiums and benefits and consist principally of whole
life insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies) are recognized as revenues when due from
policyholders. Revenues for interest-sensitive insurance policies (which include
universal life policies, interest-sensitive life policies, deferred annuities,
and annuities without life contingencies) consist of policy charges for the cost
of insurance, policy administration charges, and surrender charges assessed
against policyholder account balances during the period.
Deferred Policy Acquisition Costs and Cost of Insurance
Acquired
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 insurance business have been deferred. Deferred policy acquisition costs for
traditional life insurance are amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For interest-sensitive insurance products, deferred
policy acquisition costs are amortized
42
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles (Continued)
---------------------------------
generally in proportion to the present value of expected gross profits from
surrender charges, investment, mortality and expense margins. This amortization
is adjusted when estimates of current or future gross profits to be realized
from a group of products are reevaluated. Deferred acquisition costs are written
off when policies lapse or are surrendered.
Cost of insurance acquired is the present value of estimated future profits of
the acquired business and is amortized similar to deferred policy acquisition
costs.
Future Life, Annuity and Other Policy Benefits
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 10.0% in 1999, 1998, and 1997.
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 1999, 1998 and
1997.
Participating Insurance
Participating business constitutes 2%, 1%, and 8% of insurance in force for
1999, 1998 and 1997, 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.
Reinsurance
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.
43
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles (Continued)
---------------------------------
The Company has entered into coinsurance agreements with unaffiliated insurance
companies under which the Company assumed 100% of the risk for certain life
insurance policies and certain other policy-related liabilities of the insurance
company.
Reinsurance premiums, commissions, expense reimbursements, and reserves related
to reinsured business are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Expense allowances received in connection with reinsurance ceded are
accounted for as a reduction of the related policy acquisition costs and are
deferred and amortized accordingly.
Cemetery and Mortuary Operations
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.
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 is required to place specified amounts into restricted asset
accounts for products sold on a pre-need basis. Income from assets placed in
these restricted asset accounts are used to offset required increases to the
estimated future liability.
Revenues and costs for at-need sales are recorded when the services are
performed.
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
44
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles (Continued)
---------------------------------
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 Operations
Mortgage fee income is generated through the origination and refinancing of
mortgage loans and is deferred until such loans are sold.
Excess of Cost Over Net Assets of Acquired Businesses
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 $1,029,528 and $919,951 at December 31, 1999 and 1998,
respectively.
Income Taxes
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, and unrealized gains on
fixed maturity and equity securities available for sale.
Earnings Per Common Share
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 earnings per share is 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.
45
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles (Continued)
---------------------------------
Stock Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation".
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 has one fixed option plan (the "1993 Plan"). In accordance with APB
Opinion No. 25, no compensation cost has been recognized for the 1993 plan. Had
compensation cost for the 1993 plan been determined based upon the fair value at
the grant date consistent with the methodology prescribed under SFAS No. 123,
the Company's net income would have been reduced by approximately $9,000,
$110,000, and $10,000 in 1999, 1998, and 1997, respectively. As a result, basic
and diluted earnings per share would have been reduced by $0, $0.03, and $0 in
1999, 1998, and 1997, respectively.
The weighted average fair value of options granted in 1999 under the 1993 Plan
is estimated at $0.04 as of the grant date using the Black Scholes Option
Pricing Model with the following assumptions: dividend yield of 5%, volatility
of 28.83%, risk-free interest rate of 8.25%, and an expected life of ten years.
The weighted average 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 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. Options granted under the 1987 Plan are exercisable for
a period of ten years from the date of grant.
Pending Accounting Change
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 all derivatives in the statement of
financial position at fair value. Changes in derivative fair values will either
be recognized in earnings as offsets to the changes in fair value of related
hedged assets, liabilities and firm commitments or, for forecasted transactions,
deferred and recorded as a
46
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
1) Significant Accounting Principles (Continued)
---------------------------------
component of equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. The impact of SFAS 133 on the
Company's financial statements will depend on a variety of factors, including
future interpretive guidance from the FASB, the future level of forecasted and
actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments. However, the Company does not believe the effect of adopting SFAS
133 will be material to its financial position.
Reclassifications
Certain amounts in prior years have been reclassified to conform with the 1999
presentation.
47
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
2) Investments
The Company's investments in fixed maturity securities held to maturity and
equity securities available for sale are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- -------
December 31, 1999:
Fixed maturity securities held to maturity:
<S> <C> <C> <C> <C>
Bonds:
U.S. Treasury securities
and obligations of U.S.
Government agencies $12,822,025 $ 90,415 $ (225,797) $12,686,643
Obligations of states and
political subdivisions 176,499 6,345 (15,728) 167,116
Corporate securities
including public utilities 20,594,306 594,303 (428,752) 20,759,857
Mortgage-backed securities 6,009,010 14,095 (223,291) 5,799,814
Redeemable preferred stock 28,011 19,011 (7,000) 40,022
----------- ----------- ---------- -----------
Total fixed maturity securities
held to maturity $39,629,851 $ 724,169 $ (900,568) $39,453,452
=========== =========== ========== ===========
Securities available
for sale:
Bonds
U.S. Treasury securities
and obligations of U.S.
Government agencies $ 4,596,294 $ 4,599 $ (21,561) $ 4,579,332
Corporate securities
including public utilities 20,270,712 -- (820,966) 19,449,746
Mortgage-backed securities 90,341 -- (229) 90,112
Nonredeemable preferred stock 70,431 43,163 (7,144) 106,450
Common stock 4,279,708 2,248,436 (889,381) 5,638,763
----------- ---------- ----------- -----------
Total securities
available for sale $29,307,486 $2,296,198 $(1,739,281) $29,864,403
=========== ========== =========== ===========
Restricted equity
securities (note 7) $ 172,391 $ 234,872 $ (968) $ 406,295
=========== ========== =========== ===========
48
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- -------
December 31, 1998:
Fixed maturity securities held to maturity:
Bonds
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
Government agencies $14,548,493 $ 483,831 $ (117) $15,032,207
Obligations of states and
political subdivisions 169,941 15,047 (5,938) 179,050
Corporate securities
including public utilities 22,764,172 1,410,810 (34,627) 24,140,355
Mortgage-backed securities 7,439,713 -- -- 7,439,713
Redeemable preferred stock 62,563 51,874 (7,943) 106,494
----------- ---------- --------- -----------
Total $44,984,882 $1,961,562 $ (48,625) $46,897,819
=========== ========== ========= ===========
Securities available for sale
Bonds
U.S. Treasury securities
and obligations of U.S.
Government agencies (1) $ 5,309,323 $ -- $ -- $ 5,309,323
Corporate securities
including public
utilities(1) 23,366,117 -- -- 23,366,117
Nonredeemable preferred
stock 76,431 75,675 (3,231) 148,875
Common stock 3,958,820 1,581,457 (543,093) 4,997,184
----------- ---------- ---------- -----------
Total $32,710,691 $1,657,132 $ (546,324) $33,821,499
=========== ========== ========== ===========
Restricted equity
securities (note 7) $ 172,391 $ 203,619 $ (10,348) $ 365,662
=========== ========== ========== ===========
(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.
49
</TABLE>
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
2) Investments (Continued)
-----------
The fair values for fixed maturity securities are based on quoted market prices,
when available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services, or in the
case of private placements, are estimated by discounting expected future cash
flows using a current market value applicable to the coupon rate, credit and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.
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.
Estimated
Amortized Fair
Held to Maturity: Cost Value
---------- -------
Due in 2000 $ 5,456,257 $ 5,408,398
Due in 2001 through 2004 19,474,680 19,763,420
Due in 2005 through 2009 8,223,804 7,974,416
Due after 2009 438,089 467,382
Mortgage-backed securities 6,009,010 5,799,815
Redeemable preferred stock 28,011 40,021
----------- -----------
$39,629,851 $39,453,452
Estimated
Amortized Fair
Available for Sale: Cost Value
---------- -------
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
The Company's realized gains and losses in investments are summarized as
follows:
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)
Other assets 212,923 (5,265) --
--------- -------- ---------
Total $ 313,013 $ 74,121 $ 252,635
========= ======== =========
50
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
2) Investments (Continued)
-----------
Generally gains and losses from held to maturity securities are a result of
early calls and related amortization of premiums or discounts.
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 83% of its mortgage loans in the
state of Utah.
Investments, aggregated by issuer, in excess of 10% of shareholders' equity
(before net unrealized gains and losses on available for sale securities) at
December 31, 1999, other than investments issued or guaranteed by the United
States Government, are as follows:
Carrying Amount
Dean Witter Discover $4,065,311
Philip Morris, Inc. 5,459,717
Major categories of net investment income are as follows:
1999 1998 1997
---- ---- ----
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
============ =========== ===========
Net investment income includes net investment income earned by the restricted
assets of the cemeteries and mortuaries of approximately $733,000, $683,000 and
$609,000 for 1999, 1998, and 1997, respectively.
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
$9,632,937 at December 31, 1999 and $9,924,315 at December 31, 1998.
51
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
3) Cost of Insurance Acquired
Information with regard to cost of insurance acquired is as follows:
1999 1998 1997
---- ---- ----
Balance at
beginning of year $ 10,462,446 $ 3,370,018 $ 3,748,654
Cost of insurance
acquired -- 7,389,340 --
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
============ ============ ===========
Presuming no additional acquisitions, net amortization charged to income is
expected to approximate $860,000, $824,000, $759,000, $702,000, and $649,000 for
the years 2000 through 2004. Actual amortization may vary based on changes in
assumptions or experience.
4) Property, Plant and Equipment
The cost of property, plant and equipment is summarized below:
December 31,
------------
1999 1998
---- ----
Land and Buildings $ 10,171,943 $ 9,983,828
Furniture and equipment 6,384,208 6,011,048
------------ ------------
16,556,151 15,994,876
Less accumulated
depreciation (5,989,643) (5,312,791)
------------ ------------
Total $ 10,566,508 $ 10,682,085
============ ============
5) Bank Loans Payable and Lines of Credit
Bank loans payable are summarized as follows:
December 31,
------------
1999 1998
---- ----
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
10% note payable in monthly installments
of $8,444 including principal and
interest, collateralized by real property,
which book value is approximately
$1,079,000, due January 2013. 740,202 766,186
52
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
5) Bank Loans Payable and Lines of Credit (Continued)
--------------------------------------
December 31,
------------
1999 1998
---- ----
One year treasury constant
maturity plus 2.75% (8.59% at
December 31, 1999) note payable in
monthly installments of $6,000,
including principal and interest,
collateralized by real property,
which book value is approximately
$414,000, due October 2002. 182,089 239,134
Bank prime rate less 1.35%
(7.15% at December 31, 1999)
note payable in monthly
installments of $20,836,
including principal and interest,
collateralized by real property,
which book value in approximately
$1,077,000, due November 2007. 1,703,915 1,755,736
$5,863,000 revolving line of credit
at bank prime rate less 1%, (7.5% at
December 31, 1999) interest only to
December 1999 thereafter interest
and principal, collateralized by 15,000
shares of Security National Life Insurance
Company stock, due December 2005. 5,610,111 6,246,400
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
Bank prime rate less 1.35%
(7.15% at December 31, 1999) note payable
in monthly installments of $2,736 including
principal and interest, collateralized
by 15,000 shares of Security National Life
Insurance Company stock, due December 2005. 199,461 216,117
53
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
5) Bank Loans Payable and Lines of Credit (Continued)
--------------------------------------
December 31,
------------
1999 1998
---- ----
Other collateralized
bank loans payable 264,175 299,393
----------- ----------
Total bank loans 10,768,098 11,909,980
Less current installments 1,143,823 3,181,330
----------- ----------
Bank loans, excluding
current installments $ 9,624,275 $8,728,650
=========== ==========
$15 million revolving line of credit
at LIBOR plus 1.50% (7.32% at
December 31, 1999), payable within
30 days collateralized by receivable
rom mortgage loans sold to
investors .$ 8,687,023 $7,577,248
=========== ==========
In addition to the lines of credit described above, the Company has line of
credit agreements with banks for $2,000,000 and $5,000,000, of which none were
outstanding at December 31, 1999 or 1998. The lines of credit are for general
operating purposes. The $2,000,000 line of credit bears interest at the bank's
prime rate and must be repaid every 30 days. The $5,000,000 line of credit bears
interest at a variable rate with interest payable monthly and is collateralized
by student loans equaling 115% of the unpaid principal balance.
See Note 6 for summary of maturities in subsequent years.
6) Notes and Contracts Payable
Notes and contracts payable are summarized as follows:
December 31,
------------
1999 1998
---- ----
Due to former stockholders
of Deseret Memorial, Inc.
resulting from the acquisition of
such entity. Amount represents
the present value discounted at
8% of monthly annuity payments
ranging from $4,600 to $5,000
plus an index adjustment in the
7th through the 12th years,
due September 2011. $ 646,294 $ 667,829
54
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
6) Notes and Contracts Payable (Continued)
---------------------------
December 31,
------------
1999 1998
---- ----
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 Civil Service Employees Life
Insurance Company resulting from
the acquisition of such entity.
7% note payable in seven annual
installments with principal payments
of $151,857, due December 2003. 455,571 607,429
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
Due to Memorial Estates Endowment
Care Trust Fund for the remodel of the
Cottonwood Funeral Home. 6% note
payable in monthly installments of $5,339
including principal and interest
collateralized by the Funeral Home, which
book value is approximately $1,348,000
due March 2030 890,500 --
Other notes payable 643,366 729,365
---------- ----------
Total notes and
contracts payable 3,885,684 3,399,272
Less current
installments 414,421 416,679
---------- ----------
Notes and contracts,
excluding current
installments $3,471,263 $2,982,593
========== ==========
55
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
The following tabulation shows the combined maturities of bank loans payable,
lines of credit and notes and contracts payable:
2000 $10,245,267
2001 1,920,260
2002 2,008,230
2003 1,898,830
2004 2,030,122
Thereafter 5,238,096
-----------
Total $23,340,805
===========
Interest paid approximated interest expense in 1999, 1998 and 1997.
7) Cemetery and Mortuary Endowment Care and Pre-need
Merchandise Funds
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. As of December 31, 1999 the Company had transferred $179,939 in
excess of the required contribution to the fund. As of December 31, 1998, the
Company had recorded a liability to the fund of $540,504.
The Company has established and maintains certain restricted asset accounts to
provide for future merchandise obligations incurred in connection with its
pre-need sales. Such amounts are reported as restricted assets of cemeteries and
mortuaries in the accompanying balance sheet.
Assets in the restricted asset account are summarized as follows:
December 31,
------------
1999 1998
---- ----
Cash and cash equivalents $ 2,361,597 $ 2,243,808
Mutual funds 132,945 132,945
Fixed maturity securities 295,771 294,210
Equity securities 77,778 71,054
Participation in mortgage
loans with Security
National Life 1,357,200 1,323,164
Time certificate of deposit 33,696 33,696
----------- -----------
Total $ 4,258,987 $ 4,098,877
=========== ===========
56
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
8) Income Taxes
The Company's income tax liability at December 31 is summarized as follows:
December 31,
------------
1999 1998
---- ----
Current $ 142,002 $ 141,352
Deferred 5,594,858 5,867,185
---------- ----------
Total $5,736,860 $6,008,537
========== ==========
Significant components of the Company's deferred tax assets and liabilities at
December 31 are approximately as follows:
1999 1998
---- ----
Assets
- ------
Future policy benefits $(1,740,203) $(2,138,384)
Unearned premium (1,950,587) (965,574)
Difference between book
and tax basis of bonds (56,489) (46,885)
AMT credits -- (11,658)
Net operating loss
carryforwards expiring
in the years
2001 through 2010 (219,249) (213,409)
Other (329,361) (126,125)
----------- -----------
Total deferred
tax assets $(4,295,889) $(3,502,035)
Liabilities
-----------
Deferred policy
acquisition costs $ 4,485,047 $ 2,186,241
Cost of insurance acquired 1,884,547 3,198,551
Installment sales 1,323,994 351,080
Depreciation 660,369 758,149
Trusts 821,165 899,415
Tax on unrealized
appreciation (9,299) 541,901
Other 724,924 1,433,883
----------- -----------
Total deferred
tax liabilities 9,890,747 9,369,220
----------- -----------
Net deferred tax liability $ 5,594,858 $ 5,867,185
=========== ===========
The Company paid no income taxes in 1999, 1998 and 1997. The Company's income
tax expense (benefit) is summarized as follows:
1999 1998 1997
---- ---- ----
Current $ 2,052 $ (84,948) $200,173
Deferred 228,464 339,763 159,935
-------- --------- --------
Total $230,516 $ 254,815 $360,108
======== ========= ========
57
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
8) Income Taxes (Continued)
------------
The reconciliation of income tax expense at the U.S.
federal statutory rates is as follows:
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 insurance companies have remaining loss carry forwards for tax purposes of
approximately $1,600,000, approximately $286,000 of which is subject to an
annual limitation of approximately $300,000.
9) Reinsurance, Commitments and Contingencies
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.
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 $1,475,512 and policyholders'
account balances on deposit with reinsurer of $7,806,866 represent the 18% share
of policy loans and policyholder account balances ceded to MEGA as of December
31, 1999.
58
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
9) Reinsurance, Commitments and Contingencies (Continued)
------------------------------------------
Mortgage loans originated and sold to unaffiliated investors are sold subject to
certain recourse provisions.
Security National Mortgage Company ("Security National Mortgage"), a
wholly-owned subsidiary of the Company, has been notified that it may be subject
to an administrative action by the U.S. Department of Housing and Urban
Development ("HUD"). By way of letter from HUD to Security National Mortgage
dated February 15, 2000 and received on February 25, 2000, Security National
Mortgage was advised "that the Mortgage Review Board" of HUD "is considering an
administrative action against Security National Mortgage .... pursuant to 24 CFR
Part 25 ... and a civil money penalty pursuant to 24 CFR part 30 ....". In the
letter, HUD set forth alleged violations of HUD/Federal Housing Administration
("FHA") requirements which included among such violations: (1) failure to comply
with Security National Mortgage's own policy and procedures outlined in a July
17, 1997 letter to HUD; (2) acceptance of loans originated by personnel not
employed by or not exclusively employed by Security National Mortgage; (3)
acceptance of loans originated by non-HUD approved entities; (4) payment of fees
and compensation to unauthorized entities or individuals in connection with FHA
insured mortgages; and (5) certification of inaccurate HUD's.
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 is also a defendant in various other legal actions arising from the
normal conduct of business. Management believes that none of the actions will
have a material effect on the Company's financial position or results of
operations.
59
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
10) Retirement Plans
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.
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 1/2% 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. The
Company's matching 401(k) contributions for 1999, 1998, and 1997 were
approximately $3,858, $7,000, and $-0-, respectively. Also, the Company may
contribute at the discretion of the Company's Board of Directors an Employer
Profit Sharing Contribution to the 401-K savings plan. The Employer Profit
Sharing Contribution shall be divided among three different classes of
participants in the plan based upon the participant's title in the Company. In
1999 the Company contributed $130,958 to the Plan. There were no contributions
made in 1998 or 1997. All amounts contributed to the plan are deposited into a
trust fund administered by an independent trustee.
60
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
11) Capital Stock
The following table summarizes the activity in shares of capital stock for the
three year period ended December 31, 1999:
Class A Class C
---------- -----------
Balance at December
31, 1996 4,110,709 4,967,072
Stock Dividends 206,344 247,329
Conversion of Class C
to Class A 1,359 (13,590)
Stock Issued 8,176 --
---------- ----------
Balance at December
31, 1997 4,326,588 5,200,811
Stock Dividends 219,892 259,374
Conversion of Class C
to Class A 1,336 (13,352)
Stock Issued (cancelled) 69,514 (238)
---------- ----------
Balance at December
31, 1998 4,617,330 5,446,595
Stock Dividends 231,672 264,550
Conversion of Class C
to Class A 15,580 (155,795)
Stock Issued (cancelled) (851) --
---------- ----------
Balance at December
31, 1999 4,863,731 5,555,350
========== ==========
The Company has two classes of common stock with shares outstanding, Class A and
Class C. Class C shares vote share for share with the Class A shares on all
matters except election of one-third of the directors who are elected solely by
the Class A shares, but generally are entitled to a lower dividend participation
rate. Class C shares are convertible into Class A shares at any time on a ten to
one ratio. Also Class A shares can be converted into Class C shares, but the
conversion rights have numerous restrictions.
Stockholders of both classes of common stock have received 5% stock dividends in
the years 1989 through 1999, 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.
61
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
11) Capital Stock (Continued)
-------------
In accordance with SFAS 128, the basic and diluted earnings per share amounts
were calculated as follows:
1999 1998 1997
---- ---- ----
Numerator:
Net income $ 975,895 $ 771,229 $1,308,941
========= ============ ==========
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
--------- ------------ ----------
Dilutive potential
common shares -- -- 104,657
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
========= ============ ==========
There are no dilutive effects on net income for purpose of this calculation.
12) Deferred Compensation Plans
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 1987 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 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).
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
62
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
12) Deferred Compensation Plans (Continued)
---------------------------
hereunder shall be increased proportionately with no increase in the total
purchase price of the shares then covered, and the number of shares of Class A
Common Stock reserved for the purpose of the 1987 Plan shall be increased by the
same proportion. In the event that the shares of Class A Common Stock of the
Company from time to time issued and outstanding are reduced by a combination of
shares, the number of shares of Class A Common Stock then covered by each
outstanding option granted hereunder shall be reduced proportionately with no
reduction in the total price of the shares then so covered, and the number of
shares of Class A Common Stock reserved for the purposes of the 1987 Plan shall
be reduced by the same proportion.
The 1987 Plan terminated in 1997 and options granted are non-transferable.
Options granted and outstanding under the 1987 Plan include Stock Appreciation
Rights which permit 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.
63
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
12) Deferred Compensation Plans (Continued)
---------------------------
Activity of the 1987 Plan is summarized as follows:
Number Option
of Shares Price
Outstanding at
December 31, 1996 22,309 $2.20 - $2.47
Granted 148,000
Dividend 7,400
Exercised (22,309)
----------
Outstanding at
December 31, 1997 155,400 $4.29 - $4.71
Dividend 7,770
Exercised --
----------
Outstanding at
December 31, 1998 163,170 $4.08 - $4.49
Dividend 8,159
Exercised --
----------
Outstanding at
December 31, 1999 171,329 $3.89 - $4.28
==========
Exercisable
at end of year 171,329
==========
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.
The 1993 Plan provides for the grant of options and the award or sale of stock
to officers, directors, and employees of the Company. Both "incentive stock
options," as defined under Section 422A of the Internal Revenue Code of 1986
(the "Code"), and "non-qualified options" may be granted pursuant to the 1993
Plan. 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 not 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.
64
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
12) Deferred Compensation Plans (Continued)
---------------------------
The options were granted to reward certain officers and key employees who have
been employed by the Company for a number of years and to help the Company
retain these officers by providing them with an additional incentive to
contribute to the success of the Company.
The 1993 Plan is administered by the Board of Directors or by a committee
designated by the Board. The 1993 Plan provides that if the shares of Common
Stock shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock dividend on
its outstanding Common Stock, the number of shares of Common Stock deliverable
upon the exercise of options shall be increased or decreased proportionately,
and appropriate adjustments shall be made in the purchase price per share to
reflect such subdivision, combination or stock dividend. No options may be
exercised for a term of more than ten years from the date of grant.
The 1993 Plan has a term of ten years. The Board of Directors may amend or
terminate the 1993 Plan at any time, subject to approval of certain
modifications to the 1993 Plan by the shareholders of the Company as may be
required by law or the 1993 Plan.
On November 7, 1996 the Company amended the Articles of Incorporation as
follows: (i) to increase the number of shares of Class A Common Stock reserved
for issuance under the plan from 300,000 Class A shares to 600,000 Class A
shares; and (ii) to provide that the stock subject to options, awards and
purchases may include Class C common stock.
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.
65
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
12) Deferred Compensation Plans (Continued)
---------------------------
Activity of the 1993 Plan is summarized as follows:
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)
---------
Outstanding at
December 31, 1998 407,339 $2.34 - $4.16
Dividend 24,762
Granted 190,000
Expired (102,103)
----------
Outstanding at
December 31, 1999 519,998 $2.22 - $3.96
Exercisable
at end of year 519,998
=========
Available options
for future grant
1993 Stock
Incentive Plan 404,221
========
13) Statutory-Basis Financial Information
The Company's life insurance subsidiaries are domiciled in Utah and Florida and
prepare their statutory-basis financial statements in accordance with accounting
practices prescribed or permitted by the Utah and Florida Insurance Departments.
"Prescribed" statutory accounting practices are interspersed throughout state
insurance laws and regulations, the National Association of Insurance
Commissioners ("NAIC") Accounting Practices and Procedures Manual and a variety
of other NAIC publications. "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.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company uses to prepare its statutory- basis financial
statements. Codification will require adoption by the various states before it
becomes the
66
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
13) Statutory-Basis Financial Information (Continued)
-------------------------------------
prescribed statutory basis of accounting for insurance companies domesticated
within those states. Accordingly, before Codification becomes effective for the
Company, the states of Florida and Utah must adopt Codification as the
prescribed basis of accounting on which domestic insurers must report their
statutory-basis results to the Insurance Departments. At this time it is unclear
when the states of Florida and Utah will adopt Codification. Management has not
yet determined the impact of Codification to the Company's statutory-basis
financial statements. Statutory net income and statutory stockholder's equity
for the life subsidiaries as reported to state regulatory authorities, is
presented below:
Statutory Net Income (Loss)
December 31,
1999 1998 1997
--------------------------
Security National Life $628,538 346,659 712,219
Southern Security Life 533,233 (486,825) 45,398
Statutory Stockholders' Equity
December 31,
1999 1998 1997
----------------------------
Security National Life $12,089,618 12,083,747 11,789,615
Southern Security Life 8,976,516 8,627,252 9,316,923
Generally, the net assets of the life insurance subsidiaries available for
transfer to the Company are limited to the amounts that the life insurance
subsidiaries 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.
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.
67
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
14) Business Segment Information
Description of Products and Services by Segment
The Company has three reportable segments: life insurance, cemetery and
mortuary, and mortgage loans. The Company's life insurance segment consists of
life insurance premiums and operating expenses from the sale of insurance
products sold by the Company's independent agency force and net investment
income derived from investing policyholder and segment surplus funds. The
Company's cemetery and mortuary segment consists of revenues and operating
expenses from the sale of pre-need and at-need cemetery and mortuary merchandise
and services at its mortuaries and cemeteries and the net investment income from
investing segment surplus funds. The Company's mortgage loan segment consists of
loan originations fee income and expenses from the originations of residential
mortgage loans and interest earned and interest expenses from warehousing
pre-sold loans before the funds are received from financial institutional
investors. In addition, the Company has a corporate segment which provides
administrative and marketing services to the reportable segments described
above.
Measurement of Segment Profit or Loss and Segment Assets
The accounting policies of the reportable segments are the same as those
described in the Significant Accounting Principles. Intersegment revenues are
recorded at cost plus an agreed upon intercompany profit.
Factors Management Used to Identify the Enterprise's
Reportable Segments
The Company's reportable segments are business units that offer different
products and are managed separately due to the different products and the need
to report to the various regulatory jurisdictions.
68
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
14) Business Segment Information (Continued)
----------------------------
1999
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Corporate Items Consolidated
--------- -------- -------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
From external sources:
Revenue from customers $ 13,175,825 $ 10,178,246 $14,503,388 $ -- $ -- $ 37,857,459
Net investment income 8,305,723 733,377 1,558,166 34,036 -- 10,631,302
Realized gains
on investments 313,013 -- -- -- -- 313,013
Other revenues 812,973 22,856 14,117 5,658 -- 855,604
Intersegment revenues:
Net investment income 2,275,916 -- -- 269,904 (2,545,820) --
Other revenues 175,409 -- -- 3,568,800 (3,744,209) --
------------ ------------ ----------- ----------- ------------ ------------
$ 25,058,859 $ 10,934,479 $16,075,671 $ 3,878,398 $ (6,290,029) $ 49,657,378
Expenses:
Death and other
policy benefits 6,274,926 -- -- -- -- 6,274,926
Increase in future
policy benefits 5,700,784 -- -- -- -- 5,700,784
Amortization of
deferred policy
acquisition costs
and cost of
insurance acquired 4,857,662 -- -- -- -- 4,857,662
Depreciation 179,461 452,225 44,633 533 -- 676,852
General, administrative
and other costs:
Intersegment 3,711,809 69,072 85,719 219,684 (4,086,284) --
Other 3,307,063 9,886,187 14,207,923 2,175,798 -- 29,576,971
Interest expense:
Intersegment 269,904 181,972 1,484,726 267,143 (2,203,745) --
Other 3,236 540,051 201,976 374,139 -- 1,119,402
------------ ------------ ----------- ----------- ------------ ------------
$ 24,304,845 $ 11,129,507 $16,024,977 $ 3,037,297 (6,290,029) $ 48,206,597
------------ ------------ ----------- ----------- ------------ ------------
Earnings (losses)
before income taxes $ 754,014 $ (195,028) $ 50,694 $ 841,101 $ -- $ 1,450,781
============ ============ =========== =========== ============ ============
Identifiable
assets $196,056,087 $ 34,013,032 $11,020,380 $ 2,716,069 $(29,507,131) $214,298,437
============ ============ =========== =========== ============ ============
Expenditures for
long-lived assets $ 266 $ 527,658 $ 90,819 $ 11,002 $ -- $ 629,745
============ ============ =========== =========== ============ ============
69
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
14) Business Segment Information (Continued)
----------------------------
1998
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Corporate Items Consolidated
--------- -------- -------- --------- ----- ------------
Revenues:
<S> <C> <C> <C> <C> <C> <C>
From external sources:
Revenue from customers $ 5,915,659 $ 9,225,801 $ 10,082,330 $ -- $ -- $ 25,223,790
Net investment income 5,553,486 682,915 1,206,578 15,764 7,458,743
Realized gains
on investments 74,121 -- -- -- -- 74,121
Other revenues 22,078 32,456 6,034 2,381 -- 62,949
Intersegment revenues:
Net investment income 1,360,877 -- -- 187,151 (1,548,028) --
Other revenues 109,887 -- -- 568,800 (678,687) --
------------ ------------ ------------ ----------- ------------ ------------
$ 13,036,108 $ 9,941,172 $ 11,294,942 $ 774,096 $ (2,226,715) $ 32,819,603
Expenses:
Death and other
policy benefits $ 3,578,634 $ -- $ -- $ -- $ -- $ 3,578,634
Increase in future
policy benefits 3,353,287 -- -- -- -- 3,353,287
Amortization of
deferred policy
acquisition costs
and cost of
insurance acquired 1,273,394 -- -- -- -- 1,273,394
Depreciation 85,557 455,418 39,125 4,655 -- 584,755
General, administrative
and other costs:
Intersegment 536,400 70,656 71,631 -- (678,687) --
Other 3,497,140 8,775,932 9,540,801 190,493 -- 22,004,366
Interest expense:
Intersegment 187,151 183,908 1,176,969 -- (1,548,028) --
Other 11,587 554,283 176,091 257,162 -- 999,123
------------ ------------ ------------ ----------- ------------ ------------
$ 12,523,150 $ 10,040,197 $ 11,004,617 $ 452,310 $ (2,226,715) $ 31,793,559
------------ ------------ ------------ ----------- ------------ ------------
Earnings (losses)
before income taxes $ 512,958 $ (99,025) $ 290,325 $ 321,786 $ -- $ 1,026,044
============ ============ ============ =========== ============ ============
Identifiable
assets $183,340,180 $ 33,539,827 $ 9,010,581 $ 3,070,453 $(15,695,894) $213,265,147
============ ============ ============ =========== ============ ============
Expenditures for
long-lived assets $ 761,246 $ 1,202,056 $ 76,721 $ -- $ -- $ 2,040,023
============ ============ ============ =========== ============ ============
70
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
14) Business Segment Information (Continued)
----------------------------
1997
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Corporate Items Consolidated
--------- -------- -------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
From external sources:
Revenue from customers $ 6,140,783 $ 9,230,864 $5,661,867 $ -- $ -- $ 21,033,514
Net investment income 5,856,221 609,194 664,331 9,834 -- 7,139,580
Realized gains
on investments 252,635 -- 252,635
Other revenues 13,778 27,621 450 7,044 -- 48,893
Intersegment revenues:
Net investment income 978,930 -- -- 188,767 (1,167,697) --
Other revenues 115,622 -- -- 568,800 (684,422) --
------------ ----------- ---------- ----------- ------------ ------------
$ 13,357,969 $ 9,867,679 $6,326,648 $ 774,445 $ (1,852,119) $ 28,474,622
Expenses:
Death and other
policy benefits $ 3,694,442 $ -- $ -- $ -- $ -- $ 3,694,442
Increase in future
policy benefits 2,974,915 -- -- -- -- 2,974,915
Amortization of
deferred policy
acquisition costs
and cost of
insurance acquired 1,132,298 -- -- -- -- 1,132,298
Depreciation 55,338 420,787 29,150 10,644 -- 515,919
General, administrative
and other costs:
Intersegment 536,400 75,408 72,614 -- (684,422) --
Other 3,722,336 8,312,812 5,377,440 127,782 -- 17,540,370
Interest expense:
Intersegment 188,767 192,835 783,257 2,838 (1,167,697) --
Other 41,723 628,616 19,836 257,454 -- 947,629
------------ ----------- ---------- ----------- ------------ ------------
$ 12,346,219 $ 9,630,458 $6,282,297 $ 398,718 $ (1,852,119) $ 26,805,573
------------ ----------- ---------- ----------- ------------ ------------
Earnings (losses)
before income taxes $ 1,011,750 $ 237,221 $ 44,351 $ 375,727 $ -- $ 1,669,049
============ =========== ========== =========== ============ ============
Identifiable
assets $103,604,675 $31,297,233 $1,176,039 $ 1,881,997 $(12,508,065) $125,451,879
============ =========== ========== =========== ============ ============
Expenditures for
long-lived assets $ 40,882 $ 283,622 $ 26,587 $ -- $ -- $ 351,091
============ =========== ========== =========== ============ ============
71
</TABLE>
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
15) Disclosure about Fair Value of Financial Instruments
----------------------------------------------------
The fair values of investments in fixed maturity and equity securities along
with methods used to estimate such values are disclosed in Note 2. The following
methods and assumptions were used by the Company in estimating the "fair value"
disclosures related to other significant financial instruments:
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.
Mortgage, Policy, Student, and Collateral Loans: The fair values are estimated
using interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations. The carrying amounts reported in the accompanying
balance sheets for these financial instruments approximate their fair values.
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.
The fair values for the Company's insurance contracts other than investment-type
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, such that the Company's
exposure to changing interest rates is minimized through the matching of
investment maturities with amounts due under insurance contracts.
16) Other Comprehensive Income
The following summarizes other comprehensive income:
1999 1998 1997
---- ---- ----
Unrealized gains (losses)
on available
for-sale securities $(696,162) $ 405,047 $ 928,917
Less: reclassification
adjustment for net
realized gains in
net income (14,126) (62,702) (227,097)
--------- --------- ---------
Net unrealized gains (losses) (710,288) 342,345 701,820
Tax expense on net unrealized
gain (losses) 294,866 (92,171) (130,796)
--------- --------- ---------
Other comprehensive
income (loss) $(415,422) $ 250,174 $ 571,024
========= ========= =========
72
<PAGE>
Schedule I
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Summary of Investments
Other than Investments in Related Parties
As of December 31, 1999:
Amount at
Which
Shown
Estimated in the
Type of Investment Amortized Fair Balance
- ------------------ Cost Value Sheet
-------- --------- -------
Fixed maturity securities
held to maturity:
Bonds:
U.S. Treasury securities
and obligations
of U.S. Government
agencies $ 12,822,025 $ 12,686,643 $12,822,025
Obligations of states
and political
subdivisions 176,499 167,116 176,499
Corporate securities
including public
utilities 20,594,306 20,759,857 20,594,306
Mortgage backed
securities 6,009,010 5,799,814 6,009,010
Redeemable preferred
stocks 28,011 40,022 28,011
------------ ------------ -----------
Total Fixed
Securities held
to maturity 39,629,851 39,453,452 39,629,851
------------ ------------ -----------
Securities
available for sale:
Bonds:
U.S. Treasury
securities and
obligations of U.S.
Government agencies 4,596,294 4,579,332 4,579,332
Corporate securities
including public
utilities 20,270,712 19,449,746 19,449,746
Mortgage-backed
securities 90,341 90,112 90,112
Nonredeemable
preferred stock 70,431 106,450 106,450
Common stock:
Public utilities 285,723 396,487 396,487
Banks, trusts and
insurance companies 251,083 603,764 603,764
Industrial,
miscellaneous and
all other 3,742,902 4,638,512 4,638,512
------------ ------------ -----------
Total Securities
available for
sale 29,307,486 29,864,403 29,864,403
------------ ------------ -----------
Mortgage loans on
real estate 18,926,628 18,926,628
Real estate 7,629,952 7,629,952
Policy loans 11,607,993 11,607,993
Other investments 1,290,310 1,290,310
------------ -----------
Total investments $108,392,220 $108,949,137
============ ===========
73
<PAGE>
Schedule II
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Balance Sheets
December 31,
1999 1998
---- ----
Assets
Short-term investments $ -- $ 294,927
Cash(15,639) 118,731
Investment in subsidiaries
(equity method) 41,742,002 36,107,674
Receivables:
Receivable from
affiliates 1,629,966 1,579,965
Other 18,566 76,368
----------- -----------
Total receivables 1,648,532 1,656,333
Property, plant and
equipment, at cost,
net of accumulated
depreciation of $314,392
for 1999 and $313,859
for 1998 10,535 66
Other assets 72,641 396
----------- -----------
Total assets $43,458,071 $38,178,127
=========== ===========
See accompanying notes to parent company only financial statements.
74
<PAGE>
Schedule II Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Balance Sheets (Continued)
December 31,
1999 1998
---- ----
Liabilities:
- ------------
Bank loans payable:
Current installments $ 841,767 $ 2,358,684
Long-term 6,465,741 5,862,614
Notes and contracts payable:
Current installments 152,818 181,319
Long-term 303,713 455,572
Advances from affiliated
companies 8,290,697 1,781,118
Other liabilities and
accrued expenses 512,041 494,367
Income taxes 401,601 364,194
------------ ------------
Total liabilities 16,968,378 11,497,868
------------ ------------
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 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 $ 43,458,071 $ 38,178,127
============ ============
See accompanying notes to parent company only financial statements.
75
<PAGE>
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Statements of Earnings
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Revenue:
Net investment
income $ 39,694 $ 18,145 $ 16,878
Fees from
affiliates 3,838,704 755,951 757,567
----------- --------- -----------
Total revenue 3,878,398 774,096 774,445
----------- --------- -----------
Expenses:
General and
administrative
expenses 2,396,015 195,148 138,425
Interest expense 641,282 257,162 260,293
----------- --------- -----------
Total expenses 3,037,297 452,310 398,718
----------- --------- -----------
Earnings (loss)
before income
taxes, and
earnings of
subsidiaries 841,101 321,786 375,727
Income tax expense (277,810) (114,346) (124,256)
Equity in earnings
of subsidiaries 412,604 563,789 1,057,470
----------- --------- -----------
Net earnings $ 975,895 $ 771,229 $ 1,308,941
=========== ========= ===========
See accompanying notes to parent company only financial statements.
76
<PAGE>
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Statements of Cash Flow
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net earnings $ 975,895 $ 771,229 $ 1,308,941
Adjustments to
reconcile net earnings
to net cash provided
by (used in)
operating activities:
Depreciation and
amortization 533 4,655 10,644
Undistributed earnings
of affiliates (412,604) (563,789) (1,057,470)
Provision for
income taxes 277,810 114,346 124,254
Change in assets and
liabilities:
Accounts receivable 57,802 (90,600) 86,403
Other assets (72,245) (396) 202
Accounts payable and
accrued expenses -- 4,697 31,046
Other liabilities 17,687 263,926 (43,732)
----------- ----------- -----------
Net cash provided by
operating activities 844,878 504,068 460,288
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)
Cash flows from financing
activities:
Proceeds from advances
from affiliates 6,388,198 200,000 --
Payments of advances
to affiliates (169,023) (200,000) --
Payments of notes and
contracts payable (1,094,150) (398,353) (386,799)
Purchase of treasury
stock -- -- --
Sale of treasury stock -- -- 44,994
Proceeds from borrowings
on notes and
contracts payable -- 6,246,400 --
----------- ----------- -----------
Net cash provided by
financing activities 5,125,025 5,848,047 (341,805)
----------- ----------- -----------
Net change in cash (134,370) 90,378 39,194
Cash at beginning
of year 118,731 28,353 (10,841)
----------- ----------- -----------
Cash at end of year $ (15,639) $ 118,731 $ 28,353
=========== =========== ===========
See accompanying notes to parent company only financial statements.
77
<PAGE>
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
Notes to Parent Company Only Financial Statements
1) Bank Loans Payable
Bank loans payable are summarized as follows:
December 31,
------------
1999 1998
---- ----
$5,863,000 revolving
line of credit at bank prime
rate less 1%, (7.5% at December
31, 1999) interest only to
December 1999 thereafter
interest and principal, collateralized
by 15,000 shares of Security
National Life Insurance Company
stock, due December 2005 $5,610,111 $6,246,400
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
---------- ---------
Total bank loans 7,307,508 8,221,298
Less current installments 841,767 2,358,684
---------- ----------
Bank loans, excluding
current installments $6,465,741 $5,862,614
========== ==========
2) Notes and Contracts Payable
Notes and contracts are summarized as follows:
December 31,
------------
1999 1998
---- ----
10 year notes due April 16, 1999,
1% over U.S. Treasury 6 month
bill rate $ 535 $ 28,187
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
Other 425 1,275
--------- --------
Total notes and contracts 456,531 636,891
Less current installments 152,818 181,319
--------- --------
Notes and contracts,
excluding current
installments $303,713 $455,572
======== ========
78
<PAGE>
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
Notes to Parent Company Only Financial Statements
The following tabulation shows the combined maturities of bank loans payable and
notes and contracts payable:
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
==========
3) Advances from Affiliated Companies
December 31,
1999 1998
---- ----
Non-interest bearing
advances from affiliates:
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
4) Dividends
No dividends have been paid to the registrant for each of the last three years
by any subsidiaries.
79
<PAGE>
<TABLE>
<CAPTION>
Schedule IV
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Reinsurance
Percentage
Ceded to Assumed of Amount
Direct Other from Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- --------- ------ ------
1999
- -----
<S> <C> <C> <C> <C> <C>
Life Insurance
in force ($000) $ 1,532,597 $ 296,936 $581,296 $ 1,816,957 32.00%
=========== ========== ======== =========== ======
Premiums:
Life Insurance $12,870,339 $1,063,696 $722,080 $12,528,723 5.76%
Accident and
Health Insurance 563,592 34,643 4,565 533,514 .85%
----------- ---------- -------- ----------- ------
Total premiums $13,433,931 $1,098,339 $726,645 $13,062,237 5.56%
=========== ========== ======== =========== ======
1998
- -----
Life Insurance
in force ($000) $ 1,554,286 $ 352,777 $569,448 $ 1,770,957 32.15%
=========== ========== ======== =========== =====
Premiums:
Life Insurance $ 5,544,015 $ 251,271 $161,562 $ 5,454,306 2.96%
Accident and
Health Insurance 371,585 22,924 4,905 353,566 1.39%
----------- ---------- -------- ----------- -----
Total premiums $ 5,915,600 $ 274,195 $166,467 $ 5,807,872 2.87%
=========== ========== ======== =========== =====
1997
- ----
Life Insurance
in force ($000) $ 602,652 $ 61,629 $ 46,254 $ 587,277 7.88%
=========== ========== ======== =========== =====
Premiums:
Life Insurance $ 5,575,024 $ 237,830 $276,086 $ 5,613,280 4.92%
Accident and
Health Insurance 426,529 25,367 6,953 408,115 1.70%
----------- ---------- -------- ----------- -----
Total premiums $ 6,001,553 $ 263,197 $283,039 $ 6,021,395 4.70%
=========== ========== ======== =========== =====
80
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule V
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Balance Additions Deductions, Balance
at Charged Disposals at
Beginning to Costs and End of
of Year and Expenses Write-offs Year
--------- ------------ ---------- ------
For the Year Ended December 31, 1999
- ------------------------------------
<S> <C> <C> <C> <C>
Accumulated depreciation
on real estate $2,380,874 $369,557 $ (28,407) $2,722,024
Accumulated depreciation on
property, plant and equipment 5,312,791 817,869 (141,017) 5,989,643
Allowance for doubtful accounts 1,576,668 150,981 (259,695) 1,467,954
For the Year Ended December 31, 1998
- ------------------------------------
Accumulated depreciation
on real estate $2,049,346 $332,411 $ (883) $2,380,874
Accumulated depreciation on
property, plant and equipment 4,728,036 584,755 -- 5,312,791
Allowance for doubtful accounts 1,679,090 175,750 278,172) 1,576,668
For the Year Ended December 31, 1997
- ------------------------------------
Accumulated depreciation
on real estate $1,868,187 $300,058 $(118,899) $2,049,346
Accumulated depreciation on
property, plant and equipment 4,218,591 515,919 (6,474) 4,728,036
Allowance for doubtful accounts 1,862,599 129,502 (313,011) 1,679,090
81
</TABLE>
<PAGE>
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
- -----------------------------------
Security National Financial Corporation (the "Company") retained Tanner + Co. as
its independent auditors and replaced Ernst & Young LLP effective December 1,
1999. No report of Ernst & Young LLP on the financial statements of the Company
for either of the past two years contained an adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope, or
accounting principles. Since the engagement of Ernst & Young LLP for the
Company's two most recent fiscal years and through the date of replacement,
there were no disagreements between the Company and Ernst & Young LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. The change in independent accountants was approved
by the Company's Board of Directors and disclosed in a Form 8-K, which was filed
with the Securities and Exchange Commission on December 21, 1999. Reference is
made to current reports on Forms 8-K dated December 21, 1999.
PART III
Item 10. Directors and Executive Officers
The Company's Board of Directors consist of nine persons, six of whom are not
employees of the Company. All the Directors of the Company are also directors of
its subsidiaries. There is no family relationship between or among any of the
directors, except that Scott M. Quist is the son of George R. Quist. The
following table sets forth certain information with respect to the directors and
executive officers of the Company.
Position(s)
Name Age Director Since with the Company
- -------------- --- -------------- ----------------
George R.
Quist(2) 79 October 1979 Chairman of the
Board, President
and Chief
Executive Officer
William C.
Sargent(2) 71 February 1980 Senior Vice
President,
Secretary and
Director
Scott M.
Quist(1) 46 May 1986 First Vice
President,
General Counsel,
Treasurer and
Director
Charles L.
Crittenden(2) 80 October 1979 Director
Sherman B.
Lowe(2) 85 October 1979 Director
R.A.F.
McCormick(1) 86 October 1979 Director
H. Craig
Moody(1) 46 September 1995 Director
Norman Wilbur(2) 61 October 1998 Director
Robert G.
Hunter(2) 40 October 1998 Director
82
<PAGE>
(1) These directors were elected by the holders of Class A Common Stock
voting as a class by themselves.
(2) These directors were elected by the holders of Class A and Class C Common
Stock voting together.
Committees of the Board of Directors include an executive committee, on which
Messrs. George Quist, Scott Quist, Sargent and Moody serve; an audit committee,
on which Messrs. Crittenden, Lowe, Moody, and Wilbur serve; and a compensation
committee, on which Messrs. Crittenden, Lowe and George Quist serve.
The following is a description of the business experience of each of the
directors.
George R. Quist, age 79, has been Chairman of the Board, President and Chief
Executive Officer of the Company since October 1979. Mr. Quist is also Chairman
of the Board, President and Chief Executive Officer of Southern Security Life
Insurance Company and has served in this position since December 1998. From 1960
to 1964, he was Executive Vice President and Treasurer of Pacific Guardian Life
Insurance Company. From 1946 to 1960, he was an agent, District Manager and
Associate General Agent for various insurance companies. Mr. Quist also served
from 1981 to 1982 as the President of The National Association of Life
Companies, a trade association of 642 life insurance companies, and from 1982 to
1983 as its Chairman of the Board.
William C. Sargent, age 71, has been Senior Vice President of the Company since
1980, Secretary since October 1993, and a director since February 1980. Mr.
Sargent is also Senior Vice President, Secretary and Director of Southern
Security Life Insurance Company and has served in this position since December
1998. Prior to that time, he was employed by Security National as a salesman and
agency superintendent.
Scott M. Quist, age 46, has been General Counsel of the Company since 1982,
First Vice President since December 1990, Treasurer since October 1993, and a
director since May 1986. Mr. Quist is also First Vice President, Treasurer and
General Counsel and Director of Southern Security Life Insurance Company and has
served in this position since December 1998. From 1980 to 1982, Mr. Quist was a
tax specialist with Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986
to 1991, he was treasurer and director of The National Association of Life
Companies, a trade association of 642 insurance companies until its merger with
the American Council of Life Companies. Mr. Quist has been a member of the Board
of Governors of the Forum 500 Section (representing small insurance companies)
of the American Council of Life Insurance. Mr. Quist has also served as a
regional director of Key Bank of Utah since November 1993. Mr. Quist is
currently a director and vice president of the National Alliance of Life
Companies, a trade association of over 200 life companies.
Charles L. Crittenden, age 80, has been a director of the Company since October
1979. Mr. Crittenden is also a director of Southern Security Life Insurance
Company and has served in this position since December 1998. Mr. Crittenden has
been sole stockholder of Crittenden Paint & Glass Company since 1958. He is also
an owner of Crittenden Enterprises, a real estate development company and
Chairman of the Board of Linco, Inc.
83
<PAGE>
Sherman B. Lowe, age 85, has been a director of the Company since October 1979.
Mr. Lowe is also a director of Southern Security Life Insurance Company and has
served in this position since December 1998. Mr. Lowe was formerly President and
Manager of Lowe's Pharmacy for over 30 years. He is now retired. He is an owner
of Burton-Lowe Ranches, a general partnership.
R.A.F. McCormick, age 86, has been a director of the Company since October 1979.
Mr. McCormick is also a director of Southern Security Life Insurance Company and
has served in this position since December 1998. He is a past Vice President of
Sales for Cloverclub Foods. He is now retired.
H. Craig Moody, age 46, has been a director of the Company since September 1995.
Mr. Moody is also a director of Southern Security Life Insurance Company and has
served in this position since December 1998. Mr. Moody is owner of Moody &
Associates, a political consulting and real estate company. He is a former
Speaker and House Majority Leader of the House of Representatives of the State
of Utah.
Norman Wilbur, age 61, has been a director of the Company since October 1998.
Mr. Wilbur is also a director of Southern Security Life Insurance Company and
has served in this position since December 1998. Mr. Wilbur worked for J.C.
Penny's regional offices in budget and analysis. His final position was Manager
of Planning and Reporting for J.C. Penny's stores. After 36 years with J.C.
Penny's he took an option of an early retirement in 1997. Mr. Wilbur is a past
board member of a homeless organization in Plano, Texas.
Robert G. Hunter, M.D., age 40, has been a director of the Company since October
1998. Dr. Hunter is also a director of Southern Security Life Insurance Company
and has served in this position since December 1998. Dr. Hunter is currently a
practicing physician in private practice. Dr. Hunter created the State Wide
E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member
of the Executive Committee. He is Chairman of Surgery at Cottonwood Hospital, a
delegate to the Utah Medical Association and a delegate representing Utah to the
American Medical Association, and a member of several medical advisory boards.
Executive Officers
The following table sets forth certain information with respect to the executive
officers of the Company (the business biographies set forth above):
Name Age Title
- -------------- ---- --------------------
George R.
Quist(1) 79 Chairman of the Board, President
and Chief Executive Officer
William C.
Sargent 71 Senior Vice President and Secretary
Scott M.
Quist(1) 46 First Vice President, General Counsel
and Treasurer
(1)George R. Quist is the father of Scott M. Quist.
84
<PAGE>
The Board of Directors of the Company has a written procedure which requires
disclosure to the board of any material interest or any affiliation on the part
of any of its officers, directors or employees which is in conflict or may be in
conflict with the interests of the Company.
No director, officer or 5% stockholder of the Company or its subsidiaries, or
any affiliate thereof has had any transactions with the Company or its
subsidiaries during 1999 or 1998 other than employment arrangements as described
above, and the loan made to George R. Quist on April 29, 1998. See "Item 13.
Certain Relationships and Related Transactions."
Each of the Directors of the Company are directors of Southern Security Life
Insurance Company, which has a class of equity securities registered under the
Securities Exchange Act of 1934. In addition, Scott M. Quist is a director of
Key Bank of Utah. All directors of the Company hold office until the next annual
meeting of stockholders and until their successors have been duly elected and
qualified.
85
<PAGE>
<TABLE>
<CAPTION>
Item 11. Executive Officer Compensation
The following table sets forth, for each of the last three fiscal years, the
compensation received by George R. Quist, the Company's President and Chief
Executive Officer, and all other executive officers (collectively, the "Named
Executive Officers") at December 31, 1999 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 1999.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Other
Annual Restricted Securities Long-Term All Other
Name and Compen- Stock Underlying Incentive Compen-
Principal Position Year Salary($) Bonus($) sation($)(2) Awards($) Options/SARs(#) Payout($) sation($)(3)
- ------------------ ---- --------- -------- ------------ --------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George R. Quist (1) 1999 $147,204 $20,200 $2,400 $0 50,000 $0 $20,247
Chairman of the Board, 1998 137,454 20,200 2,400 0 50,000 0 12,084
President and Chief 1997 118,508 16,833 2,400 0 50,000 0 11,094
Executive Officer
William C. Sargent 1999 148,058 17,325 4,500 0 45,000 0 16,879
Senior Vice President, 1998 130,329 17,325 4,500 0 45,000 0 5,286
Secretary and 1997 108,685 16,500 4,500 0 45,000 0 5,224
Director
Scott M. Quist (1) 1999 134,200 18,770 7,200 0 45,000 0 15,201
First Vice President, 1998 119,025 18,770 7,200 0 35,000 0 7,257
General Counsel 1997 103,215 17,875 7,200 0 35,000 0 6,490
Treasurer and Director
86
</TABLE>
<PAGE>
(1) George R. Quist is the father of Scott M. Quist.
(2) The amounts indicated under "Other Annual Compensation" consist of
payments related to the operation of automobiles by the Named Executive
Officers. However, such payments do not include the furnishing of an automobile
by the Company to George R. Quist, William C. Sargent and Scott M. Quist nor the
payment of insurance and property taxes with respect to the automobiles operated
by the Named Executive Officers.
(3) The amounts indicated under "All Other Compensation" consist of (a)
amounts contributed by the Company into a trust for the benefit of the Named
Executive Officers under the Employee Stock Ownership Plan (for fiscal 1999,
such amounts were George R. Quist, $2,721; William C. Sargent, $2,953; and Scott
M. Quist, $2,648); (b) matching contributions made by the Company pursuant to
the 401(k) Retirement Savings Plan in which all matching contributions are
invested in the Company's Class A Common Stock (for fiscal 1999, such amounts
were George R. Quist, $-0-; William C. Sargent, $-0-; and Scott M. Quist, $-0-;
(c) profit sharing contributions made by the Company pursuant to the 401(k)
Retirement Savings Plan (for fiscal 1999, such amounts were George R. Quist,
$12,245; William C. Sargent, $13,289; and Scott M. Quist, $11,916); (d)
insurance premiums paid by the Company with respect to a group life insurance
plan for the benefit of the Named Executive Officers (for fiscal 1999, $1,911
was paid for all Named Executive Officers as a group, or $637 each for George R.
Quist, William C. Sargent and Scott M. Quist); and (e) life insurance premiums
paid by the Company for the benefit of the family of George R. Quist ($4,644).
The amounts under "All Other Compensation" do not include the no interest loan
in the amount of $172,000 that the Company made to George R. Quist on April 29,
1998, to exercise stock options. See "Item 13 Certain Relationships and Related
Transactions".
The following table sets forth information concerning the exercise of options to
acquire shares of the Company's Common Stock by the Named Executive Officers
during the fiscal year ended December 31, 1999, as well as the aggregate number
and value of unexercised options held by the Named Executive Officers on
December 31, 1999.
Aggregated Option/SAR Exercised in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs In-the-Money
Shares at Options/SARs at
Acquired December 31, December 31,
on 1999(#) 1999
Exercise Value Exercis- Unexer- Exercis- Unexer-
Name (#) Realized able cisable able cisable
- ---- --------------------- ---------- ------- ---------- -------
George R
Quist -0- $-0- 165,506 -0- $ 25,313 $-0-
William C
Sargent -0- $-0- 237,000 -0- $136,682 $-0-
Scott M
Quist -0- $-0- 126,355 -0- $ 37,246 $-0-
87
<PAGE>
Retirement Plans
George R. Quist, who has been Chairman, President and Chief Executive Officer of
the Company since 1979, has a Deferred Compensation Agreement, dated December 8,
1988, with the Company (the "Compensation Agreement"). This Compensation
Agreement provides upon Mr. Quist's retirement the Company shall pay him $50,000
per year as an annual retirement benefit for a period of 10 years from the date
of retirement; and upon his death, the remainder of such annual payments shall
be payable to his designated beneficiary.
The Compensation Agreement further provides that the Board of Directors may
elect to pay the entire amount of deferred compensation in the form of a single
lump-sum payment or other installment payments, so long as the term of such
payments do not exceed 10 years. However, in the event Mr. Quist's employment
with the Company is terminated for any reason other than retirement, death or
disability, the entire deferred compensation shall be forfeited by him.
William C. Sargent, who has been Senior Vice President of the Company since
1980, has a Deferred Compensation Agreement dated April 15, 1994, with the
Company (the "Compensation Agreement"). This Compensation Agreement provides
upon Mr. Sargent's retirement the Company shall pay him $50,000 per year as an
annual retirement benefit for a period of 10 years from the date of retirement;
and upon his death, the remainder of such annual payments shall be payable to
his designated beneficiary.
The Compensation Agreement further provides that the Board of Directors may
elect to pay the entire amount of deferred compensation in the form of a single
lump-sum payment or other installment payments, so long as the term of such
payments do not exceed 10 years. However, in the event Mr. Sargent's employment
with the Company is terminated for any reason other than retirement, death or
disability, the entire deferred compensation shall be forfeited by him.
Employment Agreement
The Company maintains an employment agreement with Scott M. Quist. The
agreement, which has a five year term, was entered into in 1996, and renewed in
1997. Under the terms of the agreement, Mr. Quist is to devote his full time to
the Company serving as its Treasurer, First Vice President, and General Counsel
at not less than his current salary and benefits, and to include $500,000 of
life insurance protection. In the event of disability, Mr. Quist's salary would
be continued for up to 5 years at 50% of its current level. In the event of a
sale or merger of the Company, and Mr. Quist were not retained in his current
position, the Company would be obligated to continue Mr. Quist's current
compensation and benefits for seven years following the merger or sale.
Director Compensation
Directors of the Company (but not including directors who are employees) are
paid a director's fee of $8,400 per year by the Company for their services and
are reimbursed for their expenses in attending board and committee meetings. No
additional fees are paid by the Company for committee participation or special
assignments.
88
<PAGE>
Employee 401(k) Retirement Savings Plan
In 1995, the Company's Board of Directors adopted a 401(k) Retirement Savings
Plan. Under the terms of the 401(k) plan, effective as of January 1, 1995, the
Company may make discretionary employer matching contributions to its employees
who choose to participate in the plan. The plan allows the board to determine
the amount of the contribution at the end of each year. The Board adopted a
contribution formula specifying that such discretionary employer matching
contributions would equal 50% of the participating employee's contribution to
the plan to purchase Company stock up to a maximum discretionary employee
contribution of 1/2% of a participating employee's compensation, as defined by
the plan.
All persons who have completed at least one year's service with the Company and
satisfy other plan requirements are eligible to participate in the 401(k) plan.
All Company matching contributions are invested in the Company's Class A Common
Stock. The Company's matching contributions for 1999, 1998, and 1997 were
approximately $3,858, $7,000 and $-0- respectively. Also, the Company may
contribute at the discretion of the Company's Board of Directors an Employer
Profit Sharing Contribution to the 401-K plan. The Employer Profit Sharing
Contribution shall be divided among three different classes of participants in
the plan based upon the participant's title in the Company. In 1999 the Company
contributed $130,958 to the Plan. There were no contributions made in 1998 or
1997. All amounts contributed to the plan are deposited into a trust fund
administered by an independent trustee.
Employee Stock Ownership Plan
Effective January 1, 1980, the Company adopted an employee stock ownership plan
(the "Ownership Plan") for the benefit of career employees of the Company and
its subsidiaries. The following is a description of the Ownership Plan, and is
qualified in its entirety by the Ownership Plan, a copy of which is available
for inspection at the Company's offices.
Under the Ownership Plan, the Company has discretionary power to make
contributions on behalf of all eligible employees into a trust created under the
Ownership Plan. Employees become eligible to participate in the Ownership Plan
when they have attained the age of 19 and have completed one year of service (a
twelve-month period in which the Employee completes at least 1,040 hours of
service). The Company's contributions under the Ownership Plan are allocated to
eligible employees on the same ratio that each eligible employee's compensation
bears to total compensation for all eligible employees during each year. To
date, the Ownership Plan has approximately 107 participants and had
contributions payable to the Plan in 1999 of $56,277. Benefits under the
Ownership Plan vest as follows: 20% after the third year of eligible service by
an employee, an additional 20% in the fourth, fifth, sixth and seventh years of
eligible service by an employee.
Benefits under the Ownership Plan will be paid out in one lump sum or in
installments in the event the employee becomes disabled, reaches the age of 65,
or is terminated by the Company and demonstrates financial hardship. The
Ownership Plan Committee, however, retains discretion to determine the final
method of payment. Finally, the Company reserves the right to amend or terminate
the
89
<PAGE>
Ownership Plan at any time. The trustees of the trust fund under the Ownership
Plan are Messrs. R.A.F. McCormick, George R. Quist, and William C. Sargent, all
directors of the Company.
1987 Incentive Stock Option Plan
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 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 increase in the total purchase price of the
shares then so covered, and the number of shares of Class A Common Stock
reserved for the purpose of the Plan shall be increased by the same proportion.
In the event that the shares of Class A Common Stock of the Company from time to
time issued and outstanding are reduced by a combination of shares, the number
of shares of Class A Common Stock then covered by each outstanding option
granted hereunder shall be reduced proportionately with no reduction in the
total price of the shares then so covered, and the number of shares of Class A
Common Stock reserved for the purposes of the Plan shall be reduced by the same
proportion.
The Plan terminated in 1997 and options granted are non-transferable. The Plan
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.
1993 Stock Option Plan
On June 21, 1993, the Company adopted the Security National Financial
Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves shares
of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at
the annual meeting of the stockholders held on June 21, 1993. 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.
The 1993 Plan provides for the grant of options and the award or sale of stock
to officers, directors, and employees of the Company. Both "incentive stock
options," as defined under Section 422A of the Internal Revenue Code of 1986
(the "Code"), and "non-qualified options" may be granted pursuant to the 1993
Plan. The exercise prices for the options granted are equal to or greater than
the fair market value of the stock subject to such options as of the
90
<PAGE>
date of grant, as determined by the Company's Board of Directors. The options
granted under the 1993 Plan, were to reward certain officers and key employees
who have been employed by the Company for a number of years and to help the
Company retain these officers by providing them with an additional incentive to
contribute to the success of the Company.
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. The Plan provides that if the shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend. In addition, the number of
shares of Common Stock reserved for purposes of the Plan shall be adjusted by
the same proportion. 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 1993 Plan has a term of ten years. The Board of Directors may amend or
terminate the 1993 Plan at any time, subject to approval of certain
modifications to the 1993 Plan by the shareholders of the Company as may be
required by law or the 1993 Plan. On November 7, 1996 the Company amended the
Articles of Incorporation as follows: (i) to increase the number of shares of
Class A Common Stock reserved for issuance under the Plan from 300,000 Class A
shares to 600,000 Class A shares; and (ii) to provide that the stock subject to
options, awards and purchases may include Class C common stock.
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.
91
<PAGE>
<TABLE>
<CAPTION>
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth security ownership information of the Company's
Class A and Class C Common Stock as of March 20, 2000, (i) for persons who own
beneficially more than 5% of the Company's outstanding Class A or Class C Common
Stock, (ii) each director of the Company, and (iii) for all executive officers
and directors of the Company as a group.
Class A
Class A Class C and Class C
Common Stock Common Stock Common Stock
------------ ------------ ------------
Amount Amount Amount
Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class Owned of Class Owned of Class
- ----------------- ------- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
George R. Quist (1)(2)
4491 Wander Lane
Salt Lake City,
Utah 84124 142,581 3.7% 223,104 4.1% 365,685 3.9%
George R. and Shirley C
Quist Family
Partnership, Ltd.(6)
4491 Wander Lane
Salt Lake City,
Utah 84124 327,371 8.4% 2,629,242 47.9% 2,956,613 31.5%
Employee Stock
Ownership Plan (4)
5300 S. 360 W., Suite 250
Salt Lake City,
Utah 84123 619,273 15.9% 1,216,848 22.2% 1,836,121 19.6%
William C. Sargent (1)(2)(3)
4974 Holladay Blvd
Salt Lake City,
Utah 84117 94,121 2.4% 300,075 5.5% 394,196 4.2%
Scott M. Quist (3)
7 Wanderwood Way
Sandy, Utah 84092 98,916 2.5% 69,672 1.3% 168,588 1.8%
Charles L. Crittenden
248 - 24th Street
Ogden, Utah 84404 1,643 * 187,752 3.4% 189,395 2.0%
92
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class A
Class A Class C and Class C
Common Stock Common Stock Common Stock
------------ ------------ ------------
Amount Amount Amount
Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class Owned of Class Owned of Class
- ----------------- ------- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Sherman B. Lowe (3)
2197 South 2100 East
Salt Lake City,
Utah 84109 22,318 * 205,187 3.7% 227,505 2.4%
R.A.F. McCormick (1)
400 East Crestwood Road
Kaysville, Utah 84037 10,703 * 107,051 1.9% 117,754 1.3%
H. Craig Moody
1782 East Faunsdale Dr.
Sandy, Utah 84092 588 * -0- * 588 *
Norman G. Wilbur
2520 Horseman Drive
Plano, Texas 75025 840 * -0- * 840 *
Robert G. Hunter
#2 Ravenwood Lane
Sandy, Utah 84092 648 * -0- * 648 *
Associated Investors (5)
5300 S. 360 W. Suite 250
Salt Lake City,
Utah 84123 83,214 2.1% 513,688 9.4% 596,902 6.4%
All directors and
executive officers
(9 persons) 782,943 20.1% 3,722,083 67.8% 4,421,812 47.1%
* Less than one percent
93
</TABLE>
<PAGE>
(1) Does not include 619,273 shares of Class A Common Stock and 1,216,848
shares of Class C Common Stock owned by the Company's Employee Stock Ownership
Plan (ESOP), of which George R. Quist, William C. Sargent and R.A.F. McCormick
are the trustees and accordingly, exercise shared voting and investment powers
with respect to such shares.
(2) Does not include 83,214 shares of Class A Common Stock and 513,688 shares
of Class C Common Stock owned by Associated Investors, a Utah general
partnership, of which these individuals are the managing partners and,
accordingly, exercise shared voting and investment powers with respect to such
shares.
(3) Does not include 85,491 shares of Class A Common Stock owned by the
Company's 401(k) Retirement Savings Plan, of which William C. Sargent, Scott M.
Quist and Sherman B. Lowe are members of the Investment Committee and
accordingly, exercise shared voting and investment powers with respect to such
shares.
(4) The trustees of the Employee Stock Ownership Plan (ESOP) are George R.
Quist, William C. Sargent and R.A.F. McCormick, who exercise shared voting and
investment powers.
(5) The managing partners of Associated Investors are George R. Quist and
William C. Sargent, who exercise shared voting and investment powers.
(6) This stock is owned by the George R. and Shirley C. Quist Family
Partnership, Ltd., of which Mr. Quist is the general partner.
The Company's officers and directors, as a group, own beneficially approximately
47.1% of the outstanding shares of the Company's Class A and Class C Common
Stock.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The Company has made a loan in the amount of $172,000 to George R. Quist, the
Company's President and Chief Executive Officer, without requiring the payment
of any interest. The loan was made under a Promissory Note dated April 29, 1998
in order for Mr. Quist to exercise stock options which were granted to him under
the 1993 Plan. No installment payments are required under the terms of the note,
but the note must be paid in full as of May 1, 2000. Mr. Quist has the right to
make prepayments on the note at any time. As of March 31, 2000, the outstanding
balance of the note was $116,600. The loan was approved by the Company's
directors on March 12, 1999, with Mr. Quist abstaining, at a Special Meeting of
the Board of Directors.
The Company's Board of Directors has a written procedure which requires
disclosure to the Board of any material interest or any affiliation on the part
of any of its officers, directors or employees which is in conflict or may be in
conflict with the interests of the Company.
No director, officer or 5% stockholder of the Company or its subsidiaries, or
any affiliate thereof, has engaged in any business transactions with the Company
or its subsidiaries during 1998 or 1999 other than as described herein.
94
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1)(2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Supplemental
Schedules" under Item 8 above.
(a)(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-K or are incorporated by reference to previous filings.
Exhibit
Table No Document
(a)(3) Exhibits:
3.A. Articles of Restatement of Articles of
Incorporation (8)
B. Bylaws (1)
4.A. Specimen Class A Stock Certificate (1)
B. Specimen Class C Stock Certificate (1)
C. Specimen Preferred Stock Certificate and
Certificate of Designation of Preferred Stock (1)
10.A. Restated and Amended Employee Stock Ownership Plan
and Trust Agreement (1)
B. Deferred Compensation Agreement with George R.
Quist (2)
C. 1993 Stock Option Plan (3)
D. Promissory Note with Key Bank of Utah (4)
E. Loan and Security Agreement with Key Bank of Utah
(4)
F. General Pledge Agreement with Key Bank of Utah (4)
G. Note Secured by Purchase Price Deed of Trust and
Assignment of Rents with the Carter Family Trust
and the Leonard M. Smith Family Trust (5)
H. Deed of Trust and Assignment of Rents with the
Carter Family Trust and the Leonard M. Smith
Family Trust (5)
I. Promissory Note with Page and Patricia Greer (6)
J. Pledge Agreement with Page and Patricia Greer (6)
K. Promissory Note with Civil Service Employees
Insurance Company (7)
L. Deferred Compensation Agreement with William C.
Sargent (8)
95
<PAGE>
M. Employment Agreement with Scott M. Quist. (8)
N. Acquisition Agreement with Consolidare
Enterprises, Inc., and certain shareholders of
Consolidare. (9)
O. Agreement and Plan of Merger between Consolidare
Enterprises, Inc., and SSLIC Holding Company. (10)
P. Administrative Services Agreement with Southern
Security Life Insurance Company. (11)
Q. Promissory Note with George R. Quist. (12)
(1) Incorporated by reference from Registration Statement on Form
S-1, as filed on June 29, 1987.
(2) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1989.
(3) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1994.
(4) Incorporated by reference from Report on Form 8-K, as filed
on February 24, 1995.
(5) Incorporated by reference from Annual Report on Form 10K, as
filed on March 31, 1995.
(6) Incorporated by reference from Report on Form 8-K, as filed
on May 1, 1995.
(7) Incorporated by reference from Report on Form 8-K, as filed
on January 16, 1996.
(8) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1998.
(9) Incorporated by reference from Report on Form 8-K, as filed
on May 11, 1998.
(10) Incorporated by reference from Report on Form 8-K, as filed
on January 4, 1999.
(11) Incorporated by reference from Report on Form 8-K, as filed
on March 4, 1999.
(12) Incorporated by reference from Annual Report on Form 10-K, as
filed on April 14, 1999.
21. Subsidiaries of the Registrant
27. Financial Data Schedule
(b) Reports on Form 8-K:
On December 1, 1999, the Company filed a Form 8-K regarding the
engagement of Tanner + Co. as its independent auditors to replace
Ernst & Young LLP.
96
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SECURITY NATIONAL FINANCIAL CORPORATION
Dated: April 14, 2000 By: George R. Quist,
---------------
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
George R. Quist Chairman of the April 14, 2000
- --------------- Board, President
and Chief Executive
Officer (Principal
Executive Officer)
Scott M. Quist First Vice April 14, 2000
- -------------- President, General
Counsel and
Treasurer and
Director (Principal
Financial and
Accounting Officer)
William C. Sargent Senior Vice April 14, 2000
- ------------------ President, Secretary
and Director
Charles L. Crittenden Director April 14, 2000
- ---------------------
Sherman B. Lowe Director April 14, 2000
- ---------------
R.A.F. McCormick Director April 14, 2000
- ----------------
H. Craig Moody Director April 14, 2000
- --------------
Norman G. Wilbur Director April 14, 2000
- ----------------
Robert G. Hunter Director April 14, 2000
- ----------------
97
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Year Ended December 31, 1999
SECURITY NATIONAL FINANCIAL CORPORATION
Commission File No. 0-9341
E X H I B I T S
<PAGE>
Exhibit Index
Exhibit No. Document Name
- ----------- ---------------------
21. Subsidiaries of the Registrant
27. Financial Data Schedule
<PAGE>
EXHIBIT 21
Subsidiaries of Security National
Financial Corporation
as of March 31, 2000
<PAGE>
Exhibit 21
Subsidiaries of Security National Financial Corporation
(as of March 31, 2000)
Security National Life Insurance Company
Security National Mortgage Company
Memorial Estates, Inc.
Memorial Mortuary
Paradise Chapel Funeral Home, Inc.
California Memorial Estates, Inc.
Cottonwood Mortuary, Inc.
Deseret Memorial, Inc.
Holladay Cottonwood Memorial Foundation
Holladay Memorial Park, Inc.
Camelback Sunset Funeral Home, Inc.
Greer-Wilson Funeral Home, Inc.
Crystal Rose Funeral Home, Inc.
Hawaiian Land Holdings
SSLIC Holding Company
Insuradyne Corporation
Southern Security Life Insurance Company
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 24,119,190
<DEBT-CARRYING-VALUE> 39,629,851
<DEBT-MARKET-VALUE> 39,453,452
<EQUITIES> 5,745,213
<MORTGAGE> 18,926,628
<REAL-ESTATE> 7,629,952
<TOTAL-INVEST> 108,949,137
<CASH> 12,422,864
<RECOVER-REINSURE> 373,459
<DEFERRED-ACQUISITION> 20,227,392
<TOTAL-ASSETS> 214,298,437
<POLICY-LOSSES> 133,879,840
<UNEARNED-PREMIUMS> 1,866,523
<POLICY-OTHER> 1,633,858
<POLICY-HOLDER-FUNDS> 2,987,618
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 214,298,437
13,175,825
<INVESTMENT-INCOME> 10,631,302
<INVESTMENT-GAINS> 313,013
<OTHER-INCOME> 25,537,238
<BENEFITS> 6,274,926
<UNDERWRITING-AMORTIZATION> 4,857,662
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,450,781
<INCOME-TAX> 230,516
<INCOME-CONTINUING> 0
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<NET-INCOME> 975,895
<EPS-BASIC> 0.22
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