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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1999 Commission File Number: 0-9341 SECURITY NATIONAL FINANCIAL CORPORATION Exact Name of Registrant. UTAH 87-0345941 - -------------------------------- ------------------- (State or other jurisdiction IRS Identification of incorporation or organization) Number 5300 South 360 West, Salt Lake City, Utah 84123 - ----------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including Area Code (801) 264-1060 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 XX NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock, $2.00 par value 3,792,644 - -------------------------------------- ----------------- Title of Class Number of Shares Outstanding as of September 30, 1999 Class C Common Stock, $.20 par value 5,348,531 - -------------------------------------- ------------------- Title of Class Number of Shares Outstanding as of September 30, 1999
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10Q QUARTER ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1 Financial Statements Page No. Consolidated Statements of Earnings - Three and nine months ended September 30, 1999 and 1998. . . . .3 Consolidated Balance Sheets - September 30, 1999 and December 31, 1998. . . . . . . . . . . . . . . .4-5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and 1998. . . . .6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . .7-9 Item 2 Management's Discussion and Analysis . . . . . .10-16 Item 3 Quantitative and Qualitative Disclosure of Market Risk . . . . . . . . . . . . . . . . . 14 PART II - OTHER INFORMATION Other Information. . . . . . . . . . . . . . . .17-19 Signature Page . . . . . . . . . . . . . . . . . . 20
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, Revenues: 1999 1998 1999 1998 - --------- ------ ------ ------ ----- Insurance premiums and other considerations $10,008,484 4,522,461 3,648,476 1,507,587 Net investment income 7,663,760 5,587,104 2,317,189 1,874,925 Net mortuary and cemetery sales 7,637,360 6,966,139 2,379,157 2,093,755 Realized gains on investments and other assets 228,622 102,991 2,964 4,892 Mortgage fee income 10,483,052 6,687,379 3,763,234 2,503,984 Other 827,413 51,555 49,351 13,035 ----------- ----------- ---------- --------- Total revenue $36,848,691 23,917,629 12,160,371 7,998,178 Benefits and expenses: Death benefits 3,434,847 1,785,148 1,051,554 663,101 Surrenders and other policy benefits 2,958,351 791,529 422,918 250,818 Increase in future policy benefits 2,355,085 2,481,246 911,014 756,575 Amortization of deferred policy acquisition costs and cost of insurance acquired 3,772,447 994,389 1,246,271 401,335 General and administrative expenses: Commissions 8,412,816 5,091,565 3,163,108 1,848,048 Salaries 5,643,863 3,950,062 1,894,696 1,329,798 Other 5,849,460 4,904,959 1,766,703 1,632,379 Interest expense 795,202 682,513 304,943 262,784 Cost of goods and services sold of the mortuaries and cemeteries 2,515,351 2,264,090 790,577 721,470 ----------- ----------- --------- --------- Total benefits and expenses 35,737,422 22,945,501 11,551,784 7,866,308 Earnings before income taxes $ 1,111,269 $ 972,128 $ 608,587$ 131,870 Income tax expense (368,844) (224,615) (209,431) (30,284) Minority interest income of subsidiary (162,635) -- (99,004) -- ----------- ----------- --------- --------- Net earnings $ 579,790 747,513 300,152 101,586 =========== ========== ========= ========= Net earnings per common share $0.13 $0.18 $0.07 $0.02 ===== ===== ===== ===== Weighted average outstanding common shares 4,380,510 4,220,488 4,335,339 4,249,563 =========== ========== ========== ========== Net earnings per common share-assuming dilution $0.13 $0.18 $0.07 $0.02 ===== ===== ===== ===== Weighted average outstanding common shares assuming-dilution 4,380,510 4,220,488 4,335,339 4,249,563 ========== ========== ========== ========== See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1999 December 31, (Unaudited) 1998 ------------------ ------------ Assets: - ------- Insurance-related investments: Fixed maturity securities held to maturity, at amortized cost $40,504,259 $ 44,984,882 Fixed maturity securities available for sale, at market 24,670,200 28,675,440 Equity securities available for sale, at market 5,170,218 5,146,059 Mortgage loans on real estate 15,357,344 12,523,395 Real estate, net of accumulated depreciation 7,890,150 7,866,151 Policy, student and other loans 11,102,574 11,493,637 Short-term investments 3,345,919 11,543,540 ----------- ------------- Total insurance-related investments 108,040,664 122,233,104 Restricted assets of cemeteries and mortuaries 4,201,724 4,098,877 Cash 8,032,183 6,670,996 Receivables: Trade contracts 4,012,565 4,011,722 Mortgage loans sold to investors 22,290,406 21,181,028 Receivable from agents 2,287,893 1,944,449 Receivable from officers 120,200 145,600 Other 1,333,157 2,603,243 ----------- ----------- Total receivables 30,044,221 29,886,042 Allowance for doubtful accounts (1,511,300) (1,576,668) ----------- ----------- Net receivables 28,532,921 28,309,374 Policyholder accounts on deposit with reinsurer 8,319,761 8,518,571 Land and improvements held for sale 8,473,149 8,405,725 Accrued investment income 1,717,227 1,440,860 Deferred policy acquisition costs 10,211,461 10,501,281 Property, plant and equipment, net 9,529,125 10,682,085 Cost of insurance acquired 10,185,636 10,462,446 Excess of cost over net assets of acquired subsidiaries 1,332,993 1,414,910 Other 1,803,795 526,918 ------------ ------------ Total assets $200,380,639 $213,265,147 ============ ============ See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) September 30, 1999 December 31, (Unaudited) 1998 ------------------- ----------- Liabilities: - ----------- Future life, annuity, and other policy benefits $135,475,359 $134,899,870 Unearned premium reserve 1,732,318 2,565,968 Line of credit for financing of mortgage loans 1,204,802 7,577,248 Bank loans payable 6,773,767 11,909,980 Notes and contracts payable 3,203,730 3,399,272 Estimated future costs of pre-need sales 6,743,983 6,376,651 Payable to endowment care fund 705,938 540,504 Accounts payable 869,990 1,321,559 Funds held under reinsurance treaties 1,412,331 1,419,357 Other liabilities and accrued expenses 3,801,928 3,787,385 Income taxes 5,935,186 6,008,537 ------------ ------------ Total liabilities 167,859,332 179,806,331 Minority interest 6,104,710 6,778,557 Stockholders' Equity: Common stock: Class A: $2 par value, authorized 10,000,000 shares, issued 4,618,935 shares in 1999 and 4,617,330 shares in 1998 9,243,004 9,234,660 Class C: $0.20 par value, authorized 7,500,000 shares, issued 5,407,559 shares in 1999 and 5,446,595 shares in 1998 1,080,998 1,089,319 ----------- ------------ Total common stock 10,324,002 10,323,979 Additional paid-in capital 9,596,462 9,596,444 Accumulated other comprehensive income, net of deferred taxes 643,010 1,081,113 Retained earnings 8,054,532 7,474,783 Treasury stock at cost (826,291 Class A shares in 1999 and 692,993 Class A shares in 1998, and 59,028 Class C shares in 1999 and 1998) (2,201,409) (1,796,060) ----------- ------------ Total stockholders' equity 26,416,597 26,680,259 ------------ ------------ Total liabilities and stockholders' equity $200,380,639 $213,265,147 ============ ============ See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1999 1998 ------- -------- Cash flows from operating activities: Net cash provided by (used in) operating activities $ 1,783,920 $(7,367,462) Cash flows from investing activities: Securities held to maturity: Purchase - fixed maturity securities -- (524,563) Calls and maturities - fixed maturity securities 4,562,415 7,661,157 Securities available for sale: Purchases - equity securities (43,759) (22,183) Sales - equity securities -- 165,085 Calls and maturities - fixed maturity securities 2,746,609 -- Purchases of short-term investments (7,896,342) (8,536,330) Sales of short-term investments 16,093,963 9,602,460 Purchases of restricted assets (102,847) (181,201) Mortgage, policy, and other loans made (4,619,857) (4,913,800) Payments received for mortgage, policy, and other loans 2,246,096 2,853,682 Purchases of property, plant, and equipment (394,196) (779,647) Purchases of real estate (368,051) (684,815) ----------- ----------- Net cash provided by investing activities 12,224,031 4,639,845 ----------- ----------- Cash flows from financing activities: Annuity receipts 7,848,532 1,980,007 Annuity withdrawals (8,385,746) (2,620,893) Repayment of bank loans and notes and contracts payable (5,331,755) (560,388) Purchase of treasury stock (405,349) -- Net change in line of credit for financing of mortgage loans (6,372,446) 1,586,011 ------------- ------------- Net cash (used in) provided by financing activities (12,646,764) 384,737 ------------- ------------- Net change in cash 1,361,187 (2,342,880) Cash at beginning of period 6,670,996 3,408,179 ------------- ------------- Cash at end of period $ 8,032,183 $ 1,065,299 ============ ============ See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1999 (Unaudited) 1. Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1998, included in the Company's Annual Report on Form 10-K (file number 0-9341). 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. 2. Comprehensive Income -------------------- For the nine months ended September 30, 1999 and 1998, total comprehensive income amounted to $142,000 and $579,000, respectively. For the three months ended September 30, 1999 and 1998, total comprehensive income (loss) amounted to $224,000 and $(91,000), respectively.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1999 (Unaudited) 3. Capital Stock In accordance with SFAS 128, the basic and diluted earnings per share amounts were calculated as follows: Nine Months Ended September 30, 1999 1998 ------ ------- Numerator: Net income $ 579,790 $ 747,513 ========== ========== Denominator: Denominator for basic earnings per share-- weighted-average shares 4,380,510 4,220,488 Effect of dilutive securities: Employee stock options Stock appreciation rights -- -- ----------- ----------- Dilutive potential common shares -- -- ----------- ------------ Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 4,380,510 4,220,488 ========== ========== Basic earnings per share $0.13 $0.18 ===== ===== Diluted earnings per share $0.13 $0.18 ===== ===== Three Months Ended September 30, 1999 1998 ------ ------ Numerator: Net income $300,152 101,586 ======== ======== Denominator: Denominator for basic earnings per share-- weighted- average shares 4,335,339 4,249,563 Effect of dilutive securities: Employee stock options Stock appreciation rights -- -- ---------- ---------- Dilutive potential common shares -- -- ----------- ----------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 4,335,339 4,249,563 ========== ========== Basic earnings per share $0.07 $0.02 ===== ===== Diluted earnings per share $0.07 $0.02 ===== ===== There are no dilutive effects on net income for purpose of this calculation.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1999 (Unaudited) 4. Business Segment Life Cemetery/ Insurance Mortuary Mortgage ------------- ----------- ---------- For the Nine Months Ended September 30, 1999 - -------------------------- Revenues from external customers $ 17,088,867 $ 8,190,945 $11,530,989 Intersegment revenues 1,592,254 -- -- Segment profit 707,166 (143,693) (48,313) Identifiable assets 181,051,469 34,303,219 3,243,131 For the Nine Months Ended September 30, 1998 - -------------------------- Revenues from external customers 8,853,981 7,523,480 7,528,725 Intersegment revenues 1,071,262 Segment profit 634,314 (69,035) 176,757 Identifiable assets 105,776,139 31,576,764 3,054,293 For the Three Months Ended September 30, 1999 - --------------------------- Revenues from external customers 5,352,226 2,567,912 4,213,504 Intersegment revenues 593,166 -- -- Segment profit 445,253 (116,203) 53,863 For the Three Months Ended September 30, 1998 - --------------------------- Revenues from external customers 2,889,536 2,297,061 2,808,385 Intersegment revenues 384,228 -- -- Segment profit 162,742 (235,280) 96,498
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1999 (Unaudited) 4. Business Segment Reconciling Corporate Items Consolidated ---------- ------------ ------------ For the Nine Months Ended September 30, 1999 - ------------------------- Revenues from external customers $ 37,890 $ $ 36,848,691 Intersegment revenues 2,876,251 (4,468,505) -- Segment profit 596,109 -- 1,111,269 Identifiable assets 2,154,010 (20,371,190) 200,380,639 For the Nine Months Ended September 30, 1998 - ------------------------- Revenues from external customers 11,443 -- 23,917,629 Intersegment revenues 568,709 (1,639,971) -- Segment profit 230,092 -- 972,128 Identifiable assets 2,239,393 (13,019,413) 129,627,176 For the Three Months Ended September 30, 1999 - --------------------------- Revenues from external customers 26,729 -- 12,160,371 Intersegment revenues 960,070 (1,553,236) -- Segment profit 225,674 -- 608,587 For the Three Months Ended September 30, 1998 - --------------------------- Revenues from external customers 3,206 -- 7,998,178 Intersegment revenues 190,090 (574,318) -- Segment profit 107,910 -- 131,870
Item 2. Management's Discussion and Analysis ------------------------------------ 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 Consolidare Enterprises, Inc., ("Consolidare") for a total cost of $12,248,194. As of September 30, 1999, Consolidare owns approximately 60.9% of the outstanding shares of common stock of Southern Security Life Insurance Company and all of the outstanding shares of stock of Insuradyne Corp. The purchase of Consolidare, including its subsidiaries was accounted for using the purchase method of accounting. Thus the results of operations of the Company for the nine and three months ended September 30, 1998 do not include the results of Consolidare. In the Management's Discussion and Analysis of the Results of Operations, the results of Consolidare for the nine and three months ended September 30, 1999 have been excluded. See table "Consolidated Statements of Earnings without Consolidare and Subsidiaries" at the end of Management's Discussion and Analysis which shows the effect of excluding the results of Consolidare for the nine and three months ended September 30, 1999. Including Consolidare, total revenues increased by $13,159,000, or 55.0%, to $37,077,000 for the nine months ended September 30, 1999, from $23,918,000 for the nine months ended September 30, 1998 and total benefits and expenses increased by $13,020,000 or 56.7%, to $35,966,000 for the nine months ended September 30, 1999, from $22,946,000 for the nine months ended September 30, 1998. Total revenues increased by $4,391,000, or 54.9%, to $12,389,000 for the three months ended September 30, 1999, from $7,998,000 for the three months ended September 30, 1998 and total benefits and expenses increased by $3,914,000, or 49.8% to $11,780,000 for the three months ended September 30, 1999, from $7,866,000 for the three months ended September 30, 1998. The results for Consolidare for the nine and three months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999, since the Company has not yet realized many of the reduced costs of consolidation of administrative functions and the implementation of new computer systems. Results of Operations Third Quarter of 1999 Compared to Third Quarter of 1998 Total revenues increased by $1,798,000, or 22.5%, to $9,796,000 for the three months ended September 30, 1999, from $7,998,000 for the three months ended September 30, 1998. Contributing to this increase in total revenues was a $1,259,000 increase in mortgage fee income, a $285,000 increase in net mortuary and cemetery sales, a $93,000 increase in insurance premiums and other considerations and a $164,000 increase in net investment income. Insurance premiums and other considerations increased by $93,000, or 6.1%, to $1,600,000 for the three months ended September 30, 1999, from $1,507,000 for the comparable period in 1998. This increase was primarily due to an increase in new business.
Net investment income increased by $164,000, or 8.8%, to $2,039,000 for the three months ended September 30, 1999, from $1,875,000 for the comparable period in 1998. This increase was attributable to a higher yield on the Company's investments. Net mortuary and cemetery sales increased by $285,000, or 13.6%, to $2,379,000 for the three months ended September 30, 1999, from $2,094,000 for the comparable period in 1998. This increase was the result of additional pre-need and at-need sales. Mortgage fee income increased by $1,259,000, or 50.3%, to $3,763,000 for the three months ended September 30, 1999, from $2,504,000 for the comparable period in 1998. This increase was primarily attributable to more loan originations during the third quarter of 1999 due to the expansion of business activities in new geographic markets. Total benefits and expenses were $9,417,000, or 96.1% of total revenues for the three months ended September 30 1999, as compared to $7,866,000, or 98.3% of total revenues for the comparable period in 1998. Death benefits, surrenders and other policy benefits, and increase in future policy benefits increased by an aggregate of $36,000, or 2.2%, to $1,706,000 for the three months ended September 30, 1999, from $1,670,000 for the comparable period in 1998. This increase was primarily the result of additional policies in force. Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $54,000, or 13.4%, to $347,000, for the three months ended September 30, 1999, from $401,000 for the comparable period in 1998. This decrease was in line with actuarial assumptions. General and administrative expenses increased by $1,458,000, or 30.3%, to $6,268,000 for the three months ended September 30, 1999, from $4,810,000 for the comparable period in 1998. This increase primarily resulted from an increase in commissions and other expenses due to additional mortgage loan originations having been made by the Company's mortgage subsidiary during the third quarter of 1999 on account of the expansion of its business activities in new geographic markets. Interest expense increased by $42,000, or 16.0%, to $305,000 for the three months ended September 30, 1999, from $263,000 for the comparable period in 1998. This increase was primarily due to additional bank borrowings required for the acquisition of Consolidare. Cost of mortuaries and cemeteries goods and services sold increased by $69,000, or 9.6%, to $790,000 for the three months ended September 30, 1999, from $721,000 for the comparable period in 1998. This increase was primarily related to an increase in pre-need and at-need sales. Nine Months Ended September 30, 1999 as Compared to Nine Months Ended September 30, 1998 Total revenues increased by $4,925,000, or 20.6%, to $28,843,000 for the nine months ended September 30, 1999, from $23,918,000 for the nine months ended September 30, 1998. Contributing to this increase in total revenues was a $3,796,000 increase in mortgage fee income, a $126,000 increase in realized gains on investments, a $261,000 increase in insurance premiums and other considerations, a $671,000 increase in net mortuary and cemetery sales, and a $55,000 increase in net investment income.
Insurance premiums and other considerations increased by $261,000, or 5.8%, to $4,784,000 for the nine months ended September 30, 1999, from $4,522,000 for the comparable period in 1998. This increase was primarily due to an increase in new business. Net investment income increased by $55,000, or 1.0%, to $5,642,000 for the nine months ended September 30, 1999, from $5,587,000 for the comparable period in 1998. This increase was attributable to a higher yield on the Company's investments. Net mortuary and cemetery sales increased by $671,000, or 9.6%, to $7,637,000 for the nine months ended September 30, 1999, from $6,966,000 for the comparable period in 1998. This increase was the result of additional pre-need and at-need sales. Mortgage fee income increased by $3,796,000, or 56.8%, to $10,483,000 for the nine months ended September 30, 1999, from $6,687,000 for the comparable period in 1998. This increase was primarily attributable to more loan originations during 1999 due to the expansion of business activities in new geographic markets. Total benefits and expenses were $28,120,000, or 97.5% of total revenues for the nine months ended September 30 1999, as compared to $22,946,000, or 95.9% of total revenues for the comparable period in 1998. Death benefits, surrenders and other policy benefits, and increase in future policy benefits increased by an aggregate of $242,000, or 4.8%, to $5,300,000 for the nine months ended September 30, 1999, from $5,058,000 for the comparable period in 1998. This increase was primarily the result of accumulative interest on policyholder funds and an increase in death claims. Amortization of deferred policy acquisition costs and cost of insurance acquired increased by $38,000, or 3.8%, to $1,032,000 for the nine months ended September 30, 1999, from $994,000 for the comparable period in 1998. This increase was in line with the increase in revenues. General and administrative expenses increased by $4,531,000 or 32.5%, to $18,477,000 for the nine months ended September 30, 1999, from $13,946,000 for the comparable period in 1998. This increase primarily resulted from an increase in commissions and other expenses due to additional mortgage loan originations having been made by the Company's mortgage subsidiary during 1999 on account of the expansion of its business activities in new geographic markets. Interest expense increased by $113,000, or 16.5%, to $795,000 for the nine months ended September 30, 1999, from $682,000 for the comparable period in 1998. This increase was primarily due to the additional bank borrowings required for the acquisition of Consolidare. Cost of mortuaries and cemeteries goods and services sold increased by $251,000, or 11.1%, to $2,515,000 for the nine months ended September 30, 1999, from $2,264,000 for the comparable period in 1998. This increase was primarily related to an increase in pre- need and at-need sales. Liquidity and Capital Resources The Company's life insurance subsidiary and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity 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 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 predominantly 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 life insurance subsidiaries amounted to $65,174,000 as of September 30, 1999, compared to $73,660,000 as of December 31, 1998. This represents 60.3% and 60.3% of the total insurance-related investments as of September 30, 1999, and December 31, 1998, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At September 30, 1999, .4% ($460,000) and at December 31, 1998, .4% ($460,000) of the Company's total investment in bonds were invested in bonds in rating categories three through six, which are considered non-investment grade. 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. 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 September 30, 1999, and December 31, 1998, the life insurance subsidiary exceeded the regulatory criteria. The Company's total capitalization of stockholders' equity and bank debt and notes payable was $36,394,000 as of September 30, 1999, as compared to $41,990,000 as of December 31, 1998. Stockholders' equity as a percent of capitalization increased to 73% as of September 30, 1999, from 64% as of December 31, 1998. Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1998 was 6.0% as compared to a rate of 11.7% for 1998. The 1999 lapse rate is approximately the same as 1998.
At September 30, 1999, $20,883,000 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's life insurance subsidiaries. The life insurance subsidiary cannot pay a dividend to its parent company without the approval of insurance regulatory authorities. Year 2000 Issues The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (Year 2000) approaches. The Year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company's insurance operations have two different administrative systems for its insurance operations. The system used for Security National Life Insurance Company was converted to a Year 2000 compliant version in the fourth quarter of 1998. The Company expended approximately $52,000 for the conversion to this latest version. As part of the acquisition of Southern Security Life Insurance Company ("Southern Security"), the Company purchased a new system which is Year 2000 compliant. The Company successfully converted Southern Security's existing system to the new system on January 1, 1999. The Company paid approximately $1.0 million for this new system in 1998. The Company's mortgage subsidiary uses a Year 2000 compliant system. The Company's mortuary and cemetery operations converted to the latest version for Year 2000 software during March 1999. The Company's general accounting and payroll systems were converted to Year 2000 versions during March 1999. The cost for these conversions were not significant to consolidated net income. The anticipated future costs of addressing potential Year 2000 problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Management believes that manual policy and claims administration could be performed in the unlikely event that one or more of its systems did not function. The Company has tested each personal computer being used for Year 2000 compliance and has installed or replaced the necessary software to meet compliance. The Company is monitoring the progress of third party vendors which the Company relies upon, such as software suppliers, telephone equipment and communication suppliers, electricity suppliers, natural gas suppliers, banks, brokers, U.S. Postal Service and express mail services. The Company is not aware of any of its suppliers that will not be Year 2000 compliant and will continue to monitor and make the necessary contingency plans where needed. The Company is aware of the risks associated with any of its internal systems or those of its suppliers that are not Year 2000 compliant. Item 3. Quantitative and Qualitative Disclosure of Market Risk There have been no significant changes since the annual report Form 10-K filed for the year ended December 31, 1998.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Without Consolidare and Subsidiaries For the Nine Months Ended September 30, 1999 and 1998 (Unaudited) Consolidare and Subsidiaries REVENUES: 1999 1998 1999 - -------- ---------- ----------- ------------ Insurance premiums and other considerations $ 10,008,484 $ 4,522,461 $ 5,224,546 Net investment income 7,663,760 5,587,104 2,021,328 Net mortuary and cemetery income 7,637,360 6,966,139 -- Realized gains on investments and other assets 228,622 102,991 -- Mortgage fee income 10,483,052 6,687,379 -- Other 827,413 51,555 760,143 ------------ ----------- ----------- Total Revenues 36,848,691 23,917,629 8,006,017 ------------ ----------- ----------- BENEFITS AND EXPENSES: Death benefits 3,434,847 1,785,148 1,439,772 Surrenders and other policy benefits 2,958,351 791,529 1,829,452 Increase in future policy benefits 2,355,085 2,481,246 179,228 Amortization of deferred policy acquisition costs and cost of insurance acquired 3,772,447 994,389 2,739,983 General and administrative expenses: Commissions 8,412,816 5,091,565 106,109 Salaries 5,643,863 3,950,062 860,271 Other 5,849,460 4,904,959 462,451 Interest expense 795,202 682,513 -- Cost of mortuaries and cemeteries goods and services sold 2,515,351 2,264,090 -- ----------- ----------- ---------- Total benefits and expenses 35,737,422 22,945,501 7,617,266 ----------- ----------- ---------- Earnings before income taxes 1,111,269 972,128 388,751 Income tax expense (368,844) (224,615) (140,397) Minority interest in income of subsidiary (162,635) -- (162,635) ----------- ----------- ---------- Net earnings $ 579,790 $ 747,513 $ 85,719
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Without Consolidare and Subsidiaries For the Nine Months Ended September 30, 1999 and 1998 (Unaudited) Variance Without without Consolidare Consolidare and and Subsidiaries Subsidiaries REVENUES: 1999 Amount Percent - -------- ------------- ------------ -------- Insurance premiums and other considerations $ 4,783,938 $ 261,477 5.8% Net investment income 5,642,432 55,328 1.0 Net mortuary and cemetery income 7,637,360 671,221 9.6 Realized gains on investments and other assets 228,622 125,631 122.0 Mortgage fee income 10,483,052 3,795,673 56.8 Other 67,270 15,715 30.5 ------------- ----------- ------ Total Revenues 28,842,674 4,925,045 20.6 ------------- ----------- ------- BENEFITS AND EXPENSES: - --------------------- Death benefits 1,995,075 209,927 11.8 Surrenders and other policy benefits 1,128,899 337,370 42.6 Increase in future policy benefits 2,175,857 (305,389) (12.3) Amortization of deferred policy acquisition costs and cost of insurance acquired 1,032,464 38,075 3.8 General and administrative expenses: Commissions 8,306,707 3,215,142 63.1 Salaries 4,783,592 833,530 21.1 Other 5,387,009 482,050 9.8 Interest expense 795,202 112,689 16.5 Cost of mortuaries and cemeteries goods and services sold 2,515,351 251,261 11.1 ----------- ---------- ------ Total benefits and expenses 28,120,156 5,174,655 22.6 ----------- ---------- ------ Earnings before income taxes 722,518 (249,610) (25.7) Income tax expense (228,447) (3,832) 1.7 Minority interest in income of subsidiary -- -- -- ----------- ----------- ----- Net earnings $ 494,071 $ (253,442) (33.9)% =========== =========== =====
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Without Consolidare and Subsidiaries For the Three Months Ended September 30, 1999 and 1998 (Unaudited) Consolidare and Subsidiaries REVENUES: 1999 1998 1999 - -------- ----------- ---------- ------------ Insurance premiums and other considerations $ 3,648,476 $ 1,507,587 $ 2,048,276 Net investment income 2,317,189 1,874,925 277,953 Net mortuary and cemetery income 2,379,157 2,093,755 -- Realized gains on investments and other assets 2,964 4,892 -- Mortgage fee income 3,763,234 2,503,984 -- Other 49,351 13,035 38,238 ------------ ----------- ----------- Total Revenues 12,160,371 7,998,178 2,364,468 ------------ ----------- ----------- BENEFITS AND EXPENSES: - --------------------- Death benefits 1,051,554 663,101 449,723 Surrenders and other policy benefits 422,918 250,818 189,118 Increase in future policy benefits 911,014 756,575 40,522 Amortization of deferred policy acquisition costs and cost of insurance acquired 1,246,271 401,335 898,911 General and administrative expenses: Commissions 3,163,108 1,848,048 136,429 Salaries 1,894,696 1,329,798 359,142 Other 1,766,703 1,632,379 60,694 Interest expense 304,943 262,784 -- Cost of mortuaries and cemeteries goods and services sold 790,577 721,470 -- ------------ ----------- ---------- Total benefits and expenses 11,551,784 7,866,308 2,134,539 ------------ ----------- ---------- Earnings before income taxes 608,587 131,870 229,929 Income tax expense (209,431) (30,284) (122,587) Minority interest in income of subsidiary (99,004) -- (99,004) ----------- ----------- ----------- Net earnings $ 300,152 $ 101,586 $ 8,338 =========== =========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Without Consolidare and Subsidiaries For the Three Months Ended September 30, 1999 and 1998 (Unaudited) Variance Without without Consolidare Consolidare and and Subsidiaries Subsidiaries REVENUES: 1999 Amount Percent - --------- ------------ ---------- ------- Insurance premiums and other considerations $ 1,600,200 $ 92,613 6.1% Net investment income 2,039,236 164,311 8.8 Net mortuary and cemetery income 2,379,157 285,402 13.6 Realized gains on investments and other assets 2,964 (1,928) (39.4) Mortgage fee income 3,763,234 1,259,250 50.3 Other 11,112 (1,923) (14.8) ----------- ---------- ----- Total Revenues 9,795,903 1,797,725 22.5 ----------- ---------- ----- BENEFITS AND EXPENSES: - ---------------------- Death benefits 601,831 (61,270) (9.2) Surrenders and other policy benefits 233,800 (17,018) (6.8) Increase in future policy benefits 870,492 113,917 15.1 Amortization of deferred policy acquisition costs and cost of insurance acquired 347,360 (53,975) (13.4) General and administrative expenses: Commissions 3,026,679 1,178,631 63.8 Salaries 1,535,554 205,756 15.5 Other 1,706,009 73,630 4.5 Interest expense 304,943 42,159 16.0 Cost of mortuaries and cemeteries goods and services sold 790,577 69,107 9.6 ---------- ---------- ----- Total benefits and expenses 9,417,245 1,550,937 19.7 ---------- ---------- ----- Earnings before income taxes 378,658 246,788 187.1 Income tax expense (86,844) (56,560) 186.8 Minority interest in income of subsidiary -- -- -- ---------- ----------- ------ Net earnings $ 291,814 $ 190,228 187.3% ========== =========== ======
Part II Other Information: Item 1. Legal Proceedings The Company has been named as a party in connection with pending litigation brought by Garry Eckard & Co., Inc. ("Eckard") in the Federal District Court for the Southern District of Indiana. The complaint was filed on October 14, 1996 and alleges breach of contract and civil conversion pertaining to a finder's fee and seeks an unspecified amount of damages plus costs and attorneys' fees. In a prior letter to the Company from Eckard, it appears that the amount of the fee being sought is $152,000 (excluding interest and attorney's fees). The complaint, pursuant to the civil conversion claim, seeks treble damages under Indiana's civil conversion statute. The complaint was initially filed in the Indiana Hamilton County Superior Court, but was subsequently removed by the Company to the Federal District Court for the Southern District of Indiana. The Company filed a motion to dismiss for lack of personal jurisdiction and Eckard filed a motion to amend its complaint and to add Security National Life Insurance Company, a subsidiary of the Company, as a party defendant. On March 18, 1997, the Company's motion was granted to dismiss the complaint against the Company for lack of personal jurisdiction and Eckard's motion was granted to amend the complaint by adding Security National Life Insurance Company as a party defendant. The Company's motion to dismiss the complaint against the Company was granted without prejudice, which allows the complaint to be refiled in an appropriate jurisdiction. Security National Life Insurance Company also filed a motion to dismiss for lack of personal jurisdiction. On October 10, 1997, this motion to dismiss the complaint for lack of personal jurisdiction was granted thereby also dismissing the case against Security National Life Insurance Company. Thus, the case in Indiana was dismissed without prejudice against both the Company and Security National Life Insurance Company for lack of personal jurisdiction. On March 13, 1998, a letter was sent by Eckard's counsel relative to a settlement proposal together with a draft complaint against the Company and Security National Life Insurance Company for filing in the United States District Court for the District of Utah. There was no material difference between the complaint prepared for filing in Utah and the amended complaint which had been filed in Indiana. The complaint was filed in Utah on August 13, 1998. Since its filing (the claims being the same as in the Indiana action), the treble damage claim (conversion) has been dismissed with prejudice. The contract claim is the remaining claim. Eckard claims a fee of $151,000 plus interest through July 31, 1999 of $168,729 (and claims interest continues to accrue), plus attorney's fees. The formal discovery period has ended. Eckard and the Company have both filed motions for summary judgment which have been argued and are pending decisions by the court. Although no prediction of outcome is given, management intends to vigorously defend the action. The Company has been named as a party in a lawsuit brought by Robert L. Anderson ("Anderson") in the Superior Court of San Diego, North County Judicial District, State of California. The complaint was filed on January 28, 1999
and pertains to the creation of the San Diego Memorial Park Partnership and the development of Singing Hills Memorial Park Cemetery. Anderson was denominated as a partner in the 1989 partnership agreement. He asserts that the Company did not carry out the partnership agreement in developing the property as a cemetery and residential lots and that instead the property was later acquired by California Memorial Estates, Inc., a subsidiary of the Company, and developed. Anderson asserts a claim for lost profits because of alleged breach of the partnership agreement and further asserts breach of fiduciary duty, actual fraud, constructive fraud, asks for an accounting, and alleges conspiracy and declaratory relief. He seeks punitive damages, legal fees and costs. Formal discovery is in process. At this juncture, with discovery in process, no complete evaluation has been made. Management, however, intends to vigorously defend the matter and believes that Anderson did not perform as required and that he has no bona fide basis to complain. 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. Item 2. Changes in Securities NONE Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information NONE Item 6. Exhibits and Reports on Form 8-K (a) 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) 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. 27. Financial Data Schedule (b) Reports on Form 8-K: NONE
SIGNATURES Pursuant to the requirements 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. REGISTRANT SECURITY NATIONAL FINANCIAL CORPORATION --------------------------------------- Registrant DATED: November 19, 1999 By: George R. Quist, ----------------- --------------- President and Chief Executive Officer (Principal Executive Officer) DATED: November 19, 1999 By: Scott M. Quist ----------------- -------------- First Vice President, General Counsel and Treasurer (Principal Financial and Accounting Officer)
7 9-MOS DEC-31-1998 SEP-30-1999 24,670,200 24,670,200 24,670,200 5,170,218 15,357,344 7,890,150 108,040,664 8,032,183 0 10,211,461 200,380,639 1,696,973 1,732,318 43,936,840 89,896,539 9,977,497 0 0 10,324,002 16,092,595 200,380,639 10,008,484 7,663,760 228,622 827,413 6,393,198 0 0 1,111,269 368,844 0 0 0 0 579,790 .13 .13 0 0 0 0 0 0 0