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, 2001 Commission File Number: 0-9341
- ------------------------------------ ------------------------------
SECURITY NATIONAL FINANCIAL CORPORATION
Exact Name of Registrant.
UTAH 87-0345941
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(State or other jurisdiction IRS Identification Number
of incorporation or organization)
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 3,874,566
- ------------------------------------- ---------------------------------
Title of Class Number of Shares Outstanding as of
September 30, 2001
Class C Common Stock, $.20 par value 5,762,729
- ------------------------------------ ----------------------------------
Title of Class Number of Shares Outstanding as of
September 30, 2001
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10Q
QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
- ------ --------
Consolidated Statement of Earnings - Nine and
Three months ended September 30, 2001 and 2000
(unaudited).............................................3
Consolidated Balance Sheet - September 30, 2001
(unaudited)and December 31, 2000 .......................4-5
Consolidated Statement of Cash Flows -
Nine months ended September 30, 2001 and 2000
(unaudited).............................................6
Notes to Consolidated Financial Statements..............7-9
Item 2 Management's Discussion and Analysis.................10-13
- ------
Item 3 Quantitative and Qualitative Disclosure of Market
Risk.................................................13
PART II - OTHER INFORMATION
Other Information....................................14-15
Signature Page.......................................16
2
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
Revenues: 2001 2000 2001 2000
- -------- ---- ---- ---- ----
Insurance premiums and
other considerations $10,019,159 $9,921,476 $3,435,975 $3,321,587
Net investment income 9,600,420 8,946,121 3,040,440 3,051,914
Net mortuary and cemetery sales 9,250,976 7,532,068 2,880,537 2,345,776
Realized gains on investments
and other assets 120,006 37,294 116,020 5,727
Mortgage fee income 26,763,907 17,095,397 9,574,016 5,987,232
Other 105,495 85,909 50,497 19,220
------------ ------------ ------------ ------------
Total revenues 55,859,963 43,618,265 19,097,485 14,731,456
Benefits and expenses:
------------
Death benefits 3,951,069 3,237,944 1,160,311 753,519
Surrenders and other policy benefits 1,155,853 1,193,033 319,299 (169,173)
Increase in future policy benefits 4,172,498 4,434,555 1,628,704 2,224,220
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 2,920,863 3,560,269 971,917 1,242,677
General and administrative expenses:
Commissions 20,487,597 13,607,401 7,228,474 4,668,286
Salaries 7,065,512 5,873,284 2,825,330 1,940,123
Other 8,663,668 7,052,318 2,694,761 2,414,573
Interest expense 2,175,012 1,487,213 558,330 593,099
Cost of goods and services sold
of the mortuaries and cemeteries 3,162,785 2,403,645 899,293 742,985
------------ ------------ ------------ ------------
Total benefits and expenses 53,754,857 42,849,662 18,286,419 14,410,309
Earnings before income taxes 2,105,106 768,603 811,066 321,147
Income tax expense (572,559) (189,467) (217,899) (79,151)
Minority interest (income)
loss of subsidiary 47,196 (48,026) 12,010 (17,366)
------------ ------------ ------------ ------------
Net earnings $1,579,743 $531,110 $605,177 $224,630
============ ------------ ============ ============
Net earnings per common share $0.35 $0.12 $0.14 $0.05
============ ============ ============ ============
Weighted average outstanding
common shares 4,450,839 4,290,775 4,450,839 4,238,724
============ ============ ============ ============
Net earnings per common
share-assuming dilution $0.35 $0.12 $0.14 $0.05
============ ============ ============ ============
Weighted average outstanding
common shares assuming-dilution 4,451,366 4,328,662 4,451,510 4,299,717
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2001 December 31,
(Unaudited) 2000
-------------- -----------
Assets:
- -------
Insurance-related investments:
Fixed maturity securities held
to maturity, at amortized cost $28,281,815 $39,384,168
Fixed maturity securities available
for sale, at market 23,307,682 23,504,989
Equity securities available for sale,
at market 2,484,807 2,774,077
Mortgage loans on real estate 15,758,876 17,435,178
Real estate, net of accumulated
depreciation 8,147,910 8,564,395
Policy, student and other loans 11,293,258 11,277,742
Short-term investments 5,868,358 1,027,927
------------- -------------
Total insurance-related
investments 95,142,706 103,968,476
Restricted assets
of cemeteries and mortuaries 5,226,724 4,841,819
Cash 7,644,473 11,275,030
Receivables:
Trade contracts 6,381,552 5,342,380
Mortgage loans sold to investors 43,280,514 26,886,162
Receivable from agents 2,104,422 2,225,784
Receivable from officers 105,200 111,500
Other 1,250,414 3,503,320
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Total receivables 53,122,102 38,069,146
Allowance for doubtful accounts (1,689,106) (1,656,223)
------------- -------------
Net receivables 51,432,996 36,412,923
Policyholder accounts on deposit
with reinsurer 7,254,114 7,434,750
Land and improvements held for sale 8,350,834 8,485,523
Accrued investment income 1,333,057 1,302,552
Deferred policy acquisition costs 12,556,615 12,043,527
Property, plant and equipment, net 10,841,091 10,824,700
Cost of insurance acquired 7,821,388 8,729,264
Excess of cost over net assets
of acquired subsidiaries 1,090,418 1,172,599
Other 586,627 695,683
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Total assets $209,281,043 $207,186,846
============= =============
See accompanying notes to consolidated financial statements.
4
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
September 30, 2001 December 31,
(Unaudited) 2000
-------------- -----------
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $140,449,413 $140,000,344
Unearned premium reserve 1,729,590 1,754,980
Bank loans payable 8,198,263 9,805,118
Notes and contracts payable 3,862,274 4,240,830
Estimated future costs of
pre-need sales 7,905,901 7,119,544
Payable to endowment care fund 43,238 --
Accounts payable 1,052,051 1,242,407
Funds held under reinsurance treaties 1,388,100 1,417,216
Other liabilities and
accrued expenses 4,923,489 4,115,920
Income taxes 6,990,842 6,124,512
------------- -------------
Total liabilities 176,543,161 175,820,871
Minority interest 4,178,645 4,624,614
Stockholders' Equity:
- --------------------
Common stock:
Class A: $2 par value,
authorized 10,000,000
shares, issued 5,107,630
shares in 2001 and 5,107,631
shares in 2000 10,215,260 10,215,262
Class C: $0.20 par value,
authorized 7,500,000 shares,
issued 5,827,805 shares in
2001 and 2000 1,165,561 1,165,561
------------- -------------
Total common stock 11,380,821 11,380,823
Additional paid-in capital 10,054,714 10,054,714
Accumulated other comprehensive
income, net of deferred taxes 1,074,886 836,751
Retained earnings 9,411,049 7,831,306
Treasury stock at cost (1,233,064
Class A shares and 65,078 Class C shares in
2001 and 2000 held
by affiliated companies) (3,362,233) (3,362,233)
------------- -------------
Total stockholders' equity 28,559,237 26,741,361
------------- -------------
Total liabilities and
stockholders' equity $209,281,043 $207,186,846
============= =============
See accompanying notes to consolidated financial statements.
5
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $(5,594,384) $5,024,387
------------ ------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (402,995) (4,798,597)
Calls and maturities - fixed
maturity securities 11,555,252 4,000,900
Securities available for sale:
Purchases - equity securities -- (120,812)
Sales - equity securities 11,382 --
Calls and maturities - fixed
maturity securities 1,064,816 1,321,827
Purchases of short-term investments (13,415,431) (4,988,744)
Sales of short-term investments 8,575,000 5,385,814
Purchases of restricted assets (384,905) (458,668)
Mortgage, policy, and other loans made (2,741,158) (1,977,673)
Payments received for mortgage,
policy, and other loans 4,606,735 3,991,477
Purchases of property, plant,
and equipment (776,042) (698,952)
Purchases of real estate (49,472) (845,408)
------------ ------------
Net cash provided by
(used in) investing activities 8,043,182 811,164
------------ ------------
Cash flows from financing activities:
Annuity receipts 5,368,875 6,616,212
Annuity withdrawals (9,462,819) (10,705,423)
Repayment of bank loans and
notes and contracts payable (1,985,411) (1,674,226)
Net change in line of credit
for financing of mortgage loans -- (8,537,023)
Purchase of treasury stock -- (815,121)
------------ ------------
Net cash (used in) provided by
financing activities (6,079,355) (15,115,581)
------------ ------------
Net change in cash (3,630,557) (9,280,030)
Cash at beginning of period 11,275,030 12,422,864
------------ ------------
Cash at end of period $7,644,473 $3,142,834
============ ============
See accompanying notes to consolidated financial statements.
6
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America 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 accounting principles generally
accepted in the United States of America 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 three and nine months ended September 30, 2001, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 2000,
included in the Company's Annual Report on Form 10-K (file number 0-9341).
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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, 2001 and 2000, total comprehensive
income amounted to $1,817,878 and $700,326, respectively. For the three months
ended September 30, 2001, total comprehensive income amounted to $628,622 and
$534,953, respectively.
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,
2001 2000
---- ----
Numerator:
Net income $1,579,743 $531,110
========== ==========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 4,450,839 4,290,775
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Effect of dilutive securities:
Employee stock options 527 37,887
Stock appreciation rights -- --
---------- ----------
Dilutive potential
common shares 527 37,887
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Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 4,451,366 4,328,662
========== ==========
Basic earnings per share $0.35 $0.12
========== ==========
Diluted earnings per share $0.35 $0.12
========== ==========
There are no dilutive effects on net income for purpose of this calculation.
7
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
3. Capital Stock
Three Months Ended September 30,
2001 2000
---- ----
Numerator:
Net income $605,177 $224,630
========== ==========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 4,450,839 4,238,724
---------- ----------
Effect of dilutive securities:
Employee stock options 671 60,993
Stock appreciation rights -- --
---------- ----------
Dilutive potential
common shares 671 60,993
---------- ----------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 4,451,510 4,299,717
========== ==========
Basic earnings per share $0.14 $0.05
========== ==========
Diluted earnings per share $0.14 $0.05
========== ==========
There are no dilutive effects on net income for purpose of this calculation.
8
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
4. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Corporate Items Consolidated
--------- -------- -------- --------- ----- ------------
For the Nine Months Ended
September 30, 2001
Revenues from
external customers . $ 15,462,026 $ 10,117,519 $ 30,280,254 $ 164 $ -- $ 55,859,963
Intersegment revenues . 2,823,155 -- -- 2,878,394 (5,701,549) --
Segment profit (101,476) 237,561 1,489,157 479,864 -- 2,105,106
Identifiable assets 196,852,974 36,825,841 5,712,935 3,299,250 (33,409,957) 209,281,043
For the Nine Months Ended
September 30, 2000
Revenues from
external customers 16,126,298 8,097,388 19,394,507 72 -- 43,618,265
Intersegment revenues 2,338,051 -- -- 2,905,826 (5,243,877) --
Segment profit 292,744 (373,705) (134,015) 983,579 -- 768,603
Identifiable assets 194,296,776 34,311,249 3,224,196 2,952,276 (31,241,308) 203,543,189
For the Three Months Ended
September 30, 2001
Revenues from
external customers 5,131,849 3,246,750 10,718,861 25 -- 19,097,485
Intersegment revenues 912,630 -- -- 897,216 (1,809,846) --
Segment profit 18,674 81,685 926,422 (215,715) -- 811,066
For the Three Months Ended
September 30, 2000
Revenues from
external customers 5,344,140 2,536,565 6,850,737 14 -- 14,731,456
Intersegment revenues 837,007 -- -- 973,207 (1,810,214) --
Segment profit 178,400 (166,598) (3,027) 312,372 -- 321,147
9
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
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 lower interest rates by originating and refinancing
mortgage loans.
During the nine months ended September 30, 2001, Security National Mortgage
Company ("SNMC") experienced increases in revenue and expenses due to the
increase in loan volume of its operations. SNMC is a mortgage lender
incorporated under the laws of the State of Utah. SNMC is approved and regulated
by the Federal Housing Administration (FHA), a department of the U.S. Department
of Housing and Urban Development (HUD), to originate mortgage loans that qualify
for government insurance in the event of default by the borrower. SNMC obtains
loans primarily from independent brokers and correspondents. SNMC funds the
loans from internal cash flows and lines of credit from financial institutions.
SNMC receives fees from origination points paid by the borrowers and service and
release premiums received from third party investors who purchase the loans from
SNMC. SNMC sells all of its loans to third party investors and does not retain
servicing to these loans. SNMC pays the brokers and correspondents a commission
for loans that are brokered through SNMC. SNMC originated and sold 5,812
($836,124,000) and 3,735 ($496,095,000) loans respectively for the nine months
ended September 30, 2001 and 2000.
Results of Operations
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Total revenues increased by $12,242,000, or 28.1%, to $55,860,000 for the nine
months ended September 30, 2001, from $43,618,000 for the nine months ended
September 30, 2000. Contributing to this increase in total revenues was a
$9,669,000 increase in mortgage fee income, a $654,000 increase in net
investment income, and a $1,719,000 increase in net mortuary and cemetery sales.
Insurance premiums and other considerations increased by $98,000, or 1.0%, to
$10,019,000 for the nine months ended September 30, 2001, from $9,921,000 for
the comparable period in 2000. This increase was primarily due to additional
premiums from increased sales of traditional life products of the Company.
Net investment income increased by $654,000, or 7.3%, to $9,600,000 for the nine
months ended September 30, 2001, from $8,946,000 for the comparable period in
2000. This increase was primarily attributable to additional interest earned as
a result of a greater number of loan originations during the nine months of
2001.
Net mortuary and cemetery sales increased by $1,719,000, or 22.8%, to $9,251,000
for the nine months ended September 30, 2001, from $7,532,0900 for the
comparable period in 2000. This increase was primarily due to additional
pre-need cemetery sales.
Realized gains on investments and other assets increased by $83,000, or 221.8%,
to $120,000 for the nine months ended September 30, 2001, from $37,000 for the
comparable period in 2000. This increase was the result of the condemnation of
Company property for highway improvements.
10
Mortgage fee income increased by $9,669,000, or 56.6%, to $26,764,000 for the
nine months ended September 30, 2001, from $17,095,000 for the comparable period
in 2000. This increase was primarily attributable to a greater number of loan
originations during the nine months of 2001 due to lower interest rates
resulting in more borrowers refinancing their mortgage loans.
Total benefits and expenses were $53,755,000, or 96.2%, of total revenues for
the nine months ended September 30, 2001, as compared to $42,850,000, or 98.2%,
of total revenues for the comparable period in 2000.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $413,000, or 4.7%, to $9,279,000
for the nine months ended September 30, 2001, from $8,866,000 for the comparable
period in 2000. This increase was primarily the result of an increase in death
claims.
Amortization of deferred policy acquisition costs and cost of insurance acquired
decreased by $639,000, or 18.0%, to $2,921,000 for the nine months ended
September 30, 2001, from $3,560,000 for the comparable period in 2000. This
decrease was primarily due to the adjustment of the amortization rate to the
Company's current actuarial assumptions.
General and administrative expenses increased by $9,684,000, or 36.5%, to
$36,217,000 for the nine months ended September 30, 2001, from $26,533,000 for
the comparable period in 2000. 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 nine months of
2001.
Interest expense increased by $688,000, or 46.2%, to $2,175,000 for the nine
months ended September 30, 2001, from $1,487,000 for the comparable period in
2000. This increase was primarily due to additional warehouse lines of credit
required for the additional mortgage loan originations by the Company's mortgage
subsidiary.
Cost of goods and services sold of the mortuaries and cemeteries increased by
$759,000, or 31.6%, to $3,163,000 for the nine months ended September 30, 2001,
from $2,404,000 for the comparable period in 2000. This increase was primarily
due to additional pre- need cemetery sales.
Third Quarter of 2001 Compared to Third Quarter of 2000
Total revenues increased by $4,366,000, or 29.6%, to $19,097,000 for the three
months ended September 30, 2001, from $14,731,000 for the three months ended
September 30, 2000. Contributing to this increase in total revenues was a
$3,587,000 increase in mortgage fee income, a $114,000 increase in insurance
premiums and other considerations and a $535,000 increase in net mortuary and
cemetery sales.
Insurance premiums and other considerations increased by $114,000, or 3.4%, to
$3,436,000 for the three months ended September 30, 2001, from $3,322,000 for
the comparable period in 2000. This increase was primarily due to additional
premiums from increased sales of traditional life products of the Company.
Net investment income decreased by $12,000, or .4%, to $3,040,000 for the three
months ended September 30, 2001, from $3,052,000 for the comparable period in
2000. This decrease was the result of lower interest income earnings due to
lower interest rates on short-term and long-term investments.
Net mortuary and cemetery sales increased by $535,000, or 22.8%, to $2,881,000
for the three months ended September 30, 2001, from $2,346,000 for the
comparable period in 2000. This increase was primarily due to additional
pre-need cemetery sales.
Realized gains on investments and other assets increased by $111,000, or
1,925.8% to $116,000 for the nine months ended September 30, 2001, from $5,000
for the comparable period in 2000. This increase was the result of the
condemnation of Company property for highway improvements.
11
Mortgage fee income increased by $3,587,000, or 59.9%, to $9,574,000 for the
three months ended September 30, 2001, from $5,987,000 for the comparable period
in 2000. This increase was primarily attributable to a greater number of loan
originations during the third quarter of 2001, due to lower interest rates
resulting in more borrowers refinancing their mortgage loans.
Total benefits and expenses were $18,286,000, or 95.8%, of total revenues for
the three months ended September 30 2001, as compared to $14,410,000, or 97.8%,
of total revenues for the comparable period in 2000.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $300,000, or 10.7%, to $3,108,000
for the three months ended September 30, 2001, from $2,808,000 for the
comparable period in 2000. This increase was primarily the result of an increase
in death claims.
Amortization of deferred policy acquisition costs and cost of insurance acquired
decreased by $271,000 or 21.8%, to $972,000, for the three months ended
September 30, 2001, from $1,243,000 for the comparable period in 2000. This
decrease was in line with actuarial assumptions.
General and administrative expenses increased by $3,726,000 or 41.3%, to
$12,749,000 for the three months ended September 30, 2001, from $9,023,000 for
the comparable period in 2000. 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 2001.
Interest expense decreased by $35,000, or 5.9%, to $558,000 for the three months
ended September 30, 2001, from $593,000 for the comparable period in 2000. This
decrease was the result of lower interest expense on borrowings due to the
decrease in lending rates.
Cost of mortuaries and cemeteries goods and services sold increased by $156,000,
or 21.0%, to $899,000 for the three months ended September 30, 2001, from
$743,000 for the comparable period in 2000. This increase was primarily due to
additional pre-need cemetery sales.
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 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 $51,589,000 as of September 30, 2001,
compared to $62,859,000 as of
12
December 31, 2000. This represents 54% and 60% of the total insurance-related
investments as of September 30, 2001, and December 31, 2000, 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 nine categories used for rating bonds. At September 30, 2001, .79%
($409,000) and at December 31, 2000, .68% ($429,000) of the Company's total
investment in bonds were invested in bonds in rating categories three through
nine, 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,
2001, and December 31, 2000, the life insurance subsidiary exceeded the
regulatory criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $40,620,000 as of September 30, 2001, as compared to
$40,787,000 as of December 31, 2000. Stockholders' equity as a percent of
capitalization increased to 70% as of September 30, 2001, from 66% as of
December 31, 2000.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2000 was 15% as compared
to a rate of 10% for 1999. The 2001 lapse rate is approximately the same as
2000.
At September 30, 2001, $22,846,000 of the Company's consolidated stockholders'
equity represents the statutory stockholders' equity of the Company's life
insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to
its parent company without the approval of insurance regulatory authorities.
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, 2000.
13
Part II Other Information:
Item 1. Legal Proceedings
An action was brought against the Company in May 2001, by Glenna
Brown Thomas individually and as personal representative of the
Estate of Lynn W. Brown (Third Judicial Court, Salt Lake County,
State of Utah, 010904432). The action asserts that Memorial
Estates delivered to Lynn W. Brown three stock certificates
representing 2,000 shares in 1970 and 1971. Mr. Brown died in
1972. It is asserted that at the time the 2,000 shares were
issued and outstanding, such represented a 2% ownership of
Memorial Estates. It is alleged Mr. Brown was entitled to
preemptive rights and that after the issuance of the stock to Mr.
Brown there were further issuances of stock without providing
written notice to Mr. Brown or his estate with respect to an
opportunity to purchase more stock. It is asserted among the
other things that the plaintiff "has the right to a transfer of
Brown's shares to Thomas on Defendants' (which includes Security
National Financial Corporation as well as Memorial Estates, Inc.)
books and to restoration of Brown's proportion of share ownership
in Memorial at the time of his death by issuance and delivery to
Thomas of sufficient shares of Defendant's publicly traded and
unrestricted stock in exchange for the 2,000 shares of Memorial
stock and payment of all dividends from the date of Thomas's
demand, as required by Article XV of the Articles of
Incorporation." Based on present information, the Company intends
to vigorously defend the matter, including an assertion that the
statute of limitations bars the claims.
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, if 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)
14
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)
R. Settlement Agreement with Capitol Indemnity Corporation, George A.
Fait, and Joel G. Fait. (13)
(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.
(13) Incorporated by reference from Quarterly Report on Form 10-Q, as
filed on August 21, 2000.
(b) Reports on Form 8-K:
NONE
15
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 16, 2001 By: George R. Quist,
----------------
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
DATED: November 16, 2001 By: Stephen M. Sill
---------------
Vice President, Controller and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16