SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 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 4,102,035
- ------------------------------------- ---------------------------------
Title of Class Number of Shares Outstanding as of
June 30, 2002
Class C Common Stock, $.20 par value 5,822,148
- ------------------------------------ ----------------------------------
Title of Class Number of Shares Outstanding as of
June 30, 2002
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10Q
QUARTER ENDED June 30, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
- ------ --------
Consolidated Statement of Earnings - Six and three
months ended June 30, 2002 and 2001 (unaudited)..................3
Consolidated Balance Sheet - June 30, 2002 (unaudited)
and December 31, 2001 .........................................4-5
Consolidated Statement of Cash Flows -
Six months ended June 30, 2002 and 2001 (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
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PART II - OTHER INFORMATION
Other Information.......................................13-16
Signature Page.............................................17
Certification..............................................17
2
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
Revenues: 2002 2001 2002 2001
- -------- ---- ---- ---- ----
Insurance premiums and
other considerations $ 6,692,209 $ 6,583,184 $ 3,369,453 $ 3,102,047
Net investment income 5,451,638 6,559,980 2,527,873 3,410,547
Net mortuary and cemetery sales 5,539,033 5,307,781 2,810,770 2,847,716
Realized gains on investments
and other assets 718,816 3,986 (601) (111)
Mortgage fee income 18,840,224 17,189,891 8,974,233 8,569,183
Other 308,967 54,998 267,620 23,674
------------ ------------ ------------ ------------
Total revenues 37,550,887 35,699,820 17,949,348 17,953,056
Benefits and expenses:
- ---------------------
Death benefits 2,973,101 2,790,758 1,304,431 1,285,849
Surrenders and other policy benefits 1,070,100 836,554 440,189 539,955
Increase in future policy benefits 2,059,116 2,543,794 1,311,930 1,249,250
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 1,768,769 1,948,946 934,242 871,209
General and administrative expenses:
Commissions 13,962,770 13,077,428 6,931,677 6,625,893
Salaries 5,383,137 4,239,587 2,774,187 2,202,924
Other 6,365,369 5,969,016 3,054,028 2,936,035
Interest expense 522,796 1,618,292 200,443 910,739
Cost of goods and services sold
of the mortuaries and cemeteries 1,282,793 1,381,405 682,468 747,808
------------ ------------ ------------ ------------
Total benefits and expenses 35,387,951 34,405,780 17,633,595 17,369,662
Earnings before income taxes 2,162,936 1,294,040 315,753 583,394
Income tax expense (530,818) (354,660) (74,446) (164,504)
Minority interest (income)
loss of subsidiary 14,365 35,186 25,315 26,683
------------ ------------ ------------ ------------
Net earnings $ 1,646,483 $ 974,566 $ 266,622 $ 445,573
============ ============ ============ ============
Net earnings per common share $.35 $.22 $.06 $.10
==== ==== ==== ====
Weighted average outstanding
common shares 4,678,817 4,450,839 4,680,628 4,450,839
Net earnings per common
share-assuming dilution $.33 $.22 $.05 $.10
==== ==== ==== ====
Weighted average outstanding
common shares assuming-dilution 5,011,394 4,451,094 5,024,915 4,451,048
See accompanying notes to consolidated financial statements.
3
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2002 December 31,
(Unaudited) 2001
-------------- -----------
Assets:
Insurance-related investments:
Fixed maturity securities held
to maturity, at amortized cost $ 28,854,886 $ 27,799,909
Fixed maturity securities available
for sale, at market 19,216,767 21,470,729
Equity securities available for sale,
at market 2,394,173 2,641,549
Mortgage loans on real estate 13,798,647 15,479,305
Real estate, net of accumulated
depreciation 9,719,462 9,051,691
Policy, student and other loans 10,961,639 11,277,975
Short-term investments 2,636,041 1,453,644
------------- -------------
Total insurance-related
investments 87,581,615 89,174,802
Restricted assets
of cemeteries and mortuaries 5,532,577 5,339,436
Cash 14,172,291 8,757,246
Receivables:
Trade contracts 5,157,627 6,945,274
Mortgage loans sold to investors 49,275,266 50,695,073
Receivable from agents 1,986,129 2,061,541
Receivable from officers 82,290 102,200
Other 1,214,641 1,183,927
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Total receivables 57,715,953 60,988,015
Allowance for doubtful accounts (2,097,303) (2,287,241)
------------- -------------
Net receivables 55,618,650 58,700,774
Policyholder accounts on deposit
with reinsurer 7,081,246 7,148,068
Land and improvements held for sale 8,138,927 8,346,448
Accrued investment income 1,031,413 1,059,789
Deferred policy acquisition costs 15,385,759 14,453,023
Property, plant and equipment, net 11,107,005 10,802,387
Cost of insurance acquired 7,246,690 7,615,348
Excess of cost over net assets
of acquired subsidiaries 1,047,833 1,065,045
Other 686,191 597,209
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Total assets $ 214,630,197 $ 213,059,575
============= =============
See accompanying notes to consolidated financial statements.
4
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
June 30, 2002 December 31,
(Unaudited) 2001
-------------- -----------
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $ 141,146,243 $ 140,504,866
Unearned premium reserve 1,918,614 1,785,977
Bank loans payable 8,150,628 8,461,900
Notes and contracts payable 3,325,016 3,635,776
Estimated future costs of
pre-need sales 9,578,535 9,338,353
Payable to endowment care fund 22,655 5,586
Accounts payable 1,141,190 1,319,319
Funds held under reinsurance
treaties 1,342,235 1,379,640
Other liabilities and
accrued expenses 4,761,704 5,547,213
Income taxes 7,435,648 6,874,597
------------- -------------
Total liabilities 178,822,468 178,853,227
Minority interest 4,250,072 4,237,030
Stockholders' Equity:
- --------------------
Common stock:
Class A: $2 par value,
authorized 10,000,000
shares, issued 5,385,887
shares in 2002 and 5,363,591
shares in 2001 10,771,774 10,727,182
Class C: $0.20 par value,
authorized 7,500,000 shares,
issued 5,890,480 shares in
2002 and 6,113,430 shares
in 2001 1,178,096 1,222,686
------------- -------------
Total common stock 11,949,870 11,949,868
Additional paid-in capital 10,168,522 10,168,523
Accumulated other comprehensive
income, net of deferred taxes 1,127,961 1,223,930
Retained earnings 11,635,713 9,989,230
Treasury stock at cost (1,283,852
in 2002 and 1,294,716 in 2001
Class A shares and 68,332 Class C
shares in 2002 and 2001 held
by affiliated companies) (3,324,409) (3,362,233)
------------- -------------
Total stockholders' equity 31,557,657 29,969,318
------------- -------------
Total liabilities and
stockholders' equity $ 214,630,197 $ 213,059,575
============= =============
See accompanying notes to consolidated financial statements.
5
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $ 7,127,294 $ (6,249,704)
------------ ------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (4,062,931) (402,995)
Calls and maturities - fixed
maturity securities 3,046,980 8,094,041
Securities available for sale:
Calls and maturities - fixed
maturity securities 2,301,497 1,064,816
Purchase of equity securities (367) --
Sales of equity securities 11,381
Purchases of short-term investments (1,182,397) (10,015,902)
Sales of short-term investments -- 8,575,000
Purchases of restricted assets (193,141) (295,053)
Mortgage, policy, and other loans made (652,143) (2,161,454)
Payments received for mortgage,
real estate, policy, and other loans 3,197,227 1,851,468
Purchases of property, plant,
and equipment (869,642) (431,896)
Purchases of real estate (1,409,857) (28,085)
------------ ------------
Net cash provided by
investing activities 175,226 6,261,321
------------ ------------
Cash flows from financing activities:
Annuity receipts 4,345,939 3,540,035
Annuity withdrawals (5,649,206) (6,801,813)
Repayment of bank loans and
notes and contracts payable (808,626) (1,227,903)
Proceeds from borrowings on bank
loans and notes and contracts payable 186,594 --
Sale of treasury stock 37,824 --
------------ ------------
Net cash used in financing
activities (1,887,475) (4,489,681)
------------ ------------
Net change in cash 5,415,045 (4,478,064)
Cash at beginning of period 8,757,246 11,275,030
------------ ------------
Cash at end of period $ 14,172,291 $ 6,796,966
============ ============
See accompanying notes to consolidated financial statements.
6
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(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 months ended June 30, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended December 31, 2001, 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 six months ended June 30, 2002 and 2001, total comprehensive income
amounted to $1,550,514 and $1,189,256, respectively.
For the three months ended June 30, 2002 and 2001, total comprehensive income
amounted to $242,703 and $526,238, respectively.
3. Capital Stock
The basic and diluted earnings per share amounts were calculated as follows:
Six Months Ended June 30,
2002 2001
---- ----
Numerator:
Net income $1,646,483 $ 974,566
========== ==========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 4,678,817 4,450,839
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Effect of dilutive securities:
Employee stock options 304,318 255
Stock Appreciation Rights 28,259 --
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Dilutive potential
common shares 332,577 255
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Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 5,011,394 4,451,094
========== ==========
Basic earnings per share $.35 $.22
==== ====
Diluted earnings per share $.33 $.22
==== ====
7
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Unaudited)
3. Capital Stock
Three Months Ended June 30,
2002 2001
---- ----
Numerator:
Net income $ 266,622 $ 445,573
========== ==========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 4,680,628 4,450,839
Effect of dilutive securities:
Employee stock options 314,050 209
Stock appreciation rights 30,237 --
---------- ----------
Dilutive potential
common shares 344,287 209
---------- ----------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 5,024,915 4,451,048
========== ==========
Basic earnings per share $.06 $.10
==== ====
Diluted earnings per share $.05 $.10
==== ====
4. Recent Accounting Pronouncement
Management has considered whether impairment exists on goodwill in relation
to Statement of Financial Accounting Standards No. 142, and does not
believe there is any material impairment.
8
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Unaudited)
5. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
For the Six Months Ended
June 30, 2002
- ------------------------
Revenues from
external customers $ 9,761,198 $ 6,751,231 $ 21,038,458 $ -- $ 37,550,887
Intersegment revenues 2,277,396 -- -- (2,277,396) --
Segment profit 504,694 1,026,417 631,825 -- 2,162,936
Identifiable assets 202,337,272 40,505,340 5,717,796 (33,930,211) 214,630,197
For the Six Months Ended
June 30, 2001
- ------------------------
Revenues from
external customers $ 10,330,316 $ 5,808,111 $ 19,561,393 $ -- $ 35,699,820
Intersegment revenues 1,777,926 -- -- (1,777,926) --
Segment profit 559,229 172,076 562,735 -- 1,294,040
Identifiable assets 198,966,779 36,555,814 4,892,580 (31,820,626) 208,594,547
For the Three Months Ended
June 30, 2002
- --------------------------
Revenues from
external customers $ 4,887,456 $ 3,062,323 $ 9,999,569 $ -- $ 17,949,348
Intersegment revenues 1,071,324 -- -- (1,071,324) --
Segment profit 168,843 55,575 91,335 -- 315,753
For the Three Months Ended
June 30, 2001
- --------------------------
Revenues from
external customers $ 4,986,554 $ 3,100,698 $ 9,865,804 $ -- $ 17,953,056
Intersegment revenues 963,925 -- -- (963,925) --
Segment profit 241,064 (5,864) 348,194 -- 583,394
9
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 six months ended June 30, 2002, 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 4,132 ($587,497,000) and 3,806
($553,489,000) loans respectively for the six months ended June 30, 2002 and
2001.
Results of Operations
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Total revenues increased by $1,851,000, or 5.2%, to $37,551,000 for the six
months ended June 30, 2002, from $35,700,000 for the six months ended June 30,
2001. Contributing to this increase in total revenues was a $1,650,000 increase
in mortgage fee income, a $231,000 increase in net mortuary and cemetery sales,
a $109,000 increase in insurance premiums and other considerations, and a
$715,000 increase in realized gains on investments and other assets.
Insurance premiums and other considerations increased by $109,000, or 1.7%, to
$6,692,000 for the six months ended June 30, 2002, from $6,583,000 for the
comparable period in 2001. This increase was primarily the result of an increase
in the amortization of unearned premium reserve to the Company's current
actuarial assumptions.
Net investment income decreased by $1,108,000 or 16.9%, to $5,452,000 for the
six months ended June 30, 2002, from $6,560,000 for the comparable period in
2001. This decrease was primarily attributable to lower yields on investments.
Net mortuary and cemetery sales increased by $231,000, or 4.4%, to $5,539,000
for the six months ended June 30, 2002, from $5,308,000 for the comparable
period in 2001. This increase was primarily due to additional at-need cemetery
and mortuary sales.
Realized gains on investments and other assets increased by $715,000, to
$719,000 for the six months ended June 30, 2002, from $4,000 for the comparable
period in 2001. This increase was the result of the sale of approximately 3.5
acres at Lakehills Cemetery in Sandy, Utah to the Utah Transit Authority.
Mortgage fee income increased by $1,650,000, or 9.6%, to $18,840,000 for the six
months ended June 30, 2002, from $17,190,000 for the comparable period in 2001.
This increase was primarily attributable to a greater number of loan
originations during the six months of 2002 due to the opening of new branch
offices in Mesa, Arizona and Houston, Texas.
10
Total benefits and expenses were $35,388,000, or 94.2%, of total revenues for
the six months ended June 30, 2002, as compared to $34,406,000, or 96.4%, of
total revenues for the comparable period in 2001.
Death benefits, surrenders and other policy benefits and increase in future
policy benefits decreased by an aggregate of $69,000, or 1.1%, to $6,102,000 for
the six months ended June 30, 2002, from $6,171,000 for the comparable period in
2001. This decrease was primarily the result of a reduction in reserves for
policyholders.
Amortization of deferred policy acquisition costs and cost of insurance acquired
decreased by $180,000, or 9.2 %, to $1,769,000 for the six months ended June 30,
2002, from $1,949,000 for the comparable period in 2001. 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 $2,425,000, or 10.4%, to
$25,711,000 for the six months ended June 30, 2002, from $23,286,000 for the
comparable period in 2001. This increase primarily resulted from an increase in
commissions, salaries and other expenses due to additional mortgage loan
originations having been made by the Company's mortgage subsidiary during the
six months of 2002.
Interest expense decreased by $1,095,000 or 67.7%, to $523,000 for the six
months ended June 30, 2002, from $1,618,000 for the comparable period in 2001.
This decrease was primarily due to lower interest rates and fewer borrowings
under the Company's warehouse lines of credit required for mortgage loan
originations by the Company's mortgage subsidiary.
Cost of goods and services sold of the mortuaries and cemeteries decreased by
$98,000, or 7.1%, to $1,283,000 for the six months ended June 30, 2002, from
$1,381,000 for the comparable period in 2001. This decrease was primarily due to
greater sales of cemetery burial property sales in 2002, which have a lower cost
of goods sold than other funeral products.
Second Quarter of 2002 Compared to Second Quarter of 2001
Total revenues decreased by $4,000, to $17,949,000 for the three months ended
June 30, 2002, from $17,953,000 for the three months ended June 30, 2001.
Contributing to this decrease in total revenues was an $883,000 decrease in net
investment income and a $37,000 decrease in net mortuary and cemetery sales.
Insurance premiums and other considerations increased by $267,000, or 8.6%, to
$3,369,000 for the three months ended June 30, 2002, from $3,102,000 for the
comparable period in 2001. This increase was primarily due to the adjustment of
the amortization rate of unearned premium reserve to the Company's current
actuarial assumptions.
Net investment income decreased by $883,000, or 25.7%, to $2,528,000 for the
three months ended June 30, 2002, from $3,411,000 for the comparable period in
2001. This decrease was primarily attributable to lower yields on investments.
Net mortuary and cemetery sales decreased by $37,000, or 1.3%, to $2,811,000 for
the three months ended June 30, 2002, from $2,848,000 for the comparable period
in 2001. This decrease is primarily due to fewer at-need mortuary sales.
Mortgage fee income increased by $405,000, or 4.7%, to $8,974,000 for the three
months ended June 30, 2002, from $8,569,000 for the comparable period in 2001.
This increase was primarily attributable to a greater number of loan
originations during the second quarter of 2002, due to the opening of new branch
offices in Mesa, Arizona and Houston, Texas.
Total benefits and expenses were $17,634,000, or 98.3%, of total revenues for
the three months ended June 30 2002, as compared to $17,370,000, or 96.8%, of
total revenues for the comparable period in 2001.
11
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits decreased by an aggregate of $18,000, or .6%, to $3,057,000 for
the three months ended June 30, 2002, from $3,075,000 for the comparable period
in 2001. This decrease was primarily the result of a reduction in interest
credited on policyholder account balances.
Amortization of deferred policy acquisition costs and cost of insurance acquired
increased by $63,000, or 7.2%, to $934,000, for the three months ended June 30,
2002, from $871,000 for the comparable period in 2001. This increase was in line
with actuarial assumptions.
General and administrative expenses increased by $995,000 or 8.5%, to
$12,760,000 for the three months ended June 30, 2002, from $11,765,000 for the
comparable period in 2001. 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 second quarter
of 2002.
Interest expense decreased by $711,000, or 78.0%, to $200,000 for the three
months ended June 30, 2002, from $911,000 for the comparable period in 2001.
This decrease was primarily due to lower interest rates and fewer borrowings
under the Company's warehouse lines of credit required for mortgage loan
originations by the Company's mortgage subsidiary.
Cost of mortuaries and cemeteries goods and services sold decreased by $66,000,
or 8.7%, to $682,000 for the three months ended June 30, 2002, from $748,000 for
the comparable period in 2001. This decrease was primarily due to greater sales
of cemetery burial property sales in 2002, which have a lower cost of goods sold
than other funeral products.
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 $48,072,000 as of June 30, 2002, compared to
$49,271,000 as of December 31,
12
2001. This represents 55% of the total insurance-related investments as of June
30, 2002, and December 31, 2001. 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 June 30, 2002 and December 31, 2001, 5% ($2,438,000) 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 June 30, 2002 and
December 31, 2001, the life insurance subsidiary exceeded the regulatory
criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $43,033,000 as of June 30, 2002, as compared to $42,067,000 as
of December 31, 2001. Stockholders' equity as a percent of capitalization
increased to 73% as of June 30, 2002, from 71% as of December 31, 2001.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2001 was 13.2% as
compared to a rate of 15.0% for 2000. The 2002 lapse rate is approximately the
same as 2001.
At June 30, 2002, $23,889,000 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, 2001.
Part II Other Information:
Item 1. Legal Proceedings
An action was brought against Southern Security Life Insurance
Company in July 1999 by Dorothy Ruth Campbell in the Circuit
Court of Escambia County, Alabama. The action arises out of a
denial of coverage under a $10,000 insurance policy. The claims
are for breach of contract, bad faith and fraudulent
misrepresentation. In the action, Campbell seeks compensatory and
punitive damages plus interest. The Company has filed its
response to the complaint and certain discovery has taken place.
A motion for summary judgment filed on behalf of the Company was
denied. A trial date has yet to be set as the Company continues
to vigorously defend the matter.
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 in the Third Judicial Court, Salt Lake
County, Utah. The action asserts that Memorial Estates delivered
to Lynn W. Brown six 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
13
an opportunity to purchase more stock. It is asserted among 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.
An action was brought against Southern Security Life Insurance
Company by National Group Underwriters, Inc. ("NGU") in state
court in the State of Texas. The case was removed by the Company
to the United States District Court for the Northern District of
Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E. An
Amended Complaint was filed on or about July 18, 2001. The
Amended Complaint asserts that NGU had a contract with the
Company wherein NGU would submit applications for certain
policies of insurance to be issued by the Company. It is alleged
that disputes have arisen between NGU and the Company with regard
to the calculation and payment of certain advanced commissions as
well as certain production bonuses.
NGU alleges that it "has been damaged far in excess of the
$75,000 minimum jurisdictional limits of this Court." NGU also
seeks attorney's fees and costs as well as prejudgment and
postjudgment interest. A second amended complaint and a third
amended complaint, which included a fraud claim, were filed. A
motion was filed by the Company to dismiss the third amended
complaint, including the fraud claim. The court denied the
motion. The Company has counterclaimed for what it claims to be a
debit balance owing to it pursuant to the relationship between
the parties with said counterclaim seeking a substantial amount
from NGU (said amount potentially subject to reduction as
premiums are received). The Company is also seeking to recover
attorney's fees and costs, as well punitive damages on three of
its causes of action. A response has not yet been filed to the
amended counterclaim. The change of venue motion of the Company
was denied. Certain discovery has taken place and further
discovery is anticipated, e.g., dispositions. The Company intends
to vigorously defend the matter as well as prosecute its
counterclaim.
An action was brought by Bernice Johnson against Southern
Security Life Insurance Company in May, 2002 in the Circuit Court
of Jefferson County, Alabama, Civil Action No. CV02 2963. The
face amount of coverage under the policy is $15,000. The insured
died in July 2001. Claims are made for non- payment of the policy
amount. The claims for relief include misrepresentation, mental
anguish and emotional distress, fraud, intentional and bad faith,
non-payment of the benefit, intentional and bad faith failure to
investigate the claim for benefits, reckless and negligent and
wanton action relative to misrepresentation and/or concealment of
facts, negligence and the wanton hiring, training and supervision
of agent. Compensatory and punitive damages are sought along with
interest and costs. An answer has been filed by the Company and
discovery is in process.
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
14
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)(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. 2000 Director Stock Option Plan (12)
E. Promissory Note with Key Bank of Utah (4)
F. Loan and Security Agreement with Key Bank of Utah (4)
G. General Pledge Agreement with Key Bank of Utah (4)
H. 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)
I. Deed of Trust and Assignment of Rents with the Carter Family Trust
and the Leonard M. Smith Family Trust (5)
J. Promissory Note with Page and Patricia Greer (6)
K. Pledge Agreement with Page and Patricia Greer (6)
L. Promissory Note with Civil Service Employees Insurance Company (7)
M. Deferred Compensation Agreement with William C. Sargent (8)
N. Employment Agreement with Scott M. Quist. (8)
O. Acquisition Agreement with Consolidare Enterprises, Inc., and certain
shareholders of Consolidare. (9)
P. Agreement and Plan of Merger between Consolidare Enterprises, Inc.,
and
SSLIC Holding Company. (10)
Q. Administrative Services Agreement with Southern Security Life
Insurance Company. (11)
R. Promissory Note with George R. Quist (13)
S. Deferred Compensation Plan (14)
(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.
15
(11) Incorporated by reference from Report on Form 8-K, as filed
on March 4, 1999.
(12) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's
Annual Meeting of Shareholders.
(13) Incorporated by reference from Report on Form 10-K, as filed
on April 16, 2001.
(14) Incorporated by reference from Report on Form 10-K, as filed
on April 3, 2002.
21. Subsidiaries of the Registrant
(b) Reports on Form 8-K:
None
16
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: August 20, 2002 By: George R. Quist,
----------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
DATED: August 20, 2002 By: Stephen M. Sill
---------------
Vice President
Treasurer and Chief
Financial Officer (Principal
Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Security National Financial
Corporation (the "Company") on Form 10Q for the period ending June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, George R. Quist, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
George R. Quist
Chief Executive Officer
August 14, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Security National Financial
Corporation (the "Company") on Form 10Q for the period ending June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stephen M. Sill, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
Stephen M. Sill
Chief Financial Officer
August 14, 2002
17
