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, 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 4,091,395
- ------------------------------------- ----------------------------------
Title of Class Number of Shares Outstanding as of
September 30, 2002
Class C Common Stock, $.20 par value 5,819,924
- ------------------------------------ ---------------------------------
Title of Class Number of Shares Outstanding as of
September 30, 2002
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10Q
QUARTER ENDED September 30, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
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Consolidated Statement of Earnings - Nine and three
months ended September 30, 2002 and 2001 (unaudited)..............3
Consolidated Balance Sheet - September 30, 2002 (unaudited)
and December 31, 2001 ............................................4-5
Consolidated Statement of Cash Flows -
Nine months ended September 30, 2002 and 2001 (unaudited).........6
Notes to Consolidated Financial Statements........................7-9
Item 2 Management's Discussion and Analysis......................10-13
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Item 3 Quantitative and Qualitative Disclosure of Market Risk....13
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Item 4 Controls and Procedures...................................13
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PART II - OTHER INFORMATION
Other Information..............................................14-16
Signature Page.................................................17
Certification..................................................17-19
2
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
Revenues: 2002 2001 2002 2001
- -------- ---- ---- ---- ----
Insurance premiums and
other considerations $10,319,892 $10,019,159 $3,627,683 $3,435,975
Net investment income 8,504,297 9,600,420 3,052,659 3,040,440
Net mortuary and cemetery sales 8,410,926 7,821,845 2,871,893 2,514,064
Realized gains on investments
and other assets 746,021 120,006 27,205 116,020
Mortgage fee income 34,828,830 26,763,907 15,988,606 9,574,016
Other 415,292 105,495 106,325 50,497
------------ ------------ ------------ ------------
Total revenues 63,225,258 54,430,832 25,674,371 18,731,012
Benefits and expenses:
- ---------------------
Death benefits 4,298,196 3,951,069 1,325,095 1,160,311
Surrenders and other policy benefits 1,442,718 1,155,853 372,618 319,299
Increase in future policy benefits 3,628,655 4,172,498 1,569,539 1,628,704
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 2,334,477 2,920,863 565,708 971,917
General and administrative expenses:
Commissions 26,554,414 20,238,147 12,591,644 7,160,719
Salaries 8,308,534 7,065,515 2,925,397 2,825,928
Other 10,320,968 8,708,725 3,955,599 2,739,709
Interest expense 1,013,868 2,174,795 491,072 556,503
Cost of goods and services sold
of the mortuaries and cemeteries 1,971,909 1,938,261 689,116 556,856
------------ ------------ ------------ ------------
Total benefits and expenses 59,873,739 52,325,726 24,485,788 17,919,946
Earnings before income taxes 3,351,519 2,105,106 1,188,583 811,066
Income tax expense (825,614) (572,559) (294,796) (217,899)
Minority interest (income)
loss of subsidiary 18,263 47,196 3,898 12,010
------------ ------------ ------------ ------------
Net earnings $2,544,168 $1,579,743 $897,685 $605,177
============ ============ ============ ============
Net earnings per common share $.54 $.35 $.19 $0.14
==== ==== ==== =====
Weighted average outstanding
common shares 4,680,665 4,450,839 4,684,250 4,450,839
============ ============ ============ ============
Net earnings per common
share-assuming dilution $.51 $.35 $.18 $.14
==== ==== ==== ====
Weighted average outstanding
common shares assuming-dilution 5,013,965 4,451,366 5,083,126 4,451,510
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2002 December 31,
(Unaudited) 2001
-------------- -----------
Assets:
Insurance-related investments:
Fixed maturity securities held
to maturity, at amortized cost $24,808,183 $27,799,909
Fixed maturity securities available
for sale, at market 18,598,865 21,470,729
Equity securities available for sale,
at market 2,071,767 2,641,549
Mortgage loans on real estate 16,536,243 15,479,305
Real estate, net of accumulated
depreciation 9,592,576 9,051,691
Policy, student and other loans 10,966,381 11,277,975
Short-term investments 2,362,224 1,453,644
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Total insurance-related
investments 84,936,239 89,174,802
Restricted assets
of cemeteries and mortuaries 5,454,480 5,339,436
Cash 20,258,946 8,757,246
Receivables:
Trade contracts 9,834,006 6,945,274
Mortgage loans sold to investors 46,584,698 50,695,073
Receivable from agents 2,036,705 2,061,541
Receivable from officers 76,290 102,200
Other 1,392,657 1,183,927
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Total receivables 59,924,356 60,988,015
Allowance for doubtful accounts (2,202,049) (2,287,241)
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Net receivables 57,722,307 58,700,774
Policyholder accounts on deposit
with reinsurer 7,011,221 7,148,068
Land and improvements held for sale 8,080,202 8,346,448
Accrued investment income 1,062,699 1,059,789
Deferred policy acquisition costs 15,507,351 14,453,023
Property, plant and equipment, net 11,055,793 10,802,387
Cost of insurance acquired 7,062,361 7,615,348
Excess of cost over net assets
of acquired subsidiaries 1,038,962 1,065,045
Other 630,146 597,209
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Total assets $219,820,707 $213,059,575
============= =============
See accompanying notes to consolidated financial statements.
4
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
September 30, 2002 December 31,
(Unaudited) 2001
-------------- -----------
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $142,013,716 $140,504,866
Unearned premium reserve 1,878,246 1,785,977
Bank loans payable 7,388,760 8,461,900
Notes and contracts payable 3,236,282 3,635,776
Deferred pre-need cemetery and
funeral contract revenue 9,718,752 9,338,353
Payable to endowment care fund 74,244 5,586
Accounts payable 1,320,559 1,319,319
Funds held under reinsurance
treaties 1,343,970 1,379,640
Other liabilities and
accrued expenses 8,362,265 5,547,213
Income taxes 7,819,921 6,874,597
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Total liabilities 183,156,715 178,853,227
Minority interest 4,298,875 4,237,030
Stockholders' Equity:
- --------------------
Common stock:
Class A: $2 par value,
authorized 10,000,000
shares, issued 5,386,110
shares in 2002 and 5,363,591
shares in 2001 10,772,221 10,727,182
Class C: $0.20 par value,
authorized 7,500,000 shares,
issued 5,888,256 shares in
2002 and 6,113,430 shares
in 2001 1,177,651 1,222,686
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Total common stock 11,949,872 11,949,868
Additional paid-in capital 10,168,519 10,168,523
Accumulated other comprehensive
income, net of deferred taxes 1,037,737 1,223,930
Retained earnings 12,533,398 9,989,230
Treasury stock at cost (1,294,715
Class A shares and 68,332 Class C shares
in 2002; 1,233,064 Class A shares
and 65,078 Class C shares in 2001,
held by affiliated companies) (3,324,409) (3,362,233)
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Total stockholders' equity 32,365,117 29,969,318
------------- -------------
Total liabilities and
stockholders' equity $219,820,707 $213,059,575
============= =============
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,
2002 2001
---- ----
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $12,523,692 $(5,594,384)
------------ ------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (4,062,931) (402,995)
Calls and maturities - fixed
maturity securities 7,122,717 11,555,252
Securities available for sale:
Calls and maturities - fixed
maturity securities 3,301,497 1,064,816
Purchase of equity securities (367) --
Sales of equity securities -- 11,382
Purchases of short-term investments (8,334,285) (13,415,431)
Sales of short-term investments 7,425,705 8,575,000
Purchases of restricted assets (147,552) (384,905)
Mortgage, policy, and other loans made (4,707,046) (2,741,158)
Payments received for mortgage,
real estate, policy, and other loans 4,648,685 4,606,735
Purchases of property, plant,
and equipment (1,160,274) (776,042)
Purchases of real estate (1,501,405) (49,472)
------------ ------------
Net cash provided by
investing activities 2,584,744 8,043,182
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Cash flows from financing activities:
Annuity receipts 6,153,617 5,368,875
Annuity withdrawals (8,325,543) (9,462,819)
Repayment of bank loans and
notes and contracts payable (1,659,228) (1,985,411)
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 (3,606,736) (6,079,355)
------------ ------------
Net change in cash 11,501,700 (3,630,557)
Cash at beginning of period 8,757,246 11,275,030
------------ ------------
Cash at end of period $20,258,946 $7,644,473
============ ============
See accompanying notes to consolidated financial statements.
6
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 and nine months ended September 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 nine months ended September 30, 2002 and 2001, total comprehensive
income amounted to $2,542,975 and $1,817,878, respectively.
For the three months ended September 30, 2002 and 2001, total comprehensive
income amounted to $992,461 and $628,622, respectively.
3. Capital Stock
The basic and diluted earnings per share amounts were calculated as follows:
Nine Months Ended September 30,
2002 2001
---- ----
Numerator:
Net income $2,544,168 $1,579,743
========== ==========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 4,680,665 4,450,839
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Effect of dilutive securities:
Employee stock options 305,041 527
Stock Appreciation Rights 28,259 --
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Dilutive potential
common shares 333,300 527
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Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 5,013,965 4,451,366
========== ==========
Basic earnings per share $.54 $.35
==== ====
Diluted earnings per share $.51 $.35
==== ====
7
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)
3. Capital Stock
Three Months Ended September 30,
2002 2001
---- ----
Numerator:
Net income $ 897,685 $ 605,177
========== ===========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 4,684,250 4,450,839
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Effect of dilutive securities:
Employee stock options 314,024 671
Stock appreciation rights 84,852 --
---------- ----------
Dilutive potential
common shares 398,876 671
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Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 5,083,126 4,451,510
========== ===========
Basic earnings per share $.19 $.14
==== ====
Diluted earnings per share $.18 $.14
==== ====
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
September 30, 2002
(Unaudited)
5. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
For the Nine Months Ended
September 30, 2002
Revenues from
external customers $14,844,979 $9,910,352 $38,469,927 $ -- $63,225,258
Intersegment revenues 3,474,189 -- -- (3,474,189) --
Segment profit 563,976 1,221,538 1,566,005 -- 3,351,519
Identifiable assets 203,071,749 41,053,996 10,180,717 (34,485,755) 219,820,707
For the Nine Months Ended
September 30, 2001
Revenues from
external customers $15,462,190 $8,688,388 $30,280,254 $ -- $54,430,832
Intersegment revenues 2,628,248 -- -- (2,628,248) --
Segment profit 354,088 261,861 1,489,157 -- 2,105,106
Identifiable assets 200,152,224 36,825,841 5,712,935 (33,409,957) 209,281,043
For the Three Months Ended
September 30, 2002
Revenues from
external customers $5,083,781 $3,159,121 $17,431,469 $ -- $25,674,371
Intersegment revenues 1,186,158 -- -- (1,186,158) --
Segment profit 59,282 195,121 934,180 -- 1,188,583
For the Three Months Ended
September 30, 2001
Revenues from
external customers $5,131,874 $2,880,277 $10,718,861 $ -- $18,731,012
Intersegment revenues 850,322 -- -- (850,322) --
Segment profit (205,141) 89,785 926,422 -- 811,066
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 nine months ended September 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 7,403
($1,075,229,000) and 5,812 ($836,124,000) loans respectively for the nine months
ended September 30, 2002 and 2001.
Results of Operations
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Total revenues increased by $8,794,000, or 16.2%, to $63,225,000 for the nine
months ended September 30, 2002, from $54,431,000 for the nine months ended
September 30, 2001. Contributing to this increase in total revenues was an
$8,065,000 increase in mortgage fee income, a $589,000 increase in net mortuary
and cemetery sales, a $301,000 increase in insurance premiums and other
considerations, and a $626,000 increase in realized gains on investments and
other assets.
Insurance premiums and other considerations increased by $301,000, or 3.0%, to
$10,320,000 for the nine months ended September 30, 2002, from $10,019,000 for
the comparable period in 2001. This increase was primarily the result of
additional written insurance premiums.
Net investment income decreased by $1,096,000 or 11.4%, to $8,504,000 for the
nine months ended September 30, 2002, from $9,600,000 for the comparable period
in 2001. This decrease was primarily attributable to lower yields on
investments.
Net mortuary and cemetery sales increased by $589,000, or 7.5%, to $8,411,000
for the nine months ended September 30, 2002, from $7,822,000 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 $626,000, to
$746,000 for the nine months ended September 30, 2002, from $120,000 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 $8,065,000, or 30.1%, to $34,829,000 for the
nine months ended September 30, 2002, from $26,764,000 for the comparable period
in 2001. This increase was primarily attributable to a greater number of loan
originations during the nine months of 2002 due to the opening of new branch
offices in Mesa, Arizona and Houston, Texas.
10
Total benefits and expenses were $59,874,000, or 94.7%, of total revenues for
the nine months ended September 30, 2002, as compared to $52,326,000, or 96.1%,
of total revenues for the comparable period in 2001.
Death benefits, surrenders and other policy benefits and increase in future
policy benefits increased by an aggregate of $90,000, or 1.0%, to $9,370,000 for
the nine months ended September 30, 2002, from $9,279,000 for the comparable
period in 2001. This increase was primarily the result of additional death
claims.
Amortization of deferred policy acquisition costs and cost of insurance acquired
decreased by $587,000, or 20.1%, to $2,334,000 for the nine months ended
September 30, 2002, from $2,921,000 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 $9,172,000, or 25.5%, to
$45,184,000 for the nine months ended September 30, 2002, from $36,012,000 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
nine months of 2002.
Interest expense decreased by $1,161,000, or 53.4%, to $1,014,000 for the nine
months ended September 30, 2002, from $2,175,000 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 increased by
$34,000, or 1.7%, to $1,972,000 for the nine months ended September 30, 2002,
from $1,938,000 for the comparable period in 2001. This increase was in line
with the increase in at- need mortuary and cemetery sales.
Third Quarter of 2002 Compared to Third Quarter of 2001
Total revenues increased by $6,943,000, to $25,674,000 for the three months
ended September 30, 2002, from $18,731,000 for the three months ended September
30, 2001. Contributing to this increase in total revenues was a $6,415,000
increase in mortgage fee income, a $358,000 increase in net mortuary and
cemetery sales and a $192,000 increase in insurance premiums and other
considerations.
Insurance premiums and other considerations increased by $192,000, or 5.6%, to
$3,628,000 for the three months ended September 30, 2002, from $3,436,000 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 increased by $13,000, or .4%, to $3,053,000 for the three
months ended September 30, 2002, from $3,040,000 for the comparable period in
2001. This increase was primarily attributable to better yields on investments.
Net mortuary and cemetery sales increased by $358,000, or 14.2%, to $2,872,000
for the three months ended September 30, 2002, from $2,514,000 for the
comparable period in 2001. This increase is primarily due to additional at-need
mortuary and cemetery sales.
Mortgage fee income increased by $6,415,000, or 67.0%, to $15,989,000 for the
three months ended September 30, 2002, from $9,574,000 for the comparable period
in 2001. This increase was primarily attributable to a greater number of loan
originations during the third quarter of 2002, due to the opening of new branch
offices in Mesa, Arizona and Houston, Texas.
Total benefits and expenses were $24,486,000, or 95.4%, of total revenues for
the three months ended September 30 2002, as compared to $17,920,000, or 95.7%,
of total revenues for the comparable period in 2001.
11
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $159,000, or 5.1%, to $3,267,000
for the three months ended September 30, 2002, from $3,108,000 for the
comparable period in 2001. This increase was primarily the result of additional
death claims.
Amortization of deferred policy acquisition costs and cost of insurance acquired
decreased by $406,000 or 41.8%, to $566,000, for the three months ended
September 30, 2002, from $972,000 for the comparable period in 2001. This
decrease was in line with actuarial assumptions.
General and administrative expenses increased by $6,747,000, or 53.0%, to
$19,473,000 for the three months ended September 30, 2002, from $12,726,000 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 third quarter
of 2002.
Interest expense decreased by $65,000, or 11.8%, to $491,000 for the three
months ended September 30, 2002, from $557,000 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 increased by $132,000
or 23.8%, to $689,000 for the three months ended September 30, 2002, from
$557,000 for the comparable period in 2001. This increase was in line with the
increase of at-need mortuary and 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 $43,407,000 as of September 30, 2002,
compared to $49,271,000 as of December 31, 2001.
12
This represents 51% and 55% of the total insurance-related investments as of
September 30, 2002, and December 31, 2001, 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, 2002 and December 31, 2001, 6% and 5%,
respectively, or ($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 September 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 $42,990,000 as of September 30, 2002, as compared to
$42,067,000 as of December 31, 2001. Stockholders' equity as a percent of
capitalization increased to 75% as of September 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 September 30, 2002, $23,166,000 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.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer (the
"Certifying Officers"), are responsible for establishing and maintaining
disclosure controls and procedures for the Company. The Certifying Officers have
concluded (based on their evaluation of these controls and procedures as of a
date within 90 days of the filing of this report) that the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934) are effective. No
significant changes were made in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
13
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 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 alleged 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 the counterclaim seeking a substantial amount
from NGU (the 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. The change of venue motion of the Company was denied.
Certain discovery has taken place. By stipulation of the parties,
the case was dismissed without prejudice. The matter was refiled
in Texas state court, Tarrant County, Case No. 348 195490 02. The
claims of the respective parties are essentially the same as set
forth above. Further discovery involving the parties is
anticipated. The Company intends to vigorously defend the matter
as well as prosecute its counterclaim.
14
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
Item 4. Submission of Matters to a Vote of Security Holders
At the annual stockholders meeting held on July 23, 2002, the
following matters were acted upon: (i) seven directors consisting
of George R. Quist, J. Lynn Beckstead, Jr., Scott M. Quist,
Charles L. Crittenden, Dr. Robert G. Hunter, H. Craig Moody and
Norman G. Wilbur were elected to serve until the next annual
stockholders meeting or until their respective successors are
elected and qualified (for George R. Quist, Class A and Class C
shares, 7,841,263 votes were cast in favor of election, 25,184
votes were cast against election and there were no abstentions;
for J. Lynn Beckstead, Jr., Class A and Class C shares, 7,843,666
votes were cast in favor of election, 22,781 votes were cast
against election and there were no abstentions; for Scott M.
Quist, Class A shares only, 2,519,924 votes were cast in favor of
election, 24,859 votes were cast against election and there were
no abstentions; for Charles L. Crittenden, Class A and Class C
shares, 7,855,702 votes were cast in favor of election and 10,745
votes were cast against election and there were no abstentions;
for Dr. Robert G. Hunter, Class A and Class C shares, 7,858,534
votes were cast in favor of election, 7,913 votes cast against
election and there were no abstentions; for H. Craig Moody, Class
A shares only, 2,535,888 votes were cast in favor of election,
8,895 votes cast against election and there were no abstentions;
for Norman G. Wilbur, Class A and Class C shares, 7,858,590 votes
were cast in favor of election, 7,857 votes were cast against
election and there were no abstentions; and (ii) the appointment
of Tanner + Co., as the Company's independent accountants for the
fiscal year ended December 31, 2002, was ratified (with 7,861,821
votes cast for appointment, 4,488 votes against appointment and
5,208 abstentions).
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)
15
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.
(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.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 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: November 14, 2002 By: George R. Quist,
----------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
DATED: November 14, 2002 By: Stephen M. Sill
---------------
Vice President
Treasurer and Chief
Financial Officer (Principal
Financial and Accounting Officer)
CERTIFICATIONS
I, George R. Quist, certify that:
1. I have reviewed this quarterly Report on Form 10-Q of Security National
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
17
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: George R. Quist
Chairman of the Board,
Chief Executive Officer
CERTIFICATIONS
I, Stephen M. Sill, certify that:
1. I have reviewed this quarterly Report on Form 10-Q of Security National
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
18
EXHIBIT 99.1
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 September 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
November 14, 2002
EXHIBIT 99.2
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 September 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
November 14, 2002
19
