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 March 31, 2004 Commission File Number: 0-9341
- -------------------------------- ------------------------------
SECURITY NATIONAL FINANCIAL CORPORATION
Exact Name of Registrant.
UTAH 87-0345941
- --------------------------------------------- --------------------------
(State or other jurisdiction of IRS Identification Number
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 X 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 5,054,906
- ------------------------------------- -------------
Title of Class Number of Shares Outstanding
as of March 31, 2004
Class C Common Stock, $.20 par value 6,260,793
- ------------------------------------ --------------
Title of Class Number of Shares Outstanding
as of March 31, 2004
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
- ------ --------
Consolidated Statement of Earnings - Three months
ended March 31, 2004 and 2003 (unaudited)................3
Consolidated Balance Sheet - March 31, 2004, (unaudited)
and December 31, 2003..................................4-5
Consolidated Statement of Cash Flows -
Three months ended March 31, 2004 and 2003
(unaudited)..............................................6
Notes to Consolidated Financial Statements............7-10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................10-13
Item 3 Quantitative and Qualitative Disclosures about
Market Risk................................................13
- ------
Item 4 Controls and Procedures....................................13
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PART II - OTHER INFORMATION
Other Information.......................................14-16
Signature Page.............................................17
Certifications..........................................18-20
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three Months Ended
March 31,
Revenues: 2004 2003
- -------- ------------ ------------
Insurance premiums and other considerations $6,396,174 $5,864,427
Net investment income 3,556,247 3,920,372
Net mortuary and cemetery sales 3,056,405 2,584,856
Realized gains on investments and other assets 5,323 --
Mortgage fee income 18,068,730 21,755,920
Other 190,038 124,122
------------ ------------
Total revenues 31,272,917 34,249,697
------------ ------------
Benefits and expenses:
Death benefits 3,772,951 3,818,319
Surrenders and other policy benefits 479,839 605,156
Increase in future policy benefits 1,868,732 1,416,571
Amortization of deferred policy acquisition costs
and cost of insurance acquired 1,199,275 958,895
General and administrative expenses:
Commissions 14,207,056 15,850,637
Salaries 3,581,644 3,222,391
Other 4,692,879 4,620,111
Interest expense 365,323 823,468
Cost of goods and services sold
of the mortuaries and cemeteries 597,532 560,867
------------ ------------
Total benefits and expenses 30,765,231 31,876,415
------------ ------------
Earnings before income taxes 507,686 2,373,282
Income tax expense (128,118) (667,542)
Minority interest (income) loss of subsidiary 22,014 (20,690)
------------ ------------
Net earnings $401,582 $1,685,050
============ ============
Net earnings per common share $.07 $.32
==== ====
Weighted average outstanding common shares 5,659,501 5,284,966
============ ============
Net earnings per common share-assuming dilution $.07 $.31
==== ====
Weighted average outstanding common shares
assuming-dilution 5,819,608 5,498,651
============ ============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2004 December 31,
(Unaudited) 2003
Assets: -------------- ------------
Insurance-related investments:
Fixed maturity securities held
to maturity, at amortized cost $48,283,709 $37,293,989
Fixed maturity securities available
for sale, at market 14,275,436 14,270,037
Equity securities available for sale,
at market 4,021,530 3,453,444
Mortgage loans on real estate 45,293,794 29,914,745
Real estate, net of accumulated
depreciation and allowances for losses 8,960,356 8,519,680
Policy, student and other loans 12,036,575 11,753,617
Short-term investments 4,063,908 2,054,248
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Total insurance-related
investments 136,935,308 107,259,760
------------- -------------
Restricted assets of cemeteries and mortuaries 4,988,732 4,745,709
------------- -------------
Cash 10,489,014 19,704,358
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Receivables:
Trade contracts 10,180,404 8,600,212
Mortgage loans sold to investors 95,467,897 114,788,185
Receivable from agents 1,212,345 1,318,958
Receivable from officers 30,040 37,540
Other 1,235,752 1,086,523
------------- -------------
Total receivables 108,126,438 125,831,418
Allowance for doubtful accounts (1,702,294) (1,706,678)
------------- -------------
Net receivables 106,424,144 124,124,740
------------- -------------
Policyholder accounts on deposit
with reinsurer 6,791,615 6,795,983
Land and improvements held for sale 8,382,172 8,387,061
Accrued investment income 1,504,938 1,142,690
Deferred policy and pre-need acquisition costs 18,034,186 17,202,489
Property, plant and equipment, net 10,911,684 11,009,416
Cost of insurance acquired 14,976,979 14,980,763
Excess of cost over net assets
of acquired subsidiaries 683,191 683,191
Other 935,072 873,424
------------- -------------
Total assets $321,057,035 $316,909,584
============= =============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
March 31, 2004 December 31,
(Unaudited) 2003
Liabilities: --------------- -------------
Future life, annuity, and other policy benefits $221,698,731 $218,793,693
Unearned premium reserve 2,095,961 1,945,203
Bank loans payable 14,092,531 14,422,670
Notes and contracts payable 3,208,994 3,440,694
Deferred pre-need cemetery and funeral
contracts revenues and estimated future
cost of pre-need sales 10,432,002 10,520,280
Accounts payable 1,087,283 1,274,183
Funds held under reinsurance treaties 1,295,470 1,294,589
Other liabilities and accrued expenses 12,139,378 11,171,368
Income taxes 11,161,244 10,914,845
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Total liabilities 277,211,594 273,777,525
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Commitments and contingencies -- --
------------- -------------
Minority interest 3,966,454 3,956,628
------------- -------------
Stockholders' Equity:
Common stock:
Class A: $2.00 par value, authorized 10,000,000
shares, issued 6,331,424 shares in 2004
and 6,275,104 shares in 2003 12,662,848 12,550,208
Class C: $0.20 par value, authorized 7,500,000
shares, issued 6,336,129 shares in
2004 and 6,469,638 shares in 2003 1,267,226 1,293,927
------------- -------------
Total common stock 13,930,074 13,844,135
Additional paid-in capital 13,812,892 13,569,582
Accumulated other comprehensive income
(loss) and other items, net of deferred taxes (136,072) (437,973)
Retained earnings 15,487,087 15,414,681
Treasury stock at cost (1,276,518 Class A shares and
75,336 Class C shares in 2004; 1,276,518
Class A shares and 75,336 Class C
shares in 2003, held by
affiliated companies) (3,214,994) (3,214,994)
------------- -------------
Total stockholders' equity 39,878,987 39,175,431
------------- -------------
Total liabilities and stockholders' equity $321,057,035 $316,909,584
============= =============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2004 2003
---- ----
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $21,000,620 $(4,971,582)
------------ ------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (12,026,957) (5,030,844)
Calls and maturities - fixed
maturity securities 2,579,486 2,287,170
Securities available for sale:
Calls and maturities - fixed
maturity securities -- 360,000
Purchases of short-term investments (8,762,251) (3,158,367)
Sales of short-term investments 6,164,882 2,918,507
Purchases of restricted assets (91,594) (98,963)
Mortgage, policy, and other loans made (22,714,986) (2,023,372)
Payments received for mortgage,
real estate, policy, and other loans 7,554,722 3,581,015
Purchases of property, plant,
and equipment (296,546) (253,304)
Purchases of real estate (488,312) (313,750)
Purchase of subsidiary (297,994) --
Sale of real estate -- 230,085
------------ ------------
Net cash (used in) provided by
investing activities (28,379,550) (1,501,823)
------------ ------------
Cash flows from financing activities:
Annuity and pre-need contract receipts 1,348,322 1,454,211
Annuity and pre-need contract withdrawals (2,544,563) (2,432,515)
Repayment of bank loans and notes and
contracts payable (640,173) (477,780)
Other -- 25,200
------------ ------------
Net cash (used in) provided by
financing activities (1,836,414) (1,430,884)
------------ ------------
Net change in cash (9,215,344) (7,904,289)
Cash at beginning of period 19,704,358 38,199,041
------------ ------------
Cash at end of period $10,489,014 $30,294,752
============ ============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004 (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 March 31, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended December 31, 2003, 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 three months ended March 31, 2004 and 2003, total comprehensive income
(loss) amounted to $703,483 and $(300,228), respectively.
3. Stock-Based Compensation
The Company accounts for stock-based compensation under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company has adopted SFAS No. 123,
"Accounting for Stock-Based Compensation". In accordance with the provisions of
SFAS 123, the Company has elected to continue to apply Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25"), and related interpretations in accounting for its stock option plans.
In accordance with APB Opinion No. 25, no compensation cost has been recognized
for these plans. Had compensation cost for these plans been determined based
upon the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123. Net earnings for the three months ended March 31, 2004 and
2003 would have been reduced by the following:
Three Months Ended March 31,
2004 2003
---- ----
Net earnings as reported $401,582 $1,685,050
Deduct: Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects -- (133,000)
-------- ----------
Pro forma net earnings $401,582 $1,552,050
======== ==========
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004 (Unaudited)
Three Months Ended March 31,
2004 2003
---- ----
Net earnings per common share:
Basic - as reported $.07 $0.32
==== =====
Basic - pro forma $.07 $0.29
==== =====
Diluted - as reported $.07 $0.31
==== =====
Diluted - pro forma $.07 $0.28
==== =====
4. Earnings Per Share
The basic and diluted earnings per share amounts were calculated
as follows:
Three Months Ended March 31,
2004 2003
---- ----
Numerator:
Net income $401,582 $1,685,050
======== ==========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 5,659,501 5,284,966
---------- ----------
Effect of dilutive securities:
Employee stock options 158,241 208,961
Stock appreciation rights 1,866 4,724
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Dilutive potential common shares 160,107 213,685
---------- ----------
Denominator for diluted earnings
per share-adjusted weighted-average
shares and assumed conversions 5,819,608 5,498,651
========== ==========
Basic earnings per share $.07 $.32
==== ====
Diluted earnings per share $.07 $.31
==== ====
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004, (Unaudited)
5. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
For the Three Months Ended
March 31, 2004
- --------------------------
Revenues from
external customers $ 8,357,223 $3,226,386 $19,689,308$ -- $31,272,917
Intersegment revenues 2,373,013 -- -- (2,373,013) --
Segment profit (loss)
before income taxes 433,208 347,749 (273,266) -- 507,686
Identifiable assets 305,088,724 44,736,652 20,357,961 (49,126,302) 321,057,035
For the Three Months Ended
March 31, 2003
- --------------------------
Revenues from
external customers $ 7,436,122 $2,840,813 $23,972,762 $ -- $34,249,697
Intersegment revenues 2,273,273 -- -- (2,273,273) --
Segment profit (loss)
before income taxes (112,461) (97,279) 2,583,022 2,373,282
Identifiable assets 296,535,351 42,785,025 18,071,543 (44,634,629) 312,757,290
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004, (Unaudited)
6. Recent Acquisition
On March 16, 2004, with the approval of the Louisiana Insurance Department,
Security National Life Insurance Company purchased all of the outstanding common
stock of Paramount Security Life Insurance Company, a Louisiana domiciled
company (Paramount) located in Shreveport, Louisiana. As of December 31, 2003,
Paramount had 9,383 policies in force and approximately, 29 agents. The purchase
consideration was $4,397,994 and was effective January 26, 2004. For the year
ended December 31, 2003, Paramount had revenues of $614,000 and net income of
$76,000. As of December 31, 2003, statutory assets and capital and surplus were
$6,073,000 and $4,100,000, respectively.
Paramount is licensed in the State of Louisiana and is permitted to appoint
agents who do not have a full life insurance license. These agents are limited
to selling small life insurance policies in the final expense market. The
Company believes that with this license it will be able to expand its operations
in Louisiana. The Company is planning on servicing Paramount policyholders out
of its Jackson, Mississippi office, and has closed the Shreveport office.
7. Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", and subsequently issued a revision to this
Interpretation in December 2003. This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies to those variable interest entities
considered to be special-purpose entities no later than December 31, 2003. The
Interpretation must also be applied to all other variable interest entities no
later than March 31, 2004. The adoption of Interpretation No. 46 did not have a
material impact on the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------
Overview
The Company's operations over the last several years generally reflect three
trends or events which the Company expects to continue: (i) increased attention
to "niche" insurance products, such as the Company's funeral plan policies and
traditional whole-life products; (ii) emphasis on cemetery and mortuary
business; and (iii) capitalizing on lower interest rates by originating and
refinancing mortgage loans.
During the three months ended March 31, 2004, Security National Mortgage Company
("SNMC") experienced a decrease in revenue and expenses due to the decrease 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 the borrowers and other secondary fees from third party investors who
purchase the loans from SNMC. SNMC primarily 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 3,291 ($496,307,000) and 4,130 ($600,313,000)
loans, respectively, for the three months ended March 31, 2004 and 2003.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004, (Unaudited)
Results of Operations
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Total revenues decreased by $2,977,000, or 8.7%, to $31,273,000 for the three
months ended March 31, 2004, from $34,250,000 for the three months ended March
31, 2003. Contributing to this decrease in total revenues was a $3,687,000
decrease in mortgage fee income, and a $364,000 decrease in net investment
income.
Insurance premiums and other considerations increased by $532,000, or 9.1%, to
$6,396,000 for the three months ended March 31, 2004, from $5,864,000 for the
comparable period in 2003. This increase was primarily due to the additional
insurance premiums that were realized on new insurance sales.
Net investment income decreased by $364,000, or 9.3%, to $3,556,000 for the
three months ended March 31, 2004, from $3,920,000 for the comparable period in
2003. This decrease was primarily attributable to reduced borrower interest
income on fewer mortgage loans originated by Security National Mortgage Company
during the quarter.
Net mortuary and cemetery sales increased by $472,000, or 18.2%, to $3,056,000
for the three months ended March 31, 2004, from $2,585,000 for the comparable
period in 2003. This increase was primarily due to additional at-need cemetery
and mortuary sales.
Mortgage fee income decreased by $3,687,000, or 16.9%, to $18,069,000 for the
three months ended March 31, 2004, from $21,756,000 for the comparable period in
2003. This decrease was primarily attributable to a decrease in the number of
loan originations during the three months of 2004 due to an increase in interest
rates resulting in fewer borrowers refinancing their mortgage loans.
Total benefits and expenses were $30,765,000, or 98.4%, of total revenues for
the three months ended March 31, 2004, as compared to $31,876,000, or 93.1%, of
total revenues for the comparable period in 2003. The lower margin in 2004 is
due to fixed expenses, which did not decrease proportionally with the drop in
revenue.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $282,000, or 4.8%, to $6,122,000
for the three months ended March 31, 2004, from $5,840,000 for the comparable
period in 2003. This increase was primarily the result of an increase in
reserves for policyholders.
Amortization of deferred policy acquisition costs and cost of insurance acquired
increased by $240,000, or 25.1%, to $1,199,000 for the three months ended March
31, 2004, from $959,000 for the comparable period in 2003. This increase was
primarily due to the additional insurance premiums for the period.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004, (Unaudited)
General and administrative expenses decreased by $1,211,000, or 5.1%, to
$22,482,000 for the three months ended March 31, 2004, from $23,693,000 for the
comparable period in 2003. This decrease primarily resulted from a decrease in
commissions due to fewer mortgage loan originations having been made by Security
National Mortgage Company during the three months of 2003.
Interest expense decreased by $458,000, or 55.6%, to $365,000 for the three
months ended March 31, 2004, from $823,000 for the comparable period in 2003.
This decrease was primarily due to reduced warehouse lines of credit required
for fewer mortgage loan originations by Security National Mortgage Company.
Cost of goods and services sold of the mortuaries and cemeteries increased by
$37,000, or 6.5%, to $598,000 for the three months ended March 31, 2004, from
$561,000 for the comparable period in 2003. This increase was primarily due to
increased costs of 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 $62,559,000 as of March 31, 2004, compared to
$51,564,000 as of December 31, 2003. This represents 46% and 48% of the total
insurance-related investments as of March 31, 2004, and December 31, 2003,
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 March 31, 2004 and
December 31, 2003, 2% ($1,315,000) and 3 % ($1,739,000) of the Company's total
investment in bonds were invested in bonds in rating categories three through
six, which are considered non-investment grade.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004, (Unaudited)
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 March 31, 2004,
and December 31, 2003, the life insurance subsidiary exceeded the regulatory
criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $57,181,000 as of March 31, 2004, as compared to $57,039,000
as of December 31, 2003. Stockholders' equity as a percent of capitalization
increased to 70% as of March 31, 2004, from 69% as of December 31, 2003.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2003 was 8.6% as compared
to a rate of 10.7% for 2002. The 2004 lapse rate to date has been approximately
the same as 2003.
At March 31, 2004, $27,550,064 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 Disclosures about Market Risk
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 2003.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures - The Company's
principal executive officer and principal financial officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the "Exchange Act") as of the end of the period covered by this
quarterly report. Based on that evaluation, the principal executive officer and
the principal financial officer have concluded that the Company's disclosure
controls and procedures are effective, providing them with material information
relating to the Company as required to be disclosed in the reports the Company
files or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls - There were no significant changes in the
Company's internal controls over financial reporting or in other factors that
could significantly affect the Company's internal controls and procedures
subsequent to the date of their most recent evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
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 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 also asserted among other things that Thomas "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." The formal discovery
cutoff was January 15, 2004. The Company has been verbally informed that Thomas
will dismiss the case but such has not been communicated in writing. Until the
foregoing actually happens, 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
asserted 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
was alleged that disputes had arisen between NGU and the Company with regard to
the calculation and payment of certain commissions as well as certain production
bonuses.
NGU alleged that it had been damaged far in excess of the $75,000 minimum
jurisdictional limits of the federal court. NGU also sought attorney's fees and
costs as well as prejudgment and post judgment 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
counterclaimed for what it claimed to be a debit balance owing to it pursuant to
the relationship between the parties (the amount subject to reduction as
premiums are received). The Company also sought to recover attorney's fees and
costs, as well as punitive damages on three of its causes of action in the
counterclaim.
Following initial discovery, the federal case was dismissed by stipulation. 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 those in
federal court, which claims include fraudulent inducement relative to entering
into a contract, fraud, breach of contract, breach of duty of good faith and
fair dealing, attorney's fees and exemplary damages as well as seeking an
accounting and contesting the interest charges. Certain discovery has taken
place, including depositions, since the filing again in state court and further
discovery is in process and is anticipated. The Company filed a motion for
partial summary judgment with respect to certain items in the counterclaim,
which motion was denied. A trial is presently set for October 2004. The Company
intends to vigorously defend the matter as well as prosecute its counterclaim.
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 and Use of Proceeds
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:
3.1. Articles of Restatement of Articles of Incorporation (8) 3.2. Amended
Bylaws (11)
4.1. Specimen Class A Stock Certificate (1) 4.2. Specimen Class C Stock
Certificate (1)
4.3. Specimen Preferred Stock Certificate and Certificate of
Designation of preferred Stock (1)
10.1 Restated and Amended Employee Stock Ownership Plan and Trust
Agreement (1)
10.2 1993 Stock Option Plan (3)
10.3 2000 Director Stock Option Plan (5)
10.4 2003 Stock Option Plan (10)
10.5 Deferred Compensation Agreement with George R. Quist (2)
10.6 Employment Agreement with Scott M. Quist. (4)
10.7 Promissory Note with George R. Quist (6)
10.8 Deferred Compensation Plan (7)
10.9 Coinsurance Agreement between Security National Life and Acadian (8)
10.10 Assumption Agreement among Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company (8)
10.11 Asset Purchase Agreement between Acadian, Acadian Financial Group,
Inc., Security National Life and the Company (8)
10.12 Promissory Note with Key Bank of Utah (9)
10.13 Loan and Security Agreement with Key Bank of Utah (9)
10.14 Stock Purchase and Sale Agreement with Ault Glazer & Co. Investment
Management LLC (11)
10.15 Stock Purchase Agreement with Paramount Security Life Insurance
Company (12)
10.16 Reinsurance Agreement between Security National Life Insurance
Company and Guaranty Income Life Insurance Company (13)
10.17 Employment agreement with J. Lynn Beckstead, Jr. (13)
31.1 Certification pursuant to 18 U.S.C. Section 1350 as enacted by Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350 as enacted by Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(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 Annual Report on Form 10-K, as filed
on March 31, 1998
(5) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's
Annual Meeting of Shareholders
(6) Incorporated by reference from Annual Report on Form 10-K,
as filed on April 16, 2001
(7) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 3, 2002
(8) Incorporated by reference from Report on Form 8-K-A as filed on
January 8, 2003
(9) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 15, 2003
(10) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, Filed on June 5, 2003 relating to the Company's Annual
Meeting of Shareholders
(11) Incorporated by reference from Report on Form 10-Q, as filed
on November 14, 2003 (12) Incorporated by reference from
Report on Form 8-K, as filed on March 29, 2004 (13)
Incorporated by reference from Report on Form 10-K, as filed
on March 30, 2004
Subsidiaries of the Registrant
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT
SECURITY NATIONAL FINANCIAL CORPORATION
Registrant
DATED: May 15, 2004 By: George R. Quist,
----------------
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
DATED: May 15, 2004 By: Stephen M. Sill
---------------
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACTED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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-15(e) and 15-d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 covered in which this report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
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 over financial reporting.
Date: May 15, 2004
By: George R. Quist
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15-d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 covered in which this report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
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 over financial reporting.
Date: May 15, 2004
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT 32.1
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 March 31, 2004, 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.
By: George R. Quist
Chief Executive Officer
May 15, 2004
EXHIBIT 32.2
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 March 31, 2004, 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.
By: Stephen M. Sill
Chief Financial Officer
May 15, 2004