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, 2005 Commission File Number: 0-9341
- ------------------------------------ ------------------------------
SECURITY NATIONAL FINANCIAL CORPORATION
Exact Name of Registrant.
UTAH 87-0345941
- ---------------------------- ------------
(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 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 5,566,229
- ------------------------------------- --------------
Title of Class Number of Shares Outstanding
as of September 30, 2005
Class C Common Stock, $.20 par value 6,326,592
- ------------------------------------ ------------
Title of Class Number of Shares Outstanding
as of September 30, 2005
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
- ------ --------
Condensed Consolidated Statements of Earnings -
Nine and three months ended September 30, 2005
and 2004 (unaudited)..........................................3
Condensed Consolidated Balance Sheets -
September 30, 2005, and December 31, 2004 (unaudited).......4-5
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2005 and 2004 (unaudited).....6
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................7-15
Item 2 Management's Discussion and Analysis of Financial
- ------ Condition and Results of Operations.......................15-19
Item 3 Quantitative and Qualitative Disclosures about
- ------ Market Risk..................................................19
Item 4 Controls and Procedures......................................19
- ------
PART II - OTHER INFORMATION
Other Information......................................20-25
Signature Page............................................26
Certifications.........................................27-29
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Revenues: 2005 2004 2005 2004
- -------- ---- ---- ---- ----
Insurance premiums and other
considerations $ 6,437,047 $ 6,516,327 $20,329,776 $19,316,466
Net investment income 5,475,357 4,097,144 14,918,458 11,895,451
Net mortuary and cemetery sales 2,472,330 2,909,252 8,203,514 8,862,139
Realized gains on investments
and other assets 15,379 142,240 38,693 147,563
Mortgage fee income 21,055,796 12,908,022 51,321,888 48,231,477
Other 104,684 124,817 415,004 555,003
-------------- ------------- -------------- --------------
Total revenues 35,560,593 26,697,802 95,227,333 89,008,099
------------ ----------- ----------- -------------
Benefits and expenses:
Death benefits 3,385,292 3,127,355 9,810,767 10,025,473
Surrenders and other policy benefits 226,244 278,353 1,049,121 1,049,526
Increase in future policy benefits 2,233,110 2,255,143 7,304,025 6,258,223
Amortization of deferred policy and
pre-need acquisition costs and costs of
insurance acquired 667,554 638,872 2,276,595 3,403,664
General and administrative expenses:
Commissions 15,267,155 10,675,849 39,592,775 37,476,010
Salaries 3,960,552 3,622,953 11,709,035 10,930,883
Other 5,882,937 4,630,235 15,798,339 14,370,675
Interest expense 1,502,491 479,263 3,171,612 1,538,829
Cost of goods and services
sold of the mortuaries and
cemeteries 479,794 612,711 1,594,750 1,750,055
-------------- -------------- ------------- -------------
Total benefits and expenses 33,605,129 26,320,734 92,307,019 86,803,338
------------ ------------ ------------ ------------
Earnings before income taxes 1,955,464 377,068 2,920,314 2,204,761
Income tax expense (628,751) 33,548 (762,218) (492,324)
Minority interest -- 39,695 -- 63,400
------------------ ---------------- ------------------ ---------------
Net earnings $ 1,326,713 $ 450,311 $ 2,158,096 $ 1,775,837
=========== ============= =========== ===========
Net earnings per common share $0.22 $0.08 $0.35 $0.31
===== ===== ===== =====
Weighted average outstanding
common shares 6,159,174 5,714,812 6,119,472 5,686,157
============ =========== ============ ===========
Net earnings per common share
-assuming dilution $0.22 $0.08 $0.35 $0.31
===== ===== ===== =====
Weighted average outstanding
common hares- assuming dilution 6,159,919 5,715,207 6,143,984 5,799,244
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
Assets: 2005 2004
- ------- ---- ----
Insurance-related investments:
Fixed maturity securities held
to maturity, at amortized cost $67,989,329 $69,984,761
Fixed maturity securities available
for sale, at market 8,708,842 11,066,025
Equity securities available for sale,
at market 4,238,019 4,166,769
Mortgage loans on real estate and
construction loans, net of allowance
for losses 67,562,857 65,831,586
Real estate, net of accumulated
depreciation and allowances for losses 9,852,443 9,709,129
Policy, student and other loans 12,445,927 13,312,471
Short-term investments 2,426,021 4,628,999
------------- -------------
Total insurance-related investments 173,223,438 178,699,740
------------- -------------
Restricted assets of cemeteries and mortuaries 5,413,673 5,176,463
------------- -------------
Cash 11,017,755 15,333,668
------------- -------------
Receivables:
Trade contracts 5,875,986 5,333,891
Mortgage loans sold to investors 60,418,850 47,167,150
Receivable from agents 1,708,548 1,416,211
Receivable from officers -- 1,540
Other 1,483,406 1,120,157
------------- -------------
Total receivables 69,486,790 55,038,949
Allowance for doubtful accounts (1,215,654) (1,302,368)
------------- -------------
Net receivables 68,271,136 53,736,581
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Policyholder accounts on deposit
with reinsurer 6,608,138 6,689,422
Cemetery land and improvements held
for sale 8,453,367 8,547,764
Accrued investment income 2,050,876 1,743,721
Deferred policy and pre-need contract
acquisition costs 22,902,608 20,181,818
Property and equipment, net 10,569,353 10,520,665
Cost of insurance acquired 12,749,013 14,053,497
Excess of cost over net assets
of acquired subsidiaries 683,191 683,191
Other 2,635,887 1,107,230
------------ ------------
Total assets $324,578,435 $316,473,760
============ ============
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
September 30 December 31,
2005 2004
--------------- ------------
Liabilities:
Future life, annuity, and other
policy benefits $229,331,535 $224,529,539
Unearned premium reserve 2,922,678 2,254,991
Bank loans payable 9,174,805 10,442,106
Notes and contracts payable 2,295,156 2,888,539
Deferred pre-need cemetery and funeral
contract revenues 10,826,575 10,762,357
Accounts payable 1,542,696 1,064,269
Funds held under reinsurance treaties 1,153,691 1,184,463
Other liabilities and accrued expenses 9,162,491 6,371,343
Income taxes 12,795,178 11,497,967
------------- -------------
Total liabilities 279,204,805 270,995,574
------------- -------------
Commitments and contingencies -- --
------------- -------------
Minority interest -- 3,813,346
------------- -------------
Stockholders' Equity:
Common stock:
Class A: $2.00 par value, authorized
10,000,000 shares, issued 6,757,796
shares in 2005 and 6,755,870 shares
in 2004 13,515,592 13,511,740
Class C: convertible, $0.20 par value,
authorized 7,500,000 shares, issued
6,458,152 shares in 2005 and
6,468,199 shares in 2004 1,291,630 1,293,641
------------- -------------
Total common stock 14,807,222 14,805,381
Additional paid-in capital 15,003,094 14,922,851
Accumulated other comprehensive (loss)
and other items, net of deferred taxes 1,122,644 (11,352)
Retained earnings 17,523,205 15,365,259
Treasury stock at cost (1,191,567 Class A shares
and 131,560 Class C shares in 2005;
1,315,075 Class A shares and 79,103
Class C shares in 2004, held
by affiliated companies) (3,082,535) (3,417,299)
------------ ------------
Total stockholders' equity 45,373,630 41,664,840
------------ ------------
Total liabilities and
stockholders' equity $324,578,435 $316,473,760
============ ============
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2005 2004
---- ----
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $(2,019,241) $52,172,785
------------ ------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (5,484,347) (35,298,358)
Calls and maturities - fixed
maturity securities 7,381,707 6,013,487
Securities available for sale:
Sales - equity securities 1,992,991 2,662,122
Purchases of short-term investments (11,924,755) (27,167,080)
Sales of short-term investments 14,127,733 24,542,798
Purchases of restricted assets (169,310) (231,902)
Mortgage, policy, and other loans made (58,817,295) (50,980,016)
Payments received for mortgage,
policy, and other loans 57,737,641 28,538,130
Purchases of property and equipment (1,403,476) (926,685)
Purchases of real estate (2,995,748) (1,830,045)
Cash paid for purchase of subsidiary -- (304,042)
Sale of real estate 2,294,238 238,502
------------ ------------
Net cash (used in) provided by
investing activities 2,739,379 (54,743,089)
------------ ------------
Cash flows from financing activities:
Annuity and pre-need contract receipts 4,237,386 3,898,324
Annuity and pre-need contract withdrawals (7,111,885) (7,532,453)
Repayment of bank loans and notes and
contracts payable (2,575,517) (3,851,225)
Stock options exercised -- --
Sale (Purchase) of Treasury Stock 413,965 110,299
------------ ------------
Net cash used in financing activities (5,036,051) (7,375,055)
------------ ------------
Net change in cash (4,315,913) (9,945,359)
Cash at beginning of period 15,333,668 19,704,358
------------ ------------
Cash at end of period $11,017,755 $9,758,999
============ ============
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005 (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed 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, 2005, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 2004 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 fairly stated in all material respects.
2. Comprehensive Income
For the three months ended September 30, 2005 and 2004, total comprehensive
income amounted to $2,586,656 and $515,113, respectively.
For the nine months ended September 30, 2005 and 2004, total comprehensive
income amounted to $3,292,092 and $1,988,307, 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 nine months ended September 30, 2005
and 2004 would have been reduced by the following:
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005 (Unaudited)
Nine Months Ended September 30,
2005 2004
---- ----
Net earnings as reported $2,158,096 $1,775,837
Deduct: Total stock-based employee
compensation expense determined
under fair value based
method for all awards, net of
related tax effects -- --
---------- ----------
Pro forma net earnings $2,158,096 $1,775,837
========== ==========
Nine Months Ended September 30,
2005 2004
---- ----
Net earnings per common share:
Basic - as reported $0.35 $0.31
Basic - pro forma $0.35 $0.31
Diluted - as reported $0.35 $0.31
Diluted - pro forma $0.35 $0.31
4. Earnings Per Share
Basic earnings per share includes Class A and Class C shares, which are
convertible on a 10-for-1 equivalent, to Class A common stock outstanding.
The basic and diluted earnings per share amounts were calculated as
follows:
Three Months Ended September 30,
2005 2004
---- ----
Numerator:
Net income $ 1,326,713 $ 450,311
=========== ===========
Denominator:
Denominator for basic
earnings per share-weighted
-average shares 6,159,174 5,714,812
------------ -----------
Effect of dilutive securities:
Employee stock options 168 --
Stock appreciation rights 577 395
------------ ----------
Dilutive potential common shares 745 395
------------ ----------
Denominator for diluted
earnings per share-adjusted
weighted-average shares and
assumed conversions 6,159,919 5,715,207
=========== ===========
Basic earnings per share $0.22 $.08
===== ====
Diluted earnings per share $0.22 $.08
===== ====
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005 (Unaudited)
Nine Months Ended September 30,
2005 2004
---- ----
Numerator:
Net income $2,158,096 $1,775,837
========== ==========
Denominator:
Denominator for basic earnings
per share-weighted-average
shares 6,119,472 5,686,157
----------- ----------
Effect of dilutive securities:
Employee stock options 23,971 111,590
Stock appreciation rights 541 1,497
------------ ----------
Dilutive potential common shares 24,512 113,087
------------ ----------
Denominator for diluted
earnings per share-adjusted
weighted-average shares
and assumed conversions $6,143,984 5,799,244
========== ==========
Basic earnings per share $0.35 $0.31
===== =====
Diluted earnings per share $0.35 $0.31
===== =====
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005, (Unaudited)
5. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
For the Three Months Ended
September 30, 2005
- --------------------------
Revenues from
external customers $8,927,439 $2,796,506 $23,836,648 $ -- $35,560,593
Intersegment revenues 1,297,110 30,668 92,743 (1,420,521) --
Segment profit (loss)
before income taxes 470,689 (23,454) 1,508,229 -- 1,955,464
For the Three Months Ended
September 30, 2004
- --------------------------
Revenues from
external sources $8,819,017 $3,172,449 $14,706,336$ -- $26,697,802
Intersegment revenues 1,866,654 38,336 69,074 (1,974,064) --
Segment profit (loss)
before income taxes 595,525 172,395 (390,852) -- 377,068
For the Nine Months Ended
September 30, 2005
- -------------------------
Revenues from
external sources $28,505,978 $9,130,423 $57,590,932 $ -- $95,227,333
Intersegment revenues 3,666,646 69,003 255,783 (3,991,432) --
Segment profit (loss)
before income taxes 1,806,834 398,433 715,047 -- 2,920,314
Identifiable assets 309,087,308 49,244,698 18,645,032 (52,398,603) 324,578,435
For the Nine Months Ended
September 30, 2004
- -------------------------
Revenues from
external sources $25,885,019 $9,628,455 $53,494,625$ -- $89,008,099
Intersegment revenues 5,818,153 38,336 191,158 (6,047,647) --
Segment profit (loss)
before income taxes 1,621,209 695,290 (111,738) -- 2,204,761
Identifiable assets 306,437,782 46,140,543 18,258,337 (51,835,770) 319,000,892
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005, (Unaudited)
6. Merger Transaction
Effective January 1, 2005, Security National Life and SSLIC Holding Company, a
wholly owned subsidiary of Security National Life, completed a merger
transaction with Southern Security Life Insurance Company. Under the terms of
the merger and pursuant to the Agreement and Plan of Reorganization, dated
August 25, 2004, among Security National Life, SSLIC Holding Company and
Southern Security Life Insurance Company, including the amendment thereto dated
December 27, 2004, SSLIC Holding Company was merged with and into Southern
Security Life Insurance Company, which resulted in (i) Southern Security Life
Insurance Company becoming a wholly-owned subsidiary of Security National Life
Insurance Company, and (ii) the unaffiliated stockholders of Southern Security
Life Insurance Company, holding an aggregate of 490,816 shares of common stock,
or 23.3% of the outstanding shares, becoming entitled to receive $3.84 in cash
for each issued and outstanding share of their common stock of Southern Security
Life Insurance Company, or an aggregate of $1,884,733.
As a result of the merger, the separate existence of SSLIC Holding Company
ceased as Southern Security Life Insurance Company became the surviving
corporation of the merger. Southern Security Life Insurance Company continues to
be governed by the laws of the State of Florida, and its separate corporate
existence continues unaffected by the merger. In addition, as a result of the
merger, Security National Life owns all of the issued and outstanding common
shares of Southern Security Life Insurance Company. Security National Financial
Corporation, through its affiliates, Security National Life Insurance Company
and SSLIC Holding Company, owned 76.7% of the Company's outstanding common
shares prior to the merger.
The minority shareholders interest in assets and liabilities were recorded at
book value. Due to the purchase price of the minority shares being less than
book value, there was a gain of $1,678,463. This gain was used to reduce the
Deferred Acquisition Costs by $1,187,044 and Cost of Insurance Acquired by
$491,419. Proforma disclosure information, as though the business combination
has been completed as of January 1, 2004, has not been included because the
change would not have been material.
The purpose of the merger is to terminate the registration of the common stock
of Southern Security Life Insurance Company under the Securities Exchange Act of
1934 (by reducing the number of its stockholders of record to fewer than 300
stockholders) and the Nasdaq listing of the common stock, reduce expenses
associated with such registration and listing, and provide the stockholders an
opportunity to sell their shares in an illiquid trading market without incurring
brokerage commissions. As a result of becoming a non-reporting company, Southern
Security Life Insurance Company is no longer required to file periodic reports
with the SEC, including among other things, annual reports on Form 10-K and
quarterly reports on Form 10-Q, and is no longer subject to the SEC's proxy
rules. In addition, its common stock is no longer eligible for trading on the
Nasdaq SmallCap Market.
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, 2005. The adoption of Interpretation No. 46 did not have a
material impact on the Company's financial position or results of operations.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005, (Unaudited)
In December 2004, FASB revised SFAS 123 to Share-Based Payment ("SFAS 123(R)").
SFAS 123(R) provides additional guidance on determining whether certain
financial instruments awarded in share-based payment transactions are
liabilities. SFAS 123(R) also requires that the cost of all share-based
transactions be recorded in the financial statements. The revised pronouncement
must be adopted by the Company by January 1, 2006. Implementation of SFAS 123(R)
will not have a significant impact on the Company's consolidated financial
statements in the period of implementation. However, any future stock options
granted could have a significant impact on the Company's consolidated financial
statements.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement
154 applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. Statement 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. It is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made occurring in
fiscal years beginning after June 1, 2005. The Company expects that the adoption
of SFAS 154 will not have a material impact on its financial statements.
8. Other Business Activities
The Company has determined that a marketing employee of Security National Life
Insurance Company has embezzled a total of $275,000 from the Company. The
Company's audit committee has conducted a formal investigation of the matter and
advised the Company's Board of Directors and registered public independent
accountants of the embezzlement. Management is in the process of attempting to
recover a portion of the embezzled funds. The Company has fidelity bond coverage
with a $50,000 deductible, but there can be no assurance that the Company will
be successful in obtaining any recovery of the embezzled funds from the insurer.
The Company has accrued a liability of $200,000 in order to reflect the loss
that may occur from this embezzlement as well as potential additional losses
related to the employees mismanagement of the related business activity.
The City of Phoenix has commenced condemnation proceedings, in order to
construct a light rail facility on the Camelback Funeral Home property. The
condemnation has resulted in the cessation of funeral operations at Camelback on
January 1, 2005. The land ($289,289) and building ($390,480) are being carried
at December 31, 2004 book value pending finalization of the purchase contract
and sale price, of which the City of Phoenix has placed $1,200,000 in escrow.
9. Subsequent Event
On September 23, 2005, the Company, through its subsidiaries, Security National
Life Insurance Company and Southern Security Life Insurance Company, entered
into a stock purchase agreement with Memorial Insurance Company of America, an
Arkansas domiciled insurance company ("Memorial Insurance Company"), to purchase
all of the outstanding shares of common stock of Memorial Insurance Company.
Under the terms of the stock purchase agreement, the shareholders of Memorial
Insurance Company will receive $13,500,000 in consideration for all of the
outstanding common shares of Memorial Insurance Company, with each shareholder
to receive a pro rata share of the total amount of the purchase consideration
based upon the number of shares such shareholder owns. The shareholders will
receive a total $13,500,000 for their shares by means of distributions, with
Security National Life Insurance Company and Southern Security Life Insurance
Company simultaneously contributing sufficient capital and surplus to Memorial
Insurance Company to maintain its status as an admitted insurer in good standing
in the state of Arkansas.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005, (Unaudited)
For federal and state tax purposes, the transaction will be treated as a part
sale, part redemption of the Memorial Insurance Company stock. At the closing of
the transaction, the shareholders of Memorial Insurance Company agree to sell
their shares of Memorial Insurance Company stock to Security National Life
Insurance Company and Southern Security Life Insurance Company, such shares
representing all of the issued and outstanding stock of Memorial Insurance
Company, free and clear of all liens, claims, and encumbrances. Following
completion of the transaction, Memorial Insurance Company will become a wholly
owned subsidiary of Southern Security Life Insurance Company.
As of December 31, 2004, Memorial Insurance Company had 100,170 policies in
force and 50 agents. For the year ended December 31, 2004, Memorial Insurance
Company had revenues of $4,893,000 and net income of $2,158,000. As of December
31, 2004, the statutory assets and the capital and surplus of Memorial Insurance
Company were $45,048,000 and $12,303,000, respectfully.
Under the terms of the stock purchase agreement, the shareholders agree, where
applicable following the closing of the transaction, to maintain any existing
policies from Memorial Insurance Company that were previously sold through such
shareholders' funeral and mortuary businesses and to avoid replacing any of such
policies with the policies of other insurance companies. The shareholders
further agree to use their reasonable best efforts to support the business and
operations of Memorial Insurance Company, including, where applicable, to
maintain a business relationship with Memorial Insurance Company to the extent
such a business relationship existed prior to such closing.
Moreover, Security National Life Insurance Company and Southern Security Life
Insurance Company agree to maintain the corporate offices of Memorial Insurance
Company at its current location in Blytheville, Arkansas. Furthermore, Security
National Life Insurance Company and Southern Security Life Insurance Company
agree to use their best efforts, following the closing, to assist Memorial
Insurance Company in retaining the sales agents and brokers in its business and
operations. Security National Life Insurance Company anticipates completing the
transaction on or about December 9, 2005. The obligations to complete the
transaction are contingent upon approval of the transaction by the Arkansas
Insurance Department. A hearing has been scheduled on December 9, 2005 with the
commissioner of the Arkansas Insurance Department to consider the request by
Security National Life Insurance Company and Southern Security Life Insurance
Company to approve the transaction.
At the closing of the transaction, Security National Life Insurance Company and
Memorial Insurance Company each agree to enter into a reinsurance agreement to
reinsure the majority of the in force business of Memorial Insurance Company to
Security National Life Insurance Company, as reinsurer, to the extent permitted
by the Arkansas Insurance Department. The parties to the reinsurance agreement
will consist of Security National Life Insurance Company, Memorial Insurance
Company, and the Arkansas Insurance Department. The assets and liabilities to be
reinsured under the reinsurance agreement shall be deposited into a trust
account, in which Zions Bancorporation, a national banking corporation, has
agreed to act as trustee. Under the terms of the reinsurance agreement, in the
event of the insolvency of Security National Life Insurance Company, Zions
Bancorporation will transfer the assets and liabilities held in trust to the
Arkansas Insurance Department for purposes of the administration of the assets
and liabilities with respect to such insolvency.
On October 20, 2005, Security National Life Insurance Company and Southern
Security Life Insurance Company submitted a Form A application to the Arkansas
Insurance Department. The Form A application included a proposed reinsurance
agreement and a trust agreement that Security National Life Insurance Company
intends to enter into with Memorial Insurance Company and the Arkansas Insurance
Department.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005, (Unaudited)
Upon approval of the reinsurance agreement by the Arkansas insurance department,
certain insurance business and operations of Memorial Insurance Company will be
transferred to Security National Life Insurance Company, as of the effective
date of the reinsurance agreement, including all policies in force as of the
effective date thereof, except for certain policies. Any future insurance
business by Memorial Insurance Company will be covered by this reinsurance
agreement. It is anticipated that all of the business and operations of Memorial
Insurance Company will be transferred to Security National Life Insurance
Company under the terms of the reinsurance agreement, except for capital and
surplus of approximately $1,000,000. Thus, it is estimated that approximately
$30,091,000 in assets and liabilities will be transferred from Memorial
Insurance Company to Security National Life Insurance Company pursuant to the
reinsurance agreement.
At the closing of the stock purchase transaction, Memorial Insurance Company
will issue a $30,091,000 note to Security National Life Insurance Company
payable, together with accrued interest, within 30 days from the date of
issuance. The note is to be repaid in cash or in assets to be transferred to
Security National Life Insurance Company. The note will be secured by the assets
owned by Memorial Insurance Company. In addition, Southern Security Life
Insurance Company will contribute $2,200,000 to Memorial Insurance Company at
closing in consideration for the surplus note. It is anticipated that Memorial
Insurance Company will repay the surplus note in early 2006 using the proceeds
from the sale of the investments in common stocks currently held in its
investment portfolio.
10. Derivative Loan Commitments
In the third quarter 2005 the Company's mortgage banking activities implemented
new practices as it relates to interest rate lock commitments and forward
commitments to sell loans to third-party investors. The Company has also
implemented a hedging strategy for these transactions. A mortgage loan
commitment binds the Company to lend funds to a qualified borrower at a
specified interest rate and within a specified period of time, generally up to
30 days after inception of the rate lock. Such a commitment is referred to as a
derivative loan commitment if the loan that will result from exercise of the
commitment will be held for sale under Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and
Hedging Activities, as amended by Statement of Financial Accounting Standards
No. 149 ("SFAS 149"), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. As such, loan commitments that are derivatives and have an
effective hedging strategy, must be recognized at fair value on the consolidated
balance sheet with changes in their fair values recorded as part of other
comprehensive income from mortgage banking operations.
In determining the fair value of its derivative loan commitments for economic
purposes, the Company considers the value that would be generated when the loan
arising from exercise of the loan commitment is sold to third party investors.
That value consists of the price, including mortgage servicing release values,
that is expected upon the sale of the loans to third-party investors.
In estimating their fair values, the Company also assigns a probability to a
loan commitment based on an expectation that it will not be exercised and the
loan will not be funded. This probability is commonly referred to as fallout.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005, (Unaudited)
The Company is exposed to price risk due to the potential impact of changes in
interest rates on the values of the derivative loan commitments from the time a
derivative loan commitment is made to an applicant to the time the loan that
would result from the exercise of that loan commitment is funded. Managing price
risk is complicated by the fact that the ultimate percentage of derivative loan
commitments that will be exercised (i.e., the number of loan commitments that
will be funded) fluctuates. The probability that a loan will not be funded
within the terms of the commitment is driven by a number of factors - in
particular, the change, if any, in mortgage rates subsequent to inception of the
rate lock. However, many borrowers continue to exercise derivative loan
commitments even when interest rates have fallen.
In general, the probability of funding increases if mortgage rates rise and
decreases if mortgage rates fall. This is due primarily to the relative
attractiveness of current mortgage rates compared to the applicant's committed
rate. The probability that a loan will not be funded within the terms of the
derivative loan commitments also is influenced by the source of the applications
(retail, broker or correspondent channels), proximity to rate lock expiration,
purpose for the loan (purchase or refinance) product type and the application
approval status. The Company has developed fallout estimates using historical
observed data that take into account all of the variables, as well as
renegotiations of rate and point commitments that tend to occur when mortgage
rates fall. These fallout estimates are used to estimate the number of loans
that it expects to be funded within the terms of the derivative loan commitments
and are updated periodically to reflect the most current data. Once a loan is
closed, it is classified as a loan receivable-held for sale.
The Company utilizes various derivative instruments to economically hedge the
price risk associated with its outstanding derivative loan commitments.
Management expects these derivatives will experience changes in fair value
opposite to changes in fair value of the derivative loan commitments, thereby
reducing earnings volatility related to the recognition in earnings of changes
in the values of the commitments. The instruments used to economically hedge the
fair value of the derivative loan commitments include forward loan sales
commitments and other free-standing derivatives such as options and U.S.
Treasury futures. A forward loan sales commitment protects the Company from
losses on sales of the loans arising from exercise of the loan commitments by
securing the ultimate sales price and delivery date of the loans. The Company
takes into account various factors and strategies in determining the portion of
the mortgage pipeline (derivative loan commitments) it wants to hedge
economically.
Included in Other Comprehensive Income is the significant components of these
transactions as follows:
Gain on forward loan sale commitments $1,259,000
Gain on derivative loan commitments 227,000
----------
$1,486,000
==========
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 historically lower interest rates by
originating and refinancing mortgage loans.
During the nine months ended September 30, 2005, Security National Mortgage
Company ("SNMC") experienced an increase 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 the borrowers and other secondary fee 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 9,421 ($1,516,694,000) and 8,790
($1,368,000,000) loans, respectively, for the nine months ended September 30,
2005 and 2004.
Results of Operations
Third Quarter of 2005 Compared to Third Quarter of 2004
(rounded to nearest thousand)
Total revenues increased by $8,863,000, or 33.2%, to $35,561,000 for the three
months ended September 30, 2005, from $26,698,000 for the three months ended
September 30, 2004. Contributing to this increase in total revenues was an
increase of $8,148,000 in mortgage fee income and an increase of $1,378,000 in
net investment income.
Insurance premiums and other considerations decreased by $79,000, or 1.2%, to
$6,437,000 for the three months ended September 30, 2005, from $6,516,000 for
the comparable period in 2004. This decrease was primarily due to fewer
insurance premiums that were realized on new insurance sales.
Net investment income increased by $1,378,000, or 33.6%, to $5,475,000 for the
three months ended September 30, 2005, from $4,097,000 for the comparable period
in 2004. This increase was primarily attributable to additional borrower
interest income from increased long-term bond purchases and mortgage loans over
the comparable period in 2004.
Net mortuary and cemetery sales decreased by $437,000, or 15.0%, to $2,472,000
for the three months ended September 30, 2005, from $2,909,000 for the
comparable period in 2004. This reduction in mortuary sales was due to reduced
pre-need property sales and the loss of sales from the Camel Back Funeral Home
as a result of the City of Phoenix having commenced condemnation proceedings in
order to construct a light rail facility on the funeral home property.
Mortgage fee income increased by $8,148,000, or 63.1%, to $21,056,000 for the
three months ended September 30, 2005, from $12,908,000 for the comparable
period in 2004. This increase was primarily attributable to an increase in the
number of loan originations during the third quarter of 2005 due to the opening
of new offices and increased production in exiting offices, which resulted in
the financing of a greater number of mortgage loans.
Total benefits and expenses were $33,605,000, or 94.5% of total revenues for the
three months ended September 30 2005, as compared to $26,321,000, or 98.6% of
total revenues for the comparable period in 2004. The higher margin in 2005 was
due to fixed expenses that did not increase proportionally with the increase in
revenues.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $184,000, or 3.3%, to $5,845,000
for the three months ended September 30, 2005, from $5,661,000 for the
comparable period in 2004. This increase was primarily the result of an increase
in death benefits.
Amortization of deferred policy acquisition costs and costs of insurance
acquired increased by $29,000, or 4.5%, to $668,000 for the three months ended
September 30, 2005, from $639,000 for the comparable period in 2004. This
increase was primarily due to the growth of policies in force.
General and administrative expenses increased by $6,182,000, or 32.7%, to
$25,111,000 for the three months ended September 30, 2005, from $18,929,000 for
the comparable period in 2004. This increase resulted primarily from an increase
in commissions due to the additional mortgage loan originations that
SecurityNational Mortgage Company made during the third quarter of 2005.
Interest expense increased by $1,023,000, or 213.5%, to $1,502,000 for the three
months ended September 30, 2005, from $479,000 for the comparable period in
2004. This increase was primarily due to the increased use of warehouse lines of
credit required for the funding of loans by SecurityNational Mortgage Company.
Cost of goods and services sold of the mortuaries and cemeteries decreased by
$133,000, or 21.7%, to $480,000 for the three months ended September 30, 2005,
from $613,000 for the comparable period in 2004. This reduction in the cost of
goods and services sold of the mortuaries and cemeteries was due to the reduced
costs of at-need merchandise at the Company's mortuaries and cemeteries and the
loss of sales from the Camelback Funeral Home as a result of the City of Phoenix
having commenced condemnation proceedings in order to construct a light rail
facility on the funeral home property.
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
2004 (rounded to nearest thousand)
Total revenues increased by $6,219,000,or 7.0%, to $95,227,000 for the nine
months ended September 30, 2005, from $89,008,000 for the nine months ended
September 30, 2004. Contributing to this increase in total revenues was a
$3,090,000 increase in mortgage fee income, a $3,023,000 increase in net
investment income, and a $1,013,000 increase in insurance premiums.
Insurance premiums and other considerations increased by $1,013,000, or 5.2%, to
$20,330,000 for the nine months ended September 30, 2005, from $19,317,000 for
the comparable period in 2004. This increase was primarily due to the additional
insurance premiums realized from new insurance sales.
Net investment income increased by $3,023,000, or 25.4%, to $14,918,000 for the
nine months ended September 30, 2005, from $11,895,000 for the comparable period
in 2004. This increase was primarily attributable to additional borrower
interest income from increased long-term bond purchases and mortgage loans over
the comparable period in 2004.
Net mortuary and cemetery sales decreased by $659,000, or 7.4%, to $8,203,000
for the nine months ended September 30, 2005, from $8,862,000 for the comparable
period in 2004. This reduction in mortuary sales was primarily due to a
reduction in pre-need property sales and the loss of sales from the Camelback
Funeral Home as a result of the City of Phoenix having commenced condemnation
proceedings in order to construct a light rail facility on the funeral home
property.
Mortgage fee income increased by $3,090,000, or 6.4%, to $51,322,000 for the
nine months ended September 30, 2005, from $48,232,000 for the comparable period
in 2004. This increase was primarily attributable to an increase in the number
of loan originations during the first nine months of 2005 due to the opening of
new offices and increased production in existing offices, which resulted in the
financing of a greater number of mortgage loans.
Total benefits and expenses were $92,307,000, or 96.9% of total revenues for the
nine months ended September 30, 2005, as compared to $86,803,000, or 97.5% of
total revenues for the comparable period in 2004. The higher margin in 2005 was
due to fixed expenses that did not increase proportionally with the increase in
revenues.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $831,000, or 4.8%, to $18,164,000
for the nine months ended September 30, 2005, from $17,333,000 for the
comparable period in 2004. This increase was primarily the result of an increase
in reserves for policyholders.
Amortization of deferred policy and pre-need acquisition costs and costs of
insurance acquired decreased by $1,127,000, or 33.1%, to $2,277,000 for the nine
months ended September 30, 2005, from $3,404,000, for the comparable period in
2004. This decrease was primarily due to recognition of improvement in
persistency.
General and administrative expenses increased by $4,323,000, or 6.9%, to
$67,100,000 for the nine months ended September 30, 2005, from $62,777,000, for
the comparable period in 2004. This increase resulted primarily from an increase
in commissions due to the additional mortgage loan originations that
SecurityNational Mortgage Company made during the nine months ended September
30, 2005.
Interest expense increased by $1,633,000 or 106.1%, to $3,172,000 for the nine
months ended September 30, 2005, from $1,539,000, for the comparable period in
2004. This increase was primarily due to the increased use of warehouse lines of
credit required for the funding of loans by SecurityNational Mortgage Company.
Cost of goods and services sold of the mortuaries and cemeteries decreased by
$155,000, or 8.9%, to $1,595,000, for the nine months ended September 30, 2005,
from $1,750,000 for the comparable period in 2004. This reduction in the cost of
goods and services sold of the mortuaries and cemeteries was due to the reduced
costs of at-need merchandise at the Company's mortuaries and cemeteries and the
loss of sales from the Camelback Funeral Home, as a result of the City of
Phoenix having commenced condemnation proceedings in order to construct a light
rail facility on the funeral home property.
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 the warehousing of 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 $76,698,000 as of September 30,
2005, compared to $81,051,000 as of December 31, 2004. This represents 50% and
45% of the total insurance-related investments as of September 30, 2005, and
December 31,
2004, respectively. Generally, all bonds owned by the life insurance
subsidiaries are rated by the National Association of Insurance Commissioners.
Under this rating system, there are nine categories used for rating bonds. At
September 30, 2005 and December 31, 2004, 2% ($1,664,000) and 2% ($1,659,000) 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,
2005, and December 31, 2004, the life insurance subsidiary exceeded the
regulatory criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $56,844,000 as of September 30, 2005, as compared to
$54,995,000 as of December 31, 2004. Stockholders' equity as a percent of
capitalization increased to 80% as of September 30, 2005, from 76% as of
December 31, 2004.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2004 was 9.0%, as
compared to a rate of 8.6 % for 2003. The 2005 lapse rate to date has been
approximately the same as 2004.
At September 30, 2005, $27,335,000 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 Disclosures about Market Risk
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 2004.
Item 4. Controls and Procedures
a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of the Company's
management, including its principal executive officer and principal financial
officer, the Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as of September 30, 2005.
Based on this evaluation, the Company's principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures were effective
and adequately designed to ensure that the information required to be disclosed
by the Company in the reports it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in applicable rules and forms.
b) Changes in internal controls over financial reporting
During the quarter ended September 30, 2005, there has been no change in
the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect its internal control over
financial reporting.
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, Inc. delivered to Lynn W. Brown six stock certificates
totaling 2,000 shares of its common stock in 1970 and 1971. Mr. Brown died in
1972. It is also asserted that at the time the 2,000 shares were issued and
outstanding, the shares represented a 2% ownership of Memorial Estates. It is
further alleged that Mr. Brown was entitled to preemptive rights and, 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 of his right to
purchase more stock.
It is further asserted that Thomas has the right to the transfer of Brown's
shares on the books of Security National Financial Corporation as well as
Memorial Estates, and to the restoration of Brown's proportion of share
ownership in Memorial Estates at the time of his death by issuance and delivery
to Thomas of sufficient shares of the Company's publicly traded and unrestricted
stock in exchange for the 2,000 shares of Memorial Estates stock, including
payment of all dividends from the date of Thomas's demand. The formal discovery
cutoff was January 15, 2004. The Company has been verbally informed that Thomas
will dismiss the case but such dismissal has not been communicated in writing.
Until the case is actually dismissed, the Company intends to vigorously defend
the matter, including the assertion that the statute of limitations bars the
claims in their entirety.
The Company received a letter dated November 9, 2004 on behalf of Charles Hood,
who worked at Singing Hills Memorial Park in El Cajon, California. He was hired
in April 2003 as a groundskeeper with his work concluding on October 30, 2003.
Mr. Hood claims that he wrote a letter to the Company outlining his concerns
regarding the operation of the cemetery and claims, as a result, that he was
terminated. Even though he recognizes his relationship was as an at-will
employee, Mr. Hood's claims against the Company include, but are not limited to,
wrongful termination, violation of labor laws, whistleblower retaliation and
infliction of emotional distress. The letter proposes a settlement in the amount
of $275,000.
On September 21, 2005, Mr. Hood filed a complaint against the Company and its
wholly owned subsidiaries, Singing Hills Memorial Park and Memorial Estates,
Inc., in the Superior Court of the State of California for the County of San
Diego (Case No. GIE028978). The complaint includes causes of action for wrongful
termination in violation of public policy, retaliation in violation of public
policy, race discrimination in violation of the California Fair Employment and
Housing Act, retaliation in violation of such act, and intentional infliction of
emotional distress. Damages, including punitive damages, are sought with no
specific amount set forth in the complaint, together with attorney's fees,
interest and costs of the lawsuit. The Company disputes the claims in the
complaint and asserts that Mr. Hood was not wrongfully terminated but had
voluntarily quit as an employee of the Company. Formal discovery has commenced.
The Company intends to vigorously defend against the action.
The Company also received a letter dated November 29, 2004 on behalf of Roger
Gornichec, who the Company recognizes as having been an independent contractor.
The attorney who wrote the letter on behalf of Mr. Hood also wrote the letter on
behalf of Mr. Gornichec. Mr. Gornichec concluded his services as an agent
selling insurance in the spring of 2003 and his license to sell cemetery plots
was not renewed in the summer of 2004. Mr. Gornichec asserts that he was an
employee contrary to the Company's position.
The claims made on behalf of Mr. Gornichec include, but are not limited to,
wrongful termination in violation of public policy, misrepresentation, age
discrimination, whistle-blower retaliation, interference with economic
advantage, breach of contract, breach of the covenant of good faith and fair
dealing, and infliction of emotional distress. Mr. Gornichec also claims that he
is owed a certain amount from a retirement plan. The letter proposes a
settlement in the amount of $420,000. Based on its investigation, the Company
believes that Mr. Gornichec was an independent contractor, not an employee, and
that the claims and the settlement amount sought are not justified. Mr.
Gornichec also filed a complaint with the California Department of Fair
Employment and Housing. He has obtained a right to sue letter but no litigation
has commenced. If the matter is not resolved and litigation ensues, the Company
is prepared to vigorously defend the action.
The Company is a defendant in various other legal actions arising from the
normal conduct of business. Management believes that none of the actions will
have a material effect on the Company's financial position or results of
operations. Based on management's assessment and legal counsel's representations
concerning the likelihood of unfavorable outcomes, no amounts have been accrued
for the above claims in the consolidated financial statements.
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
At the annual stockholders meeting held on July 8, 2005, the following
matters were acted upon: (i) seven directors consisting of George R.
Quist, Scott M. Quist, J. Lynn Beckstead, Jr., 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,
with Class A and Class C shares voting, 11,073,336 votes were cast in
favor of election, no votes were cast against election, and there were
22,106 abstentions; for Scott M. Quist, with Class A and Class C
shares voting, 11,092,859 votes were cast in favor of election, no
votes were cast against election, and there were 2,583 abstentions;
for J. Lynn Beckstead, Jr., with Class A shares voting, 5,073,477
votes were cast in favor of election, no votes were cast against
election, and there were 22,525 abstentions; for Charles L.
Crittenden, with Class A and Class C shares, 11,091,275 votes were
cast in favor of election, no votes were cast against election, and
there were 4,167 abstentions; for Dr. Robert G. Hunter, with Class A
and Class C shares voting, 11,092,160 votes were cast in favor of
election, no votes cast against election, and there were 3,282
abstentions; for H. Craig Moody, with Class A shares voting, 5,073,851
votes were cast in favor of election, no votes cast against election,
and there were 22,151 abstentions; and for Norman G. Wilbur, with
Class A and Class C shares voting, 11,093,438 votes were cast in favor
of election, no votes were cast against election, and there were 2,004
abstentions); and (ii) the appointment of Hansen, Barnett & Maxwell,
P.C. as the Company's registered pubic independent accountants for the
fiscal year ending December 31, 2005 was ratified (with 11,093,475
votes cast for appointment, 1,967 votes against appointment, and there
were 28,714 abstentions).
Item 5. Other Information
On September 23, 2005, the Company, through its subsidiaries, Security
National Life Insurance Company and Southern Security Life Insurance
Company, entered into a stock purchase agreement with Memorial
Insurance Company of America, an Arkansas domiciled insurance company
("Memorial Insurance Company"), to purchase all of the outstanding
shares of common stock of Memorial Insurance Company. Under the terms
of the stock purchase agreement, the shareholders of Memorial
Insurance Company will receive $13,500,000 in consideration for all of
the outstanding common shares of Memorial Insurance Company, with each
shareholder to receive a pro rata share of the total amount of the
purchase consideration based upon the number of shares such
shareholder owns. The shareholders will receive a total $13,500,000
for their shares by means of distributions, with Security National
Life Insurance Company and Southern Security Life Insurance Company
simultaneously contributing sufficient capital and surplus to Memorial
Insurance Company to maintain its status as an admitted insurer in
good standing in the state of Arkansas.
For federal and state tax purposes, the transaction will be treated as
a part sale, part redemption of the Memorial Insurance Company stock.
At the closing of the transaction, the shareholders of Memorial
Insurance Company agree to sell their shares of Memorial Insurance
Company stock to Security National Life Insurance Company and Southern
Security Life Insurance Company, such shares representing all of the
issued and outstanding stock of Memorial Insurance Company, free and
clear of all liens, claims, and encumbrances. Following completion of
the transaction, Memorial Insurance Company will become a wholly owned
subsidiary of Southern Security Life Insurance Company.
As of December 31, 2004, Memorial Insurance Company had 100,170
policies in force and 50 agents. For the year ended December 31, 2004,
Memorial Insurance Company had revenues of $4,893,000 and net income
of $2,158,000. As of December 31, 2004, the statutory assets and the
capital and surplus of Memorial Insurance Company were $45,048,000 and
$12,303,000, respectfully.
Under the terms of the stock purchase agreement, the shareholders
agree, where applicable following the closing of the transaction, to
maintain any existing policies from Memorial Insurance Company that
were previously sold through such shareholders' funeral and mortuary
businesses and to avoid replacing any of such policies with the
policies of other insurance companies. The shareholders further agree
to use their reasonable best efforts to support the business and
operations of Memorial Insurance Company, including, where applicable,
to maintain a business relationship with Memorial Insurance Company to
the extent such a business relationship existed prior to such closing.
Moreover, Security National Life Insurance Company and Southern
Security Life Insurance Company agree to maintain the corporate
offices of Memorial Insurance Company at its current location in
Blytheville, Arkansas. Furthermore, Security National Life Insurance
Company and Southern Security Life Insurance Company agree to use
their best efforts, following the closing, to assist Memorial
Insurance Company in retaining the sales agents and brokers in its
business and operations. Security National Life Insurance Company
anticipates completing the transaction on or about December 9, 2005.
The obligations to complete the transaction are contingent upon
approval of the transaction by the Arkansas Insurance Department. A
hearing has been scheduled on December 9, 2005 with the commissioner
of the Arkansas Insurance Department to consider the request by
Security National Life Insurance Company and Southern Security Life
Insurance Company to approve the transaction.
At the closing of the transaction, Security National Life Insurance
Company and Memorial Insurance Company each agree to enter into a
reinsurance agreement to reinsure the majority of the in force
business of Memorial Insurance Company to Security National Life
Insurance Company, as reinsurer, to the extent permitted by the
Arkansas Insurance Department. The parties to the reinsurance
agreement will consist of Security National Life Insurance Company,
Memorial Insurance Company, and the Arkansas Insurance Department. The
assets and liabilities to be reinsured under the reinsurance agreement
shall be deposited into a trust account, in which Zions
Bancorporation, a national banking corporation, has agreed to act as
trustee. Under the terms of the reinsurance agreement, in the event of
the insolvency of Security National Life Insurance Company, Zions
Bancorporation will transfer the assets and liabilities held in trust
to the Arkansas Insurance Department for purposes of the
administration of the assets and liabilities with respect to such
insolvency.
On October 20, 2005, Security National Life Insurance Company and
Southern Security Life Insurance Company submitted a Form A
application to the Arkansas Insurance Department. The Form A
application included a proposed reinsurance agreement and a trust
agreement that Security National Life Insurance Company intends to
enter into with Memorial Insurance Company and the Arkansas Insurance
Department.
Upon approval of the reinsurance agreement by the Arkansas insurance
department, certain insurance business and operations of Memorial
Insurance Company will be transferred to Security National Life
Insurance Company, as of the effective date of the reinsurance
agreement, including all policies in force as of the effective date
thereof, except for certain policies. Any future insurance business by
Memorial Insurance Company will be covered by this reinsurance
agreement. It is anticipated that all of the business and operations
of Memorial Insurance Company will be transferred to Security National
Life Insurance Company under the terms of the reinsurance agreement,
except for capital and surplus of approximately $1,000,000. Thus, it
is estimated that approximately $30,091,000 in assets and liabilities
will be transferred from Memorial Insurance Company to Security
National Life Insurance Company pursuant to the reinsurance agreement.
At the closing of the stock purchase transaction, Memorial Insurance
Company will issue a $30,091,000 note to Security National Life
Insurance Company payable, together with accrued interest, within 30
days from the date of issuance. The note is to be repaid in cash or in
assets to be transferred to Security National Life Insurance Company.
The note will be secured by the assets owned by Memorial Insurance
Company. In addition, Southern Security Life Insurance Company will
contribute $2,200,000 to Memorial Insurance Company at closing in
consideration for the surplus note. It is anticipated that Memorial
Insurance Company will repay the surplus note in early 2006 using the
proceeds from the sale of the investments in common stocks currently
held in its investment portfolio.
The Company has determined that a marketing employee of Security
National Life Insurance Company has embezzled a total of $275,000 from
the Company. The Company's audit committee has conducted a formal
investigation of the matter and advised the Company's Board of
Directors and registered public independent accountants of the
embezzlement. Management is in the process of attempting to recover a
portion of the embezzled funds. The Company has fidelity bond coverage
with a $50,000 deductible, but there can be no assurance that the
Company will be successful in obtaining any recovery of the embezzled
funds from the insurer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1. Articles of Restatement of Articles of Incorporation (7) 3.2.
Amended Bylaws (10)
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 (4)
10.4 2003 Stock Option Plan (9)
10.5 Deferred Compensation Agreement with George R. Quist (2)
10.6 Promissory Note with George R. Quist (5)
10.7 Deferred Compensation Plan (6)
10.8 Coinsurance Agreement between Security National Life and Acadian (7)
10.9 Assumption Agreement among Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company (7)
10.10 Asset Purchase Agreement among Acadian, Acadian Financial Group,
Inc., Security National Life and the Company (7)
10.11 Promissory Note with Key Bank of Utah (8)
10.12 Loan and Security Agreement with Key Bank of Utah (8)
10.13 Stock Purchase and Sale Agreement with Ault Glazer & Co. Investment
Management LLC (10)
10.14 Stock Purchase Agreement with Paramount Security Life Insurance
Company (11)
10.15 Reinsurance Agreement between Security National Life Insurance
Company and Guaranty Income Life Insurance Company (12)
10.16 Employment agreement with J. Lynn Beckstead, Jr. (12)
10.17 Employment agreement with Scott M. Quist
10.18 Agreement and Plan of Reorganization among Security National Life
Insurance Company, SSLIC Holding Company, and Southern Security
Life Insurance Company (14)
10.19 Agreement and Plan of Merger among Security National Life Insurance
Company, SSLIC Holding Company, and Southern Security Life
Insurance Company (15)
10.20 Agreement to repay indebtedness and to convey option with Monument
Title, LC.
10.21 Stock Purchase Agreement with Memorial Insurance Company of America
and the Shareholders of Memorial Insurance Company that have
executed the Agreement by Shareholders of Memorial Insurance Company
of America to Sell Shares in Stock Purchase Transaction (16)
22 Subsidiaries of the Registrant
Certification pursuant to 18 U.S.C. Section 1350 as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002 Certification
pursuant to 18 U.S.C. Section 1350 as enacted by Section 302 of
the Sarbanes-Oxley Act of 2002 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 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 Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's Annual
Meeting of Shareholders
(5) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 16, 2001
(6) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 3, 2002
(7) Incorporated by reference from Report on Form 8-K-A as filed on
January 8, 2003
(8) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 15, 2003
(9) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, Filed on June 5, 2003 relating to the Company's Annual
Meeting of Shareholders
(10) Incorporated by reference from Report on Form 10-Q, as filed on
November 14, 2003
(11) Incorporated by reference from Report on Form 8-K, as filed on
March 30, 2004
(12) Incorporated by reference from Report on Form 10-K, as filed on
March 30, 2004
(13) Incorporated by reference from Report on Form 10-Q, as filed on
August 13, 2004
(14) Incorporated by reference from Report on Form 8-K, as filed on
August 30, 2004
(15) Incorporated by reference from Report on Form 10-K, as filed on
April 15, 2005
(16) Incorporated by reference from Report on Form 8-K, as filed on
September 28, 2005
Subsidiaries of the Registrant
(b) Reports on Form 8-K:
Incorporated by reference from Report on Form 8-K, as filed on August
11, 2005 Incorporated by reference from Report on Form 8-K, as filed
on September 28, 2005
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, 2005 By: George R. Quist,
----------------
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
DATED: November 14, 2005 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 of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; 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: November 14, 2005
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 of internal control over financial reporting 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; 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: November 14, 2005
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 10-Q for the period ending September 30,
2005, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, George R. Quist, Chairman of the Board and 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.
Date: November 14, 2005
By: George R. Quist
Chairman of the Board and
Chief Executive Officer
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 10-Q for the period ending September 30,
2005, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Stephen M. Sill, Vice President, Treasurer and 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.
Date: November 14, 2005
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer