UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2007, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number: 0-9341
SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 87-0345941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5300 South 360 West, Suite 250 Salt Lake City, Utah 84123
- --------------------------------------------------- -------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 264-1060
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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 by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Securities Exchange Act
of 1934. (Check one)
Large accelerate filer [ ] Accelerated filer [ ] Non-accelerated filer [X}
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934): Yes No [X] ---
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 vae 6,297,729
- ----------------------------------- ---------
Title of Class Number of Shares Outstanding as of
July 31, 2007
Class C Common Stock, $.20 par value 7,500,000
- ------------------------------------ ---------
Title of Class Number of Shares Outstanding as of
July 31, 2007
============================================================================
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2007
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
- ------ --------
Condensed Consolidated Balance Sheets June 30, 2007
and December 31, 2006, (unaudited)....................................3-4
Condensed Consolidated Statements of Earnings -
Three and Six Months ended June 30, 2007 and 2006 (unaudited)...........5
Condensed Consolidated Statements of Cash Flows -
Six Months ended June 30, 2007 and 2006 (unaudited).....................6
Notes to Condensed Consolidated Financial Statements (unaudited).....7-14
Item 2
- -------
Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................15-20
Item 3
- ------
Quantitative and Qualitative Disclosures about Market Risk............20
Item 4
- ------
Controls and Procedures...............................................20
PART II - OTHER INFORMATION
Other Information..................................................20-26
Signature Page........................................................27
Certifications.....................................................28-30
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
Assets 2007 2006
----------- ------------
Investments:
Fixed maturity securities, held to maturity, at amortized cost $ 94,611,167 $ 98,317,519
Fixed maturity securities, available for sale, at estimated fair value 2,903,281 3,417,531
Equity securities, available for sale, at estimated fair value 5,588,669 5,261,695
Mortgage loans on real estate and construction loans,
net of allowances for losses
70,190,705 85,135,011
Real estate, net of accumulated depreciation 4,869,973 5,002,853
Policy, student and other loans net of allowance
for doubtful accounts
12,597,159 12,846,986
Short-term investments 7,008,869 4,586,828
Accrued investment income 3,004,393 2,684,029
------------ -----------
Total investments 200,774,216 217,252,452
------------ -----------
Cash and cash equivalents 7,260,800 10,376,585
Mortgage loans sold to investors 81,468,491 59,817,248
Receivable, net 17,273,249 14,878,118
Restricted assets of cemeteries and mortuaries 5,691,643 5,430,870
Cemetery perpetual care trust investments 1,424,536 1,306,984
Receivable from reinsurers 718,112 700,850
Cemetery land and improvements sold to investors 9,084,112 8,745,424
Deferred policy and pre-need contract acquisition costs 29,650,710 28,395,762
Property and equipment, net 14,887,037 14,059,529
Cost of insurance acquired 11,395,705 11,882,047
Goodwill 683,191 683,191
Other 5,272,072 3,866,123
------------ ------------
Total assets $385,583,874 $377,395,183
============ ============
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
June 30, December 31,
2007 2006
------------ ------------
Liabilities and Stockholders' Equity
Liabilities
Future life, annuity, and other benefits $272,144,533 $268,403,765
Unearned premium reserve 4,807,565 4,519,387
Bank loans payable 8,115,089 6,923,344
Notes and contracts payable 621,159 747,188
Deferred pre-need cemetery and mortuary contract revenues 12,169,581 11,533,798
Accounts payable 1,562,118 1,820,178
Other liabilities and accrued expenses 11,619,716 11,611,033
Income taxes 16,955,923 16,587,284
------------ --------------
Total liabilities 327,995,684 322,145,977
------------ -------------
Non-Controlling Interest in Perpetual Care Trusts 2,352,529 2,278,510
------------ --------------
Stockholders' Equity:
Common stock:
Class A: $2.00 par value, 10,000,000 shares
authorized; issued 7,537,394 shares in 2007 and
7,533,230 shares in 2006
15,074,788 15,066,460
Class B non-voting common stock-$1.00 par value; 5,000,000 shares
authorized; none issued or outstanding
-- --
Class C: convertible common stock - $0.20 par value; 7,500,000 shares
authorized; issued 7,500,000 shares in 2007 and 7,117,591
shares in 2006
1,500,000 1,423,518
Additional paid-in capital 17,075,572 17,064,488
Accumulated other comprehensive income and other items 2,368,249 1,703,155
Retained earnings 22,174,740 20,495,063
Treasury stock at cost - 1,239,665 Class A shares and
-0- Class C shares in 2007; 1,195,127 Class A shares and
145,045 Class C shares in 2006
(2,957,688) (2,781,988)
------------ -------------
Total stockholders' equity 55,235,661 52,970,696
------------ -------------
Total Liabilities and Stockholders' Equity $385,583,874 $377,395,183
============ ============
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
Revenues: 2007 2006 2007 2006
---- ---- ---- ----
Insurance premiums and other considerations $7,906,334 $7,403,252 $15,868,609 $14,957,522
Net investment income 9,009,038 5,504,372 16,952,496 10,579,058
Net mortuary and cemetery sales 3,434,182 3,154,220 6,945,119 6,209,018
Realized gains on investments and other assets 758,199 60,255 736,668 57,671
Mortgage fee income 33,079,231 17,930,096 62,601,118 34,559,687
Other 128,904 94,254 258,030 187,186
----------- --- -------- ------------ -----------
Total revenues 54,315,888 34,146,449 103,362,040 66,550,142
----------- ------------ ------------ -----------
Benefits and expenses:
Death benefits 4,081,699 3,567,731 8,173,978 7,389,690
Surrenders and other policy benefits 463,580 410,236 1,072,202 997,361
Increase in future policy benefits 2,930,517 3,014,873 5,673,985 5,347,880
Amortization of deferred policy and pre-need
acquisition costs and cost of insurance acquired 1,362,645 757,542 2,723,485 1,564,997
General and administrative expenses:
Commissions 24,855,478 13,686,056 47,295,202 26,048,316
Salaries 5,901,947 4,247,101 11,686,845 8,489,853
Other 8,538,985 5,909,659 15,746,867 11,200,425
Interest expense 4,158,004 1,087,760 7,257,325 2,108,551
Cost of goods and services sold-
Mortuaries and cemeteries
663,183 572,624 1,314,923 1,208,045
----------- ----------- ------------ -----------
Total benefits and expenses 52,956,038 33,253,582 100,944,812 64,355,118
----------- ----------- ------------ -----------
Earnings before income taxes 1,359,850 892,867 2,417,228 2,195,024
Income tax expense (328,822) (169,228) (641,659) (457,719)
---------- ---------- ----------- ------------
Net earnings $ 1,031,028 $ 723,639 $ 1,775,569 $ 1,737,305
=========== ========= =========== ===========
Net earnings per class A equivalent common share $0.15 $0.10 $0.25 $0.25
===== ===== ===== =====
Net earnings per class A equivalent common
share-assuming dilution $0.14 $0.10 $0.24 $0.25
===== ===== ===== =====
Weighted-average Class A equivalent common
shares outstanding 7,049,416 6,914,442 7,047,167 6,914,441
=========== ========= =========== =========
Weighted-average Class A equivalent common
shares outstanding assuming-dilution 7,321,334 7,099,143 7,306,302 7,050,468
=========== ========= =========== =========
Earnings per share amounts have been adjusted retroactively for the effect of
annual stock dividends. The weighted-average shares outstanding includes the
weighted-average Class A common shares and the weighted-average Class C common
shares determined on an equivalent Class A common stock basis. Net earnings per
common share represent net earnings per equivalent Class A common share. Net
earnings per Class C common share is equal to one-tenth (1/10) of such amount.
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2007 2006
------ ------
Cash flows from operating activities:
Net cash provided by (used in) operating activities $(16,613,660) $12,925,511
------------- -----------
Cash flows from investing activities: Securities held to maturity:
Purchase - fixed maturity securities (2,026,486) (6,874,419)
Calls and maturities - fixed maturity securities 5,756,249 1,926,606
Securities available for sale:
Purchase - fixed maturity securities (76,974) (134,262)
Sales - equity securities 789,494 9,164,900
Purchases of short-term investments (10,817,321) (7,387,637)
Sales of short-term investments 8,395,280 --
Purchases of restricted assets (243,851) 12,500
Change in assets for perpetual care trusts (89,321) 19,897
Amount received for perpetual care trusts 74,019 57,475
Mortgage, policy, and other loans made (32,831,713) (36,282,485)
Payments received for mortgage, policy, and other loans 47,986,468 22,858,386
Purchases of property and equipment (1,981,495) (664,104)
Disposal of property and equipment 730,242 --
Purchases of real estate (1,219,465) (1,686,113)
Sale of real estate 1,195,183 2,039,638
------------ -------------
Net cash provided by (used in) investing activities 15,640,309 (16,949,618)
------------ -------------
Cash flows from financing activities:
Annuity contract receipts 2,954,809 2,992,944
Annuity contract withdrawals (6,136,505) (5,013,124)
Sale of treasury stock -- 19,619
Repayment of bank loans and notes and
contracts payable (787,138) (1,270,089)
Proceeds from borrowing on bank loans 1,826,400 750,000
------------ ------------
Net cash used in financing activities (2,142,434) (2,520,650)
------------ -----------
Net change in cash and cash equivalents (3,115,785) (6,544,757)
Cash and cash equivalents at beginning of period 10,376,585 16,632,966
------------ ------------
Cash and cash equivalents at end of period $ 7,260,800 $10,088,209
============ ===========
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2007 (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 disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
These financial statements should be read in conjunction with the consolidated
financial statements of the Company and notes thereto for the year ended
December 31, 2006, included in the Company's Annual Report on Form 10-K (file
number 0-9341). 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 six months ended June 30,
2007 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2007.
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.
Certain 2006 amounts have been reclassified to bring them into conformity with
the 2007 presentation.
2. Recent Accounting Pronouncements
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes, which attempts to set out a consistent framework for preparers to use to
determine the appropriate level of valuation allowance tax reserves to maintain
for deferred tax assets relating to uncertain tax positions. This interpretation
for FASB Statement No. 109 uses a two-step approach wherein a tax benefit is
recognized if a position is more-than-likely-than-not to be sustained. The
amount of the benefit is then measured to be the highest tax benefit, which is
greater than fifty percent likely to be realized. FIN 48 also sets out
disclosure requirements to enhance transparency of an entity's tax reserves. The
Company adopted this Interpretation as of January 1, 2007. Management has
considered the amounts and the probabilities of the outcomes that could be
realized upon ultimate settlement and believes that it is more-likely-than-not
that the Company's recorded income tax benefits will be fully realized. There
were no unrecognized tax benefits at the beginning or at the end of the six
months ended June 30, 2007.
The Company records interest earned on income-tax refunds in other income, and
penalties and interest charged on tax deficiencies in interest expense. As of
the date of adoption, there were no amounts accrued for penalties or interest
related to unrecognized tax benefits.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 will be
applied prospectively and is effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. SFAS 157 is not
expected to have a material impact on the Company's consolidated financial
statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2007 (Unaudited)
In February 2007, the FASB issued SFAS No 159, The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No 115 ("SFAS 159"). SFAS 159 allows measurement at fair value of
eligible financial assets and liabilities that are not otherwise measured at
fair value. If the fair value option for an eligible item is elected, unrealized
gains and losses for that item shall be reported in current earnings at each
subsequent reporting date. SFAS 159 also establishes presentation and disclosure
requirements designed to draw comparison between the different measurement
attributes the Company elects for similar types of assets and liabilities. This
statement is effective for fiscal years beginning after November 15, 2007. The
Company is in the process of evaluating the application of the fair value option
and its effect on its financial position and results of operations.
3. Comprehensive Income
For the three months ended June 30, 2007 and 2006, total comprehensive income
amounted to $1,134,604 and $450,827, respectively. This increase of $683,777 was
primarily the result of an increase in net income of $307,419, an increase in
derivatives of $111,927, and an increase in unrealized gains and losses in
securities available for sale of $264,431.
For the six months ended June 30, 2007 and 2006, total comprehensive income
amounted to $2,440,663 and $2,660,626, respectively. This decrease of $219,963
was primarily the result of an increase in net income of $38,294, a decrease in
derivatives of $121,887, and a decrease in unrealized gains and losses in
securities available for sale of $136,370.
4. Stock-Based Compensation
The Company accounts for its stock-based compensation plans according to the
provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based
Payment" ("FAS 123R") for its stock-based compensation plans. Under SFAS 123R,
all stock-based compensation is measured at the grant date, based on the fair
value of the option or award, and is recognized as an expense in earnings over
the requisite service, which is typically through the date the options vest.
The Company adopted SFAS 123R using the modified prospective method. Under this
method, for all stock-based options and awards granted prior to January 1, 2006
that remain outstanding as of that date, compensation cost is recognized for the
unvested portion over the remaining requisite service period, using the
grant-date fair value measured under the original provisions of SFAS 123 for pro
forma and disclosure purposes. Furthermore, compensation costs will also be
recognized for any awards issued, modified, repurchased or cancelled after
January 1, 2006.
The Company utilized the Black-Scholes-Merton model for calculating the fair
value of stock awards and stock options.
No options were granted for the three and six months ended June 30, 2007. Total
compensation costs relating to stock-based compensation was not material during
the three and six months ended June 30, 2007.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2007 (Unaudited)
The Company's Board of Directors granted stock options in 2004 to Scott M.
Quist, the Company's President and Chief Operating Officer, to purchase up to
1,000,000 shares of Class C common stock at exercise prices of $.323 and $.36
per share. On May 31, 2007, Mr. Quist made a cashless exercise of such options
to purchase a total of 1,157,625 shares of Class C common stock that he was
entitled to receive, after adjustments for 5% stock dividends issued in 2005,
2006 and 2007.
In connection with the exercise of such options on a cashless basis, Mr. Quist
delivered a total of 58,376 shares of Class A common stock to the Company that
he held in exchange for all the Class C shares he would be entitled to receive
for exercising the options. Inasmuch as there were 6,966,849 shares of Class C
common stock outstanding as of May 31, 2007 out of a total of 7,500,000
authorized shares of Class C common stock, the Company could legally issue only
533,151 shares of Class C common stock to Mr. Quist, leaving a balance of
624,474 Class C common shares owing to him.
In order to issue the additional shares of Class C common shares owing to Mr.
Quist, the Board of Directors approved on July 13, 2007 an amendment to the
Company's Articles of Incorporation to increase the number of Class C common
shares from 7,500,000 shares to 15,000,000 shares. Because stockholder approval
is also required to amend the Company's Articles of Incorporation, the Company
has scheduled a special stockholders meeting on September 21, 2007 to approve
the amendment to the Articles of Incorporation to increase the number of
authorized shares of Class C common stock from 7,500,000 shares to 15,000,000
shares.
If the stockholders approve the amendment at the special stockholders meeting,
the Company will issue Mr. Quist the additional 624,474 shares of Class C common
stock that are owed pursuant to his exercise of stock options. If the amendment
is not approved at the special stockholders meeting, the Company will,
alternatively, issue Mr. Quist 62,487 shares of Class A common stock,
representing 10% of the 624,474 Class C common shares that are owed to Mr. Quist
based on the conversion ratio set forth in the Articles of Incorporation of one
share of Class A common stock for each ten shares of Class C common stock. As of
June 30, 2007, the Company has recorded the fair value of the derivative
liability in the amount of $175,700 to reflect the Company's obligation to issue
the shares of Class C common stock or, alternatively, shares of Class A common
stock owed to Mr. Quist pursuant to the exercise of the stock options. This
liability is included in other liabilities and accrued expenses in the
accompanying condensed consolidated balance sheet.
5. Earnings Per Share
The basic and diluted earnings per share amounts were calculated as follows:
Three Months Ended June 30,
2007 2006
------ ------
Numerator:
Net income $ 1,031,028 $ 723,639
=========== ===========
Denominator:
Basic weighted-average shares outstanding 7,049,416 6,914,442
----------- ---------
Effect of dilutive securities:
Employee stock options 257,075 183,470
Stock appreciation rights -- 1,231
Employee deferred compensation rights 14,843 --
----------- ----------
Dilutive potential common shares 271,918 184,701
----------- -----------
Diluted weighted-average shares outstanding 7,321,334 7,099,143
=========== ===========
Basic earnings per share $0.15 $0.10
===== =====
Diluted earnings per share $0.14 $0.10
===== =====
Earnings per share amounts have been adjusted for the effect of annual stock
dividends.
Six Months Ended June 30,
2007 2006
----- -----
Numerator:
Net income $1,775,569 $1,737,305
========== ==========
Denominator:
Basic weighted-average shares outstanding 7,047,167 6,914,441
----------- -----------
Effect of dilutive securities:
Employee stock options 244,292 134,946
Stock appreciation rights -- 1,081
Employee deferred compensation rights 14,843 --
----------- ------------
Dilutive potential common shares 259,135 136,027
------------ ------------
Diluted weighted-average shares outstanding 7,306,302 7,050,468
=========== ===========
Basic earnings per share $0.25 $0.25
===== =====
Diluted earnings per share $0.24 $0.25
===== =====
Earnings per share amounts have been adjusted for the effect of annual stock
dividends.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2007 (Unaudited)
6. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
For the Three Months Ended
June 30, 2007
Revenues from
external customers $11,428,079 $4,347,795 $38,540,014 $ -- $54,315,888
Intersegment revenues 1,767,705 23,001 122,184 (1,912,890) --
Segment profit (loss)
Before income taxes 1,039,469 588,153 (267,772) -- 1,359,850
For the Three Months Ended
June 30, 2006
Revenues from
external customers $10,698,047 $3,452,483 $19,995,919 $ -- $34,146,449
Intersegment revenues 1,264,601 23,001 121,182 (1,408,784) --
Segment profit (loss)
Before income taxes 947,324 233,273 (287,730) -- 892,867
For the Six Months Ended
June 30, 2007
Revenues from
external customers $23,227,261 $8,127,011 $72,007,768 $ -- $103,362,040
Intersegment revenues 3,105,062 46,002 242,344 (3,393,408) --
Segment profit (loss)
before income taxes
1,645,114 1,018,730 (246,616) -- 2,417,228
Identifiable assets 359,542,165 58,490,187 22,721,012 (55,169,490) 385,583,874
For the Six Months Ended
June 30, 2006
Revenues from
external customers $21,609,384 $6,769,172 $38,171,586 $ -- $66,550,142
Intersegment revenues 2,654,467 46,002 212,61 (2,913,087) --
Segment profit (loss)
before income taxes 2,053,401 605,128 (463,505) -- 2,195,024
Identifiable assets 352,247,310 51,897,683 18,891,648 (56,761,440) 366,275,201
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2007, (Unaudited)
7. Other Business Activity
On March 5, 2007, the Company received a proposed consent order from the Florida
Office of Insurance Regulation concerning the New Success Life Program, the
higher education product currently being marketed and sold by Southern Security
Life. The proposed order states that as a result of an investigation the Florida
Office has determined that Southern Security Life violated Florida law (i) by
knowingly making statements, sales presentations, omissions or comparisons that
misrepresented the benefits, advantages, or terms of the New Success Life
Program, and (ii) by knowingly making, advertisements, announcements, or
statements containing representations that were untrue or misleading.
The proposed order would require Security National Life and Southern Security
Life to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required to send a written notice to Florida consumers who purchased
the New Success Life Program on or after January 1, 1998 stating that the higher
education program is a whole life insurance product, with a term and annuity
rider, and not a college trust fund, savings plan, or other program, and it may
not necessarily pay college expenses in full from the accumulated value.
Moreover, the written notice is to provide an opportunity for the Florida
consumers who purchased the New Success Life Program on or after January 1, 1998
to cancel their policy and be given a full refund, including all premiums paid,
together with interest at the agreed upon rate in the original contract. If each
of the Florida consumers who purchased the New Success Life Program after
January 1, 1998 was to cancel his or her policy and receive a refund, the cost
to the Company to refund all premiums paid, including interest, would be
approximately $8,200,000, an amount in excess of the assets of Southern Security
Life.
The proposed consent order would also require Security National Life and
Southern Security Life to issue refunds including interest to the eleven
policyholders whose affidavits were taken in connection with the administrative
complaint that the Florida Office had previously filed against Franz Wallace,
the former National Sales Director of Southern Security Life. Security National
Life and Southern Security Life would additionally be required to issue refunds,
including interest, to any Florida policyholder in the New Success Life Program
who had filed a complaint with the Florida Department of Financial Services or
whose coverage had lapsed. Furthermore, Security National Life and Southern
Security Life would be required to notify the state insurance department in each
state in which the New Success Life Program is marketed of the order and any
complaint that Southern Security Life received relating to the New Success Life
Program from policyholders in that state. Finally, Security National Life and
Southern Security Life would be required to pay the Florida Office a penalty of
$100,000 and administrative costs of $5,000.
The Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office has with the New Success Life
Program because it has received no specific administrative complaint from the
Florida Office nor is it aware of any recent market conduct examination that the
Florida Office has conducted relative to the program. The Company intends to
vigorously oppose the proposed consent order. The Company is currently engaged
in discussions with the Florida Office in an effort to settle the dispute
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2007, (Unaudited)
7. Other Business Activity (continued)
concerning the proposed order. If the Company is unable to reach a satisfactory
resolution with the Florida Office with respect to the terms of the proposed
consent order and the Florida Office issues a similar order, the Company intends
to take action necessary to protect its rights and interests, including
requesting a hearing before an administrative law judge to oppose the order. The
Company believes any potential liability would be limited to the net assets of
Southern Security Life, which are approximately $3,914,000.
In June 2007, the Company completed the sale of the Colonial Funeral Home
property to the Utopia Station Development Corp. for $730,242, net of selling
costs of $44,758. The Colonial Funeral Home ceased operations in July 2006 and
has been inactive since that date. The carrying amount on the Company's
financial statements on June 20, 2007 was $148,777. As a result of the sale and
after the related selling expenses, the Company recognized a gain of $581,465.
The Company received a down payment of $15,242 with the remaining $715,000 to be
received in a lump sum within one year. The gain has been included as a part of
Realized Gains on Investments and Other Assets in the Company's condensed
consolidated statement of earnings.
8. Subsequent Event
On July 16, 2007, the Company completed a purchase transaction with C & J
Financial, LLC, an Alabama limited liability company ("C & J Financial"). C & J
Financial operates a factoring business with offices in Rainbow City, Alabama
with an emphasis on providing financing for funeral homes and mortuaries. Under
the terms of the Unit Purchase Agreement dated July 16, 2007, (the "Purchase
Agreement") among the Company, C & J Financial, Henry Culp, Jr. ("Culp") and
Culp Industries, Inc. ("Culp Industries"), the Company purchased all of the
outstanding member units of C & J Financial for a purchase consideration of (i)
$1,250,000 in cash, (ii) a promissory note from the Company to Culp in the
amount of $381,500 plus interest at the rate of 5% per annum, payable over a
period of 24 months in monthly payments of $16,737, including interest, until
paid in full, and (iii) a quit claim deed from C & J Financial to Culp,
conveying ownership of the building and surrounding property located in the
Jester Commercial Park in Rainbow City, Alabama, where C & J Financial currently
maintains its business offices. At closing, Culp Industries entered into a lease
agreement with C & J Financial to lease to C & J Financial approximately 5,000
square feet in the building located at the Jester Commercial Park. The lease is
for a term of three years for which C & J Financial, as tenant, is required to
make monthly payments of $1,200, for a total lease payment of $43,200.
The Purchase Agreement additionally required Culp to deliver to the Company at
closing a promissory note (the "Note") in the principal amount of $1,755,236
plus interest at the rate of 8.25% per annum from C & J Financial, as borrower,
to Culp, as lender, with such note to be cancelled and marked "paid in full".
Moreover, the agreement provides for the possibility of adjustments. If the
total equity on the balance sheet of C & J Financial as of May 31, 2007, defined
as total assets minus total liabilities, is greater than the amount of the
equity on the balance sheet of C & J Financial as of the closing date, or July
16, 2007, Culp agrees to pay to the Company the difference between the total
equity on the balance sheet as of May 31, 2007 and the total equity on the
balance sheet as of July 16, 2007 by reducing the amount of the Note by such
difference in the amounts of the total equity on such balance sheets. If the
amount of the total equity on the balance sheet of C & J Financial as of May 31,
2007 is less than the amount of the total equity on the balance sheet of C & J
Financial as of July 16, 2007, the Company agrees to pay Culp the difference
between the total equity on the balance sheet as of May 31, 2007 and the total
equity on the balance sheet as of July 16, 2007 by increasing the amount of the
Note payable by such difference in the amounts of the total equity on such
balance sheets.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2007, (Unaudited)
The Purchase Agreement further requires each unitholder to deliver to the
Company a non-competition and confidentiality agreement prohibiting the
unitholder from competing with C & J Financial for a period of five years from
July 16, 2007 through July 16, 2012. The Company also entered into a one year
consulting agreement with Culp, which requires Culp to provide part-time
consulting services for C & J Financial at $50.00 per hour, and a five year
employment agreement with Kevin O. Smith ("Smith"), Vice President of C & J
Financial, who will continue to serve in that position. The employment agreement
requires C & J Financial to pay Smith an annual salary of $96,000 plus a
discretionary bonus and a monthly car allowance of $1,161.
Finally, the Purchase Agreement requires the Company, C & J Financial, Culp and
Culp Industries to acknowledge the existence of a business loan agreement
between Regions Bank, as lender, and Culp Industries, as borrower, which
provides for a line of credit for C & J Financial. The outstanding balance on
the line of credit as of July 16, 2007 was $1,931,764. The line of credit is
secured by, among other assets, the accounts receivable of C & J Financial and
is personally guaranteed by Culp. The Company has received confirmation that
Regions Bank will not authorize any further advances or sweeps with respect to
the line of credit. The Company agrees that it will pay off the outstanding
balance of the line of credit with Regions Bank relating to the business of C &
J Financial. The Company will initially attempt to pay off the line of credit by
means of applying the payments from the accounts receivable of C & J Financial
as such payments are made in the ordinary course of business.
At June 30, 2007, total assets of C & J Financial were $3,197,000 and total
liabilities were $3,526,000, which includes the Note to Culp in the amount of
$1,755,000 that was cancelled at closing. For the seven month period from
November 1, 2006 to May 31, 2007, total revenues of C & J Financial were
$775,000 and total expenses were $764,000, resulting in net income of $11,000.
For the fiscal year ended October 31, 2006, total revenues of C & J Financial
were $1,397,000 and total expenses were $1,351,000, resulting in net income of
$46,000. For the fiscal year ended October 31, 2005, total revenues of C & J
Financial were $1,137,000 and total expenses were $1,114,000, resulting in net
income of $23,000. The Company anticipates utilizing the employees and
operations of C & J Financial to expand its fast funding operations, which
provide financing for funeral homes and mortuaries.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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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) originating and refinancing mortgage loans.
Mortgage Operations
During the three months ended June 30, 2007, 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 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 10,755 loans ($1,985,066,000 total volume) and
6,002 loans ($993,094,000 total volume), respectively, for the six months ended
June 30, 2007 and 2006.
The mortgage industry is currently experiencing substantial change due to higher
than expected delinquencies from subprime loans. The market for new subprime
loans has been substantially reduced and several mortgage companies whose
primary product was subprime mortgage originations have ceased operations. The
Company funded $4.2 million (.2% of the Company's production) in subprime loans
during the six months ending June 30, 2007 and has currently eliminated subprime
loans from its product offerings. The Company believes that its potential losses
from subprime loans are minimal.
The industry problem with subprime mortgages has created a volatile secondary
market for other high risk products, especially alternative documentation (Alt
A) loans. Alt A loans are typically offered to qualified borrowers who have
relatively high credit scores but are not required to provide full documentation
to support personal income and assets owned. Alt A loans can have a loan to
value ratio as high as 100%. There is currently a smaller market for Alt A loans
and the Company's warehouse line providers have shortened the allowable time for
the Company to sell these products to investors. As a result of these changes,
the Company is only offering these loans on a limited basis.
Alt A loans represented approximately 21% of the Company's production for the
six months ended June 30, 2007. The Company is currently experiencing an
increase in production of its other mortgage products. This increased mortgage
production will offset some of the loss of income related to the discontinuance
of Alt A loans. As of August 13, 2007, the Company had originated a total of
$60,400,000 in Alt A loans that had not been settled by investors. If the
Company were unable to sell its Alt A loans it would be required to assume the
risk of holding and servicing such loans. The Company believes it has adequate
liquidity, however, through its life insurance operations to carry such loans
until purchased by investors if warehousing lines are not available.
The Company expects the current mortgage market conditions to continue for the
remainder of 2007. Under these circumstances it is difficult to predict
profitability. Profitability may be impacted by volume reduction, changes in
margins, increased borrowing costs and future loans losses. Management has taken
and will continue to take a number of actions, however, in response to the
changing market conditions. These include offering Alt A loans on a limited
basis, closing unprofitable branch offices, obtaining new warehousing agreements
at a lower interest rates, and expense reduction initiatives.
During the six months ending June 30, 2007, the Company experienced loan losses
of $2,459,000. This amount was charged against the provision for loan losses.
The balance of the reserve for loan losses at June 30, 2007 was $1,594,000. The
provision for loan losses is included in other general and administrative
expenses. The Company adds approximately $165,000 per month to its loan loss
reserves. The Company believes the loan loss reserves are sufficient to cover
reasonably foreseeable future loan losses and that its formula for determining
the provision for such reserves is adequate.
Results of Operations
Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
Total revenues increased by $20,169,000, or 59.1%, to $54,316,000 for the three
months ended June 30, 2007, from $34,147,000 for the three months ended June 30,
2006. Contributing to this increase in total revenues was a $15,149,000 increase
in mortgage fee income, a $503,000 increase in insurance premiums and other
considerations, a $3,505,000 increase in investment income, a $280,000 increase
in net mortuary and cemetery sales, a $34,000 increase in other revenues, and a
$698,000 increase in realized gains on investments and other assets.
Insurance premiums and other considerations increased by $503,000, or 6.8%, to
$7,906,000 for the three months ended June 30, 2007, from $7,403,000 for the
comparable period in 2006. This increase was primarily due to the additional
premiums realized from new insurance sales.
Net investment income increased by $3,505,000, or 63.7%, to $9,009,000 for the
three months ended June 30, 2007, from $5,504,000 for the comparable period in
2006. This increase was primarily attributable to additional interest income
from increased long-term bond and mortgage purchases over the comparable period
in 2006.
Net mortuary and cemetery sales increased by $280,000, or 8.9%, to $3,434,000
for the three months ended June 30, 2007, from $3,154,000 for the comparable
period in 2006. This increase was due to increased at-need sales in the cemetery
and mortuary operations and increased pre-need land sales in the cemetery
operations.
Realized gains on investments and other assets increased by $698,000, or 1,163%
to $758,000 for the three months ended June 30, 2007 from $60,000 for the
comparable period in 2006. This was primarily due to a gain of $581,000 from the
sale of Colonial Funeral Home in Salt Lake City.
Mortgage fee income increased by $15,149,000, or 84.5%, to $33,079,000 for the
three months ended June 30, 2007, from $17,930,000 for the comparable period in
2006. This increase was primarily attributable to an increase in the number of
loan originations during the second quarter of 2007 as new mortgage offices were
opened and production increased in existing mortgage offices, which resulted in
the financing of a greater number of mortgage loans.
Other revenues increased by $34,000, or 35.8% to $129,000, for the three months
ended June 30, 2007 from $95,000 for the comparable period in 2006. This
increase was due to increases in several small income items throughout the
Company's operations.
Total benefits and expenses were $52,956,000, or 97.5% of total revenues, for
the three months ended June 30, 2007, as compared to $33,254,000, or 97.4% of
total revenues, for the comparable period in 2006. This increase primarily
resulted from increased loan costs at SecurityNational Mortgage Company due to a
greater number of loan originations.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $483,000, or 6.9%, to $7,476,000
for the three months ended June 30, 2007, from $6,993,000 for the comparable
period in 2006. This increase was primarily due to increased insurance business
and to the expected increase in reserves for policyholder benefits and death
claims.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $605,000, or 79.8%, to $1,363,000 for the three
months ended June 30, 2007, from $758,000 for the comparable period in 2006.
This increase was primarily due to increased deferred acquisition costs
associated with interest sensitive products and pre-need cemetery contracts.
General and administrative expenses increased by $15,454,000, or 64.8%, to
$39,296,000 for the three months ended June 30, 2007, from $23,843,000 for the
comparable period in 2006. This increase primarily resulted from an increase in
commission expenses of $11,169,000, from $13,686,000 in 2006 to $24,855,000 in
2007, due to a greater number of mortgage loan originations made by
SecurityNational Mortgage Company during the second quarter of 2007. Salaries
increased by $1,655,000 from $4,247,000 in 2006 to $5,902,000 in 2007, primarily
due to merit increases in salaries of existing employees, and an increase in the
number of employees necessitated by the Company's expanding business operations.
Other expenses increased by $2,629,000 from $5,910,000 in 2006 to $8,539,000 in
2007. The increase in other expenses primarily resulted from increased loan
costs at SecurityNational Mortgage Company due to a greater number of loan
originations.
Interest expense increased by $3,070,000, or 282.3%, to $4,158,000 for the three
months ended June 30, 2007, from $1,088,000 for the comparable period in 2006.
This increase was primarily due to increased warehouse lines of credit required
for a greater number of warehoused mortgage loans by SecurityNational Mortgage
Company.
Cost of goods and services sold of the mortuaries and cemeteries increased by
$91,000, or 15.8%, to $663,000 for the three months ended June 30, 2007, from
$572,000 for the comparable period in 2006. This increase was primarily due to
increased at-need cemetery sales.
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Total revenues increased by $36,812,000, or 55.3%, to $103,362,000 for the six
months ended June 30, 2007, from $66,550,000 for the six months ended June 30,
2006. Contributing to this increase in total revenues was a $28,042,000 increase
in mortgage fee income, a $911,000 increase in insurance premiums and other
considerations, a $6,373,000 increase in investment income, a $736,000 increase
in net mortuary and cemetery sales, a $71,000 increase in other revenues, and a
$679,000 increase in realized gains on investments and other assets.
Insurance premiums and other considerations increased by $911,000, or 6.1%, to
$15,869,000 for the six months ended June 30, 2007, from $14,958,000 for the
comparable period in 2006. This increase was primarily due to the additional
insurance premiums realized from new insurance sales.
Net investment income increased by $6,373,000, or 60.2%, to $16,952,000 for the
six months ended June 30, 2007, from $10,579,000 for the comparable period in
2006. This increase was primarily attributable to additional interest income
from increased long-term bond and mortgage purchases over the comparable period
in 2006.
Net mortuary and cemetery sales increased by $736,000, or 11.9%, to $6,945,000
for the six months ended June 30, 2007, from $6,209,000 for the comparable
period in 2006. This increase was due to increased at-need sales in the cemetery
and mortuary operations and increased pre-need land sales in cemetery
operations.
Realized gains on investments and other assets increased by $679,000, or
1,170.7%, to $737,000 for the six months ended June 30, 2007 from $58,000 for
the comparable period in 2006. This was primarily due to a one time gain of
$581,000 from the sale of Colonial Funeral Home in Salt Lake City.
Mortgage fee income increased by $28,042,000, or 81.1%, to $62,601,000 for the
six months ended June 30, 2007, from $34,559,000 for the comparable period in
2006. This increase was primarily attributable to an increase in the number of
loan originations during the six months of 2006 as new mortgage offices were
opened and production increased in existing mortgage offices, which resulted in
the financing of a greater number of mortgage loans.
Other revenues increased by $71,000, or 38.0%, to $258,000 for the six months
ended June 30, 2007 from $187,000 for the comparable period in 2006. This
increase was due to increases in several small income items throughout the
Company's operations.
Total benefits and expenses were $100,945,000, or 97.7% of total revenues, for
the six months ended June 30, 2007, as compared to $64,355,000, or 96.7% of
total revenues, for the comparable period in 2006. This increase primarily
resulted from increased loan costs at SecurityNational Mortgage Company due to a
greater number of loan originations.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $1,185,000, or 8.6%, to $14,920,000
for the six months ended June 30, 2007, from $13,735,000 for the comparable
period in 2006. This increase was primarily due to increased insurance business
and to the expected increase in reserves for policyholder benefits and death
claims.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $1,158,000, or 74.0%, to $2,723,000 for the six
months ended June 30, 2007, from $1,565,000 for the comparable period in 2006.
This increase was primarily due to increased deferred acquisition costs
associated with interest-sensitive products from the recapture of the Mega
reinsurance agreement in the first quarter of 2006, and pre-need cemetery
contracts.
General and administrative expenses increased by $28,990,000, or 63.4%, to
$74,729,000 for the six months ended June 30, 2007, from $45,739,000 for the
comparable period in 2006. This increase primarily resulted from an increase in
commission expenses by $21,247,000 from $26,048,000 in 2006 to $47,295,000 in
2007, due to a greater number of mortgage loan originations made by
SecurityNational Mortgage Company during the first six months of 2007. Salaries
increased by $3,197,000 from $8,490,000 in 2006 to $11,687,000 in 2007,
primarily due to merit increases in salaries of existing employees, and an
increase in the number of employees necessitated by the Company's expanding
business operations. Other expenses increased by $4,546,000 from $11,201,000 in
2006 to $15,747,000 in 2007. The increase in other expenses primarily resulted
from increased loan costs at SecurityNational Mortgage Company due to a greater
number of loan originations.
Interest expense increased by $5,149,000, or 244.3%, to $7,257,000 for the six
months ended June 30, 2007, from $2,108,000 for the comparable period in 2006.
This increase was primarily from increased warehouse lines of credit required
for a greater number of warehoused mortgage loans by SecurityNational Mortgage
Company.
Cost of goods and services sold by the mortuaries and cemeteries increased by
$107,000, or 8.9%, to $1,315,000 for the six months ended June 30, 2007, from
$1,208,000 for the comparable period in 2006. This increase was primarily due to
increased cemetery and mortuary sales.
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and to meet operating expenses.
During the six months ended June 30, 2007, the Company's operations used cash of
$16,614,000, while cash totaling $12,926,000 was provided by operations during
the six months ended June 30, 2006. This is due to an increase in the accrual
for mortgage loans sold to investors of $21,651,000, which is attributed to a
higher mortgage loan volume for the first six months of 2007 versus mortgage
loan volume during the first six months of 2006. The increase in the accrual
resulted from an increase in mortgage loans originated but not yet settled by
investors as of June 30, 2007.
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 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 insurance
subsidiaries amounted to $97,514,000 as of June 30, 2007, compared to
$101,735,000 as of December 31, 2006. This represents 48.6% and 46.8% of the
total investments as of June 30, 2007, and December 31, 2006, 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 June 30, 2007 0.9% (or $893,000)
and at December 31, 2006, 2.3% (or $2,402,000) of the Company's total bond
investments were invested in bonds in rating categories three through six, which
are considered non-investment grade.
The Company has classified certain of its fixed income securities, including
high-yield securities, in its portfolio as available for sale, with the
remainder classified as held to maturity. However, in accordance with Company
policy, any such securities purchased in the future will be classified as held
to maturity. Business conditions, however, may develop in the future which may
indicate a need for a higher level of liquidity in the investment portfolio. In
that event the Company believes it could sell short-term investment grade
securities before liquidating higher-yielding longer-term securities.
The Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At June 30, 2007, and
December 31, 2006, the life insurance subsidiary exceeded the regulatory
criteria.
The Company's total capitalization of stockholders' equity, and bank debt and
notes payable was $63,972,000 as of June 30, 2007, as compared to $60,641,000 as
of December 31, 2006. Stockholders' equity as a percent of total capitalization
was 86 % and 87% as of June 30, 2007 and December 31, 2006, respectively.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2006 was 8.4% as compared
to a rate of 7.9% for 2005. The 2007 lapse rate to date has been approximately
the same as 2006.
At June 30, 2007, $19,497,000 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, 2006.
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 Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act") as of June 30, 2007. 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
On March 5, 2007, the Company received a proposed consent order from the Florida
Office of Insurance Regulation concerning the New Success Life Program, the
higher education product currently being marketed and sold by Southern Security
Life. The proposed order states that as a result of an investigation the Florida
Office has determined that Southern Security Life violated Florida law (i) by
knowingly making statements, sales presentations, omissions or comparisons that
misrepresented the benefits, advantages, or terms of the New Success Life
Program, and (ii) by knowingly making, advertisements, announcements, or
statements containing representations that were untrue or misleading.
The proposed order would require Security National Life and Southern Security
Life to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required to send a written notice to Florida consumers who purchased
the New Success Life Program on or after January 1, 1998 stating that the higher
education program is a whole life insurance product, with a term and annuity
rider, and not a college trust fund, savings plan, or other program, and it may
not necessarily pay college expenses in full from the accumulated value.
Moreover, the written notice is to provide an opportunity for the Florida
consumers who purchased the New Success Life Program on or after January 1, 1998
to cancel their policy and be given a full refund, including all premiums paid,
together with interest at the agreed upon rate in the original contract. If each
of the Florida consumers who purchased the New Success Life Program after
January 1, 1998 was to cancel his or her policy and receive a refund, the cost
to the Company to refund all premiums paid, including interest, would be
approximately $8,200,000, an amount in excess of the assets of Southern Security
Life.
The proposed consent order would also require Security National Life and
Southern Security Life to issue refunds including interest to the eleven
policyholders whose affidavits were taken in connection with the administrative
complaint that the Florida Office had previously filed against Franz Wallace,
the former National Sales Director of Southern Security Life. Security National
Life and Southern Security Life would additionally be required to issue refunds,
including interest, to any Florida policyholder in the New Success Life Program
who had filed a complaint with the Florida Department of Financial Services or
whose coverage had lapsed. Furthermore, Security National Life and Southern
Security Life would be required to notify the state insurance department in each
state in which the New Success Life Program is marketed of the order and any
complaint that Southern Security Life received relating to the New Success Life
Program from policyholders in that state. Finally, Security National Life and
Southern Security Life would be required to pay the Florida Office a penalty of
$100,000 and administrative costs of $5,000.
The Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office has with the New Success Life
Program because it has received no specific administrative complaint from the
Florida Office nor is it aware of any recent market conduct examination that the
Florida Office has conducted relative to the program. The Company intends to
vigorously oppose the proposed consent order. The Company is currently engaged
in discussions with the Florida Office in an effort to settle the dispute
concerning the proposed order. If the Company is unable to reach a satisfactory
resolution with the Florida Office with respect to the terms of the proposed
consent order and the Florida Office issues a similar order, the Company intends
to take action necessary to protect its rights and interests, including
requesting a hearing before an administrative law judge to oppose the order. The
Company believes any potential liability would be limited to the net assets of
Southern Security Life, which are approximately $3,914,000.
Except for the proposed consent order from the Florida Office of Insurance
Regulation, the Company is not a party to any material legal proceedings outside
the ordinary course of business or to any other legal proceedings, which if
adversely determined, would have a material adverse effect on its financial
condition or results of operation.
Item 1A. Risk Factors
Due to changes in the mortgage industry from higher than expected delinquencies
in subprime loans, the Company may be unable to sell its alternative
documentation loans to investors, which would require the Company to assume the
risk of holding and servicing such loans.
The mortgage industry is currently experiencing substantial change due to higher
than expected delinquencies from subprime loans. The market for new subprime
loans has been substantially reduced and several mortgage companies whose
primary product was subprime mortgage originations have ceased operations. The
Company funded $4.2 million (.2% of the Company's production) in subprime loans
during the six months ending June 30, 2007 and has currently eliminated subprime
loans from its product offerings. The Company believes that its potential losses
from subprime loans are minimal.
The industry problem with subprime mortgages has created a volatile secondary
market for other high risk products, especially alternative documentation (Alt
A) loans. Alt A loans are typically offered to qualified borrowers who have
relatively high credit scores but are not required to provide full documentation
to support personal income and assets owned. Alt A loans can have a loan to
value ratio as high as 100%. There is currently a smaller market for Alt A loans
and the Company's warehouse line providers have shortened the allowable time for
the Company to sell these products to investors. As a result of these changes,
the Company is only offering these loans on a limited basis.
Alt A loans represented approximately 21% of the Company's production for the
six months ended June 30, 2007. The Company is currently experiencing an
increase in production of its other mortgage products. This increased mortgage
production will offset some of the loss of income related to the discontinuance
of Alt A loans. As of August 13, 2007, the Company had originated a total of
$60,400,000 in Alt A loans that had not been settled by investors. If the
Company were unable to sell its Alt A loans it would be required to assume the
risk of holding and servicing such loans. The Company believes it has adequate
liquidity, however, through its life insurance operations to carry such loans
until purchased by investors if warehousing lines are not available.
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
Acquisition of C & J Financial, LLC
On July 16, 2007, the Company completed a purchase transaction with C & J
Financial, LLC, an Alabama limited liability company ("C & J Financial"). C & J
Financial operates a factoring business with offices in Rainbow City, Alabama
with an emphasis on providing financing for funeral homes and mortuaries. Under
the terms of the Unit Purchase Agreement dated July 16, 2007 (the "Purchase
Agreement") among the Company, C & J Financial, Henry Culp, Jr. ("Culp") and
Culp Industries, Inc. ("Culp Industries"), the Company purchased all of the
outstanding member units of C & J Financial for a purchase consideration of (i)
$1,250,000 in cash, (ii) a
promissory note from the Company to Culp in the amount of $381,500 plus interest
at the rate of 5% per annum, payable over a period of 24 months in monthly
payments of $16,737, including interest, until paid in full, and (iii) a quit
claim deed from C & J Financial to Culp, conveying ownership of the building and
surrounding property located in the Jester Commercial Park in Rainbow City,
Alabama, where C & J Financial currently maintains its business offices. At
closing, Culp Industries entered into a lease agreement with C & J Financial to
lease to C & J Financial approximately 5,000 square feet in the building located
at the Jester Commercial Park. The lease is for a term of three years for which
C & J Financial, as tenant, is required to make monthly payments of $1,200, for
a total lease payment of $43,200.
The Purchase Agreement additionally required Culp to deliver to the Company at
closing a promissory note (the "Note") in the principal amount of $1,755,236
plus interest at the rate of 8.25% per annum from C & J Financial, as borrower,
to Culp, as lender, with such note to be cancelled and marked "paid in full".
Moreover, the agreement provides for the possibility of adjustments. If the
total equity on the balance sheet of C & J Financial as of May 31, 2007, defined
as total assets minus total liabilities, is greater than the amount of the
equity on the balance sheet of C & J Financial as of the closing date, or July
16, 2007, Culp agrees to pay to the Company the difference between the total
equity on the balance sheet as of May 31, 2007 and the total equity on the
balance sheet as of July 16, 2007 by reducing the amount of the Note by such
difference in the amounts of the total equity on such balance sheets. If the
amount of the total equity on the balance sheet of C & J Financial as of May 31,
2007 is less than the amount of the total equity on the balance sheet of C & J
Financial as of July 16, 2007, the Company agrees to pay Culp the difference
between the total equity on the balance sheet as of May 31, 2007 and the total
equity on the balance sheet as of July 16, 2007 by increasing the amount of the
Note payable by such difference in the amounts of the total equity on such
balance sheets.
The Purchase Agreement further requires each unitholder to deliver to the
Company a non-competition and confidentiality agreement prohibiting the
unitholder from competing with C & J Financial for a period of five years from
July 16, 2007 through July 16, 2012. The Company also entered into a one year
consulting agreement with Culp, which requires Culp to provide part-time
consulting services for C & J Financial at $50.00 per hour, and a five year
employment agreement with Kevin O. Smith ("Smith"), Vice President of C & J
Financial, who will continue to serve in that position. The employment agreement
requires C & J Financial to pay Smith an annual salary of $96,000 plus a
discretionary bonus and a monthly car allowance of $1,161.
Finally, the Purchase Agreement requires the Company, C & J Financial, Culp and
Culp Industries to acknowledge the existence of a business loan agreement
between Regions Bank, as lender, and Culp Industries, as borrower, which
provides for a line of credit for C & J Financial. The outstanding balance on
the line of credit as of July 16, 2007 was $1,931,764. The line of credit is
secured by, among other assets, the accounts receivable of C & J Financial and
is personally guaranteed by Culp. The Company has received confirmation that
Regions Bank will not authorize any further advances or sweeps with respect to
the line of credit. The Company agrees that it will pay off the outstanding
balance of the line of credit with Regions Bank relating to the business of C &
J Financial. The Company will initially attempt to pay off the line of credit by
means of applying the payments from the accounts receivable of C & J Financial
as such payments are made in the ordinary course of business.
At June 30, 2007, total assets of C & J Financial were $3,197,000 and total
liabilities were $3,526,000, which includes the Note to Culp in the amount of
$1,755,000 that was cancelled at closing. For the seven month period from
November 1, 2006 to May 31, 2007, total revenues of C & J Financial were
$775,000 and total expenses were $764,000, resulting in net income of $11,000.
For the fiscal year ended October 31, 2006, total revenues of C & J Financial
were $1,397,000 and total expenses were $1,351,000, resulting in net income of
$46,000. For the fiscal year ended October 31, 2005, total revenues of C & J
Financial were $1,137,000 and total expenses were $1,114,000, resulting in net
income of $23,000. The Company anticipates utilizing the employees and
operations of C & J Financial to expand its fast funding operations, which
provide financing for funeral homes and mortuaries.
Exercise of Stock Options and Special Stockholders Meeting
The Company's Board of Directors granted stock options in 2004 to Scott M.
Quist, the Company's President and Chief Operating Officer, to purchase up to
1,000,000 shares of Class C common stock at exercise prices of $.323 and $.36
per share. On May 31, 2007, Mr. Quist made a cashless exercise of such options
to purchase a total of 1,157,625 shares of Class C common stock that he was
entitled to receive, after adjustments for 5% stock dividends issued in 2005,
2006 and 2007.
In connection with the exercise of such options on a cashless basis, Mr. Quist
delivered a total of 58,376 shares of Class A common stock to the Company that
he held in exchange for all the Class C shares he would be entitled to receive
for exercising the options. Inasmuch as there were 6,966,849 shares of Class C
common stock outstanding as of May 31, 2007 out of a total of 7,500,000
authorized shares of Class C common stock, the Company could legally issue only
533,151 shares of Class C common stock to Mr. Quist, leaving a balance of
624,474 Class C common shares owing to him.
In order to issue the additional shares of Class C common shares owing to Mr.
Quist, the Board of Directors approved on July 13, 2007 an amendment to the
Company's Articles of Incorporation to increase the number of Class C common
shares from 7,500,000 shares to 15,000,000 shares. Because stockholder approval
is also required to amend the Company's Articles of Incorporation, the Company
has scheduled a special stockholders meeting on September 21, 2007 to approve
the amendment to the Articles of Incorporation to increase the number of
authorized shares of Class C common stock from 7,500,000 shares to 15,000,000
shares.
If the stockholders approve the amendment at the special stockholders meeting,
the Company will issue Mr. Quist the additional 624,474 shares of Class C common
stock that are owed pursuant to his exercise of stock options. If the amendment
is not approved at the special stockholders meeting, the Company will,
alternatively, issue Mr. Quist 62,487 shares of Class A common stock,
representing 10% of the 624,474 Class C common shares that are owed to Mr. Quist
based on the conversion ratio set forth in the Articles of Incorporation of one
share of Class A common stock for each ten shares of Class C common stock. As of
June 30, 2007, the Company has recorded the fair value of the derivative
liability in the amount of $175,700 to reflect the Company's obligation to issue
the shares of Class C common stock or, alternatively, shares of Class A common
stock owed to Mr. Quist pursuant to the exercise of the stock options. This
liability is included in other liabilities and accrued expenses in the
accompanying condensed consolidated balance sheet.
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See "Table of Contents - Part I - Financial Information" under page 2
above
(a)(2) Financial Statement Schedules
None
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are not required under the related instructions
or are inapplicable and therefore have been omitted.
(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-K or are incorporated by reference to previous filings.
3.1 Articles of Restatement of Articles of Incorporation (4)
3.2 Amended Bylaws (6)
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 2003 Stock Option Plan (5)
10.3 2006 Director Stock Option Plan
10.4 Deferred Compensation Agreement with George R. Quist (2)
10.5 Deferred Compensation Plan (3)
10.6 Employment agreement with J. Lynn Beckstead, Jr. (7)
10.7 Employment agreement with Scott M. Quist (8)
10.8 Stock Purchase Agreement among Security National Life Insurance
Company, Southern Security Life Insurance Company, Memorial
Insurance Company of America, and the shareholders of Memorial
Insurance Company (9)
10.9 Reinsurance Agreement between Security National Life Insurance
Company and Memorial Insurance Company of America (10)
10.10 Trust Agreement between Security National Life Insurance Company and
Memorial Insurance Company of America (10)
10.11 Promissory Note between Memorial Insurance Company as Maker and
Security National Life Insurance Company as Payee (10)
10.12 Security Agreement between Memorial Insurance Company as Debtor and
Security National Life Insurance Company as Secured Party (10)
10.13 Surplus Contribution Note between Memorial Insurance Company of
America as Maker and Southern Security Life Insurance Company as
Payee (10)
10.14 Guaranty Agreement by Security National Life Insurance Company and
Southern Security Life Insurance Company as Guarantors (10)
10.15 Administrative Services Agreement between Security National Life
Insurance Company and Memorial Insurance Company of America (10)
10.16 Reinsurance Agreement between Security National Life Insurance
Company and Southern Security Life Insurance Company (11)
10.17 Trust Agreement among Security National Life Insurance Company,
Southern Security Life Insurance Company and Zions First National
Bank (11)
10.18 Stock Purchase Agreement among Security National Life Insurance
Company, Southern Security Life Insurance Company and American
Network Insurance Company (12)
10.19 Escrow Agreement among Security National Life Insurance Company,
Southern Security Life Insurance Company, American Network Insurance
Company and Mackey Price Thompson & Ostler (12)
10.20 Escrow Agreement among American Network Insurance Company, Security
National Life Insurance Company, Southern Security Life Insurance
Company, and Preferred Insurance Capital Consultants, LLC (12)
10.21 Agreement and Plan of Complete Liquidation of Southern Security Life
Insurance Company into Security National Life Insurance Company (12)
10.22 Assignment between Southern Security Life Insurance Company and
Security National Life Insurance Company (12)
10.23 Assignment between Southern Security Life Insurance Company and
Security National Life Insurance Company (12)
10.24 Unit Purchase Agreement among Security National Financial
Corporation, C&J Financial, LLC, Henry Culp, Jr., and Culp
Industries, Inc. (13)
10.25 Loan Agreement between Zions First National Bank as Lender and
Security National Life Insurance Company as Borrower
10.26 Promissory Note between Security National Life Insurance Company
as Maker and Zions First National Bank as Payee
10.27 Security Agreement among Security National Life Insurance Company as
Borrower, Security National Financial Corporation as Guarantor, and
Zions First National Bank as Lender
10.28 Guarantee by Security National Financial Corporation as Guarantor
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 June 30, 1989
(3) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 3, 2002
(4) Incorporated by reference from Report on Form 8-K/A as filed on
January 8, 2003
(5) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, Filed on June 5, 2003, relating to the Company's Annual
Meeting of Shareholders
(6) Incorporated by reference from Report on Form 10-Q, as filed on
November 14, 2003
(7) Incorporated by reference from Report on Form 10-K, as filed on
March 30, 2004
(8) Incorporated by reference from Report on Form 10-Q, as filed on
August 13, 2004
(9) Incorporated by reference from Report on Form 8-K, as filed on
September 27, 2005
(10) Incorporated by reference from Report on Form 8-K, as filed on
January 5, 2006
(11) Incorporated by reference from Report on Form 8-K, as filed on
January 11, 2006
(12) Incorporated by reference from Report on Form 8-K, as filed on
January 12, 2007
(13) Incorporated by reference from Report on Form 8-K, as filed on
August 8, 2007
(b) Reports on Form 8-K:
No reports were filed by the Company during the quarter ended June
30, 2007.
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: November15, 2007 By: s/s George R. Quist
---------------------
George R. Quist
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Dated: November 15, 2007 By: s/s Stephen M. Sill
---------------------
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.
Dated: August 14, 2007 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.
Dated: August 14, 2007 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 June 30, 2007, 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.
Dated: August 14, 2007 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 June 30, 2007, 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.
Dated: August 14, 2007 By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
LOAN AGREEMENT
Between
ZIONS FIRST NATIONAL BANK
Lender
and
SECURITY NATIONAL LIFE INSURANCE COMPANY
Borrower
Effective Date: June 12, 2007
23
LOAN AGREEMENT
This Loan Agreement is made and entered into by and between Zions First
National Bank and Security National Life Insurance Company as of June 12, 2007
(the "Effective Date").
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Definitions
1.1 Definitions
Terms defined in the singular shall have the same meaning when used in the
plural and vice versa. As used herein, the term:
"Acknowledgment" means a written statement, substantially in the form
attached hereto as Exhibit B, executed by the maker of an Underlying Note
acknowledging that Borrower has collaterally assigned the Underlying Note as
payable to the order of Lender and has further collaterally assigned to Lender
all rights as beneficiary under the Underlying Deed of Trust securing the
Underlying Note together with all right, title and interest of Borrower in and
to all other documents, instruments and agreements executed and delivered by the
maker of the Underlying Note. In the alternative, Borrower may insert into any
Underlying Notes language wherein the Maker acknowledges that the Note is
assignable, such as "borrower acknowledges that lender has the right to assign
an interest in this note to another lender."
"Banking Business Day" means any day not a Saturday, Sunday, legal holiday
in the State of Utah, or day on which national banks in the State of Utah are
authorized to close.
"Borrower" means Security National Life Insurance Company, including each
of its successors, and, if permitted, assigns.
"Borrowing Base" means the aggregate of the following:
(a) for Eligible Notes that are Underlying Notes encumbered by Underlying
Property that is Commercial Property, the lesser of seventy-five percent (75%)
of the face amount of such Eligible Notes or sixty percent (60%) of the
appraised value of the Underlying Property.
(b) for Eligible Notes that are Underlying Notes encumbered by Underlying
Property that is Residential Property, Construction Property, or Land Property,
twenty percent (20%) of the face amount of such Eligible Notes, with the portion
of the Borrowing Base attributable to such Eligible Notes not exceeding, in the
aggregate, Two Million Dollars ($2,000,000.00) . (Underlying Property that is
Construction Property may be included under this subsection (b) or the next
subsection (c).)
(c) Underlying Notes encumbered by Underlying Property that is Construction
Property, the lesser of one hundred percent (100%) of the amounts loaned by
Borrower on the Underlying Note or eighty percent (80%) of the appraised value
of the Underlying Property. The portion of the Borrowing Base attributable to
Construction Property under this subsection (c) may not exceed, in the
aggregate, Ten Million Dollars ($10,000,000.00).
(d) The maximum amount of any individual Eligible Note that may be added to
the Borrowing Base is limited to not more than Five Million Dollars
($5,000,000.00).
(e) No Eligible Note that is more than Ninety (90) days past the Eligible
Note's maturity date may be included within the Borrowing Base.
"Borrowing Base Certificate" means a certificate executed by Borrower, as
set forth in Section 6.7 Financial Statements and Reports, in a form approved by
Lender and including information such as the exact name of the maker of each
Underlying Note, including the maker's address; the date of the funding of each
Underlying Note or advance based upon the Underlying Note; the amount advanced
by Lender on each Underlying Note; the identity, values, and the amount advanced
by Lender on all Real Estate Owned; the Underlying Notes collateral value; and
the current Loan-to-Value ratio of the Loan.
"Collateral" shall have the meaning set forth in Section 3.1 Collateral.
"Collateral Pool Report" means a report created by Borrower, as set forth
in Section 6.7 Financial Statements and Reports, in a form approved by Lender
and including the information set forth in section 6.7(e).
"Commercial Property" means Underlying Property upon which there are
existing improvements that are designed for and suited for commercial or
business use and for which necessary or applicable land use or zoning approval
has been obtained.
"Construction Property" means Underlying Property for which the funds
derived from the Underlying Note would be used to construct new improvements on
the Underlying Property.
"Effective Date" shall mean the date the parties intend this Loan Agreement
to become binding and enforceable, which is the date stated in the introductory
paragraph of this Loan Agreement.
"Eligible Note" means an Underlying Note described on the most recent
Borrowing Base Certificate delivered to Lender in accordance herewith and which
at all times meets the following requirements:
a. The Underlying Note is secured by an Underlying Deed of Trust which
is in form and content acceptable to Lender in its sole and absolute
discretion and which is otherwise sufficient to create a first priority
lien in and to the Underlying Property described therein in favor of
Borrower, subject only to Permitted Encumbrance; however, Lender shall also
accept an Underlying Note where the Underlying Deed of Trust is in a second
priority lien position so long as the Borrower also holds the first
priority lien position on the Underlying Property, and the Loan-to-Value
ratio from both liens is not more than 75%;
b. Borrower has (i) collaterally assigned the Underlying Note as
payable to the order of Lender, which endorsement shall be in the form
attached hereto as Exhibit C;
c. Borrower has collaterally assigned to Lender all rights as
beneficiary or mortgagee under the Underlying Deed of Trust securing the
Underlying Note together with all right, title and interest of Borrower in
and to all other documents, instruments and agreements executed and
delivered by the maker of the Underlying Note, which assignment shall be in
the form attached hereto as Exhibit D;
d. Borrower has delivered to Lender for all Underlying Notes where the
Underlying Deed of Trust encumbers either Commercial Property or
Construction Property for which 100% of the face value or 80% of the
appraised value has been applied to the Borrowing Base, the original
Underlying Note, the Assignment of the Underlying Note, the Assignment of
Deed of Trust, and a copy of the recorded Underlying Deed of Trust,
provided that Lender will not record an Assignment of Deed of Trust except
in the case of an Event of Default pursuant to paragraph 7.1 or in the
event that Lender has reasonable cause to believe it is justified in
receiving notice of any possible claims or issues involving title to the
Underlying Property and the applicable state does not provide for a
"request for notice" or similar type document to be recorded;
e. The loan represented by the Underlying Note must meet all
applicable provisions and requirements set forth in the Borrower's written
loan policy for underwriting loans secured by Commercial, Residential, Land
or Construction Loans;
f. No default in payment or performance by the maker under the
Underlying Note, and no condition, which with notice, passage of time or
both would constitute a default in payment or performance by the maker
under the Underlying Note has occurred and is continuing under the
Underlying Note, except that defaults are allowed under which Borrower in
the ordinary course of business has imposed a default interest rate or an
extension of time, or other classes or types of defaults for which Lender
has consented to Borrower in writing;
g. For an Underlying Note whose face amount is Two Hundred
Fifty-Thousand Dollars ($250,000.00) or more, the Underlying Property has
had an appraisal performed that supports the value assigned to the
Underlying Property, and, in the case of Commercial Property, the appraisal
has been submitted to the Lender's Appraisal Review Department (who may
review the appraisal to assure compliance with requirements of the
Financial Institution Reform Recovery and Enforcement Act and any other
applicable laws, regulations, or standards). Lender may periodically
provide Borrower with lists of appraisers from whom Lender will not accept
appraisals, and the appraisal may be rejected on the basis of the identity
of the appraiser; otherwise, Lender may not reject any appraisals based
solely upon the identity of the appraiser;
h. For an Underlying Note whose face amount is less than Two Hundred
Fifty-Thousand Dollars ($250,000.00), the value assigned to the Underlying
Property has been established by documentation that sets forth the square
footage of any improvements to the Underlying Property and the acreage if
the Underlying Property is Land Property, the tax-assessed value of the
Underlying Property; and either (i) a sales price within the last six
months of the Underlying Property, or (ii) documentation of two sales of
comparable properties;
i. The Underlying Property encumbered by the Underlying Deed of Trust
accompanying the Underlying Note consists of Commercial Property,
Construction Property, Residential Property, or Land Property
(specifically, no recreation property is allowed); and
j. Each of the representations and warranties of Borrower set forth in
Section 5.13 Underlying Notes and Underlying Deeds of Trust, and Standards
for Collateral Examination hereof with respect to the Underlying Notes and
the Underlying Deeds of Trust is true and correct as of the date of the
most recent Borrowing Base Certificate.
"Environmental Condition" shall mean any condition involving or relating to
Hazardous Materials and/or the environment affecting the Real Property, whether
or not yet discovered, which could or does result in any damage, loss, cost,
expense, claim, demand, order, or liability to or against Borrower or Lender by
any third party (including, without limitation, any government entity),
including, without limitation, any condition resulting from the operation of
Borrower's business and/or operations in the vicinity of the Real Property
and/or any activity or operation formerly conducted by any person or entity on
or off the Real Property.
"Environmental Health and Safety Law" shall mean any legal requirement that
requires or relates to:
a. advising appropriate authorities, employees, or the public of
intended or actual releases of Hazardous Materials, violations of discharge
limits or other prohibitions, and of the commencement of activities, such
as resource extraction or construction, that do or could have significant
impact on the environment;
b. preventing or reducing to acceptable levels the release of
Hazardous Materials;
c. reducing the quantities, preventing the release, or minimizing the
hazardous characteristics of wastes or Hazardous Materials that are
generated or are present in the environment;
d. assuring that products are designed, formulated, packaged, and used
so that they do not present unreasonable risks to human health or the
environment when used or disposed of;
e. protecting resources, species, or ecological amenities;
f. use, generation, storage, transportation, sale, disposal,
treatment, or transfer of Hazardous Materials or other potentially harmful
substances;
g. cleaning up Hazardous Materials that have been released, preventing
the threat of release, and/or paying the costs of such clean up or
prevention;
h. conducting remedial investigations, feasibility studies, risk
assessments, and any other such study or investigation as consistent with
applicable state or federal law to characterize or examine the actual or
potential release or presence of Hazardous Materials in the environment; or
i. making responsible parties pay for damages done to the health of
others or the environment or permitting self-appointed representatives of
the public interest to recover for injuries done to public assets.
"Event of Default" shall have the meaning set forth in Section 7.1 Events
of Default.
"Hazardous Materials" means (i) "hazardous waste" as defined by the Solid
Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of
1976 (42 U.S.C. Section 6901 et. seq.), including any future amendments thereto,
and regulations promulgated thereunder, and as the term may be defined by any
contemporary state counterpart to such act; (ii) "hazardous substance" as
defined by the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (42 U.S.C. Section 9601 et. seq.), including any future amendments
thereto, and regulations promulgated thereunder, and as the term may be defined
by any contemporary state counterpart of such act; (iii) asbestos; (iv)
polychlorinated biphenyls; (v) underground or above ground storage tanks,
whether empty or filled or partially filled with any substance; (vi) any
substance the presence of which is or becomes prohibited by any federal, state,
or local law, ordinance, rule, or regulation; and (vii) any substance which
under any federal, state, or local law, ordinance, rule or regulation requires
special handling or notification in its collection, storage, treatment,
transportation, use or disposal.
"Land Property" means Underlying Property on which no structural
improvements exist (specifically excluding such infrastructure such as
utilities, parking areas, or adjacent roads).
"Lender" means Zions First National Bank, its successors, and assigns.
"Loan" means the loan to be made pursuant to Section 2 Loan Description, in
the maximum principal amount of the Loan Amount.
"Loan Agreement" means this agreement, together with any exhibits,
amendments, addendums, and modifications.
"Loan Amount" means the amount of up to Forty million dollars
($40,000,000.00), to be disbursed pursuant to the terms and conditions of this
Loan Agreement, plus any sum in addition thereto advanced by Lender in its
discretion in accordance with the Loan Documents.
"Loan Availability Amount" means the lesser of (i) the Loan Amount or (ii)
the Borrowing Base.
"Loan Documents" means the Loan Agreement, Promissory Note, Guarantee,
Security Documents, Acknowledgments, all other agreements and documents
contemplated by any of the aforesaid documents, and all amendments,
modifications, addendums, and replacements, whether presently existing or
created in the future.
"Loan-to-Value Ratio" means the ratio of (i) the face amount of the
Underlying Note (or, if the context requires, the aggregate of debt encumbering
the Underlying Property) to (ii) the value of the Underlying Property.
"Organizational Documents" means, in the case of Borrower as a corporation,
its Articles or Certificate of Incorporation and By-Laws. For any other entity,
the Organizational Documents shall consist of all documents of organization
filed in the entity's state of creation, any operating agreements, governing
articles, partnership agreements, a Trust Agreement or Declaration of Trust.
"Permitted Encumbrances" means, with respect to any particular Underlying
Deed of Trust, (a) any matters other than monetary liens set forth in the policy
of title insurance issued to the beneficiary under the Underlying Deed of Trust
insuring such beneficiary's interest in the Underlying Property, which are
acceptable to Lender as of the date of the related Underlying Note, (b) the lien
of current real property taxes and assessments not yet due and payable, (c)
first priority liens as specifically allowed in this Agreement and (d) any other
lien or encumbrance that Lender shall expressly approve in its sole and absolute
discretion.
"Promissory Note" means the promissory note to be executed by Borrower
pursuant to Section 2.4 Promissory Note in the form of Exhibit A hereto, which
is incorporated herein by reference, and any and all renewals, extensions,
modifications, and replacements thereof.
"Real Property" means any and all real property and improvements thereon,
owned or leased by Borrower or in which Borrower has any other interest of any
nature whatsoever.
"Residential Property" means Underlying Property that has an existing
improvement designed for residential use and is zoned or otherwise designated by
the appropriate land use authority for residential use.
"Security Documents" means all security agreements, assignments, pledges,
financing statements, deeds of trust, mortgages, and other documents which
create or evidence any security interest, assignment, lien or other encumbrance
in favor of Lender to secure any or all of the obligations created or
contemplated by any of the Loan Documents, and all amendments, modifications,
addendums, and replacements, whether presently existing or created in the
future.
"Underlying Deed of Trust" means a deed of trust or mortgage which creates
a lien in favor of Borrower in and to the Underlying Property described therein
and which secures the related Underlying Note.
"Underlying Documents" means the Underlying Deed of Trust and the
Underlying Note
"Underlying Note" means a promissory note originally issued or subsequently
assigned to Borrower, which is executed and delivered by an owner or purchaser
of Underlying Property to evidence the owner's or purchaser's obligation to
repay a loan made to such purchaser or owner and which is secured by an
Underlying Deed of Trust.
"Underlying Property" means the real property together with all buildings,
fixtures, and improvements thereon; all waters and water rights on, relating, or
appertaining thereto; all easements, licenses and rights of way relating or
appertaining thereto; all rents, issues, royalties, income and profits; all
awards made for taking by eminent domain or any proceeding or purchase in lieu
thereof; the proceeds of any insurance; all tenements, hereditaments, rights,
privileges, and appurtenances belonging or relating thereto or any improvements
thereon; and including any of the foregoing now existing or created or arising
in the future, if any, which are described in an Underlying Deed of Trust and
which act as security for an Underlying Note.
2. Loan Description
2.1 Amount of Loan
Upon fulfillment of all conditions precedent set forth in this Loan
Agreement, and so long as no Event of Default exists, and no other breach has
occurred under the Loan Documents, Lender agrees to loan Borrower up to, in the
aggregate, the Loan Availability Amount.
2.2 Nature and Duration of Loan
The Loan shall be a revolving loan payable in full upon the date and upon
the terms and conditions provided in the Promissory Note. Lender and Borrower
intend the Loan to be in the nature of a line of credit under which Borrower may
repeatedly draw funds on a revolving basis in accordance with the terms and
conditions of this Loan Agreement and the Promissory Note. The right of Borrower
to draw funds and the obligation of Lender to advance funds shall not accrue
until all of the conditions set forth in Section 4 Conditions to Loan
Disbursements have been fully satisfied, and shall terminate: (i) upon
occurrence of an Event of Default or (ii) upon maturity of the Promissory Note,
unless the Promissory Note is renewed or extended by Lender, in which case such
termination shall occur upon the maturity of the final renewal or extension of
the Promissory Note. Upon such termination, any and all amounts owing to Lender
pursuant to the Promissory Note and this Loan Agreement shall thereupon be due
and payable in full.
2.3 Redetermination of Borrowing Base
Lender shall redetermine the Borrowing Base and the Loan Availability
Amount at monthly meetings with Borrower (or more often as Lender may agree).
Such meetings shall be scheduled to accommodate Lender's requirements as to time
and place. Lender shall redetermine the Borrowing Base, and upon such
redetermination, Borrower shall make any required payments to Lender pursuant to
Section 2.7 Prepayment of Principal to reduce the outstanding balance of the
Loan to no more than the amounts permitted hereunder. Lender shall also make
available as provided herein all advances under the Loan as supported by the
redetermined Borrowing Base.
2.4 Promissory Note and Interest Rate
The Loan shall be evidenced by the Promissory Note. The Promissory Note
shall be executed by Borrower on the form as supplied by Lender, and such
Promissory Note shall be delivered to Lender upon execution and delivery of this
Loan Agreement.
Interest shall accrue from the date of disbursement of the principal amount
or portion thereof until paid, both before and after judgment, in accordance
with the terms set forth herein. The interest rate on the Promissory Note will
be subject to change from time to time based on changes in an independent index
which is the 1 year LIBOR rate. Lender's LIBOR rate is to be strictly
interpreted and is not intended to serve any purpose other than providing an
index to determine the interest rate used herein. Lender's LIBOR rate may not
necessarily be the same as the quoted offered side in the Eurodollar time
deposit market by any particular institution or service applicable to any
interest period. As used herein, Lender's LIBOR rate shall mean the rates per
annum quoted by Lender as Lender's 1 year LIBOR rate based upon quotes from the
London Interbank Offered Rate from the British Bankers Association Interest
Settlement Rates, as quoted for U.S. Dollars by Bloomberg, or other comparable
services selected by the Lender (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notifying Borrower. The interest rate change will not occur more often than each
year. Borrower understands that Lender may make loans based on other rates as
well. Borrower understands that Lender may make loans based on other rates as
well. The interest rate to be applied to the unpaid balance of the Promissory
Note will be a rate of 1.64 percentage points (1.64%) over the Index.
2.5 Notice and Manner of Borrowing
Borrower shall be able to obtain advances under this Loan Agreement by
setting up with Lender a loan sweep account using Lender's documentation (or in
any other manner agreed to by Lender).
2.6 Fees
a. Commitment Fee. Upon execution and delivery of this Loan Agreement,
Borrower shall pay Lender a loan fee representing fourteen-and-a-half
hundreths of one percent (0.145%) of the Loan Amount, which fee is
Fifty-eight Thousand Dollars ($58,000.00), with a credit of Twenty-three
thousand Dollars for prior commitment fees paid on prior loans, which shall
make the Commitment Fee due Thirty-five thousand Dollars ($35,000.00). This
Commitment Fee from Borrower is due upon entering this Loan Agreement,
notwithstanding any other provision in this Loan Agreement, payment of this
Commitment Fee is a condition precedent to any disbursements under the
Loan, and Lender is under no obligation to make any advances until the
Commitment Fee is paid. No portion of such fee shall be refunded in the
event of early termination of this Loan Agreement or any termination or
reduction of the right of Borrower to request advances under this Loan
Agreement. The Commitment Fee may be paid through an advance on the Loan.
b. Loan Fee. Borrower shall pay to Lender a fee for the Loan for so
long as this Loan Agreement is in effect. The loan fee shall be amount
equal to one-quarter of one percent (0.25%) per annum of the unused portion
of the Loan, calculated on the average unused portion of the Loan for each
calendar month. The loan fee shall be payable quarterly, in arrears, and
shall be due upon receipt of a statement therefor from Lender.
2.7 Prepayment of Principal and Curtailments
a. Discretionary. Borrower may prepay all or any portion of the
principal amount of the Loan at any time without premium or penalty.
b. Mandatory. In the event the aggregate outstanding principal balance
of the Loan exceeds the Loan Availability Amount at any time, Borrower
shall, unless Lender shall otherwise consent in writing, without notice or
demand of any kind, immediately make such repayments of the Loan or take
such other actions as shall be necessary to eliminate such excess.
3. Security for Loan
3.1 Collateral
The Loan, Promissory Note, and all obligations of Borrower under the Loan
Documents shall be secured by such collateral as is provided in the Security
Documents (the "Collateral"), which shall include, without limitation, the
following:
a. The Underlying Notes.
b. The Underlying Deeds of Trust.
Lender will not record the Assignments of Deeds of Trust, except in the
event of default pursuant to paragraph 7.1 or in the event that Lender has
reasonable cause to believe it is justified in receiving notice of any possible
claims or issues involving title to the Underlying Property and the applicable
state does not provide for a "request for notice" or similar type document to be
recorded.
3.2 Release of Collateral
Borrower may request the release of an Underlying Note, whether or not the
same is deemed at the time of such release to be an Eligible Note, and the
release, reassignment, and/or reconveyance of any related Underlying Deed of
Trust from the lien and encumbrance of the Security Documents from time to time,
as well as the physical return of any such Underlying Note and related
Underlying Deed of Trust. Lender's obligation to release any such items of
Collateral is subject to the following:
a. Qualified Release. Lender shall release any Underlying Note and
Underlying Deed of Trust if each of the following conditions precedent are
satisfied:
i. Borrower has notified Lender in writing of the requested
release or has otherwise noted the need for the Qualified Release in
the Borrowing Base Certificate;
ii. Borrower has been paid all amounts due under the Underlying
Documents; and
iii. Borrower agrees to make all payments required pursuant to
Section 2.7(b) Prepayment of Principal - Mandatory after giving effect
to such release.
b. Discretionary Release. Collateral not eligible to be released
pursuant to the conditions specified in subparagraph (a) above will be
released upon such terms and conditions and for payment as determined by
Lender in its sole and absolute discretion.
c. Adjustment to Borrowing Base. Any Underlying Note released shall no
longer be available for consideration as an Eligible Note and, if
necessary, the Borrowing Base shall be immediately and automatically
redetermined to reflect such release.
d. Prompt Release. Lender shall make available to Borrower within 2
business days and upon notice from Borrower all Underlying Documents
qualifying for release, together with all releases, assignments, and
reconveyances necessary to effectuate the release.
4. Conditions to Loan Disbursements
4.1 Conditions to Loan Disbursements
Lender's obligation to disburse any of the Loan is expressly subject to,
and shall not arise until all of the conditions set forth below have been
satisfied. All of the documents referred to below must be in a form and
substance acceptable to Lender.
a. Lender is allowed to perform an examination of the Collateral and
the Borrowing Base, including any analysis of Borrower's lending practices
and operations (in which Lender shall be able to exam any Underlying
Documents and other documents as required by Lender in order to determine
the initial Borrowing Base to Lender's satisfaction), and Borrower has
satisfied any of Lender's concerns. The Parties acknowledge that Lender has
performed an initial Collateral Examination prior to the execution of this
Loan Agreement, and the representations and warranties in section 5.13
relating thereto (and to any subsequent Collateral Examination) must be
correct. Lender may perform subsequent Collateral Examinations as Lender
determines at its discretion.
b. Borrower shall have paid the Commitment Fee.
c. Borrower has complied with its obligations to deliver to Lender the
Borrowing Base Certificate and the Collateral Pool Report and to present
all required reporting under Section 6.7 Financial Statements and Reports.
d. The Loan must be used to pay off immediately the three-month
Fifteen Million Dollar ($15,000,000.00) bridge loan that Lender has
extended to Borrower, and no funds will be made available to Borrower under
this Loan that would not allow the bridge loan to be paid in full from the
funds of this Loan.
e. All of the Loan Documents and all other documents contemplated to
be delivered to Lender prior to funding have been fully executed and
delivered to Lender.
f. All of the documents contemplated by the Loan Documents which
require filing or recording have been properly filed and recorded so that
all of the liens and security interests granted to Lender in connection
with the Loan will be properly created and perfected and will have a
priority acceptable to Lender.
g. All other conditions precedent provided in or contemplated by the
Loan Documents or any other agreement or document have been performed.
h. As of the date of disbursement of all or any portion of the Loan,
the following shall be true and correct: (i) all representations and
warranties made by Borrower and Guarantor in the Loan Documents are true
and correct as of the date of such disbursement; and (ii) no Event of
Default has occurred and no conditions exist and no event has occurred,
which, with the passage of time or the giving of notice, or both, would
constitute an Event of Default, except those defaults, such as instances
where the Borrower in the ordinary course of business has granted
extensions of time or imposed default rates of interest, as provided for in
this Loan Agreement.
All conditions precedent set forth in this Loan Agreement and any of the
Loan Documents are for the sole benefit of Lender and may be waived unilaterally
by Lender.
4.2 No Default, Adverse Change, False or Misleading Statement
Lender's obligation to advance any funds at any time pursuant to this Loan
Agreement and the Promissory Note shall, at Lender's sole discretion, terminate
upon the occurrence of any Event of Default or upon the occurrence of any
material adverse change in Borrower's or any Guarantor's organization or affairs
or in any matter concerning which an agreement, covenant, representation, or
warranty has been made herein, or upon the determination by Lender that any of
Borrower's or any Guarantor's representations made in any of the Loan Documents
were false or materially misleading when made.
5. Representations and Warranties
5.1 Organization and Qualification
Borrower represents and warrants that it is a corporation duly incorporated
and existing in good standing under the laws of the State of Utah, and that it
is qualified and in good standing to do business in the State of Utah.
Borrower represents and warrants that it is duly qualified to do business
in each jurisdiction where the conduct of its business requires qualification.
Borrower represents and warrants that it has the full power and authority
to own its properties and to conduct the business in which it engages and to
enter into and perform its obligations under the Loan Documents.
Borrower represents and warrants that it has delivered to Lender or
Lender's counsel accurate and complete copies of Borrower's Organizational
Documents which are operative and in effect as of the Effective Date.
5.2 Authorization
Borrower represents and warrants that the execution, delivery, and
performance by the respective entity of the Loan Documents has been duly
authorized by all necessary action on the part of the Borrower and are not
inconsistent with the Borrower's Organizational Documents or any operating
agreement, do not and will not contravene any provision of, or constitute a
default under, any indenture, mortgage, contract, or other instrument to which
the Borrower is a party or by which it is bound, and that upon execution and
delivery thereof, the Loan Documents will constitute legal, valid, and binding
agreements and obligations of the Borrower, enforceable in accordance with their
respective terms.
5.3 No Governmental Approval Necessary
Borrower represents and warrants that no consent by, approval of, giving of
notice to, registration with, or taking of any other action with respect to or
by any federal, state, or local governmental authority or organization is
required for the Borrower's execution, delivery, or performance of the Loan
Documents.
5.4 Accuracy of Financial Statements
Borrower represents and warrants that all of its audited financial
statements heretofore delivered to Lender have been prepared in accordance with
generally accepted accounting principles consistently applied and fully and
fairly represent Borrower's financial condition as of the date thereof and the
results of Borrower's operations for the period or periods covered thereby.
Borrower represents and warrants that all of its unaudited financial
statements heretofore delivered to Lender fully and fairly represent the
Borrowing entity's financial condition as of the date thereof and the results of
the Borrowing entity's operations for the period or periods covered thereby and
are consistent with other financial statements previously delivered to Lender.
Borrower represents and warrants that since the dates of the most recent
audited and unaudited financial statements delivered to Lender, there has been
no material adverse change in its financial condition.
Borrower represents and warrants that all of its pro forma financial
statements heretofore delivered to Lender have been prepared consistently with
the Borrower's actual financial statements and fully and fairly represent the
Borrower's anticipated financial condition and the anticipated results of the
Borrower's operation for the period or periods covered thereby.
5.5 No Pending or Threatened Litigation
Borrower represents and warrants that except as Lender has been otherwise
advised in writing, together with an analysis by Borrower's counsel, there are
no actions, suits, or proceedings pending or, to Borrower's knowledge,
threatened against or affecting the Borrower in any court or before any
governmental commission, board, or authority which, if adversely determined,
would have a material adverse effect on the Borrower's financial condition,
conduct of its business, or ability to perform its obligations under the Loan
Documents. Lender has been advised in writing of pending litigation and
proceedings through delivery of Security National Financial Corporation's Form
10-K for the year 2006.
5.6 Full and Accurate Disclosure
Borrower represents and warrants that this Loan Agreement, the financial
statements referred to herein, any loan application submitted to Lender, and all
other statements furnished by Borrower to Lender in connection herewith contain
no untrue statement of a material fact and omit no material fact necessary to
make the statements contained therein or herein not misleading. Borrower
represents and warrants that it has not failed to disclose in writing to Lender
any fact that materially and adversely affects, or is reasonably likely to
materially and adversely affect, Borrower's business, operations, properties,
prospects, profits, condition (financial or otherwise), or ability to perform
its obligations under this Loan Agreement, the Promissory Note, the Security
Documents, or any other agreement, document, obligation, or transaction
contemplated by this Loan Agreement.
5.7 Compliance with ERISA
Borrower represents and warrants that Borrower is in compliance in all
material respects with all applicable provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"), as amended, and the regulations and
published interpretations thereunder. Neither a Reportable Event as set forth in
Section 4043 of ERISA or the regulations thereunder ("Reportable Event") nor a
prohibited transaction as set forth in Section 406 of ERISA or Section 4975 of
the Internal Revenue Code of 1986, as amended, has occurred and is continuing
with respect to any employee benefit plan established, maintained, or to which
contributions have been made by Borrower or any trade or business (whether or
not incorporated) which together with Borrower would be treated as a single
employer under Section 4001 of ERISA ("ERISA Affiliate") for its employees which
is covered by Title I or Title IV of ERISA ("Plan"); no notice of intent to
terminate a Plan has been filed nor has any Plan been terminated which is
subject to Title IV of ERISA; no circumstances exist that constitute grounds
under Section 4042 of ERISA entitling the Pension Benefit Guaranty Corporation
("PBGC") to institute proceedings to terminate, or appoint a trustee to
administer a Plan, nor has the PBGC instituted any such proceedings; neither
Borrower nor any ERISA Affiliate has completely or partially withdrawn under
Section 4201 or 4204 of ERISA from any Plan described in Section 4001(a)(3) of
ERISA which covers employees of Borrower or any ERISA Affiliate ("Multi-employer
Plan"); Borrower and each ERISA Affiliate has met its minimum funding
requirements under ERISA with respect to all of its Plans and the present fair
market value of all Plan assets equals or exceeds the present value of all
vested benefits under or all claims reasonably anticipated against each Plan, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA and the regulations thereunder and the applicable
statements of the Financial Accounting Standards Board ("FASB") for calculating
the potential liability of Borrower or any ERISA Affiliate under any Plan;
neither Borrower nor any ERISA Affiliate has incurred any liability to the PBGC
(except payment of premiums, which is current) under ERISA.
Borrower, each ERISA Affiliate and each group health plan (as defined in
ERISA Section 733) sponsored by Borrower and each ERISA Affiliate, or in which
Borrower or any ERISA Affiliate is a participating employer, are in compliance
with, have satisfied and continue to satisfy (to the extent applicable) all
requirements for continuation of group health coverage under Section 4980B of
the Internal Revenue Code and Sections 601 et seq. of ERISA, and are in
compliance with, have satisfied and continue to satisfy Part 7 of ERISA and all
corresponding and similar state laws relating to portability, access and
renewability of group health benefits and other requirements included in Part 7.
5.8 Compliance with USA Patriot Act
Borrower represents and warrants that it is not subject to any law,
regulation, or list of any government agency (including, without limitation, the
U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from
making any advance or extension of credit to Borrower or from otherwise
conducting business with Borrower.
5.9 Compliance with All Other Applicable Law
Borrower represents and warrants that it has complied with all applicable
statutes, rules, regulations, orders, and restrictions of any domestic or
foreign government, or any instrumentality or agency thereof having jurisdiction
over the conduct of Borrower's business or the ownership of its properties,
which may have a material impact or effect upon the conduct of Borrower's
business or the ownership of its properties, including, but not limited to,
compliance by Borrower, with respect to the origination of each Underlying Note
and associated loan and transaction, with the Federal Truth-in-Lending Act and
any state counterpart or similar law; the Equal Credit Opportunity Act and
Federal Reserve Board Regulation B; the Fair Credit Reporting Act; the Federal
Trade Commission Act; the FTC Credit Practices Trade Regulation Rule; the FTC
Trade Regulation Rule Concerning the Preservation of Consumers' Claims and
Defenses; the Real Estate Settlement Procedures Act and any state counterpart or
similar law; state adaptations of, or analogies to, any title or chapter of the
Federal Consumer Credit Protection Act; state laws proscribing unfair and/or
deceptive acts or practices; state laws regulating consumer sales practices;
state co-signer laws, and any other applicable consumer credit, consumer
protection and insurance laws, rules and regulations. To the extent that the
loan evidenced by an Underlying Note was serviced by Borrower prior to the date
hereof, it was serviced by Borrower in compliance with all such applicable
consumer credit, consumer protection, debt collection, insurance and other laws,
rules and regulations.
5.10 Environmental Representations and Warranties
Borrower represents and warrants that no Hazardous Materials are now
located on, in, or under the Real Property, nor is there any Environmental
Condition on, in, or under the Real Property and neither Borrower nor, to
Borrower's knowledge, after due inquiry and investigation, any other person has
ever caused or permitted any Hazardous Materials to be placed, held, used,
stored, released, generated, located or disposed of on, in or under the Real
Property, or any part thereof, nor caused or allowed an Environmental Condition
to exist on, in or under the Real Property, except in the ordinary course of
Borrower's business under conditions that are generally recognized to be
appropriate and safe and that are in strict compliance with all applicable
Environmental Health and Safety Laws. Borrower further represents and warrants
that no investigation, administrative order, consent order and agreement,
litigation or settlement with respect to Hazardous Materials and/or an
Environmental Condition is proposed, threatened, anticipated or in existence
with respect to the Real Property.
5.11 Operation of Business
Borrower represents and warrants that Borrower possesses all licenses,
permits, franchises, patents, copyrights, trademarks, and trade names, or rights
thereto, to conduct its business substantially as now conducted and as presently
proposed to be conducted, and Borrower is not in violation of any valid rights
of others with respect to any of the foregoing. The foregoing shall include, but
not be limited to, a representation and warranty by Borrower that it has
obtained, and at all relevant times has possessed and maintained, all necessary
licenses and/or approvals (including, as applicable, finance company licenses)
in all jurisdictions in which the ownership or lease of property or the conduct
of Borrower's business (including the extension of credit or origination of
loans to third parties) requires such licenses and/or approvals.
5.12 Payment of Taxes
Borrower represents and warrants that Borrower has filed all tax returns
(federal, state, and local) required to be filed and has paid all taxes,
assessments, and governmental charges and levies, including interest and
penalties, on Borrower's assets, business and income, except such as are being
contested in good faith by proper proceedings and as to which adequate reserves
are maintained.
5.13 Underlying Notes, Underlying Deeds of Trust, and Standards for Collateral
Examination
Borrower represents and warrants to Lender that for those Underlying Notes
and Underlying Deeds of Trust, if any, presented for the initial or subsequent
Collateral Examinations, or in the Borrowing Base Certificate or the Collateral
Pool Report, the following will be true:
a. Schedule of Underlying Notes and Underlying Deeds of Trust. The
information concerning each Underlying Note and each Underlying Deed of
Trust set forth in any list or schedule of Underlying Notes and Underlying
Deeds of Trust provided to Lender for the Collateral Examination, Borrowing
Base Certificate, or Collateral Pool Report will be true and correct as of
the date presented. The information concerning the payment history of any
Underlying Note provided to Lender by Borrower will be true and correct in
all material respects.
b. Enforceability.
The Underlying Documents are genuine and represent the legal, valid
and binding obligation of the relevant maker of an Underlying Note and
trustor of an Underlying Deed of Trust (as applicable, "Obligor"),
enforceable against such Obligor in accordance with their terms except as
such enforcement may be limited by fraudulent conveyance, moratorium,
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally and by general equity principles
(regardless of whether such enforcement is considered in a proceeding in
equity or at law). Lender may review any of the forms of Underlying
Documents employed by Borrower and may, at its discretion, require
reasonable revisions or adjustments to such forms, or, in the alternative,
require an opinion by legal counsel suitable to Lender that such forms are
enforceable, in compliance with applicable laws, requirements, and other
regulations, and will work for the purposes of this Loan Agreement. No
Underlying Document has been satisfied, subordinated, assigned or
rescinded, in whole or in part, or altered, waived, canceled or modified in
any material respect that is not reflected in a writing also presented to
Lender with such Document, nor, to Borrower's knowledge.
c. No Encumbrances; Liens.
i. Each of the Underlying Documents is free and clear of all
encumbrances, except for Permitted Encumbrances. Borrower is the sole
owner of the right to receive all principal, interest, and other
amounts required to be paid to the holder under each Underlying Note.
Borrower is the sole owner and beneficiary of each Underlying Deed of
Trust. Borrower has the full right and authority, subject to no
interest or participation of, or agreement with, any third party, to
sell, transfer and assign the Underlying Documents pursuant to this
Loan Agreement.
ii. The security interest granted by the relevant Obligor in each
Underlying Property is and shall remain, as of the date hereof, a
valid, perfected security interest. No broker or other individual or
entity is entitled to any unpaid commission or other compensation with
respect to any Underlying Document.
d. Condemnation;
Casualty Loss. To Borrower's knowledge, there is no pending or
threatened condemnation proceeding or similar proceedings affecting
any Underlying Property or any part of any Underlying Property which
could have a material adverse effect upon such interest in the
Underlying Property. To Borrower's knowledge, there has been no
uninsured destruction or loss of any Underlying Property. Each
Underlying Property which contains any improvements thereon is insured
by a fire and extended perils insurance policy, in an amount not less
than the replacement cost and the amount necessary to avoid the
operation of any co-insurance provisions with respect to such
Underlying Property; each Underlying Property is covered by
comprehensive general liability insurance in amounts generally
required by institutional lenders for similar properties; each
Underlying Property is also covered by flood insurance if necessary if
located in a flood zone; to Borrower's knowledge, all premiums on such
insurance policies required to be paid as of the date hereof have been
paid; such insurance policies require at least ten (10) days' prior
written notice to Borrower of termination or cancellation, and no such
notice has been received by Borrower with respect to any Underlying
Properties; such insurance names the beneficiary under the Underlying
Deeds of Trust as a named or additional insured under a standard
mortgage endorsement; each related Underlying Note or Underlying Deed
of Trust obligates Obligor thereunder to maintain all such insurance
and, at such Obligor's failure to do so, authorizes the lender or
beneficiary thereunder, as applicable, to maintain such insurance at
Obligor's cost and expense and to seek reimbursement therefor from
such Obligor.
e. Guarantees.
No notice to or consent of any guarantor under any guarantee
related to the Underlying Documents is required to consummate the
transactions contemplated herein or, except as may be required by
applicable law, to proceed against the Underlying Property or any such
guarantor in an event of default under the Underlying Documents.
f. Underlying Documents.
Before or at any disbursement under the Loan, Borrower shall
deliver to Lender the original or copies of the original Underlying
Documents assigned to Lender, as required by this Agreement. Each
Underlying Note that is delivered to Lender is the only original of
such Underlying Note (or if a copy is delivered to Lender, there is
only one original that is retained by Borrower). The Underlying
Documents are the only documents executed by Borrower and Obligor with
respect to the Underlying Property covered thereby. The entire
agreement between Borrower and each Obligor is contained in the
Underlying Documents and any additional documents executed by such
Obligor and made available to Lender and there are no warranties,
agreements or options related thereto that are not set forth therein.
Other than such documents, there are no agreements with respect to the
Underlying Property between Borrower and any Obligor.
g. No Defenses. No Obligor has asserted in writing to Borrower nor, to
Borrower's knowledge, does any Obligor have any basis to assert, any
defense, right of rescission, counterclaim or set off to its
obligations under any Underlying Document.
h. Security Interests.
i. Borrower has taken all actions and precautions with
respect to the Underlying Notes secured by Underlying
Property that a reasonably prudent lender would take to
protect and preserve the security interest therein,
including filing for record with all appropriate
governmental entities in all jurisdictions in which the
related Underlying Deed of Trust is required to be
filed and recorded to create a valid, binding and
enforceable lien on the related Underlying Property,
and each Underlying Deed of Trust creates a valid,
binding and enforceable lien in the related Underlying
Property (except as such enforcement may be limited by
fraudulent conveyance, moratorium, bankruptcy,
insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights
generally and by general principles of equity
(regardless of whether such enforceability is
considered in a proceeding in equity or at law).
ii. No Underlying Note is cross-collateralized with any
other loan or extension of credit that is not also an
Underlying Note
iii. Each Underlying Note is a whole loan and not a
participation certificate or subject to any
participation interest except as Lender may consent.
i. Taxes. To Borrower's knowledge, there are no delinquent taxes,
ground rents, water or sewer charges, assessments or other outstanding
charges payable to a governmental entity affecting any Underlying Property.
j. Environmental Laws.
To Borrower's knowledge, neither the current condition nor use of any
Underlying Property violates any Environmental Health and Safety Laws or
could reasonably be expected to result in the owner or occupant of the
Underlying Property incurring material liability under any Environmental
Health and Safety Laws. To Borrower's knowledge, no material amount of
Hazardous Materials have been disposed of or identified on, under or at any
Underlying Property. To Borrower's knowledge, there is no remediation in
progress on any Underlying Property nor is there any pending or in-progress
remediation disclosed or identified in any environmental report or analysis
performed in connection with any Underlying Property or necessary to comply
with any Environmental Health and Safety Laws.
k. Underlying Documents.
i. To Borrower's knowledge, no Obligor under any Underlying Document
is involved in bankruptcy or other similar proceeding, and no
bankruptcy, insolvency or other similar proceeding is pending or
contemplated by or against any Obligor.
ii. Each Underlying Document arose out of and constitutes a bona fide
business transaction entered into in the ordinary course of
Borrower's business.
iii. All principal, interest and any other amounts due under each
Underlying Note are payable in United States dollars in regularly
scheduled installments as set forth in the Underlying Note.
l. Use of Underlying Property.
i. To Borrower's knowledge, with respect to each Underlying Note,
the related Underlying Property is being used for the purpose set
forth in the related loan application or loan commitment or such
other documentation as Borrower may have required in connection
with the origination of the Underlying Note.
ii. To Borrower's knowledge, and in reliance on any applicable policy
of title insurance, survey and other certificates, instruments
and reports issued by governmental officials or other independent
third parties relating to the Underlying Property and such
Obligor:
(1) the related Underlying Property is in compliance with,
and is used and occupied in accordance with, all
material contractual obligations and restrictive
covenants applicable to such Underlying Property, and
in material compliance with all applicable laws;
(2) Obligor is in possession of, and in compliance with,
all material licenses, permits, franchises and
certificates and other governmental authorizations
(including but not limited to certificates of
occupancy) necessary or required by applicable law for
the use, occupancy, development, construction, repair,
or improvement of such Underlying Property, and the
Underlying Property is lawfully occupied under
applicable law; and all such material licenses, permits
and other authorizations are valid and in full force
and effect; and
(3) no improvement located on the Underlying Property is in
violation of any applicable zoning law or regulation.
iii. Borrower has not received notification from any governmental
entity that the Underlying Property is in non-compliance with any
laws or regulations, or is being used, operated or occupied
unlawfully.
m. Title Insurance.
i. Borrower has, with respect to each Underlying Deed of Trust
presented in the Collateral Examination, a Borrowing Base
Certificate, or a Collateral Pool Report, a valid and enforceable
ALTA (or state equivalent where ALTA is not available) lender's
policy of title insurance which (a) has been issued by and is a
binding obligation of a title insurer in the jurisdiction where
the related Underlying Property is located in connection with
such Underlying Deed of Trust in an amount not less than the
original principal amount secured by such Underlying Deed of
Trust, (b) is presently in full force and effect, (c) with
respect to which all premiums have been paid in full and (d)
insures Borrower, and its successors and assigns (as limited by
applicable law), that the Underlying Deed of Trust relating
thereto is a valid lien on the related Underlying Property
therein described and that the related Underlying Property is
otherwise free and clear of all encumbrances and liens having
priority over the lien of the Underlying Deed of Trust, subject
only to Permitted Encumbrances (each such policy is referred to
in this Section 5.13 as a "Title Policy").
ii. To Borrower's knowledge, there is no reason Lender will not be
able to obtain an endorsement of the Title Policies in Lender's
name. Any additional costs and premiums associated with such
endorsements shall be at Lender's expense.
n. Review and Delivery of Underlying Documents. Borrower will provide
Lender, if requested, the opportunity to review all of Borrower's books and
records relating to each Underlying Document, including, without limitation, all
files, payment histories, credit reports and other documentation relating to
each Underlying Document. Borrower will provide to Lender copies of any such
documentation requested by Lender, including, without limitation, correspondence
to or from any Obligor relating to any Underlying Document.
o. Litigation. There is no action, suit, legal or arbitration proceeding or
administrative proceeding or investigation pending to which Borrower is a party
or, to Borrower's knowledge, threatened against Borrower relating to or
affecting any Underlying Document, Obligor or Underlying Property. To Borrower's
knowledge, there is no action, suit, legal or arbitration proceeding or
administrative proceeding or investigation pending or threatened against any
person other than Borrower relating to or affecting any Underlying Document,
Obligor or Underlying Property.
p. Compliance With Laws.
i. Each Underlying Document has been originated and serviced in
compliance with all applicable laws and regulations. Borrower has
not received any written notice of violation of any law or
regulation relating to any of the Underlying Documents or the
ownership or operation thereof.
ii. Borrower is not subject to any judgment, writ, decree, injunction
or order of any federal, foreign, state or local court or
governmental entity relating to the acquisition, collection,
administration or enforcement of any Underlying Note or the
foreclosure, acquisition or disposition of any Underlying
Property or, in each case, any transactions or activities
incidental thereto.
q. No Change.
i. Since the date of origination of each Underlying Note, Borrower
has administered and serviced each Underlying Note in the
ordinary course of its business, consistent with past practices,
and has not (i) amended, modified or waived any provision of, or
extended, renewed, supplemented, reduced, subordinated, or
terminated the term of, or anticipated the payments under or
accepted the surrender of, any Underlying Note, except that the
Parties acknowledge and recognize that Borrower will issue
extensions of time for up to 12 months in the ordinary course of
business and will also impose default rates of interests as
responses to some defaults, (ii) disposed of any Underlying Note,
(iii) commenced or initiated any lawsuit, action or proceeding
with respect to any Underlying Note except in the ordinary and
usual course of business or (iv) taken possession of, or caused
any other person to take possession of, any Underlying Property
or other collateral securing a related Underlying Note, other
than insurance proceeds, except for those properties that qualify
as Real Estate Owned.
ii. Since the date of origination of each Underlying Note, Borrower
has not through its action or inaction created any encumbrances
on any Underlying Property.
r. Confirmation of Representations and Warranties. Borrower's delivery of
each Borrowing Base Certificate under this Loan Agreement shall constitute
Borrower's confirmation that each of the representations and warranties made
pursuant to this Section 5.13 are true and correct with respect to the
Underlying Notes described in such Borrowing Base Certificate as of the date
thereof.
6. Borrower's Covenants
Borrower makes the following agreements and covenants, which shall continue
so long as this Loan Agreement is in effect and so long as Borrower is indebted
to Lender for obligations arising out of, identified in, or contemplated by this
Loan Agreement.
6.1 Use of Proceeds
Borrower shall use the proceeds of the Loan solely for the purposes
identified to Lender in applying for the Loan.
Borrower shall not, directly or indirectly, use any of the proceeds of the
Loan for the purpose of purchasing or carrying any margin stock within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System,
or to extend credit to any person or entity for the purpose of purchasing or
carrying any such margin stock or for any purpose which violates, or is
inconsistent with, Regulation X of said Board of Governors, or for any other
purpose not permitted by Section 7 of the Securities Exchange Act of 1934, as
amended, or by any of the rules and regulations respecting the extension of
credit promulgated thereunder.
6.2 Continued Compliance with ERISA
Borrower covenants that, with respect to all Plans (as defined in Section
5.7 Compliance with ERISA) which Borrower or any ERISA Affiliate currently
maintains or to which Borrower or any ERISA Affiliate is a sponsoring or
participating employer, fiduciary, party in interest or disqualified person or
which Borrower or any ERISA Affiliate may hereafter adopt, Borrower and each
ERISA Affiliate shall continue to comply with all applicable provisions of the
Internal Revenue Code and ERISA and with all representations made in Section 5.7
Compliance with ERISA, including, without limitation, conformance with all
notice and reporting requirements, funding standards, prohibited transaction
rules, multi-employer plan rules, necessary reserve requirements, and health
care continuation, coverage and portability requirements.
6.3 Compliance with USA Patriot Act
Borrower shall (a) not be or become subject at any time to any law,
regulation, or list of any government agency (including, without limitation, the
U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from
making any advance or extension of credit to Borrower or from otherwise
conducting business with Borrower, and (b) provide documentary and other
evidence of Borrower's identity as may be requested by Lender at any time to
enable Lender to verify Borrower's identity or to comply with any applicable law
or regulation, including, without limitation, Section 326 of the USA Patriot Act
of 2001, 31 U.S.C. Section 5318.
6.4 Continued Compliance with Applicable Law
Borrower shall conduct its business in a lawful manner and in material
compliance with all applicable federal, state, and local laws, ordinances,
rules, regulations, and orders; shall maintain in good standing all licenses and
organizational or other qualifications reasonably necessary to its business and
existence; and shall not engage in any business not authorized by and not in
accordance with its Organizational Documents and other governing documents.
6.5 Amendment or Change of Organizational Documents
In the event of an alteration of Borrower's Organizational Documents,
Borrower shall provide to Lender, within a reasonable time after the same has
been adopted by Borrower, the revised Organizational Documents.
6.6 Payment of Taxes and Obligations
Borrower shall pay when due all taxes, assessments, and governmental
charges and levies on Borrower's assets, business, and income, and all material
obligations of Borrower of whatever nature, except such as are being contested
in good faith by proper proceedings and as to which adequate reserves are
maintained.
6.7 Financial Statements and Reports
Borrower shall provide Lender with such financial statements and reports as
Lender may reasonably request. Audited financial statements and reports shall be
prepared in accordance with generally accepted accounting principles (GAAP) or
in accordance with statutory accounting principles (SAP) as designated (or if
not designated, as Lender shall require, and if Lender has not designated the
requirement, as is appropriate to the context) and shall fully and fairly
represent Borrower's financial condition as of the date thereof and the results
of Borrower's operations for the period or periods covered thereby. Unaudited
financial statements and reports shall fully and fairly represent Borrower's
financial condition as of the date thereof and the results of Borrower's
operations for the period or periods covered thereby and shall be consistent
with other financial statements previously delivered to Lender and compliant
with GAAP or SAP as designated by Lender.
Until requested otherwise by Lender, Borrower shall provide the following
financial statements and reports to Lender:
a. Annual audited financial statements with an unqualified opinion for
each fiscal year of Borrower from an independent accounting firm and in a
form acceptable to Lender and compliant with SAP, to be delivered to Lender
within one hundred sixty (160) days of the end of the fiscal year. Borrower
shall also submit to Lender copies of any management letters or other
reports submitted to Borrower by independent certified public accountants
in connection with examination of the financial statements of Borrower made
by such accountants.
b. Quarterly financial statements for each fiscal quarter prepared by
Borrower, statements to be compliant with both GAAP and SAP, in forms
acceptable to Lender, to be delivered to Lender within sixty (60) days of
the end of the quarter. The quarterly financial statements shall include a
certification by the chief financial officer or chief executive officer of
Borrower that the quarterly financial statements fully and fairly represent
Borrower's financial condition as of the date thereof and the results of
operations for the period covered thereby and are consistent with other
financial statements previously delivered to Lender.
c. Within fifteen (15) days of the end of each fiscal quarter,
Borrower shall submit to Lender a compliance certificate in a form
acceptable to Lender certifying that Borrower is in compliance with all
terms and conditions of this Loan Agreement, including compliance with the
financial covenants provided in Section 6.14 Financial Covenants. The
compliance certificate shall include the data and calculations supporting
all financial covenants, whether in compliance or not, and shall be signed
by the chief executive officer or chief financial officer of Borrower.
d. Borrower shall submit to Lender on a monthly basis (or more
frequently if requested by Lender) within fifteen (15) days of the end of
each month a Borrowing Base Certificate in a form provided by or acceptable
to Lender demonstrating that the outstanding balance on the Loan is in
compliance with the terms and conditions of this Loan Agreement. Such
Borrowing Base Certificate must contain at a minimum the following details
for each loan in the Borrowing Base where the Underlying Property is
Commercial Property::
i. The exact name and address of the maker of each Underlying Note;
ii. The funding date of the Underlying Note;
iii. The original face amount of the Underlying Note and the current
outstanding amount under the loan represented by the Underlying
Note;
iv. The Loan-to-Value ratio of each loan in relation to the
Underlying Property;
v. The maturity date of the Underlying Note; and
vi. Any delinquency or charge-off information on the Underlying Note.
The Borrowing Base Certificate shall also contain for all Underlying
Property that is also Commercial Property a description both by individual
property and in the aggregate of the collateral value of the Underlying
Property; the amount entered into the Collateral Pool, and an aging status of
the Underlying Notes.
Where the Underlying Property is Residential, Construction, or Land
Property, the Borrowing Base Certificate must contain at a minimum a summary of
outstanding principal balance of the Underlying Notes, a summary of the
Loan-to-Value ratios of all Underlying Notes to the value of the Underlying
Property, and a summary of delinquency and charge-off information on the
Underlying Notes.
e. Borrower shall submit to Lender on a quarterly basis (or more
frequently if requested by Lender) within fifteen days of the end of each
quarter a Collateral Pool Report in a form provided by or acceptable to
Lender demonstrating that the outstanding balance on the Loan is in
compliance with the terms and conditions of this Loan Agreement. Such
Collateral Pool Report shall contain at a minimum the following:
i. The exact name and address of the maker of each Underlying Note;
ii. The funding date of the Underlying Note;
iii. The original face amount of the Underlying Note and the current
outstanding amount under the loan represented by the Underlying
Note;
iv. The Loan-to-Value ratio of each loan in relation to the
Underlying Property;
v. The maturity date of the Underlying Note; and
vi. Any delinquency or charge-off information on the Underlying Note.
The Collateral Pool Report shall also contain for all Underlying Property a
description both by individual property and in the aggregate of the collateral
value of the Underlying Property (using appraised values for Commercial
Property) and an aging status of the Underlying Notes.
6.8 Depository Relationship
Borrower shall use its best efforts to move at least one of its (or an
affiliate's) significant depository bank accounts to Lender within 12 months
from the date of this Loan Agreement, so long as Lender is able to provide the
services required by Borrower for any such accounts.
6.9 Insurance
Borrower shall maintain insurance with financially sound and reputable
insurance companies or associations in such amounts and covering such risks as
are usually carried by companies engaged in the same or a similar business and
similarly situated, which insurance may provide for reasonable deductibility
from coverage thereof.
6.10 Inspection
Borrower shall at any reasonable time and from time to time permit Lender
or any representative of Lender to examine and make copies of and abstracts from
the records and books of account of, and visit and inspect the properties and
assets of, Borrower, and to discuss the affairs, finances, and accounts of
Borrower with any of Borrower's officers and directors and with Borrower's
independent accountants.
6.11 Operation of Business
Borrower shall maintain all licenses, permits, franchises, patents,
copyrights, trademarks, and trade names, or rights thereto, necessary or
advisable to conduct its business and Borrower shall not violate any valid
rights of others with respect to any of the foregoing. Borrower shall continue
to engage in a business of the same general type as now conducted.
6.12 Maintenance of Records and Properties
Borrower shall keep adequate records and books of account in which complete
entries will be made in accordance with generally accepted accounting principles
consistently applied, reflecting all financial transactions of Borrower.
Borrower shall maintain, keep and preserve all of its properties (tangible and
intangible) necessary or useful in the proper conduct of its business in good
working order and condition, ordinary wear and tear excepted.
6.13 Notice of Claims
Borrower shall promptly notify Lender in writing of all actions, suits or
proceedings filed or threatened against or affecting Borrower in any court or
before any governmental commission, board, or authority which, if adversely
determined, would have a material adverse effect on Borrower's financial
condition, conduct of its business, or ability to perform its obligations under
the Loan Documents.
6.14 Environmental Covenants
Borrower covenants that it will:
a. Not permit the presence, use, disposal, storage or release of any
Hazardous Materials on, in, or under the Real Property, except in the
ordinary course of Borrower's business under conditions that are generally
recognized to be appropriate and safe and that are in strict compliance
with all applicable Environmental Health and Safety Laws.
b. Not permit any substance, activity or Environmental Condition on,
in, under or affecting the Real Property which is in violation of any
Environmental Health and Safety Laws.
c. Comply with the provisions of all Environmental Health and Safety
Laws.
d. Notify Lender immediately of any discharge of Hazardous Materials,
Environmental Condition, or environmental complaint or notice received from
any governmental agency or any other party.
e. Upon any discharge of Hazardous Materials or upon the occurrence of
any Environmental Condition, immediately contain and remove the same in
strict compliance with all Environmental Health and Safety Laws, promptly
pay any fine or penalty assessed in connection therewith, and immediately
notify Lender of such events.
f. Permit Lender to inspect the Real Property for Hazardous Materials
and Environmental Conditions, to conduct tests thereon, and to inspect all
books, correspondence, and records pertaining thereto.
g. Immediately advise Lender of any additional, supplemental, new, or
other information concerning any Hazardous Materials or Environmental
Conditions relating to the Real Property.
6.15 Financial Covenants
Except as otherwise provided herein, each of the accounting terms used in
this Section 6.14 Financial Covenants shall have the meanings used in accordance
with generally accepted accounting principles consistent with those used in
preparation of the financial statements of Borrower submitted to Lender.
a. Risk-Based Capital Ratio. Borrower shall maintain a Risk-Based
Capital Ratio greater than or equal to 300% based upon and in accordance
with current period NAIC guidelines. The Risk-Based Capital Ratio
calculation, with accompanying detail, will be prepared by Borrower and
provided to Lender with Borrower's annual financial statements.
b. Net Income. Net Income as measured annually will be One Million
Dollars ($1,000,000.00) measured on a GAAP basis.
6.16 Mergers, Consolidations, and Purchase and Sale of Assets
Borrower shall not wind up, liquidate, or dissolve itself; or reorganize,
merge, or consolidate with or into any other entity without the consent of
Lender, which shall not be unreasonably withheld; or convey, sell, assign,
transfer, lease, or otherwise dispose of (whether in one transaction or a series
of transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any person or entity.
6.17 No Forgiveness of Amounts Owing or Release of Liens
Borrower shall not, without Lender's prior written consent, forgive any
amounts owing to Borrower under any Underlying Note or release, in whole or in
part, the lien and encumbrance of any Underlying Deed of Trust; provided,
however, that (i) the lien and encumbrance of an Underlying Deed of Trust may be
released upon satisfaction of the conditions set forth in Section 3.2 Release of
Collateral; and (ii) Borrower may also in the course of ordinary business
forgive up to 30 days' of interest on any Underlying Note.
7. Default
7.1 Events of Default
Time is of the essence of this Loan Agreement. The occurrence of any of the
following events shall constitute a default under this Loan Agreement and under
the Loan Documents and shall be termed an "Event of Default":
a. Borrower fails in the payment or performance of any obligation,
covenant, agreement, or liability created by any of the Loan Documents.
b. Any representation, warranty, or financial statement made by or on
behalf of Borrower in any of the Loan Documents, or any document
contemplated by the Loan Documents, is materially false or materially
misleading.
c. Default occurs or Borrower fails to comply with any term in any of
the Loan Documents.
d. Guarantor fails to perform any of its obligations or covenants in
the Guarantee or this Loan Agreement or is otherwise in default of with any
provisions of the Guarantee or the Loan Agreement.
e. Borrower is dissolved or substantially ceases business operations.
f. A receiver, trustee, or custodian is appointed for any part of
Borrower's property, or any part of Borrower's property is assigned for the
benefit of creditors.
g. Any proceeding is commenced or petition filed under any bankruptcy
or insolvency law by or against Borrower.
h. Any judgment or regulatory fine is entered against Borrower which
may materially affect Borrower's ability to perform under this Agreement.
i. Borrower becomes insolvent or fails to pay its debts as they
mature.
j. Any material adverse change occurs in Borrower's condition or any
event occurs which may cause a material adverse change in Borrower's
condition.
k. Any of the foregoing events occur concerning any Guarantor.
7.2 No Waiver of Event of Default
No course of dealing or delay or failure to assert any Event of Default
shall constitute a waiver of that Event of Default or of any prior or subsequent
Event of Default.
8. Remedies
8.1 Remedies upon Event of Default
Upon the occurrence of an Event of Default, and at any time thereafter, all
or any portion of the obligations due or to become due from Borrower to Lender,
whether arising under this Loan Agreement, the Promissory Note, the Security
Documents or otherwise, at the option of Lender and without notice to Borrower
of the exercise of such option, shall accelerate and become at once due and
payable in full, and Lender shall have all rights and remedies created by or
arising from the Loan Documents, and all other rights and remedies existing at
law, in equity, or by statute.
Lender shall have the immediate remedy to take all its assignments of any
Underlying Deeds of Trust and to record such Assignments and to collect all
payments under the Underlying Documents.
8.2 Rights and Remedies Cumulative
The rights and remedies herein conferred are cumulative and not exclusive
of any other rights or remedies and shall be in addition to every other right,
power, and remedy that Lender may have, whether specifically granted herein or
hereafter existing at law, in equity, or by statute. Any and all such rights and
remedies may be exercised from time to time and as often and in such order as
Lender may deem expedient.
8.3 No Waiver of Rights
No delay or omission in the exercise or pursuance by Lender of any right,
power, or remedy shall impair any such right, power, or remedy or shall be
construed to be a waiver thereof.
9. General Provisions
9.1 Governing Agreement
In the event of conflict or inconsistency between this Loan Agreement and
the other Loan Documents, excluding the Promissory Note, the terms, provisions
and intent of this Loan Agreement shall govern.
9.2 Borrower's Obligations Cumulative
Every obligation, covenant, condition, provision, warranty, agreement,
liability, and undertaking of Borrower contained in the Loan Documents shall be
deemed cumulative and not in derogation or substitution of any of the other
obligations, covenants, conditions, provisions, warranties, agreements,
liabilities, or undertakings of Borrower contained herein or therein.
9.3 Payment of Expenses and Attorney's Fees
In the event of a dispute regarding this Agreement or any part of the
documentation of this Loan, the prevailing party shall be awarded reasonable
attorney fees and costs in prosecuting or defending the claims involved in such
dispute. Upon occurrence of an Event of Default, Borrower agrees to pay all
costs and expenses, including reasonable attorney fees and legal expenses,
incurred by Lender in enforcing, or exercising any remedies under, the Loan
Documents, and any other rights and remedies.
Borrower agrees to pay all expenses, including reasonable attorney fees and
legal expenses, incurred by Lender in any bankruptcy proceedings of any type
involving Borrower, Guarantor, the Loan Documents, or the Collateral, including,
without limitation, expenses incurred in modifying or lifting the automatic
stay, determining adequate protection, use of cash collateral or relating to any
plan of reorganization.
9.4 Right to Perform for Borrower
Lender may, in its sole discretion and without any duty to do so, elect to
discharge taxes, tax liens, security interests, or any other encumbrance upon
the Collateral or any other property or asset of Borrower, to pay any filing,
recording, or other charges payable by Borrower, or to perform any other
obligation of Borrower under this Loan Agreement or under the Security
Documents.
9.5 Assignability
Borrower may not assign or transfer any of the Loan Documents and any such
purported assignment or transfer is void.
Lender may assign or transfer any of the Loan Documents. Funding of this
Loan may be provided by an affiliate of Lender.
9.6 Third Party Beneficiaries
The Loan Documents are made for the sole and exclusive benefit of Borrower,
Lender and Guarantor and are not intended to benefit any other third party. No
third party may claim any right or benefit or seek to enforce any term or
provision of the Loan Documents.
9.7 Governing Law
The Loan Documents shall be governed by and construed in accordance with
the laws of the State of Utah, except to the extent that any such document
expressly provides otherwise.
9.8 Severability of Invalid Provisions
Any provision of this Loan Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction only, be ineffective only to
the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or thereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
9.9 Interpretation of Loan Agreement
The article and section headings in this Loan Agreement are inserted for
convenience only and shall not be considered part of the Loan Agreement nor be
used in its interpretation.
All references in this Loan Agreement to the singular shall be deemed to
include the plural when the context so requires, and vice versa. References in
the collective or conjunctive shall also include the disjunctive unless the
context otherwise clearly requires a different interpretation.
9.10 Survival and Binding Effect of Representations, Warranties, and Covenants
All agreements, representations, warranties, and covenants made herein by
Borrower shall survive the execution and delivery of this Loan Agreement and
shall continue in effect so long as any obligation to Lender contemplated by
this Loan Agreement is outstanding and unpaid, notwithstanding any termination
of this Loan Agreement. All agreements, representations, warranties, and
covenants made herein by Borrower shall survive any bankruptcy proceedings
involving Borrower. All agreements, representations, warranties, and covenants
in this Loan Agreement shall bind the party making the same, its successors and,
in Lender's case, assigns, and all rights and remedies in this Loan Agreement
shall inure to the benefit of and be enforceable by each party for whom made,
their respective successors and, in Lender's case, assigns.
9.11 Indemnification
Borrower shall indemnify Lender for any and all claims and liabilities, and
for damages which may be awarded or incurred by Lender, and for all reasonable
attorney fees, legal expenses, and other out-of-pocket expenses incurred in
defending such claims, arising from or related in any manner to the negotiation,
execution, or performance by Borrower or by Lender in good faith of any of the
Loan Documents, but excluding any such claims based upon breach or default by
Lender or gross negligence or willful misconduct of Lender.
9.12 Environmental Indemnification
Borrower shall indemnify Lender for any and all claims and liabilities, and
for damages which may be awarded or incurred by Lender, and for all reasonable
attorney fees, legal expenses, and other out-of-pocket expenses arising from or
related in any manner, directly or indirectly, to (i) Hazardous Materials
located on, in, or under the Real Property; (ii) any Environmental Condition on,
in, or under the Real Property; (iii) violation of or non-compliance with any
Environmental Health and Safety Law; (iv) any breach or violation of Section
5.10 Environmental Representations and Warranties and/or Section 6.14
Environmental Covenants; and/or (v) any activity or omission, whether occurring
on or off the Real Property, whether prior to or during the term of the loans
secured hereby, and whether by Borrower or any other person or entity, relating
to Hazardous Materials or an Environmental Condition. The indemnification
obligations of Borrower under this Section shall survive any reconveyance,
release, or foreclosure of the Real Property, any transfer in lieu of
foreclosure, and satisfaction of the obligations secured hereby.
9.13 Interest on Expenses and Indemnification, Collateral, Order of Application
All expenses, out-of-pocket costs, attorneys fees and legal expenses,
amounts advanced in performance of obligations of Borrower, and indemnification
amounts owing by Borrower to Lender under or pursuant to this Loan Agreement,
the Promissory Note, and/or any Security Documents shall be due and payable upon
demand. If not paid upon demand, all such obligations shall bear interest at the
default rate provided in the Promissory Note from the date of disbursement until
paid to Lender, both before and after judgment. Lender is authorized to disburse
funds under the Promissory Note for payment of all such obligations.
Payment of all such obligations shall be secured by the Collateral and by
the Security Documents.
All payments and recoveries shall be applied to payment of the foregoing
obligations, the Promissory Note, and all other amounts owing to Lender by
Borrower in such order and priority as determined by Lender. Unless provided
otherwise in the Promissory Note, payments on the Promissory Note shall be
applied first to accrued interest and the remainder, if any, to principal.
9.14 Limitation of Consequential Damages
Lender and its officers, directors, employees, representatives, agents, and
attorneys, shall not be liable to Borrower or any Guarantor for consequential
damages arising from or relating to any breach of contract, tort, or other wrong
in connection with the negotiation, documentation, administration or collection
of the Loan.
9.15 Waiver and Release of Claims
Borrower (i) represents that it has no current knowledge of any defenses to
or setoffs against any indebtedness or other obligations owing to Lender or its
affiliates (the "Obligations"), nor claims against Lender or its affiliates for
any matter whatsoever, related or unrelated to the Obligations. This provision
shall not apply to claims for performance of express contractual obligations
owing to Borrower by Lender or its affiliates.
9.16 Revival Clause
If the incurring of any debt by Borrower or the payment of any money or
transfer of property to Lender by or on behalf of Borrower or Guarantor should
for any reason subsequently be determined to be "voidable" or "avoidable" in
whole or in part within the meaning of any state or federal law (collectively
"voidable transfers"), including, without limitation, fraudulent conveyances or
preferential transfers under the United States Bankruptcy Code or any other
federal or state law, and Lender is required to repay or restore any voidable
transfers or the amount or any portion thereof, or upon the advice of Lender's
counsel is advised to do so, then, as to any such amount or property repaid or
restored, including all reasonable costs, expenses, and attorneys fees of Lender
related thereto, the liability of Borrower and Guarantor, and each of them,
shall automatically be revived, reinstated and restored and shall exist as
though the voidable transfers had never been made.
9.17 Arbitration
ARBITRATION DISCLOSURES:
i. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO
ONLY VERY LIMITED REVIEW BY A COURT.
ii. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN
COURT, INCLUDING THEIR RIGHT TO A JURY TRIAL.
iii. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
iv. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF ARBITRATORS' RULINGS IS VERY LIMITED.
v. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
vi. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR
THE AMERICAN ARBITRATION ASSOCIATION.
a. Any claim or controversy ("Dispute") between or among the parties
and their employees, agents, affiliates, and assigns, including, but not
limited to, Disputes arising out of or relating to the Loan, the
Collateral, the Loan Documents, Section 9.7 Governing Law, this arbitration
provision ("arbitration clause"), or any related agreements or instruments
relating hereto or delivered in connection herewith ("Related Agreements"),
and including but not limited to a Dispute based on or arising from an
alleged tort, shall at the request of any party be resolved by binding
arbitration in accordance with the applicable arbitration rules of the
American Arbitration Association (the "Administrator"). The provisions of
this arbitration clause shall survive any termination, amendment, or
expiration of this Loan Agreement or Related Agreements. The provisions of
this arbitration clause shall supersede any prior arbitration agreement
between or among the parties.
b. The arbitration proceedings shall be conducted in a city mutually
agreed by the parties. Absent such an agreement, arbitration will be
conducted in Salt Lake City, Utah or such other place as may be determined
by the Administrator. The Administrator and the arbitrator(s) shall have
the authority to the extent practicable to take any action to require the
arbitration proceeding to be completed and the arbitrator(s)' award issued
within one hundred fifty (150) days of the filing of the Dispute with the
Administrator. The arbitrator(s) shall have the authority to impose
sanctions on any party that fails to comply with time periods imposed by
the Administrator or the arbitrator(s), including the sanction of summarily
dismissing any Dispute or defense with prejudice. The arbitrator(s) shall
have the authority to resolve any Dispute regarding the terms of this Loan
Agreement, this arbitration clause, or Related Agreements, including any
claim or controversy regarding the arbitrability of any Dispute. All
limitations periods applicable to any Dispute or defense, whether by
statute or agreement, shall apply to any arbitration proceeding hereunder
and the arbitrator(s) shall have the authority to decide whether any
Dispute or defense is barred by a limitations period and, if so, to
summarily enter an award dismissing any Dispute or defense on that basis.
The doctrines of compulsory counterclaim, res judicata, and collateral
estoppel shall apply to any arbitration proceeding hereunder so that a
party must state as a counterclaim in the arbitration proceeding any claim
or controversy which arises out of the transaction or occurrence that is
the subject matter of the Dispute. The arbitrator(s) may in the
arbitrator(s)' discretion and at the request of any party: (i) consolidate
in a single arbitration proceeding any other claim arising out of the same
transaction involving another party that is substantially related to the
Dispute where that other party to that transaction that is bound by an
arbitration clause with Lender, such as borrowers, guarantors, sureties,
and owners of collateral and (ii) consolidate or administer multiple
arbitration claims or controversies as a class action in accordance with
the provisions of Rule 23 of the Federal Rules of Civil Procedure.
c. The arbitrator(s) shall be selected in accordance with the rules of
the Administrator from panels maintained by the Administrator. A single
arbitrator shall have expertise in the subject matter of the Dispute. Where
three arbitrators conduct an arbitration proceeding, the Dispute shall be
decided by a majority vote of the three arbitrators, at least one of whom
must have expertise in the subject matter of the Dispute and at least one
of whom must be a practicing attorney. The arbitrator(s) shall award to the
prevailing party recovery of all costs and fees (including attorneys' fees
and costs, arbitration administration fees and costs, and arbitrator(s)'
fees). The arbitrator(s), either during the pendency of the arbitration
proceeding or as part of the arbitration award, also may grant provisional
or ancillary remedies including but not limited to an award of injunctive
relief, foreclosure, sequestration, attachment, replevin, garnishment, or
the appointment of a receiver.
d. Judgment upon an arbitration award may be entered in any court
having jurisdiction, subject to the following limitation: the arbitration
award is binding upon the parties only if the amount does not exceed four
million dollars ($4,000,000.00); if the award exceeds that limit, any party
may demand the right to a court trial. Such a demand must be filed with the
Administrator within thirty (30) days following the date of the arbitration
award; if such a demand is not made within that time period, the amount of
the arbitration award shall be binding. The computation of the total amount
of an arbitration award shall include amounts awarded for attorneys' fees
and costs, arbitration administration fees and costs, and arbitrator(s)'
fees.
e. No provision of this arbitration clause, nor the exercise of any
rights hereunder, shall limit the right of any party to: (i) judicially or
non-judicially foreclose against any real or personal property collateral
or other security; (ii) exercise self-help remedies, including but not
limited to repossession and setoff rights; or (iii) obtain from a court
having jurisdiction thereover any provisional or ancillary remedies
including but not limited to injunctive relief, foreclosure, sequestration,
attachment, replevin, garnishment, or the appointment of a receiver. Such
rights can be exercised at any time, before or after initiation of an
arbitration proceeding, except to the extent such action is contrary to the
arbitration award. The exercise of such rights shall not constitute a
waiver of the right to submit any Dispute to arbitration, and any claim or
controversy related to the exercise of such rights shall be a Dispute to be
resolved under the provisions of this arbitration clause. Any party may
initiate arbitration with the Administrator. If any party desires to
arbitrate a Dispute asserted against such party in a complaint,
counterclaim, cross-claim, or third-party complaint thereto, or in an
answer or other reply to any such pleading, such party must make an
appropriate motion to the trial court seeking to compel arbitration, which
motion must be filed with the court within forty-five (45) days of service
of the pleading, or amendment thereto, setting forth such Dispute. If
arbitration is compelled after commencement of litigation of a Dispute, the
party obtaining an order compelling arbitration shall commence arbitration
and pay the Administrator's filing fees and costs within forty-five (45)
days of entry of such order.
f. Notwithstanding the applicability of any other law to this Loan
Agreement, the arbitration clause, or Related Agreements between or among
the parties, the Federal Arbitration Act, 9 U.S.C. ss. 1 et. seq., shall
apply to the construction and interpretation of this arbitration clause. If
any provision of this arbitration clause should be determined to be
unenforceable, all other provisions of this arbitration clause shall remain
in full force and effect.
9.18 Consent to Utah Jurisdiction and Exclusive Jurisdiction of Utah Courts
Borrower and Guarantor acknowledge that by execution and delivery of the
Loan Documents Borrower and Guarantor have transacted business in the State of
Utah and Borrower and Guarantor voluntarily submit to, consent to, and waive any
defense to the jurisdiction of courts located in the State of Utah as to all
matters relating to or arising from the Loan Documents and/or the transactions
contemplated thereby. EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER AND EXCEPT
AS PROVIDED IN THE ARBITRATION PROVISIONS ABOVE, THE STATE AND FEDERAL COURTS
LOCATED IN THE STATE OF UTAH SHALL HAVE SOLE AND EXCLUSIVE JURISDICTION OF ANY
AND ALL CLAIMS, DISPUTES, AND CONTROVERSIES, ARISING UNDER OR RELATING TO THE
LOAN DOCUMENTS AND/OR THE TRANSACTIONS CONTEMPLATED THEREBY. NO LAWSUIT,
PROCEEDING, OR ANY OTHER ACTION RELATING TO OR ARISING UNDER THE LOAN DOCUMENTS
AND/OR THE TRANSACTIONS CONTEMPLATED THEREBY MAY BE COMMENCED OR PROSECUTED IN
ANY OTHER FORUM EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER.
9.19 Joint and Several Liability
Borrower and Guarantor shall each be jointly and severally liable for all
obligations and liabilities arising under the Loan Documents.
9.20 Notices
All notices or demands by any party to this Loan Agreement shall, except as
otherwise provided herein, be in writing and may be sent by certified mail,
return receipt requested. Notices so mailed shall be deemed received when
deposited in a United States post office box, postage prepaid, properly
addressed to Borrower or Lender at the mailing addresses stated herein or to
such other addresses as Borrower or Lender may from time to time specify in
writing. Any notice so addressed and otherwise delivered shall be deemed to be
given when actually received by the addressee.
Mailing addresses:
Lender:
Zions First National Bank
Commercial Loan Center
310 South Main Street, Suite 1400
Salt Lake City, Utah 84101
Attention: Todd Harris
Borrower:
Security National Life Insurance Company
5300 South 360 West
Salt Lake City, Utah 84123
Attention: Scott M. Quist
9.21 Duplicate Originals
Two or more duplicate originals of the Loan Documents may be signed by the
parties, each duplicate of which shall be an original but all of which together
shall constitute one and the same instrument.
9.22 Disclosure of Financial and Other Information
Borrower and Guarantor hereby consent to Lender disclosing to any other
lender who may participate in the Loan any and all information, knowledge,
reports, and records, including, without limitation, financial statements,
relating in any manner whatsoever to the Loan, Borrower, and Guarantor.
9.23 Integrated Agreement and Subsequent Amendment
The Loan Documents constitute the entire agreement between Lender, Borrower
and Guarantor, and may not be altered or amended except by written agreement
signed by Lender, Borrower, and, if applicable, Guarantor. PURSUANT TO UTAH CODE
SECTION 25-5-4, BORROWER AND GUARANTOR ARE NOTIFIED THAT THESE AGREEMENTS ARE A
FINAL EXPRESSION OF THE AGREEMENT BETWEEN LENDER, BORROWER AND GUARANTOR AND
THESE AGREEMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED ORAL
AGREEMENT.
All prior and contemporaneous agreements, arrangements and understandings
between the parties hereto as to the subject matter hereof are, except as
otherwise expressly provided herein, rescinded.
IN WITNESS WHEREOF, Lender and Borrower have caused this Loan Agreement to
be duly executed and delivered as of the date first above written.
Lender:
Zions First National Bank
By: s/s Todd Harris
---------------
Todd Harris
Vice President
Borrower:
Security National Life Insurance Company
By: s/s Scott M. Quist
-------------------
Scott M. Quist
President
Guarantor:
Security National Financial Corporation
By: s/s Scott M. Quist
------------------
Scott M. Quist
President
Promissory Note
(Revolving Line of Credit)
June 12, 2007
Borrower: Security National Life Insurance Company
Lender: Zions First National Bank
Amount: $40,000,000.00
Maturity: June 12, 2008
For value received, Borrower promises to pay to the order of Lender at
Zions First National Bank, Commercial Banking Division, One South Main Street,
Second Floor, Salt Lake City, Utah, the sum of Forty Million dollars
($40,000,000.00) or such other principal balance as may be outstanding hereunder
in lawful money of the United States with interest thereon at a variable rate
computed on the basis of a 365/360 basis; that is, by applying the ratio of the
annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal
balances is outstanding.
Interest shall accrue from the date of disbursement of the principal amount
or portion thereof until paid, both before and after judgment, in accordance
with the terms set forth herein. The interest rate on this Note is subject to
change from time to time based on changes in an independent index which is the 1
year LIBOR rate. Lender's LIBOR rate is to be strictly interpreted and is not
intended to serve any purpose other than providing an index to determine the
interest rate used herein. Lender's LIBOR rate may not necessarily be the same
as the quoted offered side in the Eurodollar time deposit market by any
particular institution or service applicable to any interest period. As used
herein, Lender's LIBOR rate shall mean the rates per annum quoted by Lender as
Lender's 1 year LIBOR rate based upon quotes from the London Interbank Offered
Rate from the British Bankers Association Interest Settlement Rates, as quoted
for U.S. Dollars by Bloomberg, or other comparable services selected by the
Lender (the "Index"). The Index is not necessarily the lowest rate charged by
Lender on its loans. If the Index becomes unavailable during the term of this
loan, Lender may designate a substitute index after notifying Borrower. Lender
will tell Borrower the current Index rate upon Borrower's request. The interest
rate change will not occur more often than each year. Borrower understands that
Lender may make loans based on other rates as well. Borrower understands that
Lender may make loans based on other rates as well. The interest rate to be
applied to the unpaid balance of this Note will be a rate of 1.64 percentage
points (1.64%) over the Index. Whenever increases occur in the interest rate,
Lender may increase Borrower's payments to cover accruing interest.
Principal and interest shall be payable as follows: Interest accrued is to
be paid monthly commencing July 12, 2007, and on the same day of each month
thereafter. All principal and unpaid interest shall be paid in full on June 12,
2008.
All payments shall be applied first to late charges, if any, then accrued
interest and the remainder, if any, to principal.
This Promissory Note shall be a revolving line of credit under which
Borrower may repeatedly draw and repay funds, so long as no default has occurred
under the Loan Agreement of even date herewith between Lender and Borrower (the
"Loan Agreement") and so long as the aggregate, outstanding principal balance at
any time does not exceed the principal amount of this Promissory Note or the
Borrowing Base (as defined in the Loan Agreement). Disbursements under this
Promissory Note shall be made in accordance with the Loan Agreement.
This Promissory Note is made in accordance with the Loan Agreement and is
secured by the collateral identified in and contemplated by the Loan Agreement.
Borrower may prepay all or any portion of this Promissory Note at any
time without penalty. Any prepayment received by Lender after 2:00 p.m. Mountain
Time shall be deemed received on the following Banking Business Day (as defined
in the Loan Agreement).
If any Event of Default (as defined in the Loan Agreement) occurs, time
being the essence hereof, then the entire unpaid balance, with interest as
aforesaid, shall, at the election of the holder hereof and without notice of
such election, become immediately due and payable in full.
Upon default in payment of any principal or interest when due, whether due
at stated maturity, by acceleration, or otherwise, all outstanding principal
shall bear interest at a default rate from the date when due until paid, both
before and after judgment, which default rate shall be equal to three percent
(3.0%) per annum above the interest rate otherwise in effect, as provided
herein, adjusted as of the date of any change in the LIBOR rate.
If any Event of Default occurs, Borrower agrees to pay to the holder hereof
all collection costs, including reasonable attorney fees and legal expenses, in
addition to all other sums due hereunder.
This Promissory Note shall be governed by and construed in accordance with
the laws of the State of Utah.
Borrower acknowledges that by execution and delivery of this Promissory
Note Borrower has transacted business in the State of Utah and Borrower
voluntarily submits to, consents to, and waives any defense to the jurisdiction
of courts located in the State of Utah as to all matters relating to or arising
from this Promissory Note. EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER AND
EXCEPT AS PROVIDED IN THE ARBITRATION PROVISIONS IN THE LOAN AGREEMENT, THE
STATE AND FEDERAL COURTS LOCATED IN THE STATE OF UTAH SHALL HAVE SOLE AND
EXCLUSIVE JURISDICTION OF ANY AND ALL CLAIMS, DISPUTES, AND CONTROVERSIES,
ARISING UNDER OR RELATING TO THIS PROMISSORY NOTE. NO LAWSUIT, PROCEEDING, OR
ANY OTHER ACTION RELATING TO OR ARISING UNDER THIS PROMISSORY NOTE MAY BE
COMMENCED OR PROSECUTED IN ANY OTHER FORUM EXCEPT AS EXPRESSLY AGREED IN WRITING
BY LENDER.
Borrower and all endorsers, sureties and guarantors hereof hereby jointly
and severally waive presentment for payment, demand, protest, notice of protest,
notice of protest and of non-payment and of dishonor, and consent to extensions
of time, renewal, waivers or modifications without notice and further consent to
the release of any collateral or any part thereof with or without substitution.
IN WITNESS WHEREOF, Borrower has executed and delivered this Promissory
Note as of the day and year first above written.
SECURITY NATIONAL LIFE INSURANCE COMPANY,
a Utah corporation
By: s/s Scott M. Quist
------------------
Scott M. Quist, President
Security Agreement
This Security Agreement (the "Security Agreement") is made as of June 12,
2007, between Security National Life Insurance Company, a Utah corporation, the
"Borrower" under a Loan Agreement with Lender of the same date of this Security
Agreement, and Security National Financial Corporation, a Utah corporation, the
"Guarantor" under that Loan Agreement (collectively, "Grantor"), and Zions First
National Bank ("Lender"), pursuant to a Loan Agreement of even date herewith
between Borrower and Lender (the "Loan Agreement").
For good and valuable consideration, receipt of which is hereby
acknowledged, Grantors and Lender hereby agree as follows:
1. Definitions. Except as otherwise provided herein, terms defined in the
Loan Agreement shall have the same meanings when used herein. Terms defined in
the singular shall have the same meaning when used in the plural and vice versa.
Terms defined in the Uniform Commercial Code which are used herein shall have
the meanings set forth in the Uniform Commercial Code, except as expressly
defined otherwise. As used herein, the term:
"Collateral" means the collateral described in Section 2, Grant of Security
Interest, below.
"Default Rate" means the default interest rate provided in the Promissory
Note.
"Financial Obligations Collateral" means all Underlying Notes, instruments,
deeds of trust, mortgages, guarantees, and security agreements that are part of
the Collateral.
"Liquidation Costs" means the reasonable costs and out of pocket expenses
incurred by Lender in obtaining possession of any Collateral, in storage and
preparation for sale, lease or other disposition of any Collateral, in the sale,
lease, or other disposition of any or all of the Collateral, and/or otherwise
incurred in foreclosing on any of the Collateral, including, without limitation,
(a) reasonable attorneys fees and legal expenses, (b) transportation and storage
costs, (c) advertising costs, (d) sale commissions, (e) sales tax and license
fees, (f) costs for improving or repairing any of the Collateral, and (g) costs
for preservation and protection of any of the Collateral.
"Permitted Encumbrances" means liens for taxes and assessments not yet due
and payable or, if due and payable, those being contested in good faith by
appropriate proceedings and for which appropriate reserves are maintained,
security interests and liens created by the Loan Documents, and security
interests and liens authorized in writing by Lender.
"Uniform Commercial Code" means the Uniform Commercial Code as adopted now
or in the future in the State of Utah or any other state in which the Collateral
is located.
2. Grant of Security Interest. Grantors hereby grant to Lender a security
interest in the following personal property of Grantors (the "Collateral"):
a. Any and all Underlying Notes and instruments payable to or owing to
Security National Life Insurance Company or held by Security National Life
Insurance Company;
b. Any and all Underlying Notes and instruments payable to or owing to
Security National Mortgage Company that have been assigned to or are held
by Security National Life Insurance Company and which also qualify as
Underlying Notes under the Loan Agreement of the same date herewith between
Lender and Borrower;
c. Any and all deeds of trust, mortgages, and security agreements,
collateral that secure any of the foregoing obligations;
d. All guarantees and supporting obligations that are related to any
of the foregoing obligations; and
e. All amendments, modifications, renewals, extensions, replacements,
additions, and accessions to the foregoing and all proceeds thereof.
Grantors and Lender acknowledge their mutual intent that all security
interests contemplated herein are given as a contemporaneous exchange for new
value to Grantors, regardless of when advances to Grantors are actually made or
when the Collateral is acquired.
3. Debts Secured. The security interest granted by this Security Agreement
shall secure the following debts, obligations and liabilities of Grantors, to
Lender, including, without limitation, (a) the Promissory Note of Borrower in
favor of Lender of even date herewith in the original principal amount of Forty
Million Dollars ($40,000,000.00) (the "Promissory Note"), and all renewals,
extensions, modifications and replacements thereof (including any which increase
the original principal amount), (b) all obligations of Borrower or Guarantor
arising from or relating to the Loan Documents, including, without limitation,
this Security Agreement, (c) advances of the same kind and quality or relating
to this transaction, and (d) all overdrafts on any account of Grantors
maintained with Lender, now existing or hereafter arising.
Grantors and Lender expressly acknowledge their mutual intent that the
security interest created by this Security Agreement secure any and all future
debts, obligations, and liabilities of Grantors to Lender only upon the mutual
agreement of the parties at the time Lender extends such future credit to
Grantors.
4. Location of Grantors and Collateral. Grantors represents and warrants
that:
a. Borrower and Guarantor are corporations incorporated under the laws
of the State of Utah.
b. The complete and exact name of Borrower is Security National Life
Insurance Company. The complete and exact name of Guarantor is Security
National Financial Corporation.
c. During the five (5) years preceding the date of this Security
Agreement:
i. Grantors has not been known by nor used any legal, fictitious
or trade name;
ii. Grantors has not changed its name in any respect;
iii. Grantors has not been the surviving entity of a merger or
consolidation;
d. Grantors' chief executive office and principal place of business is
located at 5300 South 360 West, Salt Lake City, Utah, 84157.
e. Grantors' place of business is located at 5300 South 360 West, Salt
Lake City, Utah, 84157.
f. During the five (5) years preceding the date of this Security
Agreement, there has not been any change in any of the above locations.
Grantors agrees that they will not change its state of organization, name,
or any of the above locations or create any new locations for such matters
without giving Lender at least thirty (30) days prior written notice thereof.
5. Representations and Warranties Concerning Collateral. Grantors represent
and warrant that:
a. Grantors are the sole owner of the Collateral.
b. The Collateral is not subject to any security interest, lien, prior
assignment, or other encumbrance of any nature whatsoever except Permitted
Encumbrances.
c. The Financial Obligations Collateral, if any, are each a bona fide
obligation of the obligor identified therein for the amount identified in
the records of Grantors, except for normal and customary disputes which
arise in the ordinary course of business and which do not affect a material
portion of the Financial Obligations Collateral.
d. There are no defenses or setoffs to payment of the Financial
Obligations Collateral, if any, which can be asserted by way of defense or
counterclaim against Grantors or Lender, except for normal and customary
disputes which arise in the ordinary course of business and which do not
affect a material portion of the Financial Obligations Collateral.
e. Grantors have no knowledge of any fact or circumstance which would
materially impair the ability of any obligor on the Financial Obligations
Collateral, if any, to timely perform its obligations thereunder, except
those which arise in the ordinary course of business and which do not
affect a material portion of the Financial Obligations Collateral.
f. Any services performed or goods sold giving rise to the Financial
Obligations Collateral, if any, have been rendered or sold in compliance
with applicable laws, ordinances, rules, and regulations and in the
ordinary course of Grantors' business.
6. Covenants Concerning Collateral. Grantors covenant that:
a. Grantors will keep the Collateral free and clear of any and all
security interests, liens, assignments or other encumbrances, except
Permitted Encumbrances.
b. Grantors agree to furnish Lender with any information reasonably
needed to identify Collateral that Lender wishes to describe in its
financing statement promptly upon request. Grantors will execute and
deliver any documents (properly endorsed, if necessary) reasonably
requested by Lender for perfection or enforcement of any security interest
or lien, give good faith, diligent cooperation to Lender, and perform such
other acts reasonably requested by Lender for perfection and enforcement of
any security interest or lien, including, without limitation, obtaining
control for purposes of perfection with respect to Collateral consisting of
investment property, letter-of-credit rights, and electronic chattel paper.
Lender is authorized to file, record, or otherwise utilize such documents
as it deems necessary to perfect and/or enforce any security interest or
lien in the Collateral. Grantors acknowledges that they are not authorized
to file any financing statement or amendment or termination statement with
respect to any financing statement without the prior written consent of
Lender and agrees that it will not do so without the prior written consent
of Lender, subject to Grantors' rights under U.C.A. ss. 70A-9-509 of the
Utah Uniform Commercial Code or equivalent section of the Uniform
Commercial Code in any other jurisdiction. Grantors will pay the cost of
recording and filing the same in all public offices wherever recording or
filing is deemed by Lender to be necessary or desirable.
c. Borrower shall submit to Lender reports as to the Collateral, at
such times and in such form as Lender may reasonably request. Grantors will
at all times keep accurate and complete records of the Collateral. Lender
or its representatives may, at any time and from time to time, enter any
premises where the Collateral and/or the records pertaining to the
Collateral are located and inspect, inventory, audit, check, copy, and
otherwise review the Collateral and the records concerning the Collateral.
d. Upon the occurrence of an Event of Default and when Lender so
requests, all collections and other proceeds from the Financial Obligations
Collateral, if any, shall be deposited into an account designated by Lender
(the "Cash Collateral Account"), which account shall be under the sole and
exclusive control of Lender. Such proceeds and collections shall not be
commingled with any other funds and shall be promptly and directly
deposited into such account in the form in which received by Grantors. Such
proceeds and collections shall not be deposited in any other account and
said Cash Collateral Account shall contain no funds other than such
proceeds and collections. All or any portion of the funds on deposit in
said Cash Collateral Account may, in the sole discretion of Lender, be
applied from time to time as Lender elects to payment of obligations
secured by this Security Agreement or Lender may elect to turn over to
Grantors, from time to time, all or any portion of such funds.
e. Grantors agree to use diligent and good faith efforts to collect
the Financial Obligations Collateral, if any. Until written notice is given
by Lender, Grantors are authorized to collect the Financial Obligations
Collateral in a commercially reasonable manner. Lender, in its discretion,
may terminate such authority at any time whereupon Lender is authorized by
Grantors, without further act, to notify any and all account debtors and
obligors to make payment thereon directly to Lender, and to take possession
of all proceeds from the Financial Obligations Collateral, and to take any
action which Grantors might or could take to collect the Financial
Obligations Collateral, including the right to make any compromise,
discharge, or extension. Lender may exercise such collection rights at any
time, when either Grantor is in default under this Security Agreement or
the Loan Documents. Upon request of Lender, Grantors agree to execute and
deliver to Lender a notice to the account debtors and obligors instructing
said account debtors and obligors to pay Lender. Grantors further agree to
execute and deliver to Lender all other notices and similar documents
requested by Lender to facilitate collection of the Financial Obligations
Collateral.
f. All costs of collection of the Financial Obligations Collateral, if
any, including attorneys fees and legal expenses, shall be borne solely by
Grantors, whether such costs are incurred by or for Grantors or Lender. In
the event Lender elects to undertake direct collection of the Financial
Obligations Collateral, Grantors agree to deliver to Lender, if so
requested, all books, records, and documents in Grantors' possession or
under its control as may relate to the Financial Obligations Collateral or
as may be helpful to facilitate such collection. Lender shall have no
obligation to cause an attorneys demand letter to be sent, to file any
lawsuit, or to take any other legal action in collection of the Financial
Obligations Collateral. It is agreed that collection of the Financial
Obligations Collateral in a commercially reasonable manner does not require
that any such legal action be taken.
g. Grantors do hereby make, constitute, and appoint Lender and its
designees as Grantors' true and lawful attorney in fact, with full power of
substitution, such power to be exercised in the following manner: (1) upon
occurrence of an Event of Default, Lender may institute procedures whereby
payments and other proceeds of the Financial Obligations Collateral shall
be paid under a remittance account or lock box arrangement with Lender, or
Lender's agent, and pursuant to which Lender shall receive and open all
mail addressed to Grantors and remove therefrom any payments of the
Financial Obligations Collateral, if any; (2) upon occurrence of an Event
of Default, Lender may cause mail relating to the Financial Obligations
Collateral to be delivered to a designated address of Lender where Lender
may open all such mail and remove therefrom any payments of the Financial
Obligations Collateral; (3) upon occurrence of an Event of Default, Lender
may endorse Grantors' names upon notes, checks, acceptances, drafts, money
orders, or other forms of payment of the Financial Obligations Collateral;
(4) upon occurrence of an Event of Default, Lender may settle or adjust
disputes or claims in respect to the Financial Obligations Collateral for
amounts and upon such terms as Lender, in good faith, deems to be
advisable, in such case crediting Grantors with only the proceeds received
and collected by Lender after deduction of Lender's costs, including
reasonable attorneys fees and legal expenses; and (5) Lender may do any and
all other things necessary or proper to perfect and, upon occurrence of an
Event of Default, to protect the liens and rights of Lender created under
this Security Agreement.
h. Prior to the advancing of any funds under the Loan Agreement,
Grantors shall deliver to Lender the original of any of such instruments or
notes that are secured by Commercial Property or Construction Property
under the Loan Agreement that are being used as part of the Borrowing Base
as set forth in the Loan Agreement. For all other instruments or notes that
are secured by Underlying Property that is not Commercial Property or
Construction Property, Grantors may retain the original document or note.
Lender grants Grantors a revocable license to receive payments or rents
under all instruments or notes. Lender may revoke such license at any time
upon an occurrence of default under the Note, the Loan Agreement, this
Security Agreement. Upon such a revocation, Grantors shall immediately
endorse and deliver all instruments or notes to Lender as required by
Lender, along with all profits, payments, rents, or other monies received
by Grantors pursuant to such instruments or notes. For such other
instruments retained in original form by Grantors, Grantors may also sell
or assign such instruments or notes in the ordinary course of business as
long as Grantors are not in default under this Security Agreement, the Loan
Agreement, or the Promissory Note. In such instances, Lender will cooperate
with Grantors in allowing for the security interest in any such specific
instruments or chattel that are being sold to a bona fide purchaser to
terminate.
i. Grantors shall, immediately upon obtaining knowledge thereof,
report to Lender in writing any material claim or dispute asserted by any
obligor on any item of that Collateral, and any other material matters that
may affect the value, enforceability or collectability of any of that
Collateral. Grantors shall also immediately report to Lender (which may be
accomplished in any meetings with Lender to report on Collateral under the
Loan Agreement) any default on any item of Financial Obligations Collateral
under which Grantors shall take such action as foreclosing on or
repossessing any such Collateral.
j. Grantors shall not, without Lender's written consent, make any
material settlement, compromise or adjustment of any item of Financial
Obligations Collateral or grant any material discounts, extensions,
allowances or credits thereon. Grantors, however, may take such actions
that are customary and normal in its ordinary course and practice of
business without the Lender's written consent, such as granting extensions
of time for up to one year consistent with the Loan Agreement or imposing
default rates of interest in the event of default.
7. Right to Perform for Grantors. Lender may, in its sole discretion and
without any duty to do so, elect to discharge taxes, tax liens, security
interests, or any other encumbrance upon the Collateral, perform any duty or
obligation of Grantors, pay filing, recording, insurance and other charges
payable by Grantors, or provide insurance as provided herein if Grantors fail to
do so. Any such payments advanced by Lender shall be repaid by Grantors upon
demand, together with interest thereon from the date of the advance until
repaid, both before and after judgment, at the Default Rate.
8. Default. Time is of the essence of this Security Agreement. The
occurrence of any Event of Default shall constitute a default under this
Security Agreement.
No course of dealing or any delay or failure to assert any Event of Default
shall constitute a waiver of that Event of Default or of any prior or subsequent
Event of Default.
9. Remedies. Upon the occurrence of an Event of Default, Lender shall have
the following rights and remedies, in addition to all other rights and remedies
existing at law, in equity, or by statute or provided in the Loan Documents:
a. Lender shall have all the rights and remedies available under the
Uniform Commercial Code;
b. Lender shall have the right to enter upon any premises where the
Collateral or records pertaining to the Collateral may be and take
possession of the Collateral and such records;
c. Upon request of Lender, Grantors shall, at the expense of Grantors,
assemble the Collateral and records pertaining to the Collateral at a place
designated by Lender and tender the Collateral and such records to Lender;
and
d. Lender may sell, lease or otherwise dispose of any or all of the
Collateral and, after deducting the Liquidation Costs, apply the remainder
to pay, or to hold as a reserve against, the obligations secured by this
Security Agreement.
Grantors shall be liable for all deficiencies owing on any obligations
secured by this Security Agreement after liquidation of the Collateral. Lender
shall not have any obligation to clean-up or otherwise prepare any Collateral
for sale, lease, or other disposition.
The rights and remedies herein conferred are cumulative and not exclusive
of any other rights and remedies and shall be in addition to every other right,
power and remedy herein specifically granted or hereafter existing at law, in
equity, or by statute which Lender might otherwise have, and any and all such
rights and remedies may be exercised from time to time and as often and in such
order as Lender may deem expedient. No delay or omission in the exercise of any
such right, power or remedy or in the pursuance of any remedy shall impair any
such right, power or remedy or be construed to be a waiver thereof or of any
default or to be an acquiescence therein.
Upon the occurrence of any Event of Default, Grantors agree to pay all
costs and expenses, including reasonable attorneys fees and legal expenses,
incurred by or on behalf of Lender in enforcing, or exercising any remedies
under, this Security Agreement, and any other rights and remedies. Additionally,
Grantors agree to pay all Liquidation Costs. Any and all such costs, expenses,
and Liquidation Costs shall be payable by Grantors upon demand, together with
interest thereon from the date of the advance until repaid, both before and
after judgment, at the Default Rate.
Regardless of the occurrence of any Event of Default, Grantors agree to pay
all expenses, including reasonable attorneys fees and legal expenses, incurred
by Lender in any bankruptcy proceedings of any type involving Grantors, the
Collateral, or this Security Agreement, including, without limitation, expenses
incurred in modifying or lifting the automatic stay, determining adequate
protection, use of cash collateral, or relating to any plan of reorganization.
10. Notices. All notices or demands by any party hereto shall be in writing
and shall be sent as provided in the Loan Agreement.
11. Indemnification. Grantors shall indemnify Lender for any and all claims
and liabilities, and for damages which may be awarded or incurred by Lender, and
for all reasonable attorneys fees, legal expenses, and other out-of-pocket
expenses incurred in defending such claims, arising from or related in any
manner to the negotiation, execution, or performance by Grantors or by Lender in
good faith of this Security Agreement, but excluding any such claims based upon
breach or default by Lender or gross negligence or willful misconduct of Lender.
12. General. This Security Agreement is made for the sole and exclusive
benefit of Grantors and Lender and is not intended to benefit any third party.
No such third party may claim any right or benefit or seek to enforce any term
or provision of this Security Agreement.
Lender and its officers, directors, employees, representatives, agents, and
attorneys, shall not be liable to Grantors or any Guarantor for consequential
damages arising from or relating to any breach of contract, tort, or other wrong
in connection with or relating to this Security Agreement or the Collateral.
If the incurring of any debt by Grantors or the payment of any money or
transfer of property to Lender by or on behalf of Grantors or any Guarantor
should for any reason subsequently be determined to be "voidable" or "avoidable"
in whole or in part within the meaning of any state or federal law (collectively
"voidable transfers"), including, without limitation, fraudulent conveyances or
preferential transfers under the United States Bankruptcy Code or any other
federal or state law, and Lender is required to repay or restore any voidable
transfers or the amount or any portion thereof, or upon the advice of Lender's
counsel is advised to do so, then, as to any such amount or property repaid or
restored, including all reasonable costs, expenses, and attorneys fees of Lender
related thereto, the liability of Grantors and Guarantor, and each of them, and
this Security Agreement, shall automatically be revived, reinstated and restored
and shall exist as though the voidable transfers had never been made.
This Security Agreement shall be governed by and construed in accordance
with the laws of the State of Utah.
Any provision of this Security Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction only, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
All references in this Security Agreement to the singular shall be deemed
to include the plural if the context so requires and vice versa. References in
the collective or conjunctive shall also include the disjunctive unless the
context otherwise clearly requires a different interpretation.
All agreements, representations, warranties and covenants made by Grantors
shall survive the execution and delivery of this Security Agreement, the filing
and consummation of any bankruptcy proceedings, and shall continue in effect so
long as any obligation to Lender contemplated by this Security Agreement is
outstanding and unpaid, notwithstanding any termination of this Security
Agreement. All agreements, representations, warranties and covenants in this
Security Agreement shall bind the party making the same and its heirs and
successors, and shall be to the benefit of and be enforceable by each party for
whom made and their respective heirs, successors and assigns.
This Security Agreement, together with the Loan Documents, constitute the
entire agreement between Grantors and Lender as to the subject matter hereof and
may not be altered or amended except by written agreement signed by Grantors and
Lender. All other prior and contemporaneous agreements, arrangements, and
understandings between the parties hereto as to the subject matter hereof are,
except as otherwise expressly provided herein, rescinded.
IN WITNESS WHEREOF, Lender and Grantors have caused this Security Agreement
to be duly executed and delivered as of the date first above written.
Lender:
Zions First National Bank
By: s/s Todd Harris
---------------
Todd Harris
Vice President
Grantors:
Security National Life Insurance Company,
a Utah corporation
By: s/s Scott M. Quist
------------------
Scott M. Quist, President
Security National Financial Corporation,
a Utah corporation
By: s/s Scott M. Quist
------------------
Scott M. Quist, President
Guarantee
This Guarantee is made as of June 12, 2007, by Security National Financial
Corporation, a Utah corporation ("Guarantor"), to Zions First National Bank
("Lender"), as an inducement to Lender to enter into a Loan Agreement with and
to loan monies to Security National Life Insurance Company, a Utah corporation
("Borrower").
Lender, Borrower, and Guarantor are entering into a Loan Agreement of even
date herewith (the "Loan Agreement") pursuant to which Lender has agreed to make
a loan to Borrower evidenced by a Promissory Note in the original principal
amount of Forty Million Dollars ($40,000,000.00).
For good and valuable consideration, receipt of which is hereby
acknowledged, Guarantor agrees as follows:
1. Definitions. Except as otherwise provided herein, terms defined in the
Loan Agreement shall have the same meanings when used herein. Terms defined in
the singular shall have the same meaning when used in the plural and vice versa.
As used herein, the term:
"Collateral" includes, in addition to the meaning set forth in the Loan
Agreement, any other collateral for the Indebtedness which may be taken in the
future.
"Guarantee" includes, in addition to the meaning set forth in the Loan
Agreement, any other guarantee of the Indebtedness, now existing or given in the
future.
"Guarantor" includes, in addition to the meaning set forth in the Loan
Agreement, any other person or entity who guarantees the Indebtedness, now or in
the future.
"Indebtedness" means all liabilities, obligations, and indebtedness of
Borrower arising under the Loan Documents, including the Promissory Note and
including all costs and expenses, including reasonable attorneys fees and legal
expenses, for which Borrower is liable under the Loan Documents.
2. Guarantee. Guarantor absolutely and unconditionally guarantees to Lender that
Borrower shall promptly and fully perform, pay and discharge the Indebtedness.
If Borrower fails to pay any Indebtedness promptly as the same becomes due,
Guarantor agrees to pay the Indebtedness on demand.
3. Guarantee Unconditional. This Guarantee is an absolute and unconditional
guarantee of payment and not of collectability. The liability of Guarantor
hereunder is not conditional or contingent upon the genuineness, validity, or
enforceability of the Indebtedness or any of the Loan Documents or the value or
sufficiency of any Collateral.
4. Agreement to Pay Attorneys Fees. Guarantor agrees to pay all collection
costs, including reasonable attorneys fees and legal expenses, incurred by
Lender in enforcing this Guarantee.
Guarantor agrees to pay all expenses, including attorneys fees and legal
expenses, incurred by Lender in any bankruptcy proceedings of any type involving
Guarantor, including, without limitation, expenses incurred in modifying or
lifting the automatic stay, determining adequate protection, use of cash
collateral, or relating to any plan of reorganization.
5. Waiver by Guarantor. Guarantor expressly and absolutely, without
affecting the liability of Guarantor hereunder:
a. Waives notice of acceptance of this Guarantee, the offer of
guarantee contemplated by this Guarantee, or any other notice which may be
required relative to the acceptance of this Guarantee;
b. Waives demand, protest, notice of dishonor or nonpayment or
presentment for payment of the Promissory Note or any other evidence of the
Indebtedness;
c. Waives notice of transactions which have occurred under or relating
to or affecting this Guarantee;
d. Waives notice of any adverse change in the condition, financial or
otherwise, of Borrower or any Guarantor, any change concerning any
Collateral, or of any other fact which might materially increase
Guarantor's risk, whether or not Lender has knowledge of the same;
e. Waives any right to require Lender to (i) proceed against Borrower
by suit or otherwise, (ii) foreclose, proceed against, liquidate or exhaust
any Collateral, or (iii) exercise, pursue or enforce any right or remedy
Lender may have against Borrower, any Collateral, any Guarantor, any other
person or entity, or otherwise, prior to proceeding against Guarantor; and
6. Consent to Lender's Acts. Guarantor hereby authorizes and consents to
Lender at any time and from time to time, without notice or further consent of
Guarantor, doing the following and Guarantor agrees that the liability of
Guarantor shall not be released or affected by:
a. The taking or accepting, or the failure by Lender to take or
accept, any other Collateral or Guarantee for the Indebtedness;
b. Any modifications, amendments, extensions, renewals, replacements,
or termination of any of the Loan Documents, to the granting of any other
credit, and to the acceleration of maturity of the Indebtedness;
c. Any complete or partial release, substitution, subordination,
impairment, loss, compromise, or other modification of any Collateral or
any Guarantee;
d. The complete or partial release or substitution of Borrower or any
Guarantor;
e. Any renewal, extension, modification, replacement, acceleration,
consolidation, adjustment, indulgence, forbearance, waiver or compromise of
the payment of any part or all of the Indebtedness, or any liability of any
Guarantor, or the performance of any covenant contained in the Loan
Documents;
f. Any neglect, delay, omission, failure, or refusal of Lender to take
or prosecute any action for the collection of the Indebtedness or any part
thereof, or for the enforcement of any provision of any of the Loan
Documents, or any action in connection with any Collateral or any
Guarantee, including, without limitation, the failure of Lender to perfect
any security interest in any Collateral;
g. Any increase or decrease in the rate of interest on the
Indebtedness;
h. Acceptance of any partial and/or late payments on the Indebtedness;
i. Application of payments by, or recoveries from, Borrower or any
Guarantor, or any sums realized from any Collateral, in such manner and in
such order of priority as Lender deems proper, whether or not the
obligation to which the payment or recovery is applied is due at the time
of such application; and
j. Lender exercising any and all rights and remedies available to
Lender by law, at equity or by agreement, even if the exercise thereof may
affect, modify, or eliminate any Guarantor's right of subrogation against
Borrower or any other party.
7. Term of Guarantee. This Guarantee shall remain in full force and effect
until all Indebtedness has been fully paid. No termination of this Guarantee by
Guarantor shall be effective.
8. Cumulative Rights. The rights and remedies herein conferred are
cumulative and not exclusive of any other rights or remedies, and shall be in
addition to every other right, power, and remedy that Lender may have, whether
specifically granted herein, or hereafter existing at law, in equity, or by
statute; and any and all such rights and remedies may be exercised from time to
time and as often and in such order as Lender may deem expedient.
No delay or omission in the exercise or pursuance by Lender of any right,
power, or remedy shall impair any such right, power, or remedy or shall be
construed to be a waiver thereof.
9. Governing Law. This Guarantee shall be governed by and construed in
accordance with the laws of the State of Utah.
10. Binding Effect. This Guarantee may be executed and delivered to Lender
prior to the execution and delivery of the Loan Documents. This Guarantee shall
nonetheless be binding and enforceable upon its execution and delivery to
Lender.
11. Revival Clause. If the incurring of any debt by Borrower or the payment
of any money or transfer of property to Lender by or on behalf of Borrower,
Guarantor, or any other party should for any reason subsequently be determined
to be "voidable" or "avoidable" in whole or in part within the meaning of any
state or federal law (collectively "voidable transfers"), including, without
limitation, fraudulent conveyances or preferential transfers under the United
States Bankruptcy Code or any other federal or state law, and Lender is required
to repay or restore any voidable transfers or the amount or any portion thereof,
or upon the advice of Lender's counsel is advised to do so, then, as to any such
amount or property repaid or restored, including all reasonable costs, expenses,
and attorneys fees of Lender related thereto, the liability of Guarantor shall
automatically be revived, reinstated and restored and shall exist as though the
voidable transfers had never been made.
12. Financial Reports of Guarantor. Audited financial statements and
reports shall be prepared in accordance with generally accepted accounting
principles and shall fully and fairly represent Guarantor's financial condition
as of the date thereof and the results of Borrower's operations for the period
or periods covered thereby. Unaudited financial statements and reports shall
fully and fairly represent Guarantor's Borrower's financial condition as of the
date thereof and the results of Borrower's operations for the period or periods
covered thereby and shall be consistent with other financial statements
previously delivered to Lender.
Guarantor shall provide the following financial statements and reports to
Lender:
(a) Annual audited consolidating financial statements with an
unqualified opinion for each fiscal year of Borrower from an independent
accounting firm and in a form acceptable to Lender, to be delivered to
Lender within one hundred sixty (160) days of the end of the fiscal year.
(b) Quarterly financial statements for each fiscal quarter in a form
acceptable to Lender, to be delivered to Lender within sixty (60) days of
the end of the quarter. The quarterly financial statements shall include a
certification by the chief financial officer or chief executive officer of
Borrower that the quarterly financial statements fully and fairly represent
Borrower's financial condition as of the date thereof and the results of
operations for the period covered thereby and are consistent with other
financial statements previously delivered to Lender.
13. Financial Covenants of Guarantor. Guarantor covenants to comply with
the following financial covenants.
(a) Guarantor shall maintain a ratio of less than or equal to 1.25 of
funded senior debt to net worth (thereby allowing senior debt of up to 125%
of net worth) measured quarterly, compliance to be measured at a minimum on
Guarantor's quarterly and annual financial statements.
(b) Guarantor shall maintain a minimum net worth of Fifty Million
Dollars ($50,000,000.00) as measured by generally accepted accounting
principles, compliance to be measured at a minimum on Guarantor's quarterly
and annual financial statements. Minimum net worth is defined as total
assets minus total liabilities.
(c) Guarantor shall maintain a Trailing Twelve Month EBITDA of greater
than Thirteen Million Dollars ($13,000,000.00), compliance to be measured
at a minimum on Guarantor's quarterly and annual financial statements.
"EBITDA" means earnings (excluding extraordinary gains and losses realized
other than in the ordinary course of business and excluding the sale or
writedown of intangible or capital assets) before interest, taxes,
depreciation, and amortization, determined in accordance with generally
accepted accounting principles.
14. Severability and Interpretation. Any provision of this Guarantee which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction only, be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. The headings in
this Guarantee are inserted for convenience only and shall not be considered
part of the Guarantee nor be used in its interpretation. All references in this
Guarantee to the singular shall be deemed to include the plural when the context
so requires, and vice versa. References in the collective or conjunctive shall
also include the disjunctive unless the context otherwise clearly requires a
different interpretation.
15. Continuing Agreement. All agreements, representations, warranties, and
covenants made herein by Guarantor shall survive the execution and delivery of
this Guarantee and shall continue in effect so long as the Indebtedness or any
portion thereof is outstanding and unpaid. All agreements, representations,
warranties, and covenants made herein by Guarantor shall survive any bankruptcy
proceedings. This Guarantee shall bind the party making the same, and its
successors, assigns, heirs, executors, and personal representatives. The death,
insolvency, bankruptcy, disability, or lack of corporate power of Borrower,
Guarantor, or any other person or entity at any time will not affect this
Guarantee.
16. Joint and Several Liability. Guarantor shall be jointly and severally
liable with Borrower for the Indebtedness and for all obligations and
liabilities arising under this Guarantee.
17. Disclosure of Information. Guarantor hereby consents to Lender
disclosing to any financial institution or investor providing financing for
Lender, any and all information, knowledge, reports and records, including,
without limitation, financial statements, concerning Guarantor.
18. Consent to Utah Jurisdiction and Exclusive Jurisdiction of Utah Courts.
Guarantor acknowledges that by execution and delivery of this Guarantee,
Guarantor has transacted business in the State of Utah and Guarantor voluntarily
submits to, consents to, and waives any defense to the jurisdiction of courts
located in the State of Utah as to all matters relating to or arising from this
Guarantee. EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER AND EXCEPT AS
PROVIDED IN THE ARBITRATION PROVISIONS IN THE LOAN AGREEMENT, THE STATE AND
FEDERAL COURTS LOCATED IN THE STATE OF UTAH SHALL HAVE SOLE AND EXCLUSIVE
JURISDICTION OF ANY AND ALL CLAIMS, DISPUTES, AND CONTROVERSIES, ARISING UNDER
OR RELATING TO THIS GUARANTEE. NO LAWSUIT, PROCEEDING, OR ANY OTHER ACTION
RELATING TO OR ARISING UNDER THIS GUARANTEE MAY BE COMMENCED OR PROSECUTED IN
ANY OTHER FORUM EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER.
19. Entire Agreement. This Guarantee together with the Loan Agreement (and
any other loan documents referenced in the Loan Agreement) constitute the entire
agreement between Lender and Guarantor concerning the subject matter hereof and
may not be altered or amended except by written agreement signed by Lender and
Guarantor. All other prior and contemporaneous agreements, arrangements, and
understandings between the parties hereto as to the subject matter hereof are
rescinded.
IN WITNESS WHEREOF, the parties hereto have caused this Guarantee to be
duly executed and delivered as of the date first above written.
Guarantor:
Security National Financial Corporation
By: s/s Scott M. Quist
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Scott M. Quist
President