SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2004 Commission File Number: 0-9341
- ------------------------------- ------------------------------
SECURITY NATIONAL FINANCIAL CORPORATION
---------------------------------------
Exact Name of Registrant.
UTAH 87-0345941
- ------------------------------- -------------------------
(State or other jurisdiction of IRS Identification Number
incorporation or organization
5300 South 360 West, Salt Lake City, Utah 84123
- ----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code (801) 264-1060
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $2.00 par value 5,028,062
- ------------------------------------- ----------------------------------
Title of Class Number of Shares Outstanding as of
June 30, 2004
Class C Common Stock, $.20 par value 6,255,879
- ------------------------------------ ----------------------------------
Title of Class Number of Shares Outstanding as of
June 30, 2004
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
- ------ --------
Consolidated Statement of Earnings - Six and three months ended
June 30, 2004 and 2003 (unaudited)............................................................3
Consolidated Balance Sheet - June 30, 2004, (unaudited)
and December 31, 2003.......................................................................4-5
Consolidated Statement of Cash Flows -
Six months ended June 30, 2004 and 2003 (unaudited)...........................................6
Notes to Consolidated Financial Statements.................................................7-10
Item 2 Management's Discussion and Analysis of Financial Condition
- ------ and Results of Operations...................................................................11-13
Item 3 Quantitative and Qualitative Disclosures about Market Risk......................................14
- ------
Item 4 Controls and Procedures.........................................................................15
- ------
PART II - OTHER INFORMATION
Other Information............................................................................15-17
Signature Page..................................................................................18
Certifications...............................................................................19-21
2
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
Revenues: 2004 2003 2004 2003
- -------- ---- ---- ---- ----
Insurance premiums and other considerations $ 12,800,139 $11,590,095 $ 6,403,965 $ 5,725,668
Net investment income 7,798,307 8,365,540 4,242,060 4,445,168
Net mortuary and cemetery sales 5,952,887 5,295,245 2,896,482 2,710,389
Realized gains on investments and other assets 5,323 -- -- --
Mortgage fee income 35,323,455 52,912,149 17,254,725 31,156,229
Other 430,186 183,425 240,148 59,303
------------ ----------- ------------ -----------
Total revenues 62,310,297 78,346,454 31,037,380 44,096,757
------------ ----------- ------------ -----------
Benefits and expenses:
- ----------------------
Death benefits 6,898,118 7,043,060 3,125,167 3,224,741
Surrenders and other policy benefits 771,173 1,101,092 291,334 495,936
Increase in future policy benefits 4,003,080 2,807,653 2,134,348 1,391,082
Amortization of deferred policy acquisition costs
and cost of insurance acquired 2,764,792 2,268,779 1,565,517 1,309,884
General and administrative expenses:
Commissions 26,800,161 39,220,239 12,593,105 23,369,602
Salaries 7,307,930 6,957,688 3,726,286 3,735,297
Other 9,740,440 10,183,897 5,047,561 5,563,786
Interest expense 1,059,566 1,799,438 694,243 975,970
Cost of goods and services sold
of the mortuaries and cemeteries 1,137,344 1,123,738 539,812 562,871
------------ ----------- ------------ -----------
Total benefits and expenses 60,482,604 72,505,584 29,717,373 40,629,169
------------ ----------- ------------ -----------
Earnings before income taxes 1,827,693 5,840,870 1,320,007 3,467,588
Income tax expense (525,872) (1,920,227) (397,754) (1,252,685)
Minority interest (income) loss of subsidiary 23,705 (14,406) 1,691 6,284
------------ ----------- ------------ -----------
Net earnings $ 1,325,526 $ 3,906,237 $ 923,944 $ 2,221,187
============ =========== ============ ===========
Net earnings per common share $ .23 $ .74 $ .16 $ .42
============ =========== ============ ===========
Weighted average outstanding common shares 5,656,575 5,301,245 5,662,761 5,317,068
============ =========== ============ ===========
Net earnings per common share-assuming dilution $ .23 $ .71 $ .16 $ .40
============ =========== ============ ===========
Weighted average outstanding common shares
assuming-dilution 5,793,655 5,514,930 5,716,048 5,537,942
============ =========== ============ ===========
See accompanying notes to consolidated financial statements.
3
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2004 December 31,
(Unaudited) 2003
------------ ------------
Assets:
- -------
Insurance-related investments:
Fixed maturity securities held
to maturity, at amortized cost $ 63,025,570 $ 37,293,989
Fixed maturity securities available
for sale, at market 13,168,905 14,270,037
Equity securities available for sale,
at market 3,845,352 3,453,444
Mortgage loans on real estate 49,574,318 29,914,745
Real estate, net of accumulated
depreciation and allowances for losses 9,814,064 8,519,680
Policy, student and other loans 12,028,867 11,753,617
Short-term investments 4,157,735 2,054,248
------------- --------------
Total insurance-related
Investments 155,614,811 107,259,760
------------- --------------
Restricted assets of cemeteries and mortuaries 5,060,808 4,745,709
------------- --------------
Cash 13,632,731 19,704,358
------------- --------------
Receivables:
Trade contracts 7,529,555 8,600,212
Mortgage loans sold to investors 73,975,382 114,788,185
Receivable from agents 1,268,383 1,318,958
Receivable from officers 19,540 37,540
Other 1,552,584 1,086,523
------------- --------------
Total receivables 84,345,444 125,831,418
Allowance for doubtful accounts (1,705,057) (1,706,678)
------------- --------------
Net receivables 82,640,387 124,124,740
------------- --------------
Policyholder accounts on deposit
with reinsurer 6,765,401 6,795,983
Land and improvements held for sale 8,387,771 8,387,061
Accrued investment income 1,617,899 1,142,690
Deferred policy and pre-need acquisition costs 18,536,540 17,202,489
Property, plant and equipment, net 10,809,780 11,009,416
Cost of insurance acquired 14,669,152 14,980,763
Excess of cost over net assets
of acquired subsidiaries 683,191 683,191
Other 896,891 873,424
------------- --------------
Total assets $ 319,315,362 $ 316,909,584
============= ==============
See accompanying notes to consolidated financial statements.
4
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
June 30, 2004 December 31,
(Unaudited) 2003
------------- ------------
Liabilities:
- ------------
Future life, annuity, and other policy benefits $ 222,694,714 $ 218,793,693
Unearned premium reserve 2,140,677 1,945,203
Bank loans payable 12,368,301 14,422,670
Notes and contracts payable 2,970,321 3,440,694
Deferred pre-need cemetery and funeral
contracts revenues and estimated future
cost of pre-need sales 10,469,677 10,520,280
Accounts payable 1,181,690 1,274,183
Funds held under reinsurance treaties 1,288,832 1,294,589
Other liabilities and accrued expenses 10,261,903 11,171,368
Income taxes 11,489,361 10,914,845
------------- --------------
Total liabilities 274,865,476 273,777,525
------------- --------------
Commitments and contingencies -- --
------------- --------------
Minority interest 3,911,529 3,956,628
------------- --------------
Stockholders' Equity:
- ---------------------
Common stock:
Class A: $2.00 par value, authorized
10,000,000 shares, issued 6,332,016
shares in 2004 and 6,275,104 shares
in 2003 12,664,032 12,550,208
Class C: $0.20 par value, authorized
7,500,000 shares, issued 6,331,215
shares in 2004 and 6,469,638 shares
in 2003 1,266,243 1,293,927
------------- --------------
Total common stock 13,930,275 13,844,135
Additional paid-in capital 13,813,305 13,569,582
Accumulated other comprehensive income
(loss) and other items, net of deferred
taxes (290,305) (437,973)
Retained earnings 16,410,418 15,414,681
Treasury stock at cost (1,303,954 Class A
shares and 75,336 Class C shares in 2004;
1,276,518 Class A shares and 75,336 Class
C shares in 2003, held by affiliated
companies) (3,325,336) (3,214,994)
------------- --------------
Total stockholders' equity 40,538,357 39,175,431
------------- --------------
Total liabilities and stockholders' equity $ 319,315,362 $ 316,909,584
============= ==============
See accompanying notes to consolidated financial statements.
5
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2004 2003
---- ----
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $ 46,943,004 $ (25,866,840)
------------- --------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (29,806,585) (7,580,086)
Calls and maturities - fixed
maturity securities 5,653,378 5,183,815
Securities available for sale:
Calls and maturities - fixed
maturity securities 655,000 360,000
Purchases of equity securities -- (51,921)
Purchases of short-term investments (20,986,578) (11,648,133)
Sales of short-term investments 18,296,490 13,875,484
Purchases of restricted assets (179,822) 23,975
Mortgage, policy, and other loans made (37,985,756) (7,616,206)
Payments received for mortgage,
real estate, policy, and other loans 18,547,403 5,860,877
Purchases of property, plant,
and equipment (620,589) (614,440)
Purchases of real estate (1,655,862) (673,888)
Purchase of subsidiary (304,042) --
Sale of real estate 232,444 477,979
------------- --------------
Net cash used in investing activities (48,154,519) (2,402,544)
------------- --------------
Cash flows from financing activities:
Annuity and pre-need contract receipts 2,655,402 2,951,308
Annuity and pre-need contract withdrawals (5,245,367) (5,290,214)
Repayment of bank loans and notes and
contracts payable (2,270,147) (2,216,333)
Other -- 17,967
------------- --------------
Net cash used in financing activities (4,860,112) (4,537,272)
------------- --------------
Net change in cash (6,071,627) (32,806,656)
Cash at beginning of period 19,704,358 38,199,041
------------- --------------
Cash at end of period $ 13,632,731 $ 5,392,385
============= ==============
See accompanying notes to consolidated financial statements.
6
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 (Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2004, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 2003, included
in the Company's Annual Report on Form 10-K (file number 0-9341).
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
The estimates susceptible to significant change are those used in determining
the liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, and those used in
determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
2. Comprehensive Income
--------------------
For the six months ended June 30, 2004 and 2003, total comprehensive income
amounted to $1,473,194 and $2,005,805, respectively.
For the three months ended June 30, 2004 and 2003, total comprehensive income
amounted to $769,711 and $2,306,033, respectively.
3. Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company has adopted SFAS No. 123,
"Accounting for Stock-Based Compensation". In accordance with the provisions of
SFAS 123, the Company has elected to continue to apply Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25"), and related interpretations in accounting for its stock option plans.
In accordance with APB Opinion No. 25, no compensation cost has been recognized
for these plans. Had compensation cost for these plans been determined based
upon the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123, net earnings for the six months ended June 30, 2004 and 2003
would have been reduced by the following:
Six Months Ended June 30,
2004 2003
---- ----
Net earnings as reported $1,325,526 $3,906,237
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
tax effects -- (133,000)
---------- -----------
Pro forma net earnings $1,325,526 $3,773,237
========== ===========
7
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 (Unaudited)
Six Months Ended June 30,
2004 2003
---- ----
Net earnings per common share:
Basic - as reported $ .23 $ .74
Basic - pro forma $ .23 $ .71
Diluted - as reported $ .23 $ .71
Diluted - pro forma $ .23 $ .68
4. Earnings Per Share
------------------
The basic and diluted earnings per share amounts were calculated as follows:
Six Months Ended June 30,
2004 2003
---- ----
Numerator:
Net income $1,325,526 $3,906,237
========== ==========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 5,656,575 5,301,245
========== ==========
Effect of dilutive securities:
Employee stock options 135,496 208,961
Stock appreciation rights 1,584 4,724
---------- ----------
Dilutive potential common shares 137,080 213,930
---------- ----------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions 5,793,655 5,514,247
========== ==========
Basic earnings per share $ .23 $ .74
========== ==========
Diluted earnings per share $ .23 $ .71
========== ==========
Three Months Ended June 30,
2004 2003
---- ----
Numerator:
Net income $ 923,944 $2,221,187
========== ==========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 5,662,761 5,317,068
========== ==========
Effect of dilutive securities:
Employee stock options 52,007 216,081
Stock appreciation rights 1,280 4,793
---------- ----------
Dilutive potential common shares 53,287 220,874
---------- ----------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions 5,716,048 5,537,942
========== ==========
Basic earnings per share $ .16 $ .42
========== ==========
Diluted earnings per share $ .16 $ .40
========== ==========
8
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, (Unaudited)
5. Business Segment
----------------
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
For the Six Months Ended
June 30, 2004
- -------------
Revenues from
external customers $ 17,066,002 $ 6,456,006 $38,788,289 $ -- $ 62,310,297
Intersegment revenues 4,149,885 -- 122,084 (4,271,969) --
Segment profit (loss)
before income taxes 1,025,684 522,895 279,114 -- 1,827,693
Identifiable assets 305,703,959 45,689,540 18,995,687 (51,073,824) 319,315,362
For the Six Months Ended
June 30, 2003
- -------------
Revenues from
external customers $ 14,774,646 $ 5,828,578 $57,743,230 $ -- $ 78,346,454
Intersegment revenues 4,715,862 -- -- (4,715,862) --
Segment profit (loss)
before income taxes 603,100 (89,628) 5,327,398 -- 5,840,870
Identifiable assets 304,595,198 43,015,895 24,293,368 (52,165,995) 319,738,466
For the Three Months Ended
June 30, 2004
- -------------
Revenues from
external customers $ 8,708,779 $ 3,229,620 $19,098,981 $ -- $ 31,037,380
Intersegment revenues 1,776,872 -- 64,780 (1,841,652) --
Segment profit (loss)
before income taxes 592,481 175,146 552,380 -- 1,320,007
For the Three Months Ended
June 30, 2003
- -------------
Revenues from
external customers $ 7,338,524 $ 2,987,765 $33,770,468 $ -- $ 44,096,757
Intersegment revenues 2,442,589 -- -- (2,442,589) --
Segment profit 715,561 7,651 2,744,376 -- 3,467,588
9
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004, (Unaudited)
6. Recent Acquisition
------------------
On March 16, 2004, with the approval of the Louisiana Insurance Department,
Security National Life Insurance Company purchased all of the outstanding common
stock of Paramount Security Life Insurance Company, a Louisiana domiciled
company (Paramount) located in Shreveport, Louisiana. As of December 31, 2003,
Paramount had 9,383 policies in force and approximately 29 agents. The purchase
consideration was $4,397,994 and was effective January 26, 2004. For the year
ended December 31, 2003, Paramount had revenues of $614,000 and net income of
$76,000. As of December 31, 2003, statutory assets and capital and surplus were
$6,073,000 and $4,100,000, respectively.
Paramount is licensed in the State of Louisiana and is permitted to appoint
agents who do not have a full life insurance license. These agents are limited
to selling small life insurance policies in the final expense market. The
Company believes that with this license it will be able to expand its operations
in Louisiana. The Company is servicing Paramount policyholders out of its
Jackson, Mississippi office, and has closed the Shreveport office.
7. Recent Accounting Pronouncements
--------------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", and subsequently issued a revision to this
Interpretation in December 2003. This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies to those variable interest entities
considered to be special-purpose entities no later than December 31, 2003. The
Interpretation must also be applied to all other variable interest entities no
later than March 31, 2004. The adoption of Interpretation No. 46 did not have a
material impact on the Company's financial position or results of operations.
8. Subsequent Event
----------------
On July 16, 2004, the Company entered into an employment agreement with Scott M.
Quist, its President, General Counsel and Chief Operating Officer. The agreement
is effective as of December 4, 2003 and has a five-year term, but the Company
has agreed to renew the agreement on December 4, 2008 and 2013 for additional
five-year terms, provided Mr. Quist performs his duties with usual and customary
care and diligence. Under the terms of the agreement, Mr. Quist is to devote his
full time to the Company serving as its President, General Counsel and Chief
Operating Officer at not less than his current salary and benefits. The Company
also agrees to maintain a group term life insurance policy of not less than
$1,000,000 on Mr. Quist's life and a whole life insurance policy in the amount
of $500,000 on Mr. Quist's life. In the event of disability, Mr. Quist's salary
would be continued for up to five years at 75% of its current level.
In the event of a sale or merger of the Company and Mr. Quist is not retained in
his current position, the Company would be obligated to continue Mr. Quist's
current compensation and benefits for seven years following the merger or sale.
The agreement further provides that Mr. Quist is entitled to receive annual
retirement benefits beginning (i) one month from the date of his retirement (to
commence no sooner than age 65), (ii) five years following complete disability,
or (iii) upon termination of his employment without cause. These retirement
benefits are to be paid for a period of ten years in annual installments in the
amount equal to 75% of his then current rate of compensation. However, in the
event that Mr. Quist dies prior to receiving all retirement benefits thereunder,
the remaining benefits are to be paid to his heirs. The Company accrued $328,000
in fiscal 2003 to cover the present value of anticipated retirement benefits
under the employment agreement.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Overview
The Company's operations over the last several years generally reflect three
trends or events which the Company expects to continue: (i) increased attention
to "niche" insurance products, such as the Company's funeral plan policies and
traditional whole-life products; (ii) emphasis on cemetery and mortuary
business; and (iii) capitalizing on historically lower interest rates by
originating and refinancing mortgage loans.
During the six months ended June 30, 2004, Security National Mortgage Company
("SNMC") experienced a decrease in revenue and expenses due to the decrease in
loan volume of its operations as a result of increased interest rates. 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
6,551 ($1,016,000,000) and 9,995 ($1,462,000,000) loans, respectively, for the
six months ended June 30, 2004 and 2003.
Results of Operations
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Total revenues decreased by $16,036,000, or 20.5%, to $62,310,000 for the six
months ended June 30, 2004, from $78,346,000 for the six months ended June 30,
2003. Contributing to this decrease in total revenues was a $17,589,000 decrease
in mortgage fee income, and a $567,000 decrease in net investment income.
Insurance premiums and other considerations increased by $1,210,000, or 10.4%,
to $12,800,000 for the six months ended June 30, 2004, from $11,590,000 for the
comparable period in 2003. This increase was primarily due to the additional
insurance premiums that were realized on new insurance sales.
Net investment income decreased by $567,000, or 6.8%, to $7,798,000 for the six
months ended June 30, 2004, from $8,365,000 for the comparable period in 2003.
This decrease was primarily attributable to reduced borrower interest income on
fewer mortgage loans originated by Security National Mortgage Company during the
quarter.
Net mortuary and cemetery sales increased by $658,000, or 12.4%, to $5,953,000
for the six months ended June 30, 2004, from $5,295,000 for the comparable
period in 2003. This increase was primarily due to additional cemetery and
mortuary sales.
Mortgage fee income decreased by $17,589,000, or 33.2%, to $35,323,000 for the
six months ended June 30, 2004, from $52,912,000 for the comparable period in
2003. This decrease was primarily attributable to a decrease in the number of
loan originations during the six months of 2004 due to an increase in interest
rates resulting in fewer borrowers refinancing their mortgage loans.
11
Total benefits and expenses were $60,483,000, or 97.1% of total revenues for the
six months ended June 30, 2004, as compared to $72,506,000 or 92.6% of total
revenues for the comparable period in 2003. The lower margin in 2004 is due to
fixed expenses, which did not decrease proportionally with the drop in revenue.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $720,000, or 6.6%, to $11,672,000
for the six months ended June 30, 2004, from $10,952,000, for the comparable
period in 2003. This increase was primarily the result of an increase in
reserves for policyholders.
Amortization of deferred policy acquisition costs and cost of insurance acquired
increased by $496,000, or 21.9%, to $2,765,000 for the six months ended June 30,
2004, from $2,269,000, for the comparable period in 2003. This increase was
primarily due to the additional insurance premiums for the period.
General and administrative expenses decreased by $12,513,000, or 22.2%, to
$43,849,000 for the six months ended June 30, 2004, from $56,362,000, for the
comparable period in 2003. This decrease primarily resulted from a decrease in
commissions due to fewer mortgage loan originations having been made by Security
National Mortgage Company during the six months of 2004.
Interest expense decreased by $739,000, or 41.1%, to $1,060,000 for the six
months ended June 30, 2004, from $1,799,000, for the comparable period in 2003.
This decrease was primarily due to reduced warehouse lines of credit required
for fewer mortgage loan originations by Security National Mortgage Company.
Cost of goods and services sold of the mortuaries and cemeteries increased by
$13,000, or 1.2%, to $1,137,000, for the six months ended June 30, 2004, from
$1,124,000 for the comparable period in 2003. This increase was primarily due to
increased sales.
Second Quarter of 2004 Compared to Second Quarter of 2003
Total revenues decreased by $13,059,000, or 29.6% to $31,037,000 for the three
months ended June 30, 2004, from $44,097,000 for the three months ended June 30,
2003. Contributing to this decrease in total revenues was a $13,902,000 decrease
in mortgage fee income, and a $203,000 decrease in net investment income.
Insurance premiums and other considerations increased by $678,000, or 11.8%, to
$ 6,404,000 for the three months ended June 30, 2004, from $5,726,000 for the
comparable period in 2003. This increase was primarily due to the additional
insurance premiums that were realized on new insurance sales.
Net investment income decreased by $203,000, or 4.6%, to $4,242,000 for the
three months ended June 30, 2004, from $4,445,000 for the comparable period in
2003. This decrease was primarily attributable to reduced borrower interest
income on fewer mortgage loans originated by Security National Mortgage Company
during the second quarter.
Net mortuary and cemetery sales increased by $186,000, or 6.9%, to $2,896,000
for the three months ended June 30, 2004, from $2,710,000 for the comparable
period in 2003. This increase was primarily due to additional cemetery and
mortuary sales.
12
Mortgage fee income decreased by $13,901,000, or 44.6%, to $17,255,000 for the
three months ended June 30, 2004, from $31,156,000 for the comparable period in
2003. This decrease was primarily attributable to a decrease in the number of
loan originations during the second quarter of 2004 due to an increase in
interest rates resulting in fewer borrowers refinancing their mortgage loans.
Total benefits and expenses were $29,717,000, or 95.7% of total revenues for the
three months ended June 30 2004, as compared to $40,629,000, or 92.1% of total
revenues for the comparable period in 2003. The lower margin in 2004 is due to
fixed expenses, which did not decrease proportionally with the drop in revenue.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $439,000, or 8.6%, to $5,551,000
for the three months ended June 30, 2004, from $5,112,000 for the comparable
period in 2003. This increase was primarily the result of an increase in
reserves for policyholders.
Amortization of deferred policy acquisition costs and cost of insurance acquired
increased by $256,000, or 19.5%, to $1,566,000 for the three months ended June
30, 2004, from $1,310,000 for the comparable period in 2003. This increase was
primarily due to the additional insurance premiums for the period.
General and administrative expenses decreased by $11,302,000, or 34.6%, to
$21,367,000 for the three months ended June 30, 2004, from $32,669,000 for the
comparable period in 2003. This decrease primarily resulted from a decrease in
commissions due to fewer mortgage loan originations having been made by Security
National Mortgage Company during the second quarter of 2004.
Interest expense decreased by $282,000, or 28.9%, to $694,000 for the three
months ended June 30, 2004, from $976,000 for the comparable period in 2003.
This decrease was primarily due to reduced warehouse lines of credit required
for fewer mortgage loan originations by Security National Mortgage Company.
Cost of goods and services sold of the mortuaries and cemeteries decreased by
$23,000, or 4.1%, to $540,000 for the three months ended June 30, 2004, from
$563,000 for the comparable period in 2003. This decrease was primarily due to
the sales mix being greater for cemetery sales than mortuary. Cost of goods sold
is lower for cemetery versus mortuary.
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments, or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and operating expenses.
The Company attempts to match the duration of invested assets with its
policyholder and cemetery and mortuary liabilities. The Company may sell
investments other than those held-to-maturity in the portfolio to help in this
timing; however, to date, that has not been necessary. The Company purchases
short-term investments on a temporary basis to meet the expectations of
short-term requirements of the Company's products.
13
The Company's investment philosophy is intended to provide a rate of return,
which will persist during the expected duration of policyholder and cemetery and
mortuary liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominantly in fixed maturity
securities, mortgage loans, and the warehousing of mortgage loans on a
short-term basis before selling the loans to investors in accordance with the
requirements and laws governing the life insurance subsidiaries. Bonds owned by
the life insurance subsidiaries amounted to $76,194,000 as of June 30, 2004,
compared to $51,564,000 as of December 31, 2003. This represents 49% and 48% of
the total insurance-related investments as of June 30, 2004, and December 31,
2003, respectively. Generally, all bonds owned by the life insurance
subsidiaries are rated by the National Association of Insurance Commissioners.
Under this rating system, there are six categories used for rating bonds. At
June 30, 2004 and December 31, 2003, 1% ($1,316,000) and 3% ($1,739,000) of the
Company's total investment in bonds were invested in bonds in rating categories
three through six, which are considered non-investment grade.
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, 2004, and
December 31, 2003, the life insurance subsidiary exceeded the regulatory
criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $55,877,000 as of June 30, 2004, as compared to $57,039,000 as
of December 31, 2003. Stockholders' equity as a percent of capitalization
increased to 73% as of June 30, 2004, from 69% as of December 31, 2003.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2003 was 8.6% as compared
to a rate of 10.7% for 2002. The 2004 lapse rate to date has been approximately
the same as 2003.
At June 30, 2004, $27,368,000 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, 2003.
14
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures - The Company's principal
executive officer and principal financial officer have reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the "Exchange Act") as of the end of the period covered by this
quarterly report. Based on that evaluation, the principal executive officer and
the principal financial officer have concluded that the Company's disclosure
controls and procedures are effective, providing them with material information
relating to the Company as required to be disclosed in the reports the Company
files or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls - There were no significant changes in the
Company's internal controls over financial reporting or in other factors that
could significantly affect the Company's internal controls and procedures
subsequent to the date of their most recent evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
Part II Other Information:
Item 1. Legal Proceedings
An action was brought against the Company in May 2001, by Glenna Brown Thomas
individually and as personal representative of the Estate of Lynn W. Brown in
the Third Judicial Court, Salt Lake County, Utah. The action asserts that
Memorial Estates delivered to Lynn W. Brown six stock certificates representing
2,000 shares in 1970 and 1971. Mr. Brown died in 1972. It is asserted that at
the time the 2,000 shares were issued and outstanding, such represented a 2%
ownership of Memorial Estates. It is alleged Mr. Brown was entitled to
preemptive rights and that after the issuance of the stock to Mr. Brown there
were further issuances of stock without providing written notice to Mr. Brown or
his estate with respect to an opportunity to purchase more stock.
It is also asserted among other things that Thomas "has the right to a transfer
of Brown's shares to Thomas on defendants' (which includes Security National
Financial Corporation as well as Memorial Estates, Inc.) books and to
restoration of Brown's proportion of share ownership in Memorial at the time of
his death by issuance and delivery to Thomas of sufficient shares of defendant's
publicly traded and unrestricted stock in exchange for the 2,000 shares of
Memorial stock and payment of all dividends from the date of Thomas's demand, as
required by Article XV of the Articles of Incorporation." The formal discovery
cutoff was January 15, 2004. The Company has been verbally informed that Thomas
will dismiss the case but such has not been communicated in writing. Until the
foregoing actually happens, the Company intends to vigorously defend the matter,
including an assertion that the statute of limitations bars the claims.
An action was brought against Southern Security Life Insurance Company by
National Group Underwriters, Inc. ("NGU") in state court in the State of Texas.
The case was removed by the Company to the United States District Court for the
Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E.
An amended complaint was filed on or about July 18, 2001. The amended complaint
asserted that NGU had a contract with the Company wherein NGU would submit
applications for certain policies of insurance to be issued by the Company. It
was alleged that disputes had arisen between NGU and the Company with regard to
the calculation and payment of certain commissions as well as certain production
bonuses.
15
NGU alleged that it had been damaged far in excess of the $75,000 minimum
jurisdictional limits of the federal court. NGU also sought attorney's fees and
costs as well as prejudgment and post judgment interest. A second amended
complaint and a third amended complaint, which included a fraud claim, were
filed. A motion was filed by the Company to dismiss the third amended complaint,
including the fraud claim. The court denied the motion. The Company
counterclaimed for what it claimed to be a debit balance owing to it pursuant to
the relationship between the parties (the amount subject to reduction as
premiums are received). The Company also sought to recover attorney's fees and
costs, as well as punitive damages on three of its causes of action in the
counterclaim.
Following initial discovery, the federal case was dismissed by stipulation. The
matter was refiled in Texas state court, Tarrant County, Case No. 348 195490 02.
The claims of the respective parties are essentially the same as those in
federal court, which claims of NGU (estimated to be $2,133,625 through September
30, 2004) include fraudulent inducement relative to entering into a contract,
fraud, breach of contract as to commissions and production bonuses as well as
policy fees, certain dues and debits of other agents, attorney's fees and
exemplary damages as well as seeking an accounting with the appointment of an
auditor and contesting the interest charges. Certain discovery has taken place,
including depositions, since the filing again in state court and further
discovery is in process and is anticipated. The Company filed a motion for
partial summary judgment with respect to certain items in the case, which motion
was denied. The Company anticipates filing another motion for partial summary
judgment prior to trial. A trial is presently set for October 2004. The Company
intends to vigorously defend the matter as well as prosecute its counterclaim.
The Company is not a party to any other legal proceedings outside the ordinary
course of the Company's business or to any other legal proceedings, which, if
adversely determined, would have a material adverse effect on the Company or its
business.
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1. Articles of Restatement of Articles of Incorporation (7)
3.2. Amended Bylaws (10)
4.1. Specimen Class A Stock Certificate (1)
16
4.2. Specimen Class C Stock Certificate (1)
4.3 Specimen Preferred Stock Certificate and Certificate of Designation
of Preferred Stock (1)
10.1 Restated and Amended Employee Stock Ownership Plan and Trust
Agreement (1)
10.2 1993 Stock Option Plan (3)
10.3 2000 Director Stock Option Plan (4)
10.4 2003 Stock Option Plan (9)
10.5 Deferred Compensation Agreement with George R. Quist (2)
10.6 Promissory Note with George R. Quist (5)
10.7 Deferred Compensation Plan (6)
10.8 Coinsurance Agreement between Security National Life and Acadian (7)
10.9 Assumption Agreement among Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company (7)
10.10 Asset Purchase Agreement among Acadian, Acadian Financial Group,
Inc., Security National Life and the Company (7)
10.11 Promissory Note with Key Bank of Utah (8)
10.12 Loan and Security Agreement with Key Bank of Utah (8)
10.13 Stock Purchase and Sale Agreement with Ault Glazer & Co. Investment
Management LLC (10)
10.14 Stock Purchase Agreement with Paramount Security Life Insurance
Company (11)
10.15 Reinsurance Agreement between Security National Life Insurance
Company and Guaranty Income Life Insurance Company (12)
10.16 Employment agreement with J. Lynn Beckstead, Jr. (12)
10.17 Employment agreement with Scott M. Quist
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 June 30, 1994
(4) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's Annual
Meeting of Shareholders
(5) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 16, 2001
(6) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 3, 2002
(7) Incorporated by reference from Report on Form 8-K-A as filed on
January 8, 2003
(8) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 15, 2003
(9) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, Filed on June 5, 2003 relating to the Company's Annual
Meeting of Shareholders
(10) Incorporated by reference from Report on Form 10-Q, as filed on
November 14, 2003
(11) Incorporated by reference from Report on Form 8-K, as filed on March
29, 2004
(12) Incorporated by reference from Report on Form 10-K, as filed on
March 30, 2004
Subsidiaries of the Registrant
(b) Reports on Form 8-K:
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT
SECURITY NATIONAL FINANCIAL CORPORATION
---------------------------------------
Registrant
DATED: August 13, 2004 By: /s/George R. Quist
-------------------------------
George R. Quist
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
DATED: August 13, 2004 By: /s/Stephen M. Sill
-------------------------------
Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18