SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2005 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 5,441,710
- ------------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of March 31, 2005
Class C Common Stock, $.20 par value 6,380,197
- ------------------------------------ ----------------------------
Title of Class Number of Shares Outstanding
as of March 31, 2005
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
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Consolidated Statement of Earnings - Three months ended
March 31, 2005 and 2004 (unaudited)................................3
Consolidated Balance Sheet - March 31, 2005, (unaudited)
and December 31, 2004............................................4-5
Consolidated Statement of Cash Flows -
Three months ended March 31, 2005 and 2004 (unaudited).............6
Notes to Consolidated Financial Statements......................7-11
Item 2 Management's Discussion and Analysis of Financial Condition
- ------ and Results of Operations......................................11-14
Item 3 Quantitative and Qualitative Disclosures about Market Risk........14
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Item 4 Controls and Procedures...........................................14
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PART II - OTHER INFORMATION
Other Information..............................................14-17
Signature Page....................................................18
Certifications.................................................19-21
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three Months Ended March 31,
Revenues: 2005 2004
- -------- ---- ----
Insurance premiums and other considerations $7,180,520 $6,396,174
Net investment income 4,345,263 3,556,247
Net mortuary and cemetery sales 2,885,368 3,056,405
Realized gains on investments and other assets 23,690 5,323
Mortgage fee income 13,171,106 18,068,730
Other 216,737 190,038
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Total revenues 27,822,684 31,272,917
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Benefits and expenses:
- ---------------------
Death benefits 3,515,928 3,772,951
Surrenders and other policy benefits 469,367 479,839
Increase in future policy benefits 2,628,190 1,868,732
Amortization of deferred policy
and pre-need acquisition costs
and cost of insurance acquired 1,084,903 1,199,275
General and administrative expenses:
Commissions 10,344,163 14,207,056
Salaries 3,812,734 3,581,644
Other 4,516,123 4,692,879
Interest expense 641,688 365,323
Cost of goods and services sold
of the mortuaries and cemeteries 547,840 597,532
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Total benefits and expenses 27,560,936 30,765,231
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Earnings before income taxes 261,748 507,686
Income tax expense 18,160 (128,118)
Minority interest -- 22,014
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Net earnings $279,908 $401,582
============ ============
Net earnings per common share $.05 $.07
==== ====
Weighted average outstanding common shares 6,079,717 5,949,234
============ ============
Net earnings per common share-assuming dilution $.05 $.07
==== ====
Weighted average outstanding common shares
assuming-dilution 6,104,229 6,109,341
============ ============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2005 December 31,
(Unaudited) 2004
Assets:
- ------
Insurance-related investments:
Fixed maturity securities
held to maturity, at amortized cost $64,771,046 $69,984,761
Fixed maturity securities available
for sale, at market 10,866,975 11,066,025
Equity securities available for sale,
at market 3,928,995 4,166,769
Mortgage loans on real estate and
construction loans,
net of allowances for losses 62,503,891 65,831,586
Real estate, net of accumulated
depreciation and allowances for
losses 10,574,941 9,709,129
Policy, student and other loans 13,193,372 13,312,471
Short-term investments 5,160,492 4,628,999
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Total insurance-related investments 170,999,712 178,699,740
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Restricted assets of cemeteries and mortuaries 5,248,246 5,176,463
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Cash 12,950,795 15,333,668
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Receivables:
Trade contracts 5,133,693 5,333,891
Mortgage loans sold to investors 57,623,871 47,167,150
Receivable from agents 1,499,865 1,416,211
Receivable from officers -- 1,540
Other 1,021,866 1,120,157
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Total receivables 65,279,295 55,038,949
Allowance for doubtful accounts (1,223,409) (1,302,368)
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Net receivables 64,055,886 53,736,581
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Policyholder accounts on deposit
with reinsurer 6,643,914 6,689,422
Cemetery land and improvements held for sale 8,547,430 8,547,764
Accrued investment income 2,003,985 1,743,721
Deferred policy and pre-need
contract acquisition costs 21,668,190 20,181,818
Property and equipment, net 10,488,734 10,520,665
Cost of insurance acquired 12,133,381 14,053,497
Excess of cost over net assets
of acquired subsidiaries 683,191 683,191
Other 942,190 1,107,230
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Total assets $316,365,654 $316,473,760
============ ============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
March 31, 2005 December 31,
(Unaudited) 2004
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $225,775,786 $224,529,539
Unearned premium reserve 2,487,049 2,254,991
Bank loans payable 10,565,844 10,442,106
Notes and contracts payable 2,645,599 2,888,539
Deferred pre-need cemetery and funeral
contract revenues 10,771,065 10,762,357
Accounts payable 1,128,676 1,064,269
Funds held under reinsurance treaties 1,176,262 1,184,463
Other liabilities and accrued expenses 8,585,610 6,371,343
Income taxes 11,484,867 11,497,967
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Total liabilities 274,620,758 270,995,574
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Commitments and contingencies -- --
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Minority interest -- 3,813,346
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Stockholders' Equity:
Common stock:
Class A: $2.00 par value, authorized
10,000,000 shares, issued 6,756,785
shares in 2005 and 6,755,870 shares
in 2004 13,513,570 13,511,740
Class C: convertible, $0.20 par value,
authorized 7,500,000 shares,
issued 6,459,300 shares in 2005
and 6,468,199 shares in 2004 1,291,860 1,293,641
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Total common stock 14,805,430 14,805,381
Additional paid-in capital 14,922,881 14,922,851
Accumulated other comprehensive (loss)
and other items, net of deferred taxes (211,204) (11,352)
Retained earnings 15,645,088 15,365,259
Treasury stock at cost (1,315,075 Class A shares
and 79,103 Class C shares in 2005;
1,315,075 Class A shares and 79,103
Class C shares in 2004 held
by affiliated companies) (3,417,299) (3,417,299)
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Total stockholders' equity 41,744,896 41,664,840
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Total liabilities and
stockholders' equity $316,365,654 $316,473,760
============= =============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2005 2004
---- ----
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $(7,897,876) $21,000,620
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Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (502,000) (12,026,957)
Calls and maturities - fixed
maturity securities 5,622,503 2,579,486
Securities available for sale:
Sales - equity securities (7,009) --
Purchases of short-term investments (5,414,701) (8,762,251)
Sales of short-term investments 4,883,208 6,164,882
Purchases of restricted assets (41,090) (91,594)
Mortgage, policy, and other loans made (15,663,719) (22,714,986)
Payments received for mortgage,
policy, and other loans 19,117,574 7,554,722
Purchases of property and equipment (404,331) (296,546)
Purchases of real estate (1,887,950) (488,312)
Cash paid for purchase of subsidiary -- (297,994)
Sale of real estate 926,062 --
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Net cash (used in) provided by
investing activities 6,628,547 (28,379,550)
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Cash flows from financing activities:
Annuity and pre-need contract receipts 1,419,729 1,348,322
Annuity and pre-need contract withdrawals (2,560,646) (2,544,563)
Repayment of bank loans and notes and
contracts payable (242,940) (640,173)
Proceeds from borrowing on notes and
contracts 270,329 --
------------ ------------
Net cash (used in) provided by
financing activities (1,113,528) (1,836,414)
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Net change in cash (2,382,857) (9,215,344)
Cash at beginning of period 15,333,668 19,704,358
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Cash at end of period $12,950,811 $10,489,014
============ ============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005 (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. The
quarterly results for the period ended March 31, 2005, have not been reviewed by
an independent registered public accounting firm. On April 26, 2005, the Company
ceased its independent auditor relationship with Tanner LC due to the five-year
partner rotation mandated by the Sarbanes-Oxley Act and the determination by
Tanner LC that in the future it would be unable to maintain the necessary
industry expertise to continue as independent auditors for the Company. The
Company is in the process of appointing new auditors. Operating results for the
three months ended March 31, 2005 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended December 31, 2004, included in the Company's Annual
Report on Form 10-K (file number 0-9341).
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
The estimates susceptible to significant change are those used in determining
the liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, and those used in
determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are fairly stated in all material respects.
2. Comprehensive Income
For the three months ended March 31, 2005 and 2004, total comprehensive income
amounted to $80,056 and $703,483, 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005 (Unaudited)
1. Basis of Presentation (Continued)
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. Earnings per share amounts have been adjusted for the effect
of annual stock dividends. Net earnings for the three months ended March 31,
2005 and 2004 would have been reduced by the following:
Three Months Ended March 31,
2005 2004
---- ----
Net earnings as reported $279,908 $401,582
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects -- --
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Pro forma net earnings $279,908 $401,582
======== ========
Net earnings per common share:
Basic - as reported $.05 $.07
==== ====
Basic - pro forma $.05 $.07
==== ====
Diluted - as reported $.05 $.07
==== ====
Diluted - pro forma $.05 $.07
==== ====
4. Earnings Per Share
The basic and diluted earnings per share amounts were calculated as
follows:
Three Months Ended March 31,
2005 2004
---- ----
Numerator:
Net income $ 279,908 $ 401,582
=========== ===========
Denominator:
Denominator for basic earnings
per share-weighted-average shares 6,079,717 5,949,234
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Effect of dilutive securities:
Employee stock options 23,971 158,241
Stock appreciation rights 541 1,866
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Dilutive potential common shares 24,512 160,107
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Denominator for diluted earnings
per share-adjusted weighted-average
shares and assumed conversions 6,104,229 6,109,341
=========== ===========
Basic earnings per share $.05 $.07
==== ====
Diluted earnings per share $.05 $.07
==== ====
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005 (Unaudited)
1. Basis of Presentation (Continued)
Earnings per share amounts have been adjusted for the effect of annual stock
dividends.
5. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
For the Three Months Ended
March 31, 2005
Revenues from
external customers $ 9,954,114 $ 3,216,074 $14,652,496$ -- $27,822,684
Intersegment revenues 1,271,759 -- -- (1,271,759) --
Segment profit (loss)
before income taxes 637,839 354,198 (730,289) -- 261,748
Identifiable assets 305,320,094 48,186,225 14,239,233 (51,379,898) 316,365,654
For the Three Months Ended
March 31, 2004
Revenues from
external customers $ 8,357,223 $3,226,386 $19,689,308$ -- $31,272,917
Intersegment revenues 2,373,013 -- -- (2,373,013) --
Segment profit (loss)
before income taxes 433,203 347,749 (273,266) -- 507,686
Identifiable assets 305,088,724 44,736,652 15,971,494 (49,126,302) 316,670,568
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005, (Unaudited)
6. Merger Transaction
Effective January 1, 2005, Security National Life and SSLIC Holding Company, a
wholly owned subsidiary of Security National Life, completed a merger
transaction with Southern Security Life Insurance Company. Under the terms of
the merger and pursuant to the Agreement and Plan of Reorganization, dated
August 25, 2004, among Security National Life, SSLIC Holding Company and
Southern Security Life Insurance Company, including the amendment thereto dated
December 27, 2004, SSLIC Holding Company was merged with and into Southern
Security Life Insurance Company, which resulted in (i) Southern Security Life
Insurance Company becoming a wholly-owned subsidiary of Security National Life
Insurance Company, and (ii) the unaffiliated stockholders of Southern Security
Life Insurance Company, holding an aggregate of 490,816 shares of common stock,
or 23.3% of the outstanding shares, becoming entitled to receive $3.84 in cash
for each issued and outstanding share of their common stock of Southern Security
Life Insurance Company, or an aggregate of $1,884,733.
As a result of the merger, the separate existence of SSLIC Holding Company
ceased as Southern Security Life Insurance Company became the surviving
corporation of the merger. Southern Security Life Insurance Company continues to
be governed by the laws of the State of Florida, and its separate corporate
existence continues unaffected by the merger. In addition, as a result of the
merger, Security National Life owns all of the issued and outstanding common
shares of Southern Security Life Insurance Company. Security National Financial
Corporation, through its affiliates, Security National Life Insurance Company
and SSLIC Holding Company, owned 76.7% of the Company's outstanding common
shares prior to the merger.
The purpose of the merger is to terminate the registration of the common stock
of Southern Security Life Insurance Company under the Securities Exchange Act of
1934 (by reducing the number of its stockholders of record to fewer than 300
stockholders) and the Nasdaq listing of the common stock, reduce expenses
associated with such registration and listing, and provide the stockholders an
opportunity to sell their shares in an illiquid trading market without incurring
brokerage commissions. As a result of becoming a non-reporting company,
Southern Security Life Insurance Company is no longer required to file periodic
reports with the SEC, including among other things, annual reports on Form 10-K
and quarterly reports on Form 10-Q, and is no longer subject to the SEC's proxy
rules. In addition, its common stock is no longer eligible for trading on the
Nasdaq SmallCap Market.
7. Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", and subsequently issued a revision to this
Interpretation in December 2003. This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies to those variable interest entities
considered to be special-purpose entities no later than December 31, 2003. The
Interpretation must also be applied to all other variable interest entities no
later than March 31, 2005. The adoption of Interpretation No. 46 did not have a
material impact on the Company's financial position or results of operations.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005, (Unaudited)
8. Recent Accounting Pronouncements (Continued)
In December 2004, FASB revised SFAS 123 to Share-Based Payment ("SFAS 123(R)").
SFAS 123(R) provides additional guidance on determining whether certain
financial instruments awarded in share-based payment transactions are
liabilities. SFAS 123(R) also requires that the cost of all share-based
transactions be recorded in the financial statements. The revised pronouncement
must be adopted by the Company by January 1, 2006. Implementation of SFAS 123(R)
will not have a significant impact on the Company's consolidated financial
statements in the period of implementation. However, any future stock options
granted could have a significant impact on the Company's consolidated financial
statements.
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) capitalizing on historically lower interest rates by
originating and refinancing mortgage loans.
During the three months ended March 31, 2005, Security National Mortgage Company
("SNMC") experienced a decrease in revenue and expenses due to the decrease in
loan volume of its operations. SNMC is a mortgage lender incorporated under the
laws of the State of Utah. SNMC is approved and regulated by the Federal Housing
Administration (FHA), a department of the U.S. Department of Housing and Urban
Development (HUD), to originate mortgage loans that qualify for government
insurance in the event of default by the borrower. SNMC obtains loans primarily
from independent brokers and correspondents. SNMC funds the loans from internal
cash flows and lines of credit from financial institutions. SNMC receives fees
from the borrowers and other secondary fees from third party investors who
purchase the loans from SNMC. SNMC primarily sells all of its loans to third
party investors and does not retain servicing to these loans. SNMC pays the
brokers and correspondents a commission for loans that are brokered through
SNMC. SNMC originated and sold 2,072 ($316,785,000) and 3,291 ($496,307,000)
loans, respectively, for the three months ended March 31, 2005 and 2004.
Results of Operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Total revenues decreased by $3,450,000, or 11.0%, to $27,823,000 for the three
months ended March 31, 2005, from $31,273,000 for the three months ended March
31, 2004. Contributing to this decrease in total revenues was a $4,898,000
decreased in mortgage fee income, and a $171,000 decreased in net mortuary
sales.
Insurance premiums and other considerations increased by $784,000, or 12.3%, to
$7,180,000 for the three months ended March 31, 2005, from $6,396,000 for the
comparable period in 2004. This increase was primarily due to the additional
insurance premiums realized from new insurance sales.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005, (Unaudited)
Net investment income increased by $789,000, or 22.2%, to $4,345,000 for the
three months ended March 31, 2005, from $3,556,000 for the comparable period in
2004. This increase was primarily attributable to additional borrower interest
income from increased long-term bond purchases over the comparable period in
2004.
Net mortuary and cemetery sales decreased by $171,000, or 5.6%, to $2,885,000
for the three months ended March 31, 2005, from $3,056,000 for the comparable
period in 2004. This reduction in at-need mortuary sales was primarily due to
the loss of sales from the Camelback Funeral Home as a result of the City of
Phoenix having commenced condemnation proceedings in order to construct a light
rail facility on the Camelback Funeral Home property.
Mortgage fee income decreased by $4,898,000, or 27.1%, to $13,171,000 for the
three months ended March 31, 2005, from $18,069,000 for the comparable period in
2004. This decrease was primarily attributable to a decrease in the number of
loan originations during the first quarter of 2005 due to an increase in
interest rates, which resulted in the refinancing of fewer mortgage loans.
Total benefits and expenses were $27,561,000, or 99.1% of total revenues, for
the three months ended March 31, 2005, as compared to $30,765,000, or 98.4% of
total revenues, for the comparable period in 2004. The lower margin in 2004 was
due to fixed expenses, which did not decrease proportionally with the reduction
in revenues.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $492,000, or 8.0%, to $6,613,000
for the three months ended March 31, 2005, from $6,121,000 for the comparable
period in 2004. This increase was primarily the result of an increase in
reserves for policyholders.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired decreased by $114,000, or 9.5%, to $1,085,000 for the three
months ended March 31, 2005, from $1,199,000 for the comparable period in 2004.
This decrease was primarily due to recognition of improvements in persistency
and expenses.
General and administrative expenses decreased by $3,563,000, or 16.0%, to
$18,673,000 for the three months ended March 31, 2005, from $22,236,000 for the
comparable period in 2004. 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 first quarter of 2005.
Interest expense increased by $276,000, or 75.4%, to $642,000 for the three
months ended March 31, 2005, from $366,000 for the comparable period in 2004.
This increase was primarily due to increased warehouse lines of credit required
for a greater number of warehoused mortgage loans by Security National Mortgage
Company.
Cost of goods and services sold of the mortuaries and cemeteries decreased by
$50,000, or 8.3%, to $548,000 for the three months ended March 31, 2005, from
$598,000 for the comparable period in 2004. This reduction in at-need mortuary
sales was primarily due to the loss of sales from the Camelback Funeral Home as
a result of the City of Phoenix having commenced condemnation proceedings in
order to construct a light rail facility on the Camelback Funeral Home property.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005, (Unaudited)
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.
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 life
insurance subsidiaries amounted to $75,630,000 as of March 31, 2005, compared to
$81,051,000 as of December 31, 2004. This represents 44% and 45% of the total
insurance-related investments as of March 31, 2005, and December 31, 2004,
respectively. Generally, all bonds owned by the life insurance subsidiaries are
rated by the National Association of Insurance Commissioners. Under this rating
system, there are six categories used for rating bonds. At March 31, 2005 and
December 31, 2004, 2% ($1,660,000) and 2% ($1,659,000) of the Company's total
investment in bonds were invested in bonds in rating categories three through
six, which are considered non-investment grade.
The Company has classified certain of its fixed income securities, including
high-yield securities, in its portfolio as available for sale, with the
remainder classified as held to maturity. However, in accordance with Company
policy, any such securities purchased in the future will be classified as held
to maturity. Business conditions, however, may develop in the future which may
indicate a need for a higher level of liquidity in the investment portfolio. In
that event the Company believes it could sell short-term investment grade
securities before liquidating higher-yielding longer-term securities.
The Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At March 31, 2005,
and December 31, 2004, the life insurance subsidiary exceeded the regulatory
criteria.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2005, (Unaudited)
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $54,956,000 as of March 31, 2005, as compared to $54,995,000
as of December 31, 2004. Stockholders' equity as a percent of total
capitalization stayed the same at 76% as of March 31, 2005, when compared to
December 31, 2004.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2004 was 9.0% as compared
to a rate of 8.6% for 2003. The 2005 lapse rate to date has been approximately
the same as 2004.
At March 31, 2005, $29,135,000 of the Company's consolidated stockholders'
equity represents the statutory stockholders' equity of the Company's life
insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to
its parent company without the approval of insurance regulatory authorities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 2004.
Item 4. Controls and Procedures
a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management,
including principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of March 31, 2005. Based on this evaluation,
our principal executive officer and our principal financial officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective and adequately designed to ensure that
the information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in applicable rules and forms. b)
Changes in internal controls over financial reporting
During the quarter ended March 31, 2005, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Part II Other Information:
Item 1. Legal Proceedings
An action was brought against the Company in May 2001 by Glenna Brown Thomas,
individually and as personal representative of the Estate of Lynn W. Brown, in
the Third Judicial Court, Salt Lake County, Utah. The action asserts that
Memorial Estates, Inc. delivered to Lynn W. Brown six stock certificates
totaling 2,000 shares of its common stock in 1970 and 1971. Mr. Brown died in
1972. It is also asserted that at the time the 2,000 shares were issued and
outstanding, the shares represented a 2% ownership of Memorial Estates. It is
further alleged that Mr. Brown was entitled to preemptive rights and, after the
issuance of the stock to Mr. Brown, there were further issuances of stock
without providing written notice to Mr. Brown or his estate of his right to
purchase more stock.
It is further asserted that Thomas has the right to the transfer of Brown's
shares on the books of Security National Financial Corporation as well as
Memorial Estates, and to the restoration of Brown's proportion of share
ownership in Memorial Estates at the time of his death by issuance and delivery
to Thomas of sufficient shares of the Company's publicly traded and unrestricted
stock in exchange for the 2,000 shares of Memorial Estates stock, including
payment of all dividends from the date of Thomas's demand. The formal discovery
cutoff was January 15, 2004. The Company has been verbally informed that Thomas
will dismiss the case but such dismissal has not been communicated in writing.
Until the case is actually dismissed, the Company intends to vigorously defend
the matter, including the assertion that the statute of limitations bars the
claims in their entirety.
The Company received a letter dated November 9, 2004 on behalf of Charles Hood,
who worked at Singing Hills Memorial Park in El Cajon, California. He was hired
in April 2003 as a groundskeeper with his work concluding on October 30, 2003.
Mr. Hood claims that he wrote a letter to the Company outlining his concerns
regarding the operation of the cemetery, and that the next day he was
terminated. Even though he recognizes his relationship was as an at-will
employee. Mr. Hood's claims against the Company also include, but are not
limited to, violation of labor laws, whistleblower retaliation and infliction of
emotional distress. The letter proposes a settlement in the amount of $275,000.
No lawsuit has been filed in the matter. The Company has been engaged in a
review of the claims made in the letter. Based on its investigation, the Company
believes that Mr. Hood voluntarily quit and was not terminated. Counsel for the
Company and counsel for Mr. Hood have been in discussion concerning the matter.
At this stage of the investigation, the Company does not believe there is any
justification for the claims being made. If a resolution of the dispute is not
achieved and litigation ensues, the Company is prepared to vigorously defend the
action.
The Company also received a letter dated November 29, 2004 on behalf of Roger
Gornichec, who the Company recognizes as having been an independent contractor.
The attorney who wrote the letter on behalf of Mr. Hood also wrote the letter on
behalf of Mr. Gornichec. Mr. Gornichec concluded his services as an agent
selling insurance in the spring of 2003 and his license to sell cemetery plots
was not renewed in the summer of 2004. Mr. Gornichec asserts that he was an
employee contrary to the Company's position.
The claims made on behalf of Mr. Gornichec include, but are not limited to,
wrongful termination in violation of public policy, misrepresentation, age
discrimination, whistle-blower retaliation, interference with economic
advantage, breach of contract, breach of the covenant of good faith and fair
dealing, and infliction of emotional distress. Mr. Gornichec also claims that he
is owed a certain amount from a retirement plan. The letter proposes a
settlement in the amount of $420,000. Based on its investigation, the Company
believes that Mr. Gornichec was an independent contractor, not an employee, and
that the claims and the settlement amount sought are not justified. If the
matter is not resolved and litigation ensues, the Company is prepared to
vigorously defend the action.
The Company is a defendant in various other legal actions arising from the
normal conduct of business. Management believes that none of the actions will
have a material effect on the Company's financial position or results of
operations. Based on management's assessment and legal counsel's representations
concerning the likelihood of unfavorable outcomes, no amounts have been accrued
for the above claims in the consolidated financial statements.
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
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)
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 between 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 (13)
10.18 Agreement and Plan of Reorganization among Security National Life
Insurance Company, SSLIC Holding Company, and Southern Security
Life Insurance Company (14)
10.19 Agreement and Plan of Merger, among Security National Life Insurance
Company, SSLIC Holding Company, and Southern Security Life Insurance
Company (15)
10.20 Agreement to repay indebtedness and to convey option with Monument
Title, LC. (15)
10.21 Subsidiaries of the Registrant
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference from Registration Statement on Form S-1, as
filed on June 29, 1987
(2) Incorporated by reference from Annual Report on Form 10-K, as filed on
March 31, 1989
(3) Incorporated by reference from Annual Report on Form 10-K, as filed on
March 31, 1994
(4) Incorporated by reference from 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 March 30,
2004
(12) Incorporated by reference from Report on Form 10-K, as filed on March
30, 2004
(13) Incorporated by reference from Report on Form 10-Q, as filed on August
13, 2004
(14) Incorporated by reference from Report on Form 8-K, as filed on August
30, 2004
(15) Incorporated by reference from Report on Form 10-K, as filed on April
15, 2005
(b) Reports on Form 8-K:
No reports were filed by the Company during the quarter ended March
31, 2005.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT
SECURITY NATIONAL FINANCIAL CORPORATION
Registrant
DATED: May 16, 2005 By: George R. Quist,
----------------
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
DATED: May 16, 2005 By: Stephen M. Sill
---------------
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACTED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, George R. Quist, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Security National
Financial Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15-d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period covered in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal financial reporting to the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: May 16, 2005
By: George R. Quist
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen M. Sill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Security National
Financial Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15-d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period covered in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal financial reporting to the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: May 16, 2005
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Security National Financial
Corporation (the "Company") on Form 10Q for the period ending March 31, 2005, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, George R. Quist, Chairman of the Board and Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge
and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
By: George R. Quist
Chairman of the Board
and Chief Executive Officer
May 16, 2005
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Security National Financial
Corporation (the "Company") on Form 10Q for the period ending March 31, 2005, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stephen M. Sill, Vice President, Treasurer and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
May 16, 2005