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, 2001 Commission File Number: 0-9341
- -------------------------------- ------------------------------
SECURITY NATIONAL FINANCIAL CORPORATION
Exact Name of Registrant.
UTAH 87-0345941
------------- -----------------
(State or other jurisdiction IRS Identification Number
of incorporation or organization)
5300 South 360 West, Salt Lake City, Utah 84123
- ----------------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code (801) 264-1060
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES XX 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 3,874,566
- ------------------------------------- ---------------------------------
Title of Class Number of Shares Outstanding as of
March 31, 2001
Class C Common Stock, $.20 par value 5,762,729
- ------------------------------------ ----------------------------------
Title of Class Number of Shares Outstanding as of
March 31, 2001
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10Q
QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
- ------ --------
Consolidated Statement of Earnings - Three months
ended March 31, 2001 and 2000 (unaudited)..............3
Consolidated Balance Sheet - March 31, 2001 (unaudited)
and December 31, 2000 .................................4-5
Consolidated Statement of Cash Flows -
Three months ended March 31, 2001 and 2000
(unaudited)............................................6
Notes to Consolidated Financial Statements.............7-10
Item 2 Management's Discussion and Analysis...............10-13
- ------
Item 3 Quantitative and Qualitative Disclosure of
Market Risk........................................13
- ------
PART II - OTHER INFORMATION
Other Information..................................13-15
Signature Page.....................................16
2
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three Months Ended March 31,
Revenues: 2001 2000
- -------- ---- ----
Insurance premiums and
other considerations $3,481,137 $3,393,774
Net investment income 3,149,358 2,803,749
Net mortuary and cemetery sales 3,008,129 2,695,021
Realized gains on investments
and other assets 4,097 32,725
Mortgage fee income 8,620,708 4,641,211
Other 31,324 52,486
------------ ------------
Total revenues 18,294,753 13,618,966
Benefits and expenses:
- ---------------------
Death benefits 1,548,294 1,190,036
Surrenders and other policy benefits 296,599 594,076
Increase in future policy benefits 1,251,159 1,347,708
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 1,077,737 1,121,029
General and administrative expenses:
Commissions 6,537,199 3,770,448
Salaries 2,036,660 1,939,850
Other 3,037,154 2,231,696
Interest expense 707,553 332,838
Cost of goods and services sold
of the mortuaries and cemeteries 1,091,752 846,209
------------ ------------
Total benefits and expenses 17,584,107 13,373,890
Earnings before income taxes 710,646 245,076
Income tax expense (190,156) (59,062)
Minority interest (income)
loss of subsidiary 8,503 (18,808)
------------ ------------
Net earnings $528,993 $167,206
============ ============
Net earnings per common share $0.12 $0.04
============ ============
Weighted average outstanding
common shares 4,450,839 4,308,119
Net earnings per common
share-assuming dilution $0.12 $0.04
============ ============
Weighted average outstanding
common shares assuming-dilution 4,451,094 4,308,119
See accompanying notes to consolidated financial statements.
3
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2001 December 31,
(Unaudited) 2000
-------------- -----------
Assets:
Insurance-related investments:
Fixed maturity securities held
to maturity, at amortized cost $35,292,741 $39,384,168
Fixed maturity securities available
for sale, at market 24,051,839 23,504,989
Equity securities available for sale,
at market 2,622,442 2,774,077
Mortgage loans on real estate 17,983,278 17,435,178
Real estate, net of accumulated
depreciation 8,493,676 8,564,395
Policy, student and other loans 11,337,195 11,277,742
Short-term investments 208,153 1,027,927
------------- -------------
Total insurance-related
investments 99,989,324 103,968,476
Restricted assets
of cemeteries and mortuaries 4,943,491 4,841,819
Cash 3,427,260 11,275,030
Receivables:
Trade contracts 6,770,134 5,342,380
Mortgage loans sold to investors 40,601,271 26,886,162
Receivable from agents 2,187,148 2,225,784
Receivable from officers 109,700 111,500
Other 3,677,042 3,503,320
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Total receivables 53,345,295 38,069,146
Allowance for doubtful accounts (1,689,342) (1,656,223)
------------- -------------
Net receivables 51,655,953 36,412,923
Policyholder accounts on deposit
with reinsurer 7,401,986 7,434,750
Land and improvements held for sale 8,413,228 8,485,523
Accrued investment income 1,444,714 1,302,552
Deferred policy acquisition costs 12,163,923 12,043,527
Property, plant and equipment, net 10,676,491 10,824,700
Cost of insurance acquired 8,523,224 8,729,264
Excess of cost over net assets
of acquired subsidiaries 1,145,206 1,172,599
Other 593,379 695,683
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Total assets $210,378,179 $207,186,846
============= =============
See accompanying notes to consolidated financial statements.
4
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
March 31, 2001 December 31,
(Unaudited) 2000
-------------- -----------
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $139,853,424 $140,000,344
Unearned premium reserve 1,634,018 1,754,980
Line of credit for financing
line of mortgage loans 2,000,000 --
Bank loans payable 9,282,453 9,805,118
Notes and contracts payable 4,179,711 4,240,830
Estimated future costs of
pre-need sales 7,436,387 7,119,544
Accounts payable 538,597 1,242,407
Funds held under reinsurance
treaties 1,410,670 1,417,216
Other liabilities and
accrued expenses 5,405,051 4,115,920
Income taxes 6,498,571 6,124,512
------------- -------------
Total liabilities 178,238,882 175,820,871
Minority interest 4,734,920 4,624,614
Stockholders' Equity:
- --------------------
Common stock:
Class A: $2 par value,
authorized 10,000,000
shares, issued 5,107,630
shares in 2001 and 5,107,631
shares in 2000 10,215,260 10,215,262
Class C: $0.20 par value,
authorized 7,500,000 shares,
issued 5,827,805 shares in
2001 and 2000 1,165,561 1,165,561
------------- -------------
Total common stock 11,380,821 11,380,823
Additional paid-in capital 10,054,714 10,054,714
Accumulated other comprehensive
income, net of deferred taxes 970,776 836,751
Retained earnings 8,360,299 7,831,306
Treasury stock at cost (1,233,064
Class A shares and 65,078
Class C shares in 2001
and 2000 held by affiliated
companies) (3,362,233) (3,362,233)
------------- -------------
Total stockholders' equity 27,404,377 26,741,361
------------- -------------
Total liabilities and
stockholders' equity $210,378,179 $207,186,846
============= =============
See accompanying notes to consolidated financial statements.
5
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2001 2000
---- ----
Cash flows from operating activities:
Net cash (used in) provided
by operating activities $(11,925,632) $5,440,144
------------ ------------
Cash flows from investing activities: Securities held to maturity:
Purchase - fixed maturity securities (402,995) (4,798,597)
Calls and maturities - fixed
maturity securities 4,509,696 1,003,108
Securities available for sale:
Purchases - equity securities -- (64,650)
Calls and maturities - fixed
maturity securities 6,250 1,052,940
Purchases of short-term investments (6,948,226) (1,280,889)
Sales of short-term investments 7,768,000 2,039,185
Purchases of restricted assets (101,672) (123,818)
Mortgage, policy, and other loans made (1,820,134) (1,661,439)
Payments received for mortgage,
policy, and other loans 1,215,028 3,064,888
Purchases of property, plant,
and equipment (106,839) (190,342)
Purchases of real estate (18,439) (781,311)
Disposal of property, plant
and equipment -- (3,175)
------------ ------------
Net cash provided by (used
in) investing activities 4,100,669 (1,744,100)
------------ ------------
Cash flows from financing activities:
Annuity receipts 1,739,650 2,366,519
Annuity withdrawals (3,178,673) (3,301,933)
Repayment of bank loans and
notes and contracts payable (583,784) (176,068)
Net change in line of credit
for financing of mortgage loans 2,000,000 (8,587,023)
Purchase of treasury stock -- (815,121)
------------ ------------
Net cash (used in) provided by
financing activities (22,807) (10,513,626)
------------ ------------
Net change in cash (7,847,770) (6,817,582)
Cash at beginning of period 11,275,030 12,422,864
------------ ------------
Cash at end of period $3,427,260 $5,605,282
============ ============
See accompanying notes to consolidated financial statements.
6
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2001, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 2000,
included in the Company's Annual Report on Form 10-K (file number 0-9341).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The estimates susceptible to significant change are those used in determining
the liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, and those used in
determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
2. Comprehensive Income
For the three months ended March 31, 2001 and 2000, total comprehensive income
amounted to $663,018 and $28,371, respectively.
3. Capital Stock
In accordance with SFAS 128, the basic and diluted earnings per share amounts
were calculated as follows:
Three Months Ended March 31,
2001 2000
---- ----
Numerator:
Net income $ 528,993 $ 167,206
========== ===========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 4,450,839 4,308,119
Effect of dilutive securities:
Employee stock options 255 --
Stock appreciation rights -- --
----------- ----------
Dilutive potential
common shares 255 --
----------- ----------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 4,451,094 4,308,119
=========== ===========
Basic earnings per share $0.12 $0.04
===== =====
Diluted earnings per share $0.12 $0.04
===== =====
There are no dilutive effects on net income for purpose of this calculation.
7
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
(Unaudited)
4. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Corporate Items Consolidated
--------- -------- -------- --------- ----- ------------
For the Three Months Ended
March 31, 2001
Revenues from
external customers $5,343,741 $3,255,402 $9,695,589 $21 $ -- $18,294,753
Intersegment revenues 968,754 -- -- 966,748 1,935,502) --
Segment profit 6,488 169,840 214,541 319,777 -- 710,646
Identifiable assets 199,538,313 35,847,523 4,845,984 2,350,942 (32,204,583) 210,378,179
For the Three Months Ended
March 31, 2000
Revenues from external
customers $5,553,505 $2,877,374 $5,188,066 $21 $ -- $13,618,966
Intersegment revenues 696,799 -- -- 962,426 (1,659,225) --
Segment profit (23,205) 64,444 (86,344) 290,181 -- 245,076
Identifiable assets 195,084,873 34,647,782 2,884,834 2,851,354 (30,101,588) 205,367,255
8
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
(Unaudited)
Item 2. Management's Discussion and Analysis
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
interest sensitive products; (ii) emphasis on cemetery and mortuary business;
and (iii) capitalizing on lower interest rates by originating and refinancing
mortgage loans.
Results of Operations
First Quarter of 2001 Compared to First Quarter of 2000
Total revenues increased by $4,676,000, or 34.3%, to $18,295,000 for the three
months ended March 31, 2001, from $13,619,000 for the three months ended March
31, 2000. Contributing to this increase in total revenues was a $3,980,000
increase in mortgage fee income, a $346,000 increase in net investment income, a
$313,000 increase in net mortuary and cemetery sales, and a $87,000 increase in
insurance premiums and other considerations.
Insurance premiums and other considerations increased by $87,000, or 2.6%, to
$3,481,000 for the three months ended March 31, 2001, from $3,394,000 for the
comparable period in 2000. This increase was primarily the result of a
additional premiums from increased sales of final expense products.
Net investment income increased by $346,000, or 12.3%, to $3,150,000 for the
three months ended March 31, 2001, from $2,804,000 for the comparable period in
2000. This increase was primarily attributable to a greater number of loan
originations during the three months of 2001 due to lower interest rates and
borrowers refinancing their mortgage loans.
Net mortuary and cemetery sales increased by $313,000, or 11.6%, to $3,008,000
for the three months ended March 31, 2001, from $2,695,000 for the comparable
period in 2000. This increase was primarily due to additional pre-need cemetery
sales.
Mortgage fee income increased by $3,980,000, or 85.7%, to $8,621,000 for the
three months ended March 31, 2001, from $4,641,000 for the comparable period in
2000. This increase was primarily attributable to a greater number of loan
originations during the three months of 2001 due to lower interest rates and
borrowers refinancing their mortgage loans.
Total benefits and expenses were $17,584,000, or 96.1% of total revenues for the
three months ended March 31, 2001, as compared to $13,374,000, or 98.2% of total
revenues for the comparable period in 2000.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits decreased by an aggregate of $36,000, or 1.1%, to $3,096,000 for
the three months ended March 31, 2001, from $3,132,000 for the comparable period
in 2000. This decrease was primarily the result of a decrease in interest
credited on policyholder account balances.
Amortization of deferred policy acquisition costs and cost of insurance acquired
decreased by $43,000, or 3.9%, to $1,078,000 for the three months ended March
31, 2001, from $1,121,000 for the comparable period in 2000. This decrease was
in line with actuarial assumptions.
9
General and administrative expenses increased by $3,669,000, or 46.2%, to
$11,611,000 for the three months ended March 31, 2001, from $7,942,000 for the
comparable period in 2000. This increase primarily resulted from an increase in
commissions and other expenses due to additional mortgage loan originations
having been made by the Company's mortgage subsidiary during the three months of
2001 due to lower interest rates and borrowers refinancing their mortgage loans.
Interest expense increased by $375,000, or 112.6%, to $708,000 for the three
months ended March 31, 2001, from $333,000 for the comparable period in 2000.
This increase was primarily due to additional warehouse lines of credit required
for the additional mortgage loan originations by the Company's mortgage
subsidiary.
Cost of goods and services sold of the mortuaries and cemeteries increased by
$246,000, or 29.0%, to $1,092,000 for the three months ended March 31, 2001,
from $846,000 for the comparable period in 2000. This increase was primarily due
to additional pre-need cemetery sales.
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments, or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and operating expenses.
The Company attempts to match the duration of invested assets with its
policyholder and cemetery and mortuary liabilities. The Company may sell
investments other than those held-to-maturity in the portfolio to help in this
timing; however, to date, that has not been necessary. The Company purchases
short-term investments on a temporary basis to meet the expectations of
short-term requirements of the Company's products. The Company's investment
philosophy is intended to provide a rate of return which will persist during the
expected duration of policyholder and cemetery and mortuary liabilities
regardless of future interest rate movements.
The Company's investment policy is to invest predominantly in fixed maturity
securities, mortgage loans, and warehouse mortgage loans on a short-term basis
before selling the loans to investors in accordance with the requirements and
laws governing the life insurance subsidiaries. Bonds owned by the life
insurance subsidiaries amounted to $59,317,000 as of March 31, 2001, compared to
$62,889,000 as of December 31, 2000. This represents 59% and 60% of the total
insurance-related investments as of March 31, 2001, and December 31, 2000,
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, 2001, .41%
($407,000) and at December 31, 2000, .68% ($429,000) 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, 2001,
and December 31, 2000, the life insurance subsidiary exceeded the regulatory
criteria.
10
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $40,867,000 as of March 31, 2001, as compared to $40,787,000
as of December 31, 2000. Stockholders' equity as a percent of capitalization
increased to 67% as of March 31, 2001, from 66% as of December 31, 2000.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2000 was 15% as compared
to a rate of 10% for 1999. The 2001 lapse rate is approximately the same as
2000.
At March 31, 2001, $22,672,000 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 Disclosure of Market Risk
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 2000.
Part II Other Information:
Item 1. Legal Proceedings
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, adversely determined, would have a
material adverse effect on the Company or its business.
Item 2. Changes in Securities
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. A. Articles of Restatement of Articles of Incorporation (8)
B. Bylaws (1)
4. A. Specimen Class A Stock Certificate (1)
B. Specimen Class C Stock Certificate (1)
C. Specimen Preferred Stock Certificate and Certificate of
Designation of Preferred Stock (1)
10. A. Restated and Amended Employee Stock Ownership Plan and Trust
Agreement (1)
B. Deferred Compensation Agreement with George R. Quist (2)
C. 1993 Stock Option Plan (3)
D. Promissory Note with Key Bank of Utah (4)
E. Loan and Security Agreement with Key Bank of Utah (4)
F. General Pledge Agreement with Key Bank of Utah (4)
G. Note Secured by Purchase Price Deed of Trust and Assignment of Rents
with the Carter Family Trust and the Leonard M. Smith Family Trust (5)
H. Deed of Trust and Assignment of Rents with the Carter Family Trust
and the Leonard M. Smith Family Trust (5)
11
I. Promissory Note with Page and Patricia Greer (6)
J. Pledge Agreement with Page and Patricia Greer (6)
K. Promissory Note with Civil Service Employees Insurance Company (7)
L. Deferred Compensation Agreement with William C. Sargent (8)
M. Employment Agreement with Scott M. Quist. (8)
N. Acquisition Agreement with Consolidare Enterprises, Inc., and certain
shareholders of Consolidare. (9)
O. Agreement and Plan of Merger between Consolidare Enterprises, Inc., and
SSLIC Holding Company. (10)
P. Administrative Services Agreement with Southern Security Life Insurance
Company. (11)
Q. Promissory Note with George R. Quist. (12)
R. Settlement Agreement with Capitol Indemnity Corporation, George A.
Fait, and Joel G. Fait. (13)
(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 Report on Form 8-K, as filed on
February 24, 1995.
(5) Incorporated by reference from Annual Report on Form 10K, as
filed on March 31, 1995.
(6) Incorporated by reference from Report on Form 8-K, as filed
on May 1, 1995.
(7) Incorporated by reference from Report on Form 8-K, as filed on
January 16, 1996.
(8) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1998.
(9) Incorporated by reference from Report on Form 8-K, as filed on
May 11, 1998.
(10) Incorporated by reference from Report on Form 8-K, as filed
on January 4, 1999.
(11) Incorporated by reference from Report on Form 8-K, as filed on
March 4, 1999.
(12) Incorporated by reference from Annual Report on Form 10-K, as
filed on April 14, 1999.
(13) Incorporated by reference from Quarterly Report on Form 10-Q,
as filed on August 21, 2000.
(b) Reports on Form 8-K:
NONE
12
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 21, 2001 By: George R. Quist,
----------------
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
DATED: May 21, 2001 By: Scott M. Quist
--------------
First Vice President,
General Counsel,
Treasurer and Director
(Principal Financial
and Accounting Officer)
13