<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999 Commission File Number: 0-9341
SECURITY NATIONAL FINANCIAL CORPORATION
Exact Name of Registrant.
UTAH 87-0345941
- -------------------------------- -------------------
(State or other jurisdiction IRS Identification
of incorporation or organization) Number
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 3,792,644
- -------------------------------------- -----------------
Title of Class Number of Shares
Outstanding as of
September 30, 1999
Class C Common Stock, $.20 par value 5,348,531
- -------------------------------------- -------------------
Title of Class Number of Shares
Outstanding as of
September 30, 1999
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10Q
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
Consolidated Statements of Earnings - Three and
nine months ended September 30, 1999 and 1998. . . . .3
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998. . . . . . . . . . . . . . . .4-5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998. . . . .6
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . .7-9
Item 2 Management's Discussion and Analysis . . . . . .10-16
Item 3 Quantitative and Qualitative Disclosure
of Market Risk . . . . . . . . . . . . . . . . . 14
PART II - OTHER INFORMATION
Other Information. . . . . . . . . . . . . . . .17-19
Signature Page . . . . . . . . . . . . . . . . . . 20
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
Revenues: 1999 1998 1999 1998
- --------- ------ ------ ------ -----
<S> <C> <C> <C> <C>
Insurance premiums and
other considerations $10,008,484 4,522,461 3,648,476 1,507,587
Net investment income 7,663,760 5,587,104 2,317,189 1,874,925
Net mortuary and cemetery
sales 7,637,360 6,966,139 2,379,157 2,093,755
Realized gains on investments
and other assets 228,622 102,991 2,964 4,892
Mortgage fee income 10,483,052 6,687,379 3,763,234 2,503,984
Other 827,413 51,555 49,351 13,035
----------- ----------- ---------- ---------
Total revenue $36,848,691 23,917,629 12,160,371 7,998,178
Benefits and expenses:
Death benefits 3,434,847 1,785,148 1,051,554 663,101
Surrenders and other
policy benefits 2,958,351 791,529 422,918 250,818
Increase in future
policy benefits 2,355,085 2,481,246 911,014 756,575
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 3,772,447 994,389 1,246,271 401,335
General and administrative expenses:
Commissions 8,412,816 5,091,565 3,163,108 1,848,048
Salaries 5,643,863 3,950,062 1,894,696 1,329,798
Other 5,849,460 4,904,959 1,766,703 1,632,379
Interest expense 795,202 682,513 304,943 262,784
Cost of goods and services sold
of the mortuaries
and cemeteries 2,515,351 2,264,090 790,577 721,470
----------- ----------- --------- ---------
Total benefits and
expenses 35,737,422 22,945,501 11,551,784 7,866,308
Earnings before income
taxes $ 1,111,269 $ 972,128 $ 608,587$ 131,870
Income tax expense (368,844) (224,615) (209,431) (30,284)
Minority interest income
of subsidiary (162,635) -- (99,004) --
----------- ----------- --------- ---------
Net earnings $ 579,790 747,513 300,152 101,586
=========== ========== ========= =========
Net earnings per
common share $0.13 $0.18 $0.07 $0.02
===== ===== ===== =====
Weighted average outstanding
common shares 4,380,510 4,220,488 4,335,339 4,249,563
=========== ========== ========== ==========
Net earnings per common
share-assuming dilution $0.13 $0.18 $0.07 $0.02
===== ===== ===== =====
Weighted average outstanding
common shares
assuming-dilution 4,380,510 4,220,488 4,335,339 4,249,563
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 December 31,
(Unaudited) 1998
------------------ ------------
Assets:
- -------
<S> <C> <C>
Insurance-related investments:
Fixed maturity securities
held to maturity, at amortized cost $40,504,259 $ 44,984,882
Fixed maturity securities available
for sale, at market 24,670,200 28,675,440
Equity securities available for sale,
at market 5,170,218 5,146,059
Mortgage loans on real estate 15,357,344 12,523,395
Real estate, net of accumulated
depreciation 7,890,150 7,866,151
Policy, student and other loans 11,102,574 11,493,637
Short-term investments 3,345,919 11,543,540
----------- -------------
Total insurance-related
investments 108,040,664 122,233,104
Restricted assets
of cemeteries and mortuaries 4,201,724 4,098,877
Cash 8,032,183 6,670,996
Receivables:
Trade contracts 4,012,565 4,011,722
Mortgage loans sold to investors 22,290,406 21,181,028
Receivable from agents 2,287,893 1,944,449
Receivable from officers 120,200 145,600
Other 1,333,157 2,603,243
----------- -----------
Total receivables 30,044,221 29,886,042
Allowance for doubtful accounts (1,511,300) (1,576,668)
----------- -----------
Net receivables 28,532,921 28,309,374
Policyholder accounts on deposit
with reinsurer 8,319,761 8,518,571
Land and improvements held for sale 8,473,149 8,405,725
Accrued investment income 1,717,227 1,440,860
Deferred policy acquisition costs 10,211,461 10,501,281
Property, plant and equipment, net 9,529,125 10,682,085
Cost of insurance acquired 10,185,636 10,462,446
Excess of cost over net assets
of acquired subsidiaries 1,332,993 1,414,910
Other 1,803,795 526,918
------------ ------------
Total assets $200,380,639 $213,265,147
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 1999 December 31,
(Unaudited) 1998
------------------- -----------
Liabilities:
- -----------
<S> <C> <C>
Future life, annuity, and other
policy benefits $135,475,359 $134,899,870
Unearned premium reserve 1,732,318 2,565,968
Line of credit for financing
of mortgage loans 1,204,802 7,577,248
Bank loans payable 6,773,767 11,909,980
Notes and contracts payable 3,203,730 3,399,272
Estimated future costs of pre-need sales 6,743,983 6,376,651
Payable to endowment care fund 705,938 540,504
Accounts payable 869,990 1,321,559
Funds held under reinsurance
treaties 1,412,331 1,419,357
Other liabilities and
accrued expenses 3,801,928 3,787,385
Income taxes 5,935,186 6,008,537
------------ ------------
Total liabilities 167,859,332 179,806,331
Minority interest 6,104,710 6,778,557
Stockholders' Equity:
Common stock:
Class A: $2 par value, authorized
10,000,000 shares, issued 4,618,935
shares in 1999 and 4,617,330 shares
in 1998 9,243,004 9,234,660
Class C: $0.20 par value, authorized
7,500,000 shares, issued 5,407,559
shares in 1999 and 5,446,595 shares
in 1998 1,080,998 1,089,319
----------- ------------
Total common stock 10,324,002 10,323,979
Additional paid-in capital 9,596,462 9,596,444
Accumulated other comprehensive
income, net of deferred taxes 643,010 1,081,113
Retained earnings 8,054,532 7,474,783
Treasury stock at cost (826,291 Class
A shares in 1999 and 692,993 Class A
shares in 1998, and 59,028 Class C shares
in 1999 and 1998) (2,201,409) (1,796,060)
----------- ------------
Total stockholders' equity 26,416,597 26,680,259
------------ ------------
Total liabilities and
stockholders' equity $200,380,639 $213,265,147
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1999 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $ 1,783,920 $(7,367,462)
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities -- (524,563)
Calls and maturities - fixed
maturity securities 4,562,415 7,661,157
Securities available for sale:
Purchases - equity securities (43,759) (22,183)
Sales - equity securities -- 165,085
Calls and maturities - fixed
maturity securities 2,746,609 --
Purchases of short-term investments (7,896,342) (8,536,330)
Sales of short-term investments 16,093,963 9,602,460
Purchases of restricted assets (102,847) (181,201)
Mortgage, policy, and other loans made (4,619,857) (4,913,800)
Payments received for mortgage,
policy, and other loans 2,246,096 2,853,682
Purchases of property, plant,
and equipment (394,196) (779,647)
Purchases of real estate (368,051) (684,815)
----------- -----------
Net cash provided by
investing activities 12,224,031 4,639,845
----------- -----------
Cash flows from financing activities:
Annuity receipts 7,848,532 1,980,007
Annuity withdrawals (8,385,746) (2,620,893)
Repayment of bank loans and
notes and contracts payable (5,331,755) (560,388)
Purchase of treasury stock (405,349) --
Net change in line of credit
for financing of mortgage loans (6,372,446) 1,586,011
------------- -------------
Net cash (used in) provided by
financing activities (12,646,764) 384,737
------------- -------------
Net change in cash 1,361,187 (2,342,880)
Cash at beginning of period 6,670,996 3,408,179
------------- -------------
Cash at end of period $ 8,032,183 $ 1,065,299
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(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 nine months ended September 30, 1999, are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to
the consolidated financial statements and footnotes thereto for the
year ended December 31, 1998, 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 nine months ended September 30, 1999 and 1998, total
comprehensive income amounted to $142,000 and $579,000,
respectively.
For the three months ended September 30, 1999 and 1998, total
comprehensive income (loss) amounted to $224,000 and $(91,000),
respectively.
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
3. Capital Stock
In accordance with SFAS 128, the basic and diluted earnings per
share amounts were calculated as follows:
Nine Months Ended September 30,
1999 1998
------ -------
<S> <C> <C>
Numerator:
Net income $ 579,790 $ 747,513
========== ==========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 4,380,510 4,220,488
Effect of dilutive securities:
Employee stock options
Stock appreciation
rights -- --
----------- -----------
Dilutive potential
common shares -- --
----------- ------------
Denominator for diluted
earnings per
share-adjusted
weighted-average
shares and assumed
conversions 4,380,510 4,220,488
========== ==========
Basic earnings per share $0.13 $0.18
===== =====
Diluted earnings per share $0.13 $0.18
===== =====
Three Months Ended September 30,
1999 1998
------ ------
Numerator:
Net income $300,152 101,586
======== ========
Denominator:
Denominator for
basic earnings per
share-- weighted-
average shares 4,335,339 4,249,563
Effect of dilutive securities:
Employee stock options
Stock appreciation rights -- --
---------- ----------
Dilutive potential
common shares -- --
----------- -----------
Denominator for diluted
earnings per share-adjusted
weighted-average shares and
assumed conversions 4,335,339 4,249,563
========== ==========
Basic earnings per share $0.07 $0.02
===== =====
Diluted earnings per share $0.07 $0.02
===== =====
There are no dilutive effects on net income for purpose of this
calculation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
4. Business Segment
Life Cemetery/
Insurance Mortuary Mortgage
------------- ----------- ----------
For the Nine Months Ended
September 30, 1999
- --------------------------
<S> <C> <C> <C>
Revenues from external
customers $ 17,088,867 $ 8,190,945 $11,530,989
Intersegment revenues 1,592,254 -- --
Segment profit 707,166 (143,693) (48,313)
Identifiable assets 181,051,469 34,303,219 3,243,131
For the Nine Months Ended
September 30, 1998
- --------------------------
Revenues from external
customers 8,853,981 7,523,480 7,528,725
Intersegment revenues 1,071,262
Segment profit 634,314 (69,035) 176,757
Identifiable assets 105,776,139 31,576,764 3,054,293
For the Three Months Ended
September 30, 1999
- ---------------------------
Revenues from external
customers 5,352,226 2,567,912 4,213,504
Intersegment revenues 593,166 -- --
Segment profit 445,253 (116,203) 53,863
For the Three Months Ended
September 30, 1998
- ---------------------------
Revenues from external
customers 2,889,536 2,297,061 2,808,385
Intersegment revenues 384,228 -- --
Segment profit 162,742 (235,280) 96,498
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
4. Business Segment
Reconciling
Corporate Items Consolidated
---------- ------------ ------------
For the Nine Months Ended
September 30, 1999
- -------------------------
<S> <C> <C> <C>
Revenues from external
customers $ 37,890 $ $ 36,848,691
Intersegment revenues 2,876,251 (4,468,505) --
Segment profit 596,109 -- 1,111,269
Identifiable assets 2,154,010 (20,371,190) 200,380,639
For the Nine Months Ended
September 30, 1998
- -------------------------
Revenues from external
customers 11,443 -- 23,917,629
Intersegment revenues 568,709 (1,639,971) --
Segment profit 230,092 -- 972,128
Identifiable assets 2,239,393 (13,019,413) 129,627,176
For the Three Months Ended
September 30, 1999
- ---------------------------
Revenues from external
customers 26,729 -- 12,160,371
Intersegment revenues 960,070 (1,553,236) --
Segment profit 225,674 -- 608,587
For the Three Months Ended
September 30, 1998
- ---------------------------
Revenues from external
customers 3,206 -- 7,998,178
Intersegment revenues 190,090 (574,318) --
Segment profit 107,910 -- 131,870
</TABLE>
<PAGE>
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 the strong economy in the western United States by
originating and refinancing mortgage loans.
On December 17, 1998, the Company purchased all of the outstanding
shares of common stock of Consolidare Enterprises, Inc.,
("Consolidare") for a total cost of $12,248,194. As of September
30, 1999, Consolidare owns approximately 60.9% of the outstanding
shares of common stock of Southern Security Life Insurance Company
and all of the outstanding shares of stock of Insuradyne Corp.
The purchase of Consolidare, including its subsidiaries was
accounted for using the purchase method of accounting. Thus the
results of operations of the Company for the nine and three months
ended September 30, 1998 do not include the results of Consolidare.
In the Management's Discussion and Analysis of the Results of
Operations, the results of Consolidare for the nine and three months
ended September 30, 1999 have been excluded. See table
"Consolidated Statements of Earnings without Consolidare and
Subsidiaries" at the end of Management's Discussion and Analysis
which shows the effect of excluding the results of Consolidare for
the nine and three months ended September 30, 1999.
Including Consolidare, total revenues increased by $13,159,000, or
55.0%, to $37,077,000 for the nine months ended September 30, 1999,
from $23,918,000 for the nine months ended September 30, 1998 and
total benefits and expenses increased by $13,020,000 or 56.7%, to
$35,966,000 for the nine months ended September 30, 1999, from
$22,946,000 for the nine months ended September 30, 1998. Total
revenues increased by $4,391,000, or 54.9%, to $12,389,000 for the
three months ended September 30, 1999, from $7,998,000 for the three
months ended September 30, 1998 and total benefits and expenses
increased by $3,914,000, or 49.8% to $11,780,000 for the three
months ended September 30, 1999, from $7,866,000 for the three
months ended September 30, 1998. The results for Consolidare for
the nine and three months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1999, since the Company has not yet
realized many of the reduced costs of consolidation of
administrative functions and the implementation of new computer
systems.
Results of Operations
Third Quarter of 1999 Compared to Third Quarter of 1998
Total revenues increased by $1,798,000, or 22.5%, to $9,796,000 for
the three months ended September 30, 1999, from $7,998,000 for the
three months ended September 30, 1998. Contributing to this
increase in total revenues was a $1,259,000 increase in mortgage fee
income, a $285,000 increase in net mortuary and cemetery sales, a
$93,000 increase in insurance premiums and other considerations and
a $164,000 increase in net investment income.
Insurance premiums and other considerations increased by $93,000, or
6.1%, to $1,600,000 for the three months ended September 30, 1999,
from $1,507,000 for the comparable period in 1998. This increase
was primarily due to an increase in new business.
<PAGE>
Net investment income increased by $164,000, or 8.8%, to $2,039,000
for the three months ended September 30, 1999, from $1,875,000 for
the comparable period in 1998. This increase was attributable to a
higher yield on the Company's investments.
Net mortuary and cemetery sales increased by $285,000, or 13.6%, to
$2,379,000 for the three months ended September 30, 1999, from
$2,094,000 for the comparable period in 1998. This increase was the
result of additional pre-need and at-need sales.
Mortgage fee income increased by $1,259,000, or 50.3%, to $3,763,000
for the three months ended September 30, 1999, from $2,504,000 for
the comparable period in 1998. This increase was primarily
attributable to more loan originations during the third quarter of
1999 due to the expansion of business activities in new geographic
markets.
Total benefits and expenses were $9,417,000, or 96.1% of total
revenues for the three months ended September 30 1999, as compared
to $7,866,000, or 98.3% of total revenues for the comparable period
in 1998.
Death benefits, surrenders and other policy benefits, and increase
in future policy benefits increased by an aggregate of $36,000, or
2.2%, to $1,706,000 for the three months ended September 30, 1999,
from $1,670,000 for the comparable period in 1998. This increase
was primarily the result of additional policies in force.
Amortization of deferred policy acquisition costs and cost of
insurance acquired decreased by $54,000, or 13.4%, to $347,000, for
the three months ended September 30, 1999, from $401,000 for the
comparable period in 1998. This decrease was in line with actuarial
assumptions.
General and administrative expenses increased by $1,458,000, or
30.3%, to $6,268,000 for the three months ended September 30, 1999,
from $4,810,000 for the comparable period in 1998. 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 third quarter
of 1999 on account of the expansion of its business activities in
new geographic markets.
Interest expense increased by $42,000, or 16.0%, to $305,000 for the
three months ended September 30, 1999, from $263,000 for the
comparable period in 1998. This increase was primarily due to
additional bank borrowings required for the acquisition of
Consolidare.
Cost of mortuaries and cemeteries goods and services sold increased
by $69,000, or 9.6%, to $790,000 for the three months ended
September 30, 1999, from $721,000 for the comparable period in 1998.
This increase was primarily related to an increase in pre-need and
at-need sales.
Nine Months Ended September 30, 1999 as Compared to Nine Months
Ended September 30, 1998
Total revenues increased by $4,925,000, or 20.6%, to $28,843,000 for
the nine months ended September 30, 1999, from $23,918,000 for the
nine months ended September 30, 1998. Contributing to this increase
in total revenues was a $3,796,000 increase in mortgage fee income,
a $126,000 increase in realized gains on investments, a $261,000
increase in insurance premiums and other considerations, a $671,000
increase in net mortuary and cemetery sales, and a $55,000 increase
in net investment income.
<PAGE>
Insurance premiums and other considerations increased by $261,000,
or 5.8%, to $4,784,000 for the nine months ended September 30, 1999,
from $4,522,000 for the comparable period in 1998. This increase
was primarily due to an increase in new business.
Net investment income increased by $55,000, or 1.0%, to $5,642,000
for the nine months ended September 30, 1999, from $5,587,000 for
the comparable period in 1998. This increase was attributable to a
higher yield on the Company's investments.
Net mortuary and cemetery sales increased by $671,000, or 9.6%, to
$7,637,000 for the nine months ended September 30, 1999, from
$6,966,000 for the comparable period in 1998. This increase was the
result of additional pre-need and at-need sales.
Mortgage fee income increased by $3,796,000, or 56.8%, to
$10,483,000 for the nine months ended September 30, 1999, from
$6,687,000 for the comparable period in 1998. This increase was
primarily attributable to more loan originations during 1999 due to
the expansion of business activities in new geographic markets.
Total benefits and expenses were $28,120,000, or 97.5% of total
revenues for the nine months ended September 30 1999, as compared to
$22,946,000, or 95.9% of total revenues for the comparable period in
1998.
Death benefits, surrenders and other policy benefits, and increase
in future policy benefits increased by an aggregate of $242,000, or
4.8%, to $5,300,000 for the nine months ended September 30, 1999,
from $5,058,000 for the comparable period in 1998. This increase
was primarily the result of accumulative interest on policyholder
funds and an increase in death claims.
Amortization of deferred policy acquisition costs and cost of
insurance acquired increased by $38,000, or 3.8%, to $1,032,000 for
the nine months ended September 30, 1999, from $994,000 for the
comparable period in 1998. This increase was in line with the
increase in revenues.
General and administrative expenses increased by $4,531,000 or
32.5%, to $18,477,000 for the nine months ended September 30, 1999,
from $13,946,000 for the comparable period in 1998. 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 1999 on account of
the expansion of its business activities in new geographic markets.
Interest expense increased by $113,000, or 16.5%, to $795,000 for
the nine months ended September 30, 1999, from $682,000 for the
comparable period in 1998. This increase was primarily due to the
additional bank borrowings required for the acquisition of
Consolidare.
Cost of mortuaries and cemeteries goods and services sold increased
by $251,000, or 11.1%, to $2,515,000 for the nine months ended
September 30, 1999, from $2,264,000 for the comparable period in
1998. This increase was primarily related to an increase in pre-
need and at-need sales.
Liquidity and Capital Resources
The Company's life insurance subsidiary 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
<PAGE>
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 $65,174,000 as of September 30, 1999,
compared to $73,660,000 as of December 31, 1998. This represents
60.3% and 60.3% of the total insurance-related investments as of
September 30, 1999, and December 31, 1998, 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
September 30, 1999, .4% ($460,000) and at December 31, 1998, .4%
($460,000) of the Company's total investment in bonds were invested
in bonds in rating categories three through six, which are
considered non-investment grade.
The Company has classified certain of its fixed income securities,
including high-yield securities, in its portfolio as available for
sale, with the remainder classified as held to maturity. However,
in accordance with Company policy, any such securities purchased in
the future will be classified as held to maturity. Business
conditions, however, may develop in the future which may indicate a
need for a higher level of liquidity in the investment portfolio.
In that event the Company believes it could sell short-term
investment grade securities before liquidating higher-yielding
longer term securities.
The Company is subject to risk based capital guidelines established
by statutory regulators requiring minimum capital levels based on
the perceived risk of assets, liabilities, disintermediation, and
business risk. At September 30, 1999, and December 31, 1998, the
life insurance subsidiary exceeded the regulatory criteria.
The Company's total capitalization of stockholders' equity and bank
debt and notes payable was $36,394,000 as of September 30, 1999, as
compared to $41,990,000 as of December 31, 1998. Stockholders'
equity as a percent of capitalization increased to 73% as of
September 30, 1999, from 64% as of December 31, 1998.
Lapse rates measure the amount of insurance terminated during a
particular period. The Company's lapse rate for life insurance in
1998 was 6.0% as compared to a rate of 11.7% for 1998. The 1999
lapse rate is approximately the same as 1998.
<PAGE>
At September 30, 1999, $20,883,000 of the Company's consolidated
stockholders' equity represents the statutory stockholders' equity
of the Company's life insurance subsidiaries. The life insurance
subsidiary cannot pay a dividend to its parent company without the
approval of insurance regulatory authorities.
Year 2000 Issues
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium (Year 2000)
approaches. The Year 2000 problem is pervasive and complex as
virtually every computer operation will be affected in some way by
the rollover of the two digit year value to 00. The issue is whether
computer systems will properly recognize date sensitive information
when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a
system to fail.
The Company's insurance operations have two different administrative
systems for its insurance operations. The system used for Security
National Life Insurance Company was converted to a Year 2000
compliant version in the fourth quarter of 1998. The Company
expended approximately $52,000 for the conversion to this latest
version. As part of the acquisition of Southern Security Life
Insurance Company ("Southern Security"), the Company purchased a new
system which is Year 2000 compliant. The Company successfully
converted Southern Security's existing system to the new system on
January 1, 1999. The Company paid approximately $1.0 million for
this new system in 1998.
The Company's mortgage subsidiary uses a Year 2000 compliant system.
The Company's mortuary and cemetery operations converted to the
latest version for Year 2000 software during March 1999. The
Company's general accounting and payroll systems were converted to
Year 2000 versions during March 1999. The cost for these conversions
were not significant to consolidated net income.
The anticipated future costs of addressing potential Year 2000
problems are not currently expected to have a material adverse impact
on the Company's financial position, results of operations or cash
flows in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Management
believes that manual policy and claims administration could be
performed in the unlikely event that one or more of its systems did
not function.
The Company has tested each personal computer being used for Year
2000 compliance and has installed or replaced the necessary software
to meet compliance. The Company is monitoring the progress of third
party vendors which the Company relies upon, such as software
suppliers, telephone equipment and communication suppliers,
electricity suppliers, natural gas suppliers, banks, brokers, U.S.
Postal Service and express mail services. The Company is not aware
of any of its suppliers that will not be Year 2000 compliant and will
continue to monitor and make the necessary contingency plans where
needed. The Company is aware of the risks associated with any of its
internal systems or those of its suppliers that are not Year 2000
compliant.
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, 1998.
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Without Consolidare and Subsidiaries
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Consolidare
and
Subsidiaries
REVENUES: 1999 1998 1999
- -------- ---------- ----------- ------------
<S> <C> <C> <C>
Insurance premiums
and other considerations $ 10,008,484 $ 4,522,461 $ 5,224,546
Net investment income 7,663,760 5,587,104 2,021,328
Net mortuary and cemetery income 7,637,360 6,966,139 --
Realized gains on investments
and other assets 228,622 102,991 --
Mortgage fee income 10,483,052 6,687,379 --
Other 827,413 51,555 760,143
------------ ----------- -----------
Total Revenues 36,848,691 23,917,629 8,006,017
------------ ----------- -----------
BENEFITS AND EXPENSES:
Death benefits 3,434,847 1,785,148 1,439,772
Surrenders and other
policy benefits 2,958,351 791,529 1,829,452
Increase in future policy benefits 2,355,085 2,481,246 179,228
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 3,772,447 994,389 2,739,983
General and administrative
expenses:
Commissions 8,412,816 5,091,565 106,109
Salaries 5,643,863 3,950,062 860,271
Other 5,849,460 4,904,959 462,451
Interest expense 795,202 682,513 --
Cost of mortuaries and cemeteries
goods and services sold 2,515,351 2,264,090 --
----------- ----------- ----------
Total benefits and expenses 35,737,422 22,945,501 7,617,266
----------- ----------- ----------
Earnings before income taxes 1,111,269 972,128 388,751
Income tax expense (368,844) (224,615) (140,397)
Minority interest in income
of subsidiary (162,635) -- (162,635)
----------- ----------- ----------
Net earnings $ 579,790 $ 747,513 $ 85,719
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Without Consolidare and Subsidiaries
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Variance
Without without
Consolidare Consolidare
and and
Subsidiaries Subsidiaries
REVENUES: 1999 Amount Percent
- -------- ------------- ------------ --------
<S> <C> <C> <C>
Insurance premiums
and other considerations $ 4,783,938 $ 261,477 5.8%
Net investment income 5,642,432 55,328 1.0
Net mortuary and cemetery income 7,637,360 671,221 9.6
Realized gains on investments
and other assets 228,622 125,631 122.0
Mortgage fee income 10,483,052 3,795,673 56.8
Other 67,270 15,715 30.5
------------- ----------- ------
Total Revenues 28,842,674 4,925,045 20.6
------------- ----------- -------
BENEFITS AND EXPENSES:
- ---------------------
Death benefits 1,995,075 209,927 11.8
Surrenders and other
policy benefits 1,128,899 337,370 42.6
Increase in future policy benefits 2,175,857 (305,389) (12.3)
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 1,032,464 38,075 3.8
General and administrative
expenses:
Commissions 8,306,707 3,215,142 63.1
Salaries 4,783,592 833,530 21.1
Other 5,387,009 482,050 9.8
Interest expense 795,202 112,689 16.5
Cost of mortuaries and cemeteries
goods and services sold 2,515,351 251,261 11.1
----------- ---------- ------
Total benefits and expenses 28,120,156 5,174,655 22.6
----------- ---------- ------
Earnings before income taxes 722,518 (249,610) (25.7)
Income tax expense (228,447) (3,832) 1.7
Minority interest in income
of subsidiary -- -- --
----------- ----------- -----
Net earnings $ 494,071 $ (253,442) (33.9)%
=========== =========== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Without Consolidare and Subsidiaries
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
Consolidare
and
Subsidiaries
REVENUES: 1999 1998 1999
- -------- ----------- ---------- ------------
<S> <C> <C> <C>
Insurance premiums
and other considerations $ 3,648,476 $ 1,507,587 $ 2,048,276
Net investment income 2,317,189 1,874,925 277,953
Net mortuary and cemetery income 2,379,157 2,093,755 --
Realized gains on investments
and other assets 2,964 4,892 --
Mortgage fee income 3,763,234 2,503,984 --
Other 49,351 13,035 38,238
------------ ----------- -----------
Total Revenues 12,160,371 7,998,178 2,364,468
------------ ----------- -----------
BENEFITS AND EXPENSES:
- ---------------------
Death benefits 1,051,554 663,101 449,723
Surrenders and other
policy benefits 422,918 250,818 189,118
Increase in future policy benefits 911,014 756,575 40,522
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 1,246,271 401,335 898,911
General and administrative
expenses:
Commissions 3,163,108 1,848,048 136,429
Salaries 1,894,696 1,329,798 359,142
Other 1,766,703 1,632,379 60,694
Interest expense 304,943 262,784 --
Cost of mortuaries and cemeteries
goods and services sold 790,577 721,470 --
------------ ----------- ----------
Total benefits and expenses 11,551,784 7,866,308 2,134,539
------------ ----------- ----------
Earnings before income taxes 608,587 131,870 229,929
Income tax expense (209,431) (30,284) (122,587)
Minority interest in income
of subsidiary (99,004) -- (99,004)
----------- ----------- -----------
Net earnings $ 300,152 $ 101,586 $ 8,338
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Without Consolidare and Subsidiaries
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
Variance
Without without
Consolidare Consolidare
and and
Subsidiaries Subsidiaries
REVENUES: 1999 Amount Percent
- --------- ------------ ---------- -------
<S> <C> <C> <C>
Insurance premiums
and other considerations $ 1,600,200 $ 92,613 6.1%
Net investment income 2,039,236 164,311 8.8
Net mortuary and cemetery income 2,379,157 285,402 13.6
Realized gains on investments
and other assets 2,964 (1,928) (39.4)
Mortgage fee income 3,763,234 1,259,250 50.3
Other 11,112 (1,923) (14.8)
----------- ---------- -----
Total Revenues 9,795,903 1,797,725 22.5
----------- ---------- -----
BENEFITS AND EXPENSES:
- ----------------------
Death benefits 601,831 (61,270) (9.2)
Surrenders and other
policy benefits 233,800 (17,018) (6.8)
Increase in future policy benefits 870,492 113,917 15.1
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 347,360 (53,975) (13.4)
General and administrative
expenses:
Commissions 3,026,679 1,178,631 63.8
Salaries 1,535,554 205,756 15.5
Other 1,706,009 73,630 4.5
Interest expense 304,943 42,159 16.0
Cost of mortuaries and cemeteries
goods and services sold 790,577 69,107 9.6
---------- ---------- -----
Total benefits and expenses 9,417,245 1,550,937 19.7
---------- ---------- -----
Earnings before income taxes 378,658 246,788 187.1
Income tax expense (86,844) (56,560) 186.8
Minority interest in income
of subsidiary -- -- --
---------- ----------- ------
Net earnings $ 291,814 $ 190,228 187.3%
========== =========== ======
</TABLE>
<PAGE>
Part II Other Information:
Item 1. Legal Proceedings
The Company has been named as a party in connection with
pending litigation brought by Garry Eckard & Co., Inc.
("Eckard") in the Federal District Court for the Southern
District of Indiana. The complaint was filed on October
14, 1996 and alleges breach of contract and civil
conversion pertaining to a finder's fee and seeks an
unspecified amount of damages plus costs and attorneys'
fees. In a prior letter to the Company from Eckard, it
appears that the amount of the fee being sought is
$152,000 (excluding interest and attorney's fees). The
complaint, pursuant to the civil conversion claim, seeks
treble damages under Indiana's civil conversion statute.
The complaint was initially filed in the Indiana Hamilton
County Superior Court, but was subsequently removed by the
Company to the Federal District Court for the Southern
District of Indiana. The Company filed a motion to
dismiss for lack of personal jurisdiction and Eckard filed
a motion to amend its complaint and to add Security
National Life Insurance Company, a subsidiary of the
Company, as a party defendant. On March 18, 1997, the
Company's motion was granted to dismiss the complaint
against the Company for lack of personal jurisdiction and
Eckard's motion was granted to amend the complaint by
adding Security National Life Insurance Company as a party
defendant. The Company's motion to dismiss the complaint
against the Company was granted without prejudice, which
allows the complaint to be refiled in an appropriate
jurisdiction.
Security National Life Insurance Company also filed a
motion to dismiss for lack of personal jurisdiction. On
October 10, 1997, this motion to dismiss the complaint for
lack of personal jurisdiction was granted thereby also
dismissing the case against Security National Life
Insurance Company. Thus, the case in Indiana was
dismissed without prejudice against both the Company and
Security National Life Insurance Company for lack of
personal jurisdiction.
On March 13, 1998, a letter was sent by Eckard's counsel
relative to a settlement proposal together with a draft
complaint against the Company and Security National Life
Insurance Company for filing in the United States District
Court for the District of Utah. There was no material
difference between the complaint prepared for filing
in Utah and the amended complaint which had been filed in
Indiana. The complaint was filed in Utah on August 13,
1998. Since its filing (the claims being the same as in
the Indiana action), the treble damage claim (conversion)
has been dismissed with prejudice. The contract claim is
the remaining claim. Eckard claims a fee of $151,000 plus
interest through July 31, 1999 of $168,729 (and claims
interest continues to accrue), plus attorney's fees. The
formal discovery period has ended. Eckard and the Company
have both filed motions for summary judgment which have
been argued and are pending decisions by the court.
Although no prediction of outcome is given, management
intends to vigorously defend the action.
The Company has been named as a party in a lawsuit brought
by Robert L. Anderson ("Anderson") in the Superior Court
of San Diego, North County Judicial District, State of
California. The complaint was filed on January 28, 1999
<PAGE>
and pertains to the creation of the San Diego Memorial
Park Partnership and the development of Singing Hills
Memorial Park Cemetery. Anderson was denominated as a
partner in the 1989 partnership agreement. He asserts
that the Company did not carry out the partnership
agreement in developing the property as a cemetery and
residential lots and that instead the property was later
acquired by California Memorial Estates, Inc., a
subsidiary of the Company, and developed. Anderson
asserts a claim for lost profits because of alleged breach
of the partnership agreement and further asserts breach
of fiduciary duty, actual fraud, constructive fraud, asks
for an accounting, and alleges conspiracy and declaratory
relief. He seeks punitive damages, legal fees and costs.
Formal discovery is in process. At this juncture, with
discovery in process, no complete evaluation has been
made. Management, however, intends to vigorously defend
the matter and believes that Anderson did not perform as
required and that he has no bona fide basis to complain.
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)
<PAGE>
H. Deed of Trust and Assignment of Rents with the Carter
Family Trust and the Leonard M. Smith Family Trust (5)
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)
(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.
27. Financial Data Schedule
(b) Reports on Form 8-K:
NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
REGISTRANT
SECURITY NATIONAL FINANCIAL CORPORATION
---------------------------------------
Registrant
DATED: November 19, 1999 By: George R. Quist,
----------------- ---------------
President and Chief
Executive Officer
(Principal Executive
Officer)
DATED: November 19, 1999 By: Scott M. Quist
----------------- --------------
First Vice President,
General Counsel and
Treasurer (Principal
Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 24,670,200
<DEBT-CARRYING-VALUE> 24,670,200
<DEBT-MARKET-VALUE> 24,670,200
<EQUITIES> 5,170,218
<MORTGAGE> 15,357,344
<REAL-ESTATE> 7,890,150
<TOTAL-INVEST> 108,040,664
<CASH> 8,032,183
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 10,211,461
<TOTAL-ASSETS> 200,380,639
<POLICY-LOSSES> 1,696,973
<UNEARNED-PREMIUMS> 1,732,318
<POLICY-OTHER> 43,936,840
<POLICY-HOLDER-FUNDS> 89,896,539
<NOTES-PAYABLE> 9,977,497
0
0
<COMMON> 10,324,002
<OTHER-SE> 16,092,595
<TOTAL-LIABILITY-AND-EQUITY> 200,380,639
10,008,484
<INVESTMENT-INCOME> 7,663,760
<INVESTMENT-GAINS> 228,622
<OTHER-INCOME> 827,413
<BENEFITS> 6,393,198
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,111,269
<INCOME-TAX> 368,844
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 579,790
<EPS-BASIC> .13
<EPS-DILUTED> .13
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
