UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number: 0-9341
SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 87-0345941
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5300 South 360 West, Suite 250, Salt Lake City, Utah 84123
----------------------------------------------------- -------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 264-1060
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Securities Exchange Act
of 1934. (Check one)
Large accelerate filer [ ] Accelerated filer [ ] Non-accelerated filer [X}
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934): Yes No [X] ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $2.00 par value 6,382,867
------------------------------------- ---------
Title of Class Number of Shares Outstanding as of
October 31, 2007
Class C Common Stock, $.20 par value 8,124,474
------------------------------------ ---------
Title of Class Number of Shares Outstanding as of
October 31, 2007
============================================================================
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2007
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
------ --------
Condensed Consolidated Balance Sheets - September 30, 2007
and December 31, 2006, (unaudited)...............................3-4
Condensed Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 2007 and 2006
(unaudited)........................................................5
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2007 and 2006 (unaudited)..........6
Notes to Condensed Consolidated Financial Statements
(unaudited)......................................................7-15
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................16-22
Item 3 Quantitative and Qualitative Disclosures about Market Risk........22
------
Item 4 Controls and Procedures...........................................22
------
PART II - OTHER INFORMATION
Other Information..............................................22-29
Signature Page....................................................30
Certifications.................................................31-33
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
Assets 2007 2006
----------------- ----------------
Investments:
Fixed maturity securities, held to maturity, at amortized cost $ 95,705,942 $ 98,317,519
Fixed maturity securities, available for sale, at estimated fair value 2,901,343 3,417,531
Equity securities, available for sale, at estimated fair value 5,705,100 5,261,695
Mortgage loans on real estate and construction loans,
net of allowances for losses
83,213,833 85,135,011
Real estate, net of accumulated depreciation 4,655,510 5,002,853
Policy, student and other loans net of allowance
for doubtful accounts
16,472,969 12,846,986
Short-term investments 6,457,748 4,586,828
Accrued investment income 3,191,043 2,684,029
------------ ------------
Total investments 218,303,488 217,252,452
----------- ------------
Cash and cash equivalents 6,888,959 10,376,585
Mortgage loans sold to investors 93,003,056 59,817,248
Receivable, net 17,138,233 14,878,118
Restricted assets of cemeteries and mortuaries 5,624,098 5,430,870
Cemetery perpetual care trust investments 1,508,740 1,306,984
Receivable from reinsurers 726,774 700,850
Cemetery land and improvements 9,313,597 8,745,424
Deferred policy and pre-need contract acquisition costs 29,953,496 28,395,762
Property and equipment, net 14,866,155 14,059,529
Cost of insurance acquired 11,157,998 11,882,047
Goodwill 1,075,039 683,191
Other 4,034,485 3,866,123
------------ ------------
Total assets $413,594,118 $377,395,183
============ ============
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
September 30, December 31,
2007 2006
-------------- -------------
Liabilities and Stockholders' Equity
Liabilities
Future life, annuity, and other benefits $274,461,602 $268,403,765
Unearned premium reserve 4,907,694 4,519,387
Bank loans payable 35,195,784 6,923,344
Notes and contracts payable 909,571 747,188
Deferred pre-need cemetery and mortuary contract revenues 12,331,048 11,533,798
Accounts payable 1,765,112 1,820,178
Other liabilities and accrued expenses 10,859,891 11,611,033
Income taxes 16,295,092 16,587,284
------------ ------------
Total liabilities 356,725,794 322,145,977
------------ ------------
Non-Controlling Interest in Perpetual Care Trusts 2,366,429 2,278,510
------------ ------------
Stockholders' Equity:
Common stock:
Class A: $2.00 par value, 20,000,000 shares
authorized; issued 7,507,360 shares in 2007 and
7,533,230 shares in 2006
15,014,720 15,066,460
Class B non-voting common stock-$1.00 par value; 5,000,000 shares
authorized; none issued or outstanding
-- --
Class C: convertible common stock - $0.20 par value; 15,000,000
shares authorized; issued 8,124,474 shares in 2007 and
7,117,591 shares in 2006
1,624,895 1,423,518
Additional paid-in capital 17,010,745 17,064,488
Accumulated other comprehensive income and other items 1,651,326 1,703,155
Retained earnings 21,512,296 20,495,063
Treasury stock at cost - 1,124,493 Class A shares and
-0- Class C shares in 2007; 1,195,127 Class A shares and
145,045 Class C shares in 2006
(2,312,087) (2,781,988)
----------- ------------
Total stockholders' equity 54,501,895 52,970,696
------------ ------------
Total Liabilities and Stockholders' Equity $413,594,118 $377,395,183
============ ============
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Revenues: 2007 2006 2007 2006
---- ---- ---- ----
Insurance premiums and other considerations $ 8,426,016 $ 7,537,345 $ 24,294,625 $ 22,494,867
Net investment income 7,637,865 5,742,427 24,590,361 16,321,485
Net mortuary and cemetery sales 3,212,772 2,864,920 10,157,891 9,073,938
Realized gains on investments and other assets 2,053 731,658 738,721 789,329
Mortgage fee income 31,998,895 21,602,097 94,600,013 56,161,784
Other 386,340 96,328 644,370 283,514
----------- ----------- ------------ ------------
Total revenues 51,663,941 38,574,775 155,025,981 105,124,917
----------- ----------- ------------ ------------
Benefits and expenses:
Death benefits 3,997,893 3,367,393 12,171,871 10,757,083
Surrenders and other policy benefits 566,596 405,824 1,638,798 1,403,185
Increase in future policy benefits 3,133,326 2,931,798 8,807,311 8,279,678
Amortization of deferred policy and pre-need
acquisition costs and cost of insurance acquired 1,456,808 1,383,426 4,180,293 2,948,423
General and administrative expenses:
Commissions 24,609,493 15,997,433 71,904,695 42,045,749
Salaries 6,137,254 4,469,881 17,824,099 12,959,734
Other 9,186,678 5,996,090 24,933,545 17,196,515
Interest expense 3,075,886 1,331,487 10,333,211 3,440,038
Cost of goods and services sold-
Mortuaries and cemeteries
637,520 557,908 1,952,443 1,765,953
----------- ----------- ------------ ------------
Total benefits and expenses 52,801,454 36,441,240 153,746,266 100,796,358
----------- ----------- ------------ ------------
Earnings (loss) before income taxes (1,137,513) 2,133,535 1,279,715 4,328,559
Income tax (expense) benefit 475,069 (592,238) (166,590) (1,049,957)
----------- ----------- ------------ -------------
Net earnings (loss) $ (662,444) $ 1,541,297 $ 1,113,125 $ 3,278,602
========== ========== ============ =============
Net earnings (loss) per Class A equivalent
common share $(0.09) $0.22 $0.16 $0.47
======= ===== ===== =====
Net earnings (loss) per Class A equivalent
common share-assuming dilution $(0.09) $ 0.22 $0.15 $0.47
======= ====== ===== =====
Weighted-average Class A equivalent common
shares outstanding 7,146,124 6,969,001 7,095,691 6,954,329
========= ========= ========= =========
Weighted-average Class A equivalent common
shares outstanding assuming-dilution 7,146,124 7,085,531 7,305,029 7,088,205
========= ========= ========= =========
Earnings (loss) per share amounts have been adjusted retroactively for the
effect of annual stock dividends. The weighted-average shares outstanding
includes the weighted-average Class A common shares and the weighted-average
Class C common shares determined on an equivalent Class A common stock basis.
Net earnings per common share represent net earnings per equivalent Class A
common share. Net earnings per Class C common share is equal to one-tenth (1/10)
of such amount.
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2007 2006
-------- --------
Cash flows from operating activities:
Net cash provided by (used in) operating activities $(24,558,802) $23,210,232
------------ -----------
Cash flows from investing activities: Securities held to maturity:
Purchase - fixed maturity securities (3,741,486) (8,308,157)
Calls and maturities - fixed maturity securities 6,391,892 2,802,159
Securities available for sale:
Purchase - fixed maturity securities (102,849) (173,262)
Sales - equity securities 823,063 10,002,660
Purchases of short-term investments (12,570,340) (9,299,253)
Sales of short-term investments 10,699,420 --
Purchases of restricted assets (183,448) (63,943)
Change in assets for perpetual care trusts (145,930) (58,433)
Amount received for perpetual care trusts 87,919 85,855
Mortgage, policy, and other loans made (59,027,000) (51,337,926)
Payments received for mortgage, policy, and other loans 57,240,984 44,156,058
Purchases of property and equipment (2,486,470) (1,241,988)
Disposal of property and equipment 730,542 679,769
Purchases of real estate (1,223,983) (1,830,877)
Purchase of subsidiary (27,971) --
Sale of real estate 1,335,183 2,914,996
------------ ------------
Net cash provided by (used in) investing activities (2,200,474) (11,672,342)
Cash flows from financing activities:
Annuity contract receipts 4,554,778 4,484,563
Annuity contract withdrawals (9,755,104) (8,325,520)
Sale of treasury stock 469,901 454,701
Repayment of bank loans and notes and
contracts payable (2,504,778) (2,535,312)
Proceeds from borrowing on bank loans 30,506,853 750,000
------------- ------------
Net cash used in financing activities 23,271,650 (5,171,568)
------------- -------------
Net change in cash and cash equivalents (3,487,626) 6,366,322
Cash and cash equivalents at beginning of period 10,376,585 16,632,966
------------- ------------
Cash and cash equivalents at end of period $ 6,888,959 $ 22,999,288
============ ============
See accompanying notes to condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007 (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
These financial statements should be read in conjunction with the consolidated
financial statements of the Company and notes thereto for the year ended
December 31, 2006, included in the Company's Annual Report on Form 10-K (file
number 0-9341). In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 2007 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2007.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
The estimates susceptible to significant change are those used in determining
the liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, and those used in
determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are fairly stated in all material respects.
Certain 2006 amounts have been reclassified to bring them into conformity with
the 2007 presentation.
2. Recent Accounting Pronouncements
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes, which attempts to set out a consistent framework for preparers to use to
determine the appropriate level of valuation allowance tax reserves to maintain
for deferred tax assets relating to uncertain tax positions. This interpretation
for FASB Statement No. 109 uses a two-step approach wherein a tax benefit is
recognized if a position is more-than-likely-than-not to be sustained. The
amount of the benefit is then measured to be the highest tax benefit, which is
greater than fifty percent likely to be realized. FIN 48 also sets out
disclosure requirements to enhance transparency of an entity's tax reserves. The
Company adopted this Interpretation as of January 1, 2007. Management has
considered the amounts and the probabilities of the outcomes that could be
realized upon ultimate settlement and believes that it is more-likely-than-not
that the Company's recorded income tax benefits will be fully realized. There
were no unrecognized tax benefits at the beginning or at the end of the six
months ended September 30, 2007.
The Company records interest earned on income-tax refunds in other income, and
penalties and interest charged on tax deficiencies in interest expense. As of
the date of adoption, there were no amounts accrued for penalties or interest
related to unrecognized tax benefits.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 will be
applied prospectively and is effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. SFAS 157 is not
expected to have a material impact on the Company's consolidated financial
statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007 (Unaudited)
In February 2007, the FASB issued SFAS No 159, The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No 115 ("SFAS 159"). SFAS 159 allows measurement at fair value of
eligible financial assets and liabilities that are not otherwise measured at
fair value. If the fair value option for an eligible item is elected, unrealized
gains and losses for that item shall be reported in current earnings at each
subsequent reporting date. SFAS 159 also establishes presentation and disclosure
requirements designed to draw comparison between the different measurement
attributes the Company elects for similar types of assets and liabilities. This
statement is effective for fiscal years beginning after November 15, 2007. The
Company is in the process of evaluating the application of the fair value option
and its effect on its financial position and results of operations.
3. Comprehensive Income
For the three months ended September 30, 2007 and 2006, total comprehensive
(loss) income amounted to $(1,379,000) and $1,255,000, respectively. This
decrease of $2,634,000 was primarily the result of a decrease in net income of
$2,204,000, a decrease in derivatives of $168,000, and a decrease in unrealized
gains and losses in securities available for sale of $262,000.
For the nine months ended September 30, 2007 and 2006, total comprehensive
income amounted to $1,061,000 and $3,915,000, respectively. This decrease of
$2,854,000 was primarily the result of a decrease in net income of $2,165,000, a
decrease in derivatives of $292,000, and a decrease in unrealized gains and
losses in securities available for sale of $397,000.
4. Stock-Based Compensation
The Company accounts for its stock-based compensation plans according to the
provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based
Payment" ("FAS 123R"). Under SFAS 123R, all stock-based compensation is measured
at the grant date, based on the fair value of the option or award, and is
recognized as an expense in earnings over the requisite service, which is
typically through the date the options vest.
The Company adopted SFAS 123R using the modified prospective method. Under this
method, for all stock-based options and awards granted prior to January 1, 2006
that remain outstanding as of that date, compensation cost is recognized for the
unvested portion over the remaining requisite service period, using the
grant-date fair value measured under the original provisions of SFAS 123 for pro
forma and disclosure purposes. Furthermore, compensation costs will also be
recognized for any awards issued, modified, repurchased or cancelled after
January 1, 2006.
The Company utilized the Black-Scholes-Merton model for calculating the fair
value of stock awards and stock options.
No options were granted for the three and nine months ended September 30, 2007.
Total compensation costs relating to stock-based compensation was not material
during the three and nine months ended September 30, 2007.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007 (Unaudited)
The Company's Board of Directors granted stock options in 2004 to Scott M.
Quist, the Company's President and Chief Operating Officer, to purchase up to
1,000,000 shares of Class C common stock at exercise prices of $.323 and $.36
per share. On May 31, 2007, Mr. Quist made a cashless exercise of such options
to purchase a total of 1,157,625 shares of Class C common stock that he was
entitled to receive, after adjustments for 5% stock dividends the Company issued
in 2005, 2006 and 2007.
In connection with the exercise of such options on a cashless basis, Mr. Quist
delivered a total of 58,376 shares of Class A common stock to the Company that
he held in exchange for all the Class C shares he would be entitled to receive
for exercising the options. Inasmuch as there were 6,966,849 shares of Class C
common stock outstanding as of May 31, 2007 out of a total of 7,500,000
authorized shares of Class C common stock, the Company could legally issue only
533,151 shares of Class C common stock to Mr. Quist, leaving a balance of
624,474 Class C common shares owing to him.
In order to issue the additional shares of Class C common shares owing to Mr.
Quist, the Board of Directors approved on July 13, 2007 an amendment to the
Company's Articles of Incorporation to increase the authorized number of Class C
common shares from 7,500,000 shares to 15,000,000 shares. Because stockholder
approval was also required to amend the Articles of Incorporation, the Company
scheduled a Special Stockholders Meeting on September 21, 2007 to approve the
amendment to the Articles of Incorporation to increase the authorized number of
shares of Class C common stock to 15,000,000 shares. The stockholders approved
the amendment to the Articles of Incorporation at the Special Stockholders
Meeting that increased the authorized number of Class C common shares to
15,000,000 shares, and, as a result, the Company was able to issue Mr. Quist the
additional 624,474 shares of Class C common stock that were owed pursuant to his
exercise of stock options.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007 (Unaudited)
5. Earnings Per Share
The basic and diluted earnings per share amounts were calculated as follows:
Three Months Ended
September 30,
2007 2006
----- -----
Numerator:
Net earnings (loss) $(662,444) $1,541,297
========== ==========
Denominator:
Basic weighted-average shares
outstanding 7,146,124 6,960,001
---------- -----------
Effect of dilutive securities:
Employee stock options -- 124,490
Stock appreciation rights -- 1,040
Employee deferred compensation rights -- --
---------- ------------
-- 125,530
Dilutive potential common shares ---------- ------------
7,146,124 7,085,531
Diluted weighted-average shares
outstanding ========== ============
Basic earnings (loss) per share $(0.09) $0.22
====== =====
Diluted earnings (loss) per share $(0.09) $0.22
====== =====
Earnings per share amounts have been adjusted for the effect of annual
stock dividends.
Nine Months Ended
September 30,
2007 2006
------ ------
Numerator:
Net earnings (loss) $1,113,125 $3,278,602
========== ==========
Denominator:
Basic weighted-average
shares outstanding 7,095,691 6,954,329
---------- ----------
Effect of dilutive securities:
Employee stock options 174,856 132,795
Stock appreciation rights -- 1,081
Employee deferred compensation
rights 34,482 --
---------- -----------
Dilutive potential common shares 209,338 133,876
---------- -----------
Diluted weighted-average
shares outstanding 7,305,029 7,088,205
========== ===========
Basic earnings per share $0.16 $0.47
===== =====
Diluted earnings per share $0.15 $0.46
===== =====
Earnings per share amounts have been adjusted for the effect of annual
stock dividends.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007 (Unaudited)
6. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
For the Three Months Ended
September 30, 2007
Revenues from
external customers $11,796,377 $3,696,222 $36,171,342 $ -- $51,663,941
Intersegment revenues 2,189,160 23,001 120,753 (2,332,914) --
Segment profit (loss)
Before income taxes 974,792 267,801 (2,380,106) -- (1,137,513)
For the Three Months Ended
September 30, 2006
Revenues from
external customers $10,932,078 $3,908,464 $23,734,233 $ -- $38,574,775
Intersegment revenues 1,119,078 23,001 103,139 (1,245,218) --
Segment profit (loss)
Before income taxes 993,541 662,308 477,686 -- 2,133,535
For the Nine Months Ended
September 30, 2007
Revenues from
external customers $35,023,638 $11,823,233 $108,179,110 $ -- $155,025,981
Intersegment revenues 5,294,222 69,003 363,097 (5,726,322) --
Segment profit (loss)
before income taxes 2,619,906 1,286,531 (2,626,722) -- 1,279,715
Identifiable assets 393,303,995 60,185,223 20,647,581 (60,542,681) 413,594,118
For the Nine Months Ended
September 30, 2006
Revenues from
External customers $32,541,462 $10,677,636 $61,905,819 -- $105,124,917
Intersegment revenues 3,773,545 69,003 315,757 (4,158,305) --
Segment profit (loss)
before income taxes 3,046,942 1,267,436 14,181 -- 4,328,559
Identifiable assets 356,839,984 54,111,387 19,571,930 (59,248,912) 371,274,389
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007, (Unaudited)
7. Other Business Activity
On March 5, 2007, the Company received a proposed consent order from the Florida
Office of Insurance Regulation concerning the New Success Life Program, the
higher education product previously being marketed and sold by Southern Security
Life. The proposed order states that as a result of an investigation the Florida
Office has determined that Southern Security Life violated Florida law (i) by
knowingly making statements, sales presentations, omissions or comparisons that
misrepresented the benefits, advantages, or terms of the New Success Life
Program, and (ii) by knowingly making, advertisements, announcements, or
statements containing representations that were untrue or misleading.
The proposed order would require Security National Life and Southern Security
Life to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required to send a written notice to Florida consumers who purchased
the New Success Life Program on or after January 1, 1998 stating that the higher
education program is a whole life insurance product, with a term and annuity
rider, and not a college trust fund, savings plan, or other program, and it may
not necessarily pay college expenses in full from the accumulated value.
Moreover, the written notice is to provide an opportunity for the Florida
consumers who purchased the New Success Life Program on or after January 1, 1998
to cancel their policy and be given a full refund, including all premiums paid,
together with interest at the agreed upon rate in the original contract. If each
of the Florida consumers who purchased the New Success Life Program after
January 1, 1998 was to cancel his or her policy and receive a refund, the cost
to the Company to refund all premiums paid, including interest, would be
approximately $8,200,000, an amount in excess of the assets of Southern Security
Life.
The proposed consent order would also require Security National Life and
Southern Security Life to issue refunds including interest to the eleven
policyholders whose affidavits were taken in connection with the administrative
complaint that the Florida Office had previously filed against Franz Wallace,
the former National Sales Director of Southern Security Life. Security National
Life and Southern Security Life would additionally be required to issue refunds,
including interest, to any Florida policyholder in the New Success Life Program
who had filed a complaint with the Florida Department of Financial Services or
whose coverage had lapsed. Furthermore, Security National Life and Southern
Security Life would be required to notify the state insurance department in each
state in which the New Success Life Program is marketed of the order and any
complaint that Southern Security Life received relating to the New Success Life
Program from policyholders in that state. Finally, Security National Life and
Southern Security Life would be required to pay the Florida Office a penalty of
$100,000 and administrative costs of $5,000.
The Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office has with the New Success Life
Program because it has received no specific administrative complaint from the
Florida Office nor is it aware of any recent market conduct examination that the
Florida Office has conducted relative to the program. The Company intends to
vigorously oppose the proposed consent order. The Company is currently engaged
in discussions with the Florida Office in an effort to settle the dispute
concerning the proposed order. If the Company is unable to reach a satisfactory
resolution with the
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007, (Unaudited)
7. Other Business Activity (continued)
Florida Office with respect to the terms of the proposed consent order and the
Florida Office issues a similar order, the Company intends to take action
necessary to protect its rights and interests, including requesting a hearing
before an administrative law judge to oppose the order. The Company believes any
potential liability would be limited to the net assets of Southern Security
Life, which are approximately $3,914,000.
In June 2007, the Company completed the sale of the Colonial Funeral Home
property to the Utopia Station Development Corp. for $730,242, net of selling
costs of $44,758. The Colonial Funeral Home ceased operations in July 2006 and
has been inactive since that date. The carrying amount on the Company's
financial statements on June 20, 2007 was $148,777. As a result of the sale,
including payment of selling expenses, the Company recognized a gain of
$581,465. The Company received an initial payment of $15,242, with the remaining
amount due of $715,000 to be paid in a lump sum within the year. The gain has
been included as a part of realized gains on investments and other assets in the
Company's condensed consolidated statement of earnings.
On June 12, 2007, Security National Life Insurance Company entered into a
revolving line of credit with a financial institution to borrow up to
$40,000,000. The revolving line of credit is secured by commercial mortgages and
construction loans. The terms of the revolving line of credit is for a one year
term and interest is based upon the one year LIBOR rate (6.95% as of September
30, 2007). Accrued Interest will be paid on a monthly basis, with the principal,
together with any outstanding accrued interest, to be paid in full on June 12,
2008. Security National Life Insurance Company intends to use this financing to
provide short term liquidity for its commercial mortgage, construction and
warehouse lending operations of its affiliate SecurityNational Mortgage Company.
The amount outstanding as of September 30, 2007 was $28,680,453. The amount
outstanding at November 13, 2007 was $10,000,000.
Recently SecurityNational Mortgage Company renewed its warehouse lines of credit
with its non affiliated warehouse lenders. The total amount available under
these lines of credit is $450,000,000. The terms of the lines of credit are for
one year, with interest rates ranging from 1.5% to 1.75% over the three month
LIBOR (6.73% to 6.98% as of September 30, 2007).
On July 16, 2007, the Company completed a purchase transaction with C & J
Financial, LLC, an Alabama limited liability company ("C & J Financial"). C & J
Financial operates a factoring business with offices in Rainbow City, Alabama
with an emphasis on providing financing for funeral homes and mortuaries. Under
the terms of the Unit Purchase Agreement dated July 16, 2007, (the "Purchase
Agreement") among the Company, C & J Financial, Henry Culp, Jr. ("Culp") and
Culp Industries, Inc. ("Culp Industries"), the Company purchased all of the
outstanding member units of C & J Financial for a purchase consideration of (i)
$1,250,000 in cash, (ii) a promissory note from the Company to Culp in the
amount of $381,500 plus interest at the rate of 5% per annum, payable over a
period of 24 months in monthly payments of $16,737, including interest, until
paid in full, and (iii) a quit claim deed from C & J Financial to Culp,
conveying ownership of the building and surrounding property located in the
Jester Commercial Park in Rainbow City, Alabama, where C & J Financial currently
maintains its business offices. At closing, Culp Industries entered into a lease
agreement with C & J Financial to lease to C & J Financial approximately 5,000
square feet in the building located at the Jester Commercial Park. The lease is
for a term of three years for which C & J Financial, as tenant, is required to
make monthly payments of $1,200, for a total lease payment of $43,200.
6
The Purchase Agreement additionally required Culp to deliver to the Company at
closing a promissory note (the "Note") in the principal amount of $1,755,236
plus interest at the rate of 8.25% per annum from C & J Financial, as borrower,
to Culp, as lender, with such note to be cancelled and marked "paid in full".
Moreover, the agreement provides for the possibility of adjustments. If the
total equity on the balance sheet of C & J Financial as of May 31, 2007, defined
as total assets minus total liabilities, is greater than the amount of the
equity on the balance sheet of C & J Financial as of the closing date, or July
16, 2007, Culp agrees to pay to the Company the difference between the total
equity on the balance sheet as of May 31, 2007 and the total equity on the
balance sheet as of July 16, 2007 by reducing the amount of the Note by such
difference in the amounts of the total equity on such balance sheets. If the
amount of the total equity on the balance sheet of C & J Financial as of May 31,
2007 is less than the amount of the total equity on the balance sheet of C & J
Financial as of July 16, 2007, the Company agrees to pay Culp the difference
between the total equity on the balance sheet as of May 31, 2007 and the total
equity on the balance sheet as of July 16, 2007 by increasing the amount of the
Note payable by such difference in the amounts of the total equity on such
balance sheets.
The Purchase Agreement further requires each unitholder to deliver to the
Company a non-competition and confidentiality agreement prohibiting the
unitholder from competing with C & J Financial for a period of five years from
July 16, 2007 through July 16, 2012. The Company also entered into a one year
consulting agreement with Culp, which requires Culp to provide part-time
consulting services for C & J Financial at $50.00 per hour, and a five year
employment agreement with Kevin O. Smith ("Smith"), Vice President of C & J
Financial, who will continue to serve in that position. The employment agreement
requires C & J Financial to pay Smith an annual salary of $96,000 plus a
discretionary bonus and a monthly car allowance of $1,161.
Finally, the Purchase Agreement requires the Company, C & J Financial, Culp and
Culp Industries to acknowledge the existence of a business loan agreement
between Regions Bank, as lender, and Culp Industries, as borrower, which
provides for a line of credit for C & J Financial. The outstanding balance on
the line of credit as of July 16, 2007 was $1,971,764. The line of credit was
secured by, among other assets, the accounts receivable of C & J Financial and
was personally guaranteed by Culp. The Company agreed it would pay off the
outstanding balance of the line of credit with Regions Bank. The Company has
since paid off the outstanding balance on the line of credit by means of
applying the payments from the accounts receivable of C & J Financial as such
payments were made in the ordinary course of business.
At June 30, 2007, total assets of C & J Financial were $3,197,000 and total
liabilities were $3,526,000, which includes the Note to Culp in the amount of
$1,755,000 that was cancelled at closing. For the seven month period from
November 1, 2006 to May 31, 2007, total revenues of C & J Financial were
$775,000 and total expenses were $764,000, resulting in net income of $11,000.
For the fiscal year ended October 31, 2006, total revenues of C & J Financial
were $1,397,000 and total expenses were $1,351,000, resulting in net income of
$46,000. For the fiscal year ended October 31, 2005, total revenues of C & J
Financial were $1,137,000 and total expenses were $1,114,000, resulting in net
income of $23,000. The Company anticipates utilizing the employees and
operations of C & J Financial to expand its fast funding operations, which
provide financing for funeral homes and mortuaries.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007, (Unaudited)
8. Subsequent Event
On October 9, 2007, Security National Financial Corporation, through its wholly
owned subsidiary, Security National Life Insurance Company, entered into a stock
purchase agreement (the "Stock Purchase Agreement") with Capital Reserve Life
Insurance Company, a Missouri domiciled insurance company ("Capital Reserve"),
and its shareholders to purchase all of the outstanding shares of common stock
of Capital Reserve from its shareholders. Under the terms of the transaction,
Security National Life Insurance Company agrees to pay to the shareholders of
Capital Reserve purchase consideration equal to the capital and surplus of
Capital Reserve as of September 30, 2007 in the amount of $1,274,000, plus the
interest maintenance reserve in the amount of $31,000 and the asset valuation
reserve in the amount of $209,000 as of September 30, 2007, plus $1,037,967,
less certain adjustments. The adjustments consist of any losses related to two
litigation matters involving Capital Reserve and the difference in the amount of
Capital Reserve's capital and surplus at closing compared to the amount of its
capital and surplus on September 30, 2007.
As of December 31, 2006, Capital Reserve had 10,851 policies in force and
approximately 30 agents. For the year ended December 31, 2006, Capital Reserve
had revenues of $5,663,000 and a net loss of $244,000. As of December 31, 2006,
the statutory assets and the capital and surplus of Capital Reserve were
$24,084,000 and $1,960,000, respectively.
Security National Life Insurance Company anticipates completing the transaction
on or before November 30, 2007, or within seven days from the date the required
regulatory approvals are obtained. The obligations of Security National Life
Insurance Company and Capital Reserve to complete the transaction are contingent
upon satisfaction of the following conditions: (i) a complete and satisfactory
review by Security National Life Insurance Company of the books, records and
business of Capital Reserve; (ii) approval and adoption of the Stock Purchase
Agreement by the Board of Directors of Security National Life Insurance Company
and Capital Reserve; and (iii) approval of the transaction by any regulatory
authorities having jurisdiction over Security National Life Insurance Company
and Capital Reserve, including the insurance departments of the states of
Missouri and Utah.
At the closing of the transaction, Security National Life Insurance Company and
Capital Reserve intend to enter into a reinsurance agreement to reinsure the
majority of the in force business of Capital Reserve, as reinsurer, to the
extent permitted by the Missouri Department of Insurance. Under the terms of the
reinsurance agreement, Security National Life Insurance Company would pay a
ceding commission to Capital Reserve in the amount of $1,738,000. In addition,
following the payment of the ceding commission, Capital Reserve intends to
declare a dividend to Security National Life Insurance Company in the amount of
$1,738,000. The reinsurance agreement and the dividend payment are subject to
approval by the Missouri Department of Insurance.
As a result of the reinsurance agreement, certain insurance business and
operations of Capital Reserve would be transferred to Security National Life
Insurance Company, including all policies in force as of the effective date
thereof. Any future business by Capital Reserve would be covered by this
reinsurance agreement. Thus, except for capital and surplus of $1,274,000,
$23,569,000 in assets and liabilities would be transferred from Capital Reserve
to Security National Life Insurance Company pursuant to the reinsurance
agreement. Following the closing of the transaction, Capital Reserve will
continue to sell and service life insurance, annuity products, accident and
health insurance, and funeral plan insurance.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Overview
The Company's operations over the last several years generally reflect three
trends or events which the Company expects to continue: (i) increased attention
to "niche" insurance products, such as the Company's funeral plan policies and
traditional whole-life products; (ii) emphasis on cemetery and mortuary
business; and (iii) originating and refinancing mortgage loans.
Mortgage Operations
During the nine months ended September 30, 2007, Security National Mortgage
Company ("SNMC") experienced an increase in revenues and expenses due to the
increase in loan volume of its mortgage 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 15,843 loans ($2,932,656,000
total volume) and 9,665 loans ($1,607,842,000 total volume), for the nine months
ended September 30, 2007 and 2006, respectively.
The mortgage industry is currently experiencing substantial change due to higher
than expected delinquencies from subprime loans. The market for new subprime
loans has been substantially reduced and several mortgage companies whose
primary product was subprime mortgage originations have ceased operations. The
Company funded $5.4 million (0.2% of the Company's production) in subprime loans
during the nine months ending September 30, 2007 and has currently eliminated
subprime loans from its product offerings. The Company believes that its
potential losses from subprime loans are minimal.
The industry problem with subprime mortgages has created a volatile secondary
market for other products, especially alternative documentation (Alt A) loans.
Alt A loans are typically offered to qualified borrowers who have relatively
high credit scores but are not required to provide full documentation to support
personal income and assets owned. Alt A loans can have a loan to value ratio as
high as 100%. There is currently a smaller market for Alt A loans and the
Company's warehouse line providers have shortened the allowable time for the
Company to sell these products to investors. As a result of these changes, the
Company is only offering these loans on a limited basis. Alt A loans represented
approximately 21% of the Company's production for the six months ended June 30,
2007, but only 5% of the production for the third quarter.
As a consequence of these changes in the industry for Alt A loans, SNMC suffered
a pre-tax loss for the three months ended September 30, 2007 of approximately
$2.4 million. The primary reason for this loss was due to an operating loss of
$1.4 million resulting from lower secondary gains and higher interest costs and
an additional loan loss provision of $1.0 million for future estimated loan
losses. The greatest impact of the operating loss was experienced in July 2007
when there were very little secondary gains. The secondary market improved in
August decreasing the size of the monthly operating loss and September mortgage
operations showed a slight profit. In
response to the decreased secondary gain, management increased loan fees,
lowered commissions, closed unprofitable branches, obtained more favorable
borrowing terms from warehouse lenders, and reduced corporate expenses. Even
though the market changed for Alt A loans, SNMC was able to maintain volume in
the third quarter by increasing its production of other mortgage products,
primarily government and conforming loans
As of November 9, 2007, the Company had originated a total of $29,233,000 in Alt
A loans that had not been settled by investors. This is down from $60,400,000 as
of June 30, 2007. The market for the remaining Alt A loans is uncertain and if
the Company were unable to sell its Alt A loans it would be required to assume
the risk of holding and servicing such loans. If warehousing lines are not
available, the Company believes it has adequate liquidity through its life
insurance operations to carry such loans until purchased by investors.
Even though market conditions have improved somewhat, the Company expects
further significant industry challenges to continue through the second quarter
of 2008. Under these circumstances it is difficult to predict profitability, if
any. Profitability may be impacted by volume reduction, changes in margins,
increased borrowing costs,and future loan losses. Management has taken and will
continue to take a number of actions in response to the changing market
conditions. These include offering Alt A loans on a limited basis, closing
unprofitable branch offices, obtaining new warehousing agreements at a lower
interest rates, and expense reduction initiatives.
During the nine months ending September 30, 2007, the Company experienced loan
losses of $4,170,000. This amount was charged against the provision for loan
losses. The balance of the reserve for loan losses at September 30, 2007 was
$1,497,000. The provision for loan losses is included in other general and
administrative expenses. Because of the market conditions the Company has
increased its monthly loan loss accrual from 5 basis points of total production
to 7.5 basis points of total production. Under this formula the Company
currently adds $225,000 per month to its loan loss reserves. The Company
believes the loan loss reserves are sufficient to cover reasonably foreseeable
future loan losses and that its formula for determining the provision for such
reserves is adequate.
On June 12, 2007, Security National Life Insurance Company entered into a
revolving line of credit with a financial institution to borrow up to
$40,000,000. The revolving line of credit is secured by commercial mortgages and
construction loans. The terms of the revolving line of credit is for a one year
term and interest is based upon the one year LIBOR rate (6.95% as of September
30, 2007). Accrued Interest will be paid on a monthly basis, with the principal,
together with any outstanding accrued interest, to be paid in full on June 12,
2008. Security National Life Insurance Company intends to use this financing to
provide short term liquidity for its commercial mortgage, construction and
warehouse lending operations of its affiliate SecurityNational Mortgage Company.
The amount outstanding as of September 30, 2007 was $28,680,453. The amount
outstanding at November 13, 2007 was $10,000,000.
Recently SecurityNational Mortgage Company renewed its warehouse lines of credit
with its non affiliated warehouse lenders. The total amount available under
these lines of credit is $450,000,000. The terms of the lines of credit are for
one year, with interest rates ranging from 1.5% to 1.75% over the three month
LIBOR (6.73% to 6.98% as of September 30, 2007).
Results of Operations
Three Months Ended September 30, 2007 Compared to Three Months Ended September
30, 2006
Total revenues increased by $13,089,000, or 33.9%, to $51,664,000 for the three
months ended September 30, 2007, from $38,575,000 for the three months ended
September 30, 2006. Contributing to this increase in total revenues was a
$10,397,000 increase in mortgage fee income, an $889,000 increase in insurance
premiums and other considerations, a $1,895,000 increase in net investment
income, a $348,000 increase in net mortuary and cemetery sales, and a $290,000
increase in other revenues, which was offset by a $730,000 decrease in realized
gains on investments and other assets.
Insurance premiums and other considerations increased by $889,000, or 11.8%, to
$8,426,000 for the three months ended September 30, 2007, from $7,537,000 for
the comparable period in 2006. This increase was primarily due to the additional
premiums realized from new insurance sales.
Net investment income increased by $1,895,000, or 33.0%, to $7,638,000 for the
three months ended September 30, 2007, from $5,743,000 for the comparable period
in 2006. This increase was primarily attributable to additional interest income
from increased long-term bond and mortgage purchases over the comparable period
in 2006.
Net mortuary and cemetery sales increased by $348,000, or 12.1%, to $3,213,000
for the three months ended September 30, 2007, from $2,865,000 for the
comparable period in 2006. This increase was due to increased at-need sales in
the cemetery and mortuary operations and increased pre-need sale of burial
spaces in the cemetery operations.
Realized gains on investments and other assets decreased by $730,000, or 99.7%
to $2,000 for the three months ended September 30, 2007 from $732,000 for the
comparable period in 2006. This was primarily due to a gain of $760,000 during
the third quarter of 2006 from the sale of Camelback Funeral Home to the City of
Phoenix pursuant to condemnation proceedings in order to construct a light rail
facility. .
Mortgage fee income increased by $10,397,000, or 48.1%, to $31,999,000 for the
three months ended September 30, 2007, from $21,602,000 for the comparable
period in 2006. This increase was primarily attributable to an increase in the
number of loan originations during the third quarter of 2007 as new mortgage
offices were opened and production increased in existing mortgage offices, which
resulted in the financing of a greater number of mortgage loans.
Other revenues increased by $290,000, or 302.1%, to $386,000, for the three
months ended September 30, 2007 from $96,000 for the comparable period in 2006.
This increase was due to increases in several small income items throughout the
Company's operations and to a $172,000 interest payment received on the
Camelback condemnation payment as proceeds were not received in a timely manner.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $993,000, or 14.8%, to $7,698,000
for the three months ended September 30, 2007, from $6,705,000 for the
comparable period in 2006. This increase was primarily due to increased
insurance business and to the increase in reserves for policyholder benefits and
death claims.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $73,000, or 5.3%, to $1,457,000 for the three
months ended September 30, 2007, from $1,384,000 for the comparable period in
2006. This increase was primarily due to increased deferred acquisition costs
associated with interest sensitive products and pre-need cemetery contracts.
General and administrative expenses increased by $13,470,000, or 50.9%, to
$39,933,000 for the three months ended September 30, 2007, from $26,463,000 for
the comparable period in 2006. This increase primarily resulted from an increase
in commission expenses of $8,612,000, from $15,997,000 in 2006 to $24,609,000 in
2007, due to a greater number of mortgage loan originations made by
SecurityNational Mortgage Company during the third quarter of 2007. Salaries
increased by $1,667,000 from $4,470,000 in 2006 to $6,137,000 in 2007, primarily
due to merit increases in salaries of existing employees and an increase in the
number of employees necessitated by the Company's expanding business operations.
Other expenses increased by $3,191,000 from $5,996,000 in 2006 to $9,187,000 in
2007. The increase in other expenses primarily resulted from increased loan
costs at SecurityNational Mortgage Company due to a greater number of loan
originations.
Interest expense increased by $1,744,000, or 131.0%, to $3,076,000 for the three
months ended September 30, 2007, from $1,332,000 for the comparable period in
2006. This increase was primarily due to increased warehouse lines of credit
required for a greater number of warehoused mortgage loans by SecurityNational
Mortgage Company.
Cost of goods and services sold of the mortuaries and cemeteries increased by
$80,000, or 14.3%, to $638,000 for the three months ended September 30, 2007,
from $558,000 for the comparable period in 2006. This increase was primarily due
to increased at-need cemetery sales.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Total revenues increased by $49,901,000, or 47.5%, to $155,026,000 for the nine
months ended September 30, 2007, from $105,125,000 for the nine months ended
September 30, 2006. Contributing to this increase in total revenues was a
$38,438,000 increase in mortgage fee income, a $1,800,000 increase in insurance
premiums and other considerations, an $8,269,000 increase in net investment
income, a $1,084,000 increase in net mortuary and cemetery sales, and a $361,000
increase in other revenues, which was offset by a $51,000 decrease in realized
gains on investments and other assets.
Insurance premiums and other considerations increased by $1,800,000, or 8.0%, to
$24,295,000 for the nine months ended September 30, 2007, from $22,495,000 for
the comparable period in 2006. This increase was primarily due to the additional
insurance premiums realized from new insurance sales.
Net investment income increased by $8,269,000, or 50.7%, to $24,590,000 for the
nine months ended September 30, 2007, from $16,321,000 for the comparable period
in 2006. This increase was primarily attributable to additional interest income
from increased long-term bond and mortgage purchases over the comparable period
in 2006.
Net mortuary and cemetery sales increased by $1,084,000 or 11.9%, to $10,158,000
for the nine months ended September 30, 2007, from $9,074,000 for the comparable
period in 2006. This increase was due to increased at-need sales in the cemetery
and mortuary operations and increased pre-need sales of burial spaces in
cemetery operations.
Realized gains on investments and other assets decreased by $51,000, or 6.5%, to
$739,000 for the nine months ended September 30, 2007 from $790,000 for the
comparable period in 2006. This was primarily due to a net decrease in several
small income items throughout the Company's operations.
Mortgage fee income increased by $38,438,000, or 68.4%, to $94,600,000 for the
nine months ended September 30, 2007, from $56,162,000 for the comparable period
in 2006. This increase was primarily attributable to an increase in the number
of loan originations during the nine months of 2007 as new mortgage offices were
opened and production increased in existing mortgage offices, which resulted in
the financing of a greater number of mortgage loans.
Other revenues increased by $361,000, or 127.6%, to $644,000 for the nine months
ended September 30, 2007 from $283,000 for the comparable period in 2006. This
increase was due to increases in several small income items throughout the
Company's operations and to a $172,000 interest payment received on the
Camelback condemnation payment as proceeds were not received in a timely manner.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $2,178,000, or 10.7%, to
$22,618,000 for the nine months ended September 30, 2007, from $20,440,000 for
the comparable period in 2006. This increase was primarily due to increased
insurance business and to the expected increase in reserves for policyholder
benefits and death claims.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $1,232,000, or 41.8%, to $4,180,000 for the nine
months ended September 30, 2007, from $2,948,000 for the comparable period in
2006. This increase was primarily due to increased deferred acquisition costs
associated with interest-sensitive products from the recapture of the Mega
reinsurance agreement in the first quarter of 2006, and pre-need cemetery
contracts.
General and administrative expenses increased by $42,460,000, or 58.8%, to
$114,662,000 for the nine months ended September 30, 2007, from $72,202,000 for
the comparable period in 2006. This increase primarily resulted from an increase
in commission expenses by $29,859,000 from $42,046,000 in 2006 to $71,905,000 in
2007, due to a greater number of mortgage loan originations made by
SecurityNational Mortgage Company during the first nine months of 2007. Salaries
increased by $4,864,000 from $12,960,000 in 2006 to $17,824,000 in 2007,
primarily due to merit increases in salaries of existing employees and an
increase in the number of employees necessitated by the Company's expanding
business operations. Other expenses increased by $6,737,000 from $17,197,000 in
2006 to $24,934,000 in 2007. The increase in other expenses primarily resulted
from increased loan costs at SecurityNational Mortgage Company due to a greater
number of loan originations.
Interest expense increased by $6,893,000, or 200.4%, to $10,333,000 for the nine
months ended September 30, 2007, from $3,440,000 for the comparable period in
2006. This increase was primarily from increased warehouse lines of credit
required for a greater number of warehoused mortgage loans by SecurityNational
Mortgage Company.
Cost of goods and services sold by the mortuaries and cemeteries increased by
$186,000, or 10.5%, to $1,952,000`for the nine months ended September 30, 2007,
from $1,766,000 for the comparable period in 2006. This increase was primarily
due to increased cemetery and mortuary sales.
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and to meet operating expenses.
During the nine months ended September 30, 2007, the Company's operations used
cash of $24,559,000, while cash totaling $23,210,000 was provided by operations
during the nine months ended September 30, 2006. This is due to an increase of
$33,186,000 in the balance of mortgage loans sold to investors, which is
attributed to a higher mortgage loan volume for the first nine months of 2007
versus mortgage loan volume during the first nine months of 2006. The increase
in the balance resulted from an increase in mortgage loans originated but not
yet settled by investors as of September 30, 2007.
On June 12, 2007, Security National Life Insurance Company entered into a
revolving line of credit with a financial institution to borrow up to
$40,000,000. The revolving line of credit is secured by commercial mortgages and
construction loans. The terms of the revolving line of credit is for a one year
term and interest is based upon the one year LIBOR rate (6.95% as of September
30, 2007). Accrued Interest will be paid on a monthly basis, with the principal,
together with any outstanding accrued interest, to be paid in full on June 12,
2008. Security National Life Insurance Company intends to use this financing to
provide short term liquidity for its commercial mortgage, construction and
warehouse lending operations of its affiliate SecurityNational Mortgage Company.
The amount outstanding as of September 30, 2007 was $28,680,453. The amount
outstanding at November 13, 2007 was $10,000,000.
Recently SecurityNational Mortgage Company renewed its warehouse lines of credit
with its non affiliated warehouse lenders. The total amount available under
these lines of credit is $450,000,000. The terms of the lines of credit are for
one year, with interest rates ranging from 1.5% to 1.75% over the three month
LIBOR (6.73% to 6.98% as of September 30, 2007).
The Company attempts to match the duration of invested assets with its
policyholder and cemetery and mortuary liabilities. The Company may sell
investments other than those held-to-maturity in the portfolio to help in this
timing; however, to date, that has not been necessary. The Company purchases
short-term investments on a temporary basis to meet the expectations of
short-term requirements of the Company's products.
The Company's investment philosophy is intended to provide a rate of return,
which will persist during the expected duration of policyholder and cemetery and
mortuary liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominantly in fixed maturity
securities, mortgage loans, and warehousing of mortgage loans on a short-term
basis before selling the loans to investors in accordance with the requirements
and laws governing the life insurance subsidiaries. Bonds owned by the insurance
subsidiaries amounted to $98,607,000 as of September 30, 2007, compared to
$101,735,000 as of December 31, 2006. This represents 45.2% and 46.8% of the
total investments as of September 30, 2007, and December 31, 2006, respectively.
Generally, all bonds owned by the life insurance subsidiaries are rated by the
National Association of Insurance Commissioners. Under this rating system, there
are six categories used for rating bonds. At September 30, 2007, 0.9% (or
$892,000) and at December 31, 2006, 2.3% (or $2,402,000) of the Company's total
bond investments were invested in bonds in rating categories three through six,
which are considered non-investment grade.
The Company has classified certain of its fixed income securities, including
high-yield securities, in its portfolio as available for sale, with the
remainder classified as held to maturity. However, in accordance with Company
policy, any such securities purchased in the future will be classified as held
to maturity. Business conditions, however, may develop in the future which may
indicate a need for a higher level of liquidity in the investment portfolio. In
that event the Company believes it could sell short-term investment grade
securities before liquidating higher-yielding longer-term securities.
The Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At September 30,
2007, and December 31, 2006, the life insurance subsidiary exceeded the
regulatory criteria.
The Company's total capitalization of stockholders' equity, and bank debt and
notes payable was $90,607,000 as of September 30, 2007, as compared to
$60,641,000 as of December 31, 2006. Stockholders' equity as a percent of total
capitalization was 60 % and 87% as of September 30, 2007 and December 31, 2006,
respectively.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2006 was 8.4% as compared
to a rate of 7.9% for 2005. The 2007 lapse rate to date has been approximately
the same as 2006.
At September 30, 2007, $19,898,000 of the Company's consolidated stockholders'
equity represents the statutory stockholders' equity of the Company's life
insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to
its parent company without the approval of insurance regulatory authorities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 2006.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures - The Company's
principal executive officer and principal financial officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act") as of September 30, 2007. Based on that evaluation,
the principal executive officer and the principal financial officer have
concluded that the Company's disclosure controls and procedures are effective,
providing them with material information relating to the Company as required to
be disclosed in the reports the Company files or submits under the Exchange Act
on a timely basis.
(b) Changes in internal controls - There were no significant changes in the
Company's internal controls over financial reporting or in other factors that
could significantly affect the Company's internal controls and procedures
subsequent to the date of their most recent evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
Part II Other Information
Item 1. Legal Proceedings
On March 5, 2007, the Company received a proposed consent order from the Florida
Office of Insurance Regulation concerning the New Success Life Program, the
higher education product previously being marketed and sold by Southern Security
Life. The proposed order states that as a result of an investigation the Florida
Office has determined that Southern Security Life violated Florida law (i) by
knowingly making statements, sales presentations, omissions or comparisons that
misrepresented the benefits, advantages, or terms of the New Success Life
Program, and (ii) by knowingly making, advertisements, announcements, or
statements containing representations that were untrue or misleading.
The proposed order would require Security National Life and Southern Security
Life to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required to send a written notice to Florida consumers who purchased
the New Success Life Program on or after January 1, 1998 stating that the higher
education program is a whole life insurance product, with a term and annuity
rider, and not a college trust fund, savings plan, or other program, and it may
not necessarily pay college expenses in full from the accumulated value.
Moreover, the written notice is to provide an opportunity for the Florida
consumers who purchased the New Success Life Program on or after January 1, 1998
to cancel their policy and be given a full refund, including all premiums paid,
together with interest at the agreed upon rate in the original contract. If each
of the Florida consumers who purchased the New Success Life Program after
January 1, 1998 was to cancel his or her policy and receive a refund, the cost
to the Company to refund all premiums paid, including interest, would be
approximately $8,200,000, an amount in excess of the assets of Southern Security
Life.
The proposed consent order would also require Security National Life and
Southern Security Life to issue refunds including interest to the eleven
policyholders whose affidavits were taken in connection with the administrative
complaint that the Florida Office had previously filed against Franz Wallace,
the former National Sales Director of Southern Security Life. Security National
Life and Southern Security Life would additionally be required to issue refunds,
including interest, to any Florida policyholder in the New Success Life Program
who had filed a complaint with the Florida Department of Financial Services or
whose coverage had lapsed. Furthermore, Security National Life and Southern
Security Life would be required to notify the state insurance department in each
state in which the New Success Life Program is marketed of the order and any
complaint that Southern Security Life received relating to the New Success Life
Program from policyholders in that state. Finally, Security National Life and
Southern Security Life would be required to pay the Florida Office a penalty of
$100,000 and administrative costs of $5,000.
The Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office has with the New Success Life
Program because it has received no specific administrative complaint from the
Florida Office nor is it aware of any recent market conduct examination that the
Florida Office has conducted relative to the program. The Company intends to
vigorously oppose the proposed consent order. The Company is currently engaged
in discussions with the Florida Office in an effort to settle the dispute
concerning the proposed order. If the Company is unable to reach a satisfactory
resolution with the Florida Office with respect to the terms of the proposed
consent order and the Florida Office issues a similar order, the Company intends
to take action necessary to protect its rights and interests, including
requesting a hearing before an administrative law judge to oppose the order. The
Company believes any potential liability would be limited to the net assets of
Southern Security Life, which are approximately $3,914,000.
Except for the proposed consent order from the Florida Office of Insurance
Regulation, the Company is not a party to any material legal proceedings outside
the ordinary course of business or to any other legal proceedings, which if
adversely determined, would have a material adverse effect on its financial
condition or results of operation.
Item 1A. Risk Factors
Due to changes in the mortgage industry from higher than expected delinquencies
in subprime loans, the Company may be unable to sell its alternative
documentation loans to investors, which would require the Company to assume the
risk of holding and servicing such loans.
The mortgage industry is currently experiencing substantial change due to higher
than expected delinquencies from subprime loans. The market for new subprime
loans has been substantially reduced and several mortgage companies whose
primary product was subprime mortgage originations have ceased operations. The
Company funded $5.4 million (0.2% of the Company's production) in subprime loans
during the nine months ending September 30, 2007 and has currently eliminated
subprime loans from its product offerings. The Company believes that its
potential losses from subprime loans are minimal.
The industry problem with subprime mortgages has created a volatile secondary
market for other high risk products, especially alternative documentation (Alt
A) loans. Alt A loans are typically offered to qualified borrowers who have
relatively high credit scores but are not required to provide full documentation
to support personal income and assets owned. Alt A loans can have a loan to
value ratio as high as 100%. There is currently a smaller market for Alt A loans
and the Company's warehouse line providers have shortened the allowable time for
the Company to sell these products to investors. As a result of these changes,
the Company is only offering these loans on a limited basis.
Alt A loans represented approximately 21% of the Company's production for the
six months ended June 30, 2007, but only 5% of the production for the third
quarter. The Company is currently experiencing an increase in production of its
other mortgage products. This increased mortgage production will offset some of
the loss of income related to the discontinuance of Alt A loans. As of November
9, 2007, the Company had originated a total of $29,233,000 in Alt A loans that
had not been settled by investors. This is down from $60,400,000 of Alt A loans
at June 30, 2007. The market for the remaining Alt A loans is uncertain and, if
the Company were unable to sell its Alt A loans, it would be required to assume
the risk of holding and servicing such loans. If warehousing lines are not
available the Company believes it has adequate liquidity through its life
insurance operations to carry such loans until purchased by investors.
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
At the Annual Meeting of Stockholders held on July 13, 2007, the
following matters were acted upon: (i) seven directors consisting of
George R. Quist, Scott M. Quist, J. Lynn Beckstead, Jr., Charles L.
Crittenden, Dr. Robert G. Hunter, H. Craig Moody and Norman G. Wilbur
were elected to serve until the next annual stockholders meeting or
until their respective successors are elected and qualified (for
George R. Quist, with Class A and Class C shares voting, 11,147,626
votes were cast in favor of election, no votes were cast against
election, and there were 212,178 abstentions; for Scott M. Quist, with
Class A and Class C shares voting, 11,169,030 votes were cast in favor
of election, no votes were cast against election, and there were
190,774 abstentions; for J. Lynn Beckstead, Jr., with Class A shares
voting, 4,871,686 votes were cast in favor of election, no votes were
cast against election, and there were 103,378 abstentions; for Charles
L. Crittenden, with Class A and Class C shares, 11,169,237 votes were
cast in favor of election, no votes were cast against election, and
there were 190,567 abstentions; for Dr. Robert G. Hunter, with Class A
and Class C shares voting, 11,169,627 votes were cast in favor of
election, no votes cast against election, and there were 190,177
abstentions; for H. Craig Moody, with Class A shares voting, 4,878,898
votes were cast in favor of election, no votes cast against election,
and there were 96,166 abstentions; and for Norman G. Wilbur, with
Class A and Class C shares voting, 11,160,357 votes were cast in favor
of election, no votes were cast against election, and there were
199,447 abstentions); (ii) the appointment of Hansen,
Barnett & Maxwell, P.C. as the Company's registered pubic independent
accountants for the fiscal year ending December 31, 2007 was ratified
(with 11,298,892 votes cast for appointment, 60,365 votes against
appointment, and there were -0- abstentions), (iii) to amend the
Company's 2003 Stock Option Plan to authorize an additional 400,000
shares of Class A common stock and an additional 1,000,000 shares of
Class C common stock to be made available for issuance thereunder was
ratified (with 9,176,164 for and 379,699 against); and (iv) to approve
the adoption of the 2006 Director Stock Option Plan for the outside
directors and to reserve 100,000 shares of Class A common stock for
issuance was ratified thereunder (with 9,182,808 shares for and
373,205 against.)
At a Special Meeting of Stockholders held on September 21, 2007, the
proposed amendment to the Company's Articles of Incorporation to
increase the authorized capital stock of the Company from 27,500,000
shares to 45,000,000 shares, to increase the number of authorized
shares of Class A common stock from 10,000,000 shares to 20,000,000
shares and to increase the number of authorized shares of Class C
common stock from 7,500,000 shares to 15,000,000 shares was approved
(with 11,728,124 voting for and 168,142 against.)
Item 5. Other Information
Acquisition of C & J Financial, LLC
On July 16, 2007, the Company completed a purchase transaction with C & J
Financial, LLC, an Alabama limited liability company ("C & J Financial"). C & J
Financial operates a factoring business with offices in Rainbow City, Alabama
with an emphasis on providing financing for funeral homes and mortuaries. Under
the terms of the Unit Purchase Agreement dated July 16, 2007 (the "Purchase
Agreement") among the Company, C & J Financial, Henry Culp, Jr. ("Culp") and
Culp Industries, Inc. ("Culp Industries"), the Company purchased all of the
outstanding member units of C & J Financial for a purchase consideration of (i)
$1,250,000 in cash, (ii) a promissory note from the Company to Culp in the
amount of $381,500 plus interest at the rate of 5% per annum, payable over a
period of 24 months in monthly payments of $16,737, including interest, until
paid in full, and (iii) a quit claim deed from C & J Financial to Culp,
conveying ownership of the building and surrounding property located in the
Jester Commercial Park in Rainbow City, Alabama, where C & J Financial currently
maintains its business offices. At closing, Culp Industries entered into a lease
agreement with C & J Financial to lease to C & J Financial approximately 5,000
square feet in the building located at the Jester Commercial Park. The lease is
for a term of three years for which C & J Financial, as tenant, is required to
make monthly payments of $1,200, for a total lease payment of $43,200.
The Purchase Agreement additionally required Culp to deliver to the Company at
closing a promissory note (the "Note") in the principal amount of $1,755,236
plus interest at the rate of 8.25% per annum from C & J Financial, as borrower,
to Culp, as lender, with such note to be cancelled and marked "paid in full".
Moreover, the agreement provides for the possibility of adjustments. If the
total equity on the balance sheet of C & J Financial as of May 31, 2007, defined
as total assets minus total liabilities, is greater than the amount of the
equity on the balance sheet of C & J Financial as of the closing date, or July
16, 2007, Culp agrees to pay to the Company the difference between the total
equity on the balance sheet as of May 31, 2007 and the total equity on the
balance sheet as of July 16, 2007 by reducing the amount of the Note by such
difference in the amounts of the total equity on such balance sheets. If the
amount of the total equity on the balance sheet of C & J Financial as of May 31,
2007 is less than the amount of the total equity on the balance sheet of C & J
Financial as of July 16, 2007, the Company agrees to pay Culp the difference
between the total equity on the balance sheet as of May 31, 2007 and the total
equity on the balance sheet as of July 16, 2007 by increasing the amount of the
Note payable by such difference in the amounts of the total equity on such
balance sheets.
The Purchase Agreement further requires each unitholder to deliver to the
Company a non-competition and confidentiality agreement prohibiting the
unitholder from competing with C & J Financial for a period of five years from
July 16, 2007 through July 16, 2012. The Company also entered into a one year
consulting agreement with Culp, which requires Culp to provide part-time
consulting services for C & J Financial at $50.00 per hour, and a five year
employment agreement with Kevin O. Smith ("Smith"), Vice President of C & J
Financial, who will continue to serve in that position. The employment agreement
requires C & J Financial to pay Smith an annual salary of $96,000 plus a
discretionary bonus and a monthly car allowance of $1,161.
Finally, the Purchase Agreement requires the Company, C & J Financial, Culp and
Culp Industries to acknowledge the existence of a business loan agreement
between Regions Bank, as lender, and Culp Industries, as borrower, which
provides for a line of credit for C & J Financial. The outstanding balance on
the line of credit as of July 16, 2007 was $1,971,764. The line of credit was
secured by, among other assets, the accounts receivable of C & J Financial and
was personally guaranteed by Culp. The Company agreed it would pay off the
outstanding balance of the line of credit with Regions Bank. The Company has
since paid off the outstanding balance on the line of credit by means of
applying the payments from the accounts receivable of C & J Financial as such
payments were made in the ordinary course of business.
At June 30, 2007, total assets of C & J Financial were $3,197,000 and total
liabilities were $3,526,000, which includes the Note to Culp in the amount of
$1,755,000 that was cancelled at closing. For the seven month period from
November 1, 2006 to May 31, 2007, total revenues of C & J Financial were
$775,000 and total expenses were $764,000, resulting in net income of $11,000.
For the fiscal year ended October 31, 2006, total revenues of C & J Financial
were $1,397,000 and total expenses were $1,351,000, resulting in net income of
$46,000. For the fiscal year ended October 31, 2005, total revenues of C & J
Financial were $1,137,000 and total expenses were $1,114,000, resulting in net
income of $23,000. The Company anticipates utilizing the employees and
operations of C & J Financial to expand its fast funding operations, which
provide financing for funeral homes and mortuaries.
Proposed Acquisition of Capital Reserve Life Insurance Company
On October 9, 2007, Security National Financial Corporation, through its wholly
owned subsidiary, Security National Life Insurance Company, entered into a stock
purchase agreement (the "Stock Purchase Agreement") with Capital Reserve Life
Insurance Company, a Missouri domiciled insurance company ("Capital Reserve"),
and its shareholders to purchase all of the outstanding shares of common stock
of Capital Reserve from its shareholders. Under the terms of the transaction,
Security National Life Insurance Company agrees to pay to the shareholders of
Capital Reserve purchase consideration equal to the capital and surplus of
Capital Reserve as of September 30, 2007 in the amount of $1,274,000, plus the
interest maintenance reserve in the amount of $31,000 and the asset valuation
reserve in the amount of $209,000 as of September 30, 2007, plus $1,037,967,
less certain adjustments. The adjustments consist of any losses related to two
litigation matters involving Capital Reserve and the difference in the amount of
Capital Reserve's capital and surplus at closing compared to the amount of its
capital and surplus on September 30, 2007.
As of December 31, 2006, Capital Reserve had 10,851 policies in force and
approximately 30 agents. For the year ended December 31, 2006, Capital Reserve
had revenues of $5,663,000 and a net loss of $244,000. As of December 31, 2006,
the statutory assets and the capital and surplus of Capital Reserve were
$24,084,000 and $1,960,000, respectively.
Security National Life Insurance Company anticipates completing the transaction
on or before November 30, 2007, or within seven days from the date the required
regulatory approvals are obtained. The obligations of Security National Life
Insurance Company and Capital Reserve to complete the transaction are contingent
upon satisfaction of the following conditions: (i) a complete and satisfactory
review by Security National Life Insurance Company of the books, records and
business of Capital Reserve; (ii) approval and adoption of the Stock Purchase
Agreement by the Board of Directors of Security National Life Insurance Company
and Capital Reserve; and (iii) approval of the transaction by any regulatory
authorities having jurisdiction over Security National Life Insurance Company
and Capital Reserve, including the insurance departments of the states of
Missouri and Utah.
At the closing of the transaction, Security National Life Insurance Company and
Capital Reserve intend to enter into a reinsurance agreement to reinsure the
majority of the in force business of Capital Reserve, as reinsurer, to the
extent permitted by the Missouri Department of Insurance. Under the terms of the
reinsurance agreement, Security National Life Insurance Company would pay a
ceding commission to Capital Reserve in the amount of $1,738,000. In addition,
following the payment of the ceding commission, Capital Reserve intends to
declare a dividend to Security National Life Insurance Company in the amount of
$1,738,000. The reinsurance agreement and the dividend payment are subject to
approval by the Missouri Department of Insurance.
As a result of the reinsurance agreement, certain insurance business and
operations of Capital Reserve would be transferred to Security National Life
Insurance Company, including all policies in force as of the effective date
thereof. Any future business by Capital Reserve would be covered by this
reinsurance agreement. Thus, except for capital and surplus of $1,274,000,
$23,569,000 in assets and liabilities would be transferred from Capital Reserve
to Security National Life Insurance Company pursuant to the reinsurance
agreement. Following the closing of the transaction, Capital Reserve will
continue to sell and service life insurance, annuity products, accident and
health insurance, and funeral plan insurance.
Exercise of Stock Options and Special Stockholders Meeting
The Company's Board of Directors granted stock options in 2004 to Scott M.
Quist, the Company's President and Chief Operating Officer, to purchase up to
1,000,000 shares of Class C common stock at exercise prices of $.323 and $.36
per share. On May 31, 2007, Mr. Quist made a cashless exercise of such options
to purchase a total of 1,157,625 shares of Class C common stock that he was
entitled to receive, after adjustments for 5% stock dividends the Company issued
in 2005, 2006 and 2007.
In connection with the exercise of such options on a cashless basis, Mr. Quist
delivered a total of 58,376 shares of Class A common stock to the Company that
he held in exchange for all the Class C shares he would be entitled to receive
for exercising the options. Inasmuch as there were 6,966,849 shares of Class C
common stock outstanding as of May 31, 2007 out of a total of 7,500,000
authorized shares of Class C common stock, the Company could legally issue only
533,151 shares of Class C common stock to Mr. Quist, leaving a balance of
624,474 Class C common shares owing to him.
In order to issue the additional shares of Class C common shares owing to Mr.
Quist, the Board of Directors approved on July 13, 2007 an amendment to the
Company's Articles of Incorporation to increase the authorized number of Class C
common shares from 7,500,000 shares to 15,000,000 shares. Because stockholder
approval was also required to amend the Articles of Incorporation, the Company
scheduled a Special Stockholders Meeting on September 21, 2007 to approve the
amendment to the Articles of Incorporation to increase the authorized number of
shares of Class C common stock to 15,000,000 shares. The stockholders approved
the amendment to the Articles of Incorporation at the Special Stockholders
Meeting, that increased the authorized number of Class C common shares to
15,000,000 shares, and, as a result, the Company was able to issue Mr. Quist the
additional 624,474 shares of Class C common stock that were owed pursuant to his
exercise of stock options.
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
See "Table of Contents - Part I - Financial Information" under page 2
above
(a)(2) Financial Statement Schedules
None
All other schedules to the consolidated financial statements required
by Article 7 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-K or are incorporated by reference to previous filings.
3.1 Articles of Restatement of Articles of Incorporation (4)
3.2 Amended Bylaws (6)
4.1 Specimen Class A Stock Certificate (1)
4.2 Specimen Class C Stock Certificate (1)
4.3 Specimen Preferred Stock Certificate and Certificate of Designation
of Preferred Stock (1)
10.1 Restated and Amended Employee Stock Ownership Plan and Trust
Agreement (1)
10.2 2003 Stock Option Plan (5)
10.3 2006 Director Stock Option Plan (13)
10.4 Deferred Compensation Agreement with George R. Quist (2)
10.5 Deferred Compensation Plan (3)
10.6 Employment agreement with J. Lynn Beckstead, Jr. (7)
10.7 Employment agreement with Scott M. Quist (8)
10.8 Stock Purchase Agreement among Security National Life Insurance
Company, Southern Security Life Insurance Company, Memorial
Insurance Company of America, and the shareholders of Memorial
Insurance Company (9)
10.9 Reinsurance Agreement between Security National Life Insurance
Company and Memorial Insurance Company of America (10)
10.10 Trust Agreement between Security National Life Insurance Company and
Memorial Insurance Company of America (10)
10.11 Promissory Note between Memorial Insurance Company as Maker and
Security National Life Insurance Company as Payee (10)
10.12 Security Agreement between Memorial Insurance Company as Debtor and
Security National Life Insurance Company as Secured Party (10)
10.13 Surplus Contribution Note between Memorial Insurance Company of
America as Maker and Southern Security Life Insurance Company as
Payee (10)
10.14 Guaranty Agreement by Security National Life Insurance Company and
Southern Security Life Insurance Company as Guarantors (10)
10.15 Administrative Services Agreement between Security National Life
Insurance Company and Memorial Insurance Company of America (10)
10.16 Reinsurance Agreement between Security National Life Insurance
Company and Southern Security Life Insurance Company (11)
10.17 Trust Agreement among Security National Life Insurance Company,
Southern Security Life Insurance Company and Zions First National
Bank (11)
10.18 Stock Purchase Agreement among Security National Life Insurance
Company, Southern Security Life Insurance Company and American
Network Insurance Company (12)
10.19 Escrow Agreement among Security National Life Insurance Company,
Southern Security Life Insurance Company, American Network Insurance
Company and Mackey Price Thompson & Ostler (12)
10.20 Escrow Agreement among American Network Insurance Company,
Security National Life Insurance Company, Southern Security Life
Insurance Company, and Preferred Insurance Capital Consultants,
LLC (12)
10.21 Agreement and Plan of Complete Liquidation of Southern Security Life
Insurance Company into Security National Life Insurance Company (12)
10.22 Assignment between Southern Security Life Insurance Company and
Security National Life Insurance Company (12)
10.23 Assignment between Southern Security Life Insurance Company and
Security National Life Insurance Company (12)
10.24 Unit Purchase Agreement among Security National Financial
Corporation, C&J Financial, LLC, Henry Culp, Jr., and Culp
Industries, Inc. (14)
10.25 Stock Purchase Agreement among Security National Life Insurance
Company, Capital Reserve Life Insurance Company, and the
shareholders of Capital Reserve Life Insurance Company (15)
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
----------
(1) Incorporated by reference from Registration Statement on Form S-1,
as filed on June 29, 1987
(2) Incorporated by reference from Annual Report on Form 10-K, as filed
on June 30, 1989
(3) Incorporated by reference from Annual Report on Form 10-K, as filed
on April 3, 2002
(4) Incorporated by reference from Report on Form 8-K/A as filed on
January 8, 2003
(5) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, as filed on June 5, 2003, relating to the Company's
Annual Meeting of Stockholders
(6) Incorporated by reference from Report on Form 10-Q, as filed on
November 14, 2003
(7) Incorporated by reference from Report on Form 10-K, as filed on
March 30, 2004
(8) Incorporated by reference from Report on Form 10-Q, as filed on
August 13, 2004 (9) Incorporated by reference from Report on
Form 8-K, as filed on September 27, 2005
(10) Incorporated by reference from Report on Form 8-K, as filed on
January 5, 2006
(11) Incorporated by reference from Report on Form 8-K, as filed on
January 11, 2006
(12) Incorporated by reference from Report on Form 8-K, as filed on
January 12, 2007
(13) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, as filed on June 1, 2007, relating to the Company's
Annual Meeting of Shareholders
(14) Incorporated by reference from Report on Form 8-K, as filed on
August 8, 2007
(15) Incorporated by reference from Report on Form 8-K, as filed on
November 5, 2007
(b) Reports on Form 8-K:
Current report on Form 8-K, as filed on August 8, 2007
Current report on Form 8-K, as filed on November 5, 2007
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT
SECURITY NATIONAL FINANCIAL CORPORATION
Registrant
Dated: November 14, 2007 By: s/s George R. Quist
-------------------
George R. Quist
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 2007 By: s/s Stephen M. Sill
---------------------
Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACTED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, George R. Quist, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Security National
Financial Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15-d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period covered in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Dated: November 14, 2007 By: George R. Quist
Chairman of the Board and Chief
Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen M. Sill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Security National
Financial Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15-d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period covered in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Dated: November 14, 2007 By: Stephen M. Sill
Vice President, Treasurer and Chief
Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Security National Financial
Corporation (the "Company") on Form 10-Q for the period ending September 30,
2007, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, George R. Quist, Chairman of the Board and Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
Dated: November 14, 2007 By: George R. Quist
Chairman of the Board and Chief
Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Security National Financial
Corporation (the "Company") on Form 10-Q for the period ending September 30,
2007, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Stephen M. Sill, Vice President, Treasurer and Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
Dated: November 14, 2007 By: Stephen M. Sill
Vice President, Treasurer and Chief
Financial Officer