10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 2000 Commission File Number: 0-9341 ------------- ------ SECURITY NATIONAL FINANCIAL CORPORATION --------------------------------------- Exact Name of Registrant. UTAH 87-0345941 ---------------------------- ------------------------- (State or other jurisdiction IRS Identification Number of incorporation or organization) 5300 South 360 West, Salt Lake City, Utah 84123 ----------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including Area Code (801) 264-1060 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XX NO ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock, $2.00 par value 3,689,893 ------------------------------------- ---------------------------------- Title of Class Number of Shares Outstanding as of June 30, 2000 Class C Common Stock, $.20 par value 5,488,312 ------------------------------------- ---------------------------------- Title of Class Number of Shares Outstanding as of June 30, 2000 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10Q QUARTER ENDED JUNE 30, 2000 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1 Financial Statements Page No. Consolidated Statements of Earnings - Six and Three months ended June 30, 2000 and 1999.............3 Consolidated Balance Sheets - June 30, 2000 and December 31, 1999.......................................4-5 Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and 1999.......................6 Notes to Consolidated Financial Statements.................7-10 Item 2 Management's Discussion and Analysis...................10-13 Item 3 Quantitative and Qualitative Disclosure of Market Risk...............................................13 PART II - OTHER INFORMATION Other Information......................................13-15 Signature Page............................................16 2
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Six Months Ended June 30, Three Months Ended June 30, Revenues: 2000 1999 2000 1999 Insurance premiums and other considerations $ 6,599,889 $ 6,360,008 $ 3,206,115 $ 3,010,592 Net investment income 5,894,207 5,346,571 3,090,458 2,805,006 Net mortuary and cemetery sales 5,186,292 5,258,203 2,491,271 2,902,585 Realized gains on investments and other assets 31,567 225,658 (1,158) 55,965 Mortgage fee income 11,108,165 6,719,818 6,466,954 3,618,416 Other 66,689 778,062 14,203 741,142 ------------ ----------- ----------- ----------- Total revenue 28,886,809 24,688,320 15,267,843 13,133,706 Benefits and expenses: Death benefits 2,484,425 2,383,293 1,294,389 1,392,483 Surrenders and other policy benefits 1,362,206 2,535,433 768,130 1,322,294 Increase in future policy benefits .. 2,210,335 1,444,071 862,627 601,892 Amortization of deferred policy acquisition costs and cost of insurance acquired 2,317,592 2,526,176 1,196,563 1,221,623 General and administrative expenses: Commissions 8,939,115 5,249,708 5,168,667 2,823,607 Salaries 3,933,161 3,749,167 1,993,311 1,959,014 Other 4,637,745 4,082,757 2,406,049 2,139,098 Interest expense 894,114 490,259 561,276 228,997 Cost of goods and services sold of the mortuaries and cemeteries .. 1,660,660 1,724,774 814,451 987,943 ----------- ----------- ----------- ----------- Total benefits and expenses 28,439,353 24,185,638 15,065,463 12,676,951 Earnings before income taxes 447,456 502,682 202,380 456,755 Income tax expense (110,316) (159,413) (51,254) (171,394) Minority interest income of subsidiary (30,660) (63,631) (11,852) (94,750) ------------ ------------ ------------ ------------ Net earnings $ 306,480 $ 279,638 $ 139,274 $ 190,611 ============ ============ ============ ============ Net earnings per common share $0.07 $0.06 $0.03 $0.04 ===== ===== ===== ===== Weighted average outstanding common shares 4,307,694 4,407,069 4,238,724 4,388,357 ========= ========= ========== ========== Net earnings per common share-assuming dilution $0.07 $0.06 $0.03 $0.04 ===== ===== ===== ===== Weighted average outstanding common shares assuming-dilution 4,356,876 4,407,069 4,259,794 4,388,357 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 3 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2000 December 31, (Unaudited) 1999 Assets: -------------- ---------- ------ Insurance-related investments: Fixed maturity securities held to maturity, at amortized cost $ 41,943,663 $ 39,629,851 Fixed maturity securities available for sale, at market 22,675,530 24,119,190 Equity securities available for sale, at market 5,677,291 5,745,213 Mortgage loans on real estate 17,865,330 18,926,628 Real estate, net of accumulated depreciation 8,262,056 7,629,952 Policy, student and other loans 11,403,096 11,607,993 Short-term investments 508,380 1,290,310 ------------ ------------ Total insurance-related investments 108,335,346 108,949,137 Restricted assets of cemeteries and mortuaries 4,560,894 4,258,987 Cash 4,824,676 12,422,864 Receivables: Trade contracts 5,075,613 4,232,030 Mortgage loans sold to investors 28,137,545 29,071,913 Receivable from agents 2,293,212 2,272,624 Receivable from officers 115,100 118,400 Other 4,217,825 3,847,079 ------------ ----------- Total receivables 39,839,295 39,542,046 Allowance for doubtful accounts (1,556,368) (1,467,954) ------------ ----------- Net receivables 38,282,927 38,074,092 Policyholder accounts on deposit with reinsurer 7,747,099 7,806,866 Land and improvements held for sale 8,522,656 8,522,687 Accrued investment income 1,517,439 1,493,013 Deferred policy acquisition costs 11,076,103 10,630,086 Property, plant and equipment, net 10,621,070 10,566,508 Cost of insurance acquired 8,381,308 9,597,306 Excess of cost over net assets of acquired subsidiaries 1,227,387 1,305,333 Other 710,826 671,558 -------------- -------------- Total assets $ 205,807,731 $ 214,298,437 ============= ============= See accompanying notes to consolidated financial statements. 4 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) June 30, 2000 December 31, (Unaudited) 1999 Liabilities: --------------- --------------- ----------- Future life, annuity, and other policy benefits $ 139,184,908 $ 138,501,316 Unearned premium reserve 1,481,659 1,866,523 Line of credit for financing of mortgage loans 2,300,000 8,687,023 Bank loans payable 10,148,574 10,768,098 Notes and contracts payable 3,707,023 3,885,684 Estimated future costs of pre-need sales 6,900,220 6,817,685 Accounts payable 761,619 804,133 Funds held under reinsurance treaties 1,471,630 1,475,512 Other liabilities and accrued expenses 3,886,876 3,219,166 Income taxes 5,657,306 5,736,860 ------------ ------------ Total liabilities 175,499,815 181,762,000 Minority interest 4,467,971 6,046,744 Stockholders' Equity: Common stock: Class A: $2 par value, authorized 10,000,000 shares, issued 4,864,238 shares in 2000 and 4,863,731 shares in 1999 9,728,476 9,727,462 Class C: $0.20 par value, authorized 7,500,000 shares, issued 5,550,291 shares in 2000 and 5,555,350 shares in 1999 1,110,058 1,111,070 ----------- ----------- Total common stock 10,838,534 10,838,532 Additional paid-in capital 10,015,940 10,015,942 Accumulated other comprehensive income, net of deferred taxes 524,584 665,691 Retained earnings 7,823,120 7,516,640 Treasury stock at cost (1,174,345 Class A shares and 61,979 Class C shares in 2000; 966,139 Class A shares and 61,979 Class C shares in 1999 held by affiliated companies) (3,362,233) (2,547,112) ------------- ------------- Total stockholders' equity 25,839,945 26,489,693 ------------- ------------- Total liabilities and stockholders' equity $ 205,807,731 $ 214,298,437 ============= ============= See accompanying notes to consolidated financial statements. 5 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2000 1999 -------- ---------- Cash flows from operating activities: Net cash provided by operating activities $ 2,349,410 $ 2,984,501 Cash flows from investing activities: Securities held to maturity: Purchase - fixed maturity securities (4,798,597) -- Calls and maturities - fixed maturity securities 2,520,856 3,657,999 Securities available for sale: Purchases - equity securities (92,563) (43,759) Sales - equity securities 71,913 43,781 Calls and maturities - fixed maturity securities 1,214,748 1,171,236 Purchases of short-term investments (2,917,187) (6,401,565) Sales of short-term investments 3,699,117 10,493,964 Purchases of restricted assets (301,907) (47,148) Mortgage, policy, and other loans made (2,244,580) (4,022,131) Payments received for mortgage, policy, and other loans 3,523,682 2,144,338 Purchases of property, plant, and equipment (446,141) (348,422) Purchases of real estate (808,421) (303,626) Disposal of property, plant and equipment (240) 179,343 ---------- ---------- Net cash provided by (used in) investing activities (579,320) 6,524,010 ---------- ---------- Cash flows from financing activities: Annuity receipts 4,643,939 5,213,072 Annuity withdrawals (6,011,888) (6,217,085) Repayment of bank loans and notes and contracts payable (798,185) (2,271,368) Net change in line of credit for financing of mortgage loans (6,387,023) (5,493,999) Purchase of treasury stock (815,121) (339,830) ----------- ----------- Net cash used in financing activities (9,368,278) (9,109,210) ----------- ---------- Net change in cash (7,598,188) 339,301 Cash at beginning of period 12,422,864 6,670,996 ------------ ------------ Cash at end of period $ 4,824,676 $ 7,070,297 ============ ============ See accompanying notes to consolidated financial statements. 6 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2000 (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1999, included in the Company's Annual Report on Form 10-K (file number 0-9341). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The estimates susceptible to significant change are those used in determining the liability for future policy benefits and claims, those used in determining valuation allowances for mortgage loans on real estate, and those used in determining the estimated future costs for pre-need sales. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. 2. Comprehensive Income -------------------- For the six months ended June 30, 2000 and 1999, total comprehensive income (loss) amounted to $165,373 and $(82,643), respectively. For the three months ended June 30, 2000 and 1999, total comprehensive income amounted to $137,002 and $7,046 respectively. 3. Capital Stock ------------- In accordance with SFAS 128, the basic and diluted earnings per share amounts were calculated as follows: Six Months Ended June 30, 2000 1999 ---------- --------- Numerator: Net income $ 306,480 $ 279,638 ========== ========== Denominator: Denominator for basic earnings per share-- weighted-average shares 4,307,694 4,407,069 ---------- ---------- Effect of dilutive securities: Employee stock options 49,182 -- Stock appreciation rights -- -- ----------- ---------- Dilutive potential common shares 49,182 -- ---------- ---------- Denominator for diluted earnings per share-adjusted weighted- average shares and assumed conversions 4,356,876 4,407,069 =========== ========== Basic earnings per share $0.07 $0.06 ===== ===== Diluted earnings per share $0.07 $0.06 ===== ===== There are no dilutive effects on net income for purpose of this calculation. 7 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2000 (Unaudited) 3. Capital Stock (continued) Three Months Ended June 30, 2000 1999 Numerator: Net income $139,274 $190,611 ========= ======== Denominator: Denominator for basic earnings per share-- weighted-average shares 4,238,724 4,388,357 --------- --------- Effect of dilutive securities: Employee stock options 21,070 -- Stock appreciation rights -- -- --------- ---------- Dilutive potential common shares 21,070 -- --------- ---------- Denominator for diluted earnings per share-adjusted weighted- average shares and assumed conversions 4,259,794 4,388,357 ========= ========== Basic earnings per share $0.03 $0.04 ===== ===== Diluted earnings per share $0.03 $0.04 ===== ===== There are no dilutive effects on net income for purpose of this calculation. 8
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2000 (Unaudited) 4. Business Segment Life Cemetery/ Reconciling Insurance Mortuary Mortgage Corporate Items Consolidated --------- --------- -------- ---------- -------------- ------------ For the Six Months Ended June 30, 2000 ------------------------- Revenues from external customers $10,782,158 $5,560,823 $12,543,770 $58 $ -- $28,886,809 Intersegment revenues 1,501,044 -- -- 1,932,619 (3,433,663) -- Segment profit 114,344 (207,107) (130,988) 671,207 -- 447,456 Identifiable assets 195,450,371 34,629,760 3,287,654 2,863,827 (30,423,881) 205,807,731 For the Six Months Ended June 30, 1999 ------------------------ Revenues from external customers $11,736,641 $5,623,033 $7,317,485 $11,161 $ -- $24,688,320 Intersegment revenues 999,088 -- -- 1,916,181 (2,915,269) -- Segment profit 261,913 (27,490) (102,176) 370,435 -- 502,682 Identifiable assets 188,079,920 33,954,833 3,891,320 3,101,586 (24,479,142) 204,548,517 For the Three Months Ended June 30, 2000 --------------------------- Revenues from external customers $5,228,653 $2,683,449 $7,355,704 $37 $ -- $15,267,843 Intersegment revenues 804,245 -- -- 970,193 (1,774,438) -- Segment profit 137,549 (271,551) (44,644) 381,026 -- 202,380 For the Three Months Ended June 30, 1999 --------------------------- Revenues from external customers $6,127,155 $3,079,731 $3,924,015 $2,805 $ -- $13,133,706 Intersegment revenues 462,846 -- -- 958,330 (1,421,176) -- Segment profit 438,927 (80,816) 34,303 64,340 -- 456,754
9 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2000 (Unaudited) 5. Acquisition of Southern Security Life Insurance Company On December 17, 1998, the Company purchased all of the outstanding shares of common stock of Consolidare Enterprises, Inc. ("Consolidare") which owned 57.4% of the outstanding shares of common stock of Southern Security Life Insurance Company ("Southern Security"). Since then the Company has purchased 265,770 of additional shares of Southern Security and owns 71% of the outstanding shares. Item 2. Management's Discussion and Analysis Overview The Company's operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to "niche" insurance products, such as the Company's funeral plan policies and interest sensitive products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on the strong economy in the United States by originating and refinancing mortgage loans. Results of Operations Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Total revenues increased by $4,198,000, or 17.0%, to $28,887,000 for the six months ended June 30, 2000, from $24,688,000 for the six months ended June 30, 1999. Contributing to this increase in total revenues was a $4,388,000 increase in mortgage fee income, a $240,000 increase in insurance premiums and other considerations, and a $548,000 increase in net investment income. Insurance premiums and other considerations increased by $240,000, or 3.8%, to $6,600,000 for the six months ended June 30, 2000, from $6,360,000 for the comparable period in 1999. This increase was primarily due to additional premiums from new business. Net investment income increased by $548,000, or 10.2%, to $5,894,000 for the six months ended June 30, 2000, from $5,347,000 for the comparable period in 1999. This increase was primarily attributable to a greater number of loan originations during the six months of 2000, due to the expansion of business activities in new geographic markets. Net mortuary and cemetery sales decreased by $72,000, or 1.4%, to $5,186,000 for the six months ended June 30, 2000, from $5,258,000 for the comparable period in 1999. This decrease was primarily due to fewer pre-need cemetery sales. Mortgage fee income increased by $4,388,000, or 65.3%, to $11,108,000 for the six months ended June 30, 2000, from $6,720,000 for the comparable period in 1999. This increase was primarily attributable to a greater number of loan originations during the six months of 2000 due to the expansion of business activities in new geographic markets. Total benefits and expenses were $28,439,000, or 98.4% of total revenues for the six months ended June 30, 2000, as compared to $24,186,000, or 98.0% of total revenues for the comparable period in 1999. Death benefits, surrenders and other policy benefits, and increase in future policy benefits decreased by an aggregate of $306,000, or 4.8%, to $6,057,000 for the six months ended June 30, 2000, from $6,363,000 for the comparable period in 1999. This decrease was primarily the result of a reduction in policyholder account balances. Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $209,000, or 8.3%, to $2,317,000 for the six months ended June 30, 2000, from $2,526,000 for the comparable period in 1999. This decrease was in line with actuarial assumptions. 10 General and administrative expenses increased by $4,428,000, or 33.9%, to $17,510,000 for the six months ended June 30, 2000, from $13,082,000 for the comparable period in 1999. This increase primarily resulted from an increase in commissions and other expenses due to additional mortgage loan originations having been made by the Company's mortgage subsidiary during the six months of 2000 due to the expansion of its business activities in new geographic markets. Interest expense increased by $404,000, or 82.4%, to $894,000 for the six months ended June 30, 2000, from $490,000 for the comparable period in 1999. This increase was primarily due to additional warehouse lines of credit required for the additional mortgage loan originations by the Company's mortgage subsidiary. Cost of mortuaries and cemeteries goods and services sold decreased by $64,000, or 3.7%, to $1,661,000 for the six months ended June 30, 2000, from $1,725,000 for the comparable period in 1999. This decrease was primarily due to fewer pre-need cemetery sales. Second Quarter of 2000 Compared to Second Quarter of 1999 Total revenues increased by $2,134,000, or 16.2%, to $15,268,000 for the three months ended June 30, 2000, from $13,134,000 for the three months ended June 30, 1999. Contributing to this increase in total revenues was a $2,849,000 increase in mortgage fee income, a $196,000 increase in insurance premiums and other considerations and a $285,000 increase in net investment income. Insurance premiums and other considerations increased by $195,000, or 6.5%, to $3,206,000 for the three months ended June 30, 2000, from $3,011,000 for the comparable period in 1999. This increase was primarily due to additional premiums from new business. Net investment income increased by $285,000, or 10.2%, to $3,090,000 for the three months ended June 30, 2000, from $2,805,000 for the comparable period in 1999. This increase was primarily attributable to a greater number of loan originations during the second quarter of 2000, due to the expansion of business activities in new geographic markets. Net mortuary and cemetery sales decreased by $411,000, or 14.2%, to $2,491,000 for the three months ended June 30, 2000, from $2,903,000 for the comparable period in 1999. This decrease is primarily due to fewer pre-need cemetery sales. Mortgage fee income increased by $2,849,000, or 78.7%, to $6,467,000 for the three months ended June 30, 2000, from $3,618,000 for the comparable period in 1999. This increase was primarily attributable to a greater number of loan originations during the second quarter of 2000 due to the expansion of business activities in new geographic markets. Total benefits and expenses were $15,065,000, or 98.7% of total revenues for the three months ended June 30 2000, as compared to $12,677,000, or 96.5% of total revenues for the comparable period in 1999. Death benefits, surrenders and other policy benefits, and increase in future policy benefits decreased by an aggregate of $392,000, or 11.8%, to $2,925,000 for the three months ended June 30, 2000, from $3,317,000 for the comparable period in 1999. This decrease was primarily the result of a reduction in policyholder account balances. Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $25,000, or 2.1%, to $1,197,000, for the three months ended June 30, 2000, from $1,222,000 for the comparable period in 1999. This decrease was in line with actuarial assumptions. General and administrative expenses increased by $2,646,000 or 38.2%, to $9,568,000 for the three months ended June 30, 2000, from $6,922,000 for the comparable period in 1999. This increase primarily resulted from an increase in commissions and other expenses due to additional mortgage loan originations having been made by the Company's mortgage subsidiary during the second quarter of 2000 as a result of the expansion of its business activities in new geographic markets. 11 Interest expense increased by $332,000, or 145.1%, to $561,000 for the three months ended June 30, 2000, from $229,000 for the comparable period in 1999. This increase was primarily due to additional warehouse lines of credit required for the additional mortgage loan originations by the Company's mortgage subsidiary. Cost of mortuaries and cemeteries goods and services sold decreased by $173,000, or 17.6%, to $815,000 for the three months ended June 30, 2000, from $988,000 for the comparable period in 1999. This decrease was primarily due to fewer pre-need cemetery sales. Liquidity and Capital Resources The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity of held-to-maturity investments, or sale of other investments. The mortgage subsidiary realizes cash flow from fees generated by originating and refinancing mortgage loans and interest earned on mortgages sold to investors. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses on the issuance of new policies, the maintenance of existing policies, debt service, and operating expenses. The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held-to-maturity in the portfolio to help in this timing; however, to date, that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company's products. The Company's investment philosophy is intended to provide a rate of return which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements. The Company's investment policy is to invest predominantly in fixed maturity securities, mortgage loans, and warehouse mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the life insurance subsidiaries amounted to $64,620,000 as of June 30, 2000, compared to $63,749,000 as of December 31, 1999. This represents 59.6% and 58.5% of the total insurance-related investments as of June 30, 2000, and December 31, 1999, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At June 30, 2000, 1.5% ($994,000) and at December 31, 1999, 1.6% ($994,000) of the Company's total investment in bonds were invested in bonds in rating categories three through six, which are considered non-investment grade. The Company has classified certain of its fixed income securities, including high-yield securities, in its portfolio as available for sale, with the remainder classified as held to maturity. However, in accordance with Company policy, any such securities purchased in the future will be classified as held to maturity. Business conditions, however, may develop in the future which may indicate a need for a higher level of liquidity in the investment portfolio. In that event the Company believes it could sell short-term investment grade securities before liquidating higher-yielding longer term securities. The Company is subject to risk based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At June 30, 2000, and December 31, 1999, the life insurance subsidiary exceeded the regulatory criteria. The Company's total capitalization of stockholders' equity and bank debt and notes payable was $39,696,000 as of June 30, 2000, as compared to $41,144,000 as of December 31, 1999. Stockholders' equity as a percent of capitalization increased to 65.1% as of June 30, 2000, from 64.4% as of December 31, 1999. 12 Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1999 was 13.2% as compared to a rate of 6.0% for 1998. The 2000 lapse rate is approximately the same as 1999. At June 30, 2000, $21,263,000 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's life insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to its parent company without the approval of insurance regulatory authorities. Item 3. Quantitative and Qualitative Disclosure of Market Risk There have been no significant changes since the annual report Form 10-K filed for the year ended December 31, 1999. Part II Other Information: Item 1. Legal Proceedings Security National Mortgage Company ("Security National Mortgage"), a wholly- owned subsidiary of the Company, has been notified that it may be subject to an administrative action by the U.S. Department of Housing and Urban Development ("HUD"). By way of letter from HUD to Security National Mortgage dated February 15, 2000 and received on February 25, 2000, Security National Mortgage was advised "that the Mortgagee Review Board" of HUD "is considering an administrative action against Security National Mortgage ... pursuant to 24 CFR Part 25 ... and a civil money penalty pursuant to 24 CFR part 30 ...." In the letter, HUD set forth alleged violations of HUD/Federal Housing Administration ("FHA") requirements which included among such violations: (1) failure to comply with Security National Mortgage's own policy and procedures outlined in a July 17, 1997 letter to HUD; (2) acceptance of loans originated by personnel not employed by or not exclusively employed by Security National Mortgage; (3) acceptance of loans originated by non-HUD approved entities; (4) payment of fees and compensation to unauthorized entities or individuals in connection with FHA insured mortgages; and (5) certification of inaccurate HUD-1s. Concerning the administrative action by HUD relating to the above allegations, dependent upon the facts and circumstances, HUD asserts it has alternatives such as settlement, issuing a letter of reprimand, placing Security National Mortgage on probation or even suspending or withdrawing Security National Mortgage's approval function as a HUD/FHA lender. The letter indicates that the Mortgagee Review Board intends to seek a civil money penalty. With respect to any civil money penalty, which would be in addition to the foregoing, the letter from HUD states that the "amount of the civil money penalty shall not exceed $5,500 for each such listed or described violation" and that a "continuing violation may constitute a separate violation for each day that violation continues." Security National Mortgage is allowed to respond in writing to what is asserted by HUD and the procedure permits at a future time, if necessary, an evidentiary hearing. Management recognizes the serious alternative sanctions claimed by HUD to be available to it including the sanction of the loss of the ability to do FHA lending work. Recognizing the importance of the matter, a detailed written response to the letter was filed with HUD and a meeting was held with the HUD staff in an effort to insure that Security National Mortgage's position on the matter is fairly and properly presented. Further response or decision has not been received from HUD. On or about March 6, 2000, Kelly Darrow ("Darrow") filed a Charge of Discrimination with the Labor Commission of Utah, Anti-Discrimination Division against Security National Mortgage Company. It is asserted that Security National Mortgage violated the Americans with Disabilities Act of 1990 ("ADA") as amended, and the Utah Anti-Discrimination Act of 1965 ("UAD") as amended, for the alleged reasons of "demoted, denied promotion. 13 received less pay than others, denied reasonable accommodation for ... disability, forced to go on contract vendor status, and when ... complained of the treatment ... was fired." Darrow withdrew the charge in favor of a "right to sue letter" so as to be able to file a suit in federal court. Remedies which may be sought include back pay and benefits, attorneys' fees, reinstatement and punitive damages. Management takes the position that Darrow was treated appropriately and that Security National Mortgage did not violate the ADA or UAD. At this point, however, a complete evaluation of the matter has not been finalized. The Company is not a party to any other legal proceedings outside the ordinary course of the Company's business or to any other legal proceedings which, adversely determined, would have a material adverse effect on the Company or its business. Item 2. Changes in Securities NONE Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3. A. Articles of Restatement of Articles of Incorporation (8) B. Bylaws (1) 4. A. Specimen Class A Stock Certificate (1) B. Specimen Class C Stock Certificate (1) C. Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1) 10. A. Restated and Amended Employee Stock Ownership Plan and Trust Agreement (1) B. Deferred Compensation Agreement with George R. Quist (2) C. 1993 Stock Option Plan (3) D. Promissory Note with Key Bank of Utah (4) E. Loan and Security Agreement with Key Bank of Utah (4) F. General Pledge Agreement with Key Bank of Utah (4) G. Note Secured by Purchase Price Deed of Trust and Assignment of Rents with the Carter Family Trust and the Leonard M. Smith Family Trust (5) H. Deed of Trust and Assignment of Rents with the Carter Family Trust and the Leonard M. Smith Family Trust (5) I. Promissory Note with Page and Patricia Greer (6) J. Pledge Agreement with Page and Patricia Greer (6) K. Promissory Note with Civil Service Employees Insurance Company (7) L. Deferred Compensation Agreement with William C.Sargent (8) M. Employment Agreement with Scott M. Quist. (8) N. Acquisition Agreement with Consolidare Enterprises, Inc., and certain shareholders of Consolidare. (9) O. Agreement and Plan of Merger between Consolidare Enterprises, Inc., and SSLIC Holding Company. (10) P. Administrative Services Agreement with Southern Security Life Insurance Company. (11) 14 Q. Promissory Note with George R. Quist. (12) R. Settlement Agreement with Capitol Indemnity Corporation, George A. Fait, and Joel G. Fait. (1) Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987. (2) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1989. (3) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1994. (4) Incorporated by reference from Report on Form 8-K, as filed on February 24, 1995. (5) Incorporated by reference from Annual Report on Form 10K, as filed on March 31, 1995. (6) Incorporated by reference from Report on Form 8-K, as filed on May 1, 1995. (7) Incorporated by reference from Report on Form 8-K, as filed on January 16, 1996. (8) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1998. (9) Incorporated by reference from Report on Form 8-K, as filed on May 11, 1998. (10) Incorporated by reference from Report on Form 8-K, as filed on January 4, 1999. (11) Incorporated by reference from Report on Form 8-K, as filed on March 4, 1999. (12) Incorporated by reference from Annual Report on Form 10-K, as filed on April 14, 1999. 27. Financial Data Schedule (b) Reports on Form 8-K: NONE 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGISTRANT SECURITY NATIONAL FINANCIAL CORPORATION Registrant DATED: August 21, 2000 By: George R. Quist, --------------- ---------------- Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) DATED: August 21, 2000 By: Scott M. Quist --------------- -------------- First Vice President, General Counsel, Treasurer (Principal Financial and Accounting Officer) 16