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