10-Q 1 snl10q602.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, 2002 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 4,684,250 ------------------------------------- --------------------------------- Title of Class Number of Shares Outstanding as of June 30, 2002 Class C Common Stock, $.20 par value 5,822,148 ------------------------------------ ---------------------------------- Title of Class Number of Shares Outstanding as of June 30, 2002 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10Q QUARTER ENDED June 30, 2002 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1 Financial Statements Page No. ------ -------- Consolidated Statement of Earnings - Six and three months ended June 30, 2002 and 2001 (unaudited)............3 Consolidated Balance Sheet - June 30, 2002 (unaudited) and December 31, 2001 ...................................4-5 Consolidated Statement of Cash Flows - Six months ended June 30, 2002 and 2001 (unaudited)........6 Notes to Consolidated Financial Statements...............7-9 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......................................13-16 Signature Page............................................17 Certification.............................................17 2
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) Six Months Ended Three Months Ended June 30, June 30, Revenues: 2002 2001 2002 2001 -------- ---- ---- ---- ---- Insurance premiums and other considerations $6,692,209 $6,583,184 $3,369,453 $3,102,047 Net investment income 5,451,638 6,559,980 2,527,873 3,410,547 Net mortuary and cemetery sales 5,539,033 5,307,781 2,810,770 2,847,716 Realized gains on investments and other assets 718,816 3,986 (601) (111) Mortgage fee income 18,840,224 17,189,891 8,974,233 8,569,183 Other 308,967 54,998 267,620 23,674 ------------ ------------ ------------ ------------ Total revenues 37,550,887 35,699,820 17,949,348 17,953,056 Benefits and expenses: --------------------- Death benefits 2,973,101 2,790,758 1,304,431 1,285,849 Surrenders and other policy benefits 1,070,100 836,554 440,189 539,955 Increase in future policy benefits 2,059,116 2,543,794 1,311,930 1,249,250 Amortization of deferred policy acquisition costs and cost of insurance acquired 1,768,769 1,948,946 934,242 871,209 General and administrative expenses: Commissions 13,962,770 13,077,428 6,931,677 6,625,893 Salaries 5,383,137 4,239,587 2,774,187 2,202,924 Other 6,365,369 5,969,016 3,054,028 2,936,035 Interest expense 522,796 1,618,292 200,443 910,739 Cost of goods and services sold of the mortuaries and cemeteries 1,282,793 1,381,405 682,468 747,808 ------------ ----------- ------------ ------------ Total benefits and expenses 35,387,951 34,405,780 17,633,595 17,369,662 Earnings before income taxes 2,162,936 1,294,040 315,753 583,394 Income tax expense (530,818) (354,660) (74,446) (164,504) Minority interest (income) loss of subsidiary 14,365 35,186 25,315 26,683 ------------ ----------- ------------ ------------ Net earnings $1,646,483 $974,566 $266,622 $445,573 ============ =========== ============ ============ Net earnings per common share $.35 $.22 $.06 $.10 ==== ==== ==== ==== Weighted average outstanding common shares 4,678,817 4,450,839 4,680,628 4,450,839 Net earnings per common share-assuming dilution $.33 $.22 $.05 $.10 ==== ==== ==== ==== Weighted average outstanding common shares assuming-dilution 5,011,394 4,451,094 5,024,915 4,451,048 See accompanying notes to consolidated financial statements.
3 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 2002 December 31, (Unaudited) 2001 -------------- ----------- Assets: Insurance-related investments: Fixed maturity securities held to maturity, at amortized cost $28,854,886 $27,799,909 Fixed maturity securities available for sale, at market 19,216,767 21,470,729 Equity securities available for sale, at market 2,394,173 2,641,549 Mortgage loans on real estate 13,798,647 15,479,305 Real estate, net of accumulated depreciation 9,719,462 9,051,691 Policy, student and other loans 10,961,639 11,277,975 Short-term investments 2,636,041 1,453,644 ------------- ------------- Total insurance-related investments 87,581,615 89,174,802 Restricted assets of cemeteries and mortuaries 5,532,577 5,339,436 Cash 14,172,291 8,757,246 Receivables: Trade contracts 5,157,627 6,945,274 Mortgage loans sold to investors 49,275,266 50,695,073 Receivable from agents 1,986,129 2,061,541 Receivable from officers 82,290 102,200 Other 1,214,641 1,183,927 ------------- ------------- Total receivables 57,715,953 60,988,015 Allowance for doubtful accounts (2,097,303) (2,287,241) ------------- ------------- Net receivables 55,618,650 58,700,774 Policyholder accounts on deposit with reinsurer 7,081,246 7,148,068 Land and improvements held for sale 8,138,927 8,346,448 Accrued investment income 1,031,413 1,059,789 Deferred policy acquisition costs 15,385,759 14,453,023 Property, plant and equipment, net 11,107,005 10,802,387 Cost of insurance acquired 7,246,690 7,615,348 Excess of cost over net assets of acquired subsidiaries 1,047,833 1,065,045 Other 686,191 597,209 ------------- ------------- Total assets $214,630,197 $213,059,575 ============= ============= See accompanying notes to consolidated financial statements. 4 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) June 30, 2002 December 31, (Unaudited) 2001 -------------- ----------- Liabilities: ------------ Future life, annuity, and other policy benefits $141,146,243 $140,504,866 Unearned premium reserve 1,918,614 1,785,977 Bank loans payable 8,150,628 8,461,900 Notes and contracts payable 3,325,016 3,635,776 Estimated future costs of pre-need sales 9,578,535 9,338,353 Payable to endowment care fund 22,655 5,586 Accounts payable 1,141,190 1,319,319 Funds held under reinsurance treaties 1,342,235 1,379,640 Other liabilities and accrued expenses 4,761,704 5,547,213 Income taxes 7,435,648 6,874,597 ------------- ------------- Total liabilities 178,822,468 178,853,227 Minority interest 4,250,072 4,237,030 Stockholders' Equity: -------------------- Common stock: Class A: $2 par value, authorized 10,000,000 shares, issued 5,385,887 shares in 2002 and 5,363,591 shares in 2001 10,771,774 10,727,182 Class C: $0.20 par value, authorized 7,500,000 shares, issued 5,890,480 shares in 2002 and 6,113,430 shares in 2001 1,178,096 1,222,686 ------------- ------------- Total common stock 11,949,870 11,949,868 Additional paid-in capital 10,168,522 10,168,523 Accumulated other comprehensive income, net of deferred taxes 1,127,961 1,223,930 Retained earnings 11,635,713 9,989,230 Treasury stock at cost (1,283,852 in 2002 and 1,294,716 in 2001 Class A shares and 68,332 Class C shares in 2002 and 2001 held by affiliated companies) (3,324,409) (3,362,233) ------------- ------------- Total stockholders' equity 31,557,657 29,969,318 ------------- ------------- Total liabilities and stockholders' equity $214,630,197 $213,059,575 ============= ============= 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, 2002 2001 ---- ---- Cash flows from operating activities: Net cash provided by (used in) operating activities $7,127,294 $(6,249,704) ------------ ------------ Cash flows from investing activities: Securities held to maturity: Purchase - fixed maturity securities (4,062,931) (402,995) Calls and maturities - fixed maturity securities 3,046,980 8,094,041 Securities available for sale: Calls and maturities - fixed maturity securities 2,301,497 1,064,816 Purchase of equity securities (367) -- Sales of equity securities 11,381 Purchases of short-term investments (1,182,397) (10,015,902) Sales of short-term investments -- 8,575,000 Purchases of restricted assets (193,141) (295,053) Mortgage, policy, and other loans made (652,143) (2,161,454) Payments received for mortgage, real estate, policy, and other loans 3,197,227 1,851,468 Purchases of property, plant, and equipment (869,642) (431,896) Purchases of real estate (1,409,857) (28,085) ------------ ------------ Net cash provided by investing activities 175,226 6,261,321 ------------ ------------ Cash flows from financing activities: Annuity receipts 4,345,939 3,540,035 Annuity withdrawals (5,649,206) (6,801,813) Repayment of bank loans and notes and contracts payable (808,626) (1,227,903) Proceeds from borrowings on bank loans and notes and contracts payable 186,594 -- Sale of treasury stock 37,824 -- ------------ ------------ Net cash used in financing activities (1,887,475) (4,489,681) ------------ ------------ Net change in cash 5,415,045 (4,478,064) Cash at beginning of period 8,757,246 11,275,030 ------------ ------------ Cash at end of period $14,172,291 $6,796,966 ============ ============ See accompanying notes to consolidated financial statements. 6 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (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 footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2001, included in the Company's Annual Report on Form 10-K (file number 0-9341). 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 adequate. 2. Comprehensive Income For the six months ended June 30, 2002 and 2001, total comprehensive income amounted to $1,550,514 and $1,189,256, respectively. For the three months ended June 30, 2002 and 2001, total comprehensive income amounted to $242,703 and $526,238, respectively. 3. Capital Stock The basic and diluted earnings per share amounts were calculated as follows: Six Months Ended June 30, 2002 2001 ---- ---- Numerator: Net income $1,646,483 $974,566 ========== ========== Denominator: Denominator for basic earnings per share-- weighted-average shares 4,678,817 4,450,839 ---------- ---------- Effect of dilutive securities: Employee stock options 304,318 255 Stock Appreciation Rights 28,259 -- ---------- ---------- Dilutive potential common shares 332,577 255 ---------- ---------- Denominator for diluted earnings per share-adjusted weighted- average shares and assumed conversions 5,011,394 4,451,094 ========== ========== Basic earnings per share $0.35 $0.22 ===== ===== Diluted earnings per share $0.33 $0.22 ===== ===== 7 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Unaudited) 3. Capital Stock Three Months Ended June 30, 2002 2001 ---- ---- Numerator: Net income $ 266,622 $ 445,573 =========== =========== Denominator: Denominator for basic earnings per share-- weighted-average shares 4,680,628 4,450,839 Effect of dilutive securities: Employee stock options 314,050 209 Stock appreciation rights 30,237 -- ----------- ---------- Dilutive potential common shares 344,287 209 ----------- ---------- Denominator for diluted earnings per share-adjusted weighted- average shares and assumed conversions 5,024,915 4,451,048 =========== =========== Basic earnings per share $0.06 $0.10 ===== ===== Diluted earnings per share $0.05 $0.10 ===== ===== 4. Recent Accounting Pronouncement ------------------------------- Management has considered whether impairment exists on goodwill in relation to Statement of Financial Accounting Standards No. 142, and does not believe there is any material impairment. 8
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 (Unaudited) 5. Business Segment Life Cemetery/ Reconciling Insurance Mortuary Mortgage Items Consolidated --------- -------- -------- ----- ------------ For the Six Months Ended June 30, 2002 ------------------------ Revenues from external customers $9,761,198 $6,751,231 $21,038,458 $ -- $37,550,887 Intersegment revenues 2,277,396 -- -- (2,277,396) -- Segment profit 504,694 1,026,417 631,825 -- 2,162,936 Identifiable assets 202,337,272 40,505,340 5,717,796 (33,930,211) 214,630,197 For the Six Months Ended June 30, 2001 ------------------------ Revenues from external customers $10,330,316 $5,808,111 $19,561,393 $ -- $35,699,820 Intersegment revenues 1,777,926 -- -- (1,777,926) -- Segment profit 559,229 172,076 562,735 -- 1,294,040 Identifiable assets 198,966,779 36,555,814 4,892,580 (31,820,626) 208,594,547 For the Three Months Ended June 30, 2002 -------------------------- Revenues from external customers $4,887,456 $3,062,323 $9,999,569 $ -- $17,949,348 Intersegment revenues 1,071,324 -- -- (1,071,324) -- Segment profit 168,843 55,575 91,335 -- 315,753 For the Three Months Ended June 30, 2001 -------------------------- Revenues from external customers $4,986,554 $3,100,698 $9,865,804 $ -- $17,953,056 Intersegment revenues 963,925 -- -- (963,925) -- Segment profit 241,064 (5,864) 348,194 -- 583,394
9 Item 2. Management's Discussion and Analysis Overview The Company's operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to "niche" insurance products, such as the Company's funeral plan policies and interest sensitive products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on lower interest rates by originating and refinancing mortgage loans. During the six months ended June 30, 2002, Security National Mortgage Company ("SNMC") experienced increases in revenue and expenses due to the increase in loan volume of its 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 origination points paid by the borrowers and service and release premiums received from third party investors who purchase the loans from SNMC. SNMC 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 4,132 ($587,497,000) and 3,806 ($553,489,000) loans respectively for the six months ended June 30, 2002 and 2001. Results of Operations Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Total revenues increased by $1,851,000, or 5.2%, to $37,551,000 for the six months ended June 30, 2002, from $35,700,000 for the six months ended June 30, 2001. Contributing to this increase in total revenues was a $1,650,000 increase in mortgage fee income, a $231,000 increase in net mortuary and cemetery sales, a $109,000 increase in insurance premiums and other considerations, and a $715,000 increase in realized gains on investments and other assets. Insurance premiums and other considerations increased by $109,000, or 1.7%, to $6,692,000 for the six months ended June 30, 2002, from $6,583,000 for the comparable period in 2001. This increase was primarily the result of an increase in the amortization of unearned premium reserve to the Company's current actuarial assumptions. Net investment income decreased by $1,108,000 or 16.9%, to $5,452,000 for the six months ended June 30, 2002, from $6,560,000 for the comparable period in 2001. This decrease was primarily attributable to lower yields on investments. Net mortuary and cemetery sales increased by $231,000, or 4.4%, to $5,539,000 for the six months ended June 30, 2002, from $5,308,000 for the comparable period in 2001. This increase was primarily due to additional at-need cemetery and mortuary sales. Realized gains on investments and other assets increased by $715,000, to $719,000 for the six months ended June 30, 2002, from $4,000 for the comparable period in 2001. This increase was the result of the sale of approximately 3.5 acres at Lakehills Cemetery in Sandy, Utah to the Utah Transit Authority. Mortgage fee income increased by $1,650,000, or 9.6%, to $18,840,000 for the six months ended June 30, 2002, from $17,190,000 for the comparable period in 2001. This increase was primarily attributable to a greater number of loan originations during the six months of 2002 due to the opening of new branch offices in Mesa, Arizona and Houston, Texas. 10 Total benefits and expenses were $35,388,000, or 94.2%, of total revenues for the six months ended June 30, 2002, as compared to $34,406,000, or 96.4%, of total revenues for the comparable period in 2001. Death benefits, surrenders and other policy benefits and increase in future policy benefits decreased by an aggregate of $69,000, or 1.1%, to $6,102,000 for the six months ended June 30, 2002, from $6,171,000 for the comparable period in 2001. This decrease was primarily the result of a reduction in reserves for policyholders. Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $180,000, or 9.2 %, to $1,769,000 for the six months ended June 30, 2002, from $1,949,000 for the comparable period in 2001. This decrease was primarily due to the adjustment of the amortization rate to the Company's current actuarial assumptions. General and administrative expenses increased by $2,425,000, or 10.4%, to $25,711,000 for the six months ended June 30, 2002, from $23,286,000 for the comparable period in 2001. This increase primarily resulted from an increase in commissions, salaries and other expenses due to additional mortgage loan originations having been made by the Company's mortgage subsidiary during the six months of 2002. Interest expense decreased by $1,095,000 or 67.7%, to $523,000 for the six months ended June 30, 2002, from $1,618,000 for the comparable period in 2001. This decrease was primarily due to lower interest rates and fewer borrowings under the Company's warehouse lines of credit required for mortgage loan originations by the Company's mortgage subsidiary. Cost of goods and services sold of the mortuaries and cemeteries decreased by $98,000, or 7.1%, to $1,283,000 for the six months ended June 30, 2002, from $1,381,000 for the comparable period in 2001. This decrease was primarily due to greater sales of cemetery burial property sales in 2002, which have a lower cost of goods sold than other funeral products. Second Quarter of 2002 Compared to Second Quarter of 2001 Total revenues decreased by $4,000, to $17,949,000 for the three months ended June 30, 2002, from $17,953,000 for the three months ended June 30, 2001. Contributing to this decrease in total revenues was an $883,000 decrease in net investment income and a $37,000 decrease in net mortuary and cemetery sales. Insurance premiums and other considerations increased by $267,000, or 8.6%, to $3,369,000 for the three months ended June 30, 2002, from $3,102,000 for the comparable period in 2001. This increase was primarily due to the adjustment of the amortization rate of unearned premium reserve to the Company's current actuarial assumptions. Net investment income decreased by $883,000, or 25.7%, to $2,528,000 for the three months ended June 30, 2002, from $3,411,000 for the comparable period in 2001. This decrease was primarily attributable to lower yields on investments. Net mortuary and cemetery sales decreased by $37,000, or 1.3%, to $2,811,000 for the three months ended June 30, 2002, from $2,848,000 for the comparable period in 2001. This decrease is primarily due to fewer at-need mortuary sales. Mortgage fee income increased by $405,000, or 4.7%, to $8,974,000 for the three months ended June 30, 2002, from $8,569,000 for the comparable period in 2001. This increase was primarily attributable to a greater number of loan originations during the second quarter of 2002, due to the opening of new branch offices in Mesa, Arizona and Houston, Texas. Total benefits and expenses were $17,634,000, or 98.3%, of total revenues for the three months ended June 30 2002, as compared to $17,370,000, or 96.8%, of total revenues for the comparable period in 2001. 11 Death benefits, surrenders and other policy benefits, and increase in future policy benefits decreased by an aggregate of $18,000, or .6%, to $3,057,000 for the three months ended June 30, 2002, from $3,075,000 for the comparable period in 2001. This decrease was primarily the result of a reduction in interest credited on policyholder account balances. Amortization of deferred policy acquisition costs and cost of insurance acquired increased by $63,000, or 7.2%, to $934,000, for the three months ended June 30, 2002, from $871,000 for the comparable period in 2001. This increase was in line with actuarial assumptions. General and administrative expenses increased by $995,000 or 8.5%, to $12,760,000 for the three months ended June 30, 2002, from $11,765,000 for the comparable period in 2001. 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 2002. Interest expense decreased by $711,000, or 78.0%, to $200,000 for the three months ended June 30, 2002, from $911,000 for the comparable period in 2001. This decrease was primarily due to lower interest rates and fewer borrowings under the Company's warehouse lines of credit required for mortgage loan originations by the Company's mortgage subsidiary. Cost of mortuaries and cemeteries goods and services sold decreased by $66,000, or 8.7%, to $682,000 for the three months ended June 30, 2002, from $748,000 for the comparable period in 2001. This decrease was primarily due to greater sales of cemetery burial property sales in 2002, which have a lower cost of goods sold than other funeral products. 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 $48,072,000 as of June 30, 2002, compared to $49,271,000 as of December 31, 12 2001. This represents 55% of the total insurance-related investments as of June 30, 2002, and December 31, 2001. 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, 2002 and December 31, 2001, 5% ($2,438,000) 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, 2002 and December 31, 2001, the life insurance subsidiary exceeded the regulatory criteria. The Company's total capitalization of stockholders' equity and bank debt and notes payable was $43,033,000 as of June 30, 2002, as compared to $42,067,000 as of December 31, 2001. Stockholders' equity as a percent of capitalization increased to 73% as of June 30, 2002, from 71% as of December 31, 2001. Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2001 was 13.2% as compared to a rate of 15.0% for 2000. The 2002 lapse rate is approximately the same as 2001. At June 30, 2002, $23,889,000 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, 2001. Part II Other Information: Item 1. Legal Proceedings An action was brought against Southern Security Life Insurance Company in July 1999 by Dorothy Ruth Campbell in the Circuit Court of Escambia County, Alabama. The action arises out of a denial of coverage under a $10,000 insurance policy. The claims are for breach of contract, bad faith and fraudulent misrepresentation. In the action, Campbell seeks compensatory and punitive damages plus interest. The Company has filed its response to the complaint and certain discovery has taken place. A motion for summary judgment filed on behalf of the Company was denied. A trial date has yet to be set as the Company continues to vigorously defend the matter. An action was brought against the Company in May 2001, by Glenna Brown Thomas individually and as personal representative of the Estate of Lynn W. Brown in the Third Judicial Court, Salt Lake County, Utah. The action asserts that Memorial Estates delivered to Lynn W. Brown six stock certificates representing 2,000 shares in 1970 and 1971. Mr. Brown died in 1972. It is asserted that at the time the 2,000 shares were issued and outstanding, such represented a 2% ownership of Memorial Estates. It is alleged Mr. Brown was entitled to preemptive rights and that after the issuance of the stock to Mr. Brown there were further issuances of stock without providing written notice to Mr. Brown or his estate with respect to 13 an opportunity to purchase more stock. It is asserted among other things that the plaintiff "has the right to a transfer of Brown's shares to Thomas on defendants' (which includes Security National Financial Corporation as well as Memorial Estates, Inc.) books and to restoration of Brown's proportion of share ownership in Memorial at the time of his death by issuance and delivery to Thomas of sufficient shares of defendant's publicly traded and unrestricted stock in exchange for the 2,000 shares of Memorial stock and payment of all dividends from the date of Thomas's demand, as required by Article XV of the Articles of Incorporation." Based on present information, the Company intends to vigorously defend the matter, including an assertion that the statute of limitations bars the claims. An action was brought against Southern Security Life Insurance Company by National Group Underwriters, Inc. ("NGU") in state court in the State of Texas. The case was removed by the Company to the United States District Court for the Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E. An Amended Complaint was filed on or about July 18, 2001. The Amended Complaint asserts that NGU had a contract with the Company wherein NGU would submit applications for certain policies of insurance to be issued by the Company. It is alleged that disputes have arisen between NGU and the Company with regard to the calculation and payment of certain advanced commissions as well as certain production bonuses. NGU alleges that it "has been damaged far in excess of the $75,000 minimum jurisdictional limits of this Court." NGU also seeks attorney's fees and costs as well as prejudgment and postjudgment interest. A second amended complaint and a third amended complaint, which included a fraud claim, were filed. A motion was filed by the Company to dismiss the third amended complaint, including the fraud claim. The court denied the motion. The Company has counterclaimed for what it claims to be a debit balance owing to it pursuant to the relationship between the parties with said counterclaim seeking a substantial amount from NGU (said amount potentially subject to reduction as premiums are received). The Company is also seeking to recover attorney's fees and costs, as well punitive damages on three of its causes of action. A response has not yet been filed to the amended counterclaim. The change of venue motion of the Company was denied. Certain discovery has taken place and further discovery is anticipated, e.g., dispositions. The Company intends to vigorously defend the matter as well as prosecute its counterclaim. An action was brought by Bernice Johnson against Southern Security Life Insurance Company in May, 2002 in the Circuit Court of Jefferson County, Alabama, Civil Action No. CV02 2963. The face amount of coverage under the policy is $15,000. The insured died in July 2001. Claims are made for non- payment of the policy amount. The claims for relief include misrepresentation, mental anguish and emotional distress, fraud, intentional and bad faith, non-payment of the benefit, intentional and bad faith failure to investigate the claim for benefits, reckless and negligent and wanton action relative to misrepresentation and/or concealment of facts, negligence and the wanton hiring, training and supervision of agent. Compensatory and punitive damages are sought along with interest and costs. An answer has been filed by the Company and discovery is in process. 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, if 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 14 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)(3) 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. 2000 Director Stock Option Plan (12) E. Promissory Note with Key Bank of Utah (4) F. Loan and Security Agreement with Key Bank of Utah (4) G. General Pledge Agreement with Key Bank of Utah (4) H. 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) I. Deed of Trust and Assignment of Rents with the Carter Family Trust and the Leonard M. Smith Family Trust (5) J. Promissory Note with Page and Patricia Greer (6) K. Pledge Agreement with Page and Patricia Greer (6) L. Promissory Note with Civil Service Employees Insurance Company (7) M. Deferred Compensation Agreement with William C. Sargent (8) N. Employment Agreement with Scott M. Quist. (8) O. Acquisition Agreement with Consolidare Enterprises, Inc., and certain shareholders of Consolidare. (9) P. Agreement and Plan of Merger between Consolidare Enterprises, Inc., and SSLIC Holding Company. (10) Q. Administrative Services Agreement with Southern Security Life Insurance Company. (11) R. Promissory Note with George R. Quist (13) S. Deferred Compensation Plan (14) (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. 15 (11) Incorporated by reference from Report on Form 8-K, as filed on March 4, 1999. (12) Incorporated by reference from Schedule 14A Definitive Proxy Statement, filed August 29, 2000, relating to the Company's Annual Meeting of Shareholders. (13) Incorporated by reference from Report on Form 10-K, as filed on April 16, 2001. (14) Incorporated by reference from Report on Form 10-K, as filed on April 3, 2002. 21. Subsidiaries of the Registrant (b) Reports on Form 8-K: None 16 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 14, 2002 By: George R. Quist, ---------------- Chairman of the Board and Chief Executive Officer (Principal Executive Officer) DATED: August 14, 2002 By: Stephen M. Sill --------------- Vice President Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 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 10Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George R. Quist, 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. George R. Quist Chief Executive Officer August 14, 2002 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 10Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen M. Sill, 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. Stephen M. Sill Chief Financial Officer August 14, 2002 17