SEC Filing | Security National Financial Corporation

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number 0-9341 Security National Financial Corporation (Exact name of registrant as specified in its Charter) UTAH 87-0345941 - ---------------------------------- ------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 5300 South 360 West, Suite 250 84123 Salt Lake City, Utah ----------------- - ------------------------------------------ (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (801) 264-1060 ----------------- Securities registered pursuant to Section 12(d) of the Act: Name of each exchange Title of each Class on which registered - ------------------- -------------------- None None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $2.00 Par Value (Title of Class) Class C Common Stock, $0.20 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non- affiliates of the registrant as of March 31, 2000 was approximately $11,206,000. As of March 31, 2000, registrant had issued and outstanding 3,897,592 shares of Class A Common Stock and 5,493,372 shares of Class C Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the registrant's 2000 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

PART I Item 1. Business Security National Financial Corporation (the "Company") operates in three main business segments: life insurance, cemetery and mortuary, and mortgage loans. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance. These products are marketed in 34 states through a commissioned sales force of independent licensed insurance agents who may also sell insurance products of other companies. The cemetery and mortuary segment of the Company consists of five cemeteries in the state of Utah and one in the state of California and eight mortuaries in the state of Utah and six in the state of Arizona. The Company also engages in pre-need selling of funeral, cemetery and cremation services through its Utah operations. Many of the insurance agents also sell pre-need funeral, cemetery and cremation services. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction and existing homes and real estate projects. The design and structure of the Company is that each segment is related to the others and contributes to the profitability of the other segments of the Company. Because of the increasing cemetery and mortuary operations in Utah and Arizona, the Company enjoys a level of public awareness that assists in the sales and marketing of insurance and pre-need cemetery and funeral products. Security National Life Insurance Company ("Security National Life") invests its assets (representing in part the pre-paid funerals) in investments authorized by the Insurance Departments of the States of Florida and Utah. One such investment authorized by the Insurance Departments is high quality mortgage loans. Thus, while each segment is a profit center on a stand-alone basis, this horizontal integration of each segment will lead to improved profitability of the Company. The Company is also pursuing growth through acquisitions of both life insurance companies and cemeteries and mortuaries. The Company's acquisition business plan is based on reducing overhead cost of the acquired company by utilizing existing personnel, management, and technology while still providing quality service to the customers and policyholders. The Company was organized as a holding company in 1979 when Security National Life became a wholly owned subsidiary of the Company and the former stockholders of Security National Life became stockholders of the Company. Security National Life was formed in 1965 and has grown through the direct sale of life insurance and annuities and through the acquisition of other insurance companies, including the acquisitions of Capital Investors Life Insurance Company in December 1994, Civil Service Employees Life Insurance Company in December 1995 and Southern Security Life Insurance Company in December 1998. Memorial Estates, Inc. and Memorial Mortuary became direct subsidiaries of the Company in the 1979 reorganization when the Company was formed. These companies were acquired by Security National Life in 1973. The cemetery and mortuary operations have also grown through the acquisition of other cemetery and mortuary companies, including the acquisitions of Paradise Chapel Funeral Home, Inc. in 1989, Holladay Memorial Park, Inc., Cottonwood Mortuary, Inc. and Deseret Memorial, Inc. in 1991, Sunset Funeral Home in January 1994, Greer-Wilson Funeral Home, Inc. in April 1995 and Crystal Rose Funeral Home in February 1997. In July 1993, the Company formed Security National Mortgage Company ("Security National Mortgage") to originate and refinance mortgage loans. See Notes to Consolidated Financial Statements for additional disclosure and discussion regarding segments of the business. 1

Life Insurance Products The Company, through its insurance subsidiaries, Security National Life and Southern Security Life Insurance Company, issues and distributes selected lines of life insurance and annuities. The Company's life insurance business includes funeral plans and interest-sensitive whole life insurance, as well as other traditional life and accident and health insurance products but places specific marketing emphasis on funeral plans. A funeral plan is a small face value life insurance policy that generally has a face coverage of up to $5,000. The Company believes that funeral plans represent a marketing niche that has lower competition since most insurance companies do not offer similar coverages. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person's death. On a per thousand dollar cost of insurance basis, these policies are more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy to be distributed over a smaller policy size, and due to the simplified underwriting practices resulting in higher mortality costs. Markets and Distribution The Company is licensed to sell insurance in 34 states. The Company, in marketing its life insurance products, seeks to locate, develop and service specific "niche" markets. A "niche" market is an identifiable market which the Company believes is not emphasized by most insurers. The Company generally sells its life insurance products to people of middle age who have a need for insurance to protect the income of the wage earner of the family, to pay off debts at the time of death and for other estate planning purposes. Funeral plan policies are sold primarily to persons who range in age from 45 to 75. Even though people of all ages and income levels purchase funeral plans, the Company believes that the highest percentage of funeral plan purchasers are individuals who are older than 45 and have low to moderate income. A majority of the Company's funeral plan premiums come from the states of Arizona, Colorado, Idaho, Nevada, Oklahoma, Texas and Utah, and a majority of the Company's non-funeral plan life insurance premiums come from the states of Alabama, California, Florida, Georgia, Louisiana, New Mexico, South Carolina and Utah. The Company sells its life insurance products through direct agents and brokers and independent licensed agents who may also sell insurance products of other companies. The commissions on life insurance products range from approximately 10% to 90% of first year premiums. In those cases where the Company utilizes its direct agents in selling such policies, those agents customarily receive advances against future commissions. In some instances, funeral plan insurance is marketed in conjunction with the Company's cemetery and mortuary sales force. When it is marketed by that group, the beneficiary is usually the Company. Thus, death benefits that become payable under the policy are paid to the Company's cemetery and mortuary subsidiaries to the extent of services performed and products purchased. 2

In marketing the funeral plan insurance, the Company also seeks and obtains third-party endorsements from other cemeteries and mortuaries within its marketing areas. Typically, these cemeteries and mortuaries will provide letters of endorsement and may share in mailing and other lead-generating costs. The incentive for such businesses to share the costs is that these businesses are usually made the beneficiary of the policy. The following table summarizes the life insurance business for the five years ended December 31, 1999: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Life Insurance Policy/Cert. Count as of December 31 75,808(1) 69,895(1) 43,213 42,034 42,711 Insurance in force as of December 31 (omitted 000) 2,113,893(1) 2,123,734(1) 648,906 546,213 530,688 Premiums Collected (omitted 000) 15,261(1) 5,718 5,732 5,765 5,819 (1) Includes acquisition of Southern Security Life Insurance Company on December 17, 1998. Underwriting Factors considered in evaluating an application for insurance coverage include the applicant's age, occupation, general health and medical history. Upon receipt of a satisfactory application, which contains pertinent medical questions, the Company writes insurance that is based on its medical limits and requirements on a basis satisfactory to the reinsuring company (or companies, if submitted facultatively), subject to the following general non-medical limits: Age Nearest Non-Medical Birthday Limits ------------ ----------- 0-50 $75,000 51-up Exam Required When underwriting life insurance, the Company will sometimes issue policies with higher premium rates for substandard risks. In addition to the Company's ordinary life product line, the Company also sells final expense insurance. This insurance is a small face amount, with a maximum issue of $10,000. It is written on a simplified medical application with underwriting requirements being a completed application, a phone inspection on each applicant and a Medical Information Bureau inquiry. There are several underwriting classes in which an applicant can be placed. If the Company receives conflicting or incomplete underwriting information, an attending physician's statement can be ordered to insure the applicant is placed in the correct underwriting class. 3

Annuities Products The Company's annuity business includes single premium deferred annuities, flexible premium deferred annuities and immediate annuities. A single premium deferred annuity is a contract where the individual remits a sum of money to the Company, which is retained on deposit until such time as the individual may wish to purchase an immediate annuity or surrender the contract for cash. A flexible premium deferred annuity gives the contract holder the right to make premium payments of varying amounts or to make no further premium payments after his initial payment. These single and flexible premium deferred annuities can have initial surrender charges. The surrender charges act as a deterrent to individuals who may wish to surrender their annuity contracts. These types of annuities have guaranteed interest rates of 4% to 4 1/2% per annum. Above that, the interest rate credited is periodically determined by the Board of Directors at their discretion. An immediate annuity is a contract in which the individual remits to the Company a sum of money in return for the Company's obligation to pay a series of payments on a periodic basis over a designated period of time, such as an individual's life, or for such other period as may be designated. Holders of annuities enjoy a significant benefit under the current federal income tax law in that interest accretions that are credited to the annuities do not incur current income tax expense on the part of the contract holder. Instead, the interest income is tax deferred until such time as it is paid out to the contract holder. In order for the Company to realize a profit on an annuity product, the Company must maintain an interest rate spread between its investment income and the interest rate credited to the annuities. From that spread must be deducted commissions, issuance expenses and general and administrative expenses. The Company's annuities currently have credited interest rates ranging from 4% to 6 1/2%. Markets and Distribution The general market for all of the Company's annuities is middle to older age individuals who wish to save or invest their money in a tax deferred environment, having relatively high yields. The Company currently markets its annuities primarily in the states of Arizona, New Mexico, Oklahoma, Texas and Utah. The major source of annuity considerations comes from direct agents. Annuities can be sold as a by-product of other insurance sales. This is particularly true in the funeral planning area. If an individual does not qualify for a funeral plan due to health considerations, the agent will often sell that individual an annuity to take care of those final expenses. The commission rates on annuities range from 2% to 10%. 4

The following table summarizes the annuity business for the five years ended December 31, 1999: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Annuities Policy/Cert. Count as of December 31 8,369(1) 7,890(1) 7,434 7,049 6,893 Deposits Collected (omitted 000) 3,906(1) 2,770 2,521 2,859 2,375 (1) Includes acquisition of Southern Security Life Insurance Company on December 17, 1998. Accident and Health Products Prior to the acquisition of Capital Investors Life in December 1994, the Company did not actively market accident and health products. With the acquisition of Capital Investors Life, the Company acquired a block of accident and health policies which pay limited benefits to policyholders. The Company is currently offering a low-cost comprehensive diver's accident policy and a limited cancer benefit policy. The diver's policy provides world-wide coverage for medical expense reimbursement and life insurance in the event of diving or water sports accidents. The cancer policy provides a lump sum payment for the occurrence of cancer. Markets and Distribution The Company currently markets its diver's policy through water sports magazine advertising and dive shops throughout the world. The Company pays direct commissions ranging from 15% to 30% for new business generated. The following table summarizes the accident and health business for the five years ended December 31, 1999: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Accident and Health Policy/Cert. Count as of December 31 24,078(1) 27,201(1) 30,250 33,639 37,302 Premiums Collected (omitted 000) 549(1) 375 430 493 569 (1) Includes acquisition of Southern Security Life Insurance Company on December 17, 1998. Reinsurance The Company reinsures with other companies portions of the individual life insurance and accident and health policies it has underwritten. The primary purpose of reinsurance is to enable an insurance company to write a policy in an amount larger than the risk it is willing to assume for itself. No other liabilities or guarantees by the Company exist on business ceded through reinsurance treaties, however, the Company remains obligated for 5

amounts ceded in the event the reinsurers do not meet their obligations. There is no assurance that the reinsurer will be able to meet the obligations assumed by it under the reinsurance agreement. The Company's policy is to retain no more than $50,000 of ordinary insurance per insured life. Excess risk is reinsured. The total amount of life insurance in force at December 31, 1999, reinsured by other companies aggregated $296,936,000, representing approximately 14% of the Company's life insurance in force on that date. The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties which are renewable annually. The premiums paid by the Company are based on a number of factors, primarily including the age of the insured and the risk ceded to the reinsurer. Investments The investments that support the Company's life insurance and annuity obligations are determined by the Investment Committee of the Board of Directors of the various subsidiaries and ratified by the full Board of Directors of the respective subsidiaries. A significant portion of the investments must meet statutory requirements governing the nature and quality of permitted investments by insurance companies. The Company's interest-sensitive type products, primarily annuities and interest-sensitive whole life, compete with other financial products such as bank certificates of deposit, brokerage sponsored money market funds as well as competing life insurance company products. While it is not the Company's policy to offer the highest yield in this climate, in order to offer what the Company considers to be a competitive yield, it maintains a diversified portfolio consisting of common stocks, preferred stocks, municipal bonds, investment and non-investment grade bonds including high-yield issues, mortgage loans, real estate, short-term and other securities and investments. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Notes to Consolidated Financial Statements" for additional disclosure and discussion regarding investments. Cemetery and Mortuary Products The Company has six wholly-owned cemeteries and fourteen wholly- owned mortuaries. The cemeteries are non- denominational. Through its cemetery and mortuary operations, the Company markets a variety of products and services both on a pre-need basis (prior to death) and an at-need basis (at the time of death). The products include grave spaces, interment vaults, mausoleum crypts and niches, markers, caskets, flowers and other related products. The services include professional services of funeral directors, opening and closing of graves, use of chapels and viewing rooms, and use of automobiles and clothing. The Company has a funeral chapel at each of its cemeteries other than Holladay Memorial Park and Singing Hills Memorial Park and has ten separate stand-alone mortuary facilities. The Company's cemetery and mortuary business increased with the acquisition of Holladay Memorial Park, Inc., Cottonwood 6

Mortuary, Inc. and Deseret Memorial, Inc. in September 1991, the acquisition of Sunset Funeral Home, Inc. in January 1994, the acquisition of Greer-Wilson Funeral Home, Inc. in April 1995, and the acquisition of Crystal Rose Funeral Home in February 1997. Markets and Distribution The Company's pre-need cemetery and mortuary sales are marketed to persons of all ages but are generally purchased by persons 45 years of age and older. The Company also markets its mortuary and cemetery products on an at-need basis. The Company is limited in its geographic distribution of these products to areas lying within an approximate 20 mile radius of its mortuaries and cemeteries. The Company's at-need sales are similarly limited in geographic area. The Company actively seeks to sell its cemetery and funeral products to customers on a pre-need basis. The Company employs cemetery sales representatives on a commission basis to sell these products. Many of these pre-need cemetery and mortuary sales representatives are also licensed insurance salesmen and sell funeral plan insurance. In many instances, the Company's cemetery and mortuary facilities are the named beneficiary of the funeral plan policies. The sales representatives of the Company's cemetery and mortuary operations are commissioned and receive no salary. The sales commissions range from 10% to 22% for cemetery products and services and 10% to 90% of first year premiums for funeral plan insurance. Potential customers are located via telephone sales prospecting, responses to letters mailed by the sales representatives, newspaper inserts, referrals, contacts made at funeral services, and door to door canvassing. The Company trains its sales representatives and generates leads for them. If a customer comes to one of the Company's cemeteries on an at-need basis, the sales representatives are compensated on a commission basis. Mortgage Loans Products The Company, through its mortgage subsidiary, Security National Mortgage Company, originates and underwrites residential and commercial loans for new construction and existing homes and real estate projects. The Company is an approved government guaranteed and conventional lender and processes government guaranteed and conventional loans. Most of the loans are sold directly to investors. The Company has available warehouse lines of credit with affiliated companies and an unaffiliated financial institution to fund mortgage loans prior to the purchase by investors. Markets and Distribution The Company's mortgage lending services are marketed primarily to individual homeowners and businesses who are located in the area known as the "Wasatch Front," covering approximately 100 miles between Provo, Salt Lake City and Ogden, Utah, with the greatest concentration of sales being in the greater Salt Lake City area and in Valencia and Sacramento, California, Orlando, Florida and Colorado Springs, Colorado. The typical loan size for residential loans ranges from $40,000 to $150,000, and for commercial loans from $200,000 to $750,000. 7

The Company's mortgage loan originations are through full time mortgage loan officers and wholesale brokers who are paid a sales commission ranging between .40% to 3.0% of the loan amount. Prospective customers are located through contacts with builders, real estate agents, and door-to-door canvassing. Recent Acquisitions and Other Business Activities California Memorial Estates In February 1995, California Memorial Estates, Inc., a duly organized Utah corporation and wholly-owned subsidiary of the Company, entered into a Purchase and Sale Agreement and Escrow Instructions with the Carter Family Trust and the Leonard M. Smith Family Trust to purchase approximately 100 acres of real property located in San Diego County, California (the "Property"). The Company has developed the property by designating approximately 35 acres for a cemetery known as Singing Hills Memorial Park. The Company has obtained approval from the federal government and the California Cemetery Board to operate a cemetery on the Property. The Company has completed development on six acres and is currently selling cemetery lots on a pre-need and at-need basis on the developed acreage. Greer-Wilson Funeral Home In March 1995, the Company purchased 97,800 shares of common stock of Greer-Wilson Funeral Home, Inc. ("Greer-Wilson"), representing 97.8% of the total issued and outstanding shares of common stock of Greer-Wilson after the issuance of such shares. The Company continues to operate Greer-Wilson, which is located in Phoenix, Arizona, as a funeral home and mortuary. Evergreen Memorial Park In November 1995, the Company entered into a purchase sale agreement with Myers Mortuary for the sale of the Company's 65% interest in Evergreen Memorial Partnership and the Company's 50% interest in Evergreen Management Corporation. As consideration for the sale of these entities, Myers Mortuary paid $746,123 in satisfaction of the indebtedness that Evergreen Memorial Partnership owed to the Company. Myers Mortuary has also agreed to pay $200,000 to the Company in four equal annual installments of $50,000, beginning as of October 31, 1996. In addition, Myers Mortuary will pay a $10.00 royalty to the Company for each adult space sold in Evergreen Memorial Park over ten years, beginning as of January 1, 1996. Security National Life Insurance Company In December 1995, Security National Life Insurance Company ("Security National Life") was merged into Capital Investors Life Insurance Company ("Capital Investors Life") with Capital Investors Life as the surviving corporation. As a result of the merger, Capital Investors Life has licenses to transact business in 29 states. In March 1996, the Company changed the name of the surviving corporation from Capital Investors Life to Security National Life. 8

Civil Service Employees Life Insurance Company In December 1995, the Company, through its wholly-owned subsidiary, Capital Investors Life, completed the purchase of all of the outstanding shares of Common Stock of Civil Service Employees Life Insurance Company ("CSE Life"), a California corporation, from Civil Service Employees Insurance Company, and prior to the closing of the transaction, the sole stockholder of CSE Life. At the time of the transaction, CSE Life was a California domiciled insurance company with total assets of approximately $16.7 million. At the time of the acquisition, CSE Life was licensed to transact business in seven states, including the state of California. Following the completion of the purchase of CSE Life, the Company merged CSE Life into Capital Investors Life. The Company continues to operate Capital Investors Life as the surviving insurance company, which changed its name to Security National Life in March 1996. Crystal Rose Funeral Home In February 1997, the Company purchased all of the outstanding shares of common stock of Crystal Rose Funeral Home, Inc. ("Crystal Rose"), an Arizona corporation. In connection with this transaction, the Company also acquired certain real estate and other assets related to the business of Crystal Rose from the sole stockholder of Crystal Rose. The Company continues to operate Crystal Rose, which is located in Tolleson, Arizona, as a funeral home and mortuary. SSLIC Holding Company On December 17, 1998, the Company completed the acquisition of SSLIC Holding Company, (formerly Consolidare Enterprises, Inc.), a Florida corporation ("SSLIC Holding") pursuant to the terms of the Acquisition Agreement which the Company entered into on April 17, 1998 with SSLIC Holding and certain shareholders of SSLIC Holding for the purchase of all of the outstanding shares of common stock of SSLIC Holding and all of the outstanding shares of stock of Insurandyne Corp., a Florida Corporation ("Insuradyne"). As of December 31, 1999, SSLIC Holding owns approximately 61.3% of the outstanding shares of common stock of Southern Security Life Insurance Company, a Florida corporation ("Southern Security"). Southern Security is a Florida domiciled insurance company with total assets as of December 31, 1999, of approximately $77.2 million. Southern Security is currently licensed to transact business in 14 states. Southern Security is also a reporting company under Section 13 of the Securities Exchange Act of 1934. Reference is made to Southern Security's annual report on Form 10-K for the year ended December 31, 1999, which was filed with the Securities Exchange Commission on March 30, 2000, Commission File No. 2-35669. Menlo Life Insurance Company On June 30, 1999 the Company entered into a Coinsurance and Assumption Agreement (the "Agreement") with Menlo Life Insurance Company ("Menlo Life"), wherein the Company has assumed 100% of the policies in force of Menlo Life. The Agreement was not in effect until it was approved by Menlo Life's domiciled state of Arizona and 9

the state of California. These approvals were obtained on September 9, 1999 for the Arizona Insurance Department, and on December 9, 1999 for the California Insurance Department. Regulation The Company's insurance subsidiaries, Security National Life and Southern Security, are subject to comprehensive regulation in the jurisdictions in which it does business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding aggregate reserves for life policies and annuity contracts, policy claims, unearned premiums, and other matters. The Company's insurance subsidiaries are subject to this type of regulation in any state in which they are licensed to do business. Such regulation could involve additional costs, restrict operations or delay implementation of the Company's business plans. The Company is currently subject to regulation in Utah under insurance holding company legislation, and other states where applicable. Intercorporate transfers of assets and dividend payments from its insurance subsidiaries are subject to prior notice of approval from the State Insurance Department, if they are deemed "extraordinary" under these statutes. The insurance subsidiaries are required, under state insurance laws, to file detailed annual reports with the supervisory agencies in each of the states in which it does business. Their business and accounts are also subject to examination by these agencies. The Company's cemetery and mortuary subsidiaries are subject to the Federal Trade Commission's comprehensive funeral industry rules and are subject to state regulations in the various states where such operations are domiciled. The morticians must be licensed by the respective state in which they provide their services. Similarly, the mortuaries are governed by state statutes and city ordinances in both Utah and Arizona. Reports are required to be kept on file on a yearly basis which include financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually on the basis of such reports. The cemeteries maintain city or county licenses where they conduct business. The Company's mortgage loan subsidiary, Security National Mortgage, is subject to the rules and regulations of the U.S. Department of Housing and Urban Development. These regulations among other things specify the procedures for the origination, the underwriting, the licensing of wholesale brokers, quality review audits and the amounts that can be charged to borrowers for all FHA and VA loans. Each year the Company must have an audit by an independent CPA firm to verify compliance under these regulations. In addition to the government regulations, the Company must meet loan requirements of various investors who purchase the loans before the loans can be sold to the investors. 10

Income Taxes The Company's insurance subsidiaries, Security National Life and Southern Security, are taxed under the Life Insurance Company Tax Act of 1984. Pursuant thereto, life insurance companies are taxed at standard corporate rates on life insurance company taxable income. Life insurance company taxable income is gross income less general business deductions, reserves for future policyholder benefits (with modifications), and a small life insurance company deduction (up to 60% of life insurance company taxable income). The Company may be subject to the corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a result of the small life insurance company deduction. Also, under the Tax Reform Act of 1986, distributions in excess of stockholder's surplus account or significant decrease in life reserves will result in taxable income. Security National Life and Southern Security may continue to receive the benefit of the small life insurance company deduction. In order to qualify for the small company deduction, the combined assets of the Company must be less than $500,000,000 and the taxable income of the life insurance companies must be less than $3,000,000. To the extent that the net income limitation is exceeded, then the small life insurance company deduction is phased out over the next $12,000,000 of life insurance company taxable income. Since 1990, Security National Life and Southern Security have computed their life insurance taxable income after establishing a provision representing a portion of the costs of acquisition of such life insurance business. The effect of the provision is that a certain percentage of the Company's premium income is characterized as deferred expenses and recognized over a five to ten year period. The Company's non-life insurance company subsidiaries are taxed in general under the regular corporate tax provisions. For taxable years beginning January 1, 1987, the Company may be subject to the Corporate Alternative Minimum Tax and the proportionate disallowance rules for installment sales under the Tax Reform Act of 1986. Competition The life insurance industry is highly competitive. There are approximately 2,000 legal reserve life insurance companies in business in the United States. These insurance companies differentiate themselves through marketing techniques, product features, price and customer service. The Company's insurance subsidiaries compete with a large number of insurance companies, many of which have greater financial resources, a longer business history, and a more diversified line of insurance coverage than the Company. In addition, such companies generally have a larger sales force. Further, many of the companies with which the Company competes are mutual companies which may have a competitive advantage because all profits accrue to policyholders. Because the Company is small by industry standards and lacks broad diversification of risk, it may be more vulnerable to losses than larger, better established companies. The Company believes that its policies and rates for the markets it serves are generally competitive. The cemetery and mortuary industry is also highly competitive. In the Salt Lake City, Phoenix and San Diego areas in which the Company competes, there are a number of cemeteries and mortuaries which have longer business histories, more established positions in the community and stronger financial positions than the Company. In 11

addition, some of the cemeteries with which the Company must compete for sales are owned by municipalities and, as a result, can offer lower prices than can the Company. The Company bears the cost of a pre-need sales program that is not incurred by those competitors that do not have a pre-need sales force. The Company believes that its products and prices are generally competitive with those in the industry. The mortgage loan industry is highly competitive with several mortgage companies and banks in the same geographic area in which the Company is operating which have longer business histories and more established positions in the community. The refinancing market is particularly vulnerable to changes in interest rates. Employees As of December 31, 1999, the Company employed 206 full-time and 34 part-time employees. Item 2. Properties The following table sets forth the location of the Company's office facilities and certain other information relating to these properties. Approximate Owned Square Location Function Leased Footage -------- -------- ------ ------- 5300 So. 360 West Corporate Salt Lake City, UT Headquarters Owned(1) 33,000 1603 Thirteenth St. District Lubbock, TX Sales Office Owned(2) 5,000 755 Rinehart Rd. Subsidiary Lake Mary, FL Headquarters Owned(3) 27,000 (1) The Company leases an additional 6,400 square feet of the facility to unrelated third parties for approximately $98,000 per year, under leases which expire at various dates after 1999. (2) The Company leases an additional 2,766 square feet of the facility to unrelated third parties for approximately $15,000 per year, under leases which expire at various dates after 1999. (3) The Company leases an additional 5,747 square feet of the facility to unrelated third parties for approximately $109,000 per year, under leases which expire at various dates after 1999. The Company believes the office facilities it occupies are in good operating condition, are adequate for current operations and has no plan to build or acquire additional office facilities. The Company believes its office facilities are adequate for handling business in the foreseeable future. 12

The following table summarizes the location and acreage of the six Company owned cemeteries: Net Saleable Acreage Acres Sold as Total Name of Date Developed Total Cemetery Available Cemetery Location Acquired Acreage(1) Acreage(1) Spaces(2) Acreage(1) - ------------ -------- --------- ---------- ---------- --------- ---------- Memorial Estates, Inc.: Lakeview Cemetery(3) 1700 E. Lakeview Dr. Bountiful, UT 1973 6 40 7 33 Mountain View Cemetery(3) 3115 E. 7800 So. Salt Lake City, UT 1973 26 54 16 38 Redwood Cemetery(3)(5) 6500 So. Redwood Rd. West Jordan, UT 1973 40 78 34 44 Holladay Memorial Park(4)(5) 4800 So. Memory Lane Holladay, UT 1991 6 14 5 9 Lakehills Cemetery(4) 10055 So. State Sandy, UT 1991 12 44 6 38 Singing Hills Memorial Park(6) 2798 Dehesa Rd. El Cajon, CA 1995 6 35 1 34 13

(1) The acreage represents estimates of acres that are based upon survey reports, title reports, appraisal reports or the Company's inspection of the cemeteries. (2) Includes spaces sold for cash and installment contract sales. (3) As of December 31, 1999, there were mortgages of approximately $71,600 collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries. (4) As of December 31, 1999, there were mortgages of approximately $1,925,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary. (5) These cemeteries include two granite mausoleums. (6) As of December 31, 1999, there was a mortgage of approximately $727,800 collateralized by the property. 14

The following table summarizes the location, square footage and the number of viewing rooms and chapels of the fourteen Company owned mortuaries: Name of Date Viewing Square Mortuary Location Acquired Room(s) Chapel(s) Footage - ----------------- ------------ ---------- -------- --------- ---------- Memorial Mortuary 5850 South 900 East Salt Lake City, UT 1973 3 1 20,000 Memorial Estates, Inc.: Redwood Mortuary 6500 South Redwood Rd. West Jordan, UT 1973 2 1 10,000 Mountain View Mortuary 3115 East 7800 South Salt Lake City, UT 1973 2 1 16,000 Lakeview Mortuary 1700 East Lakeview Dr. Bountiful, UT 1973 0 1 5,500 Paradise Chapel Funeral Home 3934 East Indian School Road Phoenix, AZ 1989 2 1 9,800 Deseret Memorial, Inc.: Colonial Mortuary(2) 2128 South State St. Salt Lake City, UT 1991 1 1 14,500 Deseret Mortuary(2) 36 East 700 South Salt Lake City, UT 1991 2 2 36,300 Lakehills Mortuary 10055 South State St. Sandy, UT 1991 2 1 18,000 Cottonwood Mortuary(2) 4670 South Highland Dr. Salt Lake City, UT 1991 2 1 14,500 Camelback Sunset Funeral Home(1) 301 West Camelback Rd. Phoenix, AZ 1994 2 1 11,000 15

Name of Date Viewing Square Mortuary Location Acquired Room(s) Chapel(s) Footage - ------------ -------- -------- ------- --------- ------- Greer-Wilson: Greer-Wilson Funeral Home 5921 West Thomas Road Phoenix, AZ 1995 2 2 25,000 Tolleson Funeral Home 9386 West VanBuren Tolleson, AZ 1995 0 1 3,460 Avondale Funeral Home 218 North Central Avondale, AZ 1995 1 1 1,850 Crystal Rose Funeral Home(3) 9155 W. VanBuren Tolleson, AZ 1997 0 1 9,000 16

(1) As of December 31, 1999 there were mortgages of approximately $370,700 collateralized by the property and facilities of Camelback Sunset Funeral Home. (2) As of December 31, 1999, there were mortgages of approximately $1,925,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary. (3) As of December 31, 1999, there was a mortgage of approximately $206,400, collateralized by the property and facilities of Crystal Rose Funeral Home. Item 3. 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 Mortgage 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's. Concerning the administrative action by HUD relating to the above allegations, dependent upon the facts and circumstances, HUD asserts it has alternatives such as taking no action, 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. With respect to any civil money penalty, which could be in addition to the foregoing, the letter from HUD states that the "amount of the civil 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. At this stage a complete evaluation of the matter has not been made. Management, however, 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. Thus, management recognizes the great importance and need for an appropriate written response to the letter to be filed with HUD and the need to do what is necessary to see that Security National Mortgage's understanding of the matter is fairly and properly presented to HUD. 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. 17

Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The Company's Class A Common Stock trades on the Nasdaq National Market under the symbol "SNFCA." Prior to August 13, 1987, there was no active public market for the Class A and Class C Common Stock. During recent years there has been occasional trading of Class A and Class C Common Stock by brokerage firms in the over-the-counter market. The following are the high and low sales prices for Class A Common Stock as reported by Nasdaq: Period (Calendar Year) Price Range High Low ------ ------ 1998 First Quarter................................3.97 3.57 Second Quarter...............................4.29 3.57 Third Quarter................................3.99 3.10 Fourth Quarter...............................3.27 2.92 1999 First Quarter................................3.57 2.62 Second Quarter...............................3.25 2.75 Third Quarter................................3.63 2.94 Fourth Quarter...............................3.63 3.00 2000 First Quarter................................4.50 2.88 The above sales prices have been adjusted for the effect of annual stock dividends. 18

The Class C Common Stock is not actively traded, although there are occasional transactions in such stock by brokerage firms. (See Note 11 to the Consolidated Financial Statements.) The Company has never paid a cash dividend on its Class A or Class C Common Stock. The Company currently anticipates that all of its earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Class A or Class C Common Stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate. A 5% stock dividend on Class A and Class C Common Stock was paid in the years 1989 through 1999. As of March 31, 2000, there were 4,720 record holders of Class A Common Stock and 141 record holders of Class C Common Stock. 19

Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated) - ------------------------------------------------------------------------------ The following selected financial data for each of the five years in the period ended December 31, 1999, are derived from the audited consolidated financial statements. The data as of December 31, 1999 and 1998, and for the three years ended December 31, 1999, should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. Consolidated Statement of Earnings Data: Year Ended December 31, -------------------------------------------------- 1999(4) 1998 1997(2) 1996 1995(1) ---- ---- ---- ---- ------- Revenue Premiums $13,176,000 $ 5,916,000 $ 6,141,000 $ 5,666,000 $ 5,796,000 Net investment income 10,631,000 7,459,000 7,140,000 7,517,000 6,680,000 Net mortuary and cemetery income 10,178,000 9,226,000 9,231,000 8,138,000 8,238,000 Realized gains on investments 313,000 74,000 253,000 290,000 333,000 Mortgage fee income 14,503,000 10,082,000 5,662,000 8,237,000 4,943,000 Other 856,000 63,000 48,000 75,000 71,000 ------------ ----------- ----------- ----------- ----------- Total revenue 49,657,000 32,820,000 28,475,000 29,923,000 26,061,000 ------------ ----------- ----------- ----------- ----------- Expenses Policyholder benefits 11,976,000 6,932,000 6,669,000 $ 6,341,000 $ 6,111,000 Amortization of deferred policy acquisition costs 4,858,000 1,274,000 1,132,000 1,240,000 1,150,000 General and admini- strative expenses 26,959,000 19,649,000 15,361,000 17,292,000 13,019,000 Interest expense 1,119,000 999,000 948,000 1,318,000 1,208,000 Cost of goods & services of the mortuaries & cemeteries 3,295,000 2,940,000 2,696,000 2,355,000 2,314,000 ----------- ----------- ----------- ----------- ----------- Total benefits & expenses 48,207,000 31,794,000 26,806,000 28,546,000 23,802,000 ----------- ----------- ----------- ----------- ----------- Income before income tax expense 1,450,000 1,026,000 1,669,000 1,377,000 2,259,000 Income tax expense (230,000) (255,000) (360,000) (139,000) (728,000) Minority interest in (income) loss of subsidiary (244,000) -- -- -- 20,000 ----------- ----------- ---------- ------------ ----------- Net earnings $ 976,000 $ 771,000 $1,309,000 $ 1,238,000 $ 1,551,000 =========== =========== ========== ============ =========== Net earnings per common share(3) $0.22 $0.18 $0.33 $0.33 $0.44 ===== ===== ===== ===== ===== Weighted average out- standing common shares 4,397,000 4,273,000 3,988,000 3,750,000 3,508,000 Net earnings per common share-assuming dilution(3) $0.22 $0.18 $0.32 $0.32 $0.43 ===== ===== ===== ===== ===== Weighted average out- standing common shares- assuming dilution 4,397,000 4,273,000 4,093,000 3,856,000 3,576,000 20

Balance Sheet Data: Year Ended December 31, ----------------------------------------------------- 1999 1998(4) 1997(2) 1996 1995(1) ---- ---- ------ ---- ---- Assets - -------- Investments and restricted assets $ 113,208,000 $126,332,000 $ 81,039,000 $ 78,638,000 $ 80,815,000 Cash 12,423,000 6,671,000 3,408,000 3,301,000 7,710,000 Receivables 38,074,000 28,309,000 15,224,000 17,070,000 24,177,000 Other assets 50,593,000 51,953,000 25,781,000 25,701,000 25,511,000 ------------ ------------ ------------ ------------ ------------ Total assets $214,298,000 $213,265,000 $125,452,000 $124,710,000 $138,213,000 ============ ============ ============ ============ ============ Liabilities - ----------- Policyholder benefits $140,368,000 137,466,000 $ 77,890,000 $ 76,962,000 $ 76,868,000 Notes & contracts payable 23,341,000 22,887,000 9,981,000 12,490,000 27,129,000 Cemetery & mortuary liabilities 6,638,000 6,917,000 6,116,000 5,946,000 6,078,000 Other liabilities 11,415,000 12,536,000 6,070,000 5,844,000 6,219,000 ------------ ------------ ------------ ------------ ------------ Total liabilities 181,762,000 179,806,000 100,057,000 101,242,000 116,294,000 ------------ ------------ ------------ ------------ ------------ Minority interest 6,046,000 6,779,000 -- -- -- Stockholders' equity 26,490,000 26,680,000 25,395,000 23,468,000 21,919,000 ------------ ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity $214,298,000 $213,265,000 $125,452,000 $124,710,000 $138,213,000 ============ ============ ============ ============ ============ (1) Only includes Evergreen Memorial Park for the first eleven months of 1995 and the assets and liabilities of Civil Service Employees Life Insurance Company as of December 31, 1995. (2) Reflects the acquisition of Crystal Rose Funeral Home as of February 1997. (3) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the audited consolidated financial statements. (4) Reflects the acquisition of SSLIC Holding Company and subsidiaries as of December 17, 1998. 21

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------- Overview The Company's operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to "niche" insurance products, such as the Company's funeral plan policies and interest sensitive products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on the strong economy in the western United States by originating and refinancing mortgage loans. On December 17, 1998, the Company purchased all of the outstanding shares of common stock of SSLIC Holding Company ("SSLIC Holding") (formerly "Consolidare Enterprises, Inc.") and Insuradyne Corporation ("Insuradyne") for a total cost of $12,248,194. As of December 31, 1999, SSLIC Holding owns approximately 61.3% of the outstanding shares of common stock of Southern Security Life Insurance Company ("Southern Security"). The purchase of SSLIC Holding, including Insuradyne, was accounted for using the purchase method of accounting. Thus the results of operations of the Company for the twelve months ended December 31, 1998 do not include the results of SSLIC Holding and Insuradyne. In the Management's Discussion and Analysis of the Results of Operations, the results of SSLIC Holding and Insuradyne for the twelve months ended December 31, 1999 have been excluded. The following Consolidated Statements of Earnings shows the effect of excluding the results of SSLIC Holding and Insuradyne for the twelve months ended December 31, 1999. Without SSLIC Variance SSLIC Holding Holding without Southern Southern SSLIC Holding Security Security Southern Security Insuradyne Insuradyne Insuradyne REVENUES: 1999 1998 1999 1999 Amount Percent - --------- ---- ---- ------------ ------------ ------ ------- Insurance premiums and other considerations $ 13,175,825 $ 5,915,659 $ 6,901,546 $ 6,274,279 $ 358,620 6.1% Net investment income 10,631,302 7,458,743 2,938,745 7,692,557 233,814 3.1 Net mortuary and cemetery income 10,178,246 9,225,801 -- 10,178,246 952,445 10.3 Realized gains on investments and other assets 313,013 74,121 -- 313,013 238,892 322.3 Mortgage fee income 14,503,388 10,082,330 -- 14,503,388 4,421,058 43.8 Other 855,604 62,949 715,128 140,476 77,527 123.2 ----------- ------------ ---------- ----------- ----------- ------ Total Revenues 49,657,378 32,819,603 10,555,419 39,101,959 6,282,356 19.1 ----------- ------------ ---------- ----------- ----------- ------ BENEFITS AND EXPENSES: - --------------------- Death benefits 4,780,063 2,432,822 1,917,134 2,862,929 430,107 17.7 Surrenders and other policy benefits 1,494,863 1,145,812 88,208 1,406,655 260,843 22.8 Increase in future policy benefits 5,700,784 3,353,287 2,448,222 3,252,562 (100,725) (3.0) Amortization of deferred policy acquisition costs and cost of insurance acquired 4,857,662 1,273,394 3,592,217 1,265,445 (7,949) (0.6) General and administrative expenses: Commissions 11,850,763 7,618,335 364,848 11,485,915 3,867,580 50.8 Salaries 7,409,298 5,358,743 1,063,533 6,345,765 987,022 18.4 Other 7,698,779 6,671,823 550,282 7,148,497 476,674 7.1 22

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ---------------------------------------------------------------------------------------------- Overview Without SSLIC Variance SSLIC Holding Holding without Southern Southern SSLIC Holding Security Security Southern Security Insuradyne Insuradyne Insuradyne REVENUES: 1999 1998 1999 1999 Amount Percent - ---------- ---- ---- ------------ ------------ ------ ------- Interest expense 1,119,402 999,123 116,977 1,002,425 3,302 0.3 Cost of mortuaries and cemeteries goods and services sold 3,294,983 2,940,220 -- 3,294,983 354,763 12.1 ----------- --------- ------------ ----------- ----------- ----- Total benefits and expenses 48,206,597 31,793,559 10,141,421 38,065,176 6,271,617 19.7 ----------- ------------ ------------ ----------- ----------- ----- Earnings before income taxes 1,450,781 1,026,044 413,998 1,036,783 10,739 1.0 Income tax expense (230,516) (254,815) (25,803) (204,713) 50,102 19.7 Minority interest in income of subsidiary (244,370) -- (244,370) -- -- -- ----------- ----------- ---------- ----------- ----------- ------ Net earnings $ 975,895 $ 771,229 $ 143,825 $ 832,070 $ 60,841 7.9% =========== =========== ========== =========== =========== ======= 23

Results of Operations 1999 Compared to 1998 Total revenues increased by $6,282,000, or 19.1%, from $32,820,000 for fiscal year 1998 to $39,102,000 for fiscal year 1999. Insurance premiums and other considerations increased by $359,000, net investment income increased by $234,000, net mortuary and cemetery sales increased by $952,000, mortgage fee income increased by $4,421,000, and realized gains on investments and other assets increased by $239,000. Insurance premiums and other considerations increased by $359,000, from $5,915,000 in 1998 to $6,274,000 in 1999. This increase was primarily attributed to additional new business. Net investment income increased by $234,000, from $7,459,000 in 1998 to $7,693,000 in 1999. This increase was primarily the result of the reinvestment of the Company's bonds which matured or were called in 1999 into mortgage loans having higher long-term rates. Net mortuary and cemetery sales increased by $952,000, from $9,226,000 in 1998 to $10,178,000 in 1999. This increase was primarily from additional pre-need and at-need sales. Mortgage fee income increased by $4,421,000, from $10,082,000 in 1998 to $14,503,000 in 1999. This increase was primarily attributable to more loan originations made by the Company's mortgage subsidiary in 1999 due to the expansion of business activities in new geographic markets. Total benefits and expenses were $38,065,000 for 1999, which constituted 97% of the Company's total revenues, as compared to $31,794,000, or 97% of the Company's total revenues for 1998. During 1999, there was a net increase of $590,000 in death benefits, surrender and other policy benefits, and an increase in future policy benefits from $6,932,000 in 1998 to $7,522,000 in 1999. This increase was primarily due to additional interest credited on annuities and reserve increases on traditional products and additional death claims. These increases were reasonable based on the underlying actuarial assumptions. Amortization of deferred policy acquisition costs and cost of insurance acquired decreased by $8,000, from $1,273,000 in 1998 to $1,265,000 in 1999. This decrease was reasonable based on the underlying actuarial assumptions. General and administrative expenses increased by $5,331,000, from $19,649,000 in 1998 to $24,980,000 in 1999. Commission expenses increased by $3,868,000, from $7,618,000 in 1998 to $11,486,000 in 1999. Salaries increased $987,000 from $5,359,000 in 1998 to $6,346,000 in 1999. Other expenses increased $477,000, from $6,671,000 in 1998 to $7,148,000 in 1999. These increases were primarily the result of an increased number of loan originations made by the Company's mortgage subsidiary in 1999. Interest expense increased by $3,000, from $999,000 in 1998 to $1,002,000 in 1999. This increase was primarily due to more loan originations from the Company's mortgage subsidiary being funded by third parties in 1999. Cost of the mortuary and cemetery goods and services sold increased by $355,000, from $2,940,000 in 1998 to $3,295,000 in 1999. This increase was primarily due to the increase in pre-need and at-need sales. 24

1998 Compared to 1997 Total revenues increased by $4,345,000, or 15.3%, from $28,475,000 for fiscal year 1997 to $32,820,000 for fiscal year 1998. Net investment income increased $319,000 and mortgage fee income increased $4,420,000. These increases were offset by decreases in insurance premiums and other considerations of $225,000, net mortuary and cemetery sales of $5,000 and realized gains on investments and other assets of $179,000. Insurance premiums and other considerations decreased by $225,000, from $6,141,000 in 1997 to $5,916,000 in 1998. This decrease was primarily attributed to a reduction in renewal premiums. Net investment income increased by $319,000, from $7,140,000 in 1997 to $7,459,000 in 1998. This increase was primarily the result of the reinvestment of the Company's bond portfolio in 1998 into higher long-term rates in mortgage loans. Net mortuary and cemetery sales decreased by $5,000, from $9,231,000 in 1997 to $9,226,000 in 1998. The increase in cemetery sales (primarily trusted merchandise sales) was offset by a decrease in mortuary revenues. Mortgage fee income increased by $4,420,000, from $5,662,000 in 1997 to $10,082,000 in 1998. This increase was primarily due to the increased number of loan originations in the Company's primary market, the intermountain region, compared to 1997. Total benefits and expenses were $31,794,000 for 1998, which constituted 97% of the Company's total revenues, as compared to $26,806,000, or 94% of the Company's total revenues for 1997. During 1998, there was a net increase of $263,000 in death benefits, surrender and other policy benefits, and an increase in future policy benefits from $6,669,000 in 1997 to $6,932,000 in 1998. This increase was primarily due to additional interest credited on annuities and reserve increases on traditional products. This increase was reasonable based on the underlying actuarial assumptions. Amortization of deferred policy acquisition costs and cost of insurance acquired increased by $141,000, from $1,132,000 in 1997 to $1,274,000 in 1998. This increase was reasonable based on the underlying actuarial assumptions. General and administrative expenses increased by $4,288,000, from $15,361,000 in 1997 to $19,649,000 in 1998. Commission expenses increased by $2,735,000, from $4,883,000 in 1997 to $7,618,000 in 1998. Salaries increased $553,000 from $4,806,000 in 1997 to $5,359,000 in 1998. Other expenses increased $999,000, from $5,672,000 in 1997 to $6,671,000 in 1998. These increases were primarily the result of the increased number of loan originations by the Company's mortgage subsidiary. Interest expense increased by $51,000, from $948,000 in 1997 to $999,000 in 1998. This increase was primarily due to more loan originations from the Company's mortgage subsidiary that were funded by third parties. Cost of the mortuary and cemetery goods and services sold increased by $244,000 from $2,696,000 in 1997 to $2,940,000 in 1998. This increase was primarily due to the increase in trusted merchandise sales. 25

Liquidity and Capital Resources The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity of held-to-maturity investments or sale of other investments. The mortgage subsidiary realizes cash flow from fees generated by originating and refinancing mortgage loans and interest earned on mortgages sold to investors. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses on the issuance of new policies, the maintenance of existing policies, debt service, and to meet operating expenses. 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 predominately 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 insurance subsidiaries amounted to $64,518,000 at amortized cost as of December 31, 1999 compared to $72,715,000 at amortized cost as of December 31, 1998. This represents 42% of the total insurance related investments in 1999 as compared to 48 % in 1998. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners (NAIC). Under this rating system, there are six categories used for rating bonds. At December 31, 1999, 1.54% ($994,000) and at December 31, 1998, .64% ($469,000) of the Company's total invested assets were invested in bonds in rating categories three through six which are considered non-investment grade. If market conditions were to cause interest rates to change, the market value of the fixed income portfolio (approximately $82,499,000) could change by the following amounts based on the respective basis point swing (the change in the market values were calculated using a modeling technique): -200 bps -100 bps +100 bps +200 bps ----------------------------------------- Change in Market Value (in thousands) $11,361 $5,389 $(5,122) $(9,783) 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. 26

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 December 31, 1999 and 1998, the life subsidiaries exceeded the regulatory criteria. The Company's total capitalization of stockholders' equity and bank debt and notes payable was $41,144,000 and $41,989,000 as of December 31, 1999 and 1998, respectively. Stockholders' equity as a percent of total capitalization was 64% as of December 31, 1999 and 1998. Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1999 was 10%, as compared to a rate of 15% in 1998. In February 1995, the Company purchased approximately 100 acres of real property (the "Property") located in San Diego, California, approximately 35 acres of which is being used for a cemetery. The purchase price of the property was $1,062,000, $100,000 of which was paid in cash and the balance of $962,000, together with interest thereon at the rate of 9% percent per annum, to be paid in 12 monthly payments of $5,000, thereafter in equal monthly payments of $10,000. However, interest did not accrue on any part of the principal balance until February 3, 1996. A principal payment of $100,000 was made in December 1995. The Company has obtained approval from the federal government and the California Cemetery Board to operate a cemetery on the property. The Company has completed development on six acres and is currently selling cemetery lots on a pre-need and at-need basis on the developed acreage. In March 1995, the Company purchased 97,800 shares of common stock of Greer-Wilson Funeral Home, Inc., representing 97.8% of the total issued and outstanding shares of common stock of Greer-Wilson for a total consideration of $1,218,000, which included a note to the former owners in the amount of $588,000. In November 1995, the Company entered into a purchase sale agreement with Myers Mortuary for the sale of the Company's 65% interest in Evergreen Memorial Partnership and the Company's 50% interest in Evergreen Management Corporation. As consideration for the sale of these entities, Myers Mortuary paid $746,123 in satisfaction of the indebtedness that Evergreen Memorial Partnership owed to the Company. Myers Mortuary also agreed to pay $200,000 to the Company in four equal annual installments of $50,000, beginning as of October 31, 1996. In addition, Myers Mortuary will pay a $10.00 royalty to the Company for each adult space sold in Evergreen Memorial Park over the next ten years, beginning as of January 1, 1996. In December 1995, the Company purchased all of the outstanding shares of common stock of Civil Service Employees Life Insurance Company ("CSE Life") from Civil Service Employees Insurance Company for a total cost of $5,200,000, which included a promissory note in the amount of $1,063,000. Interest on the promissory note accrues at 7% per annum. Principal payments are to be made in seven equal annual installments of $151,857, beginning on December 29, 1996. Accrued interest is payable annually beginning on December 29, 1996. In February 1997, the Company purchased all of the outstanding shares of common stock of Crystal Rose Funeral Home, Inc. for a total consideration of $382,000, which included a note to the former owner in the amount of $297,000. On December 17, 1998, the Company completed the acquisition of Consolidare Enterprises, Inc., a Florida corporation ("Consolidare") pursuant to the terms of the Acquisition Agreement which the Company entered into on April 17, 1998 with Consolidare and certain shareholders of Consolidare for the purchase of all of the 27

outstanding shares of common stock of Consolidare. Consolidare owns approximately 61.3% of the outstanding shares of common stock of Southern Security Life Insurance Company, a Florida corporation ("SSLIC"), and all of the outstanding shares of stock of Insuradyne Corp., a Florida corporation ("Insuradyne"). As consideration for the purchase of the shares of Consolidare, the Company paid to the stockholders of Consolidare at closing an aggregate of $12,248,194. In order to pay the purchase consideration, the Company obtained $6,250,000 from bank financing, with the balance of $5,998,194 obtained from funds then currently held by the Company. In addition to the purchase consideration, the Company caused SSLIC to pay, on the closing date, $1,050,000 to George Pihakis, the President and Chief Executive Officer of SSLIC prior to closing, as a lump sum settlement of the executive compensation agreement between SSLIC and Mr. Pihakis. In connection with the acquisition of Consolidare, the Company entered into an Administrative Services Agreement dated December 17, 1998 with SSLIC. Under the terms of the agreement, the Company has agreed to provide SSLIC with certain defined administrative and financial services, including accounting services, financial reports and statements, actuarial, policyholder services, underwriting, data processing, legal, building management, marketing advisory services and investment services. In consideration for the services to be provided by the Company, SSLIC shall pay the Company an administrative services fee of $250,000 per month, provided, however, that such fee shall be reduced to zero for so long as the capital and surplus of SSLIC is less than or equal to $6,000,000, unless SSLIC and the Company otherwise agree in writing and such agreement is approved by the Florida Department of Insurance. The administrative services fee may be increased, beginning on January 1, 2001, to reflect increases in the Consumer Price Index, over the index amount as of January 1, 2000. The Administrative Services Agreement shall remain in effect for an initial term expiring on December 16, 2003. The term of the agreement may be automatically extended for additional one-year terms unless either the Company or SSLIC shall deliver a written notice on or before September 30 of any year stating to the other its desire not to extend the term of the agreement. However, in no event can the agreement be terminated prior to December 16, 2003. On June 30, 1999 the Company entered into a Coinsurance and Assumption Agreement (the "Agreement") with Menlo Life Insurance Company ("Menlo Life"), wherein the Company has assumed 100% of the policies in force of Menlo Life. The Agreement was not in effect until it was approved by Menlo Life's domiciled state of Arizona and the state of California. These approvals were obtained on September 9, 1999 for the Arizona Insurance Department, and on December 9, 1999 for the California Insurance Department. Menlo Life will pay consideration to the Company in the form of statutory admitted assets to equal the liabilities assumed. The liabilities assumed at December 31, 1999 was approximately $3,120,000. The consideration will be paid in the second quarter of 2000. At December 31, 1999, $21,066,134 of the Company's consolidated stockholders' equity represents the statutory stockholders' equity of the Company's insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to its parent company without the approval of insurance regulatory authorities. In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which the Company is required to adopt January 1, 2000. SFAS 133 will require the Company to include 28

all derivatives in the statement of financial position at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including future interpretive guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adopting SFAS 133 will be material to its financial position. 29

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES Page No. Financial Statements: Report of Independent Auditors...........................................31 Consolidated Balance Sheets, December 31, 1999 and 1998............................................................33 Consolidated Statements of Earnings, Years Ended December 31, 1999, 1998, and 1997.................................................................35 Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1999, 1998 and 1997. ...............................................................36 Consolidated Statements of Cash Flow, Years Ended December 31, 1999, 1998 and 1997 .................................................................37 Notes to Consolidated Financial Statements...............................................................39 Financial Statement Schedules: I. Summary of Investments -- Other than Investments in Related Parties.........................................73 II. Condensed Financial Information of Registrant.............................................................74 IV. Reinsurance............................................................80 V. Valuation and Qualifying Accounts......................................81 All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. 30

REPORT OF INDEPENDENT AUDITORS To The Board of Directors of Security National Financial Corporation We have audited the accompanying consolidated balance sheet of Security National Financial Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year ended December 31, 1999. Our audit also included the 1999 financial statement schedules listed in the Index at Item 8. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security National Financial Corporation and subsidiaries at December 31, 1999, and the consolidated results of their operations and their cash flows for the year ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related 1999 financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. TANNER + CO. Salt Lake City, Utah March 30, 2000 31

REPORT OF INDEPENDENT AUDITORS Board of Directors Security National Financial Corporation We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries as of December 31, 1998, and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flow for each of the three years in the period ended December 31, 1998. Our audits also include the financial statement schedules listed in the Index at Item 8. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security National Financial Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP Salt Lake City, Utah March 22, 1999 32

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, Assets: 1999 1998 - ------- ---- ---- Insurance-related investments: Fixed maturity securities held to maturity, at amortized cost (market $39,453,452 and $46,897,819 for 1999 and 1998) $39,629,851 $44,984,882 Fixed maturity securities available for sale, at market (cost $24,957,347 in 1999 and 28,675,440 in 1998) 24,119,190 28,675,440 Equity securities available for sale, at market (cost $4,350,139 and $4,035,251 for 1999 and 1998) 5,745,213 5,146,059 Mortgage loans on real estate 18,926,628 12,523,395 Real estate, net of accumulated depreciation of $2,722,024 and $2,380,874 for 1999 and 1998 7,629,952 7,866,151 Policy, student and other loans 11,607,993 11,493,637 Short-term investments 1,290,310 11,543,540 ------------ ------------- Total insurance-related investments 108,949,137 122,233,104 Restricted assets of cemeteries and mortuaries 4,258,987 4,098,877 Cash 12,422,864 6,670,996 Receivables: Trade contracts 4,232,030 4,011,722 Mortgage loans sold to investors 29,071,913 21,181,028 Receivable from agents 2,272,624 1,944,449 Receivable from officers 118,400 145,600 Other 3,847,079 2,603,243 ------------ ------------ Total receivables 39,542,046 29,886,042 Allowance for doubtful accounts (1,467,954) (1,576,668) ------------ ------------ Net receivables 38,074,092 28,309,374 Policyholder accounts on deposit with reinsurer 7,806,866 8,518,571 Land and improvements held for sale 8,522,687 8,405,725 Accrued investment income 1,493,013 1,440,860 Deferred policy acquisition costs 10,630,086 10,501,281 Property, plant and equipment, net 10,566,508 10,682,085 Cost of insurance acquired 9,597,306 10,462,446 Excess of cost over net assets of acquired subsidiaries 1,305,333 1,414,910 Other 671,558 526,918 ------------ ------------ Total assets $214,298,437 $213,265,147 ============ ============ See accompanying notes to consolidated financial statements. 33

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Continued) December 31, ------------ 1999 1998 ---- ---- Liabilities: - ------------ Future life, annuity, and other policy benefits $ 138,501,316 $ 134,899,870 Unearned premium reserve 1,866,523 2,565,968 Line of credit for financing of mortgage loans 8,687,023 7,577,248 Bank loans payable 10,768,098 11,909,980 Notes and contracts payable 3,885,684 3,399,272 Estimated future costs of pre-need sales 6,817,685 6,376,651 Accounts payable 804,133 1,321,559 Funds held under reinsurance treaties 1,475,512 1,419,357 Other liabilities and accrued expenses 3,219,166 4,327,889 Income taxes 5,736,860 6,008,537 ----------- ----------- Total liabilities 181,762,000 179,806,331 Commitments and contingencies -- Minority interest 6,046,744 6,778,557 Stockholders' Equity: - ----------------- Common stock: Class A: $2 par value, authorized 10,000,000 shares, issued 4,863,731 shares in 1999 and 4,617,330 shares in 1998 9,727,462 9,234,660 Class C: $0.20 par value, authorized 7,500,000 shares, issued 5,555,350 shares in 1999 and 5,446,595 shares in 1998 1,111,070 1,089,319 ---------- ----------- Total common stock 10,838,532 10,323,979 Additional paid-in capital 10,015,942 9,596,444 Accumulated other comprehensive income, net of deferred taxes (benefit) of $(71,899) and $222,967 for 1999 and 1998 665,691 1,081,113 Retained earnings 7,516,640 7,474,783 Treasury stock at cost (966,139 Class A shares and 61,979 Class C shares in 1999; 692,993 Class A shares and 59,028 Class C shares in 1998, held by affiliated companies) (2,547,112) (1,796,060) ------------ -------------- Total stockholders' equity 26,489,693 26,680,259 ------------ -------------- Total liabilities and stockholders' equity $214,298,437 $ 213,265,147 ============ ============== See accompanying notes to consolidated financial statements. 34

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Year Ended December 31, 1999 1998 1997 ---- ---- ---- Revenues: - -------- Insurance premiums and other considerations $ 13,175,825 $ 5,915,659 $ 6,140,783 Net investment income 10,631,302 7,458,743 7,139,580 Net mortuary and cemetery sales 10,178,246 9,225,801 9,230,864 Realized gains on investments and other assets 313,013 74,121 252,635 Mortgage fee income 14,503,388 10,082,330 5,661,867 Other 855,604 62,949 48,893 ------------ ------------ ----------- Total revenue 49,657,378 32,819,603 28,474,622 Benefits and expenses: - --------------------- Death benefits 4,780,063 2,432,822 2,407,931 Surrenders and other policy benefits 1,494,863 1,145,812 1,286,511 Increase in future policy benefits 5,700,784 3,353,287 2,974,915 Amortization of deferred policy acquisition costs and cost of insurance acquired 4,857,662 1,273,394 1,132,298 General and administrative expenses: Commissions 11,850,763 7,618,335 4,882,880 Salaries 7,409,298 5,358,743 4,805,571 Other 7,698,779 6,671,823 5,671,664 Interest expense 1,119,402 999,123 947,629 Cost of goods and services sold of the mortuaries and cemeteries 3,294,983 2,940,220 2,696,174 ------------ ----------- ----------- Total benefits and expenses 48,206,597 31,793,559 26,805,573 ------------ ----------- ----------- Earnings before income taxes 1,450,781 1,026,044 1,669,049 Income tax expense (230,516) (254,815) (360,108) Minority income (244,370) -- -- ------------ ----------- -------- Net earnings $ 975,895 $ 771,229 $ 1,308,941 ============ =========== =========== Net earnings per common share $0.22 $0.18 $0.33 ===== ===== ===== Weighted average outstanding common shares 4,397,141 4,272,516 3,988,034 Net earnings per common share- assuming dilution $0.22 $0.18 $0.32 ===== ===== ===== Weighted average outstanding common shares assuming-dilution 4,397,141 4,272,516 4,092,691 See accompanying notes to consolidated financial statements. 35

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Accumulated Additional Other Class Class Paid-in Comprehensive Retained Treasury A C Capital Income Earnings Stock Total -------- ------- --------- ------ -------- ----- ----- Balance at December 31, 1996 8,221,418 993,413 8,675,386 259,915 7,118,528 (1,800,632) 23,468,028 Comprehensive income: Net earnings 1,308,941 1,308,941 Unrealized gain on securities 571,024 571,024 ----------- Total comprehensive income 1,879,965 ----------- Stock dividends 412,712 49,531 431,967 (894,210) -- Conversion Class C to Class A 2,718 (2,718) -- Stock issued 16,328 (64) 26,101 43,520 85,885 Purchase of treasury stock (38,948) (38,948) ----------- ----------- ------------ ----------- ---------- ----------- ---------- Balance at December 31, 1997 8,653,176 1,040,162 9,133,454 830,939 7,533,259 (1,796,060) 25,394,930 Comprehensive income: Net earnings 771,229 771,229 Unrealized gain on securities 250,174 250,174 ----------- Total comprehensive income 1,021,403 ----------- Stock dividends 439,784 51,875 338,046 (829,705) -- Conversion Class C to Class A 2,672 (2,672) -- Stock issued 139,028 (46) 124,944 263,926 ----------- ----------- ------------ ----------- ---------- ----------- ----------- Balance at December 31, 1998 $ 9,234,660 $ 1,089,319 $ 9,596,444 $ 1,081,113 $7,474,783 $(1,796,060) $26,680,259 Comprehensive income: Net earnings 975,895 975,895 Unrealized gain on securities (415,422) (415,422) ----------- Total comprehensive income 560,473 ----------- Stock dividends 463,344 52,910 419,456 (935,710) -- Conversion Class C to Class A 31,160 (31,159) (1) -- Stock issued (cancelled) (1,702) 43 1,672 13 Purchase of treasury stock (751,052) (751,052) ----------- ----------- ------------ ----------- ---------- ----------- ---------- Balance at December 31, 1999 $ 9,727,462 $ 1,111,070 $ 10,015,942 $ 665,691 $7,516,640 $(2,547,112)$26,489,693 =========== =========== ============ =========== ========== =========== =========== See accompanying notes to consolidated financial statements. 36

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flow Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net earnings $ 975,895 $ 771,229 $1,308,941 Adjustments to reconcile net earnings to net cash provided by operating activities: Realized gains on investments and other assets (313,013) (74,121) (252,635) Depreciation 1,187,426 917,166 815,977 Provision for losses on accounts and loans receivable 150,981 175,750 129,502 Amortization of goodwill, premiums, and discounts 263,572 90,622 106,783 Provision for deferred income taxes 228,464 339,763 159,935 Policy acquisition costs deferred (3,886,279) (1,310,170) (909,943) Policy acquisition costs amortized 3,992,522 976,482 753,662 Cost of insurance acquired amortized 865,140 296,912 378,636 Change in assets and liabilities net of effects from purchases and disposals of subsidiaries: Land and improvements held for sale (116,962) 61,161 (10,584) Future life and other benefits 5,012,923 3,349,196 2,879,911 Receivables for mortgage loans sold (7,890,885) (5,841,576) 2,056,691 Other operating assets and liabilities (959,832) 836,210 (333,984) ------------ ----------- ------------ Net cash provided by (used in) operating activities (490,048) 588,624 7,082,892 Cash flows from investing activities: Securities held to maturity: Purchase - fixed maturity securities (1,207,177) (524,562) (9,254,030) Calls and maturities - fixed maturity securities 6,658,968 10,482,673 7,561,598 Securities available for sale: Purchases - equity securities (507,404) (22,183) (309,547) Sales - equity securities 2,906,278 114,608 465,935 Purchases of short-term investments (9,131,204) (11,453,095) (5,008,706) Sales of short-term investments 19,384,434 11,102,460 3,568,048 Purchases of restricted assets (119,479) (15,820) (329,379) Mortgage, policy, and other loans made (10,891,562) (6,974,351) (1,337,456) Payments received for mortgage, policy, and other loans 4,770,423 2,811,841 3,066,889 Purchases of property, plant, and equipment (767,383) (2,040,023) (351,091) Disposal of property and equipment 190,000 -- -- Purchases of real estate (421,230) (755,581) (97,013) Sale of real estate 334,500 -- -- Purchases of subsidiaries net of cash acquired -- (11,764,823) (60,602) ------------ ------------ ----------- Net cash (used in) provided by investing activities 11,199,164 (9,038,856) (2,085,354) 37

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flow (Continued) Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Cash flows from financing activities: Annuity receipts 10,522,726 2,770,045 2,521,025 Annuity withdrawals (15,183,240) (3,962,579) (4,472,918) Repayment of bank loans and notes and contracts payable (1,545,957) (918,065) (1,965,706) Proceeds from borrowings on bank loans and notes and contracts payable 890,500 6,246,400 233,000 Sale of treasury stock -- -- 44,994 Purchase of treasury stock (751,052) -- (38,948) Net change in line of credit for financing of mortgage loans 1,109,775 7,577,248 (1,211,890) ------------ ------------ ----------- Net cash (used in) provided by financing activities (4,957,248) 11,713,049 (4,890,443) ------------ ------------ ----------- Net change in cash 5,751,868 3,262,817 107,095 Cash at beginning of year 6,670,996 3,408,179 3,301,084 ------------ ----------- ----------- Cash at end of year $ 12,422,864 $ 6,670,996 $ 3,408,179 ============ =========== =========== See accompanying notes to the financial statements. 38

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles General Overview of Business Security National Financial Corporation and its wholly- owned subsidiaries (the "Company") operates in three main business segments; life insurance, cemetery and mortuary, and mortgage loans. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance marketed primarily in the intermountain west, California, Florida, Oklahoma, and Texas. The cemetery and mortuary segment of the Company consists of five cemeteries in Utah, one cemetery in California, eight mortuaries in Utah and six mortuaries in Arizona. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction, existing homes and real estate projects primarily in the intermountain west. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, for the life insurance subsidiaries, differ from statutory accounting principles prescribed or permitted by regulatory authorities. Risks The following is a description of the most significant risks facing the Company and how it mitigates those risks: Legal/Regulatory Risk - the risk that changes in the legal or regulatory environment in which the Company operates will create additional expenses and/or risks not anticipated by the Company in developing and pricing its products. That is, regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the consolidated financial statements. In addition, changes in tax law with respect to mortgage interest deductions or other public policy or legislative changes may affect the Company's mortgage sales. Also, the Company may be subject to further regulations in the cemetery/mortuary business. The Company mitigates this risk by offering a wide range of products and by diversifying its operations, thus reducing its exposure to any single product or jurisdiction, and also by employing underwriting practices which identify and minimize the adverse impact of such risk. Credit Risk - the risk that issuers of securities owned by the Company or mortgagors of mortgage loans on real estate owned by the Company will default or that other parties, including reinsurers and holders of cemetery/ mortuary contracts which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible. 39

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles (Continued) --------------------------------- Interest Rate Risk - the risk that interest rates will change which may cause a decrease in the value of the Company's investments or impair the ability of the Company to market its mortgage and cemetery/mortuary products. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company mitigates this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and/or by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, the Company might have to borrow funds or sell assets prior to maturity and potentially recognize a gain or loss. Mortality/Morbidity Risk - the risk that the Company's actuarial assumptions may differ from actual mortality/morbidity experience may cause the Company's products to be underpriced, may cause the Company to liquidate insurance or other claims earlier than anticipated and other potentially adverse consequences to the business. The Company minimizes this risk through sound underwriting practices, asset/liability duration matching, and sound actuarial practices. Estimates 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. Principles of Consolidation The accompanying consolidated financial statements include the accounts and operations of the Company. The Company's subsidiaries at December 31, 1999, are as follows: Security National Life Insurance Company Security National Mortgage Company Memorial Estates, Inc. Memorial Mortuary Paradise Chapel Funeral Home Singing Hills Memorial Park Cottonwood Mortuary, Inc. Deseret Memorial, Inc. Holladay Cottonwood Memorial Foundation Holladay Memorial Park 40

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles (Continued) --------------------------------- Camelback Sunset Funeral Home, Inc. Greer-Wilson Funeral Home Crystal Rose Funeral Home Hawaiian Land Holdings SSLIC Holding Company Insuradyne Corporation Southern Security Life Insurance Company (61.3%) All significant intercompany transactions and accounts have been eliminated in consolidation. On December 17, 1998, the Company purchased all of the outstanding shares of common stock of SSLIC Holding Company (formerly Consolidare Enterprises, Inc.), (SSLIC Holding) and Insuradyne Corporation (Insuradyne) for a total cost of $12,248,194. SSLIC Holding owns approximately 61.3% of the outstanding shares of common stock of Southern Security Life Insurance Company (Southern Security). The acquisition was accounted for using the purchase method. The assets and liabilities of SSLIC Holding and Insuradyne have been included in the Company's balance sheet at December 31, 1998. The results of operations of SSLIC Holding and Insuradyne were not material to the financial statements of the Company from the date of acquisition through December 31, 1998 and, consequently, have not been included in the Consolidated Statements of Earnings for the year then ended. Investments Investments are shown on the following basis: Fixed maturity securities held to maturity - at cost, adjusted for amortization of premium or accretion of discount. Although the Company has the ability and intent to hold these investments to maturity, infrequent and unusual conditions could occur under which it would sell certain of these securities. Those conditions include unforeseen changes in asset quality, significant changes in tax laws, and changes in regulatory capital requirements or permissible investments. Fixed maturity and equity securities available for sale - at fair value, which is based upon quoted trading prices. Changes in fair values net of income taxes are reported as unrealized appreciation or depreciation and recorded as an adjustment directly to stockholders' equity and, accordingly, have no effect on net income. Mortgage loans on real estate - at unpaid principal balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses. Real estate - at cost, less accumulated depreciation provided on a straight-line basis over the estimated useful lives of the properties, and net of allowance for impairment in value, if any. 41

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles (Continued) --------------------------------- Policy, student, and other loans - at the aggregate unpaid balances. Short-term investments - consists of certificates of deposit and commercial paper with maturities of up to one year. Restricted assets of cemeteries and mortuaries - consists of cash, participations in mortgage loans with Security National Life Insurance Company, and mutual funds carried at cost; fixed maturity securities carried at cost adjusted for amortization of premium or accretion of discount; and equity securities carried at fair market value. Realized gains and losses on investments - realized gains and losses on investments and declines in value considered to be other than temporary, are recognized in operations on the specific identification basis. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is calculated principally on the straight-line method over the estimated useful lives of the assets which range from three to thirty years. Leasehold improvements are amortized over the lesser of the useful life or remaining lease terms. Recognition of Insurance Premiums and Other Considerations Premiums for traditional life insurance products (which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, limited-payment life insurance policies, and certain annuities with life contingencies) are recognized as revenues when due from policyholders. Revenues for interest-sensitive insurance policies (which include universal life policies, interest-sensitive life policies, deferred annuities, and annuities without life contingencies) consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the period. Deferred Policy Acquisition Costs and Cost of Insurance Acquired Commissions and other costs, net of commission and expense allowances for reinsurance ceded, that vary with and are primarily related to the production of new insurance business have been deferred. Deferred policy acquisition costs for traditional life insurance are amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For interest-sensitive insurance products, deferred policy acquisition costs are amortized 42

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles (Continued) --------------------------------- generally in proportion to the present value of expected gross profits from surrender charges, investment, mortality and expense margins. This amortization is adjusted when estimates of current or future gross profits to be realized from a group of products are reevaluated. Deferred acquisition costs are written off when policies lapse or are surrendered. Cost of insurance acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred policy acquisition costs. Future Life, Annuity and Other Policy Benefits Future policy benefit reserves for traditional life insurance are computed using a net level method, including assumptions as to investment yields, mortality, morbidity, withdrawals, and other assumptions based on the life insurance subsidiaries experience, modified as necessary to give effect to anticipated trends and to include provisions for possible unfavorable deviations. Such liabilities are, for some plans, graded to equal statutory values or cash values at or prior to maturity. The range of assumed interest rates for all traditional life insurance policy reserves was 4.5% to 10.0% in 1999, 1998, and 1997. Benefit reserves for traditional limited-payment life insurance policies include the deferred portion of the premiums received during the premium-paying period. Deferred premiums are recognized as income over the life of the policies. Policy benefit claims are charged to expense in the period the claims are incurred. Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 4% to 6.5% in 1999, 1998 and 1997. Participating Insurance Participating business constitutes 2%, 1%, and 8% of insurance in force for 1999, 1998 and 1997, respectively. The provision for policyholders' dividends included in policyholder obligations is based on dividend scales anticipated by management. Amounts to be paid are determined by the Board of Directors. Reinsurance The Company follows the procedure of reinsuring risks in excess of $50,000 to provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. The Company remains liable for amounts ceded in the event the reinsurers are unable to meet their obligations. 43

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles (Continued) --------------------------------- The Company has entered into coinsurance agreements with unaffiliated insurance companies under which the Company assumed 100% of the risk for certain life insurance policies and certain other policy-related liabilities of the insurance company. Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Expense allowances received in connection with reinsurance ceded are accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. Cemetery and Mortuary Operations Land and improvements used in cemetery operations are stated at cost and charged to operations when sold based on the number of spaces available for sale. Mausoleum costs are charged to operations when sold based on the number of niches available for sale. Perpetual care is maintained on sold spaces as discussed in Note 7. Certain cemetery products are sold on a pre-need basis. Revenues from pre-need cemetery sales are recognized at the time of sale. Related costs required to establish the liability for estimated future costs of pre-need sales are also recorded at the time of sale. This liability relates to promised merchandise and funeral services and is increased or decreased each period as current costs change. A corresponding charge is made to operations to reflect the change in costs. Certain mortuary products and services are also sold on a pre-need basis. Pre-need mortuary sales are fully reserved at the time of the sale. Revenue on pre-need mortuary services is recognized at the time the service is performed. All pre-need sales contracts bear interest at 8%. The Company is required to place specified amounts into restricted asset accounts for products sold on a pre-need basis. Income from assets placed in these restricted asset accounts are used to offset required increases to the estimated future liability. Revenues and costs for at-need sales are recorded when the services are performed. The Company, through its mortuary and cemetery operations, provides a guaranteed funeral arrangement wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential mortuary customer utilizes one 44

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles (Continued) --------------------------------- of the Company's facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. However, management believes that given current inflation rates and related price increases of goods and services, the risk of exposure is minimal. Mortgage Operations Mortgage fee income is generated through the origination and refinancing of mortgage loans and is deferred until such loans are sold. Excess of Cost Over Net Assets of Acquired Businesses Previous acquisitions have been accounted for as purchases under which assets acquired and liabilities assumed were recorded at their fair values. The excess of cost over net assets of acquired businesses is being amortized over a range of fifteen to twenty years using the straight-line method. The Company periodically evaluates the recoverability of amounts recorded. Accumulated amortization was $1,029,528 and $919,951 at December 31, 1999 and 1998, respectively. Income Taxes Income taxes include taxes currently payable plus deferred taxes related to the tax effect of temporary differences in the financial reporting basis and tax basis of assets and liabilities. Such temporary differences are related principally to the deferral of policy acquisition costs and the provision for future policy benefits in the insurance operations, and unrealized gains on fixed maturity and equity securities available for sale. Earnings Per Common Share The Company computes earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This Standard requires presentation of two new amounts, basic and diluted earnings per share. Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented, after the effect of the assumed conversion of Class C Common Stock to Class A Common Stock, the acquisition of treasury stock, and the retroactive effect of stock dividends declared. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the year plus the incremental shares that would have been outstanding under certain deferred compensation plans. 45

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles (Continued) --------------------------------- Stock Compensation The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation". In accordance with the provisions of SFAS 123, the Company has elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and related interpretations in accounting for its stock option plans. The Company has one fixed option plan (the "1993 Plan"). In accordance with APB Opinion No. 25, no compensation cost has been recognized for the 1993 plan. Had compensation cost for the 1993 plan been determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123, the Company's net income would have been reduced by approximately $9,000, $110,000, and $10,000 in 1999, 1998, and 1997, respectively. As a result, basic and diluted earnings per share would have been reduced by $0, $0.03, and $0 in 1999, 1998, and 1997, respectively. The weighted average fair value of options granted in 1999 under the 1993 Plan is estimated at $0.04 as of the grant date using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 5%, volatility of 28.83%, risk-free interest rate of 8.25%, and an expected life of ten years. The weighted average fair value of each option granted in 1998 under the 1993 Plan is estimated at $0.81 as of the grant date using the Black Scholes option-pricing model with the following assumptions: dividend yield of 5%, volatility of 29.3%, risk-free interest rate of 5.7%, and an expected life of five years. The Company also has one variable option plan (the "1987 Plan"). In accordance with APB Opinion No. 25, compensation cost related to options granted and outstanding under the 1987 Plan is estimated and recognized over the period of the award based on changes in the current market price of the Company's stock over the vesting period. Options granted under the 1987 Plan are exercisable for a period of ten years from the date of grant. Pending Accounting Change In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which the Company is required to adopt January 1, 2000. SFAS 133 will require the Company to include all derivatives in the statement of financial position at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a 46

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 1) Significant Accounting Principles (Continued) --------------------------------- component of equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including future interpretive guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adopting SFAS 133 will be material to its financial position. Reclassifications Certain amounts in prior years have been reclassified to conform with the 1999 presentation. 47

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 2) Investments The Company's investments in fixed maturity securities held to maturity and equity securities available for sale are summarized as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- --------- ---------- ------- December 31, 1999: Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $12,822,025 $ 90,415 $ (225,797) $12,686,643 Obligations of states and political subdivisions 176,499 6,345 (15,728) 167,116 Corporate securities including public utilities 20,594,306 594,303 (428,752) 20,759,857 Mortgage-backed securities 6,009,010 14,095 (223,291) 5,799,814 Redeemable preferred stock 28,011 19,011 (7,000) 40,022 ----------- ----------- ---------- ----------- Total fixed maturity securities held to maturity $39,629,851 $ 724,169 $ (900,568) $39,453,452 =========== =========== ========== =========== Securities available for sale: Bonds U.S. Treasury securities and obligations of U.S. Government agencies $ 4,596,294 $ 4,599 $ (21,561) $ 4,579,332 Corporate securities including public utilities 20,270,712 -- (820,966) 19,449,746 Mortgage-backed securities 90,341 -- (229) 90,112 Nonredeemable preferred stock 70,431 43,163 (7,144) 106,450 Common stock 4,279,708 2,248,436 (889,381) 5,638,763 ----------- ---------- ----------- ----------- Total securities available for sale $29,307,486 $2,296,198 $(1,739,281) $29,864,403 =========== ========== =========== =========== Restricted equity securities (note 7) $ 172,391 $ 234,872 $ (968) $ 406,295 =========== ========== =========== =========== 48

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- --------- ---------- ------- December 31, 1998: Fixed maturity securities held to maturity: Bonds U.S. Treasury securities and obligations of U.S. Government agencies $14,548,493 $ 483,831 $ (117) $15,032,207 Obligations of states and political subdivisions 169,941 15,047 (5,938) 179,050 Corporate securities including public utilities 22,764,172 1,410,810 (34,627) 24,140,355 Mortgage-backed securities 7,439,713 -- -- 7,439,713 Redeemable preferred stock 62,563 51,874 (7,943) 106,494 ----------- ---------- --------- ----------- Total $44,984,882 $1,961,562 $ (48,625) $46,897,819 =========== ========== ========= =========== Securities available for sale Bonds U.S. Treasury securities and obligations of U.S. Government agencies (1) $ 5,309,323 $ -- $ -- $ 5,309,323 Corporate securities including public utilities(1) 23,366,117 -- -- 23,366,117 Nonredeemable preferred stock 76,431 75,675 (3,231) 148,875 Common stock 3,958,820 1,581,457 (543,093) 4,997,184 ----------- ---------- ---------- ----------- Total $32,710,691 $1,657,132 $ (546,324) $33,821,499 =========== ========== ========== =========== Restricted equity securities (note 7) $ 172,391 $ 203,619 $ (10,348) $ 365,662 =========== ========== ========== =========== (1) Fixed maturity securities available for sale were acquired as part of the SSLIC acquisition. As such, cost equaled fair value as of December 31, 1998. 49

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 2) Investments (Continued) ----------- The fair values for fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. The fair values for equity securities are based on quoted market prices. The amortized cost and estimated fair value of fixed maturity securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Fair Held to Maturity: Cost Value ---------- ------- Due in 2000 $ 5,456,257 $ 5,408,398 Due in 2001 through 2004 19,474,680 19,763,420 Due in 2005 through 2009 8,223,804 7,974,416 Due after 2009 438,089 467,382 Mortgage-backed securities 6,009,010 5,799,815 Redeemable preferred stock 28,011 40,021 ----------- ----------- $39,629,851 $39,453,452 Estimated Amortized Fair Available for Sale: Cost Value ---------- ------- Due in 2000 $ 1,199,855 $ 1,203,063 Due in 2001 through 2004 12,967,929 12,676,305 Due in 2005 through 2009 9,331,611 8,840,145 Due after 2009 1,367,611 1,309,565 Mortgage-backed securities 90,341 90,112 ----------- ----------- $24,957,347 $24,119,190 The Company's realized gains and losses in investments are summarized as follows: 1999 1998 1997 ---- ---- ---- Fixed maturity securities held to maturity: Gross realized gains $ 87,859 $ 43,154 $ 37,995 Gross realized losses (1,895) (26,470) (12,457) Securities available for sale: Gross realized gains 14,138 66,589 242,714 Gross realized losses (12) (3,887) (15,617) Other assets 212,923 (5,265) -- --------- -------- --------- Total $ 313,013 $ 74,121 $ 252,635 ========= ======== ========= 50

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 2) Investments (Continued) ----------- Generally gains and losses from held to maturity securities are a result of early calls and related amortization of premiums or discounts. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential and commercial loans and requires collateral on all real estate exposures, a substantial portion of its debtors' ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. The Company has 83% of its mortgage loans in the state of Utah. Investments, aggregated by issuer, in excess of 10% of shareholders' equity (before net unrealized gains and losses on available for sale securities) at December 31, 1999, other than investments issued or guaranteed by the United States Government, are as follows: Carrying Amount Dean Witter Discover $4,065,311 Philip Morris, Inc. 5,459,717 Major categories of net investment income are as follows: 1999 1998 1997 ---- ---- ---- Fixed maturity securities $ 4,720,838 $ 3,293,949 $ 3,519,270 Equity securities 226,857 219,785 238,097 Mortgage loans on real estate 1,451,214 1,036,132 774,478 Real estate 1,711,771 1,384,311 1,375,996 Policy loans 725,383 170,752 170,726 Short-term investments 650,035 405,848 529,979 Other 2,142,527 1,899,643 1,310,246 ------------ ----------- ----------- Gross investment income 11,628,625 8,410,420 7,918,792 Investment expenses (997,323) (951,677) (779,212) ------------ ----------- ----------- Net investment income $ 10,631,302 $ 7,458,743 $ 7,139,580 ============ =========== =========== Net investment income includes net investment income earned by the restricted assets of the cemeteries and mortuaries of approximately $733,000, $683,000 and $609,000 for 1999, 1998, and 1997, respectively. Investment expenses consist primarily of depreciation, property taxes and an estimated portion of administrative expenses relating to investment activities. Securities on deposit for regulatory authorities as required by law amounted to $9,632,937 at December 31, 1999 and $9,924,315 at December 31, 1998. 51

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 3) Cost of Insurance Acquired Information with regard to cost of insurance acquired is as follows: 1999 1998 1997 ---- ---- ---- Balance at beginning of year $ 10,462,446 $ 3,370,018 $ 3,748,654 Cost of insurance acquired -- 7,389,340 -- Imputed interest at 7% 732,371 235,901 262,406 Amortization (1,597,511) (532,813) (641,042) ------------ ------------ ----------- Net amortization charged to income (865,140) (296,912) (378,636) ------------ ------------ ----------- Balance at end of year $ 9,597,306 $ 10,462,446 $ 3,370,018 ============ ============ =========== Presuming no additional acquisitions, net amortization charged to income is expected to approximate $860,000, $824,000, $759,000, $702,000, and $649,000 for the years 2000 through 2004. Actual amortization may vary based on changes in assumptions or experience. 4) Property, Plant and Equipment The cost of property, plant and equipment is summarized below: December 31, ------------ 1999 1998 ---- ---- Land and Buildings $ 10,171,943 $ 9,983,828 Furniture and equipment 6,384,208 6,011,048 ------------ ------------ 16,556,151 15,994,876 Less accumulated depreciation (5,989,643) (5,312,791) ------------ ------------ Total $ 10,566,508 $ 10,682,085 ============ ============ 5) Bank Loans Payable and Lines of Credit Bank loans payable are summarized as follows: December 31, ------------ 1999 1998 ---- ---- Bank prime rate plus 1/2% (9.0% at December 31, 1999) note payable in monthly installments of $36,420 including principal and interest, collateralized by 15,000 shares of Security National Life stock, due December 2004. $1,697,397 $1,974,898 10% note payable in monthly installments of $8,444 including principal and interest, collateralized by real property, which book value is approximately $1,079,000, due January 2013. 740,202 766,186 52

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 5) Bank Loans Payable and Lines of Credit (Continued) -------------------------------------- December 31, ------------ 1999 1998 ---- ---- One year treasury constant maturity plus 2.75% (8.59% at December 31, 1999) note payable in monthly installments of $6,000, including principal and interest, collateralized by real property, which book value is approximately $414,000, due October 2002. 182,089 239,134 Bank prime rate less 1.35% (7.15% at December 31, 1999) note payable in monthly installments of $20,836, including principal and interest, collateralized by real property, which book value in approximately $1,077,000, due November 2007. 1,703,915 1,755,736 $5,863,000 revolving line of credit at bank prime rate less 1%, (7.5% at December 31, 1999) interest only to December 1999 thereafter interest and principal, collateralized by 15,000 shares of Security National Life Insurance Company stock, due December 2005. 5,610,111 6,246,400 Bank prime rate plus 1/2% (9.0% at December 31, 1999) note payable in monthly installments of $7,235 including principal and interest, collateralized by real property, which book value is approximately $893,128, due August 2004 370,748 412,116 Bank prime rate less 1.35% (7.15% at December 31, 1999) note payable in monthly installments of $2,736 including principal and interest, collateralized by 15,000 shares of Security National Life Insurance Company stock, due December 2005. 199,461 216,117 53

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 5) Bank Loans Payable and Lines of Credit (Continued) -------------------------------------- December 31, ------------ 1999 1998 ---- ---- Other collateralized bank loans payable 264,175 299,393 ----------- ---------- Total bank loans 10,768,098 11,909,980 Less current installments 1,143,823 3,181,330 ----------- ---------- Bank loans, excluding current installments $ 9,624,275 $8,728,650 =========== ========== $15 million revolving line of credit at LIBOR plus 1.50% (7.32% at December 31, 1999), payable within 30 days collateralized by receivable rom mortgage loans sold to investors .$ 8,687,023 $7,577,248 =========== ========== In addition to the lines of credit described above, the Company has line of credit agreements with banks for $2,000,000 and $5,000,000, of which none were outstanding at December 31, 1999 or 1998. The lines of credit are for general operating purposes. The $2,000,000 line of credit bears interest at the bank's prime rate and must be repaid every 30 days. The $5,000,000 line of credit bears interest at a variable rate with interest payable monthly and is collateralized by student loans equaling 115% of the unpaid principal balance. See Note 6 for summary of maturities in subsequent years. 6) Notes and Contracts Payable Notes and contracts payable are summarized as follows: December 31, ------------ 1999 1998 ---- ---- Due to former stockholders of Deseret Memorial, Inc. resulting from the acquisition of such entity. Amount represents the present value discounted at 8% of monthly annuity payments ranging from $4,600 to $5,000 plus an index adjustment in the 7th through the 12th years, due September 2011. $ 646,294 $ 667,829 54

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 6) Notes and Contracts Payable (Continued) --------------------------- December 31, ------------ 1999 1998 ---- ---- Due to former stockholders of Greer Wilson resulting from the acquisition of such entity. Amountrepresents the present value discounted at 10% of monthly annuity payments of $7,000, due March 2005. 344,860 392,458 Due to former stockholders of Civil Service Employees Life Insurance Company resulting from the acquisition of such entity. 7% note payable in seven annual installments with principal payments of $151,857, due December 2003. 455,571 607,429 Due to former stockholders of Crystal Rose Funeral Home resulting from the acquisition of such entity. Amount represents the present value discounted at 9% of monthly annuity payments of $5,350 due February 2007. 177,246 221,587 9%note payable in monthly installments of $10,000 including principal and interest collateralized by real property, which book value is approximately $2,908,000, due July 2008 727,847 780,604 Due to Memorial Estates Endowment Care Trust Fund for the remodel of the Cottonwood Funeral Home. 6% note payable in monthly installments of $5,339 including principal and interest collateralized by the Funeral Home, which book value is approximately $1,348,000 due March 2030 890,500 -- Other notes payable 643,366 729,365 ---------- ---------- Total notes and contracts payable 3,885,684 3,399,272 Less current installments 414,421 416,679 ---------- ---------- Notes and contracts, excluding current installments $3,471,263 $2,982,593 ========== ========== 55

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 The following tabulation shows the combined maturities of bank loans payable, lines of credit and notes and contracts payable: 2000 $10,245,267 2001 1,920,260 2002 2,008,230 2003 1,898,830 2004 2,030,122 Thereafter 5,238,096 ----------- Total $23,340,805 =========== Interest paid approximated interest expense in 1999, 1998 and 1997. 7) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds The Company owns and operates several endowment care cemeteries, for which it has established and maintains an endowment care fund. The Company records a liability to the fund for each space sold at current statutory rates. The Company is not required to transfer assets to the fund until the spaces are fully paid for. As of December 31, 1999 the Company had transferred $179,939 in excess of the required contribution to the fund. As of December 31, 1998, the Company had recorded a liability to the fund of $540,504. The Company has established and maintains certain restricted asset accounts to provide for future merchandise obligations incurred in connection with its pre-need sales. Such amounts are reported as restricted assets of cemeteries and mortuaries in the accompanying balance sheet. Assets in the restricted asset account are summarized as follows: December 31, ------------ 1999 1998 ---- ---- Cash and cash equivalents $ 2,361,597 $ 2,243,808 Mutual funds 132,945 132,945 Fixed maturity securities 295,771 294,210 Equity securities 77,778 71,054 Participation in mortgage loans with Security National Life 1,357,200 1,323,164 Time certificate of deposit 33,696 33,696 ----------- ----------- Total $ 4,258,987 $ 4,098,877 =========== =========== 56

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 8) Income Taxes The Company's income tax liability at December 31 is summarized as follows: December 31, ------------ 1999 1998 ---- ---- Current $ 142,002 $ 141,352 Deferred 5,594,858 5,867,185 ---------- ---------- Total $5,736,860 $6,008,537 ========== ========== Significant components of the Company's deferred tax assets and liabilities at December 31 are approximately as follows: 1999 1998 ---- ---- Assets - ------ Future policy benefits $(1,740,203) $(2,138,384) Unearned premium (1,950,587) (965,574) Difference between book and tax basis of bonds (56,489) (46,885) AMT credits -- (11,658) Net operating loss carryforwards expiring in the years 2001 through 2010 (219,249) (213,409) Other (329,361) (126,125) ----------- ----------- Total deferred tax assets $(4,295,889) $(3,502,035) Liabilities ----------- Deferred policy acquisition costs $ 4,485,047 $ 2,186,241 Cost of insurance acquired 1,884,547 3,198,551 Installment sales 1,323,994 351,080 Depreciation 660,369 758,149 Trusts 821,165 899,415 Tax on unrealized appreciation (9,299) 541,901 Other 724,924 1,433,883 ----------- ----------- Total deferred tax liabilities 9,890,747 9,369,220 ----------- ----------- Net deferred tax liability $ 5,594,858 $ 5,867,185 =========== =========== The Company paid no income taxes in 1999, 1998 and 1997. The Company's income tax expense (benefit) is summarized as follows: 1999 1998 1997 ---- ---- ---- Current $ 2,052 $ (84,948) $200,173 Deferred 228,464 339,763 159,935 -------- --------- -------- Total $230,516 $ 254,815 $360,108 ======== ========= ======== 57

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 8) Income Taxes (Continued) ------------ The reconciliation of income tax expense at the U.S. federal statutory rates is as follows: 1999 1998 1997 ---- ---- ---- Computed expense at statutory rate $ 493,266 $ 348,855 $ 562,772 Special deductions allowed small life insurance companies (122,204) (88,658) (152,215) Dividends received deduction (24,401) (26,691) (32,343) Minority interest taxes (102,828) -- -- Other, net (13,317) 21,309 (18,106) --------- --------- --------- Tax expense $ 230,516 $ 254,815 $ 360,108 ========= ========= ========= A portion of the life insurance income earned prior to 1984 was not subject to current taxation but was accumulated for tax purposes, in a "policyholders' surplus account." Under provisions of the Internal Revenue Code, the policyholders' surplus account was frozen at its December 31, 1983 balance and will be taxed generally only when distributed. As of December 31, 1999, the policyholders' surplus accounts approximated $4,500,000. Management does not intend to take actions nor does management expect any events to occur that would cause federal income taxes to become payable on that amount. However, if such taxes were accrued, the amount of taxes payable would be approximately $1,500,000. The insurance companies have remaining loss carry forwards for tax purposes of approximately $1,600,000, approximately $286,000 of which is subject to an annual limitation of approximately $300,000. 9) Reinsurance, Commitments and Contingencies The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranged from $30,000 to $75,000 at December 31, 1999 and 1998. The Company is liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. The Company has also assumed insurance from other companies having insurance in force amounting to $581,297,000 at December 31, 1999 and $569,448,000 at December 31, 1998. As part of the acquisition of Southern Security, the Company has a co-insurance agreement with The Mega Life and Health Insurance Company ("MEGA"). On December 31, 1992 Southern Security ceded to MEGA 18% of all universal life policies in force at that date. MEGA is entitled to 18% of all future premiums, claims, policyholder loans and surrenders relating to the ceded policies. In addition, Southern Security receives certain commission and expense reimbursements. The funds held related to reinsurance treaties of $1,475,512 and policyholders' account balances on deposit with reinsurer of $7,806,866 represent the 18% share of policy loans and policyholder account balances ceded to MEGA as of December 31, 1999. 58

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 9) Reinsurance, Commitments and Contingencies (Continued) ------------------------------------------ Mortgage loans originated and sold to unaffiliated investors are sold subject to certain recourse provisions. 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 Mortgage 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's. Concerning the administrative action by HUD relating to the above allegations, dependent upon the facts and circumstances, HUD asserts it has alternatives such as taking no action, 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. With respect to any civil money penalty, which could be in addition to the foregoing, the letter from HUD states that the "amount of the civil 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. At this stage a complete evaluation of the matter has not been made. Management, however, 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. Thus, management recognizes the great importance and need for an appropriate written response to the letter to be filed with HUD and the need to do what is necessary to see that Security National Mortgage's understanding of the matter is fairly and properly presented to HUD. The Company is also a defendant in various other legal actions arising from the normal conduct of business. Management believes that none of the actions will have a material effect on the Company's financial position or results of operations. 59

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 10) Retirement Plans The Company and its subsidiaries have a noncontributory Employee Stock Ownership Plan (ESOP) for all eligible employees. Eligible employees are primarily those with more than one year of service, who work in excess of 1,040 hours per year. Contributions, which may be in cash or stock of the Company, are determined annually by the Board of Directors. The Company's contributions are allocated to eligible employees based on the ratio of each eligible employee's compensation to total compensation for all eligible employees during each year. ESOP contribution expense totaled $56,277, $59,613, and $45,616 for 1999, 1998, and 1997, respectively. At December 31, 1999 the ESOP held 619,273 shares of Class A and 1,216,848 shares of Class C common stock of the Company. All shares held by the ESOP have been allocated to the participating employees and all shares held by the ESOP are considered outstanding for purposes of computing earnings per share. The Company has a 401(k) savings plan covering all eligible employees, as defined above, which includes employer participation in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan allows participants to make pretax contributions up to the lesser of 15% of total annual compensation or the statutory limits. The Company may match up to 50% of each employee's investment in Company stock, up to 1/2% of the employee's total annual compensation. The Company's match will be Company stock and the amount of the match will be at the discretion of the Company's Board of Directors. The Company's matching 401(k) contributions for 1999, 1998, and 1997 were approximately $3,858, $7,000, and $-0-, respectively. Also, the Company may contribute at the discretion of the Company's Board of Directors an Employer Profit Sharing Contribution to the 401-K savings plan. The Employer Profit Sharing Contribution shall be divided among three different classes of participants in the plan based upon the participant's title in the Company. In 1999 the Company contributed $130,958 to the Plan. There were no contributions made in 1998 or 1997. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee. 60

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 11) Capital Stock The following table summarizes the activity in shares of capital stock for the three year period ended December 31, 1999: Class A Class C ---------- ----------- Balance at December 31, 1996 4,110,709 4,967,072 Stock Dividends 206,344 247,329 Conversion of Class C to Class A 1,359 (13,590) Stock Issued 8,176 -- ---------- ---------- Balance at December 31, 1997 4,326,588 5,200,811 Stock Dividends 219,892 259,374 Conversion of Class C to Class A 1,336 (13,352) Stock Issued (cancelled) 69,514 (238) ---------- ---------- Balance at December 31, 1998 4,617,330 5,446,595 Stock Dividends 231,672 264,550 Conversion of Class C to Class A 15,580 (155,795) Stock Issued (cancelled) (851) -- ---------- ---------- Balance at December 31, 1999 4,863,731 5,555,350 ========== ========== The Company has two classes of common stock with shares outstanding, Class A and Class C. Class C shares vote share for share with the Class A shares on all matters except election of one-third of the directors who are elected solely by the Class A shares, but generally are entitled to a lower dividend participation rate. Class C shares are convertible into Class A shares at any time on a ten to one ratio. Also Class A shares can be converted into Class C shares, but the conversion rights have numerous restrictions. Stockholders of both classes of common stock have received 5% stock dividends in the years 1989 through 1999, as authorized by the Company's Board of Directors. The Company has Class B Common Stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. Class B shares are non-voting stock except to any proposed amendment to the Articles of Incorporation which would affect Class B Common Stock. 61

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 11) Capital Stock (Continued) ------------- In accordance with SFAS 128, the basic and diluted earnings per share amounts were calculated as follows: 1999 1998 1997 ---- ---- ---- Numerator: Net income $ 975,895 $ 771,229 $1,308,941 ========= ============ ========== Denominator: Denominator for basic earnings per share- weighted-average shares 4,397,141 4,272,516 3,988,034 Effect of dilutive securities: Employee stock options -- -- 19,606 Stock appreciation rights -- -- 85,051 --------- ------------ ---------- Dilutive potential common shares -- -- 104,657 Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 4,397,141 4,272,516 4,092,691 ========= ============ ========== Basic earnings per share $ 0.22 $ 0.18 $ 0.33 ========= ============ ========== Diluted earnings per share $ 0.22 $ 0.18 $ 0.32 ========= ============ ========== There are no dilutive effects on net income for purpose of this calculation. 12) Deferred Compensation Plans In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987 Plan). The 1987 Plan provides that shares of the Class A Common Stock of the Company may be optioned to certain officers and key employees of the Company. The 1987 Plan establishes a Stock Option Plan Committee which selects the employees to whom the options will be granted and determines the price of the stock. The 1987 Plan establishes the minimum purchase price of the stock at an amount which is not less than 100% of the fair market value of the stock (110% for employees owning more than 10% of the total combined voting power of all classes of stock). The 1987 Plan provides that if additional shares of Class A Common Stock are issued pursuant to a stock split or a stock dividend, the number of shares of Class A Common Stock then covered by each outstanding option granted 62

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 12) Deferred Compensation Plans (Continued) --------------------------- hereunder shall be increased proportionately with no increase in the total purchase price of the shares then covered, and the number of shares of Class A Common Stock reserved for the purpose of the 1987 Plan shall be increased by the same proportion. In the event that the shares of Class A Common Stock of the Company from time to time issued and outstanding are reduced by a combination of shares, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be reduced proportionately with no reduction in the total price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purposes of the 1987 Plan shall be reduced by the same proportion. The 1987 Plan terminated in 1997 and options granted are non-transferable. Options granted and outstanding under the 1987 Plan include Stock Appreciation Rights which permit the holder of the option to elect to receive cash, amounting to the difference between the option price and the fair market value of the stock at the time of the exercise, or a lesser amount of stock without payment, upon exercise of the option. 63

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 12) Deferred Compensation Plans (Continued) --------------------------- Activity of the 1987 Plan is summarized as follows: Number Option of Shares Price Outstanding at December 31, 1996 22,309 $2.20 - $2.47 Granted 148,000 Dividend 7,400 Exercised (22,309) ---------- Outstanding at December 31, 1997 155,400 $4.29 - $4.71 Dividend 7,770 Exercised -- ---------- Outstanding at December 31, 1998 163,170 $4.08 - $4.49 Dividend 8,159 Exercised -- ---------- Outstanding at December 31, 1999 171,329 $3.89 - $4.28 ========== Exercisable at end of year 171,329 ========== Available options for future grant 1987 Stock Incentive Plan -0- ----- On June 21, 1993, the Company adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserved 300,000 shares of Class A Common Stock for issuance thereunder. The 1993 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress. The 1993 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both "incentive stock options," as defined under Section 422A of the Internal Revenue Code of 1986 (the "Code"), and "non-qualified options" may be granted pursuant to the 1993 Plan. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the Code, including a requirement that the option exercise price be not less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors. 64

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 12) Deferred Compensation Plans (Continued) --------------------------- The options were granted to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company. The 1993 Plan is administered by the Board of Directors or by a committee designated by the Board. The 1993 Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. No options may be exercised for a term of more than ten years from the date of grant. The 1993 Plan has a term of ten years. The Board of Directors may amend or terminate the 1993 Plan at any time, subject to approval of certain modifications to the 1993 Plan by the shareholders of the Company as may be required by law or the 1993 Plan. On November 7, 1996 the Company amended the Articles of Incorporation as follows: (i) to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide that the stock subject to options, awards and purchases may include Class C common stock. On October 14, 1999, the Company amended the 1993 Plan to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 746,126 Class A shares to 1,046,126 Class A shares. 65

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 12) Deferred Compensation Plans (Continued) --------------------------- Activity of the 1993 Plan is summarized as follows: Number Option of Shares Price ----------- --------- Outstanding at December 31, 1996 287,816 $2.70 - $4.52 Cancelled (9,450) Dividend 13,918 --------- Outstanding at December 31, 1997 292,284 $2.58 - $4.31 Dividend 30,869 Granted 148,000 Exercised (63,814) --------- Outstanding at December 31, 1998 407,339 $2.34 - $4.16 Dividend 24,762 Granted 190,000 Expired (102,103) ---------- Outstanding at December 31, 1999 519,998 $2.22 - $3.96 Exercisable at end of year 519,998 ========= Available options for future grant 1993 Stock Incentive Plan 404,221 ======== 13) Statutory-Basis Financial Information The Company's life insurance subsidiaries are domiciled in Utah and Florida and prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Utah and Florida Insurance Departments. "Prescribed" statutory accounting practices are interspersed throughout state insurance laws and regulations, the National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual and a variety of other NAIC publications. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. In 1998, the NAIC adopted codified statutory accounting principles ("Codification"). Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that the Company uses to prepare its statutory- basis financial statements. Codification will require adoption by the various states before it becomes the 66

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 13) Statutory-Basis Financial Information (Continued) ------------------------------------- prescribed statutory basis of accounting for insurance companies domesticated within those states. Accordingly, before Codification becomes effective for the Company, the states of Florida and Utah must adopt Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results to the Insurance Departments. At this time it is unclear when the states of Florida and Utah will adopt Codification. Management has not yet determined the impact of Codification to the Company's statutory-basis financial statements. Statutory net income and statutory stockholder's equity for the life subsidiaries as reported to state regulatory authorities, is presented below: Statutory Net Income (Loss) December 31, 1999 1998 1997 -------------------------- Security National Life $628,538 346,659 712,219 Southern Security Life 533,233 (486,825) 45,398 Statutory Stockholders' Equity December 31, 1999 1998 1997 ---------------------------- Security National Life $12,089,618 12,083,747 11,789,615 Southern Security Life 8,976,516 8,627,252 9,316,923 Generally, the net assets of the life insurance subsidiaries available for transfer to the Company are limited to the amounts that the life insurance subsidiaries net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements; however, payments of such amounts as dividends are subject to approval by regulatory authorities. The Utah and Florida Insurance Departments impose minimum risk-based capital requirements that were developed by the NAIC on insurance enterprises. The formulas for determining the risk-based capital ("RBC") specify various factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The life insurance subsidiaries have a Ratio that is greater than 300% of the first level of regulatory action. 67

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 14) Business Segment Information Description of Products and Services by Segment The Company has three reportable segments: life insurance, cemetery and mortuary, and mortgage loans. The Company's life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company's independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company's cemetery and mortuary segment consists of revenues and operating expenses from the sale of pre-need and at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries and the net investment income from investing segment surplus funds. The Company's mortgage loan segment consists of loan originations fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing pre-sold loans before the funds are received from financial institutional investors. In addition, the Company has a corporate segment which provides administrative and marketing services to the reportable segments described above. Measurement of Segment Profit or Loss and Segment Assets The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit. Factors Management Used to Identify the Enterprise's Reportable Segments The Company's reportable segments are business units that offer different products and are managed separately due to the different products and the need to report to the various regulatory jurisdictions. 68

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 14) Business Segment Information (Continued) ---------------------------- 1999 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Corporate Items Consolidated --------- -------- -------- --------- ----- ------------ Revenues: From external sources: Revenue from customers $ 13,175,825 $ 10,178,246 $14,503,388 $ -- $ -- $ 37,857,459 Net investment income 8,305,723 733,377 1,558,166 34,036 -- 10,631,302 Realized gains on investments 313,013 -- -- -- -- 313,013 Other revenues 812,973 22,856 14,117 5,658 -- 855,604 Intersegment revenues: Net investment income 2,275,916 -- -- 269,904 (2,545,820) -- Other revenues 175,409 -- -- 3,568,800 (3,744,209) -- ------------ ------------ ----------- ----------- ------------ ------------ $ 25,058,859 $ 10,934,479 $16,075,671 $ 3,878,398 $ (6,290,029) $ 49,657,378 Expenses: Death and other policy benefits 6,274,926 -- -- -- -- 6,274,926 Increase in future policy benefits 5,700,784 -- -- -- -- 5,700,784 Amortization of deferred policy acquisition costs and cost of insurance acquired 4,857,662 -- -- -- -- 4,857,662 Depreciation 179,461 452,225 44,633 533 -- 676,852 General, administrative and other costs: Intersegment 3,711,809 69,072 85,719 219,684 (4,086,284) -- Other 3,307,063 9,886,187 14,207,923 2,175,798 -- 29,576,971 Interest expense: Intersegment 269,904 181,972 1,484,726 267,143 (2,203,745) -- Other 3,236 540,051 201,976 374,139 -- 1,119,402 ------------ ------------ ----------- ----------- ------------ ------------ $ 24,304,845 $ 11,129,507 $16,024,977 $ 3,037,297 (6,290,029) $ 48,206,597 ------------ ------------ ----------- ----------- ------------ ------------ Earnings (losses) before income taxes $ 754,014 $ (195,028) $ 50,694 $ 841,101 $ -- $ 1,450,781 ============ ============ =========== =========== ============ ============ Identifiable assets $196,056,087 $ 34,013,032 $11,020,380 $ 2,716,069 $(29,507,131) $214,298,437 ============ ============ =========== =========== ============ ============ Expenditures for long-lived assets $ 266 $ 527,658 $ 90,819 $ 11,002 $ -- $ 629,745 ============ ============ =========== =========== ============ ============ 69

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 14) Business Segment Information (Continued) ---------------------------- 1998 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Corporate Items Consolidated --------- -------- -------- --------- ----- ------------ Revenues: From external sources: Revenue from customers $ 5,915,659 $ 9,225,801 $ 10,082,330 $ -- $ -- $ 25,223,790 Net investment income 5,553,486 682,915 1,206,578 15,764 7,458,743 Realized gains on investments 74,121 -- -- -- -- 74,121 Other revenues 22,078 32,456 6,034 2,381 -- 62,949 Intersegment revenues: Net investment income 1,360,877 -- -- 187,151 (1,548,028) -- Other revenues 109,887 -- -- 568,800 (678,687) -- ------------ ------------ ------------ ----------- ------------ ------------ $ 13,036,108 $ 9,941,172 $ 11,294,942 $ 774,096 $ (2,226,715) $ 32,819,603 Expenses: Death and other policy benefits $ 3,578,634 $ -- $ -- $ -- $ -- $ 3,578,634 Increase in future policy benefits 3,353,287 -- -- -- -- 3,353,287 Amortization of deferred policy acquisition costs and cost of insurance acquired 1,273,394 -- -- -- -- 1,273,394 Depreciation 85,557 455,418 39,125 4,655 -- 584,755 General, administrative and other costs: Intersegment 536,400 70,656 71,631 -- (678,687) -- Other 3,497,140 8,775,932 9,540,801 190,493 -- 22,004,366 Interest expense: Intersegment 187,151 183,908 1,176,969 -- (1,548,028) -- Other 11,587 554,283 176,091 257,162 -- 999,123 ------------ ------------ ------------ ----------- ------------ ------------ $ 12,523,150 $ 10,040,197 $ 11,004,617 $ 452,310 $ (2,226,715) $ 31,793,559 ------------ ------------ ------------ ----------- ------------ ------------ Earnings (losses) before income taxes $ 512,958 $ (99,025) $ 290,325 $ 321,786 $ -- $ 1,026,044 ============ ============ ============ =========== ============ ============ Identifiable assets $183,340,180 $ 33,539,827 $ 9,010,581 $ 3,070,453 $(15,695,894) $213,265,147 ============ ============ ============ =========== ============ ============ Expenditures for long-lived assets $ 761,246 $ 1,202,056 $ 76,721 $ -- $ -- $ 2,040,023 ============ ============ ============ =========== ============ ============ 70

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 14) Business Segment Information (Continued) ---------------------------- 1997 Life Cemetery/ Reconciling Insurance Mortuary Mortgage Corporate Items Consolidated --------- -------- -------- --------- ----- ------------ Revenues: From external sources: Revenue from customers $ 6,140,783 $ 9,230,864 $5,661,867 $ -- $ -- $ 21,033,514 Net investment income 5,856,221 609,194 664,331 9,834 -- 7,139,580 Realized gains on investments 252,635 -- 252,635 Other revenues 13,778 27,621 450 7,044 -- 48,893 Intersegment revenues: Net investment income 978,930 -- -- 188,767 (1,167,697) -- Other revenues 115,622 -- -- 568,800 (684,422) -- ------------ ----------- ---------- ----------- ------------ ------------ $ 13,357,969 $ 9,867,679 $6,326,648 $ 774,445 $ (1,852,119) $ 28,474,622 Expenses: Death and other policy benefits $ 3,694,442 $ -- $ -- $ -- $ -- $ 3,694,442 Increase in future policy benefits 2,974,915 -- -- -- -- 2,974,915 Amortization of deferred policy acquisition costs and cost of insurance acquired 1,132,298 -- -- -- -- 1,132,298 Depreciation 55,338 420,787 29,150 10,644 -- 515,919 General, administrative and other costs: Intersegment 536,400 75,408 72,614 -- (684,422) -- Other 3,722,336 8,312,812 5,377,440 127,782 -- 17,540,370 Interest expense: Intersegment 188,767 192,835 783,257 2,838 (1,167,697) -- Other 41,723 628,616 19,836 257,454 -- 947,629 ------------ ----------- ---------- ----------- ------------ ------------ $ 12,346,219 $ 9,630,458 $6,282,297 $ 398,718 $ (1,852,119) $ 26,805,573 ------------ ----------- ---------- ----------- ------------ ------------ Earnings (losses) before income taxes $ 1,011,750 $ 237,221 $ 44,351 $ 375,727 $ -- $ 1,669,049 ============ =========== ========== =========== ============ ============ Identifiable assets $103,604,675 $31,297,233 $1,176,039 $ 1,881,997 $(12,508,065) $125,451,879 ============ =========== ========== =========== ============ ============ Expenditures for long-lived assets $ 40,882 $ 283,622 $ 26,587 $ -- $ -- $ 351,091 ============ =========== ========== =========== ============ ============ 71

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 15) Disclosure about Fair Value of Financial Instruments ---------------------------------------------------- The fair values of investments in fixed maturity and equity securities along with methods used to estimate such values are disclosed in Note 2. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures related to other significant financial instruments: Cash, Receivables, Short-term Investments, and Restricted Assets of the Cemeteries and Mortuaries: The carrying amounts reported in the accompanying balance sheets for these financial instruments approximate their fair values. Mortgage, Policy, Student, and Collateral Loans: The fair values are estimated using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying amounts reported in the accompanying balance sheets for these financial instruments approximate their fair values. Investment Contracts: The fair values for the Company's liabilities under investment-type insurance contracts are estimated based on the contracts' cash surrender values. The carrying amount and fair value as of December 31, 1999 were approximately $90,251,000 and $84,923,000, respectively. The fair values for the Company's insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. 16) Other Comprehensive Income The following summarizes other comprehensive income: 1999 1998 1997 ---- ---- ---- Unrealized gains (losses) on available for-sale securities $(696,162) $ 405,047 $ 928,917 Less: reclassification adjustment for net realized gains in net income (14,126) (62,702) (227,097) --------- --------- --------- Net unrealized gains (losses) (710,288) 342,345 701,820 Tax expense on net unrealized gain (losses) 294,866 (92,171) (130,796) --------- --------- --------- Other comprehensive income (loss) $(415,422) $ 250,174 $ 571,024 ========= ========= ========= 72

Schedule I SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Summary of Investments Other than Investments in Related Parties As of December 31, 1999: Amount at Which Shown Estimated in the Type of Investment Amortized Fair Balance - ------------------ Cost Value Sheet -------- --------- ------- Fixed maturity securities held to maturity: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $ 12,822,025 $ 12,686,643 $12,822,025 Obligations of states and political subdivisions 176,499 167,116 176,499 Corporate securities including public utilities 20,594,306 20,759,857 20,594,306 Mortgage backed securities 6,009,010 5,799,814 6,009,010 Redeemable preferred stocks 28,011 40,022 28,011 ------------ ------------ ----------- Total Fixed Securities held to maturity 39,629,851 39,453,452 39,629,851 ------------ ------------ ----------- Securities available for sale: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies 4,596,294 4,579,332 4,579,332 Corporate securities including public utilities 20,270,712 19,449,746 19,449,746 Mortgage-backed securities 90,341 90,112 90,112 Nonredeemable preferred stock 70,431 106,450 106,450 Common stock: Public utilities 285,723 396,487 396,487 Banks, trusts and insurance companies 251,083 603,764 603,764 Industrial, miscellaneous and all other 3,742,902 4,638,512 4,638,512 ------------ ------------ ----------- Total Securities available for sale 29,307,486 29,864,403 29,864,403 ------------ ------------ ----------- Mortgage loans on real estate 18,926,628 18,926,628 Real estate 7,629,952 7,629,952 Policy loans 11,607,993 11,607,993 Other investments 1,290,310 1,290,310 ------------ ----------- Total investments $108,392,220 $108,949,137 ============ =========== 73

Schedule II SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Balance Sheets December 31, 1999 1998 ---- ---- Assets Short-term investments $ -- $ 294,927 Cash(15,639) 118,731 Investment in subsidiaries (equity method) 41,742,002 36,107,674 Receivables: Receivable from affiliates 1,629,966 1,579,965 Other 18,566 76,368 ----------- ----------- Total receivables 1,648,532 1,656,333 Property, plant and equipment, at cost, net of accumulated depreciation of $314,392 for 1999 and $313,859 for 1998 10,535 66 Other assets 72,641 396 ----------- ----------- Total assets $43,458,071 $38,178,127 =========== =========== See accompanying notes to parent company only financial statements. 74

Schedule II Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Balance Sheets (Continued) December 31, 1999 1998 ---- ---- Liabilities: - ------------ Bank loans payable: Current installments $ 841,767 $ 2,358,684 Long-term 6,465,741 5,862,614 Notes and contracts payable: Current installments 152,818 181,319 Long-term 303,713 455,572 Advances from affiliated companies 8,290,697 1,781,118 Other liabilities and accrued expenses 512,041 494,367 Income taxes 401,601 364,194 ------------ ------------ Total liabilities 16,968,378 11,497,868 ------------ ------------ Stockholders' equity: - --------------------- Common Stock: Class A: $2 par value, authorized 10,000,000 shares, issued 4,863,731 shares in 1999 and 4,617,330 shares in 1998 9,727,462 9,234,660 Class C: $0.20 par value, authorized 7,500,000 shares, issued 5,555,350 shares in 1999 and 5,446,595 shares in 1998 1,111,070 1,089,319 ------------ ------------ Total common stock 10,838,532 10,323,979 Additional paid-in capital 10,015,942 9,596,444 Accumulated other comprehensive income 665,691 1,081,113 Retained earnings 7,516,640 7,474,783 Treasury stock at cost (966,139 Class A shares and 61,979 Class C shares in 1999; 692,993 Class A shares and 59,028 Class C shares in 1998, held by affiliated companies) (2,547,112) (1,796,060) ------------ ------------ Total stockholders' equity 26,489,693 26,680,259 ------------ ------------ Total liabilities and stockholders' equity $ 43,458,071 $ 38,178,127 ============ ============ See accompanying notes to parent company only financial statements. 75

Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Statements of Earnings Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Revenue: Net investment income $ 39,694 $ 18,145 $ 16,878 Fees from affiliates 3,838,704 755,951 757,567 ----------- --------- ----------- Total revenue 3,878,398 774,096 774,445 ----------- --------- ----------- Expenses: General and administrative expenses 2,396,015 195,148 138,425 Interest expense 641,282 257,162 260,293 ----------- --------- ----------- Total expenses 3,037,297 452,310 398,718 ----------- --------- ----------- Earnings (loss) before income taxes, and earnings of subsidiaries 841,101 321,786 375,727 Income tax expense (277,810) (114,346) (124,256) Equity in earnings of subsidiaries 412,604 563,789 1,057,470 ----------- --------- ----------- Net earnings $ 975,895 $ 771,229 $ 1,308,941 =========== ========= =========== See accompanying notes to parent company only financial statements. 76

Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION (Parent Company Only) Statements of Cash Flow Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net earnings $ 975,895 $ 771,229 $ 1,308,941 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 533 4,655 10,644 Undistributed earnings of affiliates (412,604) (563,789) (1,057,470) Provision for income taxes 277,810 114,346 124,254 Change in assets and liabilities: Accounts receivable 57,802 (90,600) 86,403 Other assets (72,245) (396) 202 Accounts payable and accrued expenses -- 4,697 31,046 Other liabilities 17,687 263,926 (43,732) ----------- ----------- ----------- Net cash provided by operating activities 844,878 504,068 460,288 Cash flows from investing activities: Purchase of short-term investments (11,045) (11,737) (96,039) Proceeds from sale of short term investments 305,972 -- 91,750 Note receivable from affiliate -- (1,000,000) -- Purchase of equipment (11,002) -- -- Investment in subsidiaries (6,388,198) (5,250,000) (75,000) ----------- ----------- ----------- Net cash used in investing activities (6,104,273) (6,261,737) (79,289) Cash flows from financing activities: Proceeds from advances from affiliates 6,388,198 200,000 -- Payments of advances to affiliates (169,023) (200,000) -- Payments of notes and contracts payable (1,094,150) (398,353) (386,799) Purchase of treasury stock -- -- -- Sale of treasury stock -- -- 44,994 Proceeds from borrowings on notes and contracts payable -- 6,246,400 -- ----------- ----------- ----------- Net cash provided by financing activities 5,125,025 5,848,047 (341,805) ----------- ----------- ----------- Net change in cash (134,370) 90,378 39,194 Cash at beginning of year 118,731 28,353 (10,841) ----------- ----------- ----------- Cash at end of year $ (15,639) $ 118,731 $ 28,353 =========== =========== =========== See accompanying notes to parent company only financial statements. 77

Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION Notes to Parent Company Only Financial Statements 1) Bank Loans Payable Bank loans payable are summarized as follows: December 31, ------------ 1999 1998 ---- ---- $5,863,000 revolving line of credit at bank prime rate less 1%, (7.5% at December 31, 1999) interest only to December 1999 thereafter interest and principal, collateralized by 15,000 shares of Security National Life Insurance Company stock, due December 2005 $5,610,111 $6,246,400 Bank prime rate plus 1/2% (9.0% at December 31, 1999) note payable in monthly installments of $36,420 including principal and interest, collateralized by 15,000 shares of Security National Life stock, due December 2004. 1,697,397 1,974,898 ---------- --------- Total bank loans 7,307,508 8,221,298 Less current installments 841,767 2,358,684 ---------- ---------- Bank loans, excluding current installments $6,465,741 $5,862,614 ========== ========== 2) Notes and Contracts Payable Notes and contracts are summarized as follows: December 31, ------------ 1999 1998 ---- ---- 10 year notes due April 16, 1999, 1% over U.S. Treasury 6 month bill rate $ 535 $ 28,187 Due to former stockholders of Civil Service Employees Life Insurance Company resulting from the acquisition of such entity. 7% note payable in seven annual principal payments of $151,857 due December 2003 455,571 607,429 Other 425 1,275 --------- -------- Total notes and contracts 456,531 636,891 Less current installments 152,818 181,319 --------- -------- Notes and contracts, excluding current installments $303,713 $455,572 ======== ======== 78

Schedule II (Continued) SECURITY NATIONAL FINANCIAL CORPORATION Notes to Parent Company Only Financial Statements The following tabulation shows the combined maturities of bank loans payable and notes and contracts payable: 2000 $ 994,585 2001 1,329,464 2002 1,420,552 2003 1,366,940 2000 1,498,926 Thereafter 1,153,572 ---------- Total $7,764,039 ========== 3) Advances from Affiliated Companies December 31, 1999 1998 ---- ---- Non-interest bearing advances from affiliates: Cemetery and Mortuary subsidiary $1,366,930 $1,126,527 Mortgage subsidiary -- -- Life Insurance subsidiary 6,923,767 654,591 ---------- ---------- $8,290,697 $1,781,118 4) Dividends No dividends have been paid to the registrant for each of the last three years by any subsidiaries. 79

Schedule IV SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Reinsurance Percentage Ceded to Assumed of Amount Direct Other from Other Net Assumed Amount Companies Companies Amount to Net ------ --------- --------- ------ ------ 1999 - ----- Life Insurance in force ($000) $ 1,532,597 $ 296,936 $581,296 $ 1,816,957 32.00% =========== ========== ======== =========== ====== Premiums: Life Insurance $12,870,339 $1,063,696 $722,080 $12,528,723 5.76% Accident and Health Insurance 563,592 34,643 4,565 533,514 .85% ----------- ---------- -------- ----------- ------ Total premiums $13,433,931 $1,098,339 $726,645 $13,062,237 5.56% =========== ========== ======== =========== ====== 1998 - ----- Life Insurance in force ($000) $ 1,554,286 $ 352,777 $569,448 $ 1,770,957 32.15% =========== ========== ======== =========== ===== Premiums: Life Insurance $ 5,544,015 $ 251,271 $161,562 $ 5,454,306 2.96% Accident and Health Insurance 371,585 22,924 4,905 353,566 1.39% ----------- ---------- -------- ----------- ----- Total premiums $ 5,915,600 $ 274,195 $166,467 $ 5,807,872 2.87% =========== ========== ======== =========== ===== 1997 - ---- Life Insurance in force ($000) $ 602,652 $ 61,629 $ 46,254 $ 587,277 7.88% =========== ========== ======== =========== ===== Premiums: Life Insurance $ 5,575,024 $ 237,830 $276,086 $ 5,613,280 4.92% Accident and Health Insurance 426,529 25,367 6,953 408,115 1.70% ----------- ---------- -------- ----------- ----- Total premiums $ 6,001,553 $ 263,197 $283,039 $ 6,021,395 4.70% =========== ========== ======== =========== ===== 80

Schedule V SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Balance Additions Deductions, Balance at Charged Disposals at Beginning to Costs and End of of Year and Expenses Write-offs Year --------- ------------ ---------- ------ For the Year Ended December 31, 1999 - ------------------------------------ Accumulated depreciation on real estate $2,380,874 $369,557 $ (28,407) $2,722,024 Accumulated depreciation on property, plant and equipment 5,312,791 817,869 (141,017) 5,989,643 Allowance for doubtful accounts 1,576,668 150,981 (259,695) 1,467,954 For the Year Ended December 31, 1998 - ------------------------------------ Accumulated depreciation on real estate $2,049,346 $332,411 $ (883) $2,380,874 Accumulated depreciation on property, plant and equipment 4,728,036 584,755 -- 5,312,791 Allowance for doubtful accounts 1,679,090 175,750 278,172) 1,576,668 For the Year Ended December 31, 1997 - ------------------------------------ Accumulated depreciation on real estate $1,868,187 $300,058 $(118,899) $2,049,346 Accumulated depreciation on property, plant and equipment 4,218,591 515,919 (6,474) 4,728,036 Allowance for doubtful accounts 1,862,599 129,502 (313,011) 1,679,090 81

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure - ----------------------------------- Security National Financial Corporation (the "Company") retained Tanner + Co. as its independent auditors and replaced Ernst & Young LLP effective December 1, 1999. No report of Ernst & Young LLP on the financial statements of the Company for either of the past two years contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. Since the engagement of Ernst & Young LLP for the Company's two most recent fiscal years and through the date of replacement, there were no disagreements between the Company and Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The change in independent accountants was approved by the Company's Board of Directors and disclosed in a Form 8-K, which was filed with the Securities and Exchange Commission on December 21, 1999. Reference is made to current reports on Forms 8-K dated December 21, 1999. PART III Item 10. Directors and Executive Officers The Company's Board of Directors consist of nine persons, six of whom are not employees of the Company. All the Directors of the Company are also directors of its subsidiaries. There is no family relationship between or among any of the directors, except that Scott M. Quist is the son of George R. Quist. The following table sets forth certain information with respect to the directors and executive officers of the Company. Position(s) Name Age Director Since with the Company - -------------- --- -------------- ---------------- George R. Quist(2) 79 October 1979 Chairman of the Board, President and Chief Executive Officer William C. Sargent(2) 71 February 1980 Senior Vice President, Secretary and Director Scott M. Quist(1) 46 May 1986 First Vice President, General Counsel, Treasurer and Director Charles L. Crittenden(2) 80 October 1979 Director Sherman B. Lowe(2) 85 October 1979 Director R.A.F. McCormick(1) 86 October 1979 Director H. Craig Moody(1) 46 September 1995 Director Norman Wilbur(2) 61 October 1998 Director Robert G. Hunter(2) 40 October 1998 Director 82

(1) These directors were elected by the holders of Class A Common Stock voting as a class by themselves. (2) These directors were elected by the holders of Class A and Class C Common Stock voting together. Committees of the Board of Directors include an executive committee, on which Messrs. George Quist, Scott Quist, Sargent and Moody serve; an audit committee, on which Messrs. Crittenden, Lowe, Moody, and Wilbur serve; and a compensation committee, on which Messrs. Crittenden, Lowe and George Quist serve. The following is a description of the business experience of each of the directors. George R. Quist, age 79, has been Chairman of the Board, President and Chief Executive Officer of the Company since October 1979. Mr. Quist is also Chairman of the Board, President and Chief Executive Officer of Southern Security Life Insurance Company and has served in this position since December 1998. From 1960 to 1964, he was Executive Vice President and Treasurer of Pacific Guardian Life Insurance Company. From 1946 to 1960, he was an agent, District Manager and Associate General Agent for various insurance companies. Mr. Quist also served from 1981 to 1982 as the President of The National Association of Life Companies, a trade association of 642 life insurance companies, and from 1982 to 1983 as its Chairman of the Board. William C. Sargent, age 71, has been Senior Vice President of the Company since 1980, Secretary since October 1993, and a director since February 1980. Mr. Sargent is also Senior Vice President, Secretary and Director of Southern Security Life Insurance Company and has served in this position since December 1998. Prior to that time, he was employed by Security National as a salesman and agency superintendent. Scott M. Quist, age 46, has been General Counsel of the Company since 1982, First Vice President since December 1990, Treasurer since October 1993, and a director since May 1986. Mr. Quist is also First Vice President, Treasurer and General Counsel and Director of Southern Security Life Insurance Company and has served in this position since December 1998. From 1980 to 1982, Mr. Quist was a tax specialist with Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to 1991, he was treasurer and director of The National Association of Life Companies, a trade association of 642 insurance companies until its merger with the American Council of Life Companies. Mr. Quist has been a member of the Board of Governors of the Forum 500 Section (representing small insurance companies) of the American Council of Life Insurance. Mr. Quist has also served as a regional director of Key Bank of Utah since November 1993. Mr. Quist is currently a director and vice president of the National Alliance of Life Companies, a trade association of over 200 life companies. Charles L. Crittenden, age 80, has been a director of the Company since October 1979. Mr. Crittenden is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Mr. Crittenden has been sole stockholder of Crittenden Paint & Glass Company since 1958. He is also an owner of Crittenden Enterprises, a real estate development company and Chairman of the Board of Linco, Inc. 83

Sherman B. Lowe, age 85, has been a director of the Company since October 1979. Mr. Lowe is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Mr. Lowe was formerly President and Manager of Lowe's Pharmacy for over 30 years. He is now retired. He is an owner of Burton-Lowe Ranches, a general partnership. R.A.F. McCormick, age 86, has been a director of the Company since October 1979. Mr. McCormick is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. He is a past Vice President of Sales for Cloverclub Foods. He is now retired. H. Craig Moody, age 46, has been a director of the Company since September 1995. Mr. Moody is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Mr. Moody is owner of Moody & Associates, a political consulting and real estate company. He is a former Speaker and House Majority Leader of the House of Representatives of the State of Utah. Norman Wilbur, age 61, has been a director of the Company since October 1998. Mr. Wilbur is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Mr. Wilbur worked for J.C. Penny's regional offices in budget and analysis. His final position was Manager of Planning and Reporting for J.C. Penny's stores. After 36 years with J.C. Penny's he took an option of an early retirement in 1997. Mr. Wilbur is a past board member of a homeless organization in Plano, Texas. Robert G. Hunter, M.D., age 40, has been a director of the Company since October 1998. Dr. Hunter is also a director of Southern Security Life Insurance Company and has served in this position since December 1998. Dr. Hunter is currently a practicing physician in private practice. Dr. Hunter created the State Wide E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member of the Executive Committee. He is Chairman of Surgery at Cottonwood Hospital, a delegate to the Utah Medical Association and a delegate representing Utah to the American Medical Association, and a member of several medical advisory boards. Executive Officers The following table sets forth certain information with respect to the executive officers of the Company (the business biographies set forth above): Name Age Title - -------------- ---- -------------------- George R. Quist(1) 79 Chairman of the Board, President and Chief Executive Officer William C. Sargent 71 Senior Vice President and Secretary Scott M. Quist(1) 46 First Vice President, General Counsel and Treasurer (1)George R. Quist is the father of Scott M. Quist. 84

The Board of Directors of the Company has a written procedure which requires disclosure to the board of any material interest or any affiliation on the part of any of its officers, directors or employees which is in conflict or may be in conflict with the interests of the Company. No director, officer or 5% stockholder of the Company or its subsidiaries, or any affiliate thereof has had any transactions with the Company or its subsidiaries during 1999 or 1998 other than employment arrangements as described above, and the loan made to George R. Quist on April 29, 1998. See "Item 13. Certain Relationships and Related Transactions." Each of the Directors of the Company are directors of Southern Security Life Insurance Company, which has a class of equity securities registered under the Securities Exchange Act of 1934. In addition, Scott M. Quist is a director of Key Bank of Utah. All directors of the Company hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. 85

Item 11. Executive Officer Compensation The following table sets forth, for each of the last three fiscal years, the compensation received by George R. Quist, the Company's President and Chief Executive Officer, and all other executive officers (collectively, the "Named Executive Officers") at December 31, 1999 whose salary and bonus for all services in all capacities exceed $100,000 for the fiscal year ended December 31, 1999. Summary Compensation Table Annual Compensation Long-Term Compensation Other Annual Restricted Securities Long-Term All Other Name and Compen- Stock Underlying Incentive Compen- Principal Position Year Salary($) Bonus($) sation($)(2) Awards($) Options/SARs(#) Payout($) sation($)(3) - ------------------ ---- --------- -------- ------------ --------- --------------- --------- ------------ George R. Quist (1) 1999 $147,204 $20,200 $2,400 $0 50,000 $0 $20,247 Chairman of the Board, 1998 137,454 20,200 2,400 0 50,000 0 12,084 President and Chief 1997 118,508 16,833 2,400 0 50,000 0 11,094 Executive Officer William C. Sargent 1999 148,058 17,325 4,500 0 45,000 0 16,879 Senior Vice President, 1998 130,329 17,325 4,500 0 45,000 0 5,286 Secretary and 1997 108,685 16,500 4,500 0 45,000 0 5,224 Director Scott M. Quist (1) 1999 134,200 18,770 7,200 0 45,000 0 15,201 First Vice President, 1998 119,025 18,770 7,200 0 35,000 0 7,257 General Counsel 1997 103,215 17,875 7,200 0 35,000 0 6,490 Treasurer and Director 86

(1) George R. Quist is the father of Scott M. Quist. (2) The amounts indicated under "Other Annual Compensation" consist of payments related to the operation of automobiles by the Named Executive Officers. However, such payments do not include the furnishing of an automobile by the Company to George R. Quist, William C. Sargent and Scott M. Quist nor the payment of insurance and property taxes with respect to the automobiles operated by the Named Executive Officers. (3) The amounts indicated under "All Other Compensation" consist of (a) amounts contributed by the Company into a trust for the benefit of the Named Executive Officers under the Employee Stock Ownership Plan (for fiscal 1999, such amounts were George R. Quist, $2,721; William C. Sargent, $2,953; and Scott M. Quist, $2,648); (b) matching contributions made by the Company pursuant to the 401(k) Retirement Savings Plan in which all matching contributions are invested in the Company's Class A Common Stock (for fiscal 1999, such amounts were George R. Quist, $-0-; William C. Sargent, $-0-; and Scott M. Quist, $-0-; (c) profit sharing contributions made by the Company pursuant to the 401(k) Retirement Savings Plan (for fiscal 1999, such amounts were George R. Quist, $12,245; William C. Sargent, $13,289; and Scott M. Quist, $11,916); (d) insurance premiums paid by the Company with respect to a group life insurance plan for the benefit of the Named Executive Officers (for fiscal 1999, $1,911 was paid for all Named Executive Officers as a group, or $637 each for George R. Quist, William C. Sargent and Scott M. Quist); and (e) life insurance premiums paid by the Company for the benefit of the family of George R. Quist ($4,644). The amounts under "All Other Compensation" do not include the no interest loan in the amount of $172,000 that the Company made to George R. Quist on April 29, 1998, to exercise stock options. See "Item 13 Certain Relationships and Related Transactions". The following table sets forth information concerning the exercise of options to acquire shares of the Company's Common Stock by the Named Executive Officers during the fiscal year ended December 31, 1999, as well as the aggregate number and value of unexercised options held by the Named Executive Officers on December 31, 1999. Aggregated Option/SAR Exercised in Last Fiscal Year and Fiscal Year-End Option/SAR Values Number of Securities Underlying Value of Unexercised Unexercised Options/SARs In-the-Money Shares at Options/SARs at Acquired December 31, December 31, on 1999(#) 1999 Exercise Value Exercis- Unexer- Exercis- Unexer- Name (#) Realized able cisable able cisable - ---- --------------------- ---------- ------- ---------- ------- George R Quist -0- $-0- 165,506 -0- $ 25,313 $-0- William C Sargent -0- $-0- 237,000 -0- $136,682 $-0- Scott M Quist -0- $-0- 126,355 -0- $ 37,246 $-0- 87

Retirement Plans George R. Quist, who has been Chairman, President and Chief Executive Officer of the Company since 1979, has a Deferred Compensation Agreement, dated December 8, 1988, with the Company (the "Compensation Agreement"). This Compensation Agreement provides upon Mr. Quist's retirement the Company shall pay him $50,000 per year as an annual retirement benefit for a period of 10 years from the date of retirement; and upon his death, the remainder of such annual payments shall be payable to his designated beneficiary. The Compensation Agreement further provides that the Board of Directors may elect to pay the entire amount of deferred compensation in the form of a single lump-sum payment or other installment payments, so long as the term of such payments do not exceed 10 years. However, in the event Mr. Quist's employment with the Company is terminated for any reason other than retirement, death or disability, the entire deferred compensation shall be forfeited by him. William C. Sargent, who has been Senior Vice President of the Company since 1980, has a Deferred Compensation Agreement dated April 15, 1994, with the Company (the "Compensation Agreement"). This Compensation Agreement provides upon Mr. Sargent's retirement the Company shall pay him $50,000 per year as an annual retirement benefit for a period of 10 years from the date of retirement; and upon his death, the remainder of such annual payments shall be payable to his designated beneficiary. The Compensation Agreement further provides that the Board of Directors may elect to pay the entire amount of deferred compensation in the form of a single lump-sum payment or other installment payments, so long as the term of such payments do not exceed 10 years. However, in the event Mr. Sargent's employment with the Company is terminated for any reason other than retirement, death or disability, the entire deferred compensation shall be forfeited by him. Employment Agreement The Company maintains an employment agreement with Scott M. Quist. The agreement, which has a five year term, was entered into in 1996, and renewed in 1997. Under the terms of the agreement, Mr. Quist is to devote his full time to the Company serving as its Treasurer, First Vice President, and General Counsel at not less than his current salary and benefits, and to include $500,000 of life insurance protection. In the event of disability, Mr. Quist's salary would be continued for up to 5 years at 50% of its current level. In the event of a sale or merger of the Company, and Mr. Quist were not retained in his current position, the Company would be obligated to continue Mr. Quist's current compensation and benefits for seven years following the merger or sale. Director Compensation Directors of the Company (but not including directors who are employees) are paid a director's fee of $8,400 per year by the Company for their services and are reimbursed for their expenses in attending board and committee meetings. No additional fees are paid by the Company for committee participation or special assignments. 88

Employee 401(k) Retirement Savings Plan In 1995, the Company's Board of Directors adopted a 401(k) Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of January 1, 1995, the Company may make discretionary employer matching contributions to its employees who choose to participate in the plan. The plan allows the board to determine the amount of the contribution at the end of each year. The Board adopted a contribution formula specifying that such discretionary employer matching contributions would equal 50% of the participating employee's contribution to the plan to purchase Company stock up to a maximum discretionary employee contribution of 1/2% of a participating employee's compensation, as defined by the plan. All persons who have completed at least one year's service with the Company and satisfy other plan requirements are eligible to participate in the 401(k) plan. All Company matching contributions are invested in the Company's Class A Common Stock. The Company's matching contributions for 1999, 1998, and 1997 were approximately $3,858, $7,000 and $-0- respectively. Also, the Company may contribute at the discretion of the Company's Board of Directors an Employer Profit Sharing Contribution to the 401-K plan. The Employer Profit Sharing Contribution shall be divided among three different classes of participants in the plan based upon the participant's title in the Company. In 1999 the Company contributed $130,958 to the Plan. There were no contributions made in 1998 or 1997. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee. Employee Stock Ownership Plan Effective January 1, 1980, the Company adopted an employee stock ownership plan (the "Ownership Plan") for the benefit of career employees of the Company and its subsidiaries. The following is a description of the Ownership Plan, and is qualified in its entirety by the Ownership Plan, a copy of which is available for inspection at the Company's offices. Under the Ownership Plan, the Company has discretionary power to make contributions on behalf of all eligible employees into a trust created under the Ownership Plan. Employees become eligible to participate in the Ownership Plan when they have attained the age of 19 and have completed one year of service (a twelve-month period in which the Employee completes at least 1,040 hours of service). The Company's contributions under the Ownership Plan are allocated to eligible employees on the same ratio that each eligible employee's compensation bears to total compensation for all eligible employees during each year. To date, the Ownership Plan has approximately 107 participants and had contributions payable to the Plan in 1999 of $56,277. Benefits under the Ownership Plan vest as follows: 20% after the third year of eligible service by an employee, an additional 20% in the fourth, fifth, sixth and seventh years of eligible service by an employee. Benefits under the Ownership Plan will be paid out in one lump sum or in installments in the event the employee becomes disabled, reaches the age of 65, or is terminated by the Company and demonstrates financial hardship. The Ownership Plan Committee, however, retains discretion to determine the final method of payment. Finally, the Company reserves the right to amend or terminate the 89

Ownership Plan at any time. The trustees of the trust fund under the Ownership Plan are Messrs. R.A.F. McCormick, George R. Quist, and William C. Sargent, all directors of the Company. 1987 Incentive Stock Option Plan In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987 Plan). The 1987 Plan provides that shares of the Class A Common Stock of the Company may be optioned to certain officers and key employees of the Company. The Plan establishes a Stock Option Plan Committee which selects the employees to whom the options will be granted and determines the price of the stock. The Plan establishes the minimum purchase price of the stock at an amount which is not less than 100% of the fair market value of the stock (110% for employees owning more than 10% of the total combined voting power of all classes of stock). The Plan provides that if additional shares of Class A Common Stock are issued pursuant to a stock split or a stock dividend, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be increased proportionately with no increase in the total purchase price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purpose of the Plan shall be increased by the same proportion. In the event that the shares of Class A Common Stock of the Company from time to time issued and outstanding are reduced by a combination of shares, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be reduced proportionately with no reduction in the total price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purposes of the Plan shall be reduced by the same proportion. The Plan terminated in 1997 and options granted are non-transferable. The Plan permits the holder of the option to elect to receive cash, amounting to the difference between the option price and the fair market value of the stock at the time of the exercise, or a lesser amount of stock without payment, upon exercise of the option. 1993 Stock Option Plan On June 21, 1993, the Company adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves shares of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at the annual meeting of the stockholders held on June 21, 1993. The 1993 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress. The 1993 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both "incentive stock options," as defined under Section 422A of the Internal Revenue Code of 1986 (the "Code"), and "non-qualified options" may be granted pursuant to the 1993 Plan. The exercise prices for the options granted are equal to or greater than the fair market value of the stock subject to such options as of the 90

date of grant, as determined by the Company's Board of Directors. The options granted under the 1993 Plan, were to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company. The 1993 Plan is to be administered by the Board of Directors or by a committee designated by the Board. The terms of options granted or stock awards or sales effected under the 1993 Plan are to be determined by the Board of Directors or its committee. The Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. In addition, the number of shares of Common Stock reserved for purposes of the Plan shall be adjusted by the same proportion. No options may be exercised for a term of more than ten years from the date of grant. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the code, including a requirement that the option exercise price be no less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company's Board of Directors. The 1993 Plan has a term of ten years. The Board of Directors may amend or terminate the 1993 Plan at any time, subject to approval of certain modifications to the 1993 Plan by the shareholders of the Company as may be required by law or the 1993 Plan. On November 7, 1996 the Company amended the Articles of Incorporation as follows: (i) to increase the number of shares of Class A Common Stock reserved for issuance under the Plan from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide that the stock subject to options, awards and purchases may include Class C common stock. On October 14, 1999, the Company amended the 1993 Plan to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 746,126 Class A shares to 1,046,126 Class A shares. 91

Item 12 - Security Ownership of Certain Beneficial Owners and Management The following table sets forth security ownership information of the Company's Class A and Class C Common Stock as of March 20, 2000, (i) for persons who own beneficially more than 5% of the Company's outstanding Class A or Class C Common Stock, (ii) each director of the Company, and (iii) for all executive officers and directors of the Company as a group. Class A Class A Class C and Class C Common Stock Common Stock Common Stock ------------ ------------ ------------ Amount Amount Amount Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent Beneficial Owner Owned of Class Owned of Class Owned of Class - ----------------- ------- -------- ----- -------- ----- -------- George R. Quist (1)(2) 4491 Wander Lane Salt Lake City, Utah 84124 142,581 3.7% 223,104 4.1% 365,685 3.9% George R. and Shirley C Quist Family Partnership, Ltd.(6) 4491 Wander Lane Salt Lake City, Utah 84124 327,371 8.4% 2,629,242 47.9% 2,956,613 31.5% Employee Stock Ownership Plan (4) 5300 S. 360 W., Suite 250 Salt Lake City, Utah 84123 619,273 15.9% 1,216,848 22.2% 1,836,121 19.6% William C. Sargent (1)(2)(3) 4974 Holladay Blvd Salt Lake City, Utah 84117 94,121 2.4% 300,075 5.5% 394,196 4.2% Scott M. Quist (3) 7 Wanderwood Way Sandy, Utah 84092 98,916 2.5% 69,672 1.3% 168,588 1.8% Charles L. Crittenden 248 - 24th Street Ogden, Utah 84404 1,643 * 187,752 3.4% 189,395 2.0% 92

Class A Class A Class C and Class C Common Stock Common Stock Common Stock ------------ ------------ ------------ Amount Amount Amount Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent Beneficial Owner Owned of Class Owned of Class Owned of Class - ----------------- ------- -------- ----- -------- ----- -------- Sherman B. Lowe (3) 2197 South 2100 East Salt Lake City, Utah 84109 22,318 * 205,187 3.7% 227,505 2.4% R.A.F. McCormick (1) 400 East Crestwood Road Kaysville, Utah 84037 10,703 * 107,051 1.9% 117,754 1.3% H. Craig Moody 1782 East Faunsdale Dr. Sandy, Utah 84092 588 * -0- * 588 * Norman G. Wilbur 2520 Horseman Drive Plano, Texas 75025 840 * -0- * 840 * Robert G. Hunter #2 Ravenwood Lane Sandy, Utah 84092 648 * -0- * 648 * Associated Investors (5) 5300 S. 360 W. Suite 250 Salt Lake City, Utah 84123 83,214 2.1% 513,688 9.4% 596,902 6.4% All directors and executive officers (9 persons) 782,943 20.1% 3,722,083 67.8% 4,421,812 47.1% * Less than one percent 93

(1) Does not include 619,273 shares of Class A Common Stock and 1,216,848 shares of Class C Common Stock owned by the Company's Employee Stock Ownership Plan (ESOP), of which George R. Quist, William C. Sargent and R.A.F. McCormick are the trustees and accordingly, exercise shared voting and investment powers with respect to such shares. (2) Does not include 83,214 shares of Class A Common Stock and 513,688 shares of Class C Common Stock owned by Associated Investors, a Utah general partnership, of which these individuals are the managing partners and, accordingly, exercise shared voting and investment powers with respect to such shares. (3) Does not include 85,491 shares of Class A Common Stock owned by the Company's 401(k) Retirement Savings Plan, of which William C. Sargent, Scott M. Quist and Sherman B. Lowe are members of the Investment Committee and accordingly, exercise shared voting and investment powers with respect to such shares. (4) The trustees of the Employee Stock Ownership Plan (ESOP) are George R. Quist, William C. Sargent and R.A.F. McCormick, who exercise shared voting and investment powers. (5) The managing partners of Associated Investors are George R. Quist and William C. Sargent, who exercise shared voting and investment powers. (6) This stock is owned by the George R. and Shirley C. Quist Family Partnership, Ltd., of which Mr. Quist is the general partner. The Company's officers and directors, as a group, own beneficially approximately 47.1% of the outstanding shares of the Company's Class A and Class C Common Stock. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The Company has made a loan in the amount of $172,000 to George R. Quist, the Company's President and Chief Executive Officer, without requiring the payment of any interest. The loan was made under a Promissory Note dated April 29, 1998 in order for Mr. Quist to exercise stock options which were granted to him under the 1993 Plan. No installment payments are required under the terms of the note, but the note must be paid in full as of May 1, 2000. Mr. Quist has the right to make prepayments on the note at any time. As of March 31, 2000, the outstanding balance of the note was $116,600. The loan was approved by the Company's directors on March 12, 1999, with Mr. Quist abstaining, at a Special Meeting of the Board of Directors. The Company's Board of Directors has a written procedure which requires disclosure to the Board of any material interest or any affiliation on the part of any of its officers, directors or employees which is in conflict or may be in conflict with the interests of the Company. No director, officer or 5% stockholder of the Company or its subsidiaries, or any affiliate thereof, has engaged in any business transactions with the Company or its subsidiaries during 1998 or 1999 other than as described herein. 94

PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1)(2) Financial Statements and Schedules See "Index to Consolidated Financial Statements and Supplemental Schedules" under Item 8 above. (a)(3) Exhibits The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or are incorporated by reference to previous filings. Exhibit Table No Document (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. 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) 95

M. Employment Agreement with Scott M. Quist. (8) N. Acquisition Agreement with Consolidare Enterprises, Inc., and certain shareholders of Consolidare. (9) O. Agreement and Plan of Merger between Consolidare Enterprises, Inc., and SSLIC Holding Company. (10) P. Administrative Services Agreement with Southern Security Life Insurance Company. (11) Q. Promissory Note with George R. Quist. (12) (1) Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987. (2) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1989. (3) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1994. (4) Incorporated by reference from Report on Form 8-K, as filed on February 24, 1995. (5) Incorporated by reference from Annual Report on Form 10K, as filed on March 31, 1995. (6) Incorporated by reference from Report on Form 8-K, as filed on May 1, 1995. (7) Incorporated by reference from Report on Form 8-K, as filed on January 16, 1996. (8) Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1998. (9) Incorporated by reference from Report on Form 8-K, as filed on May 11, 1998. (10) Incorporated by reference from Report on Form 8-K, as filed on January 4, 1999. (11) Incorporated by reference from Report on Form 8-K, as filed on March 4, 1999. (12) Incorporated by reference from Annual Report on Form 10-K, as filed on April 14, 1999. 21. Subsidiaries of the Registrant 27. Financial Data Schedule (b) Reports on Form 8-K: On December 1, 1999, the Company filed a Form 8-K regarding the engagement of Tanner + Co. as its independent auditors to replace Ernst & Young LLP. 96

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. SECURITY NATIONAL FINANCIAL CORPORATION Dated: April 14, 2000 By: George R. Quist, --------------- Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE George R. Quist Chairman of the April 14, 2000 - --------------- Board, President and Chief Executive Officer (Principal Executive Officer) Scott M. Quist First Vice April 14, 2000 - -------------- President, General Counsel and Treasurer and Director (Principal Financial and Accounting Officer) William C. Sargent Senior Vice April 14, 2000 - ------------------ President, Secretary and Director Charles L. Crittenden Director April 14, 2000 - --------------------- Sherman B. Lowe Director April 14, 2000 - --------------- R.A.F. McCormick Director April 14, 2000 - ---------------- H. Craig Moody Director April 14, 2000 - -------------- Norman G. Wilbur Director April 14, 2000 - ---------------- Robert G. Hunter Director April 14, 2000 - ---------------- 97

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Year Ended December 31, 1999 SECURITY NATIONAL FINANCIAL CORPORATION Commission File No. 0-9341 E X H I B I T S

Exhibit Index Exhibit No. Document Name - ----------- --------------------- 21. Subsidiaries of the Registrant 27. Financial Data Schedule

EXHIBIT 21 Subsidiaries of Security National Financial Corporation as of March 31, 2000

Exhibit 21 Subsidiaries of Security National Financial Corporation (as of March 31, 2000) Security National Life Insurance Company Security National Mortgage Company Memorial Estates, Inc. Memorial Mortuary Paradise Chapel Funeral Home, Inc. California Memorial Estates, Inc. Cottonwood Mortuary, Inc. Deseret Memorial, Inc. Holladay Cottonwood Memorial Foundation Holladay Memorial Park, Inc. Camelback Sunset Funeral Home, Inc. Greer-Wilson Funeral Home, Inc. Crystal Rose Funeral Home, Inc. Hawaiian Land Holdings SSLIC Holding Company Insuradyne Corporation Southern Security Life Insurance Company

7 YEAR DEC-31-1999 DEC-31-1999 24,119,190 39,629,851 39,453,452 5,745,213 18,926,628 7,629,952 108,949,137 12,422,864 373,459 20,227,392 214,298,437 133,879,840 1,866,523 1,633,858 2,987,618 23,340,805 0 0 10,838,532 15,651,161 214,298,437 13,175,825 10,631,302 313,013 25,537,238 6,274,926 4,857,662 0 1,450,781 230,516 0 0 0 0 975,895 0.22 0.22 0 0 0 0 0 0 0