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, l996.
[ ] 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 0-18485.
Life USA HOLDING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1578384
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 95, Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612)-546-7386
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 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 l934 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 (ss.229.405 of this chapter) 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 (21,262,095 shares) held by
non-affiliates of the registrant as of February 14, 1997 was $207,305,426.
The number of shares outstanding of the issuer's classes of common stock as of
February 14, l997:
Common stock, $.01 Par Value - 21,262,095 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December
31, 1996 are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders meeting to
be held April 15, 1997 are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Life USA Holding, Inc. (the Company) is a national financial services holding
and marketing company with $4.39 billion in consolidated assets. LifeUSA
Insurance Company (LifeUSA), its largest and most significant wholly-owned
subsidiary, is licensed to write and sell life insurance and several forms of
annuities through independent field marketing organizations and agents in the
District of Columbia and all states except New York. Universal Benefits Life,
which markets and administers employee payroll deduction plans, is a division of
LifeUSA.
During 1996, the Company formed two additional wholly-owned subsidiaries,
LifeUSA Securities, Inc. (LifeUSA Securities) and LifeUSA Marketing, Inc.
(LifeUSA Marketing). LifeUSA Securities has received approval from the National
Association of Securities Dealers, Inc. as a wholesale broker-dealer, will
initially market a family of LifeUSA mutual funds established through a
joint-venture agreement with a $16 billion asset management firm and is
exploring distribution of variable life insurance and annuity contracts. LifeUSA
Marketing conducts a variety of marketing activities for the Company, including
the acquisition of and investment in national field marketing organizations.
During 1996, LifeUSA Marketing acquired Tax Planning Seminars and a minority
equity interest in Creative Marketing International Corporation, both national
field marketing organizations.
The Company's consolidated assets have grown from $1.01 billion at December 31,
1991 to $4.39 billion at December 31, 1996. This growth is founded upon:
* Innovative products which offer long-term retirement benefits
to consumers who seek protection against outliving their
financial resources;
* A national marketing and distribution system comprised of
independent agents and home office staff;
* A conservative investment portfolio with long-term investments
comprised of U.S. Treasury securities, U.S. Government agency
securities, foreign government obligations denominated in U.S.
dollars and issued and traded in the United States,
mortgage-backed securities issued or guaranteed by U.S.
government corporations or agencies and investment grade
corporate obligations;
* Arrangements with reinsurers who are highly-rated by A. M.
Best Company, Inc. (A. M. Best) which enables LifeUSA to write
volumes of business that it would not otherwise have been able
to write due to regulatory restrictions based on the amount of
its statutory capital and surplus; and
* Agreements with Allianz Life Insurance Company of North
America (Allianz Life), a highly-rated insurance company,
which allow LifeUSA agents to produce life insurance and
annuity business on Allianz Life policies which are similar to
LifeUSA policies.
PRODUCTS
LifeUSA has designed its products to emphasize long-term value and benefits.
This is what management believes the "baby-boom" generation needs most and the
insurance industry is best suited to provide -- long-term benefits in the form
of income guaranteed for a lifetime. The economic concern today is not dying too
soon, but living too long. By de-emphasizing short-term gain and lump sum cash
benefits to those who surrender their policies, LifeUSA's products are less
exposed to the disintermediation risk faced by companies selling commodity-type
products.
A disintermediation risk occurs when current interest rates are higher than the
interest rates being earned by a company's existing investment portfolio. The
risk is that policyholders will move their funds away from the company to get
higher, short-term rates. If the assets supporting the policies are invested
long-term to support long-term rates of return and the liabilities offer
short-term liquidity, those who surrender their policies for cash take more than
their fair share from the company and from persisting policyholders.
Management believes that consumer demand for products that meet retirement needs
is increasing and will continue to increase in the future due primarily to the
aging of the United States population. Management also believes that LifeUSA's
products are well-situated to take advantage of this increasing demand.
The United States Census Bureau (Census Bureau) reports that persons in the
45-64 age group, as a percentage of the total United States population, will
grow from 18.8% in 1990 to 28.0% in 2010. Persons over 65 years old are
projected by the Census Bureau to be approximately 59 million, or 20.0% of the
total United States population, by the year 2020. Despite this increase, the
percentage of employed persons covered by employer-sponsored retirement plans
has declined. According to the Census Bureau, only 40% of employed persons are
currently covered by an employer-sponsored retirement plan. Moreover, management
believes that there is increasing consumer concern as to whether
government-sponsored retirement programs, such as Social Security, will continue
to provide meaningful retirement benefits. There is, therefore, a growing need
for individually-funded financial products to provide a stream of adequate
retirement income.
LifeUSA offers a portfolio of universal life insurance, annuities and benefit
riders. LifeUSA's major products emphasize rewarding long-term policyholders
with higher retirement stream-of-income benefits that protect against the cost
of living too long. LifeUSA products are designed to appeal to the rapidly
expanding retirement market of individuals and affinity groups such as
employer/employee associations, unions and state, county and local government
organizations (see "Marketing and Distribution" section which follows for
further discussion).
LifeUSA products compete against the products of other insurance companies on
the basis of long-term benefits, not on the basis of short-term interest
credited rates or high cash surrender values and liquidity. Policyholder
persistency is encouraged by LifeUSA's increased retirement income benefit for
long-term policyholders and lower benefits in case of early surrender or lapse.
LifeUSA products are designed to permit long-term investment of assets by
LifeUSA during the time premiums are being paid, the time benefits are
accumulated and the time benefits are being paid out. This product design not
only makes the products attractive to certain consumers, but also permits
LifeUSA to invest exclusively in high quality, long-term securities which tend
to provide higher yields than short-term securities. The target market for the
Company's products are consumers with average annual incomes of $25,000 to
$60,000. Management believes that this market is not adequately serviced by the
insurance industry and that the features of the Company's products will be
attractive to these consumers.
LIFE INSURANCE PRODUCTS. At December 31, 1996, life insurance account values in
force (including business produced by LifeUSA's agents for Allianz Life)
aggregated $260.1 million ($174.6 million of which was ceded to reinsurers). The
majority of in force life insurance business is paid in annual or more frequent
installments. The following describes LifeUSA's most significant life insurance
products:
Universal Annuity Life(R) I and Universal Annuity Life(R) III
The Universal Annuity Life (UAL) products are policies specifically
designed to pay the insured as much for living as for dying. At younger
ages, when the protection against premature death is needed most, the
UAL products provide tax-free benefits for the policyholder's family or
business. At retirement, there are a variety of annuitization options
available, including the IDEA(R) (see "IDEA" section which follows for
further discussion) option which allows payments to increase by as much
as 60% if the insured becomes fully disabled. The UAL I and UAL III
products are marketed by LifeUSA agents in all states except that
product approval by regulatory authorities is pending review in New
Jersey for UAL I and New Jersey and Pennsylvania for UAL III. In 1996,
the UAL I and UAL III products accounted for 88% of total life
insurance premiums. The UAL I and UAL III were introduced in 1990 and
1991, respectively.
DUALife(SM) I and DUALife(SM) III
The DUALife products are UAL policies specifically designed for
dual-income families. DUALife provides simultaneous retirement income,
disability and life insurance benefits for two individuals within one
policy. It is specifically for families in which both individuals work
and provides a death benefit, of equal amount, on both individuals.
When one individual dies, a benefit is paid, but the plan continues in
effect for the survivor, including cash values, retirement values and
post-retirement disability benefits. The DUALife I and DUALife III
products are marketed by LifeUSA agents in all states except
California, Maryland, Maine, New Hampshire, New Jersey, Pennsylvania,
South Carolina and Texas. In 1996, the DUALife I and DUALife III
products accounted for less than 1% of total life insurance premiums.
DUALife I and DUALife III were both introduced in 1995.
ANNUITY PRODUCTS. LifeUSA annuities are designed to offer flexible premium
payments and a variety of annuitization options to the annuitant. The product
design also protects LifeUSA against the negative effects of disintermediation
and other lump sum withdrawals by providing cash surrender values at amounts
less than the annuitization values. To encourage persistency, LifeUSA annuities
pay enhanced benefits to policyholders who allow the annuity funds to accumulate
over the long term and then elect some form of income payout option rather than
a lump sum cash payment. At December 31, 1996, annuity account values in force
(including business produced by LifeUSA's agents for Allianz Life) totaled $4.88
billion ($3.22 billion of which was ceded to reinsurers). Over 88% of the in
force annuities are single premium annuities. The following describes LifeUSA's
most significant annuity products and annuity products introduced during 1996
and the first quarter of 1997:
Accumulator(SM) Classic
The Accumulator Classic (formerly the Accumulator 8) is ideal for the
policyholder seeking an excellent return and relatively high liquidity.
The policyholder receives an 8% bonus, and after just one year, can
elect to receive the entire policy value over as few as five years. The
Accumulator Classic accounted for approximately 46% of total annuity
premiums in 1996. Approximately 5.9% of such policies annuitize by the
first anniversary of the policy. The average premium paid during 1996
on Accumulator Classic annuities issued in 1996 was $25,000. The
Accumulator Classic is marketed by LifeUSA agents in all states except
Oregon and Washington. The average age of the insured at the issuance
of the Accumulator Classic annuity is 58. The Accumulator Classic was
introduced in 1988.
Accumulator(SM) (Buffet) Series
The Accumulator (Buffet) Series offers both high return and flexible
liquidity options. Rather than just a single bonus amount and more
limited choices for annuitization payouts, the Series offers the
flexibility to select from a range of bonuses (5% to 10%) and
corresponding payout periods (5 to 10 years). The Accumulator (Buffet)
Series accounted for approximately 34% of total annuity premiums in
1996 and is marketed by LifeUSA agents in all states except California,
New Jersey, Oregon and Washington. The Accumulator (Buffet) Series was
introduced in 1993.
IDEA(R)
The IDEA -- Individual Disability Escalating Annuity -- is a
revolutionary concept in single premium deferred annuity product
design. With the IDEA, a policyholder will receive 60% more monthly
retirement income in the event of total disability due to illness,
accident or old age; the income increase is 30% in the event of partial
disability. The increased income benefit is paid as long as the
disability lasts, even for life. The IDEA accounted for less than 1% of
total annuity premiums in 1996 and is marketed by LifeUSA agents in all
states except Kansas, New Jersey, Oregon, Pennsylvania and Washington.
In late 1992, the IDEA feature was added to all new UAL I and UAL III
policies, with the exception of policies sold in Kansas, New Jersey,
Pennsylvania and Washington. The IDEA was introduced in 1992.
ANNU-A-DEX(SM)
The ANNU-A-DEX is a single premium fixed annuity offering an initial 7%
premium bonus, with an additional benefit tied to the performance of
the S&P 500(R) Index. The appeal of the product is that one can buy a
competitive fixed annuity, with principal and interest guaranteed, and
should the S&P 500(R) Index outperform the annuity over a seven-year
period, one-half of the incremental growth is added to the value of the
annuity. While not an investment product, the ANNU-A-DEX is positioned
as an alternative "safe haven" for investment funds. An investor can
"lock-in" current gains and still participate, should the stock market
continue to rise, all with no down-side exposure. The ANNU-A-DEX
accounted for less than 1% of total annuity premiums in 1996 and is
marketed by LifeUSA agents and issued by Allianz Life in all states
except Florida, Indiana, New Jersey, North Dakota, Oklahoma, Oregon and
Washington. The ANNU-A-DEX was introduced in 1996.
IDEAL(SM) Annuity
The IDEAL annuity is unique in that it provides up to 10 years of
protection against interest rate changes (increases and decreases).
When issued, the IDEAL annuity offers a base credited rate, plus a 1.5%
annual interest bonus, both guaranteed for five years. Thus, the
policyholder is protected against a decline in interest rates for the
next five years. At the end of the first five-year term, the
policyholder has the option to "re-enter" the policy at the interest
rate being credited on new issues. The new credited rate, plus another
1.5% annual interest bonus, is then guaranteed for a new five-year
term. Thus, the policyholder is also protected against a rise in
interest rates. The IDEAL annuity is marketed by LifeUSA agents in all
states except Connecticut, Florida, Illinois, Indiana, Maryland,
Montana, New Jersey, North Carolina, North Dakota, Oklahoma, Oregon,
Pennsylvania, South Carolina, Texas, Utah, Washington, West Virginia
and Wisconsin. The IDEAL annuity was introduced in the first quarter of
1997.
MARKETING AND DISTRIBUTION
As of March 25, 1997, 146 independent field marketing organizations (FMOs) and
51,000 agents were licensed to market LifeUSA's policies and produce business
for Allianz Life. All FMOs and agents are independent contractors and are
responsible for their operating and marketing expenses.
The FMOs coordinate and pay for the marketing of LifeUSA's products and provide
recruiting, training and management of the agents contracted through them.
Depending on the system it uses and the market in which it operates, an FMO may
have a few agents or as many as several thousand agents. LifeUSA provides
marketing support to FMOs through marketing training seminars, product
demonstrations, product literature and home office support. The FMO receives a
gross cash commission from LifeUSA on business produced and, within specified
LifeUSA guidelines, allocates such commissions among its agents.
Cash commissions as a percentage of first year premiums are higher for life
insurance sales than annuity sales. Commissions are based on a percentage of the
targeted annual premiums and consist of both a higher first year commission and
a lower renewal commission on premiums paid on a policy after the first year.
FMOs and agents are subject to a chargeback of all or a portion of the
commissions paid in the event a life insurance policy is canceled or
surrendered, including cancellations for the non-payment of premiums, within the
first 13 months of issuance. As is customary in the industry, LifeUSA advances
agents up to an aggregate of 50% of first year commissions when life insurance
policies are sold even though most of the premiums have not yet been received.
LifeUSA contracts include a financial guaranty by the FMOs for chargebacks and
advances to the agents within the FMO's organization.
Since its inception, the Company has issued its common stock or granted options
to purchase its common stock to FMOs and agents as production bonuses.
Management believes that these forms of equity participation provided agents in
the early years with additional incentives to place profitable business with
LifeUSA, to encourage policyholder persistency and to seek good underwriting
risks for LifeUSA. From 1992 through March 31, 1997, stock options were granted
to FMOs and agents at an exercise price which was equal to the greater of $10.00
per share or 150% of the average closing bid price for the Company's common
stock for the twenty trading days immediately preceding the end of the calendar
quarter for which the stock option was granted (see "Agent and Employee
Ownership" section which follows for further discussion). The Company will
discontinue the granting of stock options as production bonuses after stock
options earned by FMOs and agents during the calendar quarter ended March 31,
1997 have been granted. Today, management believes that the Company's entire
agent compensation package, which includes LifeUSA's standard cash commissions,
annual cash production bonuses for major producers and Producer Perks
Certificates which are redeemable for merchandise and earned by achieving
certain levels of production, will, along with its proven service and product
offerings, continue to encourage strong agent participation.
Although LifeUSA's larger and more successful FMOs and agents tend to produce a
majority of their business with LifeUSA, there is no requirement that they do
so. FMOs and agents may also be contracted with other life insurance companies.
Each FMO essentially serves as a "wholesaler" for LifeUSA. A typical FMO
consists of one or more highly experienced individuals who have demonstrated the
ability to build, manage and supervise a marketing organization that is
producing, or has the potential to produce, a minimum of $500,000 in annual life
and annuity commissions. During 1996, one FMO accounted for 11% of LifeUSA's
total production. Although no other single FMO accounted for more than 10% of
LifeUSA's total production, the top FMOs (including their respective agents)
produced the following portions of LifeUSA's total business during 1996:
Percent of CPCs (1)
-------------------
Top 5 FMOs 32%
Top 10 FMOs 49%
Top 25 FMOs 81%
- ----------------------------------
(1) CPCs (Combined Production Credits) are a measurement of the life insurance
and annuity business produced.
During 1996, the Company developed a strategy to generate additional premium
production from LifeUSA's existing agents and from new production sources by
making loans to or investing in FMOs and by recruiting new FMOs to sell its
products. The amount of any loan or investment relates to the revenue currently
generated by the FMO and the projected increase in business produced for LifeUSA
by the FMO. To date, the Company has made loans to FMOs that account for 31% of
the Company's 1996 life insurance and annuity production. The loans include
incentives for achieving increased production. In addition, in August 1996,
LifeUSA Marketing acquired Tax Planning Seminars, a national FMO that had been
contracted with LifeUSA for seven years and in November 1996, acquired an equity
interest in Creative Marketing International Corporation, another national FMO
that had not been contracted previously with LifeUSA. The Company has made and
expects to continue to make future investments by issuing shares of its common
stock and paying cash from its available resources ($5.6 million of fixed
maturity investments - available for sale and cash and cash equivalents as of
December 31, 1996 on an unconsolidated basis), cash generated from operations,
cash dividends from LifeUSA and borrowings under its $30 million line of credit
(no amounts outstanding at December 31, 1996). In addition, during 1996, the
Company signed marketing agreements with 31 national FMOs to market LifeUSA life
insurance and annuity products for the first time. There can be no assurances
that the Company's premium volume or income will be enhanced by the loans to or
investments in FMOs or by the contracting of new national FMOs.
Management believes that the overall reduction in employer-funded employee
benefit plans, coupled with certain tax incentives for individual retirement
planning, has created a large and rapidly growing market for insurance and
annuity products for affinity groups such as employer/employee associations,
unions, state, county and city governments and teachers. These insurance and
annuity products are normally provided to such employee benefit plans through
payroll deduction. The payroll deduction market offers the opportunity for
multiple sales at one location. Management believes that LifeUSA's products are
especially attractive in the payroll deduction market because of their emphasis
on long-term value and benefits.
Universal Benefits Life, a division of LifeUSA organized in 1992 to provide
supplemental employee retirement plans through payroll deduction, continued to
benefit from the employer-sponsored market during 1996. By the end of 1996,
38,000 employees were participating in 5,000 plans issued and administered by
Universal Benefits Life.
REINSURANCE
In the insurance industry, one company (the ceding company) may share the
rewards and risks associated with business it produces with another insurance
company (the assuming company) through reinsurance. Reinsurance gives the
assuming company a share of the policy premiums and future profits associated
with the portion of the business that it has assumed, in exchange for
commissions and expense allowances paid to the ceding company that are based on
a percentage of the policy premiums. At the same time, reinsurance also requires
the assuming company to pay a share of the future policy benefits associated
with the portion of the business it has assumed from the ceding company.
Upon the issuance of a policy, statutory accounting requires commissions and
other policy issuance costs to be expensed and statutory reserves for policy
benefits which in the aggregate exceed first year premiums to be established,
thereby creating a statutory loss during the first year in which a life
insurance policy or annuity contract is in force. As a result, the retention or
assumption of new business places a strain on the insurer's statutory capital
and surplus. When a company reinsures business it writes, it is generally not
required to use its statutory capital and surplus to establish reserves for the
portion of the business ceded to the assuming company. Rather, the assuming
company generally maintains the required reserves for the portion of the
business assumed from the ceding company, thereby reducing the strain on the
ceding company's statutory capital and surplus. In addition, the commissions and
expense allowances paid to the ceding company by the assuming company provide an
additional source of working capital to be used to support the production of
additional new business by the ceding company.
Since its inception in 1987, LifeUSA has entered into various agreements to
reinsure a substantial portion of the new life insurance and annuity business
written each year. Entering into these reinsurance agreements has allowed
LifeUSA to write a larger volume of business than it would otherwise have been
able to write due to regulatory restrictions based on the amount of its
statutory capital and surplus. In addition, under the terms of agreements
between the Company and Allianz Life, LifeUSA agents have produced life
insurance and annuity business on Allianz Life policies which are similar to
LifeUSA's policies. LifeUSA has assumed a portion of this business under
reinsurance agreements.
The Company receives commissions and expense allowances on the portions of the
LifeUSA life insurance and annuity products reinsured and service fees on
business produced by LifeUSA's agents and written by Allianz Life. The
commissions and expense allowances and service fees received on life insurance
policies are approximately 150% of the first-year planned target premium and
range from 12 1/2% to 18% of renewal and first-year excess premiums. The Company
also receives commissions and expense allowances and service fees ranging from 6
1/2% to 22% on annuity deposits. An additional allowance equal to .20% of the
account value of all annuities issued after April 1, 1991 is received as of the
beginning of policy years two through ten.
Since its inception, LifeUSA has modified its net retention (the percentage of
new life insurance and annuity business retained by LifeUSA and assumed by
LifeUSA from Allianz Life) to the extent that its statutory capital and surplus
has been able to support such changes. During 1996, net retention was maintained
at a constant 25% and LifeUSA produced a statutory net income of $13.2 million.
As a result, the Company did not make significant capital contributions to
LifeUSA during 1996. Based on currently anticipated life insurance and annuity
sales, projected statutory profits from LifeUSA's mature block of in force
business and the continuation of acceptable reinsurance arrangements, the
Company does not expect to contribute capital to LifeUSA through 1997 in order
to maintain adequate levels of statutory capital and surplus. The Company may
further alter the level of its retention and assumption of new business
depending upon future levels of production, capital needs and availability of
alternative financing.
From inception through December 31, 1996, the Company has contributed $122.5
million to LifeUSA in order to maintain LifeUSA's desired levels of statutory
capital and surplus. Although the Company does not expect to contribute capital
to LifeUSA through 1997 in order to maintain adequate levels of statutory
capital and surplus, management believes that the combination of (i) the
anticipated increase in cash flow during 1997 and the anticipated reduction in
capital requirements for new business retained or assumed by LifeUSA associated
with maintaining net retention at 25%, (ii) the statutory profits generated by
LifeUSA on the mature business which it has retained or assumed, (iii) the $5
million in proceeds that remained at December 31, 1996 from the $30 million
convertible subordinated debenture issued to Allianz Life in February 1995 and
(iv) the availability of the $30 million line of credit from two of its
reinsurers, will provide sufficient capital resources to support the capital
needs of LifeUSA through 1997, based on currently anticipated life insurance and
annuity sales and on the continuation of acceptable reinsurance arrangements.
Reinsurance Ceded
LifeUSA ceded from 95% to 100% of its new life insurance and annuity business to
Transamerica Occidental Life Insurance Company (TOLIC) from 1987 through March
31, 1991, and from April 1, 1991 through December 31, 1992 ceded 100% of its new
business equally to the following three reinsurers (the Reinsurers):
* Employers Reassurance Corporation, a subsidiary of Employers
Reinsurance Corporation, a member of the General Electric Company
group;
* Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies; and
* Republic-Vanguard Life Insurance Company, a member of the Winterthur
Swiss Insurance Group, one of the largest Swiss insurance companies.
From 1990 through 1992, TOLIC and the Reinsurers retroceded 25% to 30% of this
business back to LifeUSA. Effective December 31, 1992, the retrocession
agreement with the Reinsurers was terminated with respect to new business
written by LifeUSA after that date. From 1993 through 1995, LifeUSA retained a
portion of its new business and ceded the remainder equally to the Reinsurers.
Effective January 1, 1996, Munich American Reassurance Company reduced its share
of the new business ceded by LifeUSA to the Reinsurers to 20%, while both
Employers Reassurance Corporation and Republic-Vanguard Life Insurance Company
increased their share of this business to 40%.
During 1994, an agreement was reached with TOLIC and the Reinsurers to unwind
the retrocession agreements in effect from 1990 through 1992 and record all
business written under the terms of those agreements as direct reinsurance. As a
result, LifeUSA has accounted for all business previously retroceded to LifeUSA
from TOLIC and the Reinsurers as being retained by LifeUSA and all business
ultimately assumed by TOLIC and the Reinsurers as being ceded to TOLIC and the
Reinsurers by LifeUSA at issuance. This change had no impact on the Company's
financial position or operating results for any period presented. All
disclosures in this document reflect the unwinding of the retrocession
agreements as discussed in this paragraph.
The following table shows the percentages of new life insurance and annuity
business written by LifeUSA that have been ceded to TOLIC and the Reinsurers
since inception:
Life Insurance Annuity
-------------- -------
September 1987 - December 1988 100% 100%
January 1989 - December 1989 95 100
January 1990 - December 1990 75 75
January 1991 - December 1992 70 75
January 1993 - June 1993 65 65
July 1993 - September 1995 50 50
October 1995 - Present 75 75
Because of the initial and regular review of LifeUSA's products and operations
by the reinsurers, the reinsurance arrangements have had the additional benefit
of providing the Company access to the expertise of the reinsurers which has
assisted in the development of underwriting standards, the analysis of product
pricing and the development of actuarial assumptions. LifeUSA does not have any
risk of loss with respect to the reinsured portions of the policies unless a
reinsurer fails to pay its share of policy claims. LifeUSA is ultimately liable
for payment to policyholders of all claims which the reinsurers fail to pay.
Management does not believe, however, that LifeUSA has more than a remote
exposure on the reinsured business. LifeUSA has also entered into agreements
with the reinsurers whereby LifeUSA limits its mortality risk exposure to
$50,000 per life. Management believes that its relations with the reinsurers are
good.
Reinsurance Assumed
All new life insurance and annuity business produced by LifeUSA's agents and
written by Allianz Life from 1987 through 1994 was ceded to TOLIC. Effective
January 1, 1990, LifeUSA entered into a retrocession agreement with TOLIC to
assume a portion of this business. During 1994, LifeUSA terminated the
retrocession agreement with TOLIC and entered into an agreement with Allianz
Life to assume a portion of this business directly from Allianz Life effective
January 1, 1995.
The following table shows the percentages of new life insurance and annuity
business produced by LifeUSA's agents and written by Allianz Life that have been
assumed by LifeUSA since inception:
Life Insurance Annuity
-------------- -------
September 1987 - December 1989 --% --%
January 1990 - December 1990 25 25
January 1991 - December 1991 30 25
January 1992 - June 1993 50 30
July 1993 - September 1995 50 50
October 1995 - Present 25 25
AGREEMENTS WITH ALLIANZ LIFE
Since 1987, under the terms of agreements between the Company and Allianz Life,
LifeUSA agents have produced life insurance and annuity business on Allianz Life
policies which are similar to LifeUSA policies. These agreements require the
Company to provide all administrative and other home office services and to pay
for all commissions due LifeUSA agents and premium taxes on the business
produced for Allianz Life. For these services, Allianz Life pays service fees to
the Company. LifeUSA has assumed a portion of this business under reinsurance
agreements (see the preceding "Reinsurance Assumed" section for further
discussion). For the years 1992 through 1996, the Company derived the following
amounts of service fees from Allianz Life under the terms of these agreements:
Year Ended Percent of
December 31, Service Fees Revenues
----------- -------------- -----------
(In thousands)
1992 $ 49,795 34 %
1993 69,593 35
1994 58,062 28
1995 60,031 22
1996 63,222 20
UNDERWRITING
All life insurance business is subject to standard underwriting procedures as
agreed to by the Reinsurers, using Munich American's underwriting manual.
Republic-Vanguard is the reinsurer currently charged with the responsibility of
reviewing the underwriting practices of LifeUSA and performing periodic audits
(once per year) of LifeUSA's compliance with underwriting procedures and
results. There are minimal underwriting requirements with regard to annuity
business.
LifeUSA can underwrite all life policies with a face amount up to $500,000
without approval of Republic-Vanguard. Amounts above this level require
individual evaluation by Republic-Vanguard. As appropriate, varying
requirements, including tests, medical exams and personal financial statements,
may be required at higher ages and/or larger face amounts of insurance.
INVESTMENTS
The Company's long-term investment portfolio is comprised of U.S. Treasury
securities, U.S. Government agency securities, foreign government obligations
denominated in U.S. dollars and issued and traded in the United States,
mortgage-backed securities issued or guaranteed by U.S. government corporations
or agencies and investment grade corporate obligations. The Company has never
invested in real estate, private direct mortgages or below investment-grade
securities. The Company engages Investment Advisers, Inc. (IAI), a
Minneapolis-based investment advisory firm, and Allianz Investment Corporation
(AIC), an affiliate of Allianz Life, to serve as the Company's investment
advisers. At December 31, 1996, assets managed for customers by IAI and AIC
exceed $16 billion and $19 billion, respectively.
IAI and AIC effect purchases of investment securities for the Company based on
the Company's guidelines. The investment philosophy of LifeUSA is reflected by
investment guidelines adopted by the Board of Directors of the Company in 1990
and reaffirmed annually, as follows:
SIZE: no more than 2% of the Company's invested assets in any issuer
other than direct or guaranteed United States obligations, no more than
25% of invested assets in any industry, and no more than 2% of any
issue other than direct or guaranteed United States obligations;
QUALITY: minimum quality of "BBB-" or better, average quality "A" or
better;
DURATION: match to liabilities, allow for sufficient liquidity and cash
flow matching; and
INCOME: manage to maintain or increase income, excluding capital gains.
As of December 31, 1996, the Company had cash, cash equivalents and fixed
maturity investments on a consolidated basis totaling $1.90 billion, including
$7.6 million in restricted deposits with state insurance authorities regulating
LifeUSA. The following table summarizes the book, carrying and market values of
each investment category held at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
Book % of Carrying % of Market % of
1996: Value Total Value Total Value Total
- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 20,989 1.11% $ 20,989 1.10% $ 20,989 1.10%
Government Treasury and Agency
notes and bonds 98,982 5.24 100,909 5.30 104,537 5.46
Mortgage pass-throughs 46,085 2.44 46,804 2.46 46,836 2.45
Agency Collateralized Mortgage Obligations:
CMO - Sequential pay 6,260 .33 6,260 .33 6,284 .33
CMO - Planned amortization class 615,995 32.63 615,556 32.36 616,286 32.22
CMO - Accretion directed class 23,484 1.24 23,484 1.23 23,672 1.24
CMO - Targeted amortization class 11,970 .63 11,970 .63 12,675 .66
Investment grade corporate securities:
AAA+ to AAA- 36,749 1.95 36,900 1.94 37,930 1.98
AA+ to AA- 153,408 8.12 153,276 8.06 154,056 8.05
A+ to A- 485,766 25.72 491,040 25.81 493,102 25.78
BBB+ to BBB- 388,898 20.59 395,277 20.78 396,662 20.73
Non-investment grade corporate securities -- -- -- -- -- --
----------- ------ ----------- ------ ----------- ------
Total $1,888,586 100.00% $ 1,902,465 100.00% $ 1,913,029 100.00%
========== ====== =========== ====== =========== ======
Book % of Carrying % of Market % of
1995: Value Total Value Total Value Total
- ----- ----- ----- ----- ----- ----- -----
Cash and cash equivalents $ 33,222 1.95% $ 33,222 1.89% $ 33,222 1.85%
Government Treasury and Agency
notes and bonds 96,435 5.66 101,895 5.81 107,660 5.99
Mortgage pass-throughs 32,104 1.88 33,347 1.90 33,667 1.87
Agency Collateralized Mortgage Obligations:
CMO - Sequential pay 5,445 .32 5,445 .31 5,507 .31
CMO - Planned amortization class 616,271 36.17 620,785 35.39 638,969 35.53
CMO - Accretion directed class 23,426 1.38 23,426 1.34 24,524 1.36
CMO - Targeted amortization class 11,862 .70 11,862 .68 13,228 .74
Investment grade corporate securities:
AAA+ to AAA- 43,650 2.56 44,015 2.51 46,694 2.60
AA+ to AA- 123,941 7.28 129,105 7.36 132,157 7.35
A+ to A- 325,710 19.12 339,005 19.33 346,502 19.26
BBB+ to BBB- 391,379 22.98 411,980 23.48 416,454 23.14
Non-investment grade corporate securities -- -- -- -- -- --
----------- ------ ----------- ------ ----------- ------
Total $1,703,445 100.00% $ 1,754,087 100.00% $ 1,798,584 100.00%
========== ====== =========== ====== =========== ======
</TABLE>
The following table sets forth the investment results of the Company:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average investments (1) $ 1,793,926 $ 1,521,355 $ 1,072,650
Investment income (2) $ 130,032 $ 109,656 $ 75,002
Yield on weighted average investments (3) 7.25% 7.21% 6.99%
Net realized gains on investments $ 1,791 $ 7,634 $ 1,183
</TABLE>
- ---------------------------------------------
(1) The average book value of investments held during the year calculated
on a monthly basis.
(2) Before related investment expenses and excluding net realized gains on
investments.
(3) Excluding net realized and unrealized gains and losses on investments.
As part of its asset and liability management practices, LifeUSA manages
investments and credited interest rates to produce a net investment spread
consistent with priced-for expectations. The investment portfolio is managed
primarily by allocating new cash flows into investments which have yield,
maturity and other characteristics suitable for LifeUSA's liabilities.
Consistent with LifeUSA's asset and liability management practices, as of
December 31, 1996, the modified duration of LifeUSA's fixed income securities
was 6.01 years, compared to 6.26 years as of December 31, 1995.
The percentage of the total market value of the Company's portfolio that was
comprised of investment grade corporate obligations was 57% at December 31,
1996. With each corporate security acquisition, LifeUSA's external managers
perform a comprehensive analysis of the credit implications and outlook of the
issuing corporation and industry. Ongoing procedures are also in place for
monitoring and assessing any potential deterioration or downgrade in credit
quality. The Company's guidelines for investing in corporate securities does not
allow the purchase of securities that are rated below investment grade by
Moody's Investors Service and/or Standard & Poor's Corporation.
The remainder of the Company's portfolio is comprised of government and
government agency obligations. Government and government agency obligations are
predominantly held in the form of Planned Amortization Class (PAC) CMOs, the
most conservative type of CMO issued. These CMOs are specifically structured to
provide the highest degree of protection against swings in repayments caused
primarily by changes in interest rates and have virtually no risk of default.
These securities are well-suited to fund the payment of the liabilities they
support.
Currently, the decision as to the asset type in which to invest is dictated by
market conditions and relative values within the respective markets at the time
of purchase. Management believes that these asset types will allow the Company
to maintain high quality, consistent yields and proper maturities for the
overall portfolio.
As of December 31, 1996, the Company held 46%, or $878 million, of the total
market value of its long term securities as available for sale. The Company
believes that this percentage is a prudent level that will allow enough
liquidity to meet any adverse cash flow experience. The Company continues to
classify a significant portion of its investment securities as held to maturity
based on its intent to hold such securities to maturity. A key feature of
LifeUSA's products is the provision of bonuses to encourage policyholders to
withdraw their funds over settlement periods lasting at least five years.
Policyholders taking cash settlements do not receive the bonuses. This feature
allows the Company to hold a significant amount of assets to maturity. Insurance
regulations require LifeUSA to perform an asset adequacy analysis each year to
determine if the assets are sufficient to fund future obligations. The Company's
asset adequacy analysis indicates that the assets are sufficient to fund future
obligations. The Company continually monitors and modifies the allocation of new
assets between held to maturity and available for sale as deemed prudent based
on the continuing analysis of cash flow projections and liquidity needs.
Agent and Employee Ownership
Historically, the Company has issued a variety of equity-based financial
instruments (common stock, convertible subordinated debentures and stock
options) to LifeUSA's agents and the Company's home office employees in order to
provide these individuals with an ownership interest in the Company and create
an important incentive to produce premiums and maintain profitable operations.
From 1992 through March 31, 1997, the Company granted stock options as
commission bonuses to LifeUSA's agents based on net earned commissions on
business written. The Company will discontinue the granting of stock options as
production bonuses after stock options earned by FMOs and agents during the
calendar quarter ended March 31, 1997 have been granted. The Company also has a
stock option plan for employees under which employees on the anniversary date of
their employment receive options on a number of shares of common stock equal to
1% of their annual salary at an exercise price per share of not less than 150%
of the market value of a share of Common Stock on the date the option is issued.
The Company will continue to grant stock options to employees.
Home Office Support
Management believes that quality service, responsiveness and support to agents
and to policyholders have been and continue to be critical to agent retention,
policyholder satisfaction and cost-effective operations. As a result of their
ownership interests in the Company, home office employees have a special
commitment to their jobs and are therefore called "home office owners." An
example of home office responsiveness created by this commitment is the "48-hour
challenge." If an insurance application conforming to normal standards is not
completed within 48 hours, the agent receives $100. For 1996, over 60,000
applications were submitted and only 57 challenges were paid.
At December 31, 1996, the Company employed 412 full-time and 22 part-time
persons, and the number of persons performing home office functions were as
follows:
Number of
Home Office Function Employees
-------------------- ---------
Executive 17
Operations 174
Support 92
Marketing 57
Information Services 40
Universal Benefits Life (payroll deduction) 54
The Company's employees are not represented by a collective bargaining unit. The
Company considers its general relations with its employees to be excellent.
Regulation
LifeUSA is subject to regulation in the 49 states in which it is authorized to
do business. The laws of these states establish supervisory agencies with
administrative powers related to granting and revoking licenses to transact
business, approving the form and content of policies, reviewing the advertising
and illustration of policies, licensing agents, establishing reserve
requirements and regulating the type and amount of investments. Such regulations
are primarily intended to protect policyholders. The Company is also regulated
in several states as an insurance holding company.
The insurance regulatory framework continues to be reviewed by various states
and by the National Association of Insurance Commissioners (NAIC). Regulatory
initiatives such as risk-based capital standards have been undertaken to
identify inadequately capitalized companies and to reduce the risk of company
insolvencies. The NAIC has established risk-based capital standards to determine
the capital requirements of a life insurance company based upon the risks
inherent in its operations. LifeUSA's percentage of actual total adjusted
capital to authorized control level risk-based capital is well in excess of
regulatory requirements. As a result of the production of statutory net income
of $13.2 million during 1996, the Company did not make significant capital
contributions to LifeUSA during 1996 and, based on currently anticipated life
insurance and annuity sales and the continuation of reinsurance arrangements,
the Company does not expect to contribute capital to LifeUSA through 1997 in
order to maintain an acceptable risk-based capital ratio.
The NAIC has also considered changes in the model laws for nonforfeiture values
of life insurance and deferred annuity products. Since 1994, LifeUSA has made
presentations to and had discussions with the Life/Health Actuarial Task Force
of the NAIC, which is responsible for developing new model laws for
nonforfeiture values. LifeUSA demonstrated that its two-tier products use
longer-term, higher-yielding investments to provide higher retirement values to
policyholders, while decreasing disintermediation and solvency risks to LifeUSA.
Although it is possible that the NAIC may adopt new model laws addressing
nonforfeiture values in the future, such adoption is not currently anticipated
to have a significant impact on LifeUSA.
NAIC committees are also considering a new annuity illustration model
regulation, a new approach to statutory valuation of liabilities (reserves) and
regulations for equity-indexed products. The Company is monitoring these
developments and no significant impact is anticipated at this time.
In December 1995, the NAIC passed a model regulation for disclosure in life
insurance policy illustrations. A number of states either have adopted the model
regulation by its January 1, 1997 effective date or are in the process of
adopting the model regulation. LifeUSA has already completed the certification
process required by the model regulation. This regulation has not had and is not
anticipated to have a significant impact on LifeUSA.
Insurance laws also require LifeUSA to file detailed periodic reports with the
regulatory agencies in each of the states in which it writes business, and these
agencies may examine LifeUSA's business and accounts at any time. Under NAIC
rules, one or more of the regulatory agencies will periodically examine LifeUSA,
normally at three-year intervals, on behalf of the states in which LifeUSA is
licensed. During 1996, the Minnesota Department of Commerce conducted a
triennial examination of LifeUSA for the three years ended December 31, 1995.
The Company expects to receive the final examination report in the near future
and has not been made aware of any issues or recommendations that will be
material individually or in the aggregate.
In April 1996, the B++ (Very Good) rating initially assigned LifeUSA in June
1994 was reaffirmed by the A.M. Best Company. The A. M. Best Company assigns the
B++ rating to companies which, in its opinion, have achieved very good overall
performance when compared to the standards established by the A. M. Best
Company. B++ companies have a good ability to meet their obligations to
policyholders over a long period of time.
In December 1996, Standard & Poor's assigned LifeUSA an initial claims-paying
ability rating of BBB+ (Adequate). Standard & Poor's assigns the BBB+ rating to
insurers which, in its opinion, offer adequate financial security, but capacity
to meet policyholder obligations is susceptible to adverse economic and
underwriting conditions.
The Company is subject to the Minnesota insurance holding company laws and
applicable regulations which require it to file certain information regarding
the Company primarily relating to ownership and transactions between it and each
life insurance subsidiary, and to obtain prior approval for certain changes of
control and certain extraordinary transactions, including certain distributions
or dividend payments. Approval by the Minnesota Department of Commerce is
required for LifeUSA to pay dividends in any 12 month period in an amount
exceeding the lesser of (i) 10% of the insured's statutory earned surplus at the
end of the preceding year or (ii) the insured's statutory net gain from
operations, not including realized capital gains, for the year preceding the
distribution, both of which are determined in accordance with the Minnesota
insurance laws and regulations. Although LifeUSA did not have any earned surplus
at December 31, 1996, the Department of Commerce of the State of Minnesota
allowed its request to pay a $2.5 million extraordinary dividend to the Company
during February of 1997. The Company does not currently intend to pay dividends
to its common shareholders.
Competition
The industry in which the Company operates is highly competitive, with many
competitors offering diverse products through various alternative marketing or
distribution systems. The Company's products compete not only with life
insurance and annuities but with other retirement-oriented financial products.
Many of the Company's competitors have substantially greater financial resources
and more established products. Nonetheless, management believes that LifeUSA's
unique and innovative products will continue to attract policyholders to LifeUSA
and its products. Competition for FMOs and agents with demonstrated ability is
also intense. However, management believes that LifeUSA has been able to attract
and will continue to be able to attract, motivate and retain productive,
independent FMOs and agents by providing innovative products and quality
service.
Forward-Looking Statements
Statements other than historical information contained in this Annual Report are
considered forward-looking and involve a number of risks and uncertainties. In
addition to the factors discussed in this Annual Report, there are other factors
that could cause actual results to differ materially from expected results
including, but not limited to, development and acceptance of new products,
impact of changes in federal and state regulation, dependence upon key
personnel, changes in interest rates generally and credited rates on the new
business retained or assumed by LifeUSA, the level of premium production,
competition and other risks described from time to time in the Company's
Securities and Exchange Commission filings, including but not limited to this
Form 10-K, copies of which are available from the Company without charge.
ITEM 2. PROPERTIES
Under leases expiring in February 2001, the Company leases approximately 144,000
square feet of office space at Interchange North Building, 300 South Highway
169, Minneapolis, Minnesota. See Note 6 of the Notes to Consolidated Financial
Statements included in the annual shareholder report for the year ended December
31, 1996 as incorporated herein by reference for additional information
regarding the lease commitments. Based on the Company's business plan,
management believes the Company's current facilities will be adequate through
1997.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, the Company was not involved in any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted to the vote of security holders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company, their ages and
titles:
<TABLE>
<CAPTION>
Name Age Title
------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Robert W. MacDonald 54 Chairman and Chief Executive Officer
Margery G. Hughes 46 President and Chief Operating Officer
Mark A. Zesbaugh 32 Executive Vice President, Chief Financial Officer , Treasurer and
Secretary
Daniel J. Rourke 67 Senior Vice President and Chief Marketing Officer
Donald J. Urban 55 Senior Vice President and Director of Sales
Bradley E. Barks 37 Senior Vice President Finance
Bruce D. Bengtson 47 Senior Vice President and Chief Actuary
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock trades on the Nasdaq National Market Tier of The
Nasdaq Stock Market under the symbol: "LUSA." Over-the-counter market quotations
reflect inter-dealer prices without retail mark-up, mark-down or commissions and
may not necessarily represent actual transactions. The following table shows the
range of high and low sales prices per share of the Company's common stock as
reported by Nasdaq for the periods indicated.
High Low
-------- --------
1996
------------
4th Quarter $ 12.00 $ 8.63
3rd Quarter 9.25 7.75
2nd Quarter 9.38 7.63
1st Quarter 9.88 7.63
1995
------------
4th Quarter $ 9.25 $ 7.63
3rd Quarter 10.13 8.25
2nd Quarter 10.50 8.63
1st Quarter 11.38 7.19
As of February 14, 1997, there were 7,950 holders of record of the Company's
common stock. On March 24, 1997, the closing sale price per share of the
Company's common stock as reported by Nasdaq was $10.38.
DIVIDENDS
Since its inception, the Company has not paid any dividends on its common stock.
Currently, the Company's Board of Directors has a policy of retaining earnings
for future growth, and the Company does not anticipate paying dividends on its
common stock in the near future. In addition, there are statutory and regulatory
limitations upon the extent to which dividends may be paid to the Company from
an insurance subsidiary, including the restriction that an insurance company may
only pay dividends out of earned surplus. Approval by the Minnesota Department
of Commerce is required for LifeUSA to pay dividends in any 12-month period in
an amount exceeding the lesser of (i) 10% of the insured's statutory earned
surplus at the end of the preceding year or (ii) the insured's statutory net
gain from operations, not including realized capital gains, for the year
preceding the distribution, both of which are determined in accordance with the
Minnesota insurance laws and regulations. Although LifeUSA did not have any
earned surplus at December 31, 1996, the Department of Commerce of the State of
Minnesota allowed its request to pay a $2.5 million extraordinary dividend to
the Company during February of 1997.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial and Operating Data on pages 4 and 5 of the
annual shareholder report for the year ended December 31, 1996 is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 6 through 18 of the annual shareholder report for the year
ended December 31, 1996 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included on pages 19 through 44 of the
annual shareholder report for the year ended December 31, 1996 are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 4 and 5 and page 8 of Life USA Holding,
Inc.'s Proxy Statement dated March 12, 1997, under the captions "Business
Experience of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" with respect to directors and executive officers of the Company, is
incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 6 through 13 of Life USA Holding, Inc.'s
Proxy Statement dated March 12, 1997, under the captions "Compensation of
Directors," "Executive Compensation," "Compensation Committee Interlocks and
Insider Participation," "Report of the Compensation Committee and the Stock
Option Committee on Executive Compensation" and "Common Stock Price Performance
Chart" with respect to executive compensation and transactions, is incorporated
herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 2 and 3 of Life USA Holding, Inc.'s Proxy
Statement dated March 12, 1997, under the caption "Principal Shareholders and
Security Ownership of Management Table" with respect to security ownership of
certain beneficial owners and management, is incorporated herein by reference in
response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 6 of Life USA Holding, Inc.'s Proxy Statement
dated March 12, 1997, under the caption "Arrangements with Directors, Nominees,
Executive Officers and Their Family Members" with respect to certain
relationships and related transactions, is incorporated herein by reference in
response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Life USA Holding,
Inc. included in the annual shareholder report for the year ended
December 31, 1996 are incorporated herein by reference in Item 8:
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) The following consolidated financial statement schedules of Life USA
Holding, Inc. required by Item 14(d) are included in a separate section
of this Report:
II Condensed Financial Information of Registrant
III Supplementary Insurance Information
IV Reinsurance
V Valuation and Qualifying Accounts
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.
(a)(3) Listing of Exhibits
The Exhibits required to be a part of this Report are listed in the
Index to Exhibits which follows the Financial Statement Schedules.
(b) Reports on Form 8-K
None.
(c) Exhibits
Included in Item 14(a)(3) above.
(d) Financial Statement Schedules
Included in Item 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Life USA HOLDING, INC.
By /s/ Mark A. Zesbaugh
------------------------------
Mark A. Zesbaugh
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Robert W. MacDonald Chief Executive Officer March 25, 1997
- ------------------------ (Principal Executive Officer)
Robert W. MacDonald and Director
/s/ Mark A. Zesbaugh Chief Financial Officer March 25, 1997
- ------------------------ (Principal Financial and
Mark A. Zesbaugh Accounting Officer)
and Director
* Director
- ------------------------
Hugh Alexander
* Director
- ------------------------
Jack H. Blaine
* Director
- ------------------------
Joseph W. Carlson
* Director
- ------------------------
Margery G. Hughes
* Director
- ------------------------
Barbara J. Lautzenheiser
* Director
- ------------------------
Robert J. Oster
* Director
- ------------------------
Daniel J. Rourke
* Director
- ------------------------
Ralph Strangis
* Director
- ------------------------
Donald J. Urban
*By /s/ Mark A. Zesbaugh March 25, l997
-----------------------
Mark A. Zesbaugh
Attorney-in-Fact
* Mark A. Zesbaugh, on his own behalf and pursuant to Powers of
Attorney, dated prior to the date hereof, attested by the officers and directors
listed above and filed with the Securities and Exchange Commission, by signing
his name hereto does hereby sign and execute this Report of Life USA Holding,
Inc. on behalf of each of the officers and directors named above, in the
capacities in which the name of each appears above.
SCHEDULE II
Page 1
Life USA HOLDING, INC.
CONDENSED FINANCIAL INFORMATION
(PARENT COMPANY ONLY)
BALANCE SHEET
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS December 31, December 31,
1996 1995
--------- ---------
<S> <C> <C>
Fixed maturity investments - available for sale,
at fair value (amortized cost: $5,190 at December 31, 1996
and $13,204 at December 31, 1995) $ 5,392 $ 14,333
Cash and cash equivalents 182 57
Fixed assets and leasehold improvements, net 5,652 4,160
Investments in subsidiaries, net 206,722 183,273
Deferred income taxes 1,937 998
Other assets 6,382 8,443
--------- ---------
$ 226,267 $ 211,264
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other policyholders' funds $ 3,028 $ 2,091
Amounts due reinsurers 231 150
Accounts payable 6,617 4,478
Accrued commissions to agents 4,029 4,315
Convertible subordinated debentures 36,030 36,030
Other liabilities 3,717 7,304
--------- ---------
Total liabilities 53,652 54,368
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value; 45,000,000 shares
authorized, 20,953,517 shares issued and outstanding
(20,279,343 shares at December 31, 1995) 210 203
Common stock to be issued, 21,384 shares
(45,404 shares at December 31, 1995) 357 382
Additional paid-in capital 86,474 80,931
Notes receivable from stock sales (3,888) --
Unrealized gain on fixed maturity
investments - available for sale 3,335 12,707
Retained earnings 86,127 62,673
--------- ---------
Total shareholders' equity 172,615 156,896
--------- ---------
$ 226,267 $ 211,264
========= =========
</TABLE>
SCHEDULE II
Page 2
Life USA HOLDING, INC.
CONDENSED FINANCIAL INFORMATION
(PARENT COMPANY ONLY)
STATEMENT OF INCOME
(Dollars in thousands)
Year ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
Revenues:
Management fees $ 32,476 $ 29,389 $ 24,707
Net investment income 1,378 1,825 1,003
Commissions and expense allowances, net 63,222 59,286 57,027
Equity in income of wholly-owned subsidiaries 21,321 16,083 10,814
Other 316 8 --
-------- -------- --------
Total revenues 118,713 106,591 93,551
Expenses:
Commissions 38,133 36,483 35,113
Salaries and employee benefits 24,720 19,189 14,064
Depreciation and amortization 1,246 676 771
Interest expense 1,982 1,785 474
Other 27,609 27,168 25,892
-------- -------- --------
Total expenses 93,690 85,301 76,314
-------- -------- --------
Income before income taxes 25,023 21,290 17,237
Income taxes 1,569 2,193 2,768
-------- -------- --------
Net income $ 23,454 $ 19,097 $ 14,469
======== ======== ========
SCHEDULE II
Page 3
Life USA HOLDING, INC.
CONDENSED FINANCIAL INFORMATION
(PARENT COMPANY ONLY)
STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 23,454 $ 19,097 $ 14,469
Adjustments to reconcile net income to net
cash provided by operating activities (10,147) (1,660) (8,703)
-------- -------- --------
Net cash provided by operating activities 13,307 17,437 5,766
Cash flows from investing activities:
Fixed maturity investments -
available for sale:
Purchases -- (22,954) (861)
Proceeds from maturities and principal payments on
mortgage-backed securities -- 1,660 1,825
Investment in LifeUSA Insurance Company -- (23,675) (13,606)
Investment in LifeUSA Securities, Inc. (285) -- --
Investment in LifeUSA Marketing, Inc. (9,250) -- --
Loans to field marketing organizations (1,219) -- --
Acquisition of Fidelity Union Life Insurance Company -- -- (1,100)
Capital expenditures (2,629) (3,079) (491)
-------- -------- --------
Net cash used in investing activities (13,383) (48,048) (14,233)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 226 195 937
Proceeds from convertible subordinated debenture issuance -- 30,000 --
Other financing activities (25) 230 282
-------- -------- --------
Net cash provided by financing activities 201 30,425 1,219
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 125 (186) (7,248)
Cash and cash equivalents at beginning of the year 57 243 7,491
-------- -------- --------
Cash and cash equivalents at end of the year $ 182 $ 57 $ 243
======== ======== ========
Cash paid during the year for interest $ 1,984 $ 1,223 $ 473
======== ======== ========
Cash paid during the year for income taxes $ 2,032 $ 2,550 $ 2,354
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Issuance of stock upon conversion of convertible
subordinated debentures $ -- $ 11 $ 309
Cancellation of convertible subordinated debentures -- -- 1
Issuance of stock to employees as compensation 1,436 831 943
Fixed assets contributed to LifeUSA Insurance Company 1,362 1,766 997
</TABLE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
Life USA HOLDING, INC. AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F
Future policy
Deferred benefits, Other policy
policy losses, claims claims and
acquisition and loss Unearned benefits Premium
Segment costs expenses (1) premiums payable revenue (2)
- ------------------------------ ----------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance and annuities $ 212,138 $4,078,621 $ -- $ -- $ 46,842
========== ========== =========== ============ ==========
Year ended December 31, 1995:
Life insurance and annuities $ 175,296 $3,566,012 $ -- $ -- $ 35,983
========== ========== =========== ============ ==========
Year ended December 31, 1994:
Life insurance and annuities $ 174,702 $2,877,447 $ -- $ -- $ 21,659
========== ========== =========== ============ ==========
[WIDE TABLE CONTINUED FROM ABOVE]
Col. G Col. H Col. I Col. J
Benefits, Amortization
claims, of deferred
Net losses and policy Other
investment settlement acquisition operating
Segment income expenses (3) costs expenses
- ------------------------------ ----------- ------------ ---------- ----------
Year ended December 31, 1996:
Life insurance and annuities $ 129,412 $ 116,931 $ 24,495 $ 138,407
========== ========== ========== ==========
Year ended December 31, 1995:
Life insurance and annuities $ 109,092 $ 99,363 $ 22,096 $ 121,361
========== ========== ========== ==========
Year ended December 31, 1994:
Life insurance and annuities $ 74,510 $ 65,111 $ 11,643 $ 106,527
========== ========== ========== ==========
</TABLE>
- -------------------------------
(1) Amounts shown are gross with respect to amounts recoverable from
reinsurers of $2,166,116, $1,853,540 and $1,593,025 at December 31,
1996, 1995 and 1994, respectively. The liabilities net of related
amounts recoverable from reinsurers are $1,912,505, $1,712,472 and
$1,284,422 at December 31, 1996, 1995 and 1994, respectively.
(2) Includes policyholder charges.
(3) Includes interest credited to policyholder account values and other
benefits to policyholders.
Column K (Premiums written) has not been included as it does not apply to life
insurance.
<TABLE>
<CAPTION>
SCHEDULE IV - REINSURANCE
Life USA HOLDING, INC. AND SUBSIDIARIES
(Dollars in thousands)
Col. A Col. B Col. C Col. D Col. E Col. F
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------- ------------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance in force $ 6,428,513 $ 4,747,188 $ 704,009 $ 2,385,334 29.5%
============= ============= ============= ============= =======
Premiums:
Life insurance $ 61,973 $ 40,341 $ 7,254 $ 28,886 25.1%
Annuities 547,748 397,566 115,461 265,643 43.5%
------------- ------------- ------------- ------------- -------
$ 609,721 $ 437,907 $ 122,715 $ 294,529 41.7%
============= ============= ============= ============= =======
Year ended December 31, 1995:
Life insurance in force $ 6,270,169 $ 4,666,062 $ 730,804 $ 2,334,911 31.3%
============= ============= ============= ============= =======
Premiums:
Life insurance $ 60,869 $ 38,518 $ 7,604 $ 29,955 25.4 %
Annuities 585,739 312,325 167,857 441,271 38.0%
------------- ------------- ------------- ------------- -------
$ 646,608 $ 350,843 $ 175,461 $ 471,226 37.2%
============= ============= ============= ============= =======
Year ended December 31, 1994:
Life insurance in force $ 5,585,565 $ 4,132,874 $ 662,138 $ 2,114,829 31.3%
============= ============= ============= ============= =======
Premiums:
Life insurance $ 54,928 $ 36,271 $ 6,785 $ 25,442 26.7%
Annuities 481,138 249,803 175,257 406,592 43.1%
------------- ------------- ------------- ------------- -------
$ 536,066 $ 286,074 $ 182,042 $ 432,034 42.1%
============= ============= ============= ============= =======
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Life USA HOLDING, INC. AND SUBSIDIARIES
(Dollars in thousands)
Col. A Col. B Col. C Col. D Col. E
------------------------------
Balance Charged to Balance
at beginning costs and Charged to at end
of period expenses other accounts Deductions of period
------------ ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Reserve and allowances deducted from asset accounts:
Valuation allowance for deferred tax assets $ 8,578(2) -- -- $ 8,578(1) --
</TABLE>
- -----------------------------------------------------
(1) Due to the fact that an unrealized gain on fixed maturity investments -
available for sale was recorded as a separate component of shareholders'
equity at both December 31, 1996 and December 31, 1995, the deferred tax
assets and related valuation allowance recorded at December 31, 1994 were
no longer required.
(2) Established to cover 100% of the deferred tax assets recorded for
unrealized losses on fixed maturity investments available for sale and
included in the unrealized loss on fixed maturity investments-available for
sale shown as a separate component of shareholders' equity.
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3) AND 14(c)
EXHIBITS
Life USA HOLDING, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Regulation S-K
Exhibit Table Sequential
Item Reference Page No.
---- -------------- ----------
<S> <C>
Restated Articles of Incorporation of the Company................................. 3(12)
Bylaws of the Company............................................................. 3(3)
Amendment to Bylaws of the Company................................................ 3(7)
Form of Stock Certificate......................................................... 4(11)
Form of Option Certificate........................................................ 4(12)
Form of Debenture filed as part of Indenture
between the Company and Continental Bank,
National Association............................................................. 4(8)
Indenture between the Company and Continental Bank,
National Association, as trustee, dated as of April 1, 1991...................... 4(8)
Warrant dated as of October 1, 1992 to Lions Gate Capital, Ltd.
covering 192,000 shares of common stock at an exercise price
of $10.00 per share, subject to adjustment....................................... 4(16)
Service Agreement dated January 27, 1988 between
the Company and North American Life and Casualty Company......................... 10(2)
Agreement dated April 6, 1987 with Transamerica Insurance
Corporation of California........................................................ 10(1)
Life Coinsurance Agreement effective September 1, 1987
between Transamerica Occidental Life Insurance Company
and Universal Security Assurance Life Insurance Company
and Addendum thereto............................................................. 10(3)
Amendment to Life Coinsurance Agreement effective
January 1, 1989.................................................................. 10(2)
Addenda No. 2, 3, 4 and 5 to Life Coinsurance Agreement
between LifeUSA and Transamerica Occidental Life
Insurance Company................................................................ 10(13)
Addenda No. 6, 7 and 8 to Life Coinsurance Agreement between
LifeUSA and Transamerica Occidental Life Insurance Company....................... 10(20)
Life and Annuity Retrocession Agreement effective
January 1, 1990 between LifeUSA and Transamerica
Occidental Life Insurance Company................................................ 10(13)
Addenda No. 1, 2 and 3 to Life and Annuity Retrocession Agreement
between LifeUSA and Transamerica Occidental Life Insurance Company............... 10(20)
Termination Addendum to Life and Annuity Retrocession Agreement between
LifeUSA and Transamerica Occidental Life Insurance Company....................... 10(20)
Life and ADB YRT Retrocession Agreement between LifeUSA
and Transamerica Occidental Life Insurance Company
effective January 1, 1990........................................................ 10(14)
Addendum No. 1 to Life and ADB YRT Retrocession Agreement between
LifeUSA and Transamerica Occidental Life Insurance Company....................... 10(20)
Retrocessional Agreement between LifeUSA and
Transamerica Occidental Life Insurance Company
effective April 1, 1991.......................................................... 10(13)
Addenda No. 1, 2 and 3 to Retrocessional Agreement between LifeUSA
and Transamerica Occidental Life Insurance Company............................... 10(20)
Trust Agreement dated April 1, 1993 among LifeUSA Insurance Company,
Continental Trust Company and Transamerica Occidental Life
Insurance Company................................................................ 10(16)
Restated Trust Agreement among LifeUSA Insurance Company, Continental
Trust Company and Transamerica Occidental Life Insurance Company................. 10(20)
Information Services Agreement with Universal Systems
of America, Inc. dated as of January 1, 1993..................................... 10(13)
License Agreement with Universal Systems of America, Inc.
dated as of January 1, 1993...................................................... 10(13)
Agreement dated September 24, 1991, between David Mitchell
and Associates and Life USA Holding, Inc......................................... 10(13)
Office Lease, as amended on July 25, 1989 with
The Equitable Life Assurance Society of the United States........................ 10(2)
Amendment No. 2 to Office Lease dated November 29, 1990........................... 10(5)
Amendment No. 3 to Office Lease dated November 15, 1993........................... 10(16)
Sublease Agreement dated February 3, 1992, between the
Company and Tonka Corporation.................................................... 10(12)
Sublease Modification Agreement dated November 5, 1993, between
the Company and Tonka Corporation................................................ 10(16)
Form of Indemnification Agreement dated as of December 31, 1989................... 10(2)
Life USA Holding, Inc. Employee Savings Plan effective
January 1, 1990.................................................................. 10(4)
First Amendment to Employee Savings Plan.......................................... 10(9)
Second Amendment to Employee Savings Plan......................................... 10(11)
Third Amendment to Employee Savings Plan.......................................... 10(13)
Fourth Amendment to Employee Savings Plan......................................... 10(17)
Fifth Amendment to Employee Savings Plan.......................................... 10(17)
Restated Life USA Holding, Inc. Stock Option Plan................................. 10(12)
Life USA Director Option Plan..................................................... 10(16)
Agreement dated June 8, 1989 among Robert W. MacDonald,
Life USA Holding, Inc. and LifeUSA Insurance Company............................. 10(13)
Consulting Agreement with Peyton J. Huffman dated
August 1, 1993................................................................... 10(16)
Life and Annuity Coinsurance Agreement effective April 1, 1991
among LifeUSA Insurance Company, Employers Reassurance
Corporation, Munich American Reassurance Company and
Republic-Vanguard Life Insurance Company......................................... 10(6)
Addenda Nos. 1 through 4 to the Life and Annuity
Coinsurance Agreement............................................................ 10(13)
Addendum No. 5 to the Life and Annuity Coinsurance Agreement...................... 10(16)
Addendum No. 6 to the Life and Annuity Coinsurance Agreement...................... 10(20)
Life and Annuity Retrocession Agreement effective
April 1, 1991 between LifeUSA Insurance Company
and Employers Reassurance Corporation............................................ 10(6)
Addendum No. 1 to Life and Annuity Retrocession
Agreement between LifeUSA Insurance Company and
Employers Reassurance Corporation................................................ 10(13)
Addendum No. 2 to Life and Annuity Retrocession Agreement
between LifeUSA Insurance Company and Employers
Reassurance Corporation.......................................................... 10(16)
Termination Addendum to the Life and Annuity Retrocession
Agreement between LifeUSA Insurance Company and
Employers Reassurance Corporation................................................ 10(20)
Trust Agreement among LifeUSA Insurance Company,
Continental Bank, N.A. and Employers Reassurance Corporation..................... 10(16)
Amendment to Trust Agreement among LifeUSA Insurance Company,
Continental Bank, N.A. and Employers Reassurance Corporation..................... 10(16)
Life and Annuity Retrocession Agreement effective
April 1, 1991 between LifeUSA Insurance Company
and Munich American Reassurance Company.......................................... 10(6)
Addendum No. 1 to Life and Annuity Retrocession Agreement
between LifeUSA Insurance Company and Munich American
Reassurance Company.............................................................. 10(13)
Addendum No. 2 to Life and Annuity Retrocession Agreement
between LifeUSA Insurance Company and Munich American
Reassurance Company.............................................................. 10(16)
Termination Addendum to Life and Annuity Retrocession Agreement
between LifeUSA Insurance Company and Munich American
Reassurance Company.............................................................. 10(20)
Restated Trust Agreement among LifeUSA Insurance Company,
Continental Bank, N.A. and Munich American Reassurance Company................... 10(16)
Amendment No. 1 to Restated Trust Agreement among
LifeUSA Insurance Company, Continental Bank, N.A. and
Munich American Reassurance Company.............................................. 10(16)
Life and Annuity Retrocession Agreement effective
April 1, 1991 between LifeUSA Insurance Company and
Republic-Vanguard Life Insurance Company......................................... 10(6)
Addendum No. 1 to Life and Annuity Retrocession Agreement
between LifeUSA Insurance Company and Republic-Vanguard
Life Insurance Company........................................................... 10(13)
Addendum No. 2 to Life and Annuity Retrocession Agreement
between LifeUSA Insurance Company and Republic-Vanguard
Life Insurance Company........................................................... 10(16)
Termination Addendum to Life and Annuity Retrocession Agreement
between LifeUSA Insurance Company and Republic-Vanguard
Life Insurance Company........................................................... 10(20)
Trust Agreement among LifeUSA Insurance Company, Continental
Bank, N.A. and Republic-Vanguard Life Insurance Company.......................... 10(16)
Amendment to Trust Agreement among LifeUSA Insurance Company,
Continental Bank, N.A. and Republic-Vanguard Life Insurance Company.............. 10(16)
Life and ADB YRT Retrocession Agreements between
LifeUSA and each of Employers Reassurance Corporation,
Munich American Reassurance Company and Republic-Vanguard
Life Insurance Company ("Reinsurers") effective April 1, 1991.................... 10(13)
Addenda No. 1 to Life and ADB YRT Retrocession Agreements......................... 10(16)
Termination Addendum to Life and ADB YRT Retrocession Agreements.................. 10(20)
Life and ADB YRT Reinsurance Agreement between LifeUSA and
the Reinsurers effective January 1, 1993......................................... 10(13)
Addendum No. 1 to Life and ADB YRT Reinsurance Agreement
between LifeUSA and the Reinsurers............................................... 10(16)
Addendum No. 2 to Life and ADB YRT Reinsurance Agreement
between LifeUSA and the Reinsurers............................................... 10(20)
Investment Management Agreement between the Company
and Investment Advisers, Inc. dated April 9, 1991................................ 10(10)
Stock Purchase Agreement among Allianz of America, Inc.,
Allianz Life Insurance Company of North America and
Life USA Holding, Inc., dated November 19, 1993.................................. 10(15)
Plan and Agreement of Merger By and Between LifeUSA
Insurance Company and Fidelity Union Life Insurance Company...................... 10(18)
Articles of Merger of LifeUSA Insurance Company into
Fidelity Union Life Insurance Company............................................ 10(18)
Debenture Purchase Agreement dated February 17, 1995 among Life USA
Holding, Inc. and Allianz Life Insurance Company of North America................ 10(19)
Variable Rate Convertible Subordinated Debenture.................................. 10(19)
Conversion Protection Warrant Certificate for Purchase of Shares of Common
Stock of Life USA Holding, Inc. ................................................. 10(19)
Life and Annuity Coinsurance Agreement effective January 1, 1995 between Allianz
Life Insurance Company of North America and LifeUSA Insurance Company............ 10(19)
Trust Agreement between Allianz Life Insurance Company of North America,
LifeUSA Insurance Company and Continental Trust Company.......................... 10(19)
Joint Marketing Agreement entered into by and between Allianz Life Insurance
Company of North America and Life USA Holding, Inc............................... 10(19)
Investment Management Agreement entered into by and between LifeUSA
Insurance Company and Allianz Investment Corporation............................. 10(19)
Investment Management Agreement entered into by and between Life USA
Holding, Inc. and Allianz Investment Corporation................................. 10(19)
Addendum No. 8 to the Interests and Liabilities Agreement of Employers
Reassurance Corporation with respect to the Life and Annuity Coinsurance
Agreement issued to LifeUSA Insurance Company.................................... 10(21)
Addendum No. 8 to the Interests and Liabilities Agreement of Munich
American Reassurance Company with respect to the Life and Annuity
Coinsurance Agreement issued to LifeUSA Insurance Company........................ 10(21)
Addendum No. 8 to the Interests and Liabilities Agreement of Republic-
Vanguard Life Insurance Company with respect to the Life and Annuity
Coinsurance Agreement issued to LifeUSA Insurance Company........................ 10(21)
Consulting Agreement dated April 17, 1996 between
Life USA Holding, Inc. and Joseph W. Carlson..................................... 10(22)
Loan Agreement dated May 17, 1996 between Life USA Holding, Inc.
and Employers Reassurance Corporation and Named Lenders.......................... 10(23)
Stock Pledge Agreement dated May 17, 1996 between Life USA Holding, Inc.
and Employers Reassurance Corporation............................................ 10(23)
Claims Administration Agreement dated December 30, 1996
between Allianz Life Insurance Company of North America
and LifeUSA Insurance Company.................................................... 10.1(24)
Administration and Marketing Agreement dated December 30, 1996
between Allianz Life Insurance Company of North America
and Life USA Holding, Inc........................................................ 10.2(24)
Employment Agreement dated January 1, 1997 between
Life USA Holding, Inc. and Margery G. Hughes..................................... 10.3(24)
Employment Agreement dated January 1, 1997 between
Life USA Holding, Inc. and Mark A. Zesbaugh...................................... 10.4(24)
Statement of Computation of Per Share Earnings
(Years Ended December 31, 1996, 1995 and 1994)................................... 11(24)
1996 Annual Report to Shareholders................................................ 13(24)
Subsidiaries of the Registrant.................................................... 21(24)
Consent of Ernst & Young LLP...................................................... 23(24)
Powers of Attorney................................................................ 24(24)
Financial Data Schedule (electronic filing only).................................. 27(24)
</TABLE>
- ------------------------------
(1) Filed with the Company's Registration Statement No. 33-21989 and
incorporated by reference herein.
(2) Filed with the Company's 1989 Annual Report on Form 10-K, as amended,
and incorporated by reference herein.
(3) Filed with the Company's Registration Statement No. 33-30506, as
amended by Post-Effective Amendment No. 1, and incorporated by
reference herein.
(4) Filed with the Company's Registration Statement No. 33-37981 and
incorporated by reference herein.
(5) Filed with Post-Effective Amendment No. 1 to the Company's Registration
Statement No. 33-37981 and incorporated by reference herein.
(6) Filed with the Company's 1990 Annual Report on Form 10-K and
incorporated by reference herein.
(7) Filed with Pre-Effective Amendment No. 1 to the Company's Registration
Statement No. 33-41359 and incorporated by reference herein.
(8) Filed with Pre-Effective Amendment No. 2 to the Company's Registration
Statement No. 33-41359 and incorporated by reference herein.
(9) Filed with the Company's 1991 Annual Report on Form 10-K and
incorporated by reference herein.
(10) Filed with the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1991 and incorporated by reference herein.
(11) Filed with the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1992 and incorporated by reference herein.
(12) Filed with the Company's Registration Statement No. 33-52624 and
incorporated by reference herein.
(13) Filed with the Company's Registration Statement No. 33-68528 and
incorporated by reference herein.
(14) Filed with Amendment No. 1 to the Company's Registration Statement No.
33-68528 and incorporated by reference herein.
(15) Filed with Amendment No. 1 to the Company's Registration Statement No.
33-71068 and incorporated by reference herein.
(16) Filed with the Company's 1993 Annual Report on Form 10-K and
incorporated by reference herein.
(17) Filed with the Company's Registration Statement No. 33-81426 and
incorporated by reference herein.
(18) Filed with the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1994 and incorporated by reference herein.
(19) Filed with the Company's Current Report on Form 8-K filed March 3, 1995
and incorporated by reference herein.
(20) Filed with the Company's 1994 Annual Report on Form 10-K and
incorporated by reference herein.
(21) Filed with the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1995 and incorporated by reference herein.
(22) Filed with the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1996 and incorporated by reference herein.
(23) Filed with the Company's Current Report on Form 8-K filed June 17, 1996
and incorporated by reference herein.
(24) Filed with this Annual Report on Form 10-K.
The exhibits filed with this Annual Report on Form 10-K may be obtained by
writing to:
Mark A. Zesbaugh
Executive Vice President, Chief Financial Officer and Treasurer
Life USA Holding, Inc.
300 South Highway 169 Suite 95
Minneapolis, MN 55426
CLAIMS ADMINISTRATION AGREEMENT
ENTERED INTO BY AND BETWEEN
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
OF MINNEAPOLIS, MINNESOTA
(HEREINAFTER REFERRED TO AS THE "COMPANY")
AND
LIFEUSA INSURANCE COMPANY
OF MINNEAPOLIS, MINNESOTA
(HEREINAFTER REFERRED TO AS "LIFEUSA")
WHEREAS, the Company desires to utilize LifeUSA's skills in adjusting and
paying any claims with respect to Covered Products and New Insurance Products as
those terms are defined in this Agreement;
NOW, THEREFORE, in consideration for the mutual promises and undertakings
set forth herein and for other good and valuable consideration, the parties
hereby agree as follows:
SECTION 1 - DEFINITIONS
1.1 "Covered Products" shall mean ordinary life insurance policies and
annuities issued on the forms listed on the reinsurance contract dated as of
January 1, 1995 (the "Reinsurance Contract") by and between the Company and
LifeUSA. It is expressly understood and agreed that the Reinsurance Contract may
be amended from time to time to add New Insurance Products.
1.2 "New Insurance Products" shall be life insurance and annuity products
developed by LifeUSA or its parent, Life USA Holding, Inc., which are, with the
approval of the Company added to those listed in the Reinsurance Contract.
SECTION 2 - SERVICES
2.1 LifeUSA shall provide all services related to paying claims with
respect to the Covered Products and New Insurance Products in the states listed
in Schedule A hereto. LifeUSA shall provide such claims paying services in the
name of and on behalf of the Company only as provided in this Agreement or as
directed by the Company in writing. Except as specifically set forth in this
Agreement or as authorized by the Company in writing, Holding shall not have
authority to enter into any agreements on the Company's behalf or to alter or
amend any of the policies relating to the Covered Products and New Insurance
Products or to modify, waive or extend any of their provisions.
2.2 In connection with the claims paying services provided by LifeUSA under
this Agreement, LifeUSA shall:
(a) maintain all records, including but not limited to statistical and
accounting records, that a life insurance company would maintain with respect to
the Covered Products and New Insurance Products so as to allow the Company to
make only general ledger entries in its books and records; and
(b) maintain all other data which are necessary to enable the Company to
prepare its annual convention statement and any other reports required by any
governmental agency or reporting bureau or which are reasonably required by the
Company in order that the Company may properly analyze and manage the business
included under this Agreement, provided that such data will be provided by
LifeUSA to the Company upon request bprovided that such data will be provided by
LifeUSA to the Company upon request by the Company.
2.3 LifeUSA shall provide the claims paying services (a) in accordance with
all applicable laws, regulations, bulletins and insurance department
requirements, and (b) in accordance with applicable written rules, regulations,
instructions and directives of the Company regarding claims adjustment and
payment, or such other service standards as the parties shall mutually agree in
writing from time to time.
2.4 LifeUSA shall be liable to the Company for any losses to the Company
caused by negligent or intentional acts of LifeUSA, its officers, employees or
agents.
2.5 LifeUSA agrees to indemnify and hold the Company harmless from and
against any and all losses, costs, damages and expenses (including attorney's
fees) which the Company may incur by reason of any demand or action by any
person arising out of the negligence or intentional acts of LifeUSA, and the
Company agrees to indemnify and hold LifeUSA harmless from and against any and
all losses, costs, damages and expenses (including attorney's fees) which
LifeUSA may incur by reason of any demand or action by any person arising out of
the negligence or intentional acts of the Company.
2.6 If LifeUSA does not perform all of its duties and responsibilities
under this Agreement after written notice and a reasonable opportunity to
perform, the Company may adjust the compensation paid under Section 4 of this
Agreement, or other remittances to Holding, in order to restore the Company to
the position it would have occupied had Holding performed all of its duties and
responsibilities.
SECTION 3 - OPERATION EXPENSES
LifeUSA shall be responsible for all operation expenses incurred in
connection with the business subject to this Agreement, including, by way of
illustration and not of limitation, such items as rentals, salaries, supplies
not furnished by the Company, postage, advertising, local license fees,
attorney's fees, utilities, or cost of equipment.
SECTION 4 - COMPENSATION
4.1 The Company agrees to allow LifeUSA a service fee equal to (a) 0.1% of
the reinsurance allowance or ceding commission (expressed as a percentage)
allowed the Company under the reinsurance contract dated as of January 1, 1995
(the "Reinsurance Contracts") between the Company and LifeUSA multiplied by (b)
the amount of business to which such allowance or commission is applicable.
4.2 If a policy reinsured under the Reinsurance Contract lapses at any
point in time during the first 13 months, LifeUSA agrees to reimburse the
Company an amount equal to the excess, if any, of the total first year service
fee paid by the Company on that policy over the total first year "initial"
premium paid on that policy, as defined in the Reinsurance Contract.
SECTION 5 - STATUS OF LIFEUSA, ITS EMPLOYEES AND AGENTS
While performing its authorities granted herein, LifeUSA shall be deemed an
independent contractor, as the Company reserves no authority or right to control
LifeUSA's method of performance of its duties and responsibilities hereunder. No
employees of LifeUSA shall be regarded as employees of the Company, except as
may be required by governing statutes.
SECTION 6 - EXAMINATION OF BOOKS AND RECORDS
LifeUSA shall, as often as reasonably requested by the Company, submit all
books and records maintained by LifeUSA pursuant hereto for examination and
review by any authorized representative of the Company and/or its quota share
reinsurers; and LifeUSA shall in all things cooperate and render assistance in
such examination. LifeUSA shall make copies of any such books and records and
furnish them to the Company as may be requested by the Company's
representatives.
SECTION 7 - COMMENCEMENT AND TERMINATION
7.1 The effective date of commencement of this Agreement shall be January
1, 1997, and this Agreement shall continue for a minimum of one year and will be
subject to termination upon either party giving one year advance notice of
cancellation.
7.2 If either party fails to perform substantially and materially the
duties and responsibilities set forth in this Agreement or fails to make
required payments hereunder and such failure continues for more than 30 days
after written notice delivered by the other party, the other party may terminate
this Agreement notwithstanding any other provisions to the contrary.
SECTION 8 - MISCELLANEOUS
8.1 This Agreement, and all rights and interests arising herefrom, shall be
binding upon, and shall inure to the benefit of, the parties hereto, their
representatives, successors and assigns; however, the authorities, duties and
responsibilities of either LifeUSA or the Company may not be assigned by either
of such parties without the written consent of the other.
8.2 This Agreement may not be modified verbally, nor may it be modified by
any subsequent practice or course of dealing by the parties, or in any manner
other than in writing signed by the parties hereto. No forbearance or neglect on
the part of the Company to enforce any of the provisions of this Agreement shall
be construed as a waiver of any of its rights or privileges hereunder, unless in
each instance a written memorandum specifically expressing such waiver be made
and subscribed by the President or a Vice President of the Company. No such
waiver shall modify this Agreement or affect the rights of the Company with
respect to any subsequent default or failure or performance by LifeUSA.
8.3 This Agreement shall be deemed to be a Minnesota contract and construed
in accordance with the laws of the State of Minnesota.
8.4 This Agreement supersedes all previous agreements with respect to the
subject matter herein, either oral or written, between the parties hereto.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Agreement as of the dates undermentioned at:
Minneapolis, Minnesota, this 30th day of December, 1996.
/s/ Mark L. Solverud
---------------------
Mark L. Solverud, Vice President
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA
Minneapolis, Minnesota, this 30th day of December, 1996
/s/ Mark A. Zesbaugh
---------------------
Mark A. Zesbaugh, Vice President
LIFEUSA INSURANCE COMPANY
ADMINISTRATION AND MARKETING AGREEMENT
ENTERED INTO BY AND BETWEEN
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
OF MINNEAPOLIS, MINNESOTA
(HEREINAFTER REFERRED TO AS THE "COMPANY")
AND
LIFE USA HOLDING, INC.
OF MINNEAPOLIS, MINNESOTA
(HEREINAFTER REFERRED TO AS "HOLDING")
WHEREAS, Holding, through its subsidiary, LifeUSA Insurance Company
("LifeUSA"), has offered a line of life insurance and annuity products, and the
Company desires to provide a similar line of life insurance and annuity products
utilizing Holding's skills in product design and underwriting; and
WHEREAS, the parties hereto entered into the Joint Marketing Agreement
dated February 16, 1995 (the "Joint Marketing Agreement"); and
WHEREAS, the parties desire to terminate the Joint Marketing Agreement and
substitute in its place this Administration and Marketing Agreement (this
"Agreement") for business written after December 31, 1996;
NOW, THEREFORE, in consideration for the mutual promises and undertakings
set forth herein and for other good and valuable consideration, the parties
hereby agree as follows:
SECTION 1 - TERMINATION OF JOINT MARKETING AGREEMENT
It is hereby agreed, effective January 1, 1997, that the Joint Marketing
Agreement is terminated as to new sales, and this Agreement is substituted in
its place for new sales after December 31, 1996, during the term of this
Agreement.
SECTION 2 - DEFINITIONS
2.1 "Covered Products" shall mean ordinary life insurance policies and
annuities issued on the forms listed on the reinsurance contract dated as of
January 1, 1995 (the "Reinsurance Contract") by and between the Company and
LifeUSA Insurance Company ("LifeUSA"), as amended or replace hereafter. It is
expressly understood and agreed that the Reinsurance Contract may be amended
from time to time to add New Insurance Products.
2.2 "Marketing Services" shall mean identifying prospective agents
("Prospective Agents") of the Company for purposes of marketing the Covered
Products and New Insurance Products, notifying the Company of Prospective Agents
and processing agent appointments and cancellations on behalf of the Company,
and training and supervising all agents appointed with respect to the Covered
Products and New Insurance Products. "Marketing Services" shall also include,
subject to such limitations as the Company may from time to time deem
appropriate, seeking approval on behalf of the Company by appropriate insurance
departments, wherever required, of appointments of Prospective Agents.
2.3 "New Insurance Products" shall be life insurance and annuity products
developed by Holding or its subsidiary, LifeUSA, which are, with the approval of
the Company added to those listed in the Reinsurance Contract. New Insurance
Products shall be products similar to those of LifeUSA written on the Company's
paper.
2.4 "Operating Manuals" shall mean all written rules, regulations,
instructions and directives of the Company regarding its operations, as are in
effect from time to time.
2.5 "Policy Administration Services" shall mean, with respect to the
Covered Products and New Insurance Products, (a) preparation and filing with
state insurance departments, as appropriate all policy form filings, including
premium rates, subject to such limitations as the Company may from time to time
deem appropriate, (b) provision of full administration services, including
billing and collecting premium, monthly processing, loan processing, valuation,
policyholder statements, maintenance of policy records, processing policy
cancellations, policy changes, contractual changes, reinstatements and customer
inquiries, (c) designing, printing and distribution of administrative forms as
they become necessary, and (d) all other administrative activities in connection
with the Covered Products and New Insurance Products, including, but not limited
to, maintaining necessary records and the producing of required reports such
that the cash payments made between Holding and the Company, and between the
Company and its reinsurers, can be accurately computed and recorded. "Policy
Administrative Services" shall not include any activities related to (i)
adjusting or paying claims or (ii) negotiating reinsurance on behalf of the
Company.
2.6 "Services" shall mean Underwriting Services, Policy Administration
Services and Marketing Services.
2.7 "Underwriting Guidelines" shall mean the Company's underwriting
guidelines as in effect from time to time. Holding may recommend changes to the
Underwriting Guidelines, which changes shall be subject to the Company's
approval, which approval shall not be unreasonably withheld.
2.8 "Underwriting Services" shall mean, with respect to the Covered
Products and New Insurance Products, processing and accepting applications and
proposals for insurance, underwriting (including determination of appropriate
rates), policy issuance, policy printing, processing of unscheduled policy
changes, policy cancellations, routing of applications and other papers required
in the underwriting process, routing of issued policies for delivery to
policyholders, and all other related services.
SECTION 3 - SERVICES
3.1 Holding shall provide the Services in the name of and on behalf of the
Company with respect to the Covered Products and New Insurance Products in the
states listed in Schedule A hereto. Holding shall provide the Services in the
name of and on behalf of the Company only as provided in this Agreement or as
directed by the Company in writing. Except as specifically set forth in this
Agreement or as authorized by the Company in writing, Holding shall not have
authority to enter into any agreements on the Company's behalf or to alter or
amend any of the policies relating to the Covered Products and New Insurance
Products or to modify, waive or extend any of their provisions.
3.2 In connection with the Policy Administration Services provided by
Holding under this Agreement, Holding shall:
(a) be responsible for all Company policies entrusted to it whether issued
or not, and shall only issue policies in series;
(b) be responsible for making, or causing to be made, any modifications to
administrative systems required for the ongoing administration of all policies
in force or new policies being issued;
(c) maintain all records, including but not limited to statistical and
accounting records, that a life insurance company would maintain with respect to
the Covered Products and New Insurance Products so as to allow the Company to
make only general ledger entries in its books and records; and
(d) maintain all other data which are necessary to enable the Company to
prepare its annual convention statement and any other reports required by any
governmental agency or reporting bureau or which are reasonably required by the
Company in order that the Company may properly analyze and manage the business
included under this Agreement, provided that such data will be provided by
Holding to the Company upon request by the Company.
3.3 In connection with the Marketing Services provided by Holding under
this Agreement, and subject to such limitations as the Company may from time to
time determine, Holding shall have the authority, on behalf of the Company, to
appoint agents of the Company for the purpose of soliciting and producing the
Covered Products and New Insurance Products and to remove any of such agents.
The purpose of such agent appointment is to enable the agents to sell the
Covered Products and New Insurance Products in those states in which they are
licensed and authorized to sell products for LifeUSA in all jurisdictions listed
in Schedule A hereto. Holding will also use its best efforts to cause such
agents to sell the Covered Products and the New Insurance Products. Holding
shall pay all costs of licensing and appointing such agents on behalf of the
Company.
3.4 Holding shall use reasonable efforts to cause the Company's agents
appointed with respect to the Covered Products and the New Insurance Products,
who are also appointed agents of any insurer affiliate of Holding, to distribute
the Company's variable universal life, variable annuity, term insurance,
long-term care and other mutually agreed products of the Company (the
"Non-covered Products") for compensation to Holding and pursuant to terms as
mutually agreed.
3.5 The Covered Products and the New Insurance Products shall be
differentiated from LifeUSA products through terms as the Company and Holding
mutually agree. The Company will commit to annual first year and single premium
goals for the Covered Products and the New Insurance Products prior to the
beginning of each calendar year during the term of this Agreement. The goal for
1997 is $390,000,000 in first year and single premium. Six months prior to the
beginning of each calendar year commencing with respect to the calendar year
1998, the Company and Holding will mutually agree to the amount of first year
and single premium which can be written on the Covered Products and the New
Insurance Products for the next calendar year.
3.6 Holding shall not:
(e) accept applications for, bind or issue any insurance covering any risk
prohibited in writing by the Company or excluded (whether by exclusion or
warranty) from the Reinsurance Contract, as amended or replaced from time to
time, covering business produced under this Agreement;
(f) have any authority, right or responsibility with respect to any of the
following activities related to the business produced under this Agreement: (i)
adjusting or paying any claims; or (ii) negotiating reinsurance on behalf of the
Company;
(g) mass cancel policies in force that are Covered Products or New
Insurance Products except upon written instructions from the Company to do so;
(h) bind the Company in contravention of its Operating Manuals or
Underwriting Guidelines; or
(i) issue any advertising or promotional material bearing the Company's
name without first obtaining the written approval of the Company.
3.7 Holding shall provide the Services (a) in accordance with all
applicable laws, regulations, bulletins and insurance department requirements,
(b) in accordance with applicable Operating Manuals, or such other service
standards as the parties shall mutually agree in writing from time to time, and
(c) in accordance with Sections 3.1 through 3.6 of this Agreement.
3.8 Holding shall be liable to the Company for any losses to the Company
caused by negligent or intentional acts of Holding, its officers, employees or
agents.
3.9 Holding agrees to indemnify and hold the Company harmless from and
against any and all losses, costs, damages and expenses (including attorney's
fees) which the Company may incur by reason of any demand or action by any
person arising out of the negligence or intentional acts of Holding, and the
Company agrees to indemnify and hold Holding harmless from and against any and
all losses, costs, damages and expenses (including attorney's fees) which
Holding may incur by reason of any demand or action by any person arising out of
the negligence or intentional acts of the Company.
3.10 If Holding does not perform all of its duties and responsibilities
under this Agreement after written notice and a reasonable opportunity to
perform, the Company may adjust the compensation paid under Section 6 of this
Agreement, or other remittances to Holding, in order to restore the Company to
the position it would have occupied had Holding performed all of its duties and
responsibilities.
3.11 This Agreement is not exclusive. The Company reserves the right to
appoint agents in the territory covered by this Agreement for the purpose of
producing business other than the Covered Products and New Insurance Products.
Holding reserves, on behalf of its subsidiaries, the right of such subsidiaries
to appoint agents, including agents appointed with respect to the Covered
Products and New Insurance Products pursuant to this Agreement, for the purpose
of producing business for such subsidiaries.
SECTION 4 - PREMIUMS
4.1 All premiums received by Holding with respect to the Covered Products
and New Insurance Products, either before or after termination of this
Agreement, shall be held by Holding as trustee for the Company. Holding shall
have the authority to draw against said funds held for and on behalf of the
Company, but only for one or more of the following purposes:
a. Payment of return premiums;
b. Payment of policy claims and benefits; or
c. Payment of reinsurance premiums for any related reinsurance the Company
has obtained with respect to any of the Company's policies issued under this
Agreement.
4.2 Premiums temporarily held by Holding as trustee for the Company may be
invested by Holding in demand or time bank accounts as may be authorized by the
Minnesota Insurance Codes as legal bank investments for Life Insurance
Companies, until drawn on for one or more of the purposes set forth in Section
4.1. Holding shall promptly remit all premiums to the Company's reinsurer in
accordance with the terms of the Reinsurance Contract.
4.3 The Company hereby assigns to Holding all income derived from premiums
invested on behalf of the Company by Holding pursuant to the authority granted
herein.
4.4 The keeping of an account with Holding on the Company's books in the
form of a debtor-creditor account is to be deemed merely a record of business
transacted. Neither the keeping of an account in such form, nor the rendering of
same, nor failure to enforce prompt remittance, nor alteration in compensation
rate, nor compromise or settlement, shall be held to waive assertion of the
trust relationship as to premiums collected by Holding. It is further understood
and agreed that Holding is responsible for, and guarantees to the Company,
payment of all premiums on policies due and received on behalf of the Company
with respect to the Covered Products and the New Insurance Products. Should
Holding fail to pay the Company any such premiums received when due, Holding
agrees to bear any collection or other expense, including reasonable attorney's
fees and costs, expended by the Company to enforce collection from Holding.
SECTION 5 - OPERATION AND ACQUISITION EXPENSES
Holding shall be responsible for all operation and acquisition expenses
incurred in connection with the Covered Products and New Insurance Products
subject to this Agreement, including, by way of illustration and not of
limitation, such items as rentals, salaries, supplies not furnished by the
Company, postage, advertising, local license fees, attorney's fees, utilities,
cost of equipment, agents' fees or commissions and assessments or assignments,
if any, lawfully made by governmental authority, the sole liability of the
Company being payment of premium taxes and payment to Holding of the
compensation stipulated in Section 6 hereof.
SECTION 6 - COMPENSATION
6.1 The Company agrees to allow Holding a service fee equal to (a) the
reinsurance allowance or ceding commission (expressed as a percentage) allowed
the Company under the Reinsurance Contract, less 0.1%, multiplied by (b) the
amount of business to which such allowance or commission is applicable. Holding
shall be responsible for paying all commissions due agents appointed by the
Company with respect to business written by the Company and reinsured under the
Reinsurance Contract.
6.2 Holding agrees to reimburse the Company for premium taxes on all
business subject hereto.
6.3 If a policy reinsured under the Reinsurance Contract lapses at any
point in time during the first 13 months, Holding agrees to reimburse the
Company an amount equal to the excess, if any, of the total first year service
fee paid by the Company under Section 6.1 on that policy over the total first
year "initial" premium paid on that policy, as defined in the Reinsurance
Contract.
6.4 Holding will pay all payments assessed by the various state guaranty
associations based on the Covered Products business. The Company will reimburse
Holding for the Company's share of such assessments based on premiums retained,
net of reinsurance cessions to LifeUSA. The Company and Holding agree that
assessments will be sought to be recovered either through future premium tax
offsets or additional margins or inforce business.
SECTION 7 - REPORTS AND REMITTANCES
7.1 Within 10 days after the end of each month, Holding shall provide the
Company with a copy of the report LifeUSA sends the reinsurer under the
Reinsurance Agreement.
7.2 Within 10 days after the end of each month, Holding shall report the
net written premium hereunder for the month of account and remit the provision
for premium taxes as stipulated in Section 6.
SECTION 8 - STATUS OF HOLDING, ITS EMPLOYEES AND AGENTS
While performing its authorities granted herein, Holding shall be deemed an
independent contractor, as the Company reserves no authority or right to control
Holding's method of performance of its duties and responsibilities hereunder. No
employees of Holding shall be regarded as employees of the Company, except as
may be required by governing statutes.
SECTION 9 - EXAMINATION OF BOOKS AND RECORDS
Holding shall, as often as reasonably requested by the Company, submit all
books and records maintained by Holding pursuant hereto for examination and
review by any authorized representative of the Company and/or its quota share
reinsurers; and Holding shall in all things cooperate and render assistance in
such examination. Holding shall make copies of any such books and records and
furnish them to the Company as may be requested by the Company's
representatives.
SECTION 10 - OWNER OF POLICY FORMS, SUPPLIES AND LICENSES
All policy forms, records and supplies furnished by the Company to Holding,
as well as any policy forms or other supplies on which the Company's name
appears, whether supplied by the Company or not, shall be and remain the
property of the Company and shall be turned over to the Company promptly upon
demand. All licenses and other material relating to governmental licensing or
authorization of the Company with respect to this Agreement shall be and remain
the property of the Company and shall be turned over to the Company by Holding
promptly upon demand.
SECTION 11 - COMMENCEMENT AND TERMINATION
11.1 The effective date of commencement of this Agreement shall be January
1, 1997, and this Agreement shall continue for a minimum of one year and will be
subject to termination upon either party giving one year advance notice of
cancellation. In the event of the termination of this Agreement, the Company
shall not directly or indirectly (through reinsurance or otherwise) sell any
life or annuity products similar to the Covered Products or the New Insurance
Products during the one year following such termination.
In the event of a termination of this Agreement, Holding may not directly
or indirectly (through reinsurance or otherwise) sell any products similar to
products of the Company other than Covered Products during one year following
such termination.
11.2 If either party fails to perform substantially and materially the
duties and responsibilities set forth in this Agreement or fails to make
required payments hereunder and such failure continues for more than 30 days
after written notice delivered by the other party, the other party may terminate
this Agreement notwithstanding any other provisions to the contrary.
SECTION 12 - MISCELLANEOUS
12.1 This Agreement, and all rights and interests arising herefrom, shall
be binding upon, and shall inure to the benefit of, the parties hereto, their
representatives, successors and assigns; however, the authorities, duties and
responsibilities of either Holding or the Company may not be assigned by either
of such parties without the written consent of the other.
12.2 This Agreement may not be modified verbally, nor may it be modified by
any subsequent practice or course of dealing by the parties, or in any manner
other than in writing signed by the parties hereto. No forbearance or neglect on
the part of the Company to enforce any of the provisions of this Agreement shall
be construed as a waiver of any of its rights or privileges hereunder, unless in
each instance a written memorandum specifically expressing such waiver be made
and subscribed by the President or a Vice President of the Company. No such
waiver shall modify this Agreement or affect the rights of the Company with
respect to any subsequent default or failure or performance by Holding.
12.3 This Agreement shall be deemed to be a Minnesota contract and
construed in accordance with the laws of the State of Minnesota.
12.4 This Agreement supersedes all previous agreements with respect to the
subject matter herein, either oral or written, between the parties hereto.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Agreement as of the dates undermentioned at:
Minneapolis, Minnesota, this 30th day of December, 1996.
/s/ Mark L. Solverud
--------------------
Mark L. Solverud, Vice President
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA
Minneapolis, Minnesota, this 30th day of December, 1996
/s/ Mark A. Zesbaugh
---------------------
Mark A. Zesbaugh,
Executive Vice President
LIFE USA HOLDING, INC.
SCHEDULE A
TO THE
ADMINISTRATION AND MARKETING AGREEMENT
BETWEEN
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
AND
LIFE USA HOLDING, INC.
The territory covered by this Agreement includes the following
jurisdictions:
All states* except: New York
No other jurisdiction shall be included in the territory covered without
the express written agreement of both parties.
*Life USA Holding, Inc. (and its affiliates) will not act as Allianz Life
Insurance Company of North America's general agent for insurance sales in the
State of Connecticut and will not perform duties nor have responsibilities
related thereto under this Agreement.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of January 1, 1997 between LIFE
USA HOLDING, INC., a Minnesota corporation (the "Company"), and MARGERY G.
HUGHES (the "Executive").
R E C I T A L S:
WHEREAS, the Executive is now and has been the President and Chief
Operating Officer of the Company and serves as an officer and/or director of
certain subsidiaries of the Company;
WHEREAS, the Executive and the Company wish to enter into this Agreement to
provide for the continued employment of Executive; and
WHEREAS, the Executive and the Company are willing to enter into this
Agreement upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual premises and agreements set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Employment and Duties. The parties hereby agree that, during the term of
this Agreement as set forth in paragraph 2 below, the Executive shall be
employed as the President and Chief Operating Officer of the Company with the
duties and responsibilities attendant to such positions. In discharging such
duties and responsibilities, the Executive may also serve as an executive
officer and/or director of any direct or indirect subsidiary of the Company
(collectively the "Subsidiaries"). The salary, other compensation and benefits
provided herein may be allocated among the Company and the Subsidiaries based
upon the portion of the Executive's services provided to the Company and each of
the Subsidiaries, respectively, and the Executive shall assist the Company in
making such allocation as the Company may reasonably request. During the term of
this Agreement, the Executive shall apply on a full-time basis (allowing for
usual vacations and sick leave) all of the Executive's skill and experience to
the performance of the Executive's duties hereunder with the Company and the
Subsidiaries. It is understood that the Executive may have other business
investments and participate in charitable organizations which may, from time to
time, require minor portions of Executive's time, but which shall not interfere
or be inconsistent with the Executive's duties under this Agreement. The
Executive shall perform the Executive's duties at the Company's principal
executive offices in Minneapolis, Minnesota or at such other location as may be
mutually agreed upon by the Executive and the Company; provided that the
Executive shall travel to other locations at such times as may be necessary for
the performance of the Executive's duties under this Agreement.
2. Term of Employment. Unless sooner terminated as provided in paragraph 4
below, the term of this Agreement shall commence on the date hereof and shall
continue through December 31, 1999; provided that the term shall be
automatically extended for one year on each December 31st commencing December
31, 1997 unless either party gives written notice to the other prior to the date
on which the automatic extension would be effective; provided that the term
shall not be extended beyond Executive's sixty-fifth (65th) birthday.
3. Compensation and Benefits. During the term of this Agreement, the
Executive shall be entitled to the following compensation and benefits for
service to the Company and the Subsidiaries, including service as a director of
the Company or its Subsidiaries:
(a) Base Salary. The Executive shall be paid a base salary at a minimum
annual rate of $315,000, payable in accordance with the Company's customary
payroll policy, which salary shall be reviewed and may be increased from time to
time at the discretion of the Board of Directors of the Company or the
Compensation Committee of the Board of Directors (the "Base Salary"); provided
that the amount of the Base Salary shall not be reduced after it has been
increased by the Board of Directors or the Compensation Committee without the
Executive's written consent. The performance of the Executive shall be reviewed
at least once each calendar year which may be at the same time as any adjustment
to the Base Salary of Executive.
(b) Bonus. The Executive shall, in addition to the Base Salary, also be
entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by
the Company of performance goals established by the Board of Directors or the
Compensation Committee of the Company's Board of Directors.
(c) Stock Incentives. The Executive shall be eligible to receive stock
options under any stock based plan from time to time adopted by the Company (the
"Stock Plans"), as from time to time determined by the Board of Directors or
Stock Option Committee of the Company's Board of Directors.
(d) Reimbursement of Expenses. The Company shall reimburse the Executive
for all business expenses properly documented in accordance with the Company's
expense reimbursement policy.
(e) Other Benefits. The Executive shall be entitled to participate and
shall be included in any employee benefit plan, medical/dental coverage plan,
life insurance plan, disability coverage plan, or similar benefit plan of the
Company now existing or established hereafter which are generally applicable to
executives of the Company.
4. Termination of Employment.
(a) Death or Disability. In the event of the Executive's death or
disability as defined in the Company's long term disability plan then in effect,
the employment of the Executive hereunder shall terminate and the Company's
obligation to make further Base Salary and Annual Bonus (to the extent not yet
earned) payments hereunder shall thereupon terminate as of the end of the month
in which such death or disability occurs. The Executive's rights to other
compensation and benefits shall be determined under the Company's benefit plans
and policies applicable to Company executives then in effect.
(b) Termination for Cause by the Company. By following the procedure set
forth in paragraph 4(e), the Company shall have the right to terminate the
employment of the Executive for "Cause" in the event the Executive: (i) has
repeatedly failed to perform the Executive's duties under this Agreement, which
failure is willful and deliberate; (ii) has engaged in an act or acts of
dishonesty which is or are intended to result in substantial personal enrichment
for the Executive; (iii) has knowingly engaged in conduct which is materially
injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A)
any felony (other than any felony arising out of negligence), or (B) any crime
or offense involving dishonesty with respect to the Company or any of the
Subsidiaries; (v) has failed to comply with the covenants contained in paragraph
5 of this Agreement; or (vi) knowingly provides materially misleading
information concerning the Company to the Board of Directors of the Company or
any of its Subsidiaries, any governmental body or regulatory agency or to any
lender or other financing source or proposed financing source of the Company or
its Subsidiaries. If the employment of the Executive is terminated by the
Company for Cause, the Company's obligation to make further Base Salary and
Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon
terminate, except the Executive shall receive the Base Salary through the end of
the month during which such a termination occurs. The Executive's rights to
other compensation and benefits shall be determined under the Company's benefit
plans and policies applicable to executives of the Company then in effect.
(c) Termination for Good Reason by the Executive. By following the
procedure set forth in paragraph 4(e), the Executive shall have the right to
terminate the Executive's employment with the Company for "Good Reason" in the
event (i) the Executive is not at all times the duly elected the President and
Chief Operating Officer of the Company; (ii) there is any material reduction in
the scope of the Executive's authority and responsibility; (iii) there is a
reduction in the Executive's Base Salary, a material reduction in the amount of
Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan
or employee retirement plan applicable to the Executive which is materially
adverse to the Executive, or a material reduction in the other benefits to which
the Executive is entitled under paragraph 3(e) above; (iv) the Company requires
the Executive's principal place of employment to be anywhere other than the
Company's principal executive offices, or there is a relocation of the Company's
principal executive offices outside of Minneapolis/St. Paul, Minnesota
metropolitan area; or (v) the Company otherwise fails to perform its obligations
under this Agreement. If the employment of the Executive is terminated by the
Executive for Good Reason before a Change in Control (as defined below) or
following twenty-four (24) months after a Change in Control, the Executive shall
be entitled to the severance benefits set forth in paragraph 4(f) below. If the
employment of the Executive is terminated by the Executive for Good Reason upon
or within (and including) twenty-four (24) months after a Change in Control, the
Executive shall be entitled to the severance benefits set forth in paragraph
4(g) below. In addition, in the event a Change in Control has occurred and the
Executive elects upon ten (10) days prior notice to the Company, to terminate
employment with the Company within the sixty (60) period following the first
anniversary of the Change in Control, such termination shall be considered a
termination by the Executive for Good Reason and the Executive shall be entitled
to the severance benefits under paragraph 4(g) below.
(d) Termination Without Cause. The Company may terminate the Executive's
employment without Cause prior to the expiration of the term of this Agreement.
If the employment of the Executive is terminated by the Company without Cause
before a Change in Control or following twenty-four (24) months after a Change
in Control, the Executive shall be entitled to the severance benefits set forth
in paragraph 4(f) below. If the employment of the Executive is terminated by the
Company without Cause upon or within (and including) twenty-four (24) months
after a Change in Control, the Executive shall be entitled to the severance
benefits set forth in paragraph 4(g) below.
(e) Notice and Right to Cure.
(i) Termination by Company for Cause. If the Company proposes to
terminate the employment of the Executive for Cause under paragraph
4(b), the Company shall give written notice to the Executive specifying
the reasons for such proposed determination with particularity and, in
the case of a termination for Cause under paragraph 4(b)(i), the
Executive shall have a reasonable opportunity to correct any curable
situation to the reasonable satisfaction of the Board of Directors of
the Company, which period shall be no less than thirty (30) days from
the Executive's receipt of the notice of proposed termination.
Notwithstanding the foregoing, the Executive's employment shall not be
terminated for Cause unless and until there shall be delivered to the
Executive a copy of the resolution duly adopted by the affirmative vote
of not less than the majority of the members of the Board of Directors
of the Company at a meeting called and held for the purpose (after
reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's legal counsel, to be heard
before the Board of Directors) finding that, in the opinion of the
Company's Board of Directors, the Executive has engaged in conduct
justifying a termination for Cause.
(ii) Termination by Executive for Good Reason. If the Executive
proposes to terminate the Executive's employment for Good Reason under
paragraph 4(c) above (other than the last sentence of paragraph 4(c)
above), the Executive shall give written notice to the Company,
specifying the reason therefor with particularity. In the event the
Executive proposes to terminate employment for Good Reason under
paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination shall be
effective on the date of such notice. In the event the Executive
proposed to terminate employment for Good Reason under paragraph
4(c)(v) above, the Company will have an opportunity to correct any
curable situation to the reasonable satisfaction of the Executive
within the period of time specified in the notice which shall not be
less than thirty (30) days. If such correction is not so made or the
circumstances or situation is such that it is not curable, the
Executive may, within thirty (30) days after the expiration of the time
so fixed within which to correct such situation, give written notice to
the Company that the Executive's employment is terminated for Good
Reason effective forthwith.
(f) Severance Benefits. If the Executive is entitled to severance benefits
under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a Change in
Control or following twenty-four months after a Change in Control, the Executive
shall be provided to the following benefits (regardless of the death or
disability of the Executive after the Termination Date):
(i) Base Salary. The Company shall continue to pay to the Executive the
Base Salary when and as such Base Salary would have been paid from the
date of termination (the "Termination Date") through the end of the
term of this Agreement under paragraph 2 as if such termination did not
occur and there were no further automatic extensions of the term
pursuant to paragraph 2 (the "Severance Period") as if the Executive
continued to be employed by the Company during the Severance Period and
regardless of the death or disability of the Executive subsequent to
the Termination Date.
(ii) Annual Bonus. If the effective date of such termination occurs
before the Annual Bonus for any preceding calendar year has been paid,
the Company shall, within thirty (30) days after the Termination Date,
pay to the Executive the amount of the Executive's Annual Bonus for
such preceding calendar year when and as it would have been paid if the
Executive remained employed by the Company.
(iii) Disability, Life Insurance and Medical/Dental Coverage. The
Executive shall be entitled to the disability coverage, life insurance
and medical/dental coverage which the Executive and the Executive's
family received under paragraph 3(e) as if the Executive continued to
be employed by the Company during the Severance Period; provided that
if Executive obtains new employment with comparable benefits during the
Severance Period, all entitlements under this paragraph 4(f)(iii) shall
cease. Nothing in this paragraph shall be construed as providing
Executive with coverage under any plan of Employer to which Executive
would not otherwise be entitled and in the event any coverage is
unavailable, e.g., if Executive is uninsurable, Employer's obligations
under this paragraph may be satisfied by paying to Executive the cost
of such coverage if it were available, as determined in good faith by
the Company.
(iv) Stock Options. Not later than thirty (30) days after the date on
which the Executive's employment terminates, the Company shall pay the
Executive a lump sum cash payment equal to the amount by which the fair
market value (determined as of the Termination Date) of the number of
shares of stock subject to any stock option granted under the Stock
Plans which was not exercisable on the Termination Date and which would
have become vested and exercisable during the Severance Period if the
Executive had remained employed by the Company during the Severance
Period.
(g) Severance Benefits for Change in Control. In the event of a Change in
Control and either upon or within (and including) twenty-four (24) months after
such Change in Control, the Executive terminates employment for Good Reason or
the Executive's employment is terminated by the Company for any reason other
Cause, then (regardless of the death or disability of the Executive after the
Termination Date) the Company shall pay the Executive a lump sum cash payment
within five (5) days after the Termination Date, in an amount equal to the
amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of the
Deemed Bonus (as defined below), and the Company shall also provide the
Executive the severance benefits referred to in paragraph 4(f)(iii) as provided
therein. In addition, the Company shall pay the Executive the Gross-Up Payment
in accordance with the following provisions:
(i) Gross-Up Payment. Anything to the contrary notwithstanding, in the
event it shall be determined that any payment, distribution or benefit
made or provided by the Company to or for the benefit of the Executive
(whether pursuant to this Agreement or otherwise) (a "Payment"), would
be subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended, (the "Code") or any interest or
penalties with respect to such excise tax (such excise tax, together
with any such interest and penalties, are collectively referred to as
the "Excise Tax"), then the Company shall pay the Executive in cash an
amount (the "Gross-Up Payment") such that after payment by the
Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including but not limited to income taxes
(and any interest and penalties imposed with respect thereto) and the
Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed on the
Payments.
(ii) Determination of Gross-Up Payment. Subject to paragraph 4(g)(iii)
below, all determinations required to be made under this paragraph
4(g)(i), including whether a Gross-Up Payment is required and the
amount of the Gross-Up Payment, shall be made by the firm of
independent public accountants selected by the Company to audit its
financial statements for the year immediately preceding the Change in
Control (the "Accounting Firm") which shall provide detailed supporting
calculations to the Company and the Executive within thirty (30) days
after the Termination Date. In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group
effecting the Change in Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations
required under this paragraph 4(g) (which accounting firm shall then be
referred to as the "Accounting Firm"). All fees and expenses of the
Accounting Firm in connection with the work it performs pursuant to
this paragraph 4(g) shall be promptly paid by the Company. An Gross-Up
Payment (as determined pursuant to paragraph 4(g)(i) above) shall be
paid by the Company to the Executive within five (5) days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall
furnish the Executive with a written opinion that failure to report the
Excise Tax on the Executive's applicable federal income tax return
would not result in the imposition of a negligence or a similar
penalty. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm, it is possible that Gross-up
Payments which will not have been made by the Company should have been
made ("Underpayment"). In the event that the Company exhausts its
remedies pursuant to paragraph 4(g)(iii) below, and the Executive is
thereafter required to make a payment of Excise Tax, the Accounting
Firm shall promptly determine the amount of the Underpayment that has
occurred and any such Underpayment shall be paid by the Company to the
Executive within five (5) days after such determination.
(iii) Contest. The Executive shall notify the Company in writing of any
claim made by the Internal Revenue Service that, if successful, would
require the Company to pay a Gross-Up Payment. Such notification shall
be given as soon as practicable but no later than ten (10) business
days after the Executive knows of such claim and shall apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay such claim prior to
the expiration of the thirty (30) day period following the date on
which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Employee shall:
(A) give the Company any information reasonably requested by
the Company relating to such claim;
(B) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time
to time, without limitation, accepting legal representation
with respect to such claim by an attorney selected by the
Company and reasonably acceptable to the Executive;
(C) cooperate with the Company in good faith in order
effectively to contest such claim;
(D) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company
shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with
such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income
tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing
provisions of this paragraph 4(g)(iii), the Company shall
control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at
its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided,
however, that if the Company directs the Executive to pay such
claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free
basis, from any Excise Tax or income tax, including interest
or penalties with respect thereto, imposed with respect to
such advance or with respect to any imputed income with
respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to
which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect
to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service
or any other taxing authority.
(iv) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to paragraph 4(g)(iii), the Executive becomes
entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of paragraph 4(g)(iii)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to paragraph
4(g)(iii), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does
not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Gross-Up Payment required to be paid.
(h) Benefits in Lieu of Severance Pay Policy. The severance benefits
provided for in this paragraph 4 are in lieu of any benefits that would
otherwise be provided to the Executive under the Company's severance pay policy
and the Executive shall not be entitled to any benefits under the Company's
severance pay policy.
(i) No Funding of Severance. Nothing contained in this Agreement or
otherwise shall require the Company to segregate, earmark or otherwise set aside
any funds or other assets to provide for any payments required to be made under
this paragraph 4 and the rights of the Executive to the severance benefits
hereunder shall be solely those of a general, unsecured creditor of the Company.
However, the Company may, in its discretion, deposit cash or property, or a
combination of both, equal in value to all or a portion of the amounts
anticipated to be payable hereunder into a trust, the assets of which are to be
distributed by such times as determined by the trustee of such trust; provided
that such assets shall be subject at all times to the rights of the Company's
general creditors.
(j) Definitions.
A "Change in Control" shall be deemed to have occurred if, prior to the
expiration of the term of the Employment Agreement:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934) (other than the Company or any of
its subsidiaries or any employee benefit plan of the Company or any of
its subsidiaries) becomes a beneficial owner, directly or indirectly,
of securities of the Company representing 20% or more of the voting
power of all of the Company's then outstanding securities; or
(ii) during any period of two consecutive years individuals who at the
beginning of such period constituted the Board of Directors of the
Company (the "Incumbent Directors") together with any director (the
"New Incumbent Director") whose nomination or election was approved by
at least two-thirds of the Incumbent Directors and any New Incumbent
Director who was previously elected, in each case who are directors at
the time of the nomination or election of such director cease for any
reason to constitute at least a majority, the Board of Directors of the
Company; or
(iii) the shareholders of the Company approve the sale of all, or
substantially all, of the business or assets of the Company or the
liquidation or dissolution of the Company.
The "Deemed Bonus" shall be an amount equal to the number of calendar years
(including the calendar year in which the Termination Date occurs) multiplied by
the Company shall pay the Executive an amount equal to the greater of (A) the
Annual Bonus paid to the Executive for the period after the Change of Control or
(B) the average of the Annual Bonus paid or payable to the Executive in respect
of the two calendar years immediately preceding the calendar year in which the
Change in Control occurs.
5. Confidentiality; Non-Solicitation Covenant.
(a) Confidentiality. The Executive agrees that, at all times, both during
the Executive's employment and after the termination thereof, the Executive
shall not divulge to any other person, firm or corporation, or in any way use
for the Executive's own benefit, except as required in the conduct of the
business of the Company or any of its Subsidiaries or as authorized in writing
on behalf of the Company, any trade secrets or confidential information of the
Company or its Subsidiaries obtained during the course of the Executive's
employment with the Company or its Subsidiaries. The Executive also agrees that
the Executive will not, either subsequent to termination of employment or during
employment, except as required in the conduct of the business of the Company or
any of its Subsidiaries, or as authorized in writing on behalf of the Company,
interfere with or disturb or attempt to interfere with or disturb any
employment, contractual or business arrangements of the Company or any of its
Subsidiaries with any of its employees, agents, suppliers, customers, reinsurers
or other parties with which the Company or any of its Subsidiaries has a
contractual relationship, as the case may be.
(b) Non-Solicitation Covenant. While the Executive is actively employed
with the Company and, in the event of a termination of employment with the
Company for any reason, for a period of two years after the Termination Date,
the Executive agrees that, except with the prior written permission of the Board
of Directors of the Company, the Executive will not offer to hire, entice away,
or in any manner attempt to persuade any officer, employee, or agent of the
Company or any of the Subsidiaries to discontinue his or her relationship with
the Company or any of the Subsidiaries nor will the Executive directly or
indirectly solicit, divert, take away or attempt to solicit any business of the
Company or any of its Subsidiaries as to which Executive has acquired any
knowledge during the term of the Executive's employment with the Company.
(c) Remedies. If the Executive commits a breach, or threatens to commit a
breach, of any of the provisions of this paragraph 5, the Company shall have the
following rights and remedies, in addition to any rights and remedies otherwise
available at law or equity:
(i) The right and remedy to have the provisions of this paragraph 5
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed by the Executive that any such breach or
threatened breach will cause irreparable injury to the Company and the
Subsidiaries and that money damages will not provide an adequate remedy
to the Company and the Subsidiaries; and
(ii) The right and remedy to require the Executive to account for and
pay over to the Company all compensation, profits, monies, accruals,
increments, or other benefits, other than those payable under this
Agreement, derived or received by the Executive or the enterprise in
competition with the Company or any of the Subsidiaries as the result
of any transactions constituting a breach of any part of this paragraph
5, and Executive agrees to account for and pay over to the Company such
amounts promptly upon demand therefor.
6. Beneficiaries. In the event of the Executive's death after termination
of employment, any amount or benefit payable or distributable to him pursuant to
this Agreement shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument received by the Company prior to the
Executive's death, if any, or, if no beneficiary has been designated, to the
Executive's estate, but such designation shall not be deemed to supersede any
beneficiary designation under any benefit plan of the Company. Whenever this
Agreement provides for the written designation of a beneficiary of beneficiaries
of the Executive, the Executive shall have the right to revoke such designation
and to redesignate a beneficiary or beneficiaries by written notice to either
the Company to such effect, except to the extent, if any, restricted by law.
7. Rights in the Event of Dispute. In the event of a dispute between the
Company and the Executive regarding the Executive's employment or this
Agreement, it is the intention of this Agreement that the dispute shall be
resolved as expeditiously as possible, consistent with fairness to both sides,
and that during pendency of the dispute the Executive and the Company shall be
on equal footing, as follows:
(a) Arbitration. Any claim or dispute relating to the Executive's
employment or the terms and performance of this Agreement, shall be resolved by
binding private arbitration before three arbitrators and any award rendered by
any arbitration panel, or a majority thereof, may be filed and a judgment
obtained in any court having jurisdiction over the parties unless the relief
granted in the award is delivered within ten (10) days of the award. Either
party may request arbitration by written notice to the other party. Within
thirty (30) days of receipt of such notice by the opposing party, each party
shall appoint a disinterested arbitrator and the two arbitrators selected
thereby shall appoint a third neutral arbitrator; in the event the two
arbitrators cannot agree upon the third arbitrator within then (10) days after
their appointment, then the neutral arbitrator shall be appointed by the Chief
Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding
conducted hereunder shall be in the City of Minneapolis and shall follow the
procedures set forth in the Rules of Commercial Arbitration of the American
Arbitration Association, and both sides shall cooperate in as expeditious a
resolution of the proceeding as is reasonable under the circumstances. The
arbitration panel shall have the power to enter any relief it deems fair and
just on any claim, including interim and final equitable relief, along with any
procedural order that is reasonable under the circumstances.
(b) Expenses of Prosecution/Defense of Claim. During the pendency of a
dispute between the Company and the Executive relating to the Executive's
employment or the terms or performance of this Agreement, the Company shall
promptly pay the Executive's reasonable expenses of representation upon delivery
of periodic billings for same, provided that (i) Executive (or a person claiming
on the Executive's behalf) shall promptly repay all amounts paid hereunder at
the conclusion of the dispute if the resolution thereof includes a finding that
the Executive did not act in good faith in the matter in dispute or in the
dispute proceeding itself, and (ii) no claim for expenses of representation
shall be submitted by the Executive or any person acting on the Executive's
behalf unless made in writing to the Board of Directors within one year of the
performance of the services for which such claim is made.
8. No Obligation to Mitigate Damages. In the event the Executive becomes
eligible to receive compensation or benefits subsequent to the termination of
the Executive's employment under this Agreement, the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the Executive's
termination of employment, the compensation and benefits received from such
employment shall not reduce the compensation and benefits otherwise due under
this Agreement, except as provided in paragraph 4(f)(iii) above.
9. Other Benefits. The benefits provided under this Agreement shall, except
to the extent otherwise specifically provided herein, be in addition to, and not
in derogation or diminution of, any benefits that Executive or the Executive's
beneficiary may be entitled to receive under any other plan or program now or
hereafter maintained by the Company, or its Subsidiaries.
10. Successors. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to expressly
assume and agree to perform its obligations under this Agreement in the same
manner and to the same extent that the Company would be required to perform them
if no succession had taken place unless, in the opinion of legal counsel
mutually acceptable to the Company and the Executive, such obligations have been
assumed by the successor as a matter of law. Failure of the Company to obtain
such agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the Executive to
terminate the Executive's employment and to receive the payments provided for in
paragraph 4(f) above as if the Executive terminated this Agreement for Good
Reason. The Executive's rights under this Agreement shall inure to the benefit
of, and shall be enforceable by, the Executive's legal representative or other
successors in interest, but shall not otherwise be assignable or transferable.
11. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable, the invalidity or unenforceability
thereof shall not affect any other provisions or applications of this Agreement
which can be given effect without the invalid or unenforceable provision or
application.
12. Survival. The rights and obligations of the parties pursuant to this
Agreement shall survive the term of the employment to the extent that any
performance is required hereunder after the expiration or termination of such
term.
13. Notices. All notices under this Agreement shall be in writing and shall
be deemed effective when delivered in person (in the Company's case, to its
Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid,
addressed, in the case of the Executive, to the Executive's last known address
as carried on the personnel records of the Company and, in the case of the
Company, to the corporate headquarter,s, attention of the Secretary, or to such
other address as the party to be notified may specify by written notice to the
other party.
14. Amendments and Construction. This Agreement may only be amended in a
writing signed by the parties hereto. This Agreement shall be construed under
the laws of the State of Minnesota. Paragraph headings are for convenience only
and shall not be considered a part of the terms and provisions of the Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first written above.
LIFE USA HOLDING, INC.
By /s/ Robert W. MacDonald
---------------------------
Robert W. MacDonald, Chairman
and Chief Executive Officer
/s/ Margery G. Hughes
----------------------
Margery G. Hughes
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of January 1, 1997 between LIFE
USA HOLDING, INC., a Minnesota corporation (the "Company"), and MARK A. ZESBAUGH
(the "Executive").
R E C I T A L S:
WHEREAS, the Executive is now and has been the Executive Vice President and
Chief Financial Officer of the Company and serves as an officer and/or director
of certain subsidiaries of the Company;
WHEREAS, the Executive and the Company wish to enter into this Agreement to
provide for the continued employment of Executive; and
WHEREAS, the Executive and the Company are willing to enter into this
Agreement upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual premises and agreements set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Employment and Duties. The parties hereby agree that, during the term of
this Agreement as set forth in paragraph 2 below, the Executive shall be
employed as the Executive Vice President and Chief Financial Officer of the
Company with the duties and responsibilities attendant to such positions. In
discharging such duties and responsibilities, the Executive may also serve as an
executive officer and/or director of any direct or indirect subsidiary of the
Company (collectively the "Subsidiaries"). The salary, other compensation and
benefits provided herein may be allocated among the Company and the Subsidiaries
based upon the portion of the Executive's services provided to the Company and
each of the Subsidiaries, respectively, and the Executive shall assist the
Company in making such allocation as the Company may reasonably request. During
the term of this Agreement, the Executive shall apply on a full-time basis
(allowing for usual vacations and sick leave) all of the Executive's skill and
experience to the performance of the Executive's duties hereunder with the
Company and the Subsidiaries. It is understood that the Executive may have other
business investments and participate in charitable organizations which may, from
time to time, require minor portions of Executive's time, but which shall not
interfere or be inconsistent with the Executive's duties under this Agreement.
The Executive shall perform the Executive's duties at the Company's principal
executive offices in Minneapolis, Minnesota or at such other location as may be
mutually agreed upon by the Executive and the Company; provided that the
Executive shall travel to other locations at such times as may be necessary for
the performance of the Executive's duties under this Agreement.
2. Term of Employment. Unless sooner terminated as provided in paragraph 4
below, the term of this Agreement shall commence on the date hereof and shall
continue through December 31, 1999; provided that the term shall be
automatically extended for one year on each December 31st commencing December
31, 1997 unless either party gives written notice to the other prior to the date
on which the automatic extension would be effective; provided that the term
shall not be extended beyond Executive's sixty-fifth (65th) birthday.
3. Compensation and Benefits. During the term of this Agreement, the
Executive shall be entitled to the following compensation and benefits for
service to the Company and the Subsidiaries, including service as a director of
the Company or its Subsidiaries:
(a) Base Salary. The Executive shall be paid a base salary at a minimum
annual rate of $250,000, payable in accordance with the Company's customary
payroll policy, which salary shall be reviewed and may be increased from time to
time at the discretion of the Board of Directors of the Company or the
Compensation Committee of the Board of Directors (the "Base Salary"); provided
that the amount of the Base Salary shall not be reduced after it has been
increased by the Board of Directors or the Compensation Committee without the
Executive's written consent. The performance of the Executive shall be reviewed
at least once each calendar year which may be at the same time as any adjustment
to the Base Salary of the Executive.
(b) Bonus. The Executive shall, in addition to the Base Salary, also be
entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by
the Company of performance goals established by the Board of Directors or the
Compensation Committee of the Company's Board of Directors.
(c) Stock Incentives. The Executive shall be eligible to receive stock
options under any stock based plan from time to time adopted by the Company (the
"Stock Plans"), as from time to time determined by the Board of Directors or
Stock Option Committee of the Company's Board of Directors.
(d) Reimbursement of Expenses. The Company shall reimburse the Executive
for all business expenses properly documented in accordance with the Company's
expense reimbursement policy.
(e) Other Benefits. The Executive shall be entitled to participate and
shall be included in any employee benefit plan, medical/dental coverage plan,
life insurance plan, disability coverage plan, or similar benefit plan of the
Company now existing or established hereafter which are generally applicable to
executives of the Company.
4. Termination of Employment.
(a) Death or Disability. In the event of the Executive's death or
disability as defined in the Company's long term disability plan then in effect,
the employment of the Executive hereunder shall terminate and the Company's
obligation to make further Base Salary and Annual Bonus (to the extent not yet
earned) payments hereunder shall thereupon terminate as of the end of the month
in which such death or disability occurs. The Executive's rights to other
compensation and benefits shall be determined under the Company's benefit plans
and policies applicable to Company executives then in effect.
(b) Termination for Cause by the Company. By following the procedure set
forth in paragraph 4(e), the Company shall have the right to terminate the
employment of the Executive for "Cause" in the event the Executive: (i) has
repeatedly failed to perform the Executive's duties under this Agreement, which
failure is willful and deliberate; (ii) has engaged in an act or acts of
dishonesty which is or are intended to result in substantial personal enrichment
for the Executive; (iii) has knowingly engaged in conduct which is materially
injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A)
any felony (other than any felony arising out of negligence), or (B) any crime
or offense involving dishonesty with respect to the Company or any of the
Subsidiaries; (v) has failed to comply with the covenants contained in paragraph
5 of this Agreement; or (vi) knowingly provides materially misleading
information concerning the Company to the Board of Directors of the Company or
any of its Subsidiaries, any governmental body or regulatory agency or to any
lender or other financing source or proposed financing source of the Company or
its Subsidiaries. If the employment of the Executive is terminated by the
Company for Cause, the Company's obligation to make further Base Salary and
Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon
terminate, except the Executive shall receive the Base Salary through the end of
the month during which such a termination occurs. The Executive's rights to
other compensation and benefits shall be determined under the Company's benefit
plans and policies applicable to executives of the Company then in effect.
(c) Termination for Good Reason by the Executive. By following the
procedure set forth in paragraph 4(e), the Executive shall have the right to
terminate the Executive's employment with the Company for "Good Reason" in the
event (i) the Executive is not at all times the duly elected the Executive Vice
President and Chief Financial Officer of the Company; (ii) there is any material
reduction in the scope of the Executive's authority and responsibility; (iii)
there is a reduction in the Executive's Base Salary, a material reduction in the
amount of Annual Bonus for which the Executive is eligible, an amendment to any
Stock Plan or employee retirement plan applicable to the Executive which is
materially adverse to the Executive, or a material reduction in the other
benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the
Company requires the Executive's principal place of employment to be anywhere
other than the Company's principal executive offices, or there is a relocation
of the Company's principal executive offices outside of Minneapolis/St. Paul,
Minnesota metropolitan area; or (v) the Company otherwise fails to perform its
obligations under this Agreement. If the employment of the Executive is
terminated by the Executive for Good Reason before a Change in Control (as
defined below) or following twenty-four (24) months after a Change in Control,
the Executive shall be entitled to the severance benefits set forth in paragraph
4(f) below. If the employment of the Executive is terminated by the Executive
for Good Reason upon or within (and including) twenty-four (24) months after a
Change in Control, the Executive shall be entitled to the severance benefits set
forth in paragraph 4(g) below. In addition, in the event a Change in Control has
occurred and the Executive elects upon ten (10) days prior notice to the
Company, to terminate employment with the Company within the sixty (60) period
following the first anniversary of the Change in Control, such termination shall
be considered a termination by the Executive for Good Reason and the Executive
shall be entitled to the severance benefits under paragraph 4(g) below.
(d) Termination Without Cause. The Company may terminate the Executive's
employment without Cause prior to the expiration of the term of this Agreement.
If the employment of the Executive is terminated by the Company without Cause
before a Change in Control or following twenty-four (24) months after a Change
in Control, the Executive shall be entitled to the severance benefits set forth
in paragraph 4(f) below. If the employment of the Executive is terminated by the
Company without Cause upon or within (and including) twenty-four (24) months
after a Change in Control, the Executive shall be entitled to the severance
benefits set forth in paragraph 4(g) below.
(e) Notice and Right to Cure.
(i) Termination by Company for Cause. If the Company proposes to
terminate the employment of the Executive for Cause under paragraph
4(b), the Company shall give written notice to the Executive specifying
the reasons for such proposed determination with particularity and, in
the case of a termination for Cause under paragraph 4(b)(i), the
Executive shall have a reasonable opportunity to correct any curable
situation to the reasonable satisfaction of the Board of Directors of
the Company, which period shall be no less than thirty (30) days from
the Executive's receipt of the notice of proposed termination.
Notwithstanding the foregoing, the Executive's employment shall not be
terminated for Cause unless and until there shall be delivered to the
Executive a copy of the resolution duly adopted by the affirmative vote
of not less than the majority of the members of the Board of Directors
of the Company at a meeting called and held for the purpose (after
reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's legal counsel, to be heard
before the Board of Directors) finding that, in the opinion of the
Company's Board of Directors, the Executive has engaged in conduct
justifying a termination for Cause.
(ii) Termination by Executive for Good Reason. If the Executive
proposes to terminate the Executive's employment for Good Reason under
paragraph 4(c) above (other than the last sentence of paragraph 4(c)
above), the Executive shall give written notice to the Company,
specifying the reason therefor with particularity. In the event the
Executive proposes to terminate employment for Good Reason under
paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination shall be
effective on the date of such notice. In the event the Executive
proposed to terminate employment for Good Reason under paragraph
4(c)(v) above, the Company will have an opportunity to correct any
curable situation to the reasonable satisfaction of the Executive
within the period of time specified in the notice which shall not be
less than thirty (30) days. If such correction is not so made or the
circumstances or situation is such that it is not curable, the
Executive may, within thirty (30) days after the expiration of the time
so fixed within which to correct such situation, give written notice to
the Company that the Executive's employment is terminated for Good
Reason effective forthwith.
(f) Severance Benefits. If the Executive is entitled to severance benefits
under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a Change in
Control or following twenty-four months after a Change in Control, the Executive
shall be provided to the following benefits (regardless of the death or
disability of the Executive after the Termination Date):
(i) Base Salary. The Company shall continue to pay to the Executive the
Base Salary when and as such Base Salary would have been paid from the
date of termination (the "Termination Date") through the end of the
term of this Agreement under paragraph 2 as if such termination did not
occur and there were no further automatic extensions of the term
pursuant to paragraph 2 (the "Severance Period") as if the Executive
continued to be employed by the Company during the Severance Period and
regardless of the death or disability of the Executive subsequent to
the Termination Date.
(ii) Annual Bonus. If the effective date of such termination occurs
before the Annual Bonus for any preceding calendar year has been paid,
the Company shall, within thirty (30) days after the Termination Date,
pay to the Executive the amount of the Executive's Annual Bonus for
such preceding calendar year when and as it would have been paid if the
Executive remained employed by the Company.
(iii) Disability, Life Insurance and Medical/Dental Coverage. The
Executive shall be entitled to the disability coverage, life insurance
and medical/dental coverage which the Executive and the Executive's
family received under paragraph 3(e) as if the Executive continued to
be employed by the Company during the Severance Period; provided that
if Executive obtains new employment with comparable benefits during the
Severance Period, all entitlements under this paragraph 4(f)(iii) shall
cease. Nothing in this paragraph shall be construed as providing
Executive with coverage under any plan of Employer to which Executive
would not otherwise be entitled and in the event any coverage is
unavailable, e.g., if Executive is uninsurable, Employer's obligations
under this paragraph may be satisfied by paying to Executive the cost
of such coverage if it were available, as determined in good faith by
the Company.
(iv) Stock Options. Not later than thirty (30) days after the date on
which the Executive's employment terminates, the Company shall pay the
Executive a lump sum cash payment equal to the amount by which the fair
market value (determined as of the Termination Date) of the number of
shares of stock subject to any stock option granted under the Stock
Plans which was not exercisable on the Termination Date and which would
have become vested and exercisable during the Severance Period if the
Executive had remained employed by the Company during the Severance
Period.
(g) Severance Benefits for Change in Control. In the event of a Change in
Control and either upon or within (and including) twenty-four (24) months after
such Change in Control, the Executive terminates employment for Good Reason or
the Executive's employment is terminated by the Company for any reason other
Cause, then (regardless of the death or disability of the Executive after the
Termination Date) the Company shall pay the Executive a lump sum cash payment
within five (5) days after the Termination Date, in an amount equal to the
amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of the
Deemed Bonus (as defined below), and the Company shall also provide the
Executive the severance benefits referred to in paragraph 4(f)(iii) as provided
therein. In addition, the Company shall pay the Executive the Gross-Up Payment
in accordance with the following provisions:
(i) Gross-Up Payment. Anything to the contrary notwithstanding, in the
event it shall be determined that any payment, distribution or benefit
made or provided by the Company to or for the benefit of the Executive
(whether pursuant to this Agreement or otherwise) (a "Payment"), would
be subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended, (the "Code") or any interest or
penalties with respect to such excise tax (such excise tax, together
with any such interest and penalties, are collectively referred to as
the "Excise Tax"), then the Company shall pay the Executive in cash an
amount (the "Gross-Up Payment") such that after payment by the
Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including but not limited to income taxes
(and any interest and penalties imposed with respect thereto) and the
Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed on the
Payments.
(ii) Determination of Gross-Up Payment. Subject to paragraph 4(g)(iii)
below, all determinations required to be made under this paragraph
4(g)(i), including whether a Gross-Up Payment is required and the
amount of the Gross-Up Payment, shall be made by the firm of
independent public accountants selected by the Company to audit its
financial statements for the year immediately preceding the Change in
Control (the "Accounting Firm") which shall provide detailed supporting
calculations to the Company and the Executive within thirty (30) days
after the Termination Date. In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group
effecting the Change in Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations
required under this paragraph 4(g) (which accounting firm shall then be
referred to as the "Accounting Firm"). All fees and expenses of the
Accounting Firm in connection with the work it performs pursuant to
this paragraph 4(g) shall be promptly paid by the Company. An Gross-Up
Payment (as determined pursuant to paragraph 4(g)(i) above) shall be
paid by the Company to the Executive within five (5) days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall
furnish the Executive with a written opinion that failure to report the
Excise Tax on the Executive's applicable federal income tax return
would not result in the imposition of a negligence or a similar
penalty. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm, it is possible that Gross-up
Payments which will not have been made by the Company should have been
made ("Underpayment"). In the event that the Company exhausts its
remedies pursuant to paragraph 4(g)(iii) below, and the Executive is
thereafter required to make a payment of Excise Tax, the Accounting
Firm shall promptly determine the amount of the Underpayment that has
occurred and any such Underpayment shall be paid by the Company to the
Executive within five (5) days after such determination.
(iii) Contest. The Executive shall notify the Company in writing of any
claim made by the Internal Revenue Service that, if successful, would
require the Company to pay a Gross-Up Payment. Such notification shall
be given as soon as practicable but no later than ten (10) business
days after the Executive knows of such claim and shall apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay such claim prior to
the expiration of the thirty (30) day period following the date on
which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Employee shall:
(A) give the Company any information reasonably requested by
the Company relating to such claim;
(B) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time
to time, without limitation, accepting legal representation
with respect to such claim by an attorney selected by the
Company and reasonably acceptable to the Executive;
(C) cooperate with the Company in good faith in order
effectively to contest such claim;
(D) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company
shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with
such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income
tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing
provisions of this paragraph 4(g)(iii), the Company shall
control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at
its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided,
however, that if the Company directs the Executive to pay such
claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free
basis, from any Excise Tax or income tax, including interest
or penalties with respect thereto, imposed with respect to
such advance or with respect to any imputed income with
respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to
which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect
to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service
or any other taxing authority.
(iv) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to paragraph 4(g)(iii), the Executive becomes
entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of paragraph 4(g)(iii)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to paragraph
4(g)(iii), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does
not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Gross-Up Payment required to be paid.
(h) Benefits in Lieu of Severance Pay Policy. The severance benefits
provided for in this paragraph 4 are in lieu of any benefits that would
otherwise be provided to the Executive under the Company's severance pay policy
and the Executive shall not be entitled to any benefits under the Company's
severance pay policy.
(i) No Funding of Severance. Nothing contained in this Agreement or
otherwise shall require the Company to segregate, earmark or otherwise set aside
any funds or other assets to provide for any payments required to be made under
this paragraph 4 and the rights of the Executive to the severance benefits
hereunder shall be solely those of a general, unsecured creditor of the Company.
However, the Company may, in its discretion, deposit cash or property, or a
combination of both, equal in value to all or a portion of the amounts
anticipated to be payable hereunder into a trust, the assets of which are to be
distributed by such times as determined by the trustee of such trust; provided
that such assets shall be subject at all times to the rights of the Company's
general creditors.
(j) Definitions.
A "Change in Control" shall be deemed to have occurred if, prior to the
expiration of the term of the Employment Agreement:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934) (other than the Company or any of
its subsidiaries or any employee benefit plan of the Company or any of
its subsidiaries) becomes a beneficial owner, directly or indirectly,
of securities of the Company representing 20% or more of the voting
power of all of the Company's then outstanding securities; or
(ii) during any period of two consecutive years individuals who at the
beginning of such period constituted the Board of Directors of the
Company (the "Incumbent Directors") together with any director (the
"New Incumbent Director") whose nomination or election was approved by
at least two-thirds of the Incumbent Directors and any New Incumbent
Director who was previously elected, in each case who are directors at
the time of the nomination or election of such director cease for any
reason to constitute at least a majority, the Board of Directors of the
Company; or
(iii) the shareholders of the Company approve the sale of all, or
substantially all, of the business or assets of the Company or the
liquidation or dissolution of the Company.
The "Deemed Bonus" shall be an amount equal to the number of calendar years
(including the calendar year in which the Termination Date occurs) multiplied by
the Company shall pay the Executive an amount equal to the greater of (A) the
Annual Bonus paid to the Executive for the period after the Change of Control or
(B) the average of the Annual Bonus paid or payable to the Executive in respect
of the two calendar years immediately preceding the calendar year in which the
Change in Control occurs.
5. Confidentiality; Non-Solicitation Covenant.
(a) Confidentiality. The Executive agrees that, at all times, both during
the Executive's employment and after the termination thereof, the Executive
shall not divulge to any other person, firm or corporation, or in any way use
for the Executive's own benefit, except as required in the conduct of the
business of the Company or any of its Subsidiaries or as authorized in writing
on behalf of the Company, any trade secrets or confidential information of the
Company or its Subsidiaries obtained during the course of the Executive's
employment with the Company or its Subsidiaries. The Executive also agrees that
the Executive will not, either subsequent to termination of employment or during
employment, except as required in the conduct of the business of the Company or
any of its Subsidiaries, or as authorized in writing on behalf of the Company,
interfere with or disturb or attempt to interfere with or disturb any
employment, contractual or business arrangements of the Company or any of its
Subsidiaries with any of its employees, agents, suppliers, customers, reinsurers
or other parties with which the Company or any of its Subsidiaries has a
contractual relationship, as the case may be.
(b) Non-Solicitation Covenant. While the Executive is actively employed
with the Company and, in the event of a termination of employment with the
Company for any reason, for a period of two years after the Termination Date,
the Executive agrees that, except with the prior written permission of the Board
of Directors of the Company, the Executive will not offer to hire, entice away,
or in any manner attempt to persuade any officer, employee, or agent of the
Company or any of the Subsidiaries to discontinue his or her relationship with
the Company or any of the Subsidiaries nor will the Executive directly or
indirectly solicit, divert, take away or attempt to solicit any business of the
Company or any of its Subsidiaries as to which Executive has acquired any
knowledge during the term of the Executive's employment with the Company.
(c) Remedies. If the Executive commits a breach, or threatens to commit a
breach, of any of the provisions of this paragraph 5, the Company shall have the
following rights and remedies, in addition to any rights and remedies otherwise
available at law or equity:
(i) The right and remedy to have the provisions of this paragraph 5
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed by the Executive that any such breach or
threatened breach will cause irreparable injury to the Company and the
Subsidiaries and that money damages will not provide an adequate remedy
to the Company and the Subsidiaries; and
(ii) The right and remedy to require the Executive to account for and
pay over to the Company all compensation, profits, monies, accruals,
increments, or other benefits, other than those payable under this
Agreement, derived or received by the Executive or the enterprise in
competition with the Company or any of the Subsidiaries as the result
of any transactions constituting a breach of any part of this paragraph
5, and Executive agrees to account for and pay over to the Company such
amounts promptly upon demand therefor.
6. Beneficiaries. In the event of the Executive's death after termination
of employment, any amount or benefit payable or distributable to him pursuant to
this Agreement shall be paid to the beneficiary designated by the Executive for
such purpose in the last written instrument received by the Company prior to the
Executive's death, if any, or, if no beneficiary has been designated, to the
Executive's estate, but such designation shall not be deemed to supersede any
beneficiary designation under any benefit plan of the Company. Whenever this
Agreement provides for the written designation of a beneficiary of beneficiaries
of the Executive, the Executive shall have the right to revoke such designation
and to redesignate a beneficiary or beneficiaries by written notice to either
the Company to such effect, except to the extent, if any, restricted by law.
7. Rights in the Event of Dispute. In the event of a dispute between the
Company and the Executive regarding the Executive's employment or this
Agreement, it is the intention of this Agreement that the dispute shall be
resolved as expeditiously as possible, consistent with fairness to both sides,
and that during pendency of the dispute the Executive and the Company shall be
on equal footing, as follows:
(a) Arbitration. Any claim or dispute relating to the Executive's
employment or the terms and performance of this Agreement, shall be resolved by
binding private arbitration before three arbitrators and any award rendered by
any arbitration panel, or a majority thereof, may be filed and a judgment
obtained in any court having jurisdiction over the parties unless the relief
granted in the award is delivered within ten (10) days of the award. Either
party may request arbitration by written notice to the other party. Within
thirty (30) days of receipt of such notice by the opposing party, each party
shall appoint a disinterested arbitrator and the two arbitrators selected
thereby shall appoint a third neutral arbitrator; in the event the two
arbitrators cannot agree upon the third arbitrator within then (10) days after
their appointment, then the neutral arbitrator shall be appointed by the Chief
Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding
conducted hereunder shall be in the City of Minneapolis and shall follow the
procedures set forth in the Rules of Commercial Arbitration of the American
Arbitration Association, and both sides shall cooperate in as expeditious a
resolution of the proceeding as is reasonable under the circumstances. The
arbitration panel shall have the power to enter any relief it deems fair and
just on any claim, including interim and final equitable relief, along with any
procedural order that is reasonable under the circumstances.
(b) Expenses of Prosecution/Defense of Claim. During the pendency of a
dispute between the Company and the Executive relating to the Executive's
employment or the terms or performance of this Agreement, the Company shall
promptly pay the Executive's reasonable expenses of representation upon delivery
of periodic billings for same, provided that (i) Executive (or a person claiming
on the Executive's behalf) shall promptly repay all amounts paid hereunder at
the conclusion of the dispute if the resolution thereof includes a finding that
the Executive did not act in good faith in the matter in dispute or in the
dispute proceeding itself, and (ii) no claim for expenses of representation
shall be submitted by the Executive or any person acting on the Executive's
behalf unless made in writing to the Board of Directors within one year of the
performance of the services for which such claim is made.
8. No Obligation to Mitigate Damages. In the event the Executive becomes
eligible to receive compensation or benefits subsequent to the termination of
the Executive's employment under this Agreement, the Executive shall have no
obligation to seek other employment in an effort to mitigate damages. To the
extent the Executive shall accept other employment after the Executive's
termination of employment, the compensation and benefits received from such
employment shall not reduce the compensation and benefits otherwise due under
this Agreement, except as provided in paragraph 4(f)(iii) above.
9. Other Benefits. The benefits provided under this Agreement shall, except
to the extent otherwise specifically provided herein, be in addition to, and not
in derogation or diminution of, any benefits that Executive or the Executive's
beneficiary may be entitled to receive under any other plan or program now or
hereafter maintained by the Company, or its Subsidiaries.
10. Successors. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to expressly
assume and agree to perform its obligations under this Agreement in the same
manner and to the same extent that the Company would be required to perform them
if no succession had taken place unless, in the opinion of legal counsel
mutually acceptable to the Company and the Executive, such obligations have been
assumed by the successor as a matter of law. Failure of the Company to obtain
such agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the Executive to
terminate the Executive's employment and to receive the payments provided for in
paragraph 4(f) above as if the Executive terminated this Agreement for Good
Reason. The Executive's rights under this Agreement shall inure to the benefit
of, and shall be enforceable by, the Executive's legal representative or other
successors in interest, but shall not otherwise be assignable or transferable.
11. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable, the invalidity or unenforceability
thereof shall not affect any other provisions or applications of this Agreement
which can be given effect without the invalid or unenforceable provision or
application.
12. Survival. The rights and obligations of the parties pursuant to this
Agreement shall survive the term of the employment to the extent that any
performance is required hereunder after the expiration or termination of such
term.
13. Notices. All notices under this Agreement shall be in writing and shall
be deemed effective when delivered in person (in the Company's case, to its
Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid,
addressed, in the case of the Executive, to the Executive's last known address
as carried on the personnel records of the Company and, in the case of the
Company, to the corporate headquarter,s, attention of the Secretary, or to such
other address as the party to be notified may specify by written notice to the
other party.
14. Amendments and Construction. This Agreement may only be amended in a
writing signed by the parties hereto. This Agreement shall be construed under
the laws of the State of Minnesota. Paragraph headings are for convenience only
and shall not be considered a part of the terms and provisions of the Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first written above.
LIFE USA HOLDING, INC.
By /s/ Robert W. MacDonald
---------------------------
Robert W. MacDonald, Chairman
and Chief Executive Officer
/s/ Mark A. Zesbaugh
---------------------
Mark A. Zesbaugh
EXHIBIT 11
<TABLE>
<CAPTION>
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Life USA HOLDING, INC.
(Dollars in thousands, except per share amounts)
Year ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY
Average shares outstanding and to be issued 20,767,538 20,270,532 20,124,556
Net effect of dilutive stock options and warrants having
exercise prices less than the average market price
of the common stock using the treasury stock method 163,482 166,688 284,491
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,419,411 2,084,384 --
----------- ----------- -----------
Total common and common equivalent shares 23,350,431 22,521,604 20,409,047
=========== =========== ===========
Net income $ 23,454 $ 19,097 $ 14,469
Add convertible subordinated debenture interest,
net of federal income tax effect 870 757 --
----------- ----------- -----------
Adjusted net income $ 24,324 $ 19,854 $ 14,469
=========== =========== ===========
Per common and common equivalent share amount $ 1.04 $ .88 $ .71
=========== =========== ===========
FULLY DILUTED
Average shares outstanding and to be issued 20,767,538 20,270,532 20,124,556
Net effect of dilutive stock options and warrants,
having exercise prices less than the greater of
the average or the end of period market price of
the common stock using the treasury stock method 215,897 172,547 300,365
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,419,411 2,084,384 --
----------- ----------- -----------
Total common and common equivalent shares 23,402,846 22,527,463 20,424,921
=========== =========== ===========
Net income $ 23,454 $ 19,097 $ 14,469
Add convertible subordinated debenture interest,
net of federal income tax effect 870 757 --
----------- ----------- -----------
Adjusted net income $ 24,324 $ 19,854 $ 14,469
=========== =========== ===========
Per common and common equivalent share amount $ 1.04 $ .88 $ .71
=========== =========== ===========
</TABLE>
[LOGO]
LIFEUSA(R)
1996 Annual Report
COMPANY DESCRIPTION
Life USA Holding, Inc. is a national financial services holding and marketing
company based in Minneapolis. Its primary subsidiary, LifeUSA Insurance Company,
is represented by over 130 marketing organizations nationwide and over 50,000
independent agents. Life USA Holding, Inc. common stock trades on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol LUSA.
HIGHLIGHTS OF 1996
* Consolidated total revenues increased to $316.9 million in 1996 from
$272.8 million in 1995.
* Consolidated net income increased to $23.5 million in 1996 from $19.1
million in 1995.
* Collected premiums for 1996 (including Allianz Life) increased to $1.05
billion from $1.04 billion in 1995.
* Consolidated assets increased to $4.39 billion at December 31, 1996
from $3.87 billion at December 31, 1995.
* Life USA Holding, Inc. entered into a $30 million line of credit
agreement with two of its reinsurers in May 1996.
* LifeUSA Marketing, Inc. acquired Tax Planning Seminars in August 1996.
* LifeUSA Marketing, Inc. acquired a minority interest in Creative
Marketing International Corporation in November 1996.
* The ANNU-A-DEX(SM) equity indexed annuity was introduced in September
1996.
* Life USA Holding, Inc. formed LifeUSA Securities, Inc. in March 1996.
LifeUSA Securities, Inc. received approval from the National
Association of Securities Dealers, Inc. as a wholesale broker-dealer in
October 1996.
MESSAGE TO SHAREHOLDERS
Come back with me 10 years to February 26, 1987, the date our company was
incorporated. Until that date, with the exception of the five original founders
(plus one reinsurance actuary, a high-priced lawyer and a public relations
specialist), no one had ever heard the name, "LifeUSA." Despite this anonymity,
the articles of incorporation stated that Life USA Holding, Inc. ". . . was
formed to become a national life insurance holding company." A presumptuous
objective for a start-up company in a mature industry dominated by century-old
financial giants. Almost no one gave the company much chance to survive, let
alone become a force in the industry.
Now come forward to today. Not only has the company survived, but the Life
USA name is household in the life insurance industry. Setting new standards for
product innovation, service and distribution strategies, Life USA is now one of
the fastest growing, most successful companies in the industry. Ironically, it's
the financial giants who have struggled to survive. Many have passed from the
scene, while others have been so severely wounded by the changes of the decade
that they seem to stagger from crisis to scandal.
Today, Life USA, the unknown company of 1987, enters its second decade as a
flourishing, highly visible company fully intent on taking its place among
industry leaders with over $4 billion of assets, annual premiums in excess of $1
billion, and representation by over 50,000 agents.
Life USA ended its first decade with a bang-up year. Boosted by an 11%
increase in fourth quarter collected premiums, consolidated 1996 net income
increased 23%, to $23.5 million or $1.04 per share, compared to $19.1 million or
$.88 per share in 1995. 1996 consolidated net operating income increased 31%, to
$25.0 million or $1.11 per share, compared to $19.1 million or $.88 per share in
1995.
Of particular note, LifeUSA Insurance Company reported a 1996 after-tax
statutory profit of $13.2 million. This is a significant improvement over the
$367,000 after-tax statutory profit reported in 1995. Statutory profits are
important because they are indicative of a growing block of profitable inforce
business, reduce the need for external capital, are a critical measure for
rating agency action, and provide the basis for potential dividends from the
life insurance company to the parent.
Consolidated revenues increased 16% in 1996, to $316.9 million, compared to
$272.8 million in 1995. During 1996, consolidated assets increased 13%, to $4.39
billion from $3.87 billion. Consolidated net investment income increased 19%
during 1996, to $129.4 million from $109.1 million reported in 1995.
Total collected premiums for 1996 were $1.05 billion, a 1% increase over
the $1.04 billion reported in 1995. Normally, one would not look upon a 1%
increase in premiums as a positive, but in light of the current difficult sales
environment for fixed income products, the results are very encouraging. A.M.
Best projected that industry wide fixed annuity premium would decline
approximately 30% from 1995 to 1996.
For LifeUSA to post even a small gain in premiums while competing against a
roaring stock market with long-term interest rates below 7%, demonstrates the
underlying potency of our distribution system, not matched by many other
companies. Of note is that almost 12% of our total premiums were produced by
marketing organizations contracted with LifeUSA for less than two years. This
lays the groundwork for even more growth in the future.
Life USA has accomplished much during our first decade. We are pleased, but
not satisfied. Now, it's on to the next century.
We look to a combination of operational and strategic factors to foster
continued success. As Life USA enters its second decade, it's time to take our
story to a broader public. The process will start with a national advertising
and promotional campaign, targeted to our marketing niche. The objective is to
enhance the credibility and visibility of Life USA, not only with agents, but
with consumers and investors as well. Ultimately, we hope this effort will
translate into expanded distribution, increased sales and profits and a more
meaningful valuation of the company.
LifeUSA agents will start the year with two new products in their arsenal
- -- the ANNU-A-DEX(SM) and the IDEAL(SM) annuity.
1
The ANNU-A-DEX is a competitive fixed annuity, offering an initial 7%
premium bonus, but with an additional benefit tied to the performance of the S&P
500(R) Index. The appeal of the product is that one can buy a competitive fixed
annuity, with principal and interest guaranteed, and should the S&P 500(R) Index
outperform the annuity over a seven-year period, one-half of the incremental
growth is added to the value of the annuity. While not an investment product,
the ANNU-A-DEX is positioned as an alternative "safe haven" for investment
funds. An investor can "lock-in" current gains and still participate, should the
stock market continue to rise, all with no down-side exposure.
The IDEAL annuity (introduced during the first quarter of 1997), is unique
in that it provides up to 10 years of protection against interest rate changes
- -- up or down. When issued, the IDEAL annuity offers a base credited rate, plus
a 1.5% annual interest bonus, both guaranteed for five years. Thus, the
policyholder is protected against a decline in interest rates for the next five
years. At the end of the first five-year term, the policyholder has the option
to "re-enter" the policy at the interest rate being credited on new issues. The
new credited rate, plus another 1.5% annual interest bonus, is then guaranteed
for a new five-year term. Thus, the policyholder is also protected against a
rise in interest rates.
The interest rate change protection along with other competitive benefits
make this an IDEAL annuity for the consumer. A handsome compensation package
makes this an IDEAL annuity for agents. Over time, this annuity could be the
IDEAL stimulant needed for increased sales.
LifeUSA believes that the best insurance product for the consumer and the
company is one that offers exceptional long-term benefits, as opposed to a
short-term, commodity-type product. This type of benefit-oriented product must
be explained and sold by a knowledgeable sales person. For that reason, LifeUSA
is even more committed to building the largest and strongest agent distribution
system in the industry.
We believe that distribution will be the key to success in the future. Not
only distribution of our own products, but distribution of products for other
manufacturers. If you can control distribution, you control your competitor's
products. That does not necessarily mean that you own or control the
distribution system, but that you own and control "access" to the distribution
system. The one who wins the distribution battles of the next few years will win
the war.
With that in mind, in 1996, Life USA purchased Tax Planning Seminars, a
large marketing organization based in Voorhees, New Jersey, and made a
substantial ownership investment in Creative Marketing International
Corporation, another marketing organization based in Overland Park, Kansas.
These two organizations sell an aggregate of over $200 million of annual annuity
premiums. There is no guarantee that LifeUSA will receive all the business these
organizations produce, but we will receive first call and will profit from
business sold with other companies as well as LifeUSA. Encouraged by the initial
success of these two transactions, Life USA will be looking aggressively for
similar opportunities in 1997 and beyond.
Several years of low interest rates and a thriving stock market have caused
the market for fixed annuities to shrink, but the potential market for annuities
has barely been tapped. Should long-term interest rates rise above 8% and the
stock market make even a modest correction, there is a vast pool of capital that
will be looking for a safe haven, and LifeUSA is well-positioned to take
advantage of such a circumstance.
Just the same, to cover all the bases, 1997 will see the launch of LifeUSA
Securities, Inc. to market a family of LifeUSA mutual funds. We are also
exploring the distribution of variable life and annuity contracts issued by
other companies. This action expands and helps to balance our product universe,
as well as enhance our ability to attract an even broader base of distribution.
2
While nothing is guaranteed, when the momentum of our past success is
combined with the fresh plans we have for the future, then it becomes clear that
Life USA is well positioned for a healthy start to our second decade. In short,
we are encouraged, both by our past success and future opportunities.
Before we close out our first decade and move on, I would like to pause
just a moment to thank all those who have been so important to our success.
Living in Minnesota, we're not far from the headwaters of the Mississippi
River. At the point of origin, one can easily jump across the river. As the
river moves south, it gradually becomes the mighty Mississippi, not because of
the volume of the water at the source, but from hundreds of creeks, streams and
other rivers that flow into it. Viewing the Mississippi in all its grandeur, one
cannot identify the various sources of the river because the contributions all
flow together to make one great river.
The same dynamics are true with a successful business. At the beginning, it
was easy to identify the source of the power at Life USA. However, as the
company has grown, hundreds, even thousands, of people have added their part.
Today, it is impossible to break out individual contributions. They all flow
together. To all of those who have believed and contributed their talents to our
success, I offer a deep, sincere thanks. And, along with that goes our
commitment to make our second decade even better than the first.
Robert W. MacDonald
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Life USA Holding, Inc.
CHIEF EXECUTIVE OFFICER
LifeUSA Insurance Company
THEN AND NOW
(1987 - 1996)
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
1996 1987
--------------------------
Collected Premiums ...... $1,052,458 $ 179
Total Revenues .......... 316,898 286
Net Income (Loss) ....... 23,454 (2,135)
Earnings (Loss) Per Share 1.04 (.11)
CONSOLIDATED BALANCE SHEET DATA AS OF DECEMBER 31
(DOLLARS IN THOUSANDS):
1996 1987
-----------------------
Fixed Maturity Investments ......... $1,881,476 $ 3,362
Total Shareholders' Equity (Deficit) 172,615 (521)
3
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Life USA Holding, Inc.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31 1996
- -----------------------------------------------------------------------------------------
<S> <C>
Consolidated results of operations:
Revenues ............................................................... $ 316,898
Net income ............................................................. 23,454
Adjustments to arrive at net operating income (1):
Net realized gains on investments ..................................... (408)
Charges for state guaranty fund assessments ........................... 1,998
------------
Net operating income (1) ............................................... 25,044
Per share data:
Fully diluted shares ................................................... 23,402,846
Convertible subordinated debenture interest addback, net of tax ........ $ 870
Net income ............................................................. 1.04
Net operating income (1) ............................................... 1.11
Consolidated financial position:
Assets ................................................................. $ 4,386,723
Invested assets (fixed maturity investments and cash and cash
equivalents) .......................................................... 1,902,465
Debt (convertible subordinated debentures) ............................. 36,030
Shareholders' equity:
As reported ........................................................... 172,615
Excluding SFAS No. 115 ................................................ 169,280
Common stock data:
Shares issued and outstanding and to be issued 20,974,901 Book value per
share:
As reported ........................................................... $ 8.23
Excluding SFAS No. 115 ................................................ 8.07
Closing Price ......................................................... 12.00
Financial ratios and other data:
Return on invested assets--net income .................................. 1.23%
Return on invested assets--net operating income (1) .................... 1.32%
Return on equity--net income:
As reported ........................................................... 13.59%
Excluding SFAS No. 115 ................................................ 13.86%
Return on equity--net operating income (1):
As reported ........................................................... 14.51%
Excluding SFAS No. 115 ................................................ 14.79%
Debt to equity:
As reported ........................................................... 20.87%
Excluding SFAS No. 115 ................................................ 21.28%
Closing price to net income per share .................................. 11.55x
Closing price to net operating income per share (1) .................... 10.8x
Closing price to book value per share:
As reported ........................................................... 1.46x
Excluding SFAS No. 115 ................................................ 1.49x
Total market capitalization ............................................ $ 251,699
</TABLE>
- -----------------------------
1) Net operating income equals net income, excluding, net of related
income taxes: (i) net realized gains on investments and the
corresponding increases in amortization of deferred policy acquisition
costs and other benefits to policyholders and (ii) charges for state
guaranty fund assessments.
In 1993, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets
and liabilities are determined based on differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Prior to the adoption of SFAS No. 109,
income tax expense was based on items of income and expense that were reported
in different years in the financial statements and tax returns and were measured
at the tax rate in effect in the year the difference originated. As permitted by
SFAS No. 109, the Company restated its 1992 financial statements.
4
(WIDE TABLE CONTINUED)
FIVE YEAR
AVERAGE
COMPOUND
1995 1994 1993 1992 GROWTH RATE
- --------------------------------------------------------------------------------
$ 272,781 $ 206,313 $ 199,685 $ 145,800 22.78%
19,097 14,469 15,115 9,870 39.44%
(1,828) (641) (989) (1,877)
1,877 1,704 624 961
- ---------------------------------------------------------------
19,146 15,532 14,750 8,954 59.95%
22,527,463 20,424,921 19,439,945 14,887,306
$ 757 N/A N/A N/A
0.88 $ 0.71 $ 0.78 $ 0.66 26.87%
0.88 0.76 0.76 0.60 45.46%
$ 3,867,539 $ 3,065,271 $ 2,394,471 $ 1,537,375 34.08%
1,754,087 1,249,321 899,998 447,386 49.20%
36,030 6,041 6,351 8,336
156,896 106,916 107,204 38,898 43.44%
144,189 123,836 107,204 38,898 42.88%
20,324,747 20,179,617 19,978,118 14,262,937
$ 7.72 $ 5.30 $ 5.37 $ 2.73 32.62%
7.09 6.14 5.37 2.73 32.10%
8.00 7.25 18.88 11.13
1.09% 1.16% 1.68% 2.21%
1.09% 1.24% 1.64% 2.00%
12.17% 13.53% 14.10% 25.37%
13.24% 11.68% 14.10% 25.37%
12.20% 14.53% 13.76% 23.02%
13.28% 12.54% 13.76% 23.02%
22.96% 5.65% 5.92% 21.43%
24.99% 4.88% 5.92% 21.43%
9.08x 10.23x 24.28x 16.78x
9.1x 9.5x 24.9x 18.5x
1.04x 1.37x 3.52x 4.08x
1.13x 1.18x 3.52x 4.08x
$ 162,598 $ 146,302 $ 377,087 $ 158,675
Also, in 1993, the Company implemented SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."
SFAS No. 113 requires the reporting of assets and liabilities relating to
ceded life insurance contracts on a gross basis rather than the previous
practice of reporting these items net of reinsurance. In accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts," the Company presents
assets and liabilities related to its annuity contracts on a gross basis.
Total assets and liabilities for all periods presented have been increased to
reflect the implementation of SFAS No. 113 and FASB Interpretation No. 39.
In 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Beginning January 1, 1994, under the provisions
of SFAS No. 115, held to maturity investments are carried at amortized cost and
available for sale investments are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' equity.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIFE USA HOLDING, INC.
GENERAL
The following analysis of the results of operations and financial condition
of Life USA Holding, Inc. (the Company) and its wholly-owned subsidiaries,
LifeUSA Insurance Company (LifeUSA), LifeUSA Securities, Inc. (LifeUSA
Securities) and LifeUSA Marketing, Inc. (LifeUSA Marketing), should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Annual Report.
During 1996, the Company formed two wholly-owned subsidiaries: LifeUSA
Securities and LifeUSA Marketing. LifeUSA Securities has received approval from
the National Association of Securities Dealers, Inc. as a wholesale
broker-dealer, will initially market a family of LifeUSA mutual funds
established through a joint-venture agreement with a $16 billion asset
management firm and is exploring distribution of variable life insurance and
annuity contracts. LifeUSA Marketing conducts a variety of marketing activities
for the Company, including the acquisition of and investment in national field
marketing organizations. The results of operations and financial condition of
LifeUSA Securities and LifeUSA Marketing, both individually and in the
aggregate, are not material to the 1996 consolidated financial statements of the
Company. Therefore, the analysis that follows will focus primarily on the
Company and LifeUSA.
Since its inception in 1987, LifeUSA has entered into various agreements to
reinsure a substantial portion of the new life insurance and annuity business
written each year. Entering into these reinsurance agreements has allowed
LifeUSA to write a larger volume of business than it would otherwise have been
able to write due to regulatory restrictions based on the amount of its
statutory capital and surplus.
Since April 1, 1991, LifeUSA has ceded a substantial portion of its new
life insurance and annuity business to the following three reinsurers (the
Reinsurers):
* Employers Reassurance Corporation, a subsidiary of Employers
Reinsurance Corporation, a member of the General Electric
Company group;
* Munich American Reassurance Company, a subsidiary of Munich
Reinsurance Company, one of the largest German insurance
companies; and
* Republic-Vanguard Life Insurance Company, a member of the
Winterthur Swiss Insurance Group, one of the largest Swiss
insurance companies.
Effective October 1, 1995, LifeUSA began ceding 75% of its new life
insurance and annuity business to the Reinsurers. From July 1, 1993 through
September 30, 1995, LifeUSA ceded 50% of its new life insurance and annuity
business to the Reinsurers. LifeUSA receives commissions and expense allowances
on business ceded to the Reinsurers.
Since 1987, under the terms of agreements between the Company and Allianz
Life Insurance Company of North America (Allianz Life), LifeUSA agents have
produced life insurance and annuity business on Allianz Life policies which are
similar to LifeUSA agents for Allianz Life. Effective October 1, 1995, LifeUSA
began assuming 25% of the new life insurance and annuity business produced by
its agents for Allianz Life. From July 1, 1993 through September 30, 1995,
LifeUSA assumed 50% of the new life insurance and annuity business produced by
LifeUSA agents for Allianz Life.
The reduction in LifeUSA's net retention (the percentage of new life
insurance and annuity business retained by LifeUSA and assumed by LifeUSA from
Allianz Life) from 50% to 25%, effective October 1, 1995, is one of the primary
reasons for several fluctuations discussed in the Results of Operations section
that follows. For comparative purposes, LifeUSA's net retention was a constant
25% throughout 1996, 50% for the first nine months and 25% for the last three
months of 1995 and a constant 50% throughout 1994. These reductions will be
referred to as "the October 1, 1995 reduction in LifeUSA's net retention" during
the remainder of this document.
6
The following table shows LifeUSA's life insurance and annuity in force
information at December 31 (in millions):
1996 1995
-------- --------
Life insurance account values:
All policies produced by LifeUSA agents (1) $ 260.1 $ 216.0
Direct and assumed business (2) ........... 223.4 185.6
Net of reinsurance (3) .................... 85.5 69.1
Life insurance face amounts:
All policies produced by LifeUSA agents (1) 8,171.2 7,939.0
Direct and assumed business (2) ........... 7,104.0 6,924.7
Net of reinsurance (3) .................... 2,860.2 2,923.7
Annuity account values:
All policies produced by LifeUSA agents (1) 4,876.7 4,369.7
Direct and assumed business (2) ........... 3,496.3 3,183.3
Net of reinsurance (3) .................... 1,655.5 1,574.1
- ------------------------------
(1) Includes all policies produced by LifeUSA agents, including policies
produced by LifeUSA agents for Allianz Life.
(2) Includes all LifeUSA policies and the portion of policies produced by
LifeUSA agents for Allianz Life that have been assumed by LifeUSA.
(3) Includes the portion of LifeUSA policies that have been retained by
LifeUSA and the portion of policies produced by LifeUSA agents for
Allianz Life that have been assumed by LifeUSA.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
7
RESULTS OF OPERATIONS
In 1996, the Company generated increases in collected life insurance
premiums and annuity deposits, invested assets and life insurance and annuities
in force. As a result, revenues from policyholder charges, net investment income
and commissions and expense allowances increased. Expenses incurred for interest
credited to policyholder account values and commissions also increased during
1996 for similar reasons. Primarily as a result of these factors, net income and
earnings per share for 1996 increased 23% and 18%, respectively, compared to the
corresponding results achieved during 1995. In addition, the combination of two
non-operating items (net realized gains on investments and charges for state
guaranty fund assessments) had a slight negative effect on 1996 net income and
earnings per share.
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including
premiums and deposits on policies produced by LifeUSA agents for Allianz Life,
were $1.05 billion, $1.04 billion and $915.5 million in 1996, 1995 and 1994,
respectively, and represented an increase of 1% in 1996 compared to 1995 and an
increase of 14% in 1995 compared to 1994. The following table shows the amounts
of premiums and deposits collected, ceded and retained for the three years (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Collected Premiums and Deposits (1):
LifeUSA:
Life:
First year .......................................... $ 12,731 $ 16,451 $ 16,197
Single and renewal .................................. 49,242 44,418 38,731
----------------------------------
Total Life ......................................... 61,973 60,869 54,928
Annuities ............................................ 547,748 585,739 481,138
----------------------------------
Total LifeUSA collected premiums and deposits ..... 609,721 646,608 536,066
Allianz Life:
Life:
First year .......................................... 3,261 4,693 5,318
Single and renewal .................................. 14,817 13,010 10,839
----------------------------------
Total Life ......................................... 18,078 17,703 16,157
Annuities ............................................ 424,659 379,588 363,319
----------------------------------
Total Allianz Life collected premiums and deposits 442,737 397,291 379,476
----------------------------------
Total collected premiums and deposits ........... $1,052,458 $1,043,899 $915,542
==================================
8
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Premiums and Deposits Not Retained or Assumed (2):
LifeUSA:
Life:
First year ........................................... $ 8,416 $ 8,351 $ 8,443
Single and renewal ................................... 31,925 30,167 27,828
------------------------------
Total Life .......................................... 40,341 38,518 36,271
Annuities ............................................. 397,566 312,325 249,803
------------------------------
Total LifeUSA premiums and deposits not retained ... 437,907 350,843 286,074
Allianz Life:
Life:
First year ............................................ 2,228 2,377 2,661
Single and renewal .................................... 8,596 7,722 6,711
------------------------------
Total Life .......................................... 10,824 10,099 9,372
Annuities ............................................. 309,198 211,731 188,062
------------------------------
Total Allianz Life premiums and deposits not assumed 320,022 221,830 197,434
------------------------------
Total premiums and deposits not
retained or assumed .............................. $757,929 $572,673 $483,508
==============================
Retained or Assumed Premiums and Deposits(3):
LifeUSA:
Life:
First year ........................................... $ 4,315 $ 8,100 $ 7,754
Single and renewal ................................... 17,317 14,251 10,903
------------------------------
Total Life .......................................... 21,632 22,351 18,657
Annuities ............................................. 150,182 273,414 231,335
------------------------------
Total LifeUSA retained premiums and deposits ....... 171,814 295,765 249,992
Allianz Life:
Life:
First year ........................................... 1,033 2,316 2,657
Single and renewal ................................... 6,221 5,288 4,128
------------------------------
Total Life .......................................... 7,254 7,604 6,785
Annuities ............................................. 115,461 167,857 175,257
------------------------------
Total Allianz Life assumed premiums and deposits ... 122,715 175,461 182,042
------------------------------
Total retained or assumed premiums and deposits ... $294,529 $471,226 $423,034
==============================
</TABLE>
- -------------------------------
(1) Includes premiums and deposits related to all policies produced by
LifeUSA agents, including policies produced by LifeUSA agents for
Allianz Life.
(2) Includes premiums and deposits related to LifeUSA policies that have
been ceded by LifeUSA to the Reinsurers and premiums and deposits
related to policies produced by LifeUSA agents for Allianz Life that
have not been assumed by LifeUSA.
(3) Includes premiums and deposits related to LifeUSA policies that have
been retained by LifeUSA and premiums and deposits related to policies
produced by LifeUSA agents for Allianz Life that have been assumed by
LifeUSA. LifeUSA invests these premiums and deposits for the purpose of
providing future benefits to its policyholders.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
9
REVENUES. Total revenues were $316.9 million, $272.8 million, and $206.3
million in 1996, 1995 and 1994, respectively. The increase in total revenues of
16% in 1996 compared to 1995 was primarily due to the increase in policyholder
charges and net investment income generated by the growth in life insurance and
annuities in force and invested assets and the increase in commissions and
expense allowances associated with the October 1, 1995 reduction in LifeUSA's
net retention. The increase in total revenues of 32% in 1995 compared to 1994
was primarily due to the growth in life insurance and annuities in force and
invested assets, net realized gains recorded on investment sales and the
increase in commissions and expense allowances associated with the October 1,
1995 reduction in LifeUSA's net retention and the increase in collected premiums
and deposits in 1995 compared to 1994.
Policyholder charges, which represent the amounts assessed against policy
account balances for the cost of insurance, policy administration and
surrenders, increased 30%, or $10.9 million, in 1996 compared to 1995, and 66%,
or $14.3 million, in 1995 compared to 1994, reflecting the growth in LifeUSA's
net retained life insurance and annuities in force.
Increases in net investment income of 19%, or $20.3 million, in 1996
compared to 1995, and 46%, or $34.6 million, in 1995 compared to 1994, are
primarily attributable to increases in invested assets (fixed maturity
investments and cash and cash equivalents) to $1.90 billion at December 31, 1996
from $1.75 billion at December 31, 1995 and $1.25 billion at December 31, 1994.
The weighted average annual yield on invested assets (exclusive of realized and
unrealized gains and losses) was 7.44% at December 31, 1996, compared to 7.46%
at December 31, 1995 and 1994.
In accordance with generally accepted accounting principles, net realized
gains on investments had the following impact on the amortization of deferred
policy acquisition costs, other benefits to policyholders, net income and
earnings per share for 1996, 1995 and 1994 (dollars in millions, except per
share amounts):
1996 1995 1994
--------------------
Net realized gains on investments ......... $1.8 $7.6 $1.2
Increase in:
Amortization of deferred policy acquisition
costs .................................... .7 2.8 .1
Other benefits to policyholders ........... .5 2.0 .1
--------------------
Income before income taxes ................ .6 2.8 1.0
Income taxes .............................. .2 .9 .3
--------------------
Net income ................................ $ .4 $1.9 $ .7
--------------------
Earnings per share ........................ $.02 $.08 $.03
====================
The total of the increases in amortization of deferred policy acquisition
costs and other benefits to policyholders as a percentage of net realized gains
on investments is greater in 1996 and 1995 than in 1994 due to the fact that the
majority of the gains recorded in 1996 and 1995 were a result of the sale of
securities which supported policyholder liabilities, while the majority of the
gains recorded in 1994 were a result of the sale of securities which supported
the Company's shareholders' equity.
Net commissions and expense allowances on premiums and deposits collected
on reinsured policies and service fees on business produced for Allianz Life
increased 15%, or $17.9 million, in 1996 compared to 1995. The increase was due
primarily to the October 1, 1995 reduction in LifeUSA's net retention. The
increase in net commissions and expense allowances of 10%, or $10.9 million, in
1995 compared to 1994 was due primarily to the increase in collected premiums
and deposits in 1995 and the October 1, 1995 reduction in LifeUSA's net
retention.
10
The following table shows the amounts of net commissions and expense
allowances for 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
LifeUSA:
Life:
First year ............................................. $ 10,263 $ 9,746 $ 9,183
Single and renewal ..................................... 5,246 5,039 4,694
--------------------------------
Total Life ............................................ 15,509 14,785 13,877
Annuities ............................................... 59,003 45,776 37,995
--------------------------------
Total LifeUSA ........................................ 74,512 60,561 51,872
Allianz Life:
Life:
First year ............................................. 3,336 4,746 5,336
Single and renewal ..................................... 2,227 1,941 1,634
--------------------------------
Total Life ............................................ 5,563 6,687 6,970
Annuities ............................................... 58,431 53,344 51,093
--------------------------------
Total Allianz Life ................................... 63,994 60,031 58,063
Lapse policy chargebacks ................................. (772) (746) (1,036)
--------------------------------
Total commissions and expense allowance, net......... $137,734 $119,846 $108,899
================================
</TABLE>
- -------------------------------
The above table includes commissions and expense allowances related to LifeUSA
policies that have been ceded by LifeUSA to the Reinsurers and service fees
related to policies produced by LifeUSA agents for Allianz Life.
The Company pays a lapse policy chargeback to the Reinsurers when a life
insurance policy that has been ceded lapses before the end of 13 months. The
chargeback paid for each policy is equal to the excess of the allowances
received over the premiums received.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
EXPENSES. Total expenses were $279.8 million, $242.8 million and $183.3
million in 1996, 1995 and 1994, respectively. The increase in total expenses of
15% in 1996 compared to 1995 was primarily due to growth in life insurance and
annuities in force and the increase of 32% in 1995 compared to 1994 was
primarily due to growth in life insurance and annuities in force and increased
production.
Increases in interest credited to policyholder account values of 18%, or
$14.9 million, in 1996 compared to 1995 and 45%, or $26.3 million, in 1995
compared to 1994 reflect the growth in LifeUSA's life insurance and annuities in
force.
The increases in other benefits to policyholders of 18%, or $2.7 million,
in 1996 compared to 1995 and 119%, or $8.0 million, in 1995 compared to 1994
reflect the growth in LifeUSA's life insurance and annuities in force, the
additional accrual of bonuses to be paid to policyholders (the primary component
of other benefits to policyholders) that is generated by the net realized gains
on investments described above and the revisions made to the estimates in the
models used to accrue for bonuses to be paid to policyholders described below.
Amortization of deferred policy acquisition costs increased 11%, or $2.4
million, in 1996 compared to 1995 and 90%, or $10.5 million, in 1995 compared to
1994 reflecting the increase in gross profits due to a growing, more mature
block of in force business, the additional amortization of deferred policy
acquisition costs that is generated by the net realized gains on investments
described above and the revisions made to the estimates in the models used to
amortize deferred policy acquisition costs described below.
11
LifeUSA uses models to estimate future gross profits and allocate current
gross margins in order to amortize deferred policy acquisition costs and accrue
for bonuses to be paid to policyholders (the primary component of other benefits
to policyholders). In accordance with Statement of Financial Accounting
Standards (SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments," LifeUSA is required to make revisions to the estimates in these
models and adjust amortization accordingly. During 1996, 1995 and 1994,
revisions were made to the estimates in the models used to amortize deferred
policy acquisition costs and accrue for bonuses to be paid to policyholders. The
cumulative effect of these revisions increased pretax income by $2.7 million in
1996, decreased pretax income by $200,000 in 1995 and increased pretax income by
$1.4 million in 1994.
The following table shows comparative rates for lapses, surrenders and
annuitizations for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Annualized first year lapse rate for life insurance policies
(excluding single premium) ................................. 20.7% 21.1% 20.6%
Cumulative annualized first year surrender rate for annuities 1.1 1.1 1.1
Cumulative annualized first year annuitization rate for
annuities .................................................. 5.9 6.0 6.2
</TABLE>
The impact on estimated gross profits of actual policy experience,
including the rates shown above, is consistent with the assumptions in the
models used by LifeUSA to compute deferred policy acquisition cost amortization.
Utilizing the actual policy experience and appropriate assumptions for future
periods, these models indicate that deferred policy acquisition costs are fully
recoverable.
Commissions to agents increased 12%, or $8.5 million, in 1996 compared to
1995 due to the increase in collected premiums and deposits discussed above and
the October 1, 1995 reduction in LifeUSA's net retention which resulted in less
commissions being deferred in 1996 than were deferred in 1995, partially offset
by the decline in collected first year life premiums, which receive the highest
commission rates paid by LifeUSA. Commissions to agents increased 12%, or $7.6
million, in 1995 compared to 1994 due to the increase in collected premiums and
deposits discussed above and due to the October 1, 1995 reduction in LifeUSA's
net retention which resulted in less commissions being deferred in 1995 than
were deferred in 1994.
Taxes, licenses and fees decreased 54%, or $4.1 million, in 1996 compared
to 1995. This decrease was primarily due to the combined impact of a $1.8
million refund of state premium taxes paid in prior years that was received
during 1996 and changes made in the method of accruing for premium taxes,
partially offset by the slight increase in charges for state guaranty fund
assessments recorded during 1996. The increase in taxes, licenses and fees of
16%, or $1.1 million in 1995 compared to 1994 is primarily due to the increase
in charges related to state guaranty fund assessments recorded during 1995. The
Company holds a reserve for future assessments that is based on current data
from various industry sources that monitor the status of open and closed
insolvencies and is adjusted as assessments are received. Charges for state
guaranty fund assessments, including adjustments made to the Company's reserve
for future assessments, represented $3.1 million, $3.0 million and $2.6 million
of total taxes, licenses and fees recorded in 1996, 1995 and 1994, respectively.
Operating expenses increased 30%, or $12.7 million, in 1996 compared to
1995. This increase was primarily due to the growth in LifeUSA's life insurance
and annuities in force and the October 1, 1995 reduction in LifeUSA's net
retention which resulted in less operating expenses being deferred in 1996 than
were deferred in 1995. Operating expenses increased 17%, or $6.2 million, in
1995 compared to 1994. This increase was also primarily due to the growth in
LifeUSA's life insurance and annuities in force and the October 1, 1995
reduction in LifeUSA's net retention which resulted in less operating expenses
being deferred in 1995 than were deferred in 1994.
12
Income taxes were $13.6 million in 1996, $10.9 million in 1995 and $8.6
million in 1994. The effective income tax rates for 1996, 1995 and 1994 were
36.7%, 36.3% and 37.2%, respectively.
NET INCOME. Net income was $23.5 million in 1996, $19.1 million in 1995 and
$14.5 million in 1994 which represents an increase in net income of 23% in 1996
compared to 1995 and 32% in 1995 compared to 1994. Earnings per share were $1.04
in 1996, $.88 in 1995 and $.71 in 1994 which represents an increase of 18% in
1996 compared to 1995 and 24% in 1995 compared to 1994. The following table
shows net operating income (net income, excluding, net of related income taxes,
net realized gains on investments and the corresponding increases in
amortization of deferred policy acquisition costs and other benefits to
policyholders and charges for state guaranty fund assessments) and earnings per
share, the effect of those items considered to be non-operating and net income
and earnings per share for 1996, 1995 and 1994, respectively (income in
millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------
INCOME EPS INCOME EPS INCOME EPS
--------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating income and earnings per share $25.1 $1.11 $19.1 $.88 $15.5 $.76
Increase (decrease) net income and
earnings per share:
Net realized gains on investments ......... .4 .02 1.9 .08 .7 .03
Change for state guaranty fund assessments (2.0) (.09) (1.9) (.08) (1.7) (.08)
-------------------------------------------
Net income and earnings per share ......... $23.5 $1.04 $19.1 $.88 $14.5 $.71
===========================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company's primary sources of cash were (i) service fees
received by the Company for business produced by LifeUSA's agents for Allianz
Life, (ii) management fees from LifeUSA, (iii) proceeds from the $30 million
convertible subordinated debenture purchased by Allianz Life in February 1995,
and (iv) interest earned on invested assets. A substantial portion of the
Company's operating expenses is attributable to services provided to LifeUSA,
such as employees, data processing, facilities and supplies, which are
reimbursed by LifeUSA through management fees. LifeUSA is expected to have
sufficient cash to provide reimbursement through 1997, based on currently
anticipated life insurance and annuity sales and on the continuation of
acceptable reinsurance arrangements. In addition, LifeUSA has made a formal
request to the Commissioner of the State of Minnesota Department of Commerce to
pay a $2.5 million cash dividend to the Company during 1997. LifeUSA's ability
to pay dividends in the future is also subject to compliance with Minnesota
insurance laws and regulations.
In May 1996, the Company entered into an agreement with two of its
Reinsurers which provides a long-term line of credit in the amount of $30
million. Funds drawn against the line of credit can be used to fund certain
investments and acquisitions which the Company may make, capital contributions
to LifeUSA or capital expenditures. As of December 31, 1996, the Company had no
outstanding borrowings under this line of credit.
The Company's cash needs consist of (i) capital contributions to LifeUSA to
permit increases in sales volume and retention or assumption of new life
insurance and annuity business produced by LifeUSA agents and to provide LifeUSA
sufficient capital and surplus to maintain adequate capital ratios, (ii)
commission advances to agents, (iii) payment of interest on the Company's
convertible subordinated debentures, (iv) operating expenses, including expenses
in connection with the efforts to increase the production of LifeUSA's existing
agents and expand the size of LifeUSA's field force, and (v) investments in
marketing organizations expected to increase premium production volume for
LifeUSA. Management believes that the combination of (i) the anticipated
increase in cash flow during 1997 and the anticipated reduction in capital
requirements for new business retained or assumed by LifeUSA associated with the
October 1, 1995
13
reduction in LifeUSA's net retention, (ii) the statutory profits generated by
LifeUSA on the mature business which it has retained or assumed, (iii) the $5
million in proceeds that remained at December 31, 1996 from the $30 million
convertible subordinated debenture issued to Allianz Life in February 1995, (iv)
the availability of the $30 million line of credit from two of its Reinsurers,
and (v) cash generated by operations, will provide sufficient capital resources
to support the capital needs of LifeUSA and meet all the Company's cash needs in
the ordinary course of business through 1997, based on currently anticipated
life insurance and annuity sales and on the continuation of acceptable
reinsurance arrangements. The Company's future investments in marketing
organizations may require additional capital during 1997.
For LifeUSA to retain or assume life insurance and annuity business,
LifeUSA must maintain a sufficient level of statutory capital and surplus as
established by the regulatory authorities in the jurisdictions where LifeUSA is
licensed to do business. As LifeUSA retains and assumes business, it is required
to expense commissions and other policy issuance costs for statutory accounting
purposes and to establish statutory reserves for policy benefits, thereby
creating a statutory loss and reducing statutory surplus in the first year of
the policy. The anticipated profits from the retained or assumed business are
realized over the remaining period that the policies are in force. As a result
of the October 1, 1995 reduction in LifeUSA's net retention, the need for
additional capital to cover the statutory loss from such business has been
reduced.
During 1996, LifeUSA produced a statutory net income of $13.2 million. As a
result, the Company did not make significant capital contributions to LifeUSA
during 1996. In addition, based on currently anticipated life insurance and
annuity sales, projected statutory profits from LifeUSA's mature block of in
force business and the continuation of acceptable reinsurance arrangements, the
Company does not expect to contribute capital to LifeUSA through 1997 in order
to maintain adequate levels of statutory capital and surplus.
As of December 31, 1996, LifeUSA had statutory capital and surplus for
regulatory purposes of $87.3 million compared to $75.7 million at December 31,
1995. Assuming continuation of the current level of retention and assumption of
new business and the expected level of life insurance and annuity business
produced by LifeUSA agents, LifeUSA expects to continue to satisfy statutory
capital and surplus requirements for 1997 primarily through statutory profits on
its mature block of retained inforce business. In the future the Company may
alter the level of its retention and assumption of new business depending upon
future levels of production, capital needs and availability of alternative
financing.
The Company has developed a strategy to generate additional premium
production from LifeUSA's existing agents and from new production sources by
making loans to or investing in marketing organizations and by recruiting new
marketing organizations to sell its products. The amount of any loan or
investment relates to the revenue currently generated by the marketing
organization and the projected increase in business produced for LifeUSA by the
marketing organization. To date, the Company has made loans to marketing
organizations that account for 31% of the Company's 1996 life insurance and
annuity production. The loans include incentives for achieving increased
production. In addition, in August 1996, LifeUSA Marketing acquired Tax Planning
Seminars, a national marketing organization that had been contracted with
LifeUSA for seven years and in November 1996, acquired an equity interest in
Creative Marketing International Corporation, another national marketing
organization that had not been contracted previously with LifeUSA. The Company
has made and expects to continue to make future investments by issuing shares of
its common stock and paying cash from its available resources ($5.6 million of
fixed maturity investments -- available for sale and cash and cash equivalents
as of December 31, 1996 on an unconsolidated basis), cash generated from
operations, cash dividends from LifeUSA and borrowings under its $30 million
line of credit (no amounts outstanding at December 31, 1996). In addition,
during 1996, the Company signed marketing agreements with 31 national marketing
organizations to market LifeUSA life insurance and annuity products for the
first time. There can be no assurances that the Company's premium volume or
income will be enhanced by the loans to or investments in marketing
organizations or by the contracting of new national marketing organizations.
14
REGULATORY ENVIRONMENT. LifeUSA is subject to regulation in the 49 states
in which it is authorized to do business. The laws of these states establish
supervisory agencies with administrative powers related to granting and revoking
licenses to transact business, approving the form and content of policies,
reviewing the advertising and illustration of policies, licensing agents,
establishing reserve requirements and regulating the type and amount of
investments. Such regulations are primarily intended to protect policyholders.
The Company is also regulated in several states as an insurance holding company.
The insurance regulatory framework continues to be reviewed by various
states and by the National Association of Insurance Commissioners (NAIC).
Regulatory initiatives such as risk-based capital standards have been undertaken
to identify inadequately capitalized companies and to reduce the risk of company
insolvencies. The NAIC has established risk-based capital standards to determine
the capital requirements of a life insurance company based upon the risks
inherent in its operations. LifeUSA's percentage of actual total adjusted
capital to authorized control level risk-based capital is well in excess of
regulatory requirements. As a result of the production of statutory net income
of $13.2 million during 1996, the Company did not make significant capital
contributions to LifeUSA during 1996 and, based on currently anticipated life
insurance and annuity sales and the continuation of reinsurance arrangements,
the Company does not expect to contribute capital to LifeUSA through 1997 in
order to maintain an acceptable risk-based capital ratio.
The NAIC has also considered changes in the model laws for nonforfeiture
values of life insurance and deferred annuity products. Since 1994, LifeUSA has
made presentations to and had discussions with the Life/Health Actuarial Task
Force of the NAIC, which is responsible for developing new model laws for
nonforfeiture values. LifeUSA demonstrated that its two-tier products use
longer-term, higher-yielding investments to provide higher retirement values to
policyholders, while decreasing disintermediation and solvency risks to LifeUSA.
Although it is possible that the NAIC may adopt new model laws addressing
nonforfeiture values in the future, such adoption is not currently anticipated
to have a significant impact on LifeUSA.
NAIC committees are also considering a new annuity illustration model
regulation, a new approach to statutory valuation of liabilities (reserves) and
regulations for equity-indexed products. The Company is monitoring these
developments and no significant impact is anticipated at this time.
In December 1995, the NAIC passed a model regulation for disclosure in life
insurance policy illustrations. A number of states either have adopted the model
regulation by its January 1, 1997 effective date or are in the process of
adopting the model regulation. LifeUSA has already completed the certification
process required by the model regulation. This regulation has not had and is not
anticipated to have a significant impact on LifeUSA.
Insurance laws also require LifeUSA to file detailed periodic reports with
the regulatory agencies in each of the states in which it writes business, and
these agencies may examine LifeUSA's business and accounts at any time. Under
NAIC rules, one or more of the regulatory agencies will periodically examine
LifeUSA, normally at three-year intervals, on behalf of the states in which
LifeUSA is licensed. During 1996, the Minnesota Department of Commerce conducted
a triennial examination of LifeUSA for the three years ended December 31, 1995.
The Company expects to receive the final examination report in the near future
and has not been made aware of any issues or recommendations that will be
material individually or in the aggregate.
In April 1996, the B++ (Very Good) rating initially assigned LifeUSA in
June 1994 was reaffirmed by the A.M. Best Company. The A. M. Best Company
assigns the B++ rating to companies which, in its opinion, have achieved very
good overall performance when compared to the standards established by the A. M.
Best Company. B++ companies have a good ability to meet their obligations to
policyholders over a long period of time.
15
In December 1996, Standard & Poor's assigned LifeUSA an initial
claims-paying ability rating of BBB+ (Adequate). Standard & Poor's assigns the
BBB+ rating to insurers which, in its opinion, offer adequate financial
security, but capacity to meet policyholder obligations is susceptible to
adverse economic and underwriting conditions.
INVESTMENTS. As of December 31, 1996, the Company had cash, cash
equivalents and fixed maturity investments on a consolidated basis totaling
$1.90 billion, including $7.6 million in restricted deposits with state
insurance authorities regulating LifeUSA. The following table summarizes the
book, carrying and market values of each investment category held at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
BOOK % OF CARRYING % OF MARKET % OF
1996 VALUE TOTAL VALUE TOTAL VALUE TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ............ $ 20,989 1.11% $ 20,989 1.10% $ 20,989 1.10%
Government Treasury and Agency
notes and bonds ..................... 98,982 5.24 100,909 5.30 104,537 5.46
Mortgage pass-throughs ............... 46,085 2.44 46,804 2.46 46,836 2.45
Agency Collateralized Mortgage
Obligations:
CMO -- Sequential pay .............. 6,260 .33 6,260 .33 6,284 .33
CMO -- Planned amortization class .. 615,995 32.63 615,556 32.36 616,286 32.22
CMO -- Accretion directed class .... 23,484 1.24 23,484 1.23 23,672 1.24
CMO -- Targeted amortization class . 11,970 .63 11,970 .63 12,675 .66
Investment grade corporate securities:
AAA+ to AAA- ....................... 36,749 1.95 36,900 1.94 37,930 1.98
AA+ to AA- ......................... 153,408 8.12 153,276 8.06 154,056 8.05
A+ to A- ........................... 485,766 25.72 491,040 25.81 493,102 25.78
BBB+ to BBB- ....................... 388,898 20.59 395,277 20.78 396,662 20.73
Non-investment grade corporate
securities .......................... -- -- -- -- -- --
--------------------------------------------------------------------------
Total ................................ $1,888,586 100.00% $1,902,465 100.00% $1,913,029 100.00%
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
BOOK % OF CARRYING % OF MARKET % OF
1995 VALUE TOTAL VALUE TOTAL VALUE TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ............ $ 33,222 1.95% $ 33,222 1.89% $ 33,222 1.85%
Government Treasury and Agency
notes and bonds ..................... 96,435 5.66 101,895 5.81 107,660 5.99
Mortgage pass-throughs ............... 32,104 1.88 33,347 1.90 33,667 1.87
Agency Collateralized Mortgage
Obligations:
CMO -- Sequential pay .............. 5,445 .32 5,445 .31 5,507 .31
CMO -- Planned amortization class .. 616,271 36.17 620,785 35.39 638,969 35.53
CMO -- Accretion directed class .... 23,426 1.38 23,426 1.34 24,524 1.36
CMO -- Targeted amortization class . 11,862 .70 11,862 .68 13,228 .74
Investment grade corporate securities:
AAA+ to AAA- ....................... 43,650 2.56 44,015 2.51 46,694 2.60
AA+ to AA- ......................... 123,941 7.28 129,105 7.36 132,157 7.35
A+ to A- ........................... 325,710 19.12 339,005 19.33 346,502 19.26
BBB+ to BBB- ....................... 391,379 22.98 411,980 23.48 416,454 23.14
Non-investment grade corporate
securities .......................... -- -- -- -- -- --
--------------------------------------------------------------------------
Total ................................ $1,703,445 100.00% $1,754,087 100.00% 1,798,584 100.00%
==========================================================================
</TABLE>
16
As part of its asset and liability management practices, LifeUSA manages
investments and credited interest rates to produce a net investment spread
consistent with priced-for expectations. As of December 31, 1996, the weighted
average credited interest rate for deferred annuities and life insurance
policies was 4.74% and the weighted average yield on the assets backing
liabilities was 7.48%. As of December 31, 1995, this weighted average credited
interest rate was 5.14% and the weighted average yield on the assets backing
liabilities was 7.52%. Investment income from the assets backing liabilities
exceeded interest credited to policyholders by $24.2 million during 1996. The
investment portfolio is managed primarily by allocating new cash flows into
investments which have yield, maturity and other characteristics suitable for
LifeUSA's expected policyholder liabilities. Consistent with LifeUSA's asset and
liability management practices, as of December 31, 1996, the modified duration
of LifeUSA's fixed income securities was 6.01 years, compared to 6.26 years as
of December 31, 1995.
The percentage of the total market value of the Company's portfolio that
was comprised of investment grade corporate obligations was 57% at December 31,
1996. With each corporate security acquisition, LifeUSA's external managers
perform a comprehensive analysis of the credit implications and outlook of the
issuing corporation and industry. Ongoing procedures for monitoring and
assessing any potential deterioration or downgrade in credit quality are also in
place. The Company's guidelines for the acquisition of corporate securities does
not allow the purchase of securities that are rated below investment grade by
Moody's Investors Service and Standard & Poor's Corporation.
The remainder of the Company's portfolio is comprised of government and
government agency obligations. Government and government agency obligations are
predominantly held in the form of Planned Amortization Class (PAC) CMOs, the
most conservative type of CMO issued. These CMOs are specifically structured to
provide the highest degree of protection against swings in repayments caused
primarily by changes in interest rates and have virtually no risk of default.
These securities are well-suited to fund the payment of the liabilities they
support.
Currently, the decision of the asset type in which to invest is dictated by
market conditions and relative values within the respective markets at the time
of purchase. Management believes that these asset types will allow the Company
to maintain high quality, consistent yields and proper maturities for the
overall portfolio.
As of December 31, 1996, the Company held 46%, or $878 million of the total
market value of its long term securities as available for sale. The Company
believes that this percentage is a prudent level that will allow enough
liquidity to meet any adverse cash flow experience. The Company continues to
classify a significant portion of its investment securities as held to maturity
based on its intent to hold such securities to maturity. A key feature of
LifeUSA's products is the provision of bonuses to encourage policyholders to
withdraw their funds over settlement periods lasting at least five years.
Policyholders taking cash settlements do not receive the bonuses. This feature
allows the Company to hold a significant amount of assets to maturity. Insurance
regulations require LifeUSA to perform an asset adequacy analysis each year to
determine if the assets are sufficient to fund future obligations. The Company's
asset adequacy analysis indicates that the assets are sufficient to fund future
obligations. The Company continually monitors and modifies the allocation of new
assets between held to maturity and available for sale as deemed prudent based
on the continuing analysis of cash flow projections and liquidity needs.
At December 31, 1996, the Company's shareholders' equity and book value per
share were $172.6 million and $8.23, respectively, compared to $156.9 million
and $7.72, respectively, at December 31, 1995. Excluding the effect of the net
unrealized gain on fixed maturity investments -- available for sale reported as
a separate component of shareholders' equity in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company's shareholders' equity and book value per share were $169.3 million and
$8.07, respectively, at December 31, 1996, compared to $144.2 million and $7.09,
respectively, at December 31, 1995.
17
Statements other than historical information contained in this Report
are considered forward-looking and involve a number of risks and
uncertainties. In addition to the factors discussed in this Report,
there are other factors that could cause actual results to differ
materially from expected results including, but not limited to,
development and acceptance of new products, impact of changes in
federal and state regulation, dependence upon key personnel, changes in
interest rates generally and credited rates on the new business
retained or assumed by LifeUSA, the level of premium production,
competition and other risks described from time to time in the
Company's Securities and Exchange Commission filings, including but not
limited to the Form 10-K, copies of which are available from the
Company without charge.
18
LIFE USA HOLDING, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
--------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments (Note 3): Available for sale, at fair value
(amortized cost:
$864,400 at
December 31, 1996 and $761,553 at December 31, 1995) ................... $ 878,279 $ 812,195
Held to maturity, at amortized cost (fair value:
$1,013,761 at
December 31, 1996 and $953,167 at December 31, 1995) ................... 1,003,197 908,670
Policy loans .............................................................. 23,908 19,789
--------------------------
Total investments ..................................................... 1,905,384 1,740,654
Cash and cash equivalents ................................................... 20,989 33,222
Accrued investment income ................................................... 27,834 23,510
Future policy benefits recoverable and amounts due
from reinsurers (Note 2) ................................................... 2,179,999 1,862,311
Deferred policy acquisition costs ........................................... 212,138 175,296
Other assets ................................................................ 40,379 32,546
--------------------------
$ 4,386,723 $ 3,867,539
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits .................................................... $ 4,078,621 $ 3,566,012
Other policyholders' funds ................................................ 5,381 4,453
Amounts due reinsurers (Note 2) ........................................... 23,605 27,303
Accrued commissions to agents ............................................. 10,243 11,364
Taxes, licenses and fees payable .......................................... 17,868 18,913
Accounts payable .......................................................... 6,967 4,771
Convertible subordinated debentures (Note 5) .............................. 36,030 36,030
Deferred income taxes ..................................................... 12,924 19,640
Other liabilities ......................................................... 22,469 22,157
--------------------------
Total liabilities ........................................................ 4,214,108 3,710,643
Commitments and contingencies (Notes 2 and 4)
Shareholders' equity (Notes 7 and 11):
Preferred stock, $.01 par value; 15,000,000 shares
authorized, none issued .................................................. -- --
Common stock, $.01 par value; 45,000,000 shares authorized,
20,953,517 shares issued and outstanding (20,279,343 shares
at December 31, 1995) .................................................... 210 203
Common stock to be issued, 21,384 shares (45,404 shares at
December 31, l995) ....................................................... 357 382
Additional paid-in capital ................................................ 86,474 80,931
Notes receivable from stock sales ......................................... (3,888) --
Net unrealized gain on fixed maturity investments --
available for sale (Note 3) .............................................. 3,335 12,707
Retained earnings ......................................................... 86,127 62,673
--------------------------
Total shareholders' equity ............................................... 172,615 156,896
--------------------------
$ 4,386,723 $ 3,867,539
==========================
</TABLE>
SEE ACCOMPANYING NOTES.
19
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Revenues:
Policyholder charges .................................. $ 46,842 $ 35,983 $ 21,659
Net investment income (Note 3) ........................ 129,412 109,092 74,510
Net realized gains on investments (Note 3) ............ 1,791 7,634 1,183
Commissions and expense allowances, net (Note 2) ...... 137,734 119,846 108,899
Other ................................................. 1,119 226 62
---------------------------------------
Total revenues ....................................... 316,898 272,781 206,313
Expenses:
Interest credited to policyholder account
values ............................................... 99,517 84,665 58,405
Other benefits to policyholders ....................... 17,414 14,698 6,706
Amortization of deferred policy acquisition
costs ................................................ 24,495 22,096 11,643
Commissions ........................................... 80,093 71,575 63,988
Taxes, licenses and fees .............................. 3,596 7,734 6,678
Operating expenses .................................... 54,718 42,052 35,861
---------------------------------------
Total expenses ....................................... 279,833 242,820 183,281
---------------------------------------
Income before income taxes .............................. 37,065 29,961 23,032
Income taxes (Note 8) ................................... 13,611 10,864 8,563
---------------------------------------
Net income .............................................. $ 23,454 $ 19,097 $ 14,469
=======================================
Income per common and common equivalent share:
Primary ............................................... $ 1.04 $ .88 $ .71
=======================================
Fully diluted ......................................... $ 1.04 $ .88 $ .71
=======================================
Number of shares used in per share calculation:
Primary ............................................... 23,350,431 22,521,604 20,409,047
Fully diluted ......................................... 23,402,846 22,527,463 20,424,921
</TABLE>
SEE ACCOMPANYING NOTES.
20
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 23,454 $ 19,097 $ 14,469
Adjustments to reconcile net income to net cash
used in operating activities:
Accretion of discount on investments, net ........... (2,441) (4,344) (4,439)
Net realized gains on investments ................... (1,791) (7,634) (1,183)
Policy acquisition costs deferred ................... (38,992) (65,460) (60,664)
Amortization of deferred policy acquisition costs ... 24,495 22,096 11,643
Convertible subordinated debentures (Note 5) ........ -- (11) (310)
Deferred income tax (benefit) provision ............. (1,669) 2,180 4,032
Changes in operating assets and liabilities (Note 10) (13,347) (7,594) (10,864)
Stock compensation (Note 7) ......................... 1,436 831 943
-----------------------------------
Net cash used in operating activities ................... (8,855) (40,839) (46,373)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases ........................................... (152,389) (397,171) (320,904)
Proceeds from sales ................................. 42,542 382,606 63,646
Proceeds from maturities and principal payments on
mortgage-backed securities ......................... 9,081 4,984 5,319
Transfer from fixed maturity investments-held to
maturity ........................................... -- (339,470) --
Fixed maturity investments-held to maturity:
Purchases ........................................... (102,603) (442,085) (116,233)
Proceeds from maturities and principal payments on
mortgage-backed securities ......................... 10,227 9,532 11,488
Transfer to fixed maturity investments-available for
sale ............................................... -- 339,470 --
Investments in and loans to field marketing
organizations ...................................... (10,469) -- --
Acquisition of Fidelity Union Life Insurance Company .. -- -- (1,100)
-----------------------------------
Net cash used in investing activities ................... (203,611) (442,134) (357,784)
Cash flows from financing activities:
Receipts from universal life and investment products .. 294,529 471,226 432,034
Withdrawals on universal life and investment products . (208,523) (140,462) (80,401)
Interest credited to policyholders .................... 99,517 84,665 58,405
Proceeds from exercise of stock options and warrants .. 226 195 937
Proceeds from convertible subordinated debenture
issuance ............................................. -- 30,000 --
Other financing activities ............................ 14,484 12,851 4,709
-----------------------------------
Net cash provided by financing activities ............... 200,233 458,475 415,684
-----------------------------------
Net (decrease) increase in cash and cash equivalents .... (12,233) (24,498) 11,527
Cash and cash equivalents at beginning of the year ...... 33,222 57,720 46,193
-----------------------------------
Cash and cash equivalents at end of the year ............ $ 20,989 $ 33,222 $ 57,720
===================================
Cash paid during the year for interest .................. $ 1,984 $ 1,223 $ 473
===================================
Cash paid during the year for income taxes .............. $ 16,263 $ 8,000 $ 6,634
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
21
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER
OF COMMON COMMON
STOCK SHARES STOCK
---------------------
<S> <C> <C>
Balance at December 31, 1993 ................................... 19,978,118 $200
Cumulative effect of change in accounting principle.............
Issuance of common shares to Employee Savings Plan ............. 81,734 1
Issuance of shares through conversion of convertible
subordinated debentures ....................................... 17,019 0
Issuance of shares through exercise of options ................. 74,581 1
Issuance of shares through exercise of warrants ................ 16,134 0
Conversion repurchase .......................................... 1,794 0
Common stock to be issued-shares, net of
191,262 shares issued ......................................... 10,237
Change in net unrealized gain (loss) on fixed maturity
investments -- available for sale..............................
Net income......................................................
--------------------
Balance at December 31, 1994 ................................... 20,179,617 202
Issuance of common shares to Employee Savings Plan ............. 95,028 1
Issuance of shares through conversion of convertible
subordinated debentures ....................................... 571 0
Issuance of shares through exercise of options ................. 26,627 0
Common stock to be issued-shares, net of 122,226 shares issued . 22,904
Change in net unrealized gain (loss) on fixed maturity
investments -- available for sale..............................
Net income......................................................
--------------------
Balance at December 31, 1995 ................................... 20,324,747 203
Issuance of common shares to Employee Savings Plan ............. 167,457 2
Issuance of shares through field marketing organization loan
program ....................................................... 478,262 5
Issuance of shares through exercise of options ................. 28,455 0
Common stock to be issued-shares, net of 674,174 shares issued . (24,020)
Change in net unrealized gain on fixed maturity
investments -- available for sale..............................
Net income......................................................
--------------------
Balance at December 31, 1996 ................................... 20,974,901 $210
====================
</TABLE>
SEE ACCOMPANYING NOTES.
22
(WIDE TABLE CONTINUED)
<TABLE>
<CAPTION>
NET UNREALIZED
NOTES GAIN (LOSS) ON
COMMON ADDITIONAL RECEIVABLE FIXED MATURITY TOTAL
STOCK TO PAID-IN FROM INVESTMENTS- RETAINED SHAREHOLDERS'
BE ISSUED CAPITAL STOCK SALES AVAILABLE FOR SALE EARNINGS EQUITY
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 192 $77,705 $29,107 $107,204
$ 831 831
(943) 942 --
308 308
839 840
97 97
4 4
914 914
(17,751) (17,751)
14,469 14,469
- -----------------------------------------------------------------------------------------
163 79,895 (16,920) 43,576 106,916
(831) 830 --
11 11
195 195
1,050 1,050
29,627 29,627
19,097 19,097
- -----------------------------------------------------------------------------------------
382 80,931 12,707 62,673 156,896
(1,436) 1,434 --
3,883 $(3,888) --
226 226
1,411 1,411
(9,372) (9,372)
23,454 23,454
- -----------------------------------------------------------------------------------------
$ 357 $86,474 $(3,888) $ 3,335 $86,127 $172,615
=========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
23
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Life USA Holding, Inc. (the Company) was incorporated on February 26, 1987
in the State of Minnesota for the purpose of acquiring, managing and funding the
operations of a life insurance company. During 1987, the Company acquired
Financial Assurance, Incorporated (FAI), a Colorado domiciled stock life
insurance company, authorized to issue life insurance products in 40 states and
the District of Columbia. After the acquisition, the Company changed the name of
FAI to LifeUSA Insurance Company, which conducts its life insurance business
under the registered trade name of "LifeUSA."
During 1994, the Company acquired Fidelity Union Life Insurance Company
(FULICO), a Minnesota domiciled shell life insurance company authorized to issue
life insurance products in 49 states (excluding only New York) and the District
of Columbia, and subsequently merged LifeUSA and FULICO into a single company.
The surviving company retained the LifeUSA name and is domiciled in Minnesota,
where the Company is headquartered.
LifeUSA sells a variety of innovative life insurance and annuity products
which offer long-term retirement benefits to consumers who seek protection
against outliving their financial resources. These products are sold by a
national marketing and distribution system comprised of independent agents and
home office staff.
During 1996, the Company formed two additional wholly-owned subsidiaries,
LifeUSA Securities, Inc. (LifeUSA Securities) and LifeUSA Marketing, Inc.
(LifeUSA Marketing). LifeUSA Securities has received approval from the National
Association of Securities Dealers, Inc. as a wholesale broker-dealer, will
initially market a family of LifeUSA mutual funds established through a
joint-venture agreement with a $16 billion asset management firm and is
exploring distribution of variable life insurance and annuity contracts. LifeUSA
Marketing conducts a variety of marketing activities for the Company, including
the acquisition of and investment in national field marketing organizations.
During 1996, LifeUSA Marketing acquired Tax Planning Seminars and a minority
equity interest in Creative Marketing International Corporation, both national
field marketing organizations.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, LifeUSA, LifeUSA Securities and
LifeUSA Marketing. All intercompany accounts and transactions have been
eliminated in consolidation.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The adoption of SFAS No. 115 increased the carrying
value of available for sale investments by $1.8 million. This amount was offset
by a reduction in deferred policy acquisition costs of $.4 million and the
recording of a $.6 million deferred tax liability, resulting in a net unrealized
gain of $.8 million which was recorded as a separate component of shareholders'
equity.
The Company classifies investments at the time of purchase as held to
maturity or available for sale. Investments which the Company has the ability
and positive intent to hold to maturity are so classified and carried at
amortized cost. All other investments are classified as available for sale and
carried at fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity.
The Company anticipates prepayments in the accounting for discounts and
premiums related to its Collateralized Mortgage Obligation (CMO) investments. As
differences arise between actual and anticipated prepayments, the effective
yield of CMOs is recalculated to reflect actual prepayments to date and
anticipated future prepayments. The net investment in the CMOs is then adjusted
to the amount that would have existed had the new effective yield been applied
since the acquisition of the CMOs.
24
Realized gains and losses on sales of available for sale investments are
recorded as revenue using the specific identification method. In addition, the
amortization of deferred policy acquisition costs and other benefits to
policyholders are adjusted for gains and losses realized on sales of available
for sale investments which support policyholder liabilities. Changes in the fair
value of available for sale investments are reflected directly in shareholders'
equity, net of related adjustments for deferred policy acquisition costs and
deferred taxes and related valuation allowances that would have been recorded if
these investments would have been sold as of the balance sheet date.
Investments that are determined to have a decline in value that is other
than temporary are written down to estimated fair value. This value becomes the
investment's new cost basis and the amount of the write down is recorded as a
realized loss.
CASH AND CASH EQUIVALENTS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. The carrying amounts
reported in the balance sheet for these financial instruments are based on cost
and approximate fair value.
ACCOUNTING FOR CEDED COMMISSIONS AND EXPENSE ALLOWANCES
Commissions and expense allowances, and the expenses associated with these
revenues, are recognized in the period in which life insurance premiums and
annuity deposits are ceded. The net cost of reinsurance for life insurance
policies is realized ratably over the life of the affected business in relation
to gross profits.
ACCOUNTING FOR LIFE INSURANCE POLICIES AND ANNUITY CONTRACTS
Revenues from universal life insurance, single premium life insurance and
annuities represent amounts assessed against policyholders and are reported in
the period that the amounts are assessed. The liability for future policy
benefits for universal life insurance, single premium life insurance and
annuities is equal to the sum of the balance that accrues to the benefit of
policyholders, any amounts that have been assessed to compensate the insurer for
services to be performed over future periods, an accrual for future retirement
bonuses and any amounts previously assessed against policyholders that are
refundable on termination of the contract. The liability for contracts in a
payout status is based on the 1983 Individual Annuity Table at interest rates
ranging from 5.5% to 8.5%.
The Company reports assets and liabilities related to ceded life insurance
and annuity contracts on a gross basis. Specifically, account values ceded to
reinsurers are reflected as a receivable and the liability for future policy
benefits is recorded on a gross basis.
For business written directly, LifeUSA defers the cost of acquiring new
business, principally sales compensation, policy issue costs, underwriting and
other related sales expenses. LifeUSA defers the same proportion of costs of
acquiring new business as the proportion of business retained. For business
produced by LifeUSA's agents for Allianz Life Insurance Company of North America
(Allianz Life) and assumed by LifeUSA, the amount of the allowance paid by
LifeUSA to Allianz Life as the cost of acquiring new business is deferred. These
deferred costs are amortized over the lives of the policies in proportion to the
estimated gross profits expected to be realized on the policies.
ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applies Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its stock option plans. Note 7 to the
Consolidated Financial Statements contains a summary of the pro forma effects to
reported net income and earnings per share for 1996 and 1995 as if the Company
had elected to recognize compensation cost based on the fair value of the
options granted as prescribed by SFAS No. 123.
25
STATE GUARANTY FUND ASSESSMENTS
The Company uses the accrual basis of accounting to record its liability
for state guaranty fund assessments. The liability recorded includes a provision
for anticipated assessments that is calculated using data available from various
industry sources that monitor the current status of open and closed insolvencies
and report the premium base utilized by each state in calculating amounts
assessed to individual insurers. Although additional provisions may be required,
the Company is currently unaware of any significant pending assessments
requiring accrual.
The Company has also established an asset for assessments expected to be
recovered through future premium tax offsets. Although changing legislative
initiatives may affect the right to offset, the Company is currently unaware of
any such initiatives affecting the recoverability of the asset recorded at
December 31, 1996.
In December 1996, the American Institute of Certified Public Accountants
released an exposure draft of a proposed Statement of Position (SOP) titled
"Accounting by Insurance and Other Enterprises for Guaranty-Fund and Certain
Other Insurance-Related Assessments," for the purpose of soliciting comments on
all matters addressed by the proposed SOP. Because the proposed SOP may be
changed significantly prior to its issuance as a final document, the Company has
not determined the impact of the proposed SOP on its financial position or
operating results.
INCOME PER SHARE
Primary income per share is computed based on the weighted average number
of shares outstanding, assuming conversion of all stock options and warrants
having exercise prices less than the average market price of the common stock
using the treasury stock method. The dilutive effect of debentures considered to
be common stock equivalents is included in the primary earnings per share
calculation using the if-converted method. Fully diluted income per share is
computed based on the weighted average number of shares outstanding assuming
conversion of all stock options and warrants having exercise prices less than
the greater of the average or the year-end market price of the common stock
using the treasury stock method. The dilutive effect of all debentures is
included in the fully diluted earnings per share calculation using the
if-converted method.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Retroactive application
of SFAS No. 125 is not permitted. The Company is in the process of evaluating
whether SFAS 125 applies to annuity business written directly by LifeUSA that is
ceded under the terms of reinsurance agreements and therefore has not been able
to determine the impact of adoption on its financial position or operating
results. If found to be applicable, SFAS No. 125 will be adopted by the Company
in the first quarter of 1997.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
26
2. REINSURANCE
Since its inception in 1987, LifeUSA has entered into various agreements to
reinsure a substantial portion of the new life insurance and annuity business
written each year. Entering into these reinsurance agreements has allowed
LifeUSA to write a larger volume of business than it would otherwise have been
able to write due to regulatory restrictions based on the amount of its
statutory capital and surplus.
In addition, under the terms of agreements between the Company and Allianz
Life, LifeUSA agents have produced life insurance and annuity business on
Allianz Life policies which are similar to LifeUSA policies. LifeUSA has assumed
a portion of this business under reinsurance agreements.
The Company receives commissions and expense allowances on the portions of
the LifeUSA life insurance and annuity products reinsured and service fees on
business produced by LifeUSA's agents and written by Allianz Life. The
commissions and expense allowances and service fees received on life insurance
policies are approximately 150% of the first-year planned target premium and
range from 12-1/2 % to 18% of renewal and first-year excess premiums. The
Company also receives commissions and expense allowances and service fees
ranging from 6-1/2 % to 22% on annuity deposits. An additional allowance equal
to .20% of the account value of all annuities issued after April 1, 1991 is
received as of the beginning of policy years two through ten.
REINSURANCE CEDED
LifeUSA ceded from 95% to 100% of its new life insurance and annuity
business to Transamerica Occidental Life Insurance Company (TOLIC) from 1987
through March 31, 1991, and from April 1, 1991 through December 31, 1992, ceded
100% of its new business equally to the following three reinsurers (the
Reinsurers):
* Employers Reassurance Corporation, a subsidiary of Employers
Reinsurance Corporation, a member of the General Electric Company
group;
* Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies; and
* Republic-Vanguard Life Insurance Company, a member of the Winterthur
Swiss Insurance Group, one of the largest Swiss insurance companies.
From 1990 through 1992, TOLIC and the Reinsurers retroceded 25% to 30% of
this business back to LifeUSA. Effective December 31, 1992, the retrocession
agreement with the Reinsurers was terminated with respect to new business
written by LifeUSA after that date. From 1993 through 1996, LifeUSA retained a
portion of its new business and ceded the remainder equally to the Reinsurers.
Effective January 1, 1996, Munich American Reassurance Company reduced its share
of the new business ceded by LifeUSA to the Reinsurers to 20%, while both
Employers Reassurance Corporation and Republic-Vanguard Life Insurance Company
increased their share of this business to 40%.
During 1994, an agreement was reached with TOLIC and the Reinsurers to
unwind the retrocession agreements in effect from 1990 through 1992 and record
all business written under the terms of those agreements as direct reinsurance.
As a result, LifeUSA has accounted for all business previously retroceded to
LifeUSA from TOLIC and the Reinsurers as being retained by LifeUSA and all
business ultimately assumed by TOLIC and the Reinsurers as being ceded to TOLIC
and the Reinsurers by LifeUSA at issuance. This change had no impact on the
Company's financial position or operating results for any period presented. All
disclosures in these notes reflect the unwinding of the retrocession agreements
as discussed in this paragraph.
27
The following table shows the percentages of new life insurance and annuity
business written by LifeUSA that have been ceded to TOLIC and the Reinsurers
since inception:
LIFE INSURANCE ANNUITY
-------------- -------
September 1987 - December 1988.. 100% 100%
January 1989 - December 1989 ... 95 100
January 1990 - December 1990 ... 75 75
January 1991 - December 1992 ... 70 75
January 1993 - June 1993 ....... 65 65
July 1993 - September 1995 ..... 50 50
October 1995 - Present ......... 75 75
The reinsurance agreements require the Reinsurers' approval of policy forms
and terms of LifeUSA's products reinsured by the Reinsurers. Under these
agreements, $437.9 million, $350.8 million and $286.1 million of premiums and
deposits were ceded to the Reinsurers and TOLIC by LifeUSA for the years ended
December 31, 1996, 1995 and 1994, respectively.
When a life insurance policy ceded to TOLIC or the Reinsurers lapses before
the end of 13 months, the Company has agreed to pay a chargeback equal to the
excess of the allowances received over the premiums received. As of December 31,
1996 and 1995, the reserve for lapsed policy chargebacks was $700,000 and
$650,000, respectively.
Reporting assets and liabilities related to reinsurance ceded on a gross
basis reflects the possibility that reinsured risks could become a liability to
the Company in the event the Reinsurers or TOLIC become unable to meet the
obligations they have assumed. Any restriction, limitation or condition imposed
by the Reinsurers could have a material effect on LifeUSA's ability to write new
business if LifeUSA was not able to replace the current reinsurers.
REINSURANCE ASSUMED
All new life insurance and annuity business produced by LifeUSA's agents
and written by Allianz Life from 1987 through 1994 was ceded to TOLIC. Effective
January 1, 1990, LifeUSA entered into a retrocession agreement with TOLIC to
assume a portion of this business. During 1994, LifeUSA terminated the
retrocession agreement with TOLIC and entered into an agreement with Allianz
Life to assume a portion of this business directly from Allianz Life effective
January 1, 1995. Under these agreements, $122.7 million, $175.5 million and
$182.0 million of premiums and deposits were assumed by LifeUSA from Allianz
Life and TOLIC for the years ended December 31, 1996, 1995 and 1994,
respectively.
The following table shows the percentages of new life insurance and annuity
business produced by LifeUSA's agents and written by Allianz Life that have been
assumed by LifeUSA since inception:
LIFE INSURANCE ANNUITY
-------------- -------
September 1987 - December 1989.. --% --%
January 1990 - December 1990 ... 25 25
January 1991 - December 1991 ... 30 25
January 1992 - June 1993 ....... 50 30
July 1993 - September 1995 ..... 50 50
October 1995 - Present ......... 25 25
28
MAINTENANCE EXPENSES
The Company is obligated to continue servicing the underlying life
insurance and annuity policies written directly by LifeUSA or produced by
LifeUSA's agents for Allianz Life. For policies issued prior to 1991, the
Company believes that the present value of anticipated future expenses required
to service policies that have been ceded will exceed the present value of
anticipated future renewal allowances by $250,000, and has accrued a liability
for that amount. This requires estimating renewal allowances and servicing costs
many years into the future, and it is possible that actual future renewal
allowances and servicing costs will not conform to the assumptions inherent in
the current estimation of allowances and costs. Management continuously monitors
actual renewal allowance and servicing cost experience as it emerges and, should
material changes in the assumptions occur, the liability will be modified to the
extent that the present value of future servicing costs is expected to exceed
the present value of future renewal allowances.
3. INVESTMENTS
The amortized cost and fair value of fixed maturity investments as of
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
<S> <C> <C> <C> <C>
1996:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 11,839 $ 1,023 $ 19 $ 12,843
Foreign government obligations ............ 59,096 1,432 509 60,019
Investment grade corporate obligations .... 611,958 19,264 7,592 623,630
Mortgage-backed securities ................ 181,507 1,969 1,689 181,787
---------------------------------------------------
$ 864,400 $23,688 $9,809 $ 878,279
===================================================
HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S. government corporations and agencies. $ 17,409 $ 3,382 $ -- $ 20,791
Foreign government obligations ............ 10,638 325 79 10,884
Investment grade corporate obligations .... 452,863 7,768 2,511 458,120
Mortgage-backed securities ................ 522,287 8,791 7,112 523,966
---------------------------------------------------
$1,003,197 $20,266 $9,702 $1,013,761
===================================================
</TABLE>
29
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
<S> <C> <C> <C> <C>
1995:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S government corporations and agencies . $ 11,518 $ 1,581 $ 3 $ 13,096
Foreign government obligations ............ 58,100 3,882 -- 61,982
Investment grade corporate obligations .... 521,320 39,423 -- 560,743
Mortgage-backed securities ................ 170,615 5,884 125 176,374
-------------------------------------------------
$761,553 $50,770 $128 $812,195
=================================================
HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S government corporations and agencies . $ 16,148 $ 4,978 $ -- $ 21,126
Foreign government obligations ............ 10,669 787 -- 11,456
Investment grade corporate obligations .... 351,725 17,131 -- 368,856
Mortgage-backed securities ................ 530,128 21,671 70 551,729
-------------------------------------------------
$908,670 $44,567 $ 70 $953,167
=================================================
</TABLE>
Fair values for investments are based on quoted market prices. No holdings
of any issuer are greater than 5% of the Company's total investments in fixed
maturities, other than direct or guaranteed obligations of the United States
government or United States government corporations and agencies. The foreign
government obligations held are denominated in U.S. dollars and issued and
traded in the United States.
The amortized cost and fair value of fixed maturity investments at December
31, 1996, by contractual maturity, are as follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less .............. $ 5,224 $ 5,285 $ -- $ --
Due after one year through five years 11,898 11,892 157,624 156,887
Due after five years through ten years 301,185 315,358 185,171 189,984
Due after ten years .................. 364,586 363,957 138,115 142,924
--------------------------------------------------
682,893 696,492 480,910 489,795
Mortgage-backed securities ........... 181,507 181,787 522,287 523,966
-------------------------------------------------
Total ................................ $ 864,400 $878,279 $1,003,197 $1,013,761
==================================================
</TABLE>
Expected maturities in the foregoing table may differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
30
During 1996, 1995 and 1994, the Company sold certain investments classified
as available for sale. Proceeds from these sales were immediately reinvested in
investments of a similar high grade as those investments sold. Gross gains of
$1.9 million, $9.4 million and $2.0 million were realized on these sales in
1996, 1995 and 1994, respectively. Gross losses of $.1 million, $1.8 million and
$.8 million were realized on these sales in 1996, 1995 and 1994, respectively.
The recognition of these net realized gains resulted in an increase in the
amortization of deferred policy acquisition costs and an increase in other
benefits to policyholders of $1.2 million, $4.8 million and $.2 million in 1996,
1995 and 1994, respectively.
As permitted by the special report entitled "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities -- Questions and Answers," issued by the FASB in November 1995, the
Company transferred certain securities from held to maturity to available for
sale on November 20, 1995. Prior to their transfer, the held to maturity
securities were carried at a total amortized cost of $339.5 million. Unrealized
gains of $1.1 million were recorded upon transferring these securities to
available for sale, where they are carried at fair value.
The components of net investment income are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-----------------------------------
Fixed maturities ............ $ 128,629 $ 106,566 $ 73,458
Cash and cash equivalents.... 1,403 3,090 1,544
Policy loans ................ 519 356 249
Agent advances .............. 94 133 74
-----------------------------------
130,645 110,145 75,325
Investment expenses ......... (1,233) (1,053) (815)
-----------------------------------
Net investment income ....... $ 129,412 $ 109,092 $ 74,510
===================================
LifeUSA has entered into investment management agreements with Investment
Advisers, Inc. (IAI) and Allianz Investment Corporation, an affiliate of Allianz
Life. For their services, IAI and Allianz Investment Corporation are paid a fee
based on the market value of investments at the end of each quarter. For the
years ended December 31, 1996, 1995 and 1994, LifeUSA paid a total of $1.0
million, $.8 million and $.6 million, respectively, for investment management
services.
Fixed maturity investments with a total carrying value of $7.6 million are
on deposit with various states in support of statutory requirements as of
December 31, 1996.
The net unrealized gain on fixed maturity investments -- available for sale
included in shareholders' equity consists of the following at December 31 (in
thousands):
1996 1995
--------------------
Gross unrealized gain on fixed maturity
investments -- available for sale ........ $ 13,879 $ 50,642
Adjustments for:
Deferred tax liability ................. (4,858) (17,725)
Deferred policy acquisition costs ...... (8,748) (31,093)
Deferred tax asset ..................... 3,062 10,883
--------------------
Net unrealized gain on fixed maturity
investments -- available for sale ........ $ 3,335 $ 12,707
====================
31
4. LINE OF CREDIT
On May 17, 1996, the Company entered into a line of credit agreement with
two of the Reinsurers that can be used to fund certain investments and
acquisitions the Company may make, capital contributions to LifeUSA or capital
expenditures. The maximum borrowing allowed under this agreement is $30 million
(no amounts outstanding at December 31, 1996). Borrowings under the line of
credit may be made through May 17, 1999, will mature on March 31, 2001 and will
be subject to mandatory repayments from 25% of excess cash flow (as defined) for
the prior calendar year on June 30, 1999 and March 31, 2000. The line of credit
agreement contains various financial covenants, including maintenance of minimum
levels of consolidated tangible net worth for the Company and statutory capital
and surplus and risk-based capital for LifeUSA. The Company is required to pay a
commitment fee of 1/4 of 1% per annum on the average daily unused portion of the
credit line.
5. CONVERTIBLE SUBORDINATED DEBENTURES
During 1995, Allianz Life purchased a 15-year, $30 million convertible
subordinated debenture from the Company. The interest rate on the convertible
subordinated debenture is fixed at 5% per annum for the first five years. In
years 6 through 15, the debenture will be amortized in equal semi-annual
payments of $1.5 million, with interest set annually at LIBOR (London Interbank
Offering Rate) plus 1% per annum.
During the first five years, Allianz Life may convert the debenture into
the Company's common stock at $12.40 per share (subject to customary
anti-dilution adjustments). During years 6 through 10, the conversion price is
the higher of $12.40 per share (subject to customary anti-dilution adjustments)
or two times the Company's GAAP (Generally Accepted Accounting Principles) book
value per share, as calculated at the end of the month preceding conversion. The
debenture may be redeemed by the Company at any time without penalty.
Contemporaneous with the issuance of the debenture to Allianz Life, the
Company also issued Allianz Life, for no additional consideration, a conversion
protection warrant to acquire 2.4 million shares of the Company's common stock
at $12.40 per share, which is only exercisable if the debenture is redeemed
prior to February 17, 2000 and the average trading price for the Company's
common stock has not been at least $15.625 per share for any consecutive 45
trading days. The conversion protection warrant expires on the earlier of (i)
February 17, 2000, or (ii) 30 days after the Company has notified Allianz Life
that the average trading price for the Company's common stock has been at least
$15.625 per share for any consecutive 45 trading days.
The agreements also grant Allianz Life preemptive rights to acquire
additional shares of the Company's common stock equal to 10.5% of (i) the number
of shares of the Company's common stock deemed outstanding for the purpose of
computing fully diluted earnings per share under the treasury stock method of
accounting as of the end of the month immediately preceding the notice of
exercise of preemptive rights, less (ii) 22,857,142. The exercise price per
share is equal to the lesser of (i) $12.40 or (ii) the weighted average price at
which shares of the Company's common stock have been issued subsequent to
February 17, 1995, subject to certain exceptions and customary anti-dilution
adjustments.
Allianz Life also has observer rights at the meetings of the Boards of
Directors of the Company and LifeUSA so long as the convertible debt is held by
Allianz Life or its affiliates, or 2.0 million shares of the Company's common
stock are owned by Allianz Life or its affiliates. In addition, in the event
that the convertible debt is converted in its entirety into the Company's common
stock and so long as Allianz Life owns at least 2.0 million shares of the
Company's common stock, Allianz Life will have the right to designate one
director of the Company and one director of LifeUSA.
32
Prior to 1993, the Company's agents and employees earned convertible
subordinated debentures as compensation. At December 31, 1996, $6.0 million of
these debentures are outstanding. The debentures bear an 8% fixed interest rate
which is payable annually. The debentures mature on June 30, 2000 or sooner at
the option of the Company or mandatorily upon the sale of the Company. Subject
to certain conditions, the debentures may be converted into shares of the
Company's common stock at a conversion price of $22.50 per share through June
30, 1997. This conversion price increases by $1.50 per year up to a maximum of
$27.00 per share. The debentures are subordinate to all present and future
indebtedness of the Company, including lease obligations. During 1995 and 1994,
$11,000 and $309,000 of debentures were converted to 571 and 17,019 shares of
common stock, respectively.
The Allianz Life debenture is a common stock equivalent for the purpose of
calculating the Company's primary earnings per share, while the debentures
outstanding to the Company's agents and employees are not considered to be
common stock equivalents.
6. LEASES
The Company leases office space, telephone equipment and furniture under
operating leases expiring in various years through February 2001, with rights to
lease additional office space at specified future dates and options to renew the
leases for office space for an additional eight years and ten months from the
expiration date. The office lease payments are subject to adjustment for real
estate taxes and maintenance expenses. Rent expense on these operating leases
charged to operations was $1.5 million, $1.3 million and $1.4 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1996 are as follows (in
thousands):
1997..................... $1,913
1998..................... 1,938
1999..................... 2,132
2000..................... 2,132
2001..................... 356
------
$8,471
======
7. CAPITAL STRUCTURE
PREFERRED STOCK
The Board of Directors has the authority to designate additional classes of
preferred stock and the rights and preferences of any class of preferred stock
from the 15 million authorized preferred shares. The issuance of preferred stock
may adversely affect various rights, including voting rights, of the common
shareholders and may be used as an anti-takeover device.
STOCK WARRANTS
In September 1992, the Company entered into an agreement with Lions Gate
Capital Ltd. (Lions Gate) whereby Lions Gate assisted the Company in investor
relations matters through August 1993. As compensation for its services, Lions
Gate was issued a warrant to acquire 192,000 shares of common stock. Lions Gate
could elect monthly to receive all or a part of each month's compensation in
cash instead of that month's portion of the warrant. The number of shares under
this warrant was reduced by the amount of cash compensation Lions Gate elected
to receive. Lions Gate received cash totaling $15,500 during the period covered
by the agreement. As of December 31, 1996 and 1995, there were outstanding
warrants originally issued to Lions Gate for 176,500 shares of common stock at
an exercise price of $10.00 per share, subject to certain adjustments. These
warrants expire on September 30, 1997. No further warrants are issuable to Lions
Gate.
33
COMMON STOCK TO BE ISSUED
In connection with employee and Company contributions to the Life USA
Holding, Inc. Employee Savings Plan (Savings Plan), 21,384 shares of common
stock are to be issued at a price of $12.00 per share at December 31, 1996 and
45,404 shares of common stock were to be issued at prices of $8.00 to $9.00 per
share at December 31, 1995 to employee accounts under the Savings Plan.
NOTES RECEIVABLE FROM STOCK SALES
During 1996, the Company issued common stock to several of its field
marketing organizations (FMOs) in exchange for promissory notes in order to
provide additional incentives for the FMOs to increase the life insurance and
annuity business produced for LifeUSA or through LifeUSA under its joint
marketing agreement with Allianz Life. The shares of common stock issued for the
account of the FMO are held in the possession of the Company as security for the
repayment of the promissory note. The promissory notes bear interest at the rate
of 8% per annum compounded monthly and payable at maturity (the fifth
anniversary of the date of the note).
STOCK OPTION PLANS
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123 requires the use of highly
subjective option valuation models that were developed for use in valuing
publicly traded stock options. Under APB No. 25, no compensation cost is
recognized since the exercise price of the Company's stock options is equal to,
or greater than, the market price of the underlying stock on the date of grant.
The binomial and Black and Scholes option valuation models were developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. To further facilitate the
use of the information disclosed, a range of reasonable values also is presented
with the Company's pro forma information to reflect the variability of the
results of the valuation process that would arise from changes made to the
assumptions.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined using binomial option
valuation models as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The assumptions used for each
stock option plan are included in the discussion of that specific plan.
In 1990, the Company established the Life USA Holding, Inc. 1990 Stock
Option Plan (the 1990 Stock Option Plan). The 1990 Stock Option Plan provides
for the granting of stock options to employees and consultants of the Company.
An aggregate of 4 million shares of common stock is reserved for issuance upon
the exercise of the options granted. The purchase price of the shares of common
stock subject to options granted under the 1990 Stock Option Plan is determined
by a committee of the Board of Directors and cannot be less than 100% of the
fair market value on the date the option is granted for incentive stock options
and cannot be less than 85% of the fair market value on the date the option is
granted for non-qualified options. No options may be granted under the 1990
Stock Option Plan after September 2000. The option vesting period and exercise
period are determined by the committee at the date of the grant. The vesting
periods range from zero to four years. During 1996, the committee determined
that the life of all outstanding employee stock options issued with a five year
life would be extended to ten years and all future employee stock option grants
would be issued with a life of ten years. The additional expense related to the
grant extensions is disclosed separately in the 1996 pro forma disclosures.
34
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the 1990 Stock Option Plan. The
volatility used was 38.03% and 36.89% for 1996 and 1995, respectively; the risk
free interest rates ranged from 5.04% to 6.38% and 5.88% to 6.05% for 1996 and
1995, respectively; and the expected option life was seven years and four years
for 1996 and 1995, respectively.
Exercise prices for options outstanding as of December 31, 1996 ranged from
$6.00 to $28.00. A summary of the Company's stock option activity for the 1990
Stock Option Plan, and related information for the years ended December 31
follows (in thousands, except exercise price amounts):
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year ......... 2,289 $10.26 2,103 $10.10
Granted equal to market .................. 373 8.77 67 8.88
Granted above market ..................... 151 12.96 165 12.76
Exercised ................................ (29) 7.00 (27) 6.05
Canceled ................................. (64) 11.50 (19) 15.48
-----------------------------------------------------------
Outstanding -- end of year ............... 2,720 10.21 2,289 10.26
===========================================================
Exercisable -- end of year ............... 1,858 $10.39 1,376 $10.27
===========================================================
Weighted-average fair value of options
granted during the year (using SFAS
123 assumptions) ........................ $ 4.21 $ 2.70
===========================================================
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996 (in thousands, except exercise price
and remaining contractual life amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.00 - 9.00 7.2 977 $ 7.45 640 $ 6.78
$ 9.01 - 13.50 7.6 1,519 10.93 994 11.14
$13.51 - 20.25 7.5 180 15.70 180 15.70
$20.26 - 28.00 6.8 44 24.52 44 24.52
</TABLE>
Beginning in 1992, the Company granted stock options as commission bonuses
to LifeUSA's agents (Agent Option Plan) based on net earned commissions on
business written. An aggregate of 4,797,843 shares of the Company's common stock
is reserved for issuance upon the exercise of these options. The purchase price
of shares of common stock subject to these options is the greater of $10.00 per
share or 150% of the average closing bid price for the Company's common stock
for the twenty days immediately preceding the end of the calendar quarter for
which the stock option is granted. These options vest immediately upon issuance
and expire on the December 31st in the fifth year following the date of grant.
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the Agent Option Plan. The
volatility used was 36.89% for 1996 and 1995; the risk free interest rates
ranged from 6.10% to 6.15% and 5.95% to 6.05% for 1996 and 1995, respectively;
and the expected option life was four years for 1996 and 1995.
35
Exercise prices for options outstanding as of December 31, 1996 ranged from
$10.00 to $27.28. A summary of the Company's stock option activity for the Agent
Option Plan, and related information for the years ended December 31 follows (in
thousands, except exercise price amounts):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year ........ 3,482 $14.93 2,406 $15.60
Granted above market .................... 664 12.79 1,088 13.48
Canceled ................................ (111) 15.88 (12) 15.88
--------------------------------------------------------
Outstanding -- end of year .............. 4,035 14.56 3,482 14.93
========================================================
Exercisable -- end of year .............. 4,035 $14.56 3,482 $14.93
========================================================
Weighted-average fair value of options
granted during the year (using SFAS
123 assumptions) ....................... $ 2.37 $ 1.93
========================================================
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996 (in thousands, except exercise price
and remaining contractual life amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES CONTRACTUAL LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 9.01 - 13.50 3.4 1,833 $11.56 1,833 $11.56
$13.51 - 20.25 3.1 1,852 15.49 1,852 15.49
$20.26 - 28.00 2.0 350 25.29 350 25.29
</TABLE>
During 1993, the Company established the LifeUSA Director Option Plan
(Director Option Plan) which provides for the granting of stock options to
members of the Company's Board of Directors who are not and have not been
full-time employees of the Company or any of its subsidiaries. Each such
director receives a non-qualified stock option to purchase 1,000 shares of
common stock for each meeting of the Board of Directors attended. The price of
the option will be equal to the fair market value of the stock on the date of
the meeting. An aggregate of 100,000 shares of common stock is reserved for
issuance upon the exercise of the options granted. These options vest
immediately, are exercisable six months and one day after issuance, and expire
on the earlier of five years from issuance or one year after the director ceases
to be a member of the Board of Directors.
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the Director Option Plan. The
volatility used was 36.89% for 1996 and 1995; the risk free interest rates
ranged from 6.03% to 6.10% and 5.88% to 5.99% for 1996 and 1995, respectively;
and the expected option life was four years for 1996 and 1995.
36
Exercise prices for options outstanding as of December 31, 1996 ranged from
$8.25 to $19.50. A summary of the Company's stock option activity for the
Director Option Plan, and related information for the years ended December 31
follows (in thousands, except exercise price amounts):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year ........ 45 $11.67 25 $13.88
Granted equal to market ................. 20 8.78 20 8.92
--------------------------------------------------------
Outstanding -- end of year .............. 65 10.78 45 11.67
========================================================
Exercisable -- end of year .............. 55 $11.12 35 $12.55
========================================================
Weighted-average fair value of options
granted during the year (using SFAS
123 assumptions) ....................... $ 3.28 $ 3.32
========================================================
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996 (in thousands, except exercise price
and remaining contractual life amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES CONTRACTUAL LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.00 - 9.00 3.8 30 $ 8.57 25 $ 8.59
$ 9.01 - 13.50 3.1 25 10.23 20 10.44
$13.51 - 20.25 1.9 10 18.81 10 18.81
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is charged to expense in the year of grant. The expense generated as a
result of the grant of agent options has been reduced by the amount that would
be deferred as a cost of acquiring new business. This amount has been calculated
using a method consistent with that utilized by LifeUSA to defer commissions
paid to agents. The Company's pro forma information follows (in thousands,
except for earnings per share information):
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------
RANGE OF VALUES RANGE OF VALUES
---------------- ----------------
SFAS 123 HIGH LOW SFAS 123 HIGH LOW
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reported net income ......... $23,454 $23,454 $23,454 $19,097 $19,097 $19,097
Additional expense:
1990 Stock Option Plan:
Original grants ........ (1,273) (1,626) (444) (362) (512) (154)
Grant extensions ....... (3,628) (5,091) (981) -- -- --
Agent Option Plan ........ (998) (1,512) (320) (867) (1,393) (225)
Director Option Plan ..... (38) (49) (21) (38) (50) (21)
-------------------------------------------------------------------
Pro forma net income ........ $17,517 $15,176 $21,688 $17,830 $17,142 $18,697
===================================================================
Pro forma earnings per share:
Primary .................. $ .79 $ .69 $ .97 $ .82 $ .79 $ .86
===================================================================
Fully diluted ............ $ .78 $ .68 $ .96 $ .82 $ .79 $ .86
===================================================================
</TABLE>
37
SAVINGS PLAN
In 1990, the Company adopted the Savings Plan. An aggregate of 700,000
shares of common stock is reserved for issuance by the Savings Plan. All
permanent employees age 18 and over are eligible to participate in the Savings
Plan. Participants may contribute from 1% to 15% of their annual salary to the
Savings Plan, and the Company will match these contributions at a percentage to
be determined annually at the discretion of the Company. The Company may also
contribute a discretionary profit sharing amount, determined annually.
Contributions made to the Savings Plan by the Company are invested in common
stock of the Company. During the years of 1996, 1995 and 1994, the Company
matched the participants' contributions dollar-for-dollar up to 6% of their
annual salaries. The Company's expense for the years ended December 31, 1996,
1995 and 1994, was $.9 million, $.7 million and $.6 million, respectively.
DIVIDENDS
The ability of the Company to pay dividends is limited because a majority
of the Company's revenues is produced by LifeUSA, and distributions by LifeUSA
to the Company are subject to approval and other limitations imposed by the
Department of Commerce of the State of Minnesota. Although LifeUSA has made
a formal request of the Department of Commerce of the State of Minnesota for
approval to pay a $2.5 million dividend to the Company during 1997, the Company
does not currently intend to pay dividends.
8. INCOME TAXES
Income taxes consist of the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------------------------------
Current:
Federal ...... $14,459 $ 8,312 $4,197
State ........ 821 372 334
--------------------------------
Total current.... 15,280 8,684 4,531
Deferred ........ (1,669) 2,180 4,032
--------------------------------
$13,611 $10,864 $8,563
================================
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate for the years ended December 31
is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------
PROVISION RATE PROVISION RATE PROVISION RATE
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes based on the statutory rate... $12,973 35.0% $10,486 35.0% $8,061 35.0%
State income tax, net of federal benefit... 453 1.2 183 .6 231 1.0
Other ..................................... 185 .5 195 .7 271 1.2
------------------------------------------------------------------
Income taxes .............................. $13,611 36.7% $10,864 36.3% $8,563 37.2%
==================================================================
</TABLE>
38
The components of the deferred tax (benefit) provision for the years ended
December 31 are as follows (in thousands):
1996 1995 1994
------------------------------------
Deferred policy acquisition costs.... $ 3,548 $ 12,810 $ 15,453
Future policy benefits .............. (3,840) (10,173) (10,373)
Deferred agent compensation ......... 49 (534) (745)
State guaranty fund assessments ..... (1,109) (729) 211
Other ............................... (317) 806 (514)
------------------------------------
$(1,669) $ 2,180 $ 4,032
====================================
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
DECEMBER 31,
------------------
1996 1995
------------------
Deferred tax assets:
Future policy benefits .............. $52,143 $48,303
Unrealized gains/losses on
investments ........................ 3,062 10,883
Deferred agent compensation ......... 2,664 2,713
State guaranty fund assessments ..... 1,723 641
Other ............................... 5,930 5,513
------------------
Total gross deferred tax assets ........ 65,522 68,053
Deferred tax liabilities:
Deferred policy acquisition costs.... 67,536 63,988
Unrealized gains/losses on
investments ........................ 4,858 17,725
State guaranty fund assessments ..... 878 905
Other ............................... 5,174 5,075
------------------
Total gross deferred tax liabilities.... 78,446 87,693
------------------
Net deferred tax liability ............. $12,924 $19,640
==================
The Company began filing life-nonlife consolidated income tax returns in
1994.
The Internal Revenue Service is currently auditing the Company's and
LifeUSA's federal income tax returns for the years 1992 and 1991. The outcome of
the examination is not known at this time.
9. RELATED PARTY TRANSACTIONS
The Company incurred legal fees of $.4 million, $.4 million and $.3 million
for the years ended December 31, 1996, 1995 and 1994, respectively, from the law
firm of which one of its directors and one officer of the Company are members.
Members of such firm beneficially owned 328,830 shares of the Company at
December 31, 1996, or approximately 1.6% of the then outstanding shares.
The Company incurred actuarial and other consulting fees of $.7 million,
$.9 million and $.9 million for the years ended December 31, 1996, 1995 and
1994, respectively, from the firm of which one of its directors is a member.
The Company incurred legal and other consulting fees of $.1 million, $.1
million, and $.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively, from the firm of which one of its directors is a member.
39
10. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
Changes in operating assets and liabilities consist of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Increase in policy loans ................................ $ (1,553) $ (1,666) $ (1,520)
Increase in accrued investment income ................... (4,324) (14,091) (4,221)
Increase in future policy benefits recoverable and
amounts due from reinsurers ............................ (7,678) (5,768) (4,962)
Decrease (increase) in other assets ..................... 2,636 (14,867) (4,287)
Increase (decrease) in other policyholders' funds ....... 928 (48) 1,608
(Decrease) increase in amounts due reinsurers ........... (3,698) 12,242 2,669
(Decrease) increase in accrued commissions to agents .... (1,121) 2,859 306
(Decrease) increase in taxes, licenses and fees
payable ................................................ (1,045) 13,542 3,024
Increase (decrease) in accounts payable ................. 2,196 565 (36)
Increase (decrease) in other liabilities ................ 312 (362) (3,445)
---------------------------------
$(13,347) $ (7,594) $(10,864)
=================================-
Supplemental schedule of noncash financing activities:
Issuance of stock upon conversion of
convertible subordinated debentures ................. $ -- $ 11 $ 309
Cancellation of convertible subordinated
debentures .......................................... -- -- 1
Issuance of stock to employees as
compensation ........................................ 1,436 831 943
</TABLE>
11. STATUTORY CAPITAL AND SURPLUS
LifeUSA, domiciled in Minnesota, prepares its statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Department of Commerce of the State of Minnesota. LifeUSA does not utilize
any accounting practices in the preparation of its statutory financial
statements which differ from those prescribed by the Department of Commerce of
the State of Minnesota.
At December 31, 1996 and 1995, LifeUSA had statutory capital and surplus of
$87.3 million and $75.7 million, respectively, as reported to regulatory
authorities. During 1996 and 1995, the Company contributed to LifeUSA a total of
$1.4 million and $25.4 million, respectively, to increase LifeUSA's statutory
capital and surplus. LifeUSA has made a formal request to the Department of
Commerce of the State of Minnesota for approval to pay a $2.5 million cash
dividend to the Company during 1997. LifeUSA's ability to pay dividends in the
future is also subject to compliance with Minnesota insurance laws and
regulations. Statutory net income for the years ended December 31, 1996 and 1995
was $13.2 million and $.4 million, respectively, while the statutory net loss
for the year ended December 31, 1994 was $12.5 million. Differences between net
income and statutory results of operations arise primarily from deferred policy
acquisition costs, future policy benefits, deferred income taxes, amortization
of licenses and noncash transactions relating to agent advances.
40
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996:
Revenues ................... $73,554 $77,429 $84,032 $81,883
Net income ................. 4,621 5,666 6,762 6,404
Income per common and common
equivalent share:
Primary ................. .21 .25 .30 .28
Fully diluted ........... .21 .25 .30 .28
1995:
Revenues ................... 59,868 70,132 64,202 78,580
Net income ................. 3,706 4,959 3,823 6,609
Income per common and common
equivalent share:
Primary ................. .18 .23 .18 .30
Fully diluted ........... .18 .23 .18 .30
</TABLE>
The results for the quarters ended December 31 were impacted by the following
items (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------------------------------------------
NET INCOME PER SHARE NET INCOME PER SHARE
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net realized gains on investments ......... $ -- $ -- $ 1,870 $ .08
Charges for state guaranty fund assessments (1,487) (.06) (1,415) (.06)
Reduction of state premium tax expense .... 1,838 .08 -- --
Adjustments made to annual
production based accruals ................ (938) (.04) 590 .03
Revisions made to the estimates in the
models used to amortize deferred policy
acquisition costs and accrue for bonuses
to be paid to policyholders .............. 1,184 .05 -- --
</TABLE>
41
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS AND POLICY LOANS
The carrying amounts reported in the balance sheet for these financial
instruments approximate fair value.
INVESTMENT CONTRACTS
The fair value of the Company's liabilities for deferred annuity contracts
is estimated to be the cash surrender value of each contract. The cash surrender
value represents the policyholder's account balance less applicable surrender
charges. The fair value of liabilities for supplemental contracts without life
contingencies and in-benefit annuity contracts is estimated by discounting
estimated cash flows using appropriate market interest rates.
The fair value of the Company's deferred policy acquisition costs is not
required to be disclosed. However, in the event that the fair value of the
liabilities for deferred annuity contracts, supplemental contracts without life
contingencies and in-benefit annuity contracts were realized (i.e., the business
is sold or completely ceded to a third party), the deferred policy acquisition
cost asset with a carrying value of $167.9 million and $155.4 million at
December 31, 1996 and 1995, respectively, would have a fair value of $0.
CONVERTIBLE SUBORDINATED DEBENTURES
The fair value of convertible subordinated debentures is estimated using
discounted cash flow analyses, based on interest rates for similar types of
financial instruments with maturities consistent with those remaining for the
debentures.
The carrying amounts and fair values of the Company's financial instruments
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturity investments:
Available for sale .................... $ 878,279 $ 878,279 $ 812,195 $ 812,195
Held to maturity ...................... 1,003,197 1,013,761 908,670 953,167
Policy loans ............................. 23,908 23,908 19,789 19,789
Cash and cash equivalents ................ 20,989 20,989 33,222 33,222
Future policy benefits recoverable and
amounts due from reinsurers ............. 2,065,817 1,999,158 1,766,833 1,633,730
LIABILITIES
Investment contracts:
Deferred annuities .................... $2,884,403 $2,562,624 $2,651,463 $2,359,788
Supplementary contracts and
in-benefit annuities ................. 954,150 984,832 716,648 749,391
Convertible subordinated debentures ...... 36,030 39,633 36,030 32,813
</TABLE>
42
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments without attempting to estimate the value of estimated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
43
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Life USA Holding, Inc.
We have audited the accompanying consolidated balance sheets of Life USA
Holding, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Life USA
Holding, Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
In 1994, as discussed in Note 1 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 31, 1997
44
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Life USA Holding, Inc. is responsible for the
consolidated financial statements, accompanying notes and all other information
presented in this Annual Report. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles appropriate
in the circumstances and include amounts based on the best estimates and
judgments of management.
In order to safeguard assets and to maintain the integrity and objectivity
of data in these financial statements, Life USA Holding, Inc. maintains a
comprehensive system of internal accounting controls. These controls are
supported by the careful selection and training of qualified personnel and an
appropriate division of responsibilities. In addition, an integral part of the
comprehensive system of internal control is an effective internal audit
department. The Life USA Holding, Inc. internal audit department systematically
evaluates the adequacy and effectiveness of internal accounting controls and
measures adherence to established policies and procedures. The management of
Life USA Holding, Inc. believes that as of December 31, 1996, its system of
internal control is adequate to accomplish the objectives discussed herein.
The financial statements for the years ended December 31, 1996, 1995 and
1994 have been audited by Ernst & Young LLP, independent auditors. Their audits
were made in accordance with generally accepted auditing standards and included
a review of the system of internal controls to the extent necessary to express
an opinion on the financial statements.
The audit committee of the Board of Directors, comprised solely of outside
directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the audit committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of financial reporting.
/s/ Robert W. MacDonald
- -------------------------
Robert W. MacDonald
Chairman and Chief Executive Officer
/s/ Mark A. Zesbaugh
- -------------------------
Mark A. Zesbaugh
Executive Vice President and
Chief Financial Officer
45
LIFE USA HOLDING, INC.
BOARD OF DIRECTORS
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Margery G. Hughes
President
Chief Operating Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Donald J. Urban
Senior Vice President
Director of Sales
Joseph W. Carlson, FLMI
Consultant
Ralph Strangis
Counsel to the Company
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A.
Robert J. Oster
Private Venture Capital Investor
Jack H. Blaine
President
National Organization of Life
and Health Insurance
Guaranty Associations
Hugh Alexander
Member of Alexander Law Firm, P.C.
Barbara J. Lautzenheiser
Lautzenhieser & Associates
OFFICERS
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Margery G. Hughes
President
Chief Operating Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Donald J. Urban
Senior Vice President
Director of Sales
Bradley E. Barks, FSA, MAAA, CPA
Senior Vice President Finance
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Chief Actuary
Bruce J. Parker
Assistant Secretary
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A
- ---------------
VICE PRESIDENTS
Jo-Anne S. Halek
Kimberly A. Lees
- ----------------
ANNUAL MEETING
The annual meeting of the shareholders of Life USA Holding, Inc. will be held on
April 15, 1997 at the Interchange Tower, 600 South Highway 169, Minneapolis,
Minnesota 55426. All shareholders are invited to attend.
CORPORATE INFORMATION
CORPORATE OFFICE
300 South Highway 169
Minneapolis, Minnesota 55426
612-546-7386
General Counsel
Kaplan, Strangis and Kaplan, P.A
Minneapolis, Minnesota
Independent Auditors
Ernst & Young LLP
Minneapolis, Minnesota
Transfer Agent
Harris Trust and Savings Bank
Chicago, Illinois
- ----------------
REINSURANCE PARTNERS
Allianz Life Insurance Company
of North America
Minneapolis, Minnesota
Employers Reassurance Corporation
Overland Park, Kansas
Munich American
Reassurance Company
Atlanta, Georgia
Republic-Vanguard Life
Insurance Company
Dallas, Texas
Transamerica Occidental Life
Insurance Company
Charlotte, North Carolina
FORM 10-K
The Life USA Holding, Inc. Form 10-K can be obtained by writing to
Mark A. Zesbaugh, Chief Financial Officer, 300 South Highway 169,
Minneapolis, Minnesota 55426.
SHAREHOLDER INFORMATION
Life USA Holding, Inc. common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol: "LUSA." No dividends have been paid
since inception.
1995 1996
--------------- --------------
HIGH LOW HIGH LOW
--------------------------------
1st Quarter $11-3/8 $7-3/16 $9-7/8 $7-5/8
2nd Quarter $10-1/2 $ 8-5/8 $9-3/8 $7-5/8
3rd Quarter $10-1/8 $ 8-1/4 $9-1/4 $7-3/4
4th Quarter $ 9-1/4 $ 7-5/8 $ 12 $8-5/8
As of December 31, 1996, there were 5,093 holders of record of the Company's
common stock.
46
LIFEUSA INSURANCE COMPANY
BOARD OF DIRECTORS
Robert W. MacDonald, CLU
Chief Executive Officer
Daniel J. Rourke, CLU
Chairman
Donald J. Urban
President
Margery G. Hughes
Executive Vice President
Mark A. Zesbaugh, CPA, CFA, FLMI
Senior Vice President
Treasurer
Jacqueline K. Katrein, CPA
Senior Vice President
Support Division
Chief Financial Officer
Joseph W. Carlson, FLMI
Consultant
Ralph Strangis
Counsel to the Company Member of
the Law Firm Kaplan, Strangis and
Kaplan, P.A.
Robert J. Oster
Private Venture Capital Investor
Stephen M. Kerns
Insurmark
David A. Sunderland
Sunderland Insurance Services
Joseph R. Lehman, CFP, CLU
Life Sales
Edward A. Omert
Roster Financial
OFFICERS
Robert W. MacDonald, CLU
Chief Executive Officer
Daniel J. Rourke, CLU
Chairman
LifeUSA Insurance Company
Chairman and
Chief Executive Officer
Universal Benefits Life Division
Donald J. Urban
President
Margery G. Hughes
Executive Vice President
Mark A. Zesbaugh, CPA, CFA, FLMI
Senior Vice President
Treasurer
Ronald L. Berger, CPA
Senior Vice President
Information & Technology
Denise M. Blizil
Senior Vice President
Operating Division
Secretary
Linda K. Burm
Senior Vice President
Chief Operating Officer
Universal Benefits Life Division
Jacqueline K. Katrein
Senior Vice President
Support Division
Chief Financial Officer
Charles M. Kavitsky
Senior Vice President
Sales and Marketing
VICE PRESIDENTS
Robin Aeshliman
Leo J. Anderson, FLMI
Rolf D. Baglien, CPA
Kevin J. Boyce
Caroyln K. Cosgrove, FLMI
Michael A. Eitel, CPA
Lorraine M. Frankewicz
John T. Helgerson, CLU
Susan L. Kumpula
Lane A. Kurle, FLMI
Robert L. Miller
Kathaleen A. Morrow
Janet M. Neary
David K. Sandberg, ASA, MAAA
Susan K. Swanson
Cathy H. Waldhauser, FSA, MAAA
Kevin E. Walker, FLMI
Deborah J. Wesenberg, FLMI, FALU, CLU
Scott A. Wheeler, CPA, CLU, FLMI
- ----------------
ASSISTANT VICE PRESIDENTS
Kristi K. Bizer, CPA, FLMI
Lisa B. Carlson
Brenda Z. Duenwald
Jeffrey R. Girod
Amelia L. Jensen
John R. Kraft
Richard P. Lapcinski
Leslie J. LeQue
Neil H. McKay, FSA, MAAA
Rodney D. Meyer, ALHC, FLMI
Lisa M. Nicholson
Philip B. Rosenbaum, CPA, FLMI
Sharyl L. Schultz, CLU
Roxanne M. Watercott
Ann M. Yaggie
47
LIFEUSA(R)
300 South Highway 169
Minneapolis, Minnesota 55426
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State or other jurisdiction of
Name of subsidiary incorporation or organization
- ------------------ -----------------------------
LifeUSA Insurance Company Minnesota
LifeUSA Securities, Inc. Minnesota
LifeUSA Marketing, Inc. Minnesota
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Life USA Holding, Inc. of our report dated January 31, 1997 included in the
1996 Annual Report to Shareholders of Life USA Holding, Inc.
Our audits also included the financial statement schedules of Life USA Holding,
Inc. listed in item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statements schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-38610) pertaining to the Life USA Holding, Inc. Employee Stock
Option Plan, the Registration Statement (Form S-8 No. 33-38821) pertaining to
the Life USA Holding, Inc. Employee Savings Plan, and the Registration Statement
(Form S-3 No. 33-71068) pertaining to the Life USA Holding, Inc. Option Bonus
Program of our report dated January 31, 1997 with respect to the consolidated
financial statements incorporated herein by reference, and our report included
in the preceding paragraph with respect to the financial statement schedules
included in this Annual Report (Form 10-K) of Life USA Holding, Inc.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 25, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that LIFE USA HOLDING, INC., a Minnesota
corporation (the "Company"), and each of the undersigned directors of the
Company, hereby constitutes and appoints Robert W. MacDonald and Mark A.
Zesbaugh and each of them (with full power to each of them to act alone) its/his
true and lawful attorney-in-fact and agent, for it/him and on its/his behalf in
its/his name, place and stead, in any and all capacities to sign, execute, affix
its/his seal thereto and file the Annual Report on Form 10-K for the year ended
December 31, 1996 under the Securities Exchange Act of 1934, as amended,
including any amendment or amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority.
There is hereby granted to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing, requisite and
necessary to be done in respect of the foregoing as fully as it/he or
itself/himself might or could do if personally present, thereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in any number of counterparts, each
of which shall be an original, but all of which taken together shall constitute
one and the same instrument and any of the undersigned directors may execute
this Power of Attorney by signing any such counterpart.
IN WITNESS WHEREOF, LIFE USA HOLDING, INC. has caused this Power of
Attorney to be executed in its name by its President on the 15th day of January,
1997.
LIFE USA HOLDING, INC.
By /s/ Margery G. Hughes
------------------------
Margery G. Hughes, President
The undersigned directors of LIFE USA HOLDING, INC. have hereunto set their
hands as of the 15th day of January, 1997.
/s/ Hugh Alexander /s/ Robert J. Oster
- ---------------------------- ------------------------
Hugh Alexander Robert J. Oster
/s/ Jack H. Blaine /s/ Daniel J. Rourke
- ---------------------------- ------------------------
Jack H. Blaine Daniel J. Rourke
/s/ Joseph W. Carlson /s/ Ralph Strangis
- ---------------------------- ------------------------
Joseph W. Carlson Ralph Strangis
/s/ Margery G. Hughes /s/ Donald J. Urban
- ---------------------------- ------------------------
Margery G. Hughes Donald J. Urban
/s/ Barbara J. Lautzenheiser /s/ Mark A. Zesbaugh
- ---------------------------- ------------------------
Barbara J. Lautzenheiser Mark A. Zesbaugh
/s/ Robert W. MacDonald
- ----------------------------
Robert W. MacDonald
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 878,279
<DEBT-CARRYING-VALUE> 1,003,197
<DEBT-MARKET-VALUE> 1,013,761
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,905,304
<CASH> 20,989
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 212,138
<TOTAL-ASSETS> 4,386,723
<POLICY-LOSSES> 4,078,621
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 5,381
<NOTES-PAYABLE> 36,030
0
0
<COMMON> 210
<OTHER-SE> 172,405
<TOTAL-LIABILITY-AND-EQUITY> 4,386,723
0
<INVESTMENT-INCOME> 129,412
<INVESTMENT-GAINS> 1,791
<OTHER-INCOME> 185,695
<BENEFITS> 116,931
<UNDERWRITING-AMORTIZATION> 24,495
<UNDERWRITING-OTHER> 138,407
<INCOME-PRETAX> 37,065
<INCOME-TAX> 13,611
<INCOME-CONTINUING> 23,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,454
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
