UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1997
Commission File No. 0-18485
Life USA HOLDING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1578384
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1997
-------------- ---------------------------------
Common Stock, 21,989,138
Par Value $.01 Per Share
<PAGE>
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the Third Quarter Ended September 30, 1997
I N D E X
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
September 30, 1997 and December 31, 1996.....................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months and nine months ended
September 30, 1997 and September 30, 1996......................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Nine months ended September 30, 1997
and September 30, 1996.........................................6
Notes to Condensed Consolidated Financial Statements
(Unaudited)..................................................7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................9-31
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.............................................32
Item 2. Changes in Securities.........................................32
Item 3. Defaults Upon Senior Securities...............................32
Item 4. Submission of Matters to a Vote of Security Holders...........32
Item 5. Other Information..........................................33-34
Item 6. Exhibits and Reports on Form 8-K..............................34
SIGNATURES:.................................................................35
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$854,111 at September 30, 1997 and $864,400 at
December 31, 1996) $ 878,744 $ 878,279
Held to maturity, at amortized cost (fair value:
$1,214,351 at September 30, 1997 and $1,013,761 at
December 31, 1996) 1,183,501 1,003,197
Policy loans 27,922 23,908
---------- ----------
Total investments 2,090,167 1,905,384
Cash and cash equivalents 57,014 20,989
Accrued investment income 29,167 27,834
Future policy benefits recoverable and amounts due
from reinsurers 2,474,468 2,179,999
Deferred policy acquisition costs 218,262 212,138
Other assets 44,233 40,379
---------- ----------
$4,913,311 $4,386,723
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 4,538,111 $ 4,078,621
Other policyholders' funds 13,869 5,381
Amounts due reinsurers 37,216 23,605
Accrued commissions to agents 10,104 10,243
Taxes, licenses and fees payable 17,119 17,868
Accounts payable 4,938 6,967
Convertible subordinated debentures 36,030 36,030
Deferred income taxes 14,210 12,924
Other liabilities 37,786 22,469
----------- -----------
Total liabilities 4,709,383 4,214,108
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 45,000,000
shares authorized, 21,989,138 issued and
outstanding (20,953,517 shares at December 31, 1996) 220 210
Common stock to be issued, 43,791 shares
(21,384 shares at December 31, l996) 662 357
Additional paid-in capital 96,728 86,474
Notes receivable from stock sales (5,643) (3,888)
Net unrealized gain on fixed maturity
investments - available for sale 6,157 3,335
Retained earnings 105,804 86,127
----------- -----------
Total shareholders' equity 203,928 172,615
----------- -----------
$ 4,913,311 $ 4,386,723
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 12,535 $ 11,291 $ 37,191 $ 35,138
Net investment income 36,795 32,948 106,379 95,519
Net realized gains on investments 2,837 -- 4,071 1,671
Commissions and expense allowances, net 54,471 39,527 129,499 102,275
Other 549 266 1,215 412
----------- ----------- ----------- -----------
Total revenues 107,187 84,032 278,355 235,015
Benefits and expenses:
Interest credited to policyholder account values 27,691 25,120 80,548 73,604
Other benefits to policyholders 6,934 4,571 17,402 13,920
Amortization of deferred policy acquisition costs 7,430 5,660 21,460 18,571
Commissions 33,301 23,149 76,842 59,467
Taxes, licenses and fees 1,315 1,186 3,246 3,523
Operating expenses 15,127 13,670 46,640 38,980
----------- ----------- ----------- -----------
Total benefits and expenses 91,798 73,356 246,138 208,065
----------- ----------- ----------- -----------
Income before income taxes 15,389 10,676 32,217 26,950
Income taxes 5,761 3,914 12,113 9,900
----------- ----------- ----------- -----------
Net income $ 9,628 $ 6,762 $ 20,104 $ 17,050
=========== =========== =========== ===========
Income per common and common equivalent share:
Primary $ .38 $ .30 $ .83 $ .76
=========== =========== =========== ===========
Fully diluted $ .38 $ .30 $ .83 $ .76
=========== =========== =========== ===========
Number of shares used in per share calculation:
Primary 25,643,160 23,478,591 24,717,676 23,243,705
Fully diluted 25,923,849 23,482,537 24,885,263 23,253,123
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,104 $ 17,050
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Accretion of discount on investments, net (1,995) (1,745)
Net realized gains on investments (4,071) (1,671)
Policy acquisition costs deferred (33,997) (29,348)
Amortization of deferred policy acquisition costs 21,460 18,571
Other changes 24,042 (5,332)
--------- ---------
Net cash provided by (used in) operating activities 25,543 (2,475)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases (151,969) (123,337)
Proceeds from sales 154,957 37,682
Proceeds from maturities and principal payments
on mortgage-backed securities 11,717 6,210
Fixed maturity investments-held to maturity:
Purchases (192,083) (82,212)
Proceeds from maturities and principal payments
on mortgage-backed securities 13,429 6,287
Investments in and loans to field marketing
organizations (7,983) --
--------- ---------
Net cash used in investing activities (171,932) (155,370)
Cash flows from financing activities:
Receipts from universal life and investment products 263,973 223,131
Withdrawals on universal life and investment products (189,384) (153,040)
Interest credited to policyholder account values 80,548 73,604
Other financing activities 27,277 11,977
--------- ---------
Net cash provided by financing activities 182,414 155,672
--------- ---------
Net increase (decrease) in cash and cash equivalents 36,025 (2,173)
Cash and cash equivalents at beginning of the period 20,989 33,222
--------- ---------
Cash and cash equivalents at end of the period $ 57,014 $ 31,049
========= =========
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at September 30, 1997 and the related condensed consolidated
statements of income and cash flows for the three months and nine months
ended September 30, 1997 and 1996, are unaudited; however, in the opinion
of management, all adjustments necessary for a fair presentation have
been included and are of a normal recurring nature. The results of
operations for the three months and nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the full
year. The balance sheet at December 31, 1996 is derived from the audited
balance sheet as of that date.
2. Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
3. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to the December 31, 1996 consolidated
financial statements.
4. The net unrealized gain on fixed maturity investments - available for
sale included in shareholders' equity consists of the following:
September 30, December 31,
1997 1996
-------- --------
Gross unrealized gain on fixed maturity
investments - available for sale $ 24,633 $ 13,879
Adjustments for:
Deferred tax liability (8,621) (4,858)
Deferred policy acquisition costs (15,161) (8,748)
Deferred tax asset 5,306 3,062
-------- --------
Net unrealized gain on fixed maturity
investments - available for sale $ 6,157 $ 3,335
======== ========
5. The Company introduced single premium deferred annuity products with an
additional benefit credited to the policy annuitization value based on
the growth in the Standard & Poor's 500 Index. The Company has analyzed
the characteristics of these benefits and has purchased option contracts
with similar characteristics to hedge these risks. These options are
reported at fair value in other assets on the condensed consolidated
balance sheet. Unrealized gains and losses on the contracts are recorded
in other revenues to offset the expense of increases in the future policy
benefits liability for the index benefit.
The Financial Accounting Standards Board (FASB) has issued an exposure
draft, "Accounting for Derivative and Similar Financial Instruments and
for Hedging Activities," which addresses the accounting for derivative
instruments, such as the options owned by the Company, used as hedges
against changes in the fair value of specified assets or liabilities. The
Company's use of option contracts to hedge against increases in the
future policy benefits liability and the Company's accounting treatment
of these contracts fully meet the criteria for fair value hedge
accounting defined in this exposure draft. A final statement from the
FASB could be issued
<PAGE>
by the end of 1997, and as currently drafted would be effective for
financial statements issued for periods beginning after December 15,
1998. The Company's accounting treatment is also consistent with the fair
value treatment prescribed by Statement of Financial Accounting Standards
(SFAS) No. 80, "Accounting for Futures Contracts" for hedges of
liabilities carried at fair value.
6. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
No. 125 defines the accounting treatment and disclosure requirements for
securities lending programs. During the third quarter of 1997, the
Company entered a securities lending program with the custodial bank of
the Company's fixed maturity investment portfolio. The Company currently
reports fees earned under this arrangement in net investment income. The
effective date of the securities lending provisions of SFAS No. 125 was
amended by SFAS No. 127 to apply to transactions occurring after December
31, 1997 and will be adopted by the Company in the first quarter of 1998.
The Company does not expect the adoption of this statement to have any
impact on its financial statements. Further description of the Company's
securities lending program is included in Management's Discussion and
Analysis of Financial Condition and Results of Operations which follows.
7. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share."
SFAS No. 128 establishes standards for computing and presenting earnings
per share for all entities with complex capital structures. SFAS No. 128
is effective for financial statements issued for periods ending after
December 15, 1997 and will be adopted by the Company in the fourth
quarter of 1997. SFAS No. 128 will replace primary earnings per share
with basic earnings per share. Basic earnings per share is calculated
using actual weighted average shares outstanding and excludes the effects
of common stock equivalents currently used in the primary earnings per
share calculation. The Company expects basic earnings per share to be
higher than previously reported primary earnings per share because the
latter will include dilution related to options, warrants and convertible
securities outstanding in the calculation. SFAS No. 128 also replaces
fully diluted earnings per share with diluted earnings per share. The
Company does not expect diluted earnings per share to differ from fully
diluted earnings per share.
8. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 defines the financial statement presentation for
all changes in a company's equity during a period except those resulting
from investments by owners and distributions to owners. SFAS No. 130 is
effective for financial statements issued for fiscal years beginning
after December 15, 1997 and will be adopted by the Company in the first
quarter of 1998. Because the statement is merely a change in
presentation, the Company does not expect the adoption of this statement
to have any impact on the amount of net income, earnings per share or
total shareholders' equity reported.
9. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise" and
defines financial and descriptive information about a company's operating
segments that is to be disclosed in financial statements. Management has
separated the Company into three business segments in order to focus on
the distinct functional, revenue and expense characteristics associated
with the activities performed by each. The results of operations for the
Company's Insurance, Marketing and Corporate business segments are
presented in Management's Discussion and Analysis of Financial Condition
and Results of Operations which follows.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Insurance), 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 Report.
During 1996, the Company formed two wholly-owned subsidiaries: LifeUSA
Securities and LifeUSA Marketing. LifeUSA Securities is a retail broker-dealer
which distributes a family of LifeUSA mutual funds as well as other established
mutual funds and distributes variable life insurance and annuity contracts.
LifeUSA Marketing conducts a variety of marketing activities for the Company.
The results of operations and financial condition of LifeUSA Securities and
LifeUSA Marketing, both individually and in the aggregate, are not material to
the 1997 or 1996 consolidated financial statements of the Company. Therefore,
the analysis that follows in the remainder of this section and the Results of
Operations section focuses primarily on the Company and LifeUSA Insurance.
Management has also separated the Company into three business segments in order
to focus on the distinct functional revenue and expense characteristics
associated with the activities performed by each. The Business Segments section
that follows focuses on these segments and the financial information used by
management to make decisions and analyze the results of their operations.
Since its inception in 1987, LifeUSA Insurance 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 Insurance 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 Insurance 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 (Employers);
* Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies (Munich); and
* Republic-Vanguard Life Insurance Company, a member of the Winterthur
Swiss Insurance Group, one of the largest Swiss insurance companies
(Republic-Vanguard).
Since 1988, under the terms of agreements between the Company and Allianz Life
Insurance Company of North America (Allianz Life), LifeUSA Insurance agents have
produced life insurance and annuity business on Allianz Life policies which are
similar to LifeUSA Insurance policies. During 1997, LifeUSA Insurance agents
began producing long-term care business for Allianz Life. The Company receives
service fees on the business produced by LifeUSA Insurance agents for Allianz
Life.
<PAGE>
Effective October 1, 1995, LifeUSA Insurance began ceding 75% of its new life
insurance and annuity business to the reinsurers and assuming 25% of the new
life insurance and annuity business produced by its agents for Allianz Life. For
comparative purposes, LifeUSA Insurance's net retention (the percentage of new
life insurance and annuity business retained by LifeUSA Insurance and assumed by
LifeUSA Insurance from Allianz Life) was 25% throughout 1996 and the first three
quarters of 1997. LifeUSA Insurance receives commissions and expense allowances
on business ceded to the Reinsurers.
The following table shows LifeUSA Insurance's life insurance and annuity in
force information at September 30, 1997 and December 31, 1996 (in millions):
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Life insurance account values:
All policies produced by LifeUSA Insurance agents (1) $ 289.6 $ 260.1
Direct and assumed business (2) 248.8 223.4
Net of reinsurance (3) 96.0 85.5
Life insurance face amounts:
All policies produced by LifeUSA Insurance agents (1) 8,058.1 8,204.2
Direct and assumed business (2) 6,988.7 7,132.5
Net of reinsurance (3) 2,306.9 2,385.2
Annuity account values:
All policies produced by LifeUSA Insurance agents (1) 5,383.4 4,876.7
Direct and assumed business (2) 3,809.9 3,496.3
Net of reinsurance (3) 1,756.4 1,655.5
________________________________________
</TABLE>
(1) Includes all policies produced by LifeUSA Insurance agents, including
policies produced by LifeUSA Insurance agents for Allianz Life.
(2) Includes all LifeUSA Insurance policies and the portion of policies
produced by LifeUSA Insurance agents for Allianz Life that have been
assumed by LifeUSA Insurance.
(3) Includes the portion of LifeUSA Insurance policies that have been retained
by LifeUSA Insurance and the portion of policies produced by LifeUSA
Insurance agents for Allianz Life that have been assumed by LifeUSA
Insurance.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
From its inception through March 31, 1997, the Company issued its common stock
and convertible subordinated debentures or granted options to purchase its
common stock to Field Marketing Organizations (FMOs) and agents as production
bonuses. Management believed that in the early years of the Company these forms
of equity participation provided agents with additional incentives to place
profitable business with LifeUSA Insurance, to encourage policyholder
persistency and to seek good underwriting risks for LifeUSA Insurance. 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 quarter for which the stock option was
granted. The Company discontinued the granting of stock options as production
bonuses following the calendar quarter ended March 31, 1997. Management
currently believes that the Company's entire agent compensation package, which
includes LifeUSA Insurance'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, along with
LifeUSA Insurance's proven service and product offerings, continue to encourage
strong agent participation.
<PAGE>
RESULTS OF OPERATIONS
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including premiums
and deposits on policies produced by LifeUSA Insurance agents for Allianz Life,
were $432.0 million and $307.9 million in the third quarter of 1997 and 1996,
respectively, an increase of 40%. Total collected premiums and deposits were
$986.6 million and $790.4 million for the first nine months, respectively, an
increase of 25%. The following table shows the amounts of premiums and deposits
collected, ceded and retained for the comparable three- and nine-month periods
(in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Collected Premiums and Deposits (1):
LifeUSA Insurance:
Life:
First year $ 1,809 $ 2,895 $ 6,231 $ 10,196
Single and renewal 13,017 12,395 39,218 36,529
-------- -------- -------- --------
Total Life 14,826 15,290 45,449 46,725
Annuities 275,726 165,919 510,235 463,141
-------- -------- -------- --------
Total LifeUSA Insurance collected premiums and deposits 290,552 181,209 555,684 509,866
Allianz Life:
Life:
First year 525 864 1,677 2,571
Single and renewal 3,721 3,735 11,264 11,074
-------- -------- -------- --------
Total Life 4,246 4,599 12,941 13,645
Annuities 137,189 122,052 417,970 266,867
-------- -------- -------- --------
Total Allianz Life collected premiums and deposits 141,435 126,651 430,911 280,512
-------- -------- -------- --------
Total collected premiums and deposits $431,987 $307,860 $986,595 $790,378
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums and Deposits Not Retained or Assumed (2):
LifeUSA Insurance:
Life:
First year $ 1,356 $ 2,017 $ 4,674 $ 6,529
Single and renewal 8,495 7,963 25,415 23,768
-------- -------- -------- --------
Total Life 9,851 9,980 30,089 30,297
Annuities 205,355 122,237 376,316 336,317
-------- -------- -------- --------
Total LifeUSA Insurance premiums and deposits not retained 215,206 132,217 406,405 366,614
Allianz Life:
Life:
First year 394 620 1,258 1,714
Single and renewal 2,215 2,156 6,628 6,437
-------- -------- -------- --------
Total Life 2,609 2,776 7,886 8,151
Annuities 101,697 89,728 308,331 192,482
-------- -------- -------- --------
Total Allianz Life premiums and deposits not assumed 104,306 92,504 316,217 200,633
-------- -------- -------- --------
Total collected premiums and deposits not retained or assumed $319,512 $224,721 $722,622 $567,247
======== ======== ======== ========
Retained or Assumed Premiums and Deposits (3):
LifeUSA Insurance:
Life:
First year $ 453 $ 878 $ 1,557 $ 3,667
Single and renewal 4,522 4,432 13,803 12,761
-------- -------- -------- --------
Total Life 4,975 5,310 15,360 16,428
Annuities 70,371 43,682 133,919 126,824
-------- -------- -------- --------
Total LifeUSA Insurance retained premiums and deposits 75,346 48,992 149,279 143,252
Allianz Life:
Life:
First year 131 244 419 857
Single and renewal 1,506 1,579 4,636 4,637
-------- -------- -------- --------
Total Life 1,637 1,823 5,055 5,494
Annuities 35,492 32,324 109,639 74,385
-------- -------- -------- --------
Total Allianz Life assumed premiums and deposits 37,129 34,147 114,694 79,879
-------- -------- -------- --------
Total retained or assumed premiums and deposits $112,475 $ 83,139 $263,973 $223,131
======== ======== ======== ========
</TABLE>
(1) Includes premiums and deposits related to all policies produced by LifeUSA
Insurance agents, including policies produced by LifeUSA Insurance agents
for Allianz Life.
(2) Includes premiums and deposits related to LifeUSA Insurance policies that
have been ceded by LifeUSA Insurance to the Reinsurers and premiums and
deposits related to policies produced by LifeUSA Insurance agents for
Allianz Life that have not been assumed by LifeUSA Insurance.
(3) Includes premiums and deposits related to LifeUSA Insurance policies that
have been retained by LifeUSA Insurance and premiums and deposits related
to policies produced by LifeUSA Insurance agents for Allianz Life that have
been assumed by LifeUSA Insurance. LifeUSA Insurance 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.
<PAGE>
REVENUES. Total revenues were $107.2 million and $84.0 million in the third
quarter of 1997 and 1996, respectively, and $278.4 million and $235.0 million
for the first nine months of 1997 and 1996, respectively. The increases in total
revenues of 28% for the quarter and 18% for the first nine months were primarily
due to the increase in net commissions and expense allowances associated with
increased production of business not retained or assumed. Also contributing to
the increase in revenues was the increase in net investment income generated by
the growth of annuities in force and invested assets, and net realized gains on
investment sales.
Policyholder charges, which represent the amounts assessed against policy
account values for the cost of insurance, policy administration and surrenders,
increased 11%, or $1.2 million, in the third quarter of 1997 compared to the
third quarter of 1996, and 6%, or $2.1 million, in the first nine months of 1997
compared to the first nine months of 1996, reflecting the growth in and maturity
of LifeUSA Insurance's net retained account values in force.
Increases in net investment income of 12% for the quarter and 11% for the first
nine months are attributable to increases in invested assets (fixed maturity
investments and cash and cash equivalents) to $2.12 billion at September 30,
1997 from $1.86 billion at September 30, 1996, which was only partially offset
by the reduction in yield on investments. The weighted average annual yield on
invested assets (exclusive of realized and unrealized gains and losses) was
7.32% and 7.44% at September 30, 1997 and 1996, respectively.
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 the three and nine months ended September 30, 1997 and 1996 (dollars
in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net realized gains on investments $2,837 $ -- $4,071 $1,671
Increase in:
Amortization of deferred policy acquisition costs 1,313 -- 1,765 615
Other benefits to policyholders 1,051 -- 1,375 443
------ ------- ------ ------
Income before income taxes 473 -- 931 613
Income taxes 172 -- 337 227
------ ------- ------ ------
Net income $ 301 $ -- $ 594 $ 386
====== ======= ====== ======
Earnings per share $ .01 $ -- $ .02 $ .01
====== ======= ====== ======
</TABLE>
<PAGE>
Net commissions and expense allowances on premiums and deposits collected on
reinsured policies and service fees on business produced for Allianz Life
increased 38%, or $14.9 million, in the third quarter of 1997 compared to 1996
and 27%, or $27.2 million, in the first nine months of 1997 compared to 1996.
The increase in net commissions and expense allowances of 38% for the third
quarter of 1997 compared to 1996 is less than the 42% increase in total
collected premiums and deposits not retained or assumed due to a greater
proportion of total production in annuity sales and a greater proportion of
total production sold by LifeUSA Insurance compared to Allianz Life during 1997
than 1996. The increase in net commissions and expense allowances of 27% for the
first nine months of 1997 compared to 1996 is consistent with the 27% increase
in total collected premiums and deposits not retained or assumed.
The following table shows the amounts of net commissions and expense allowances
for the comparable quarters and nine-month periods ended September 30, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
LifeUSA Insurance:
Life:
First year $ 1,709 $ 2,466 $ 5,621 $ 7,903
Single and renewal 1,375 1,305 4,129 3,915
--------- --------- --------- ---------
Total Life 3,084 3,771 9,750 11,818
Annuities 30,216 17,653 57,110 49,644
--------- --------- --------- ---------
Total LifeUSA Insurance 33,300 21,424 66,860 61,462
Allianz Life:
Life:
First year 497 843 1,666 2,607
Single and renewal 523 555 1,594 1,692
--------- --------- --------- ---------
Total Life 1,020 1,398 3,260 4,299
Annuities 20,385 16,800 60,092 36,892
--------- --------- --------- ---------
Total Allianz Life 21,405 18,198 63,352 41,191
Lapse policy chargebacks (234) (95) (713) (378)
--------- --------- --------- ---------
Total commissions and expense allowances, net $ 54,471 $ 39,527 $ 129,499 $ 102,275
========= ========= ========= =========
______________________________________________________
</TABLE>
The above table includes commissions and expense allowances related to LifeUSA
Insurance policies that have been ceded by LifeUSA Insurance to the Reinsurers
and service fees related to policies produced by LifeUSA Insurance 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 15 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.
BENEFITS AND EXPENSES. Total benefits and expenses were $91.8 million and $73.4
million in the third quarter of 1997 and 1996, respectively, and $246.1 million
and $208.1 million for the first nine months of 1997 and 1996, respectively. The
increases in total benefits and expenses of 25% for the third quarter were
primarily due to
<PAGE>
increased sales in 1997. The increase of 18% for the first nine months was the
result of increased sales in 1997 and the Company's 1997 national advertising
and sales promotion campaign.
Increases in interest credited to policyholder account values of 10%, or $2.6
million, in the third quarter of 1997 compared to the third quarter of 1996
reflect the growth in and maturity of annuities in force. Increases in other
benefits to policyholders of 52%, or $2.4 million, in the third quarter of 1997
compared to the third quarter of 1996 reflect 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. For the first nine months of 1997 compared to 1996, interest
credited increased 9%, or $6.9 million, and other benefits to policyholders
increased 25%, or $3.5 million, for the same reasons.
Amortization of deferred policy acquisition costs increased 31%, or $1.8
million, in the third quarter of 1997 as compared to 1996 and 16%, or $2.9
million, for the first nine months of 1997 compared to 1996. This reflects the
combination of an increase in gross profits due to a growing, more mature block
of in force business, and an increase in the amortization of deferred policy
acquisition costs as a result of the net realized gains on investments described
above. The impact on estimated gross profits of actual policy experience,
including rates for lapses, surrenders and annuitizations, is consistent with
the assumptions in the models used by LifeUSA Insurance 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 44%, or $10.2 million, in the third quarter of
1997 compared to 1996 and 29%, or $17.4 million, for the first nine months of
1997 compared to 1996. These increases were due to an increase in total
collected premiums and deposits discussed above and a change in the mix of
deferred annuity products sold, both of which were partially offset by the
decline in collected first year life insurance premiums which receive the
highest commission rates paid by LifeUSA Insurance.
Taxes, licenses and fees increased 11%, or $129,000, in the third quarter of
1997 compared to 1996 due to premium taxes on increased collected premiums and
deposits. Taxes, licenses and fees decreased 8%, or $277,000, through the first
nine months of 1997 compared to 1996. This decrease was primarily due to
recoveries in the first quarter of 1997 of guaranty fund assessments and state
income taxes paid in 1996.
Operating expenses increased 11%, or $1.5 million, in the third quarter of 1997
compared to 1996 and 20%, or $7.7 million, for the first nine months of 1997
compared to 1996. These increases were primarily due to the growth of LifeUSA
Insurance's annuity in force business and expenditures for a national
advertising and sales promotion campaign completed during the first and second
quarters of 1997.
In early 1997, the Company conducted a risk assessment of the impact of the Year
2000 issue on its operations. The assessment and a subsequent plan was presented
to the audit committee of the board of directors. The plan, if completed as
designed, would result in the Company being Year 2000 compliant by the end of
the first quarter of 1998 at a cost of less than $500,000. Because the Company
has only been operating since 1987, it has significantly less exposure than the
industry.
Income taxes were $5.8 million in the third quarter of 1997 and $3.9 million in
the third quarter of 1996. For the first nine months, income taxes increased
22%, or $2.2 million, in 1997 compared to 1996. The effective income tax rates
for the first nine months of 1997 and 1996 were 37.6% and 36.7%, respectively.
<PAGE>
NET INCOME. Net income was $9.6 million and $6.8 million in the third quarter of
1997 and 1996, respectively, which represents an increase of 42%. Earnings per
share was $.38 and $.30 in the third quarter of 1997 and 1996, respectively,
which represents an increase of 27%. The per share increase of only 27% compared
to the 42% increase in net income is due to an additional 2.4 million common and
common equivalent shares as of September 30, 1997 compared to September 30, 1996
(see Exhibit 11 which follows for details). Net income was $20.1 million and
$17.1 million ($.83 and $.76 per share) for the first nine months of 1997 and
1996, respectively.
<PAGE>
The following table summarizes the operating highlights for the three months and
nine months ended September 30, 1997 and 1996 (dollars in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------
1997 1996
------------------- ------------------
Income EPS Income EPS
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Consolidated net income and earnings per share $ 9,628 $0.38 $ 6,762 $0.30
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (301) (0.01) -- --
Charges for state guaranty fund assessments 102 0.00 176 0.00
-------- ----- -------- -----
Consolidated net operating income and earnings per share 9,429 0.37 6,938 0.30
Impact of expenses associated with 1997 national
advertising campaign 39 0.00 -- --
-------- ----- -------- -----
Consolidated net operating income and earnings per share
excluding impact of expenses associated with 1997 national
advertising campaign $ 9,468 $0.37 $ 6,938 $0.30
======== ===== ======== =====
Nine months ended September 30,
-------------------------------------------
1997 1996
------------------- ------------------
Income EPS Income EPS
-------- ----- -------- -----
Consolidated net income and earnings per share $ 20,104 $0.83 $ 17,050 $0.76
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (594) (0.02) (386) (0.01)
Tax liability for prior years' activity 700 0.03 -- --
Charges for state guaranty fund assessments 46 0.00 511 0.02
-------- ----- -------- -----
Consolidated net operating income and earnings per share 20,256 0.84 17,175 0.77
Impact of expenses associated with 1997 national
advertising campaign 1,993 0.08 -- --
-------- ----- -------- -----
Consolidated net operating income and earnings per share
excluding impact of expenses associated with 1997 national
advertising campaign $ 22,249 $0.92 $ 17,175 $0.77
======== ===== ======== =====
________________________________________
</TABLE>
(1) Consolidated 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, (ii) tax liability for prior
years' activity, and (iii) charges for state guaranty fund assessments.
<PAGE>
BUSINESS SEGMENTS
Management has separated the Company into three business segments in order to
focus on the distinct functional revenue and expense characteristics associated
with the activities performed by each. The Insurance Segment focuses on the
administration, management and reinsurance of fixed insurance products. The
Marketing Segment focuses on the management of the field force used to
distribute fixed insurance products. The Corporate Segment provides strategic
direction for all segments and includes the operations of LifeUSA Securities
because the results of operations of LifeUSA Securities are not yet material and
do not warrant separate disclosure. The results of operations for the Company's
Insurance, Marketing and Corporate Segments are presented in the discussion
which follows. Management is still considering the proper allocation of
identifiable assets and liabilities to the business segments.
INSURANCE SEGMENT. The Insurance Segment develops fixed insurance products for
LifeUSA Insurance and Allianz Life, cedes a portion of the business written by
LifeUSA Insurance to the Reinsurers, assumes a portion of the business produced
by LifeUSA Insurance agents for Allianz Life, manages the assets and liabilities
for business retained or assumed by LifeUSA Insurance and administers all of the
business produced by LifeUSA Insurance agents for LifeUSA Insurance and Allianz
Life.
The Insurance Segment's primary revenue sources are policyholder charges, net
investment income and commissions and expense allowances. The Insurance
Segment's primary expenses are interest credited to policyholder account values,
other benefits to policyholders, amortization of deferred policy acquisition
costs, intersegment marketing service fees paid to the Marketing Segment for the
production of LifeUSA Insurance and Allianz Life annuity and life insurance
premium and operating expenses. The Insurance Segment's profitability is derived
from its ability to effectively manage the assets and liabilities retained or
assumed by LifeUSA Insurance and manage the operating expenses incurred to
administer all of the business produced by LifeUSA Insurance agents for LifeUSA
Insurance and Allianz Life.
<PAGE>
The following table summarizes the Insurance Segment's revenues, expenses and
net income for the three months and nine months ended September 30, 1997 and
1996 (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 12,535 $ 11,291 $ 37,191 $ 35,138
Net investment income 36,483 32,947 105,701 95,518
Net realized gains on investments 2,837 -- 4,071 1,671
Commissions and expense allowances, net 54,471 39,527 129,499 102,275
Other 321 143 742 289
-------- -------- -------- --------
Total revenues 106,647 83,908 277,204 234,891
Expenses:
Interest credited to policyholder
account values 27,691 25,120 80,548 73,604
Other benefits to policyholders 6,934 4,571 17,402 13,920
Amortization of deferred policy
acquisition costs 7,430 5,660 21,460 18,571
Marketing service fee 43,501 31,535 102,508 82,068
Taxes, licenses and fees 1,315 1,186 3,246 3,523
Operating expenses:
Salaries and employee benefits 3,931 3,780 11,724 10,347
Data processing 846 913 2,439 3,418
Printing and office supplies 208 264 681 631
Other 5,968 4,892 15,515 14,127
-------- -------- -------- --------
Total expenses 97,824 77,921 255,523 220,209
-------- -------- -------- --------
Income before income taxes 8,823 5,987 21,681 14,682
Income taxes 3,179 2,195 8,058 5,392
-------- -------- -------- --------
Net income $ 5,644 $ 3,792 $ 13,623 $ 9,290
======== ======== ======== ========
</TABLE>
REVENUES. Total revenues were $106.6 million and $83.9 million in the third
quarter of 1997 and 1996, respectively, and $277.2 million and $234.9 million
for the first nine months of 1997 and 1996, respectively. Since the revenues
reported by the Insurance Segment account for the majority of the revenues
reported by the Company on a consolidated basis, the reasons for these increases
are consistent with those previously discussed in the Results of Operations
section.
EXPENSES. Total expenses were $97.8 million and $77.9 million in the third
quarter of 1997 and 1996, respectively, and $255.5 million and $220.2 million
for the first nine months of 1997 and 1996, respectively. The increase in total
expenses of 26% for the quarter and 16% for the first nine months is primarily
attributable to the increase in the marketing service fee paid to the Marketing
Segment as a result of the increase in premium production. The marketing service
fee, which increased 38% for the quarter and 25% for the first nine months of
1997 compared to 1996, is calculated as a percentage of premium and will vary
generally with the change in premium production. Differences in the mix of
production between annuities and life insurance and differences in the mix of
premium between single, first year and renewal will cause the marketing service
fee to change by greater or lesser amounts than the change in premium.
NET INCOME. Net income was $5.6 million and $3.8 million for the third quarter
of 1997 and 1996, respectively and $13.6 million and $9.3 million for the first
nine months of 1997 and 1996, respectively.
<PAGE>
MARKETING SEGMENT. The Marketing Segment provides all services related to the
recruitment of agents and FMOs, support of agents contracted to sell LifeUSA
Insurance and Allianz Life annuity, life insurance and Allianz Life long-term
care products and incentive programs to increase the production of LifeUSA
Insurance and Allianz Life annuity, life insurance and Allianz Life long-term
care premiums and deposits. The Marketing Segment also manages all acquisitions
of and investments in field marketing organizations for the Company.
The Marketing Segment's primary revenue source is the intersegment marketing
service fee assessed to the Insurance Segment for the production of LifeUSA
Insurance and Allianz Life annuity, life insurance and long-term care premiums
and deposits. This fee is calculated as a percentage of the premiums and
deposits produced with varying rates for annuity and life production and for
first year, single and renewal premium and deposits. The amount assessed is
comparable to commissions earned by large national FMOs performing similar
services. The Marketing Segment's profitability is derived from its ability to
manage commissions and operating costs.
The following table summarizes the Marketing Segment's revenues, expenses and
net income for the three months and nine months ended September 30, 1997 and
1996 (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Marketing service fee $ 50,757 $ 36,483 $117,521 $ 97,606
Net investment income 119 -- 119 --
Other 228 123 473 123
-------- -------- -------- --------
Total revenues 51,104 36,606 118,113 97,729
Expenses:
Commissions 40,079 27,751 90,641 73,788
Operating expenses:
Salaries and employee benefits 1,625 1,154 4,459 3,256
Data processing 337 402 932 1,493
Printing and office supplies 382 354 1,093 1,017
Other 3,164 2,523 9,095 6,965
-------- -------- -------- --------
Total expenses 45,587 32,184 106,220 86,519
-------- -------- -------- --------
Income before income taxes 5,517 4,422 11,893 11,210
Income taxes 2,196 1,621 4,594 4,118
-------- -------- -------- --------
Net income $ 3,321 $ 2,801 $ 7,299 $ 7,092
======== ======== ======== ========
</TABLE>
REVENUES. Total revenues were $51.1 million and $36.6 million in the third
quarter of 1997 and 1996, respectively, and $118.1 million and $97.7 million for
the first nine months of 1997 and 1996, respectively. The increase in total
revenues of 40% for the quarter and 21% for the first nine months is primarily
attributable to the increase in the marketing service fee which is based on
premium and deposit production. Total collected premiums and deposits increased
40% for the quarter and 25% for the first nine months. The entire amount of the
marketing service fee is charged to the Insurance Segment and is eliminated in
consolidation.
EXPENSES. Total expenses were $45.6 million and $32.2 million in the third
quarter of 1997 and 1996, respectively, and $106.2 million and $86.5 million for
the first nine months of 1997 and 1996, respectively. The increase in total
expenses of 42% for the quarter and 23% for the first nine months is primarily
attributable
<PAGE>
to the increase in commissions incurred due to the increase in premium and
deposit production. Commissions increased 44% for the quarter and 23% for the
first nine months of 1997 compared to 1996. Commissions are also calculated as a
percentage of premiums and deposits and will vary generally with the change in
premiums and deposits production. Differences in the mix of production between
annuities and life insurance and differences in the mix of premium between
single, first year and renewal will also cause commissions to change.
NET INCOME. Net income was $3.3 million and $2.8 million for the third quarter
of 1997 and 1996, respectively and $7.3 million and $7.1 million for the first
nine months of 1997 and 1996, respectively.
CORPORATE SEGMENT. The Corporate Segment provides strategic direction for the
Company and its various business segments and includes the operations of LifeUSA
Securities as the results of LifeUSA Securities are not yet material and do not
warrant separate disclosure. The Corporate Segment charges a fee to all other
segments based on the revenues of those individual segments. Expenses of an
enterprise-wide nature such as the national advertising campaign are retained by
the Corporate Segment.
The following table summarizes the Corporate Segment's revenues, expenses and
net income for the three months and nine months ended September 30, 1997 and
1996 (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
----------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Corporate fee $ 3,026 $ 2,229 $ 7,257 $ 6,047
Net investment income 193 1 559 1
------- ------- ------- -------
Total revenues 3,219 2,230 7,816 6,048
Expenses:
Operating expenses:
Salaries and employee benefits 868 1,150 2,392 2,334
Data processing 47 16 135 60
Printing and office supplies (34) 17 93 165
Other 1,289 780 6,553 2,431
------- ------- ------- -------
Total expenses 2,170 1,963 9,173 4,990
------- ------- ------- -------
Income (loss) before income taxes 1,049 267 (1,357) 1,058
Income taxes 386 98 (539) 390
------- ------- ------- -------
Net income (loss) $ 663 $ 169 $ (818) $ 668
======= ======= ======= =======
</TABLE>
REVENUES. Total revenues were $3.2 million and $2.2 million for the third
quarter of 1997 and 1996, respectively, and $7.8 million and $6.0 million for
the first nine months of 1997 and 1996, respectively. The increase in total
revenues of 44% for the quarter and 29% for the first nine months of 1997
compared to 1996 is primarily related to the increases in the Corporate fee
which is directly related to the increase in revenues for the Insurance Segment
and Marketing Segment Total revenues of the Insurance Segment increased 27% for
the quarter and 18% for the first nine months of 1997 compared to 1996. Total
revenues of the Marketing Segment increased 40% for the quarter and 21% for the
first nine months of 1997 compared to 1996. These increases produced increases
in the Corporate fee of 36% for the third quarter and 20% for the first nine
months of 1997 compared to 1996. Net investment income on the fixed maturity
investments held by the Company was first allocated to the Corporate Segment
beginning in 1997. Prior to 1997, net investment income was fully allocated to
the Insurance Segment.
<PAGE>
EXPENSES. Total expenses were $2.2 million and $2.0 million for the third
quarter of 1997 and 1996, respectively, and $9.2 million and $5.0 million for
the first nine months of 1997 and 1996, respectively. The increase in total
expenses of 11% for the third quarter of 1997 compared to 1996 reflects the
startup costs of LifeUSA Securities and general growth in operating costs. The
increase of 84% for the first nine months of 1997 compared to 1996 is
attributable to the cost of a national advertising campaign that occurred over
the first six months of 1997.
NET INCOME(LOSS). Net income (loss) was $663,000 and $169,000 for the third
quarter of 1997 and 1996, respectively and $(818,000) and $668,000 for the first
nine months of 1997 and 1996, respectively.
RECONCILIATION OF OPERATING SEGMENTS TO CONSOLIDATED RESULTS OF OPERATIONS. The
following tables reconcile the results of operations reported by the three
business segments to the Company's consolidated results of operations for the
three months and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended September 30, 1997 (in thousands):
-----------------------------------------------------------------------
Insurance Marketing Corporate Eliminating
Segment Segment Segment Entries (1) Consolidated
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 12,535 $ 12,535
Net investment income 36,483 $ 119 $ 193 36,795
Net realized gains on investments 2,837 2,837
Commissions and expense allowances, net 54,471 54,471
Marketing service fee 50,757 $(50,757) --
Corporate fee 3,026 (3,026) --
Other 321 228 549
-------- -------- -------- -------- --------
Total revenues 106,647 51,104 3,219 (53,783) 107,187
Expenses:
Interest credited to policyholder account values 27,691 27,691
Other benefits to policyholders 6,934 6,934
Amortization of deferred policy acquisition costs 7,430 7,430
Commissions and marketing service fee 43,501 40,079 (50,279) 33,301
Taxes, licenses and fees 1,315 1,315
Operating expenses:
Salaries and employee benefits 3,931 1,625 868 (191) 6,233
Data processing 846 337 47 (19) 1,211
Printing and office supplies 208 382 (34) (70) 486
Other 5,968 3,164 1,289 (3,224) 7,197
-------- -------- -------- -------- --------
Total expenses 97,824 45,587 2,170 (53,783) 91,798
-------- -------- -------- -------- --------
Income before income taxes 8,823 5,517 1,049 -- 15,389
Income taxes 3,179 2,196 386 -- 5,761
-------- -------- -------- -------- --------
Net income $ 5,644 $ 3,321 $ 663 -- $ 9,628
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three months ended September 30, 1996 (in thousands):
-----------------------------------------------------------------------
Insurance Marketing Corporate Eliminating Consolidated
Segment Segment Segment Entries (1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 11,291 $ 11,291
Net investment income 32,947 $ 1 32,948
Net realized gains on investments --
Commissions and expense allowances, net 39,527 39,527
Marketing service fee $ 36,483 $(36,483) --
Corporate fee 2,229 (2,229) --
Other 143 123 266
-------- -------- -------- -------- --------
Total revenues 83,908 36,606 2,230 (38,712) 84,032
Expenses:
Interest credited to policyholder account values 25,120 25,120
Other benefits to policyholders 4,571 4,571
Amortization of deferred policy acquisition costs 5,660 5,660
Commissions and marketing service fee 31,535 27,751 (36,137) 23,149
Taxes, licenses and fees 1,186 1,186
Operating expenses:
Salaries and employee benefits 3,780 1,154 1,150 (132) 5,952
Data processing 913 402 16 (15) 1,316
Printing and office supplies 264 354 17 (51) 584
Other 4,892 2,523 780 (2,377) 5,818
-------- -------- -------- -------- --------
Total expenses 77,921 32,184 1,963 $(38,712) 73,356
-------- -------- -------- -------- --------
Income before income taxes 5,987 4,422 267 -- 10,676
Income taxes 2,195 1,621 98 -- 3,914
-------- -------- -------- -------- --------
Net income $ 3,792 $ 2,801 $ 169 -- $ 6,762
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1997 (in thousands):
------------------------------------------------------------------------
Insurance Marketing Corporate Eliminating
Segment Segment Segment Entries (1) Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 37,191 $ 37,191
Net investment income 105,701 $ 119 $ 559 106,379
Net realized gains on investments 4,071 4,071
Commissions and expense allowances, net 129,499 129,499
Marketing service fee 117,521 $(117,521) --
Corporate fee 7,257 (7,257) --
Other 742 473 1,215
--------- --------- --------- --------- ---------
Total revenues 277,204 118,113 7,816 (124,778) 278,355
Expenses:
Interest credited to policyholder account values 80,548 80,548
Other benefits to policyholders 17,402 17,402
Amortization of deferred policy acquisition costs 21,460 21,460
Commissions and marketing service fee 102,508 90,641 (116,307) 76,842
Taxes, licenses and fees 3,246 3,246
Operating expenses:
Salaries and employee benefits 11,724 4,459 2,392 (503) 18,072
Data processing 2,439 932 135 (46) 3,460
Printing and office supplies 681 1,093 93 (175) 1,692
Other 15,515 9,095 6,553 (7,747) 23,416
--------- --------- --------- --------- ---------
Total expenses 255,523 106,220 9,173 $(124,778) 246,138
--------- --------- --------- --------- ---------
Income (loss) before income taxes 21,681 11,893 (1,357) -- 32,217
Income taxes 8,058 4,594 (539) -- 12,113
--------- --------- --------- --------- ---------
Net income (loss) $ 13,623 $ 7,299 $ (818) -- $ 20,104
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1996 (in thousands):
------------------------------------------------------------------------
Insurance Marketing Corporate Eliminating
Segment Segment Segment Entries (1) Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 35,138 $ 35,138
Net investment income 95,518 $ 1 95,519
Net realized gains on investments 1,671 1,671
Commissions and expense allowances, net 102,275 102,275
Marketing service fee $ 97,606 $ (97,606) --
Corporate fee 6,047 (6,047) --
Other 289 123 412
--------- --------- --------- --------- ---------
Total revenues 234,891 97,729 6,048 (103,653) 235,015
Expenses:
Interest credited to policyholder account values 73,604 73,604
Other benefits to policyholders 13,920 13,920
Amortization of deferred policy acquisition costs 18,571 18,571
Commissions and marketing service fee 82,068 73,788 (96,389) 59,467
Taxes, licenses and fees 3,523 3,523
Operating expenses:
Salaries and employee benefits 10,347 3,256 2,334 (447) 15,490
Data processing 3,418 1,493 60 (65) 4,906
Printing and office supplies 631 1,017 165 (173) 1,640
Other 14,127 6,965 2,431 (6,579) 16,944
--------- --------- --------- --------- ---------
Total expenses 220,209 86,519 4,990 $(103,653) 208,065
--------- --------- --------- --------- ---------
Income before income taxes 14,682 11,210 1,058 -- 26,950
Income taxes 5,392 4,118 390 -- 9,900
--------- --------- --------- --------- ---------
Net income $ 9,290 $ 7,092 $ 668 -- $ 17,050
========= ========= ========= ========= =========
______________________________________________
</TABLE>
(1) On a consolidated basis, the Company defers the costs of acquiring new
business and amortizes these costs over the lives of the policies in proportion
to the estimated gross profits expected to be realized on the policies. For
business segment reporting purposes, the amortization of deferred policy
acquisition costs is recorded as an expense of the Insurance Segment. In
addition, expenses allocated to the Marketing Segment and Corporate Segment for
business segment reporting purposes that are deferred by the Company on a
consolidated basis are reported direct (gross of the amounts deferred) by each
of these segments. The Insurance Segment reports the impact of these deferrals
as a reduction in the marketing service and corporate fees paid to the Marketing
Segment and Corporate Segment, respectively. The differences between the total
of the expenses reported by all of the segments and the expenses (net of
deferrals) reported by the Company on a consolidated basis appear as
intersegment eliminations in the tables presented above.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through September 1997, the Company's primary available sources of cash were (i)
service fees received by the Company for business produced by LifeUSA
Insurance's agents for Allianz Life, (ii) management fees from LifeUSA
Insurance, (iii) proceeds remaining from the $30 million convertible
subordinated debenture purchased by Allianz Life in February 1995, (iv) interest
earned on invested assets, (v) a dividend of $2.5 million paid by LifeUSA
Insurance in the first quarter of 1997, (vi) issuance of shares upon exercise of
common stock options, and (vii) a $50 million long-term line of credit from two
of its reinsurers. A substantial portion of the Company's operating expenses is
attributable to services provided to LifeUSA Insurance, such as employees, data
processing, facilities and supplies, which are reimbursed by LifeUSA Insurance
through management fees. LifeUSA Insurance is expected to have sufficient cash
to provide reimbursement through 1998, based on currently anticipated life
insurance and annuity sales and on the continuation of acceptable reinsurance
arrangements. LifeUSA Insurance's ability to pay dividends in the future is
subject to compliance with Minnesota insurance laws and regulations.
The Company has entered into an agreement with two of its Reinsurers which
provides a long-term line of credit in the amount of $50 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
Insurance or capital expenditures. On July 15, 1997, the Company borrowed $5.0
million under this line of credit. The Company has no other borrowings under
this agreement.
The Company's cash needs consist of (i) operating expenses, including expenses
in connection with the efforts to increase the production of LifeUSA Insurance's
existing agents and expand the size of LifeUSA Insurance's field force, (ii)
investments in and additional purchase payments to marketing organizations
expected to increase premium production volume for LifeUSA Insurance, (iii)
commission advances to agents, (iv) payment of interest on the Company's
convertible subordinated debentures and borrowings under the line of credit, and
(v) potential capital contributions to LifeUSA Insurance to permit increases in
sales volume and retention or assumption of new life insurance and annuity
business produced by LifeUSA Insurance agents and to provide LifeUSA Insurance
sufficient capital and surplus to maintain adequate capital ratios. Management
believes that the combination of (i) the statutory profits generated by LifeUSA
Insurance on the mature business which it has retained or assumed, (ii)
borrowings under the $50 million line of credit from two of its Reinsurers,
(iii) cash generated by operations, (iv) issuance of shares upon exercise of
common stock options, and (v) dividends from LifeUSA Insurance, will provide
sufficient capital resources to support the capital needs of LifeUSA Insurance
and meet all the Company's cash needs in the ordinary course of business through
1998, based on currently anticipated life insurance and annuity sales and on the
continuation of the current level of net retention and acceptable reinsurance
arrangements. Investments by the Company in additional marketing organizations
may require additional capital during 1997 and 1998.
For LifeUSA Insurance to retain or assume life insurance and annuity business,
LifeUSA Insurance must maintain a sufficient level of statutory capital and
surplus as established by the regulatory authorities in the jurisdictions where
LifeUSA Insurance is licensed to do business. As LifeUSA Insurance 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. The maturity of LifeUSA Insurance's retained and assumed
business first produced statutory net income during 1995.
<PAGE>
LifeUSA Insurance produced a statutory net income of $11.9 million during the
first nine months of 1997 compared to $11.2 million during the first nine months
of 1996. As a result, the Company did not make capital contributions to LifeUSA
Insurance during the first nine months of 1997. As of September 30, 1997,
LifeUSA Insurance had statutory capital and surplus for regulatory purposes of
$94.6 million compared to $87.3 million at December 31, 1996. Assuming
continuation of the current level of net retention and the expected level of
life insurance and annuity business produced by LifeUSA Insurance agents,
LifeUSA Insurance expects to continue to satisfy statutory capital and surplus
requirements through 1998 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 Insurance'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
Insurance by the marketing organization. To date, the Company has made loans to
marketing organizations that accounted for 36% of the Company's life insurance
and annuity production during the first nine months of 1997. The loans include
incentives of possible interest and principal forgiveness for achieving
increased production.
In August 1996, LifeUSA Marketing acquired Tax Planning Seminars, a national
marketing organization that had been contracted with LifeUSA Insurance for seven
years. In addition, LifeUSA Marketing acquired minority equity interests in
Creative Marketing International Corporation (CMIC) in November 1996,
Personalized Brokerage Services, Inc. (PBS) in May 1997 and Ann Arbor Annuity
Exchange (AAAE) in July 1997. CMIC and PBS are national marketing organizations
that had not been contracted previously with LifeUSA Insurance; AAAE's 1996
production with LifeUSA Insurance was not significant. The CMIC, PBS and AAAE
acquisition agreements contain certain provisions which could require LifeUSA
Marketing to purchase part or all of the remaining equity interests.
In addition, during the first nine months of 1997, LifeUSA Insurance signed
marketing agreements with 19 national marketing organizations to market LifeUSA
Insurance 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.
REGULATORY ENVIRONMENT. LifeUSA Insurance 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 has been placed under increased scrutiny 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. These standards continue to be reviewed by the
<PAGE>
NAIC. LifeUSA Insurance's percentage of actual total adjusted capital to
authorized control level risk-based capital is well in excess of regulatory
requirements.
The NAIC has also considered changes in the model laws for nonforfeiture values
of life insurance and deferred annuity products. Since 1994, LifeUSA Insurance
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 and
regulations which affect statutory actuarial items and nonforfeiture values.
LifeUSA Insurance 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
Insurance. 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 Insurance.
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 whose effective date was January 1, 1997 or are in the process of
adopting the model regulation. LifeUSA Insurance 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.
Insurance laws also require LifeUSA Insurance 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 Insurance's business and accounts at any
time. Under NAIC rules, one or more of the regulatory agencies will periodically
examine LifeUSA Insurance, normally at three-year intervals, on behalf of the
states in which LifeUSA Insurance is licensed. During 1996, the Minnesota
Department of Commerce conducted a triennial examination of LifeUSA Insurance
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 June 1997, the B++ (Very Good) rating assigned to LifeUSA Insurance 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 Insurance 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.
In September 1997, Moody's Investors Service assigned a Baa3 (adequate) rating
to LifeUSA Insurance. This rating falls within Moody's "Strong Companies"
category and reflects LifeUSA Insurance's high asset quality, good
administrative efficiency and strong tie with its distribution network.
<PAGE>
INVESTMENTS. As of September 30, 1997, the Company had cash, cash equivalents
and fixed maturity investments on a consolidated basis totaling $2.12 billion,
including $7.5 million in restricted deposits with state insurance authorities
regulating LifeUSA Insurance. The following table summarizes the amortized cost,
carrying and fair values of each investment category held at September 30, 1997
(dollars in thousands):
<TABLE>
<CAPTION>
Amortized % of Carrying % of Fair % of
Cost Total Value Total Value Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 57,014 2.72% $ 57,014 2.69% $ 57,014 2.65%
Government Treasury and Agency notes and bonds 77,113 3.68 79,753 3.76 84,356 3.92
Mortgage pass throughs 39,144 1.87 40,492 1.91 40,492 1.88
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials 5,422 0.26 5,422 0.26 5,450 0.25
CMO -- PACs 610,020 29.12 612,351 28.90 624,275 29.05
CMO -- ADs 23,527 1.12 23,527 1.11 24,318 1.13
CMO -- TACs 11,138 0.53 11,138 0.53 12,104 0.56
Investment grade corporate securities:
AAA+ to AAA- 36,766 1.76 36,961 1.74 38,541 1.79
AA+ to AA- 146,566 7.00 147,443 6.96 149,194 6.94
A+ to A- 588,517 28.10 597,942 28.21 603,584 28.07
BBB+ to BBB- 499,399 23.84 507,216 23.93 510,781 23.76
Non investment grade corporate securities -- -- -- -- -- --
----------------------------------------------------------------------------
Total cash and invested assets $2,094,626 100.00% $2,119,259 100.00% $2,150,109 100.00%
============================================================================
</TABLE>
As part of its asset and liability management practices, LifeUSA Insurance
manages investments and credited interest rates to produce a net investment
spread consistent with priced-for expectations. As of September 30, 1997, the
weighted average credited interest rate for deferred annuities and life
insurance policies was 5.08% and the weighted average yield on the assets
backing liabilities was 7.38%. As of December 31, 1996, this weighted average
credited interest rate was 5.00% and the weighted average yield on the assets
backing liabilities was 7.48%. The decrease in the weighted average yield on
assets backing liabilities is attributable, in part, to the Company's
repositioning of a portion of the investment portfolio discussed below. This
decrease in yield was offset by the gains realized on the repositioning.
Investment income from the assets backing liabilities exceeded interest credited
to policyholders by $21.0 million during the first nine months of 1997. The
investment portfolio is managed primarily by allocating new cash flows into
investments which have yield, maturity and other characteristics suitable for
LifeUSA Insurance's expected policyholder liabilities. Consistent with LifeUSA
Insurance's asset and liability management practices, as of September 30, 1997,
the effective duration of LifeUSA Insurance's fixed income securities was 5.37
years, compared to 5.88 years as of December 31, 1996.
The percentage of the total fair value of the Company's portfolio that was
comprised of investment grade corporate obligations was 61% at September 30,
1997. With each corporate security acquisition, LifeUSA Insurance'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 do
not allow the purchase of securities that are rated below investment grade by
Moody's Investors Service and Standard & Poor's Corporation.
<PAGE>
The remainder of the Company's portfolio is comprised of government and
government agency obligations. Government and government agency obligations are
primarily held in the form of Planned Amortization Class (PAC) Collateralized
Mortgage Obligations (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 September 30, 1997, the Company held 43%, or $878.7 million, of the total
fair value of its fixed maturity investments 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 Insurance's products is the provision of bonuses to encourage
terminating 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 Insurance 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.
In 1997, the Company repositioned a portion of its investment portfolio to
achieve a more efficient matching of asset maturities to expected policyholder
payments. The repositioning, completed in October, resulted in the disposal of
bonds with a amortized cost of approximately $157.3 million with maturities of 6
to 11 years, and purchasing a like amount of investment grade corporate
obligations with maturities of 2 to 5 years in length. By targeting these
specific maturities, this repositioning provided a better match with the
expected cash flows of the Company's liabilities. These transactions resulted in
only minor changes in overall yields and a net realized gain of approximately
$2.9 million.
During the third quarter of 1997, the Company entered a securities lending
program with the custodial bank of the Company's fixed maturity investment
portfolio. Under this program, the Company has made available approximately 50%
of its portfolio to be used in a pool of available securities for lending
transactions, however the Company anticipates that only 6% of its portfolio will
be on loan at any point in time. The custodial bank provides the securities to
borrowers in exchange for cash collateral of at least 102% of the daily market
value of securities on loan. Since the Company retains effective control of all
securities on loan, no accounting recognition of these transactions is required.
Fees earned by the Company under the arrangement are reported with net
investment income and are currently immaterial.
<PAGE>
At September 30, 1997, the Company's shareholders' equity and book value per
share were $203.9 million and $9.26, respectively, compared to $172.6 million
and $8.23, respectively, at December 31, 1996. 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 $197.8 million and
$8.98, respectively, at September 30, 1997, compared to $169.3 million and
$8.07, respectively, at December 31, 1996.
* * * *
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 Insurance, 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1997, two policyholders of Fidelity Union Life Insurance Company
(FULICO) whose policies were assumed by Allianz Life commenced an action against
Allianz Life in state court in California. LifeUSA Insurance was also named in
the lawsuit because it is the successor of FULICO and a third plaintiff who is a
policyholder of LifeUSA Insurance asserted certain claims against LifeUSA
Insurance. This action is styled on behalf of the plaintiffs and seeks
certification on behalf of a class of policyholders who had purchased FULICO and
LifeUSA Insurance insurance products. The plaintiffs allege that they and other
policyholders have been damaged due to certain alleged improper sales practices
relating to vanishing premiums, churning and retirement plans as well as certain
alleged fraudulent practices. The case has been removed to federal court in
California. In 1994, Allianz sold the stock of FULICO to the Company. The
Company then merged its Colorado life insurance subsidiary with FULICO and
changed FULICO's corporate name to LifeUSA Insurance in order to redomesticate
its Colorado life insurance subsidiary to Minnesota and obtain licenses in all
states except for New York. As part of the transaction, Allianz Life assumed all
of the business written by FULICO prior to the sale of the stock of FULICO to
the Company and agreed to indemnify the Company and LifeUSA Insurance against
any liabilities of FULICO arising prior to the date on which FULICO was sold to
the Company. LifeUSA Insurance and Allianz Life have filed a motion to transfer
the case to the Minnesota federal court which the plantiffs are not opposing.
Although the litigation is at an early stage, the Company believes that it has
meritorious defenses and does not anticipate any material adverse financial
result.
ITEM 2. CHANGES IN SECURITIES
During the period covered by this Report, the constituent instruments defining
the rights of the holders of the common stock were not materially modified, nor
were the rights evidenced by the common stock materially limited or qualified by
the issuance or modification of any other class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the period covered by this Report, there has been no material default
with respect to any indebtedness of the Registrant or its subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
ITEM 5. OTHER INFORMATION
The following tables summarize the quarterly results of operations for the
Company's three business segments for fiscal 1997 and 1996:
<TABLE>
<CAPTION>
INSURANCE SEGMENT: Three months ended (in thousands):
--------------------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 12,535 $ 12,853 $ 11,802 $ 11,704 $ 11,291 $ 12,763 $ 11,084
Net investment income 36,483 35,095 34,122 33,892 32,947 31,644 30,926
Net realized gains on investments 2,837 -- 1,234 120 -- (8) 1,679
Commissions and expense allowances, net 54,471 43,649 31,379 35,459 39,527 32,932 29,817
Other 321 262 160 140 143 98 48
--------- --------- --------- --------- --------- --------- ---------
Total revenues 106,647 91,859 78,697 81,315 83,908 77,429 73,554
Expenses:
Interest credited to policyholder account
values 27,691 26,612 26,245 25,913 25,120 24,253 24,230
Other benefits to policyholders 6,934 5,569 4,899 3,494 4,571 4,680 4,669
Amortization of deferred policy acquisition
costs 7,430 7,448 6,581 5,924 5,660 6,743 6,168
Marketing service fee 43,501 34,607 24,401 27,808 31,535 26,714 23,821
Taxes, licenses and fees 1,315 1,363 569 73 1,186 1,100 1,237
Operating expenses:
Salaries and employee benefits 3,931 3,933 3,860 4,249 3,780 3,349 3,219
Data processing 846 810 783 888 913 1,191 1,314
Printing and office supplies 208 256 217 148 264 211 156
Other 5,968 5,400 4,147 4,902 4,892 4,576 4,658
--------- --------- --------- --------- --------- --------- ---------
Total expenses 97,824 85,998 71,702 73,399 77,921 72,817 69,472
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 8,823 5,861 6,995 7,916 5,987 4,612 4,082
Income taxes 3,179 2,342 2,537 2,902 2,195 1,699 1,497
--------- --------- --------- --------- --------- --------- ---------
Net income $ 5,644 $ 3,519 $ 4,458 $ 5,014 $ 3,792 $ 2,913 $ 2,585
========= ========= ========= ========= ========= ========= =========
MARKETING SEGMENT: Three months ended (in thousands):
--------------------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
--------- --------- --------- --------- --------- --------- ---------
Revenues:
Marketing service fee $ 50,757 $ 38,918 $ 27,846 $ 30,874 $ 36,483 $ 32,080 $ 29,044
Net investment income 119 -- -- -- -- -- --
Other 228 (226) 471 567 123 -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues 51,104 38,692 28,317 31,441 36,606 32,080 29,044
Expenses:
Commissions 40,079 29,575 20,987 23,370 27,751 24,087 21,949
Operating expenses:
Salaries and employee benefits 1,625 1,440 1,393 1,318 1,154 1,066 1,037
Data processing 337 295 300 380 402 505 586
Printing and office supplies 382 343 368 243 354 334 330
Other 3,164 3,033 2,898 2,933 2,523 2,343 2,099
--------- --------- --------- --------- --------- --------- ---------
Total expenses 45,587 34,686 25,946 28,244 32,184 28,335 26,001
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 5,517 4,006 2,371 3,197 4,422 3,745 3,043
Income taxes 2,196 1,536 862 1,175 1,621 1,374 1,123
--------- --------- --------- --------- --------- --------- ---------
Net income $ 3,321 $ 2,470 $ 1,509 $ 2,022 $ 2,801 $ 2,371 $ 1,920
========= ========= ========= ========= ========= ========= =========
<PAGE>
CORPORATE SEGMENT: Three months ended (in thousands):
--------------------------------------------------------------------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Corporate fee $ 3,026 $ 2,379 $ 1,852 $ 1,985 $ 2,229 $ 1,992 $ 1,826
Net investment income 193 183 184 1 1 -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues 3,219 2,562 2,036 1,986 2,230 1,992 1,826
Expenses:
Operating expenses:
Salaries and employee benefits 868 794 730 2,117 1,150 559 626
Data processing 47 45 43 17 16 22 22
Printing and office supplies (34) 74 53 31 17 10 138
Other 1,289 2,768 2,496 819 780 808 843
--------- --------- --------- --------- --------- --------- ---------
Total expenses 2,170 3,681 3,322 2,984 1,963 1,399 1,629
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 1,049 (1,119) (1,286) (998) 267 593 197
Income taxes (benefit) 386 (461) (464) (366) 98 211 81
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 663 $ (658) $ (822) $ (632) $ 169 $ 382 $ 116
========= ========= ========= ========= ========= ========= =========
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(11) Statement of computation of per share earnings
(27) Financial data schedule (electronic filing only)
(b) None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Life USA HOLDING, INC.
-------------------------
(Registrant)
Date: November 12, 1997
/s/ Mark A. Zesbaugh
-------------------------
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
EXHIBIT 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Life USA HOLDING, INC.
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------ ------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding and to be issued 21,910,297 20,927,005 21,612,947 20,702,575
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 1,309,738 151,586 681,604 141,130
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,423,125 2,400,000 2,423,125 2,400,000
----------- ----------- ----------- -----------
Total common and common equivalent shares 25,643,160 23,478,591 24,717,676 23,243,705
=========== =========== =========== ===========
Net income $ 9,628 $ 6,762 $ 20,104 $ 17,050
Add convertible subordinated debenture interest,
net of federal income tax effect 218 218 653 653
----------- ----------- ----------- -----------
Adjusted net income $ 9,846 $ 6,980 $ 20,757 $ 17,703
=========== =========== =========== ===========
Per common and common equivalent share amount $ .38 $ .30 $ .83 $ .76
=========== =========== =========== ===========
FULLY DILUTED
Average shares outstanding and to be issued 21,910,297 20,927,005 21,612,947 20,702,575
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 1,590,428 155,532 849,191 150,548
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,423,125 2,400,000 2,423,125 2,400,000
----------- ----------- ----------- -----------
Total common and common equivalent shares 25,923,849 23,482,537 24,885,263 23,253,123
=========== =========== =========== ===========
Net income $ 9,628 $ 6,762 $ 20,104 $ 17,050
Add convertible subordinated debenture interest,
net of federal income tax effect $ 218 $ 218 $ 653 $ 653
----------- ----------- ----------- -----------
Adjusted net income $ 9,846 $ 6,980 $ 20,757 $ 17,703
=========== =========== =========== ===========
Per common and common equivalent share amount $ .38 $ .30 $ .83 $ .76
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 878,744
<DEBT-CARRYING-VALUE> 1,183,501
<DEBT-MARKET-VALUE> 1,214,351
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,090,167
<CASH> 57,014
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 218,262
<TOTAL-ASSETS> 4,913,311
<POLICY-LOSSES> 4,538,111
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 13,869
<NOTES-PAYABLE> 36,030
0
0
<COMMON> 220
<OTHER-SE> 203,708
<TOTAL-LIABILITY-AND-EQUITY> 4,913,311
0
<INVESTMENT-INCOME> 106,379
<INVESTMENT-GAINS> 4,071
<OTHER-INCOME> 167,905
<BENEFITS> 97,950
<UNDERWRITING-AMORTIZATION> 21,460
<UNDERWRITING-OTHER> 126,728
<INCOME-PRETAX> 32,217
<INCOME-TAX> 12,113
<INCOME-CONTINUING> 20,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,104
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
