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, 1998
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 of incorporation (I.R.S. Employer Identification
or organization) Number)
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, 1998
------------- ---------------------------------
Common Stock, 25,299,546
Par Value $.01 Per Share
<PAGE>
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the Third Quarter Ended September 30, 1998
I N D E X
---------
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
September 30, 1998 and December 31, 1997.......................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months and nine months ended
September 30, 1998 and September 30, 1997........................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Nine months ended September 30, 1998
and September 30, 1997...........................................6
Notes to Condensed Consolidated Financial Statements
(Unaudited)....................................................7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................9-23
Management's Discussion and Analysis of Financial
Condition and Results of Operations on Business Segments ....24-29
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...............................................30
Item 2. Changes in Securities...........................................30
Item 3. Defaults Upon Senior Securities.................................30
Item 4. Submission of Matters to a Vote of Security Holders.............30
Item 5. Other Information...............................................30
Item 6. Exhibits and Reports on Form 8-K................................30
SIGNATURES: .................................................................31
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$934,738 at September 30, 1998 and $846,466 at
December 31, 1997) $ 1,005,227 $ 882,159
Held to maturity, at amortized cost (fair value:
$1,339,418 at September 30, 1998 and $1,289,621 at
December 31, 1997) 1,265,854 1,249,488
Policy loans 34,031 29,003
----------- -----------
Total investments 2,305,112 2,160,650
Cash and cash equivalents 41,424 34,139
Accrued investment income 31,519 30,976
Future policy benefits recoverable and amounts due
from reinsurers 2,744,378 2,577,598
Deferred policy acquisition costs 200,665 215,097
Other assets 61,970 44,314
----------- -----------
$ 5,385,068 $ 5,062,774
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 4,933,859 $ 4,686,172
Other policyholders' funds 14,530 9,208
Amounts due reinsurers 44,305 38,403
Accrued commissions to agents 7,855 11,583
Taxes, licenses and fees payable 7,890 8,415
Accounts payable 4,211 5,323
Long-term debt 15,000 5,000
Convertible subordinated debentures 6,015 36,030
Deferred income taxes 21,592 16,513
Other liabilities 44,991 23,727
------------ ------------
Total liabilities 5,100,248 4,840,374
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 60,000,000
shares authorized, 25,299,546 issued and
outstanding (22,723,830 shares at December 31, 1997) 253 227
Common stock to be issued, 24,621 shares
(35,458 shares at December 31, l997) 330 565
Additional paid-in capital 151,577 108,372
Notes receivable from stock sales (4,266) (7,477)
Retained earnings 120,162 112,564
Accumulated other comprehensive income:
Net unrealized gain on fixed
maturity investments - available for sale 16,764 8,149
------------ ------------
Total shareholders' equity 284,820 222,400
------------ ------------
$ 5,385,068 $ 5,062,774
============ ============
</TABLE>
See accompanying notes.
4
<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,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 13,930 $ 12,535 $ 40,964 $ 37,191
Net investment income 40,118 36,625 118,044 106,150
Net realized gains on investments -- 2,837 767 4,071
Commissions and expense allowances, net 34,213 54,471 107,885 129,499
Other 506 719 2,882 1,444
------------ ------------ ------------ ------------
Total revenues 88,767 107,187 270,542 278,355
Benefits and expenses:
Interest credited to policyholder account values 29,592 27,691 87,850 80,548
Other benefits to policyholders 7,052 6,934 18,856 17,402
Amortization of deferred policy acquisition costs 7,634 7,430 23,586 21,460
Commissions 20,509 33,301 63,745 76,842
Taxes, licenses and fees 889 1,315 1,685 3,246
Operating expenses 14,856 15,127 48,028 46,640
------------ ------------ ------------ ------------
Total benefits and expenses 80,532 91,798 243,750 246,138
------------ ------------ ------------ ------------
Income before income taxes 8,235 15,389 26,792 32,217
Income taxes 3,067 5,761 10,041 12,113
------------ ------------ ------------ ------------
Net income $ 5,168 $ 9,628 $ 16,751 $ 20,104
============ ============ ============ ============
Basic earnings per common share $ .20 $ .44 $ .65 $ .93
============ ============ ============ ============
Diluted earnings per common share $ .20 $ .38 $ .63 $ .84
============ ============ ============ ============
Number of shares used in per share calculation:
Basic 25,841,369 21,866,505 25,854,890 21,590,961
Diluted 26,347,913 25,643,160 26,732,995 24,717,676
</TABLE>
See accompanying notes.
5
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,751 $ 20,104
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion of discount on investments, net (4,458) (1,995)
Net realized gains on investments (767) (4,071)
Policy acquisition costs deferred (30,563) (33,997)
Amortization of deferred policy acquisition costs 23,586 21,460
Other changes 18,601 19,042
---------- ----------
Net cash provided by operating activities 23,150 20,543
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases (131,505) (151,969)
Proceeds from sales 25,789 154,957
Proceeds from maturities and principal payments
on mortgage-backed securities 18,226 11,717
Fixed maturity investments-held to maturity:
Purchases (77,751) (192,083)
Proceeds from sales 10,785 --
Proceeds from maturities and principal payments
on mortgage-backed securities 55,113 13,429
Investments in and loans to field marketing organizations (11,100) (7,983)
---------- ----------
Net cash used in investing activities (110,443) (171,932)
Cash flows from financing activities:
Receipts from universal life and investment products 219,299 263,973
Withdrawals on universal life and investment products (241,191) (189,384)
Interest credited to policyholder account values 87,850 80,548
Change in deferred liability and reserves 16,265 14,701
Proceeds from line of credit 10,000 5,000
Proceeds from exercise of stock options 5,351 6,247
Proceeds from common stock issuance to Allianz Life 10,000 --
Repurchase of common stock (13,988) --
Other financing activities 992 6,329
---------- ----------
Net cash provided by financing activities 94,578 187,414
---------- ----------
Net increase in cash and cash equivalents 7,285 36,025
Cash and cash equivalents at beginning of the period 34,139 20,989
---------- ----------
Cash and cash equivalents at end of the period $ 41,424 $ 57,014
========== ==========
</TABLE>
See accompanying notes.
6
<PAGE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at September 30, 1998 and the related condensed consolidated
statements of income and cash flows for the three months and nine months
ended September 30, 1998 and 1997, 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, 1998 are not
necessarily indicative of the results to be expected for the full year. The
balance sheet at December 31, 1997 is derived from the audited balance
sheet as of that date.
2. Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
3. The accompanying condensed consolidated financial statements should be read
in conjunction with the notes to the December 31, 1997 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,
1998 1997
------------- ------------
Gross unrealized gain on fixed maturity
investments - available for sale $ 70,489 $ 35,693
Adjustments for:
Deferred tax liability (25,100) (12,835)
Deferred policy acquisition costs (44,038) (22,629)
Deferred tax asset 15,413 7,920
----------- -----------
Net unrealized gain on fixed maturity
investments - available for sale $ 16,764 $ 8,149
=========== ===========
5. Some of the products sold by the Company are 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
consolidated balance sheet. Unrealized gains and losses on the contracts
are recorded in other revenues to offset the effects of changes in the
future policy benefits liability for the index benefit.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "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. This statement is required to be
adopted in years beginning after September 15, 1999. The Company has not
yet determined the impact of the new statement.
7
<PAGE>
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 was adopted by the Company in the first quarter of 1998. The
adoption of this statement had no impact on its financial statements.
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 was adopted
by the Company in the first quarter of 1998. The effect of the statement is
merely a change in presentation on the balance sheet. The adoption of this
statement had no impact on the amount of net income, earnings per share or
total shareholders' equity reported.
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. SFAS No. 131 will be
adopted by the Company for the year ended December 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 97-3 titled "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." The SOP was
adopted by the Company in the first quarter of 1998. As the accounting
prescribed by the SOP is generally consistent with the Company's former
method of accounting for assessments, adoption did not have a material
impact on the Company's financial statements.
7. The terms of an agreement announced in January 1998 ("the agreement with
Allianz Life") allow Allianz Life to acquire up to 35% of the outstanding
common stock of the Company over the next five years. In February 1998,
Allianz Life Insurance Company of North America (Allianz Life) converted
the $30 million debenture it purchased from the Company in 1995. In order
to complete the conversion, the Company issued Allianz Life 2.43 million
shares of common stock at a conversion price of $12.34 per share. In August
1998, Allianz Life acquired 406,092 shares of the Company's common stock
for $10 million.
8. In June 1998, a fixed maturity investment classified as held to maturity
was sold with an amortized cost of $10 million. The realized gain on this
sale was not significant. The sale of this fixed maturity investment was
due to significant deterioration in the issuer's creditworthiness as
indicated by downgrades by Standard & Poor's and Moody's Investor Services
just prior to the sale.
9. In July 1998, the Company announced that its Board of Directors authorized
a program to repurchase up to four million shares of its common stock
through periodic purchases in the marketplace. As of September 30, 1998,
1.3 million shares have been repurchased by the Company at an average price
of $12.36 per share.
8
<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 Marketing, Inc. (LifeUSA
Marketing), LifeUSA Securities, Inc. (LifeUSA Securities) and LTCAmerica
Holding, Inc. (LTCAmerica) should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in this
Report.
LifeUSA Insurance sells and reinsures a variety of innovative life insurance and
annuity products which offer long-term retirement benefits to consumers who seek
protection against outliving their financial resources. These products are
serviced by home office staff and sold by a national marketing and distribution
system comprised of Field Marketing Organizations (FMOs) with independent
agents.
LifeUSA Marketing conducts a variety of marketing activities for the Company,
including the acquisition of and investment in national FMOs. In April 1998,
LifeUSA Marketing acquired a 40% minority interest in Signature Financial
Services, Inc. (SFS), a national life insurance and annuity marketing company
that has an agent base of over 7,500 agents. As a result of the transaction, SFS
has become a national FMO for LifeUSA Insurance. In March 1998, LifeUSA
Marketing acquired a 50% interest in Life Sales LLC, a national life insurance
and annuity marketing company that has represented LifeUSA Insurance for ten
years and operates with an agent base of over 12,000 agents. Life Sales LLC
accounted for 13% of total production in 1997. LifeUSA Marketing currently owns
an equity interest in seven FMOs.
LifeUSA Securities is a retail broker-dealer which distributes a full range of
securities products, including a wide array of established mutual funds and
variable life insurance and annuity contracts, and processes general securities
transactions.
In April 1998, the Company purchased a 40% minority interest in Windsor
Financial Group, LLC (Windsor), a Minneapolis-based investment management firm.
Windsor manages $3.6 billion of assets for financial institutions, foundations,
retirement plans and high net worth individuals, including $1.9 billion of
LifeUSA Insurance's portfolio.
In July 1998, the Company formed its fourth wholly-owned subsidiary, LTCAmerica.
LTCAmerica will seek to purchase, as a subsidiary, either an existing long-term
care insurance company or a shell insurance company that will underwrite and
issue long-term care products.
Management has organized 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 segments include: Insurance,
Marketing and Corporate. Management's Discussion and Analysis of Business
Segments, which follows on page 24, focuses on these segments and the financial
information used by management to make decisions and analyze the results of
operations of each segment.
RELATIONSHIP WITH ALLIANZ LIFE
Since 1988, under the terms of agreements between the Company and Allianz Life,
life insurance and annuity products have been produced for Allianz Life on
policy forms similar to those of LifeUSA Insurance (the "Allianz/LUSA
Business"). The Company has received commission and expense allowances, provided
all administrative and other home office services, paid commissions due agents
and paid applicable premium taxes on the Allianz/LUSA Business.
9
<PAGE>
LifeUSA Insurance assumes 25% of the Allianz/LUSA Business and pays commission
and expense allowances on the assumed business. Since 1997, the Company has
produced long-term care business for Allianz Life and received marketing and
service fees for that business.
The terms of an agreement announced in January 1998 ("the agreement with Allianz
Life") allow Allianz Life to acquire up to 35% of the outstanding common stock
of the Company over the next five years and extend the marketing agreement
between the two companies to December 31, 2000.
Allianz Life will acquire its interest in the Company over a five-year period by
purchasing from the Company $100 million of newly issued common stock in
increments of $10 million semi-annually. The price at which Allianz Life will
purchase the common stock will be at 250 percent of the Company's six-month
average book value per share (excluding SFAS No. 115), at the time the common
stock is issued. In August 1998, Allianz Life acquired 406,092 shares of the
Company's common stock with the initial $10 million semi-annual installment.
Reference is made to Note 10 of the 1997 Annual Report to Shareholders and Form
10-K for further details regarding the agreement with Allianz Life.
REINSURANCE
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 statutory capital and surplus
requirements.
From April 1, 1991 through March 31, 1998, LifeUSA Insurance 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).
Effective April 1, 1998, and in accordance with the agreement with Allianz Life,
Allianz Life began assuming a portion of LifeUSA Insurance's business. Also
effective April 1, 1998, Munich is no longer assuming any new business from
LifeUSA Insurance. LifeUSA Insurance receives commissions and expense allowances
on business ceded.
10
<PAGE>
The following table shows LifeUSA Insurance life insurance and annuity in force
information at September 30, 1998 and December 31, 1997 (in millions):
September 30, 1998 December 31, 1997
------------------ -----------------
Life insurance account values:
All policies (1) $325.5 $ 299.1
Direct and assumed business (2) 279.4 257.0
Net of reinsurance (3) 108.8 99.3
Life insurance face amounts:
All policies (1) 7,785.3 7,997.5
Direct and assumed business (2) 6,736.6 6,931.7
Net of reinsurance (3) 2,329.0 2,277.7
Annuity account values:
All policies (1) 5,674.9 5,518.4
Direct and assumed business (2) 4,013.8 3,916.6
Net of reinsurance (3) 1,801.5 1,781.1
- -----------------------------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
(2) Includes all LifeUSA Insurance products and the Allianz/LUSA Business
assumed by LifeUSA Insurance.
(3) Includes the portion of LifeUSA Insurance products retained by LifeUSA
Insurance and the portion of Allianz/LUSA Business assumed by LifeUSA
Insurance.
Reference is made to Reinsurance in the Company and Business Description section
on pages 10-12 of the 1997 Annual Report to Shareholders and Form 10-K for
further details regarding the Company's reinsurance agreements.
11
<PAGE>
RESULTS OF OPERATIONS
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including the
Allianz/LUSA Business, were $245.1 million and $432.0 million in the third
quarter of 1998 and 1997, respectively, a decrease of 43%. Total collected
premiums and deposits were $786.5 million and $986.6 million for the first nine
months of 1998 and 1997, respectively, a decrease of 20%. The following table
shows the amounts of premiums and deposits collected, ceded and retained for the
comparable quarters (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Collected Premiums and Deposits (1):
LifeUSA Insurance:
Life:
First year $ 1,354 $ 1,809 $ 4,329 $ 6,231
Single and renewal 12,822 13,017 39,308 39,218
--------- --------- --------- ---------
Total Life 14,176 14,826 43,637 45,449
Annuities 129,891 275,726 415,344 510,235
--------- --------- --------- ---------
Total LifeUSA Insurance collected premiums and deposits 144,067 290,552 458,981 555,684
Allianz Life:
Life:
First year 319 525 1,164 1,677
Single and renewal 3,734 3,721 11,509 11,264
--------- --------- --------- ---------
Total Life 4,053 4,246 12,673 12,941
Annuities 97,018 137,189 314,817 417,970
--------- --------- --------- ---------
Total Allianz Life collected premiums and deposits 101,071 141,435 327,490 430,911
--------- --------- --------- ---------
Total collected premiums and deposits $ 245,138 $ 431,987 $ 786,471 $ 986,595
========= ========= ========= =========
</TABLE>
- -----------------------------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
12
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Premiums and Deposits Not Retained or Assumed (2):
LifeUSA Insurance:
Life:
First year $ 872 $ 1,356 $ 3,042 $ 4,674
Single and renewal 8,489 8,495 25,979 25,415
--------- --------- --------- ---------
Total Life 9,361 9,851 29,021 30,089
Annuities 90,618 205,355 297,193 376,316
--------- --------- --------- ---------
Total LifeUSA Insurance premiums and deposits not retained 99,979 215,206 326,214 406,405
Allianz Life:
Life:
First year 239 394 874 1,258
Single and renewal 2,273 2,215 6,948 6,628
--------- --------- --------- ---------
Total Life 2,512 2,609 7,822 7,886
Annuities 72,030 101,697 233,136 308,331
--------- --------- --------- ---------
Total Allianz Life premiums and deposits not assumed 74,542 104,306 240,958 316,217
--------- --------- --------- ---------
Total collected premiums and deposits not retained or assumed $ 174,521 $ 319,512 $ 567,172 $ 722,622
========= ========= ========= =========
Retained or Assumed Premiums and Deposits (3):
LifeUSA Insurance:
Life:
First year $ 482 $ 453 $ 1,287 $ 1,557
Single and renewal 4,333 4,522 13,329 13,803
--------- --------- --------- ---------
Total Life 4,815 4,975 14,616 15,360
Annuities 39,273 70,371 118,151 133,919
--------- --------- --------- ---------
Total LifeUSA Insurance retained premiums and deposits 44,088 75,346 132,767 149,279
Allianz Life:
Life:
First year 80 131 290 419
Single and renewal 1,461 1,506 4,561 4,636
--------- --------- --------- ---------
Total Life 1,541 1,637 4,851 5,055
Annuities 24,988 35,492 81,681 109,639
--------- --------- --------- ---------
Total Allianz Life assumed premiums and deposits 26,529 37,129 86,532 114,694
--------- --------- --------- ---------
Total retained or assumed premiums and deposits $ 70,617 $ 112,475 $ 219,299 $ 263,973
========= ========= ========= =========
</TABLE>
- -----------------------------------------
(2) Includes premiums and deposits related to LifeUSA Insurance ceded by
LifeUSA Insurance to the Reinsurers and premiums and deposits related to
Allianz/LUSA Business that have not been assumed by LifeUSA Insurance.
(3) Includes premiums and deposits related to LifeUSA Insurance retained by
LifeUSA Insurance and premiums and deposits related to Allianz/LUSA
Business 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 Reinsurance in the Company and Business Description section
on pages 10-12 in the Annual Report to Shareholders and Form 10-K for further
details on the Company's reinsurance agreements.
13
<PAGE>
REVENUES. Total revenues were $88.8 million and $107.2 million in the third
quarter of 1998 and 1997, respectively. The decrease in total revenues of 17%
was primarily due to the decrease in net commissions and expense allowances
associated with decreased production of business not retained or assumed. This
factor was offset by the increase in net investment income generated by the
growth of annuities in force and invested assets. For the first nine months of
1998 and 1997, total revenues were $270.5 million and $278.4 million,
respectively. This 3% decrease in total revenues for the first nine months is
consistent with the factors mentioned for the third quarter. The discussion
which follows gives a line-by-line comparison of revenues for the three and nine
months ended September 30, 1998 and 1997. See also the Business Segments section
which follows for additional analysis of the results of operations.
Policyholder charges, which represent the amounts assessed against policy
account balances for the cost of insurance, policy administration and
surrenders, increased 11%, or $1.4 million, in the third quarter of 1998
compared to the third quarter of 1997, and 10%, or $3.8 million, in the first
nine months of 1998 compared to the first nine months of 1997, reflecting the
growth in and maturity of LifeUSA Insurance's net retained account values in
force.
Increases in net investment income of 10%, or $3.5 million, in the third quarter
of 1998 and 11%, or $11.9 million, for the first nine months are primarily
attributable to an increase in invested assets (fixed maturity investments and
cash and cash equivalents) to $2.31 billion at September 30, 1998 from $2.12
billion at September 30, 1997, which was 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 7.24% at September
30, 1998, compared to 7.32% at September 30, 1997.
Net realized gains on investments (excluding gains/losses on fixed assets) 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, 1998 and 1997 (dollars in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net realized gains on investments $ -- $ 2,837 $ 838 $ 4,071
Increase in:
Amortization of deferred policy acquisition costs -- 1,313 334 1,765
Other benefits to policyholders -- 1,051 237 1,375
-------- -------- -------- --------
Income before income taxes -- 473 267 931
Income taxes -- 172 101 337
-------- -------- -------- --------
Net income $ -- $ 301 $ 166 $ 594
======== ======== ======== ========
Earnings per share $ -- $ .01 $ .01 $ .02
======== ======== ======== ========
</TABLE>
Net commissions and expense allowances on premiums and deposits collected on
reinsured policies and service fees on the Allianz/LUSA Business decreased 37%,
or $20.3 million, in the third quarter of 1998, and 17%, or $21.6 million for
the first nine months of 1998. The decreases are consistent with the decreases
in total collected premiums and deposits discussed previously and with the
decline in collected first year life insurance premiums, both of which were
partially offset by changes in the mix of deferred annuity products sold.
14
<PAGE>
The following table shows the amounts of net commissions and expense allowances
for the three and nine months ended September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
LifeUSA Insurance:
Life:
First year $ 1,069 $ 1,709 $ 3,776 $ 5,621
Single and renewal 1,355 1,375 4,163 4,129
---------- ---------- ---------- ----------
Total Life 2,424 3,084 7,939 9,750
Annuities 15,496 30,216 48,520 57,110
---------- ---------- ---------- ----------
Total LifeUSA Insurance 17,920 33,300 56,459 66,860
Allianz Life:
Life:
First year 336 497 1,257 1,666
Single and renewal 512 523 1,586 1,594
---------- ---------- ---------- ----------
Total Life 848 1,020 2,843 3,260
Annuities 15,610 20,385 49,066 60,092
---------- ---------- ---------- ----------
Total Allianz Life 16,458 21,405 51,909 63,352
Lapse policy chargebacks (165) (234) (483) (713)
---------- ---------- ---------- ----------
Total commissions and expense allowances, net $ 34,213 $ 54,471 $ 107,885 $ 129,499
========== ========== ========== ==========
</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 Allianz/LUSA Business.
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 Reinsurance in the Company and Business Description section
on pages 10-12 in the Annual Report to Shareholders and Form 10-K for further
details on the Company's reinsurance agreements.
BENEFITS AND EXPENSES. Total benefits and expenses were $80.5 million and $91.8
million in the third quarter of 1998 and 1997, respectively. This decrease of
12% for third quarter was primarily due to a decrease in commission expenses
partially offset by the growth in annuities in force. Total benefits and
expenses were $243.8 million and $246.1 million for the first nine months of
1998 and 1997, respectively. This decrease of 1% for the first nine months is
consistent with the factors mentioned for the third quarter. The following
discussion gives a line-by-line comparison of benefits and expenses for the
third quarter ended September 30, 1998 and 1997. See also the Business Segments
section which follows for additional analysis of the results of operations.
Increases in interest credited to policyholder account values of 7%, or $1.9
million, and 9%, or $7.3 million in the third quarter and first nine months of
1998, respectively, reflect the growth in annuities in force. The increases in
other benefits to policyholders of 2%, or $118,000, for third quarter 1998
reflects increased surrenders and growth in and maturity of in force business.
These factors were partially offset by a decrease in reserves for index related
benefits on policies in force. The increase of 8%, or $1.5 million, for the
first nine months reflect increased surrenders and growth in and maturity of in
force business. See note 5 in the Notes to Condensed Consolidated Financial
Statements for further information related to accounting for index related
benefits.
15
<PAGE>
Amortization of deferred policy acquisition costs increased 3%, or $204,000, in
the third quarter of 1998 as compared to the third quarter of 1997 and 10%, or
$2.1 million, for the first nine months of 1998 compared to the first nine
months of 1997. The third quarter and nine month increases reflect an increase
in gross profits due to a growing, more mature block of in force business with
slightly increased surrenders. Utilizing the actual policy experience and
appropriate assumptions for future periods, models indicate that deferred policy
acquisition costs are fully recoverable.
Commissions to agents decreased 38%, or $12.8 million, in the third quarter of
1998 compared to the third quarter of 1997 and 17%, or $13.1 million, for the
first nine months of 1998 compared to 1997. The decreases are consistent with
the decreases in total collected premiums and deposits discussed previously and
with the decline in collected first year life insurance premiums, both of which
were partially offset by changes in the mix of deferred annuity products sold.
Taxes, licenses and fees decreased 32%, or $426,000, in the third quarter of
1998 compared to the third quarter of 1997 and 48%, or $1.6 million, for the
first nine months of 1998 compared to 1997. The decreases were primarily due to
a reduction in guaranty fund assessments accrued and the decrease in premium
production.
Operating expenses decreased 2%, or $271,000, in the third quarter of 1998
compared to the third quarter of 1997. The decrease is due primarily to a
decrease in interest expense as a result of Allianz Life converting the $30
million debenture in February of 1998, partially offset by the growth of LifeUSA
Insurance's annuity in force business. Operating expenses increased 3%, or $1.4
million, for the first nine months of 1998 compared to 1997. This increase was
primarily due to the growth of LifeUSA Insurance's annuity in force business,
partially offset by a significant amount of the 1997 national advertising
campaign that was incurred in the second quarter of 1997.
Income taxes were $3.1 million and $5.8 million in the third quarter of 1998 and
1997, respectively. For the first nine months, income taxes decreased 17%, or
$2.1 million, in 1998 compared to 1997. The effective income tax rates for the
first nine months of 1998 and 1997 were 37.5% and 37.6%, respectively.
NET INCOME. Net income was $5.2 million in the third quarter of 1998 and $9.6
million in the third quarter of 1997, which represents an decrease of 46%.
Diluted earnings per share were $.20 in the third quarter of 1998 compared to
$.38 in the third quarter of 1997, which represents a decrease of 47%. Net
income was $16.8 million and $20.1 million ($.63 and $.84 diluted earnings per
share) for the first nine months of 1998 and 1997, respectively.
16
<PAGE>
The following table summarizes the operating highlights for the three and nine
months ended September 30, 1998 and 1997 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------------------------
1998 1997
----------------------- -----------------------
Income EPS Income EPS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated net income and diluted earnings per share $ 5,168 $ .20 $ 9,628 $ .38
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments -- -- (301) (.01)
Charges for state guaranty fund assessments 12 .00 102 .00
Tax liability for prior years' activity 39 .00 -- --
--------- --------- --------- ---------
Consolidated net operating income and diluted earnings per share 5,219 .20 9,429 .37
Impact of expenses associated with 1997 national
advertising campaign -- -- 39 .00
--------- --------- --------- ---------
Consolidated net operating income and diluted earnings per share
excluding impact of expenses associated with national
advertising campaign $ 5,219 $ .20 $ 9,468 $ .37
========= ========= ========= =========
<CAPTION>
Nine months ended September 30,
1998 1997
----------------------- -----------------------
Income EPS Income EPS
--------- --------- --------- ---------
Consolidated net income and diluted earnings per share $ 16,751 $ .63 $ 20,104 $ .84
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (166) (.01) (594) (.02)
Charges (credits) for state guaranty fund assessments (656) (.02) 46 .00
Tax liability for prior years' activity 71 .00 700 .03
--------- --------- --------- ---------
Consolidated net operating income and diluted earnings per share 16,000 .60 20,256 .85
Impact of expenses associated with 1997 national
advertising campaign -- -- 1,993 .08
--------- --------- --------- ---------
Consolidated net operating income and diluted earnings per share
excluding impact of expenses associated with national
advertising campaign $ 16,000 $ .60 $ 22,249 $ .93
========= ========= ========= =========
</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) charges (credits) for state
guaranty fund assessments and (iii) tax liability for prior years'
activity.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through September 1998, the Company's primary available sources of cash were:
* service fees received by the Company for the Allianz/LUSA Business
* management fees from LifeUSA Insurance
* interest earned on invested assets
* the first semi-annual installment of $10 million received from Allianz in
August 1998
* dividend of $2.5 million paid by LifeUSA Insurance in the first quarter of
1998
* issuance of shares upon exercise of common stock options
* $3.0 million in proceeds from shares purchased by Allianz Life upon
exercise of its preemptive rights
* a $50 million long-term line of credit from its Reinsurers, Employers and
Republic-Vanguard
In September 1998, the Company borrowed $10 million under its line of credit to
increase the total outstanding balance to $15 million. 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 extended marketing relationship with Allianz Life and related infusion of
$100 million in capital over the next five years, along with the $50 million
line of credit from the Reinsurers, provides sufficient capital to fund the
Company's needs. Effective April 1, 1998 and in accordance with the agreement
with Allianz Life, Allianz Life, either as a direct writer or reinsurer, has the
right to retain 37.5% of the new life insurance and annuity business produced by
the Company's agents, up from 25% under the previous marketing agreement. Also,
effective April 1, 1998, LifeUSA Insurance increased the retention of its
annuity business from 25 to 30% and its life insurance business from 25 to 50%.
In July 1998, the Company announced that its Board of Directors authorized a
program to repurchase up to four million shares of its common stock through
periodic purchases in the marketplace. The shares to be repurchased represent
approximately 15% of the Company's 26.0 million shares outstanding. As of
September 30, 1998, 1.3 million shares have been repurchased by the Company at
an average price of $12.36 per share. Repurchased shares will be deemed to be
outstanding shares for purposes of calculating the 35% of the outstanding common
stock of the Company to be acquired over the next five years by Allianz Life.
The Company's cash needs consist of:
* operating expenses, including expenses in connection with efforts to
increase the production of LifeUSA Insurance's existing agents and expand
the size of the LifeUSA Insurance field force
* capital contributions to LifeUSA Marketing for investments in and
additional purchase payments to marketing organizations expected to
increase premium and deposit production volume for LifeUSA Insurance and
Allianz Life
* commission advances to agents
* repayments of borrowings under the line of credit
* potential contributions to LifeUSA Securities to ensure compliance with
NASD capital requirements
* quarterly dividends to shareholders of record
* authorized repurchases of its common stock
18
<PAGE>
* potential contributions to LTCAmerica to purchase an existing long-term
care insurance company or a "shell" insurance company and commence
operations
* 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 available sources of cash 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 during the next
twelve months, based on currently anticipated life insurance and annuity sales,
expected levels of net retention and acceptable reinsurance agreements.
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 combination of these dynamics first produced
statutory net income during 1995.
LifeUSA Insurance had statutory net income of $17.0 million during the first
nine months of 1998 compared to $11.9 million during the first nine months of
1997. As of September 30, 1998, LifeUSA Insurance had statutory capital and
surplus for regulatory purposes of $117.9 million compared to $103.7 million at
December 31, 1997. LifeUSA Insurance expects to continue to satisfy statutory
capital and surplus requirements through 1998 primarily through statutory
profits on its maturing block of retained in force business. Effective April 1,
1998, LifeUSA Insurance increased the retention of its annuity business from 25
to 30% and its life insurance business from 25 to 50%. The changes in the
retention levels did not produce a significant impact on statutory capital in
the third quarter.
In October 1998, the Company announced that its Board of Directors declared a
cash dividend of 2.5 cents per share for the third quarter of 1998, payable on
November 13, 1998, to shareholders of record as of October 28, 1998. The Company
declared similar dividends in the first and second quarters of 1998. It is the
intention of the Board of Directors to pay regular quarterly dividends in 1998
of 2.5 cents per share, or ten cents per share on an annual basis.
Although the Board of Directors of the Company determines when dividends are
paid on its common stock, there are statutory and regulatory limitations upon
the extent to which dividends may be paid to a parent from an insurance
subsidiary, including the restriction that an insurance company may only pay
ordinary dividends out of unassigned funds (earned surplus). Approval by the
Department of Commerce of the State of Minnesota is required for LifeUSA
Insurance to pay dividends to the Company in any 12-month period in an amount
exceeding the lesser of (i) 10 percent of the insured's statutory earned surplus
at the end of the preceding year or (ii) the insured's statutory net gain from
operations, not including realized capital gains, for the year preceding the
distribution, both of which are determined in accordance with Minnesota
insurance laws and regulations. LifeUSA Insurance paid $2.5 million in
extraordinary dividends to the Company during the first quarter of 1998 and
1997, which were permitted by the Department of Commerce of the State of
Minnesota.
19
<PAGE>
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
and as a third party administrator.
With the objective of reducing the risk of company insolvencies, the National
Association of Insurance Commissioners (NAIC) established risk-based capital
standards. The risks inherent in a life insurance company's operation determine
its current capital requirements. These standards continue to be reviewed by the
NAIC. LifeUSA Insurance's current percentage of actual total adjusted capital to
authorized control level risk-based capital is well in excess of regulatory
requirements.
The NAIC continues to consider changes to model laws based on innovative product
designs. Nonforfeiture law discussions have been considering how to better
support multiple benefit product designs, such as LifeUSA Insurance's two-tier
annuities and universal life contracts with enhanced retirement benefits.
LifeUSA Insurance has been able to successfully demonstrate the financial
stability of such designs, which provide higher retirement benefits to consumers
while decreasing disintermediation and solvency risks to LifeUSA Insurance.
As of September 30, 1998, the NAIC Life Insurance Illustration Model Regulation
was effective in twenty-four states. A requirement of the regulation is that
prescribed tests be satisfied to demonstrate illustrated benefits are self
supporting and not lapse supported. The requirements of this regulation have
been successfully implemented by LifeUSA Insurance. NAIC committees are also
considering a new annuity disclosure model regulation. The NAIC committee will
meet in December and intends to determine if development should proceed for
annuity illustrations on supportability testing rules and format requirements.
LifeUSA Insurance is monitoring these developments, and no significant impact is
anticipated at this time.
NAIC committees are considering a new approach to statutory valuation of
liabilities (reserves) and regulations for equity-indexed products. LifeUSA
Insurance is monitoring these developments and no significant impact is
anticipated at this time.
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 also examine LifeUSA Insurance business operations and
financial statements 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 and a report of Association Financial Examination was released June 30,
1998. The recommendations contained in the report were not material individually
or in the aggregate to LifeUSA Insurance's business operations or financial
statements.
LifeUSA Securities, as a registered broker and dealer in securities, is subject
to the Securities and Exchange Commission's Uniform Net Capital Rule. As of
September 30, 1998, LifeUSA Securities' net capital exceeded the minimum
required balance.
20
<PAGE>
In June 1998, the A.M. Best Company upgraded the rating assigned to LifeUSA
Insurance to A- (Excellent) from B++ (Very Good). The A- rating is assigned to
companies which, in A.M. Best's opinion, have, on balance, excellent financial
strength, operating performance and market profile when compared to the
standards established by the A.M. Best Company. A- companies have a strong
ability to meet their ongoing obligations to policyholders. According to A.M.
Best, the upgrade reflects LifeUSA Insurance's innovative product portfolio and
marketing ability, its extensive distribution system, its strong reinsurance
relationships, and its ability to raise capital through its parent as
demonstrated by the recent marketing and investment agreement with Allianz Life.
In May 1998, Moody's Investors Service (Moody's) upgraded the rating assigned to
LifeUSA Insurance to A3 from Baa3. This rating falls within Moody's "Strong
Companies" category. According to Moody's, the upgrade reflects the significant
minority interest to be held by Allianz Life, as well as the enhanced marketing,
reinsurance and strategic ties between the Company and Allianz Life.
In August 1998, Standard & Poor's (S&P) affirmed LifeUSA Insurance's initial
claims-paying ability rating of BBB+ (Adequate). S&P 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.
YEAR 2000 UPDATE
GENERAL. A comprehensive analysis of the Year 2000 (Y2K) issue was completed in
1997. The analysis set out a plan for compliance of all Company information
systems and significant non-computer devices to ensure they will accurately
process date data from the twentieth and into the twenty-first centuries. The
project also includes identification of key vendors and obtaining certification
that their key systems are Y2K compliant. Because the Company has only been
operating since 1987, significant systems were already Y2K compliant. Total cost
of the project was estimated at $500,000. At the end of third quarter, incurred
costs totaled $537,000 with final costs expected to be approximately $650,000,
including upgrading of operating systems, development tools and desktop
applications.
SYSTEMS. The Company's mainframe, local area network and voicemail systems are
all Y2K compliant. Full scale production level system testing was completed in
September 1998. These tests covered every functional component of the software
and tested conditions through the first quarter of 2001. The machine environment
and application software executed as expected into 2001. Complete documentation
of each test has been compiled and will be archived.
Full scale production level system testing for each of the personal computer
based applications was completed in September 1998. These tests covered every
functional component of software and tested conditions through the first quarter
of 2001. Complete documentation of each test has been compiled and will be
archived. The personal computer based applications executed as expected into
year 2001. The annuity and disbursement system is being modified to be Y2K
compliant with testing of changes to be completed by the end of fourth quarter
1998. During the normal course of business the Company is upgrading its
financial accounting system and policy assembly system.
The financial accounting system is being upgraded to a system that provides more
functionality. This system is Y2K compliant and installation is expected by the
end of first quarter 1999. In addition, LifeUSA Insurance is automating its
policy assembly function during the first quarter of 1999, to Y2K compliant
systems.
21
<PAGE>
All key software vendors have now released compliant versions of their software.
All personal computers and non-computer hardware are or will be Y2K compliant by
June 1999.
ONGOING ACTIVITY. A compliance letter for certification has been sent to all key
vendors, and follow-up will continue throughout the remainder of 1998 and into
1999, as appropriate. Testing of data exchange with key external business
partners continues for purposes of date compliance. Contingency planning
continues to address the noncompliance by vendors. At this time, contingency
planning does not apply to key vendors who are already Y2K compliant or have
certified dates at the end of 1998 or into 1999, when compliance is anticipated.
SUMMARY. The Company is aware of no Y2K compliance issues at this time that will
negatively impact the key business processes of the Company or its affiliated
companies. All Y2K compliance plan activities are scheduled to be completed by
June 1999.
INVESTMENTS. As of September 30, 1998, the Company had cash, cash equivalents
and fixed maturity investments on a consolidated basis totaling $2.31 billion,
including $7.8 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, 1998
(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 $ 41,424 1.85% $ 41,424 1.79% $ 41,424 1.74%
Government Treasury and Agency notes and bonds 84,511 3.77 90,263 3.90 99,468 4.17
Taxable municipals 8,302 .37 8,650 .37 8,779 .37
Mortgage pass throughs 55,222 2.46 58,381 2.52 58,381 2.45
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials 2,785 .12 2,785 .12 2,884 .12
CMO -- PACs 618,889 27.60 625,950 27.07 650,201 27.25
CMO -- ADs 22,066 .98 22,066 .95 23,374 .98
CMO -- TACs 7,914 .35 7,914 .34 8,689 .36
Investment grade corporate securities:
AAA+ to AAA- 56,920 2.54 58,106 2.51 61,460 2.58
AA+ to AA- 199,807 8.91 206,730 8.94 214,897 9.01
A+ to A- 625,530 27.90 650,034 28.11 668,610 28.02
BBB+ to BBB- 513,732 22.93 536,893 23.24 544,595 22.81
Non investment grade corporate securities 4,914 .22 3,309 .14 3,309 .14
--------------------------------------------------------------------------------
Total cash and invested assets $2,242,016 100.00% $2,312,505 100.00% $2,386,071 100.00%
================================================================================
</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, 1998, the
weighted average credited interest rate for deferred annuities and life
insurance policies was 4.93% and the weighted average yield on the assets
backing liabilities was 7.28%. As of December 31, 1997, the weighted average
credited interest rate was 5.00% and the weighted average yield on the assets
backing liabilities was 7.34%. Investment income from the assets backing
liabilities exceeded interest credited to policyholders by $21.0 million during
the first nine months of 1998. The investment portfolio is managed primarily by
allocating new cash flows into investments which have yield, maturity and other
characteristics suitable for LifeUSA Insurance expected policyholder
liabilities. Consistent with LifeUSA Insurance asset and liability management
practices, as of September 30, 1998, the effective duration of LifeUSA Insurance
fixed income securities was 4.57 years, compared to 5.03 years as of December
31, 1997.
22
<PAGE>
The percentage of the total fair value of the Company's portfolio that
was comprised of investment grade corporate obligations was 62% at September 30,
1998. With each corporate security acquisition, LifeUSA Insurance 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 and S&P.
The remainder of the Company's portfolio is substantially 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 the types of assets invested in will allow
the Company to maintain high quality, consistent yields and proper maturities
for the overall portfolio.
As of September 30, 1998, the Company held 44%, or $1.01 billion, 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 foreseeable cash flow needs. 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 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.
EQUITY. At September 30, 1998, the Company's shareholders' equity and book value
per share were $284.8 million and $11.25, respectively, compared to $222.4
million and $9.77, respectively, at December 31, 1997. 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 $268.1 million and
$10.58, respectively, at September 30, 1998, compared to $214.3 million and
$9.41, respectively, at December 31, 1997.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ON BUSINESS SEGMENTS
Management has organized the Company into three business segments in order to
focus on the distinct functional activities performed by each. The Insurance
Segment focuses on the administration, asset/liability management and
reinsurance of fixed insurance products. The Marketing Segment focuses its
efforts on the field force used to distribute fixed insurance products and the
management of investments in marketing subsidiaries. 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 continues to analyze 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 reinsurers and assumes a portion of the Allianz/LUSA
Business. The Insurance Segment manages the assets and liabilities for business
retained or assumed by LifeUSA Insurance and administers all of the LifeUSA
Insurance and Allianz/LUSA Business.
The Insurance Segment's primary revenue sources are net investment income, net
commissions and expense allowances and policyholder charges. 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 fees paid to the Marketing Segment for the
production of LifeUSA Insurance and Allianz/LUSA Business 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.
REVENUES. Total revenues were $87.7 million and $106.6 million in third quarter
1998 and 1997, respectively, and $267.0 million and $277.2 million for the first
nine months of 1998 and 1997, 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 the decreases are consistent
with those previously discussed in the Company's Results of Operations section.
EXPENSES. Total expenses were $81.0 million and $97.8 million in third quarter
1998 and 1997, respectively, and $246.3 million and $255.5 million for the first
nine months of 1998 and 1997, respectively. The decrease in total expenses of
17% for the third quarter is primarily attributable to the decrease in the
marketing fee paid to the Marketing Segment, net of deferral, as a result of the
decrease in premium production. This factor is partially offset by an increase
in interest credited to policyholder account values due to growth of annuities
in force. The marketing fee, which decreased 40% from third quarter 1997, is
calculated as a percentage of premium and will vary generally with the change in
premium production which decreased 43% from third quarter 1997. 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. The decrease in total expenses of 4% for the first nine months of 1998
compared to 1997 is consistent with the reasons mentioned for the decrease in
the third quarter.
24
<PAGE>
BUSINESS SEGMENTS RESULTS OF OPERATIONS. The following table summarizes the
results of operations reported by the three business segments and reconciles to
the Company's consolidated results of operations for the third quarter ended
September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Insurance Segment Marketing Segment
Percent Percent
1998 1997 Change 1998 1997 Change
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 13,930 $ 12,535 11% $ -- $ -- --%
Net investment income 39,814 36,432 9 2 -- 100
Net realized gains on investments -- 2,837 (100) -- -- --
Commissions and expense allowances, net 34,213 54,471 (37) -- -- --
Marketing fee -- -- -- 31,152 50,757 (39)
Corporate fee -- -- -- -- -- --
Other (226) 372 (161) 401 347 16
------------------------------------ -----------------------------------
Total revenues 87,731 106,647 (18) 31,555 51,104 (38)
Expenses:
Interest credited to policyholder account values 29,592 27,691 7 -- -- --
Other benefits to policyholders 7,052 6,934 2 -- -- --
Amortization of deferred policy acquisition costs 7,634 7,430 3 -- -- --
Commissions and marketing fee 26,166 43,501 (40) 24,836 40,079 (38)
Taxes, licenses and fees 889 1,315 (32) -- -- --
Operating expenses:
Salaries and employee benefits 3,731 3,931 (5) 1,890 1,625 16
Data processing 931 846 10 391 337 16
Printing and office supplies 116 208 (44) 298 382 (22)
Other 4,876 5,968 (18) 2,926 3,164 (8)
------------------------------------ -----------------------------------
Total expenses 80,987 97,824 (17) 30,341 45,587 (33)
------------------------------------ -----------------------------------
Income before income taxes 6,744 8,823 (24) 1,214 5,517 (78)
Income taxes 2,542 3,179 (20) 441 2,196 (80)
------------------------------------ -----------------------------------
Net income $ 4,202 $ 5,644 (26%) $ 773 $ 3,321 (77%)
==================================== ===================================
</TABLE>
MARKETING SEGMENT. The Marketing Segment provides all services related to the
recruitment of agents and FMOs, support of agents contracted to sell LifeUSA
Insurance, Allianz/LUSA Business and Allianz Life long-term care products and
incentive programs to increase production. The Marketing Segment also manages
all acquisitions of and investments in field marketing organizations.
The Marketing Segment's primary revenue source is the intersegment marketing fee
assessed to the Insurance Segment for the production of LifeUSA Insurance,
Allianz/LUSA Business and Allianz Life long-term care premiums and deposits.
This fee is calculated as a percentage of the premiums and deposits produced
with varying rates for life insurance and annuity 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.
25
<PAGE>
<TABLE>
<CAPTION>
Corporate Segment Eliminating Entries (1) Consolidated
Percent Percent
1998 1997 Change 1998 1997 1998 1997 Change
- ------------------------------------- ------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- --% $ -- $ -- $ 13,930 $ 12,535 11%
302 193 56 -- -- 40,118 36,625 10
-- -- -- -- -- -- 2,837 (100)
-- -- -- -- -- 34,213 54,471 (37)
-- -- -- (31,152) $ (50,757) -- -- --
2,075 3,026 (31) (2,075) (3,026) -- -- --
331 -- 100 -- -- 506 719 (30)
- ------------------------------------- ------------------------- ------------------------------------
2,708 3,219 (16) (33,227) (53,783) 88,767 107,187 (17)
-- -- -- -- -- 29,592 27,691 7
-- -- -- -- -- 7,052 6,934 2
-- -- -- -- -- 7,634 7,430 3
208 -- 100 (30,701) (50,279) 20,509 33,301 (38)
-- -- -- -- -- 889 1,315 (32)
958 868 10 (196) (191) 6,383 6,233 2
66 47 40 (21) (19) 1,367 1,211 13
8 (34) 124 (59) (70) 363 486 (25)
1,191 1,289 (8) (2,250) (3,224) 6,743 7,197 (6)
- ------------------------------------- ------------------------- ------------------------------------
2,431 2,170 12 (33,227) (53,783) 80,532 91,798 (12)
- ------------------------------------- ------------------------- ------------------------------------
277 1,049 (74) -- -- 8,235 15,389 (46)
84 386 (78) -- -- 3,067 5,761 (47)
- ------------------------------------- ------------------------- ------------------------------------
$ 193 $ 663 (71%) $ -- $ -- $ 5,168 $ 9,628 (46%)
===================================== ========================= =====================================
</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 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.
REVENUES. Total revenues were $31.6 million and $51.1 million in third quarter
1998 and 1997, respectively, and $99.2 million and $118.1 million for the first
nine months of 1998 and 1997, respectively. The decrease in total revenues of
38% for third quarter and 16% for the first nine months is primarily
attributable to the decrease in the marketing fee which is based on premium and
deposit production discussed previously. The entire amount of the marketing fee
is charged to the Insurance Segment and is eliminated in consolidation.
26
<PAGE>
BUSINESS SEGMENTS RESULTS OF OPERATIONS. The following table summarizes the
results of operations reported by the three business segments and reconciles to
the Company's consolidated results of operations for the nine months ended
September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Insurance Segment Marketing Segment
Percent Percent
1998 1997 Change 1998 1997 Change
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 40,964 $ 37,191 10% $ -- $ -- --%
Net investment income 116,948 105,591 11 29 -- 100
Net realized gains (losses) on investments 793 4,071 (81) -- -- --
Commissions and expense allowances, net 107,885 129,499 (17) -- -- --
Marketing fee -- -- -- 97,474 117,521 (17)
Corporate fee -- -- -- -- -- --
Other 425 852 (50) 1,667 592 182
------------------------------------- -------------------------------------
Total revenues 267,015 277,204 (4) 99,170 118,113 (16)
Expenses:
Interest credited to policyholder account values 87,850 80,548 9 -- -- --
Other benefits to policyholders 18,856 17,402 8 -- -- --
Amortization of deferred policy acquisition costs 23,586 21,460 10 -- -- --
Commissions and marketing fee 83,209 102,508 (19) 76,207 90,641 (16)
Taxes, licenses and fees 1,685 3,246 (48) -- -- --
Operating expenses:
Salaries and employee benefits 11,300 11,724 (4) 5,686 4,459 28
Data processing 2,754 2,439 13 1,164 932 25
Printing and office supplies 737 681 8 1,127 1,093 3
Other 16,343 15,515 5 9,197 9,095 1
------------------------------------- -------------------------------------
Total expenses 246,320 255,523 (4) 93,381 106,220 (12)
------------------------------------- -------------------------------------
Income (loss) before income taxes 20,695 21,681 (5) 5,789 11,893 (51)
Income taxes 7,508 8,058 (7) 2,477 4,594 (46)
------------------------------------- -------------------------------------
Net income (loss) $ 13,187 $ 13,623 (3%) $ 3,312 $ 7,299 (55%)
===================================== =====================================
</TABLE>
EXPENSES. Total expenses were $30.3 million and $45.6 million in third quarter
1998 and 1997, respectively, and $93.4 million and $106.2 million for the first
nine months of 1998 and 1997, respectively. The decrease in total expenses of
33% for the third quarter is primarily due to the 38% decrease in commissions
incurred. Commissions decreased due to the decrease in premium and deposit
production offset by a change in the mix of deferred annuity products sold and
by the decline in collected first year life insurance premiums. The 12% decrease
in total expenses for the first nine months of 1998 is primarily due to a 16%
decrease in commissions incurred.
CORPORATE SEGMENT. The Corporate Segment provides strategic direction for the
Company and its various business segments and includes the operations of LifeUSA
Securities because 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. The Corporate
Segment retains expenses of an enterprise-wide nature, such as the 1997 national
advertising campaign.
27
<PAGE>
<TABLE>
<CAPTION>
Corporate Segment Eliminating Entries (1) Consolidated
Percent Percent
1998 1997 Change 1998 1997 1998 1997 Change
- ---------------------------------------- ------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- --% $ -- $ -- $ 40,964 $ 37,191 10%
1,067 559 84 -- -- 118,044 106,150 11
(26) -- (100) -- -- 767 4,071 (81)
-- -- -- -- -- 107,885 129,499 (17)
-- -- -- (97,474) $(117,521) -- -- --
6,436 7,257 (11) (6,436) (7,257) -- -- --
790 -- 100 -- -- 2,882 1,444 100
- ---------------------------------------- ------------------------- --------------------------------------
8,267 7,816 6 (103,910) (124,778) 270,542 278,355 (3)
-- -- -- -- -- 87,850 80,548 9
-- -- -- -- -- 18,856 17,402 8
-- -- -- -- -- 23,586 21,460 10
523 -- 100 (96,194) (116,307) 63,745 76,842 (17)
-- -- -- -- -- 1,685 3,246 (48)
2,759 2,392 15 (537) (503) 19,208 18,072 6
168 135 24 (57) (46) 4,029 3,460 16
114 93 23 (196) (175) 1,782 1,692 5
4,395 6,553 (33) (6,926) (7,747) 23,009 23,416 (2)
- ---------------------------------------- ------------------------- --------------------------------------
7,959 9,173 (13) (103,910) (124,778) 243,750 246,138 (1)
- ---------------------------------------- ------------------------- --------------------------------------
308 (1,357) 123 -- -- 26,792 32,217 (17)
56 (539) 110 -- -- 10,041 12,113 (19)
- ---------------------------------------- ------------------------- --------------------------------------
$ 252 $ (818) 131% $ -- $ -- $ 16,751 $ 20,104 (17%)
======================================== ========================= ======================================
</TABLE>
REVENUES. Total revenues were $2.7 million and $3.2 million for third quarter
1998 and 1997, respectively, and $8.3 million and $7.8 million for the first
nine months of 1998 and 1997, respectively. The decrease in total revenues of
16% for the third quarter is due to the decrease in the corporate fee partially
offset by an increase in other revenues. The corporate fee decrease is due to a
decrease in third quarter revenues of the Marketing and Insurance Segments. The
increase in other revenues is due to LifeUSA Securities concession revenue on
sales of security products. Sales have increased as LifeUSA Securities is now in
its third year. The 6% increase in total revenues for the first nine months of
1998 is due to an increase in net investment income and other revenues partially
offset by the decrease in the corporate fee. Net investment income increased due
to an increase in invested assets. Explanations for changes in other revenues
and the corporate fee are consistent with those mentioned for the third quarter.
EXPENSES. Total expenses were $2.4 million and $2.2 million for third quarter
1998 and 1997, respectively, and $8.0 million and $9.2 million for the first
nine months of 1998 and 1997, respectively. The increase of 12% for the third
quarter is primarily due to an increase in commissions from LifeUSA Securities'
increased sales mentioned above. The decrease of 13% for the first nine months
of 1998 is primarily attributable to the cost of a national advertising and
sales
28
<PAGE>
campaign that was launched during first quarter of 1997 partially offset by the
increase in commissions incurred from LifeUSA Securities.
* * * *
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,
distribution system expansion, changes in interest rates generally and credited
rates on the new business retained or assumed by LifeUSA Insurance, sales
volume, failure of the Company and its subsidiaries or significant third parties
to achieve Year 2000 compliance or material expense in connection with such
compliance, competition and other risks described from time to time in the
Company's Securities and Exchange Commission filings, including but not limited
to the Annual Report to Shareholders and Form 10-K, copies of which are
available from the Company without charge.
29
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings previously
disclosed in the Annual Report to Shareholders and Form 10-K and in the Form
10-Q for the period ended June 30, 1998.
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
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10) Amendment No. 1, dated January 30, 1998, to the Stock Purchase
Agreement entered into as of January 13, 1998 between the Company and
Allianz Life. (electronic filing only)
Amendment No. 2, dated July 15, 1998, to the Stock Purchase Agreement
entered into as of January 13, 1998 between the Company and Allianz
Life. (electronic filing only)
(11) Statement of computation of per share earnings
(27) Financial data schedule (electronic filing only)
30
<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, 1998
/s/ Mark A. Zesbaugh
--------------------------------
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
31
EXHIBIT 10
AMENDMENT NO. 1
TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT is made and entered into as of January 30, 1998 among LIFE
USA HOLDING, INC., a Minnesota corporation (the "Company"), and ALLIANZ LIFE
INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation ("Allianz").
W I T N E S S E T H:
WHEREAS, the parties hereto have entered into the Stock Purchase Agreement
dated January 13, 1998 (the "Agreement" and all terms defined in the Agreement
are used herein as defined in the Agreement); and
WHEREAS, as a result of the finalization of the Company's audited financial
statements for the year ended December 31, 1997, the Company has determined that
the number of shares of its Common Stock subject to the Preemptive Rights was
241,846 shares as of December 31, 1997 rather than 239,165 shares as stated in
the Agreement and the parties desire to amend the Agreement to reflect this
change;
NOW, THEREFORE, in consideration of these premises and of the covenants,
conditions and promises hereinafter set forth and for One Dollar ($1.00) and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Shares Subject to Preemptive Rights. The number "241,846" is hereby
inserted in lieu of the number "239,165" in Section 1.2 of the Agreement.
2. Full Force and Effect. Except as expressly set forth herein, the
Agreement as amended hereby shall continue in full force and effect in
accordance with its terms.
3. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which, when so executed and delivered, shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
4. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Minnesota, without regard to the
principles thereof regarding conflict of laws.
1
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, each as of
the date first above written.
LIFE USA HOLDING, INC.
/s/ Mark A. Zesbaugh
----------------------------
Mark A. Zesbaugh, Executive
Vice President and Chief
Financial Officer
ALLIANZ LIFE INSURANCE COMPANY OF
NORTH AMERICA
/s/ Michael T. Westermeyer
----------------------------
Michael T. Westermeyer
Vice President, Secretary, and
Corporate Legal Officer
2
<PAGE>
AMENDMENT NO. 2
TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT is made and entered into as of July 15, 1998 between LIFE
USA HOLDING, INC., a Minnesota corporation (the "Company"), and ALLIANZ LIFE
INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation ("Allianz").
W I T N E S S E T H:
WHEREAS, the parties hereto have entered into the Stock Purchase Agreement
dated January 13, 1998, as amended by Amendment No. 1 to Stock Purchase
Agreement dated as of January 30, 1998 (the "Agreement" and all terms defined in
the Agreement are used herein as defined in the Agreement); and
WHEREAS, the parties wish to amend Section 2.2 of the Agreement to include
certain shares of Common Stock in the divisor for purposes of determining Book
Value Per Share; and
WHEREAS, the Company has authorized the repurchase of up to 4,000,000
shares of its Common Stock pursuant to a stock repurchase plan adopted by the
Board of Directors of the Company on July 15, 1998 (the "Stock Repurchase
Plan"); and
WHEREAS, Section 2.5 of the Agreement limits the percentage ownership by
Allianz of the Company's Common Stock, and the parties wish to amend Section 2.5
to the Agreement to avoid reduction in the maximum ownership by Allianz as a
result of the Stock Repurchase Plan; and
WHEREAS, the parties wish to amend Section 7.17(b) of the Agreement to
permit the Company to carry out the Stock Repurchase Plan,
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Amendment to Section 2.2 of the Agreement. Section 2.2 of the Agreement is
amended by adding an additional sentence to the end of Section 2.2 reading
as follows:
3
<PAGE>
"For purposes of determining Book Value Per Share pursuant to this
Section 2.2, the actual number of issued and outstanding shares of
Common Stock as of the Determination Date shall be deemed to include
shares to be issued in the July or January immediately following the
Determination Date for the benefit of participants in the Company's
Employee Savings Plan (401(k) Plan) upon payment of funds reserved for
the purchase of Common Stock during the calendar quarter ended as of
the Determination Date."
2. Amendment of Section 2.5 of the Agreement. Section 2.5 of the Agreement is
amended by adding an additional sentence to the end of Section 2.5 reading
as follows:
"For purposes of this Section 2.5, the actual number of issued and
outstanding shares of Common Stock of the Company with respect to
which Allianz's percentage ownership shall be determined shall be
deemed to include all Common Stock repurchased by the Company pursuant
to the stock repurchase plan approved by the Board of Directors of the
Company on July 15, 1998."
3. Amendment to Section 7.17 of the Agreement. Clause (b) of Section 7.17 of
the Agreement is hereby amended to read as follows:
"(b) repurchase any shares of its Common Stock from any of its
shareholders in any calendar year in excess of five percent (5%) of
the number of shares of Common Stock outstanding at the beginning of
such year, provided that this restriction on repurchase shall not
apply to the Company's repurchase of its Common Stock pursuant to the
stock repurchase plan approved by the Board of Directors of the
Company on July 15, 1998."
4. Full Force and Effect. Except as expressly set forth herein, the Agreement
as amended hereby shall continue in full force and effect in accordance
with its terms.
5. Counterparts. This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which,
when so executed and delivered, shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Minnesota, without regard to the
principles thereof regarding conflict of laws.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, each as of
the date first above written.
LIFE USA HOLDING, INC.
/s/ Mark A. Zesbaugh
------------------------------------------
Mark A. Zesbaugh, Executive
Vice President and Chief Financial Officer
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA
/s/ Michael T. Westermeyer
------------------------------------------
Michael T. Westermeyer, Vice President
5
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,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC
Weighted-average shares outstanding 25,841,369 21,866,505 25,854,890 21,590,961
============ ============ ============ ============
Net income $ 5,168 $ 9,628 $ 16,751 $ 20,104
============ ============ ============ ============
Per common share amount $ .20 $ .44 $ .65 $ .93
============ ============ ============ ============
DILUTED
Average shares outstanding and to be issued 25,865,990 21,910,297 25,863,097 21,612,947
Net effect of dilutive stock options and warrants,
having exercise prices of the average market
price of the common stock using the treasury
stock method 481,923 1,309,738 869,898 681,604
Shares assuming conversion of convertible
subordinated debentures -- 2,423,125 -- 2,423,125
------------ ------------ ------------ ------------
Adjusted weighted-average shares 26,347,913 25,643,160 26,732,995 24,717,676
============ ============ ============ ============
Net income $ 5,168 $ 9,628 $ 16,751 $ 20,104
Add convertible subordinated debenture interest,
net of federal income tax effect $ -- $ 218 $ 85 $ 653
------------ ------------ ------------ ------------
Adjusted net income $ 5,168 $ 9,846 $ 16,836 $ 20,757
============ ============ ============ ============
Per common share amount $ .20 $ .38 $ .63 $ .84
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 1,005,227
<DEBT-CARRYING-VALUE> 1,265,854
<DEBT-MARKET-VALUE> 1,339,418
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,305,112
<CASH> 41,424
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 200,665
<TOTAL-ASSETS> 5,385,068
<POLICY-LOSSES> 4,933,859
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 14,530
<NOTES-PAYABLE> 6,015
0
0
<COMMON> 253
<OTHER-SE> 284,567
<TOTAL-LIABILITY-AND-EQUITY> 5,385,068
0
<INVESTMENT-INCOME> 118,044
<INVESTMENT-GAINS> 767
<OTHER-INCOME> 151,731
<BENEFITS> 106,706
<UNDERWRITING-AMORTIZATION> 23,586
<UNDERWRITING-OTHER> 113,458
<INCOME-PRETAX> 26,792
<INCOME-TAX> 10,041
<INCOME-CONTINUING> 16,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,751
<EPS-PRIMARY> .65
<EPS-DILUTED> .63
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
