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
June 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 (I.R.S. Employer Identification
incorporation 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 June 30, 1998
----------------- ----------------------------
Common Stock, 25,935,081
Par Value $.01 Per Share
<PAGE>
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the Second Quarter Ended June 30, 1998
I N D E X
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
June 30, 1998 and December 31, 1997............................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months and six months ended
June 30, 1998 and June 30, 1997..................................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Six months ended June 30, 1998
and June 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...........................9-22
Management's Discussion and Analysis of Financial
Condition and Results of Operations on Business Segments ....23-28
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...............................................29
Item 2. Changes in Securities...........................................29
Item 3. Defaults Upon Senior Securities.................................29
Item 4. Submission of Matters to a Vote of Security Holders..........29-30
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>
June 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$903,002 at June 30, 1998 and $846,466 at
December 31, 1997) $ 950,652 $ 882,159
Held to maturity, at amortized cost (fair value:
$1,317,805 at June 30, 1998 and $1,289,621 at
December 31, 1997) 1,271,040 1,249,488
Policy loans 32,528 29,003
----------- -----------
Total investments 2,254,220 2,160,650
Cash and cash equivalents 34,010 34,139
Accrued investment income 32,250 30,976
Future policy benefits recoverable and amounts due
from reinsurers 2,705,451 2,577,598
Deferred policy acquisition costs 212,197 215,097
Other assets 57,681 44,314
----------- -----------
$ 5,295,809 $ 5,062,774
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 4,868,038 $ 4,686,172
Other policyholders' funds 14,959 9,208
Amounts due reinsurers 48,722 38,403
Accrued commissions to agents 7,374 11,583
Taxes, licenses and fees payable 8,069 8,415
Accounts payable 4,301 5,323
Convertible subordinated debentures 6,015 36,030
Deferred income taxes 19,036 16,513
Other liabilities 40,979 28,727
------------ ------------
Total liabilities 5,017,493 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, 25,935,081 issued and
outstanding (22,723,830 shares at December 31, 1997) 259 227
Common stock to be issued, 32,186 shares
(35,458 shares at December 31, l997) 446 565
Additional paid-in capital 147,742 108,372
Notes receivable from stock sales (4,266) (7,477)
Retained earnings 122,945 112,564
Accumulated other comprehensive income:
Net unrealized gain on fixed
maturity investments - available for sale 11,190 8,149
------------ ------------
Total shareholders' equity 278,316 222,400
------------ ------------
$ 5,295,809 $ 5,062,774
============ ============
</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 June 30, Six months ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 13,968 $ 12,853 $ 27,034 $ 24,655
Net investment income 39,303 35,278 77,926 69,584
Net realized gains on investments 788 -- 767 1,234
Commissions and expense allowances, net 34,555 43,649 73,672 75,028
Other 1,083 36 2,376 667
----------- ----------- ----------- -----------
Total revenues 89,697 91,816 181,775 171,168
Benefits and expenses:
Interest credited to policyholder account values 29,253 26,612 58,258 52,857
Other benefits to policyholders 5,660 5,569 11,804 10,468
Amortization of deferred policy acquisition costs 8,442 7,448 15,952 14,029
Commissions 20,328 25,567 43,236 43,541
Taxes, licenses and fees 902 1,363 796 1,932
Operating expenses 16,177 16,509 33,172 31,513
----------- ----------- ----------- -----------
Total benefits and expenses 80,762 83,068 163,218 154,340
----------- ----------- ----------- -----------
Income before income taxes 8,935 8,748 18,557 16,828
Income taxes 3,361 3,417 6,974 6,352
----------- ----------- ----------- -----------
Net income $ 5,574 $ 5,331 $ 11,583 $ 10,476
=========== =========== =========== ===========
Basic earnings per common share $ .22 $ .25 $ .45 $ .49
=========== =========== =========== ===========
Diluted earnings per common share $ .21 $ .23 $ .43 $ .45
=========== =========== =========== ===========
Number of shares used in per share calculation:
Basic 25,914,569 21,517,148 25,844,861 21,450,069
Diluted 26,910,992 24,389,155 26,924,840 24,253,382
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,583 $ 10,476
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion of discount on investments, net (2,591) (1,249)
Net realized gains on investments (767) (1,234)
Policy acquisition costs deferred (20,384) (20,222)
Amortization of deferred policy acquisition costs 15,952 14,029
Other changes 13,656 17,743
---------- ----------
Net cash provided by operating activities 17,449 19,543
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases (94,054) (68,476)
Proceeds from sales 25,789 33,504
Proceeds from maturities and principal payments
on mortgage-backed securities 12,263 5,970
Fixed maturity investments-held to maturity:
Purchases (65,197) (63,980)
Proceeds from sales 10,785 --
Proceeds from maturities and principal payments
on mortgage-backed securities 35,755 7,698
Investments in and loans to field marketing
organizations (9,100) (4,998)
---------- ----------
Net cash used in investing activities (83,759) (90,282)
Cash flows from financing activities:
Receipts from universal life and investment products 148,682 151,498
Withdrawals on universal life and investment products (158,089) (124,543)
Interest credited to policyholder account values 58,258 52,857
Change in deferred liability and reserves 10,304 8,794
Proceeds from exercise of stock options 4,899 2,713
Other financing activities 2,127 1,166
---------- ----------
Net cash provided by financing activities 66,181 92,485
---------- ----------
Net increase (decrease) in cash and cash equivalents (129) 21,746
Cash and cash equivalents at beginning of the period 34,139 20,989
---------- ----------
Cash and cash equivalents at end of the period $ 34,010 $ 42,735
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at June 30, 1998 and the related condensed consolidated
statements of income and cash flows for the three months and six months
ended June 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 six months ended June 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:
June 30, December 31,
1998 1997
---------- -----------
Gross unrealized gain on fixed maturity
investments - available for sale $ 47,650 $ 35,693
Adjustments for:
Deferred tax liability (16,986) (12,835)
Deferred policy acquisition costs (29,960) (22,629)
Deferred tax asset 10,486 7,920
---------- -----------
Net unrealized gain on fixed maturity
investments - available for sale $ 11,190 $ 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 June 15, 1999. The
Company has not yet determined the impact of the new statement.
<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 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.
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.
7. 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.
8. During the second quarter of 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.
<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) and LifeUSA Securities, Inc. (LifeUSA Securities) should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Report.
LifeUSA Insurance sells a variety of innovative life insurance and annuity
products which offer long-term retirement benefits to consumers who seek
protection against outliving their financial resources. These products are
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. 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 $3.5 billion of assets for financial institutions, foundations,
retirement plans and high net worth individuals, including $1.8 billion of
LifeUSA Insurance's portfolio.
In July 1998, the Company formed its fourth wholly-owned subsidiary, LTC America
Holding, Inc. (LTC America). LTC America will seek to purchase, as a subsidiary,
either an existing long-term care company or a shell company that will be used
to 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 23, 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. LifeUSA
Insurance assumes 25% of the Allianz/LUSA Business and pays commission and
expense allowances on the
<PAGE>
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 percent 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 October 1, 1995, LifeUSA Insurance began ceding 75% of its new life
insurance and annuity business to the reinsurers. Effective April 1, 1998,
LifeUSA Insurance began ceding 50% of its new life insurance and 70% of its new
annuity business.
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.
<PAGE>
The following table shows LifeUSA Insurance life insurance and annuity in force
information at June 30, 1998 and December 31, 1997 (in millions):
June 30, 1998 December 31, 1997
------------- -----------------
Life insurance account values:
All policies (1) $ 317.4 $ 299.1
Direct and assumed business (2) 272.5 257.0
Net of reinsurance (3) 105.8 99.3
Life insurance face amounts:
All policies (1) 7,869.6 7,997.5
Direct and assumed business (2) 6,812.4 6,931.7
Net of reinsurance (3) 2,321.2 2,277.7
Annuity account values:
All policies (1) 5,661.4 5,518.4
Direct and assumed business (2) 4,017.3 3,916.6
Net of reinsurance (3) 1,801.9 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.
<PAGE>
RESULTS OF OPERATIONS
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including the
Allianz/LUSA Business, were $251.5 million and $319.6 million in the second
quarter of 1998 and 1997, respectively, a decrease of 21% in total collected
premiums and deposits. Total collected premiums and deposits were $541.3 million
and $554.6 million for the first six months of 1998 and 1997, respectively, a
decrease of 2%. 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 June 30, Six months ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Collected Premiums and Deposits (1):
LifeUSA Insurance:
Life:
First year $ 1,494 $ 2,032 $ 2,975 $ 4,422
Single and renewal 13,124 12,992 26,486 26,201
----------- ----------- ----------- -----------
Total Life 14,618 15,024 29,461 30,623
Annuities 132,562 136,368 285,453 234,509
----------- ----------- ----------- -----------
Total LifeUSA Insurance collected premiums and deposits 147,180 151,392 314,914 265,132
Allianz Life:
Life:
First year 422 613 845 1,152
Single and renewal 3,936 3,746 7,775 7,543
----------- ----------- ----------- -----------
Total Life 4,358 4,359 8,620 8,695
Annuities 99,972 163,816 217,799 280,781
----------- ----------- ----------- -----------
Total Allianz Life collected premiums and deposits 104,330 168,175 226,419 289,476
----------- ----------- ----------- -----------
Total collected premiums and deposits $ 251,510 $ 319,567 $ 541,333 $ 554,608
=========== =========== =========== ===========
</TABLE>
- ----------------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Premiums and Deposits Not Retained or Assumed (2):
LifeUSA Insurance:
Life:
First year $ 1,059 $ 1,524 $ 2,170 $ 3,318
Single and renewal 8,670 8,414 17,490 16,920
---------- ---------- ---------- ----------
Total Life 9,729 9,938 19,660 20,238
Annuities 93,518 99,984 206,575 170,961
---------- ---------- ---------- ----------
Total LifeUSA Insurance premiums and deposits not retained 103,247 109,922 226,235 191,199
Allianz Life:
Life:
First year 317 460 635 864
Single and renewal 2,383 2,202 4,675 4,413
---------- ---------- ---------- ----------
Total Life 2,700 2,662 5,310 5,277
Annuities 73,939 120,709 161,106 206,634
---------- ---------- ---------- ----------
Total Allianz Life premiums and deposits not assumed 76,639 123,371 166,416 211,911
---------- ---------- ---------- ----------
Total collected premiums and deposits not retained or assumed $ 179,886 $ 233,293 $ 392,651 $ 403,110
========== ========== ========== ==========
Retained or Assumed Premiums and Deposits (3):
LifeUSA Insurance:
Life:
First year $ 435 $ 508 $ 805 $ 1,104
Single and renewal 4,454 4,578 8,996 9,281
---------- ---------- ---------- ----------
Total Life 4,889 5,086 9,801 10,385
Annuities 39,044 36,384 78,878 63,548
---------- ---------- ---------- ----------
Total LifeUSA Insurance retained premiums and deposits 43,933 41,470 88,679 73,933
Allianz Life:
Life:
First year 105 153 210 288
Single and renewal 1,553 1,544 3,100 3,130
---------- ---------- ---------- ----------
Total Life 1,658 1,697 3,310 3,418
Annuities 26,033 43,107 56,693 74,147
---------- ---------- ---------- ----------
Total Allianz Life assumed premiums and deposits 27,691 44,804 60,003 77,565
---------- ---------- ---------- ----------
Total retained or assumed premiums and deposits $ 71,624 $ 86,274 $ 148,682 $ 151,498
========== ========== ========== ==========
</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.
<PAGE>
REVENUES. Total revenues were $89.7 million and $91.8 million in the second
quarter of 1998 and 1997, respectively. The decrease in total revenues of 2% 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 six months of
1998 and 1997, total revenues were $181.8 million and $171.2 million,
respectively. This 6% increase in total revenues for the first six months was
primarily due to the increase in net investment income generated by the growth
of annuities in force and invested assets. The discussion which follows gives a
line-by-line comparison of revenues for the three and six months ended June 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 9%, or $1.1 million, in the second quarter of 1998
compared to the second quarter of 1997, and 10%, or $2.4 million, in the first
six months of 1998 compared to the first six months of 1997, reflecting the
growth in and maturity of LifeUSA Insurance's net retained account values in
force.
An increase in net investment income of 11%, or $4.0 million, in the second
quarter of 1998 and 12%, or $8.3 million, for the first six months are primarily
attributable to an increase in invested assets (fixed maturity investments and
cash and cash equivalents) to $2.26 billion at June 30, 1998 from $2.01 billion
at June 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 7.26% at June 30, 1998, compared
to 7.42% at June 30, 1997.
In accordance with generally accepted accounting principles, 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 six months
ended June 30, 1998 and 1997 (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net realized gains on investments $ 798 $ -- $ 838 $ 1,234
Increase in:
Amortization of deferred policy acquisition costs 305 -- 334 453
Other benefits to policyholders 228 -- 237 324
--------- --------- --------- ---------
Income before income taxes 265 -- 267 457
Income taxes 100 -- 101 164
--------- --------- --------- ---------
Net income $ 165 $ -- $ 166 $ 293
========= ========= ========= =========
Earnings per share $ .01 $ -- $ .01 $ .01
========= ========= ========= =========
</TABLE>
Net commissions and expense allowances on premiums and deposits collected on
reinsured policies and service fees on business produced for Allianz Life
decreased 21%, or $9.1 million, in the second quarter of 1998, and 2%, or $1.4
million for the first six months of 1998. The decreases are consistent with the
21% and 2% decreases in total collected premiums and deposits for the second
quarter and the first six months of 1998, respectively.
<PAGE>
The following table shows the amounts of net commissions and expense allowances
for the three and six months ended June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
LifeUSA Insurance:
Life:
First year $ 1,278 $ 1,881 $ 2,707 $ 3,912
Single and renewal 1,392 1,370 2,808 2,754
---------- ---------- ---------- ----------
Total Life 2,670 3,251 5,515 6,666
Annuities 15,324 15,869 33,024 26,894
---------- ---------- ---------- ----------
Total LifeUSA Insurance 17,994 19,120 38,539 33,560
Allianz Life:
Life:
First year 448 595 921 1,169
Single and renewal 543 530 1,074 1,070
---------- ---------- ---------- ----------
Total Life 991 1,125 1,995 2,239
Annuities 15,721 23,648 33,456 39,708
---------- ---------- ---------- ----------
Total Allianz Life 16,712 24,773 35,451 41,947
Lapse policy chargebacks (151) (244) (318) (479)
---------- ---------- ---------- ----------
Total commissions and expense allowances, net $ 34,555 $ 43,649 $ 73,672 $ 75,028
========== ========== ========== ==========
</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 $80.8 million and $83.1
million in the second quarter of 1998 and 1997, respectively. This decrease of
3% for second quarter was primarily due to a decrease in commission expenses
partially offset by the growth in annuities in force. Total benefits and
expenses were $163.2 million and $154.3 million for the first six months of 1998
and 1997, respectively. This increase of 6% for the first six months was
primarily due to the growth in annuities in force. The discussion which follows
gives a line-by-line comparison of benefits and expenses for the second quarter
ended June 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 10%, or $2.6
million, and 10%, or $5.4 million in the second quarter and first six months of
1998, respectively, reflect the growth in annuities in force. The increase in
other benefits to policyholders of 2%, or $91,000 for second quarter 1998,
reflects the growth and maturity of in force business partially offset by a
decrease in life insurance claims and a decrease in reserves for index related
benefits on policies in force. The increase in other benefits to policyholders
of 13%, or $1.3 million for the first six months reflects the growth and
maturity of in force business and additional reserves for index related benefits
on policies in force.
<PAGE>
Amortization of deferred policy acquisition costs increased 13%, or $994,000, in
the second quarter of 1998 as compared to the second quarter of 1997 and 14%, or
$1.9 million, for the first six months of 1998 compared to the first six months
of 1997. The second quarter increase reflects an increase in gross profits due
to a growing, more mature block of in force business and the increased
amortization of deferred policy acquisition costs generated by the net realized
gains on investments described above. The increase for the first six months of
1998 reflects an increase in gross profits due to a growing, more mature block
of in force business. 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 decreased 20%, or $5.2 million, in the second quarter of
1998 compared to the second quarter of 1997 and 1%, or $305,000, for the first
six 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 34%, or $461,000, in the second quarter of
1998 compared to the second quarter of 1997 and 59%, or $1.1 million, for the
first six 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 $332,000, in the second quarter of 1998
compared to the second quarter of 1997. This decrease is primarily due to a
significant amount of the 1997 national advertising campaign that was incurred
in the second quarter of 1997. Operating expenses increased 5%, or $1.7 million,
for the first six 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 the 1997 national advertising campaign.
A comprehensive analysis of the Year 2000 issue was completed in 1997. Key code
programming changes for all transaction systems that will be used into the Year
2000 were identified and completed by the end of the second quarter of 1998 at a
cost of less than $500,000. In addition, procedures are in place to test and
monitor all other software applications as well as obtain Year 2000 compliance
assurance from outside vendors. Because the Company has only been operating
since 1987, it has significantly less exposure than most companies.
Income taxes were $3.4 million in the second quarter of 1998 and 1997. For the
first six months, income taxes increased 10%, or $622,000, in 1998 compared to
1997. The effective income tax rates for the first six months of 1998 and 1997
were 37.6% and 37.8%, respectively.
NET INCOME. Net income was $5.6 million in the second quarter of 1998 and $5.3
million in the second quarter of 1997, which represents an increase of 5%.
Diluted earnings per share were $.21 in the second quarter of 1998 compared to
$.23 in the second quarter of 1997, which represents a decrease of 9%. The per
share decrease is due to an increase of 2.5 million diluted shares used in the
earnings per share calculation for second quarter 1998. The increase in diluted
shares is due primarily to the conversion and dilutive impact of "in the money"
stock options (see Exhibit 11 which follows for details). Net income was $11.6
million and $10.5 million ($.43 and $.45 diluted earnings per share) for the
first six months of 1998 and 1997, respectively.
<PAGE>
The following table summarizes the operating highlights for the three and six
months ended June 30, 1998 and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended June 30,
------------------------------------------------------
1998 1997
------------------------ ------------------------
Income EPS Income EPS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated net income and diluted earnings per share $ 5,574 $ 0.21 $ 5,331 $ 0.23
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (165) (0.01) -- --
Charges (credits) for state guaranty fund assessments (18) (0.00) 54 0.00
Tax liability for prior years' activity 32 0.00 700 0.03
--------- --------- --------- ---------
Consolidated net operating income and diluted earnings per share 5,423 0.20 6,085 0.26
Impact of expenses associated with 1997 national
advertising campaign -- -- 1,174 0.05
--------- --------- --------- ---------
Consolidated net operating income and diluted earnings per share
excluding impact of expenses associated with national
advertising campaign $ 5,423 $ 0.20 $ 7,259 $ 0.31
========= ========= ========= =========
<CAPTION>
Six months ended June 30,
------------------------------------------------------
1998 1997
------------------------ ------------------------
Income EPS Income EPS
--------- --------- --------- ---------
Consolidated net income and diluted earnings per share $ 11,583 $ 0.43 $ 10,476 $ 0.45
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (166) (0.01) (293) (0.01)
Charges (credits) for state guaranty fund assessments (668) (0.02) (56) (0.00)
Tax liability for prior years' activity 32 0.00 700 0.03
--------- --------- --------- ---------
Consolidated net operating income and diluted earnings per share 10,781 0.40 10,827 0.47
Impact of expenses associated with 1997 national
advertising campaign -- -- 1,954 0.08
--------- --------- --------- ---------
Consolidated net operating income and diluted earnings per share
excluding impact of expenses associated with national
advertising campaign $ 10,781 $ 0.40 $ 12,781 $ 0.55
========= ========= ========= =========
</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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through June 1998, the Company's primary available sources of cash were (i)
service fees received by the Company for the Allianz/LUSA Business, (ii)
management fees from LifeUSA Insurance, (iii) interest earned on invested
assets, (iv) a dividend of $2.5 million paid by LifeUSA Insurance in the first
quarter of 1998, (v) issuance of shares upon exercise of common stock options,
(vi) $3.0 million in proceeds from shares purchased by Allianz Life upon
exercise of its preemptive rights, 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.
As discussed previously, the extended marketing relationship with Allianz Life
and related infusion of $100 million in capital over the next five years
beginning in August of 1998, gives the Company additional opportunity to expand
its distribution system and take advantage of marketing opportunities. 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
percent of the new life insurance and annuity business produced by the Company's
agents, up from 25% under the previous marketing agreement. Also, LifeUSA
Insurance increased the retention of its annuity business from 25 to 30 percent
and its life insurance business from 25 to 50 percent.
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. Repurchased
shares will be deemed to be outstanding shares for purposes of calculating the
35 percent 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 (i) operating expenses, including expenses
in connection with the efforts to increase the production of LifeUSA Insurance
existing agents and expand the size of the LifeUSA Insurance field force, (ii)
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, (iii)
commission advances to agents, (iv) repayments of borrowings under the line of
credit, (v) potential contributions to LifeUSA Securities to ensure compliance
with NASD capital requirements, (vi) quarterly dividends to shareholders of
record, (vii) authorized repurchases of its common stock, (viii) potential
contributions to LTC America to purchase an existing long term care company or a
"shell" company, and (ix) 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 through 1998, 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
<PAGE>
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 $10.5 million during the first six
months of 1998 compared to $6.8 million during the first six months of 1997. As
a result, the Company did not make capital contributions to LifeUSA Insurance
during the first six months of 1998. As of June 30, 1998, LifeUSA Insurance had
statutory capital and surplus for regulatory purposes of $112.1 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 under the terms of the agreement with Allianz Life,
LifeUSA Insurance increased the retention of its annuity business from 25 to 30
percent and its life insurance business from 25 to 50 percent. The changes in
the retention levels did not produce a significant impact on statutory capital
in the second quarter.
In July 1998, the Company announced that its Board of Directors declared a cash
dividend of 2.5 cents per share for the second quarter of 1998, payable on
August 14, 1998, to shareholders of record on July 29, 1998. In April 1998, the
Board of Directors declared the first dividend in the eleven-year history of the
Company. 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 the 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.
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
<PAGE>
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 June 30, 1998, the NAIC Life Insurance Illustration Model Regulation was
effective in twenty-three 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 illustration model regulation. It proposes to
establish disclosure requirements, illustration formats and rules for
identifying the supportability of illustrated benefits. LifeUSA Insurance is
monitoring these developments, and no significant impact is anticipated at this
time.
A new approach to statutory valuation of liabilities (reserves) and regulations
for equity-indexed products is also being considered by NAIC committees. 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 June
30, 1998, LifeUSA Securities' net capital exceeded the minimum required balance.
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 December 1996, Standard & Poor's (S&P) assigned LifeUSA Insurance an 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. As a result of the agreement with Allianz Life, S&P is
reexamining the rating assigned to LifeUSA Insurance.
<PAGE>
INVESTMENTS. As of June 30, 1998, the Company had cash, cash equivalents and
fixed maturity investments on a consolidated basis totaling $2.26 billion,
including $7.6 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 June 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 $ 34,010 1.54% $ 34,010 1.51% $ 34,010 1.48%
Government Treasury and Agency notes and bonds 83,652 3.79 87,639 3.89 94,167 4.09
Taxable municipals 2,237 .10 2,237 .10 2,237 .10
Mortgage pass throughs 58,183 2.64 60,364 2.68 60,364 2.62
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials 4,319 .20 4,319 .19 4,390 .19
CMO -- PACs 612,263 27.73 616,402 27.33 633,513 27.51
CMO -- ADs 22,985 1.04 22,985 1.02 23,930 1.04
CMO -- TACs 8,766 .40 8,766 .39 9,539 .41
Investment grade corporate securities:
AAA+ to AAA- 46,772 2.12 47,261 2.10 49,567 2.15
AA+ to AA- 195,033 8.83 200,658 8.90 205,452 8.92
A+ to A- 646,191 29.27 662,391 29.37 670,737 29.13
BBB+ to BBB- 488,729 22.12 504,912 22.35 510,802 22.20
Non investment grade corporate securities 4,912 .22 3,758 .17 3,758 .16
----------------------------------------------------------------------------
Total cash and invested assets $2,208,052 100.00% $2,255,702 100.00% $2,302,466 100.00%
============================================================================
</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 June 30, 1998, the
weighted average credited interest rate for deferred annuities and life
insurance policies was 4.95% and the weighted average yield on the assets
backing liabilities was 7.30%. 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 $15.9 million during
the first six 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 June 30, 1998, the effective duration of LifeUSA Insurance
fixed income securities was 4.89 years, compared to 5.03 years as of December
31, 1997.
The percentage of the total fair value of the Company's portfolio that was
comprised of investment grade corporate obligations was 62% at June 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.
<PAGE>
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 June 30, 1998, the Company held 42%, or $950.7 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 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.
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 securities available 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.
EQUITY. At June 30, 1998, the Company's shareholders' equity and book value per
share were $278.3 million and $10.72, 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 $267.1 million and
$10.29, respectively, at June 30, 1998, compared to $214.3 million and $9.41,
respectively, at December 31, 1997.
<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 revenue and expense characteristics associated
with the 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, assumes a portion of the Allianz/LUSA Business,
manages the assets and liabilities for business retained or assumed by LifeUSA
Insurance and administers all of the Allianz/LUSA Business.
The Insurance Segment's primary revenue sources are policyholder charges, net
investment income and net 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 fees paid to the Marketing Segment for the
production of LifeUSA Insurance and Allianz Life annuity deposits 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.
REVENUES. Total revenues were $88.3 million and $91.9 million in second quarter
1998 and 1997, respectively, and $179.3 million and $170.6 million for the first
six 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 increase are consistent
with those previously discussed in the Results of Operations section.
EXPENSES. Total expenses were $81.3 million and $86.0 million in second quarter
1998 and 1997, respectively, and $165.3 million and $157.7 million for the first
six months of 1998 and 1997, respectively. The decrease in total expenses of 5%
for the second 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 23% from second quarter 1997, is
calculated as a percentage of premium and will vary generally with the change in
premium production which decreased 21% from second 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 increase in total expenses of 5% for the first six months of 1998
compared to 1997 is primarily due to an increase in interest credited to
policyholder account values due to growth of annuities in force.
<PAGE>
OPERATING 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 second quarter ended
June 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 $ 13,968 $ 12,853 9% $ -- $ -- --%
Net investment income 38,912 35,095 11 18 -- 100
Net realized gains on investments 788 -- 100 -- -- --
Commissions and expense allowances, net 34,555 43,649 (21) -- -- --
Marketing fee -- -- -- 31,526 38,918 (19)
Corporate fee -- -- -- -- -- --
Other 35 262 (87) 738 (226) 427
----------------------------------- -----------------------------------
Total revenues 88,258 91,859 (4) 32,282 38,692 (17)
Expenses:
Interest credited to policyholder account values 29,253 26,612 10 -- -- --
Other benefits to policyholders 5,660 5,569 2 -- -- --
Amortization of deferred policy acquisition costs 8,442 7,448 13 -- -- --
Commissions and marketing fee 26,749 34,607 (23) 24,448 29,575 (17)
Taxes, licenses and fees 902 1,363 (34) -- -- --
Operating expenses:
Salaries and employee benefits 3,752 3,933 (5) 1,872 1,440 30
Data processing 905 810 12 373 295 26
Printing and office supplies 246 256 (4) 392 343 14
Other 5,418 5,400 0 3,056 3,033 1
----------------------------------- -----------------------------------
Total expenses 81,327 85,998 (5) 30,141 34,686 (13)
----------------------------------- -----------------------------------
Income (loss) before income taxes 6,931 5,861 18 2,141 4,006 (47)
Income taxes 2,433 2,342 4 1,004 1,536 (35)
----------------------------------- -----------------------------------
Net income (loss) $ 4,498 $ 3,519 28% $ 1,137 $ 2,470 (54%)
=================================== ===================================
</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 and Allianz Life annuities, life insurance 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 and
Allianz Life annuities, life insurance 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.
<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>
$ -- $ -- --% $ -- $ -- $ 13,968 $ 12,853 9%
373 183 104 -- -- 39,303 35,278 11
-- -- -- -- -- 788 -- 100
-- -- -- -- -- 34,555 43,649 (21)
-- -- -- (31,526) $(38,918) -- -- --
2,103 2,379 (12) (2,103) (2,379) -- -- --
310 -- 100 -- -- 1,083 36 2,908
- ----------------------------------- ---------------------- ---------------------------------
2,786 2,562 9 (33,629) (41,297) 89,697 91,816 (2)
-- -- -- -- -- 29,253 26,612 10
-- -- -- -- -- 5,660 5,569 2
-- -- -- -- -- 8,442 7,448 13
196 -- 100 (31,065) (38,615) 20,328 25,567 (20)
-- -- -- -- -- 902 1,363 (34)
920 794 16 (190) (155) 6,354 6,012 6
52 45 16 (20) (10) 1,310 1,140 15
47 74 (36) (74) (49) 611 624 (2)
1,708 2,768 (38) (2,280) (2,468) 7,902 8,733 (10)
- ----------------------------------- ---------------------- ----------------------------------
2,923 3,681 (21) (33,629) (41,297) 80,762 83,068 (3)
- ----------------------------------- ---------------------- ----------------------------------
(137) (1,119) 88 -- -- 8,935 8,748 2
(76) (461) 84 -- -- 3,361 3,417 (2)
- ----------------------------------- ---------------------- ----------------------------------
$ (61) $ (658) 91% $ -- $ -- $ 5,574 $ 5,331 5%
=================================== ====================== ==================================
</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 $32.3 million and $38.7 million in second quarter
1998 and 1997, respectively, and $67.6 million and $67.0 million for the first
six months of 1998 and 1997, respectively. The decrease in total revenues of 17%
for second quarter 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. The 1% increase in total revenues for the first six
months is due to income associated from interests in FMOs. Premium and annuity
deposit production for the first six months of 1998 is relatively consistent
with the first six months of 1997, thus the marketing fee is also consistent.
<PAGE>
OPERATING 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 six months ended June
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 $ 27,034 $ 24,655 10% $ -- $ -- --%
Net investment income 77,134 69,217 11 27 -- 100
Net realized gains (losses) on investments 793 1,234 (36) -- -- --
Commissions and expense allowances, net 73,672 75,028 (2) -- -- --
Marketing fee -- -- -- 66,322 66,764 (1)
Corporate fee -- -- -- -- -- --
Other 651 422 54 1,266 245 417
----------------------------------- ---------------------------------
Total revenues 179,284 170,556 5 67,615 67,009 1
Expenses:
Interest credited to policyholder account values 58,258 52,857 10 -- -- --
Other benefits to policyholders 11,804 10,468 13 -- -- --
Amortization of deferred policy acquisition costs 15,952 14,029 14 -- -- --
Commissions and marketing fee 57,042 59,008 (3) 51,372 50,562 2
Taxes, licenses and fees 796 1,932 (59) -- -- --
Operating expenses:
Salaries and employee benefits 7,569 7,793 (3) 3,795 2,833 34
Data processing 1,823 1,593 14 773 595 30
Printing and office supplies 621 473 31 829 711 17
Other 11,468 9,547 20 6,271 5,931 6
----------------------------------- ---------------------------------
Total expenses 165,333 157,700 5 63,040 60,632 4
----------------------------------- ---------------------------------
Income (loss) before income taxes 13,951 12,856 9 4,575 6,377 (28)
Income taxes 4,966 4,879 2 2,036 2,398 (15)
----------------------------------- ---------------------------------
Net income (loss) $ 8,985 $ 7,977 13% $ 2,539 $ 3,979 (36%)
=================================== ==================================
</TABLE>
EXPENSES. Total expenses were $30.1 million and $34.7 million in second quarter
1998 and 1997, respectively, and $63.0 million and $60.6 million for the first
six months of 1998 and 1997, respectively. The decrease in total expenses of 13%
for the second quarter is primarily due to the 17% 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 4% increase
in total expenses for the first six months of 1998 is primarily due to an
increase in salaries and employee benefits.
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. Expenses of
an enterprise-wide nature, such as the 1997 national advertising campaign, are
retained by the Corporate Segment.
<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>
$ -- $ -- --% $ -- $ -- $ 27,034 $ 24,655 10%
765 367 108 -- -- 77,926 69,584 12
(26) -- (100) -- -- 767 1,234 (38)
-- -- -- -- -- 73,672 75,028 (2)
-- -- -- (66,322) $(66,764) -- -- --
4,361 4,231 3 (4,361) (4,231) -- -- --
459 -- 100 -- -- 2,376 667 256
- ---------------------------------- ---------------------- ---------------------------------
5,559 4,598 21 (70,683) (70,995) 181,775 171,168 6
-- -- -- -- -- 58,258 52,857 10
-- -- -- -- -- 11,804 10,468 13
-- -- -- -- -- 15,952 14,029 14
315 -- 100 (65,493) (66,029) 43,236 43,541 (1)
-- -- -- -- -- 796 1,932 (59)
1,801 1,524 18 (341) (311) 12,824 11,839 8
102 88 16 (36) (26) 2,662 2,250 18
106 127 (17) (137) (106) 1,419 1,205 18
3,204 5,264 (39) (4,676) (4,523) 16,267 16,219 0
- ---------------------------------- ---------------------- ---------------------------------
5,528 7,003 (21) (70,683) (70,995) 163,218 154,340 6
- ---------------------------------- ---------------------- ---------------------------------
31 (2,405) 101 -- -- 18,557 16,828 10
(28) (925) 97 -- -- 6,974 6,352 10
- ---------------------------------- ---------------------- ---------------------------------
$ 59 $ (1,480) 104% $ -- $ -- $ 11,583 $ 10,476 11%
================================== ====================== =================================
</TABLE>
REVENUES. Total revenues were $2.8 million and $2.6 million for second quarter
1998 and 1997, respectively, and $5.6 million and $4.6 million for the first six
months of 1998 and 1997, respectively. The increase in total revenues of 9% for
the second quarter and 21% for the first six months is primarily related to the
increases in other revenues and net investment income. Other revenues consist
primarily of LifeUSA Securities concession revenue on sales of security
products. Sales have increased as LifeUSA Securities is now in its third year.
Net investment income increased due to an increase in invested assets. The
corporate fee is the most significant revenue item for the Corporate Segment and
is directly related to the total revenues for the Insurance Segment and
Marketing Segment. The decrease in the corporate fee of 12% for the second
quarter of 1998 is consistent with the decrease in second quarter total revenues
of the Insurance Segment and the Marketing Segment, and the increase in the
corporate fee of 3% for the first six months of 1998 in consistent with the
increase in total revenues of the Insurance Segment and the Marketing Segment
for the first six months of 1998.
EXPENSES. Total expenses were $2.9 million and $3.7 million for second quarter
1998 and 1997, respectively, and $5.5 million and $7.0 million for the first six
months of 1998 and 1997, respectively. The decrease of 21% for both the
<PAGE>
quarter and the first six months of 1998 is primarily attributable to the cost
of a national advertising and sales campaign that was launched during first
quarter of 1997.
* * * *
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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
An action similar to the lawsuit commenced against the Company in January 1998
by six annuity policyholders (see legal proceedings disclosed in the Annual
Report to Shareholders and Form 10-K) was commenced by one annuity policyholder
during the current quarter in New Jersey State Court. The Company has moved to
transfer the case to Federal Court and expects that it will be consolidated with
the January 1998 case. There have been no material developments in the other
legal proceedings previously disclosed in the Annual Report to Shareholders and
Form 10-K.
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
The Company held its annual meeting of shareholders on April 14, 1998. Proxies
for the meeting were solicited pursuant to Regulation 14 of the Securities
Exchange Act of 1934. The following matters were voted upon at the meeting:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
For Abstained Against Non-Vote
---------- --------- ------- --------
<S> <C> <C> <C> <C>
1) To elect the following persons as Directors:
Hugh Alexander 22,114,660 1,113,031 -- --
Jack H. Blaine 22,114,660 1,113,031 -- --
Edward J. Bonach 22,114,660 1,113,031 -- --
Margery G. Hughes 22,114,643 1,113,048 -- --
Robert S. James 22,114,632 1,113,059 -- --
Barbara J. Lautzenheiser 22,114,631 1,113,060 -- --
Robert W. MacDonald 22,114,660 1,113,031 -- --
Daniel J. Rourke 22,114,660 1,113,031 -- --
Ralph Strangis 22,114,660 1,113,031 -- --
Donald J. Urban 22,114,660 1,113,031 -- --
Mark A. Zesbaugh 22,114,660 1,113,031 -- --
2) To increase the number of the Company's
authorized shares of common stock, par
value $.01 per share, by 15,000,000
shares to 60,000,000 shares 22,150,735 26,569 1,050,387 --
<PAGE>
<CAPTION>
Votes Votes Votes Broker
For Abstained Against Non-Vote
---------- --------- ------- --------
3) To increase the number of shares of the
Company's Common Stock reserved for
issuance under the Stock Option Plan by
1,000,000 shares to 5,000,000 shares 17,330,718 33,010 5,863,963 --
4) To increase the number of shares of the
Company's Common Stock reserved for
issuance under the Director Option Plan
by 100,000 shares to 200,000 shares and
to extend the date to which options may
be granted under the Plan to December 31, 2003 18,427,022 31,935 4,768,734 --
5) To ratify the appointment of Ernst & Young LLP
as the independent auditors for the
Company for the year 1998 23,189,607 20,126 17,958 --
</TABLE>
ITEM 5. OTHER INFORMATION
By an action of the Board of Directors effective August 5, 1998, the Board of
Directors of the Company has adopted an amendment to the Company's bylaws, which
amendment provides that no business shall be considered at an annual meeting of
the shareholders except business identified (a) pursuant to the Company's Notice
of Meeting, (b) by or at the direction of the Board of Directors, or (c) by any
shareholder of the Company who (i) was a shareholder of record at the time of
giving of the notice specified in clause (iii) below, (ii) is entitled to vote
at the meeting, and (iii) gives notice of the matter, which must otherwise be a
proper matter for shareholder action, in a writing received by the Secretary of
the Company not less than 120 calendar days in advance of the date the Company's
proxy statement and notice was released to shareholders in connection with the
Company's previous year's annual shareholder meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(3)(ii) Amended and Restated Bylaws effective as of August 5, 1998
(electronic filing only)
(11) Statement of computation of per share earnings
(27) Financial data schedule (electronic filing only)
<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: August 13, 1998
/s/ Mark A. Zesbaugh
---------------------------------
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
Exhibit 3(ii)
AMENDED AND RESTATED
BYLAWS
OF
LIFE USA HOLDING, INC.
<PAGE>
Life USA Holding, Inc., a corporation organized under Minnesota Statutes
Chapter 302A.
ARTICLE I
MEETINGS OF SHAREHOLDERS
Section 1.01. Regular Meetings. Regular meetings of shareholders may be
called by the Chief Executive Officer, the Secretary, the Board of Directors, or
by shareholder demand in accordance with Minnesota Statutes Section 302A.431,
subdivision 2. No meeting shall be designated a regular meeting unless
specifically described as such in the notice of meeting or unless all the
shareholders are present in person or by proxy and none of them objects to this
designation.
Section 1.02. Special Meetings. Special meetings of the shareholders may
be called for any purpose or purposes at any time by the Chief Executive
officer, Chief Financial Officer, two or more directors or by shareholder demand
in accordance with Minnesota Statutes Section 302A.433, subdivision 2.
Section 1.03. Time and Place of Shareholder Meetings. Except as otherwise
provided by statute, any meeting of shareholders shall be held on the date and
at the time and place fixed by the Chief Executive Officer or the Board of
Directors of the corporation.
Section 1.04. Notice of Shareholder Meeting. Except as otherwise provided
by statute, written notice of the date, time, and place of any meeting of
shareholders shall be given to every holder of voting shares at such address as
appears on the stock book of the corporation at least ten days prior to the
meeting if by mail, or two days prior to the meeting if by telex, telegram, or
in person.
Section 1.05. Voting. Except where a greater percentage is required by
statute, the shareholders shall take action by the affirmative vote of the
holders of a majority of the voting power of the shares present.
Section 1.06. Notice of Business to be Considered. No business shall be
considered at an annual meeting of the shareholders except business identified
(a) pursuant to the Company's Notice of Meeting, (b) by or at the direction of
the Board of Directors, or (c) by any shareholder of the Company who (i) was a
shareholder of record at the time of giving of the notice specified in clause
(iii) below, (ii) is entitled to vote at the meeting, and (iii) gives notice of
the matter, which otherwise must be a proper matter for shareholder action, in a
writing received by the Secretary of the Company not less than 120 calendar days
in advance of the date the Company's proxy statement and notice was released to
shareholders in connection with the Company's previous year's annual shareholder
meeting.
<PAGE>
ARTICLE II
DIRECTORS
Section 2.01. Number, Term of Office. The Board of Directors shall
consist of not less than three or more than fifteen directors. The Board of
Directors shall be elected annually by ballot of the holders of the shares of
the corporation entitled to vote thereon for the term of one year, and shall
serve until the election and qualifications of their successors, unless they
sooner resign. The number of directors may be increased or decreased at any time
by a majority vote of the Board of Directors, except that no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. The Board of Directors shall be empowered to fill any
vacancies on the Board of Directors.
Section 2.02. Removal. The Board of Directors or shareholders may remove
any director of the corporation at any time, for cause or without cause. New
directors may be elected at a meeting at which directors are removed.
Section 2.03. Board Meetings, Notice. The Chief Executive Officer (if a
director) , the Chairman of the Board (if one is elected) or Directors
comprising at least one-third of the number of directors then in office may call
a Board meeting by giving ten days notice if by mail, or two days notice if by
telephone, telex, telegram, or in person, to all directors of the day or date
and time of the meeting. Meetings of the Board of Directors may be held at the
day or date, time, and place, as shall be determined by the Board. If the day or
date, time, and place have been announced at a previous meeting of the Board, or
if a meeting schedule is adopted by the Board, no notice is required. In the
absence of a designation by the Board of Directors, Board meetings shall be held
at the principal executive offices of the corporation.
Section 2.04. (a) Advance Written Consent or Opposition. Any member of
the Board or a committee thereof, as the case may be, may give advance written
consent or opposition to a proposal to be acted on at a Board or committee
meeting. If a director or committee member is not present at the meeting,
advance written consent or opposition to a proposal does not constitute presence
for the purpose of determining whether a quorum exists, but such advance written
consent or opposition shall be a vote in favor of or against the proposal or
resolution if the proposal or resolution acted upon at the meeting is
substantially the same or has substantially the same effect as the proposal or
resolution to which the member of the Board or committee has consented or
objected.
(b) Action Without Meeting. Any action, other than an action requiring
shareholder approval, may be taken by written action signed by the number of
directors that would be required to take the same action at a meeting of the
board at which all directors were present. An action requiring shareholder
approval required or permitted to be taken at a board meeting may be taken by
written action signed by all of the directors. Any such written action is
effective when signed by the required number of directors, unless a different
effective time is provided in the written action. When written action is taken
by less than all directors, all directors shall be notified immediately of its
text and effective date. Failure to provide the notice does not invalidate the
written action. A director who does not sign or consent to the written action
has no liability for the action or actions taken thereby.
<PAGE>
Section 2.05 (a) Electronic Conferences. A conference among directors by
any means or communication through which the directors may simultaneously hear
each other during the conference constitutes a regular or special meeting of
directors, if the same notice is given of the conference to every holder of
shares entitled to vote as would be required for a meeting, and if the number of
shares held by the directors participating in the conference would be sufficient
to constitute a quorum at a meeting. Participation in a conference by that means
constitutes presence at the meeting in person or by proxy if all the other
requirements of Section 302A.449 of the Minnesota Business Corporation Act are
met.
(b) Participation by Electronic Means. A director may participate in a
regular or special meeting of directors by any means of communication through
which the director, other directors so participating, and all directors
physically present at the meeting may simultaneously hear each other during the
meeting. Participation in a meeting by that means constitutes presence at the
meeting in person or by proxy if all the other requirements of section 302A.449
of the Minnesota Business Corporation Act are met.
ARTICLE III
OFFICERS
Section 3.01. Election; Term of Office; Removal. The Board of Directors
shall elect a Chief Executive Officer and Chief Financial officer or one or more
officers exercising the functions of such offices, and may elect such other
officers as it may deem necessary for the operation and management of the
corporation, each of whom shall have the duties and responsibilities incident to
the offices which they hold or as determined by the Board. Officers need not be
directors or shareholders. Without limiting the foregoing, the Board may elect a
Chairman of the Board, President, a Chief Operating Officer, one or more Vice
Presidents, a Treasurer, a Secretary and such assistant officers as it may
designate with titles to describe their duties, functions or special
responsibilities. Officers shall hold office at the will of the Board for an
indefinite term until their successors are elected and qualified. Any officer
elected or appointed by the Board of Directors may be removed by the Board at
any time with or without cause.
ARTICLE IV
AMENDMENTS
Section 4.01. Subject to the power of shareholders to adopt, amend, or
repeal these Bylaws as provided in Minnesota Statutes Section 302A.181,
subdivision 3, any Bylaw may be amended or repealed by the Board of Directors at
any meeting, provided that, after adoption of the initial Bylaws, the Board
shall not adopt, amend, or repeal a Bylaw fixing a quorum for meetings of
shareholders, prescribing procedures for removing directors or filling vacancies
in the Board, or fixing the number of directors or their classifications,
qualifications, or terms of office. The Board may adopt or amend a Bylaw to
increase the number of directors.
<PAGE>
ARTICLE V
INDEMNIFICATION
Section 5.01. The corporation shall indemnify persons for such expenses
and liabilities in such manner, under such circumstances, and to the extent
required by Minnesota Statutes Section 302A.521.
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 June 30, Six months ended June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC
Weighted-average shares outstanding 25,914,569 21,517,148 25,844,861 21,450,069
=========== =========== =========== ===========
Net income $ 5,574 $ 5,331 $ 11,583 $ 10,476
=========== =========== =========== ===========
Per common share amount $ .22 $ .25 $ .45 $ .49
=========== =========== =========== ===========
DILUTED
Average shares outstanding and to be issued 25,946,755 21,541,905 25,860,954 21,462,447
Neteffect of dilutive stock options and warrants,
having exercise prices of the average market
price of the common stock using the treasury
stock method 964,237 423,851 1,063,886 367,536
Shares assuming conversion of convertible
subordinated debentures -- 2,423,399 -- 2,423,399
----------- ----------- ----------- -----------
Adjusted weighted-average shares 26,910,992 24,389,155 26,924,840 24,253,382
=========== =========== =========== ===========
Net income $ 5,574 $ 5,331 $ 11,583 $ 10,476
Add convertible subordinated debenture interest,
net of federal income tax effect $ -- $ 218 $ 85 $ 435
----------- ----------- ----------- -----------
Adjusted net income $ 5,574 $ 5,549 $ 11,668 $ 10,911
=========== =========== =========== ===========
Per common share amount $ .21 $ .23 $ .43 $ .45
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 950,652
<DEBT-CARRYING-VALUE> 1,271,040
<DEBT-MARKET-VALUE> 1,317,805
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,254,220
<CASH> 34,010
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 212,197
<TOTAL-ASSETS> 5,295,809
<POLICY-LOSSES> 4,868,038
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 14,959
<NOTES-PAYABLE> 6,015
0
0
<COMMON> 259
<OTHER-SE> 278,057
<TOTAL-LIABILITY-AND-EQUITY> 5,295,809
0
<INVESTMENT-INCOME> 77,926
<INVESTMENT-GAINS> 767
<OTHER-INCOME> 103,082
<BENEFITS> 70,062
<UNDERWRITING-AMORTIZATION> 15,952
<UNDERWRITING-OTHER> 77,204
<INCOME-PRETAX> 18,557
<INCOME-TAX> 6,974
<INCOME-CONTINUING> 11,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,583
<EPS-PRIMARY> .45
<EPS-DILUTED> .43
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
