SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, l998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to ___________________.
Commission file number 0-18485.
Life USA HOLDING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1578384
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 95, Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612)-546-7386
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Annual
Report to Shareholders and Form 10-K or any amendment to this Annual Report to
Shareholders and Form 10-K. [ ]
The aggregate market value of the voting stock (17,603,796 shares) held by
non-affiliates of the registrant as of February 12, 1999 was $201,387,426.
The number of shares outstanding of the issuer's classes of common stock as of
February 12, l999:
Common stock, $.01 Par Value - 17,603,796 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to
be held April 13, 1999 are incorporated by reference into Part III.
<PAGE>
CONTENTS
PAGE
-----
Financial Summary ................... 1
Letter to Shareholders .............. 2
Selected Consolidated Financial and
Operating Data ..................... 6
General ............................. 8
Management's Discussion & Analysis --
Consolidated ....................... 16
Management's Discussion & Analysis --
Segment Reporting .................. 29
Consolidated Financial Statements and
Notes .............................. 36
Form 10-K and other corporate
information ........................ 65
Topical cross-reference ............. 65
ABOUT THE COMPANY
Life USA Holding, Inc. is a national financial services holding and marketing
company with $5.46 billion in consolidated assets and three wholly-owned
subsidiaries. LifeUSA Insurance Company, its largest and most significant
wholly-owned subsidiary, is licensed to write and sell life insurance and
several forms of annuities, and is represented by over 140 marketing
organizations and 70,000 independent agents nationwide. LifeUSA Marketing, Inc.
conducts a variety of marketing activities, including acquiring equity interests
in independent marketing organizations. LifeUSA Securities, Inc. is a retail
broker-dealer that distributes a full range of securities products, including
non-proprietary mutual funds, variable life insurance and annuity contracts, and
processes general securities transactions. Life USA Holding, Inc. common stock
trades on The Nasdaq Stock Market under the symbol LUSA.
HIGHLIGHTS OF 1998
o Consolidated total revenues were $362.6 million.
o Consolidated net income was $21.9 million.
o Collected premiums and deposits (including business produced for Allianz
Life) were $1.06 billion.
o Consolidated assets increased to $5.46 billion at December 31, 1998.
o LifeUSA Insurance Company's A.M. Best rating was upgraded to A-
(Excellent).
o LifeUSA Insurance Company's Moody's Investors Service rating was upgraded
to A3 (Strong).
o Agreement announced in January 1998 with Allianz Life to invest $100
million in LifeUSA over five years.
o LTCAmerica Holding, Inc. was formed in July 1998.
o LifeUSA Marketing, Inc. acquired minority interests in Life Sales LLC in
March 1998 and Signature Financial Services, Inc. in April 1998.
o Life USA Holding, Inc. acquired a minority interest in Windsor Financial
Group, LLC in April 1998.
o LifeUSA Marketing, Inc. recruited over 20,000 new agents.
o Life USA Holding, Inc. paid dividends of 2.5 cents per share to
shareholders in the second, third and fourth quarters of 1998.
o 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.
o LifeUSA Insurance ranked fourth in sales of equity-indexed annuity
products.
<PAGE>
FINANCIAL SUMMARY
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 CHANGE
- ---------------------------------------------------- --------------- --------------- ------------
<S> <C> <C> <C>
Consolidated Results of Operations
Revenues .......................................... $ 362,648 $ 369,903 (2)%
Net income ........................................ 21,907 26,978 (19)
Net operating income .............................. 20,782 26,078 (20)
Consolidated Financial Position
Total assets ...................................... $ 5,458,719 $ 5,062,774 8%
Invested assets ................................... 2,301,333 2,165,786 6
Debt .............................................. 20,898 41,030 (49)
Shareholders' equity (excluding SFAS 115) ......... 266,551 214,251 24
Financial Ratios
Return on invested assets ......................... .95% 1.25% --
Return on equity (excluding SFAS 115) ............. 8.22% 12.59% --
Debt to equity (excluding SFAS 115) ............... 7.84% 19.15% --
Per Share Data
Diluted net income per share ...................... $ .83 $ 1.11 (25)%
Diluted net operating income per share ............ .79 1.07 (26)
Book value (excluding SFAS 115) ................... 10.76 9.41 14
Adjusted weighted-average shares .................. 26,426,291 25,160,437 5
Shares issued, outstanding and to be issued ....... 24,776,517 22,759,288 9
Share price
High
1st Quarter ..................................... $ 17.56 $ 11.88
2nd Quarter ..................................... 17.00 14.25
3rd Quarter ..................................... 14.00 17.25
4th Quarter ..................................... 13.75 18.00
Low
1st Quarter ..................................... 12.50 9.00
2nd Quarter ..................................... 11.13 9.13
3rd Quarter ..................................... 10.75 13.75
4th Quarter ..................................... 9.50 16.00
</TABLE>
[BAR CHARTS]
TOTAL REVENUES NET INCOME INVESTED ASSETS PREMIUM & DEPOSITS
$ MILLIONS $ MILLIONS $ BILLIONS $ BILLIONS
94 206 94 14 94 1.2 94 0.9
95 273 95 19 95 1.8 95 1.0
96 317 96 23 96 1.9 96 1.1
97 370 97 27 97 2.2 97 1.3
98 363 98 22 98 2.3 98 1.1
BOOK VALUE PER SHARE
(EXCLUDING SFAS 115)
DOLLARS
94 6.14
95 7.09
96 8.07
97 9.41
98 10.76
1
Life USA Holding, Inc.
<PAGE>
LETTER TO SHAREHOLDERS
LETTER TO SHAREHOLDERS
It may be a stretch to suggest that a year in which both sales and net
income declined was a good year, but let me try. Of course, no one involved in
the management of Life USA (the Company) is ever satisfied with disappointing
financial results. And, despite our best efforts, the cold truth is that in 1998
consolidated net income declined 19% to $21.9 million or $.83 per share,
compared to $27.0 million or $1.11 per share for 1997. The principal reason for
the reduced earnings was an 18% decline in 1998 collected premiums to $1.06
billion in 1998 from $1.29 billion in 1997.
Actually, net income would have been reduced even more had it not been for
the extraordinary efforts of our president and chief operating officer, Maggie
Hughes, the senior management of the company and the dedicated home office
owners who worked diligently and successfully to control expenses. In 1998,
consolidated operating expenses increased only 2% to $63.6 million, compared to
$62.4 million for 1997. Total consolidated expenses increased minimally in 1998
to $327.5 million, from $326.8 million in 1997.
What then, you may ask, occurred during 1998 to offset the weak financial
results, and make the year a success? Well, there were a number of
accomplishments that we believe will have a decided impact on future results.
First of all, the collected premium results of 1998 should not be
discounted. In the worst possible environment for the sale of traditional fixed
annuities, the coordinated efforts of our field force, marketing company and the
entire home office support staff resulted in over $1 billion of new premium.
That is a remarkable accomplishment, especially in light of projections that
total industry production for fixed annuities declined 30% in 1998.
The year got off to a good start with the announcement in January 1998 of
an enhanced relationship with Allianz Life Insurance Company of North America
(Allianz Life). In exchange for the extension of the marketing, administration
and reinsurance relationship with the Company, Allianz Life agreed to provide
the Company with a sequentially timed equity placement (STEP) of $100 million.
Every six months, over a five-year period, Allianz Life will provide the Company
with $10 million of fresh capital. This will be accomplished either by the
purchase of newly issued common stock or a convertible debenture. In either
case, the terms of purchase are quite favorable to the Company. The transaction
with Allianz Life is important in that it assures the Company of a reliable
source of capital to support future growth.
During 1998, the A.M. Best Company increased the rating of LifeUSA
Insurance Company (LifeUSA Insurance) from B++ to A-, and Moody's Investment
Services upgraded its rating of LifeUSA Insurance from Baa3 to A3. The enhanced
ratings for the company offer concrete evidence of growing financial maturity
and stability.
During 1998, a record total of 20,752 new independent agents were
contracted with LifeUSA Insurance. As these agents become familiar with LifeUSA
Insurance's products and services, they form a basis for future premium growth.
With over 70,000 agents under contract, LifeUSA Insurance has one of the most
extensive agent distribution systems in the industry. In addition, during 1998,
LifeUSA Marketing made equity investments in two major national marketing
groups. The investments made in agent marketing companies are designed to
increase current production and assure continued access to the production for
years to come.
On the financial side, 1998 was the year in which the Company declared the
first shareholder dividend of 2.5 cents per quarter, and the board of directors
authorized the company to repurchase up to four million shares of the Company's
common stock. With the cost of capital at less than 5% and shares trading well
below what the company believes to be the fair value of the stock, it was
advantageous to existing shareholders to repurchase the Company's stock on the
open market. At the end of 1998, a total of 1.8 million shares had been
repurchased.
Probably the most significant activities of 1998 revolved around product
development. Over the past few years, as interest rates declined to historic
lows and the stock market rose to historic highs, many financial analysts
discounted the Company as a mono-line product (fixed annuities) company that
would have a difficult time growing. For the most part, the criticism was valid
and recognized by management. At the time, there
Life USA Holding, Inc.
2
<PAGE>
LETTER TO SHAREHOLDERS
were two choices: change the product mix by developing variable annuity and life
insurance products or maintain the current product mix and attempt to offset a
shrinking fixed annuity market by expanding market share.
Not willing to commit the capital and resources required to develop the
manufacturing, administrative and distribution capabilities needed to enter the
variable market (dominated by the largest companies) as a Johnny-come-lately,
management opted for the second option. While hoping (praying) to see the
environment for the sale of fixed annuities improve, management set out to
expand the Company's share of a shrinking market. The strategy required
aggressive recruiting of agents and investments in national marketing
organizations. To a point, the strategy was successful. For the past four years,
as other fixed annuity providers have either exited the market or experienced
significant de-growth, the Company has "held its own," producing over $1 billion
of premium each year. But, we seek to do more than "hold our own."
With that in mind, LifeUSA Insurance has developed a series of products
that we believe will be attractive, even in an environment of low interest rates
and a robust stock market. Make no mistake, these products are fixed annuities,
but they are structured in a way to allow the annuity holder to enhance the
value of the annuity by participating in a portion of the growth in the S&P 500
Index. This is accomplished with the use of "options" in the S&P Index. Since
these are still fixed annuities with principal and interest rates guaranteed,
the policyholder is spared the normal downside risk associated with equity
investments.
While these products, under the generic name of "equity-indexed" annuities,
have been on the market for a number of years, LifeUSA Insurance intends to
introduce a new generation of products in 1999. The new products are designed to
be aggressors in the marketplace, taking business away from the equity market.
In 1998, the sale of equity-indexed products accounted for over 30% of
total LifeUSA Insurance sales. In terms of premium production of equity-indexed
products, LifeUSA Insurance ranks among the top five companies in the industry.
Using the new products as the primary weapons, LifeUSA Insurance intends to take
equity-indexed annuities to a new level in 1999, both in terms of benefits
offered the consumer and total production. The goal is to become the industry
leader in equity-indexed annuities.
The new type of equity-indexed product developed by LifeUSA Insurance is
the PowerHouse. The PowerHouse has the advantage of combining all the most
popular features of various equity-indexed annuities into one product. In
addition, LifeUSA Insurance will be the first company to take the concept of
indexing and apply it to the payouts received by the annuitant. Now the
annuitant will have the option to participate in the growth of the S&P 500
Index, even while receiving benefits from the annuity.
To meet the growing needs of those retiring now, LifeUSA Insurance has
developed an innovative single-premium, immediate annuity. The product, called
WealthCare, offers three benefits not available from any other single-premium,
immediate annuity. Those benefits are a death benefit, annual payouts indexed to
the S&P 500 Index (with no downside risk) and an increase in benefits should the
annuitant become sick or disabled prior to death. With the new equity-indexed
products and the unique innovations applied to them, LifeUSA Insurance becomes
an even more potent force in the annuity market and now will be able to compete
heads-up against variable products.
No longer can LifeUSA Insurance be considered a mono-line annuity product
company. While equity-indexed products are certainly not investments per se, as
are variable annuities, such products are designed to compete effectively in a
low interest rate, rising stock market environment. Equity-indexed products also
offer the advantage of being less costly to administer (they use the same system
as traditional fixed annuities), and since agents are not required to have a
securities license to sell the product, the company can use the existing
distribution system. The broad distribution system of LifeUSA Insurance gives
the company a tremendous advantage in marketing equity-indexed products.
The Company is now well-positioned for any market. Should the market for
traditional fixed annuities reverse itself and begin to grow, the Company is
ready to be an industry leader. If the current interest rate and investment
environment continues, the Company can compete effectively. The addition of the
single-premium immediate annuity should also help capture the ever-growing flow
of retirement funds. Our estimate is that the equity-indexed family of products
could account for as much as 50% of total premium in 1999 and gives some reason
to be optimistic that our efforts will result in increased total sales.
3
Life USA Holding, Inc.
<PAGE>
LETTER TO SHAREHOLDERS
Annuities were not the only area of product development for LifeUSA
Insurance. In order to put some life into life sales, an exciting new concept in
life insurance was developed. The new product is called LifeFund and it truly is
an innovation in life insurance. With traditional life insurance, there is
always a "fund" of money available to the insured. The only problem is that the
insured has to die for his beneficiaries to access the fund. That was great when
people died young, but that was 100 years ago. We all know there are
catastrophes other than death that can impact the financial stability of a
family. Events such as heart attack, stroke, disabling accident and cancer can
threaten the very life of the family, even if the event is not life threatening.
LifeFund is a new type of life insurance that meets the needs of the consumer by
making all or part of the fund available to the insured -- at the time of
occurrence, not just at death. We believe LifeFund will be well received by
regulators, consumers and agents. LifeFund can be the catalyst for increased
life insurance sales.
New products were not the only areas of development for the Company during
1998. After getting off to a rocky start, LifeUSA Securities has been stabilized
by the addition of stronger marketing and administrative management, as well as
a strengthening staff. We do not anticipate that LifeUSA Securities will be
profitable in 1999, but we do expect to make important progress, especially in
expanding the base of registered representatives. LifeUSA Securities seeks to
position itself as the broker-dealer of choice for the independent insurance
agent who is also registered to sell securities. This approach is in tune with,
and provides support to, the total distribution system of LifeUSA Insurance.
The other new development for the Company in 1998 was planning for the
entrance into the long-term care market. But, the Company is not looking to just
dabble in the long-term care market. Our objective is to be a dominant player in
the long-term care market within five years.
Most experts agree that providing financing for the long-term care of an
aging population is the growth market for the insurance industry. As long as the
government gets out of the way, the companies that provide a solution to the
impending crisis in long-term care financing will be well rewarded. The Company
is going to make an effort to be one of those companies.
To accomplish our end, LTCAmerica Holding, Inc. (LTCAmerica) has been
formed as a subsidiary of LifeUSA Insurance. Established as an independent
company, LTCAmerica will be able to focus and concentrate on becoming a leader
in the long-term care market. LTCAmerica has been structured in the "shadow"
image of the Company, including the expectation that common stock ownership will
be offered to the employees, agents and marketing organizations working to build
the company. The concept of agent and employee ownership worked well with the
Company, and we believe it will work even better with LTCAmerica.
What is important to understand about the private market for long-term care
is that it is still quite small and immature. There is no doubt that the need to
finance long-term care offers tremendous potential; the risk is whether or not
the potential emerges in a way for private insurance companies to participate.
One thing is certain, the success of LTCAmerica will not be determined by
how much of the current long-term care market can be captured. It is too small
to be worth the effort. No, the key to success for LTCAmerica will be found in
its ability to expand the market for the sale of long-term care insurance. This
can only be accomplished by encouraging agents who have never sold the product
to do so. To achieve this goal, two things are needed: favorable access to an
extensive distribution system of agents and new products that are easier to
understand and sell.
With access to the 70,000 agents of the LifeUSA Insurance distribution
system, LTCAmerica is in a unique position to leverage the first requirement for
success. To meet the second need, LTCAmerica is currently in the process of
developing a totally new approach to long-term care insurance. When these two
elements are combined, we believe that LTCAmerica will be positioned to be a
leading player in the long-term care market.
Despite the decline in sales and income in 1998, the Company continued to
build value. A review of the numbers following this letter will highlight
increases in consolidated assets, shareholder equity and book value. Hopefully,
as a Life USA shareholder, you will be encouraged by the actions we have taken
to assure the steady, long-term growth and success of our company. Sometimes
it's difficult to be a long-term company
Life USA Holding, Inc.
4
<PAGE>
LETTER TO SHAREHOLDERS
in a short-term world, but we are confident that the course we have chosen will
return equitable and competitive long-term benefits to our policyholders, as
well as substantial long-term returns to our shareholders. We believe the
efforts and accomplishments of 1998 moved our company closer to our goals.
Please accept my thanks for your continued support of Life USA, and I offer
a special thanks to all of those associated with Life USA and our affiliated
companies, who have worked so diligently to assure the continued success of our
company.
/s/ Robert W. MacDonald
Robert W. MacDonald
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Life USA Holding, Inc.
CHIEF EXECUTIVE OFFICER
LifeUSA Insurance Company
5
Life USA Holding, Inc.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
S SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31 1998
- --------------------------------------------------------------------------------- --------------
<S> <C>
Consolidated results of operations:
Revenues ....................................................................... $ 362,648
Net income ..................................................................... 21,907
Adjustments to arrive at net operating income(1):
Net realized gains on investments ............................................ (167)
Charges (credits) for state guaranty fund assessments ........................ (1,068)
Changes in tax liability for prior years' activity ........................... 110
-----------
Net operating income(1) ........................................................ 20,782
Per share data:
Adjusted weighted-average shares ............................................... 26,426,291
Convertible subordinated debenture interest addback, net of tax ................ $ 85
Net income ..................................................................... 0.83
Net operating income(1) ........................................................ 0.79
Consolidated financial position:
Assets ......................................................................... $ 5,458,719
Invested assets (fixed maturity investments and cash and cash equivalents) ..... 2,301,333
Debt (convertible subordinated debentures and line of credit) .................. 20,898
Shareholders' equity:
As reported .................................................................. 279,985
Excluding SFAS No. 115 ....................................................... 266,551
Common stock data:
Shares issued and outstanding and to be issued ................................. 24,776,517
Book value per share:
As reported .................................................................. $ 11.30
Excluding SFAS No. 115 ....................................................... 10.76
Cash dividends declared per share .............................................. 0.08
Closing price .................................................................. 12.88
Financial ratios and other data:
Return on invested assets--net income .......................................... 0.95%
Return on invested assets--net operating income(1) ............................. 0.90%
Return on equity--net income:
As reported .................................................................. 7.82%
Excluding SFAS No. 115 ....................................................... 8.22%
Return on equity--net operating income(1):
As reported .................................................................. 7.42%
Excluding SFAS No. 115 ....................................................... 7.80%
Debt to equity:
As reported .................................................................. 7.46%
Excluding SFAS No. 115 ....................................................... 7.84%
Closing price to net income per share (P/E ratio) .............................. 15.5x
Closing price to net operating income per share(1) ............................. 16.3x
Closing price to book value per share:
As reported .................................................................. 1.14x
Excluding SFAS No. 115 ....................................................... 1.20x
Total market capitalization .................................................... $ 318,998
</TABLE>
- ------------------
1) Net operating income equals net income, excluding, net of related income
taxes: (i) net realized gains on investments and the corresponding increases
in amortization of deferred policy acquisition costs and other benefits to
policyholders, (ii) charges (credits) for state guaranty fund assessments and
(iii) changes in tax liability for prior years' activity.
In 1994, the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Beginning January 1, 1994, under
the provisions of SFAS No. 115, held to maturity investments are carried at
amortized cost and available for sale investments are carried at fair value,
with unrealized gains and losses reported as a separate component of
shareholders' equity.
Life USA Holding, Inc.
6
<PAGE>
<TABLE>
<CAPTION>
FIVE YEAR
AVERAGE
COMPOUND
1997 1996 1995 1994 1993 GROWTH RATE
- -------------- -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
$ 369,903 $ 316,898 $ 272,781 $ 206,313 $ 199,685 12.68%
26,978 23,454 19,097 14,469 15,115 7.70%
(670) (408) (1,828) (641) (989)
(930) 1,998 1,877 1,704 624
700 0 0 0 0
----------- ----------- ----------- ----------- -----------
26,078 25,044 19,146 15,532 14,750 7.10%
25,160,437 23,358,663 22,524,396 20,409,047 19,055,286
$ 870 $ 870 $ 757 N/A N/A
1.11 1.04 0.88 $ 0.71 $ 0.79 0.96%
1.07 1.11 0.88 0.76 0.77 0.40%
$ 5,062,774 $ 4,386,723 $ 3,867,539 $ 3,065,271 $ 2,394,471 17.92%
2,165,786 1,902,465 1,754,087 1,249,321 899,998 20.66%
41,030 36,030 36,030 6,041 6,351
222,400 172,615 156,896 106,916 107,204 21.17%
214,251 169,280 144,189 123,836 107,204 19.98%
22,759,288 20,974,901 20,324,747 20,179,617 19,978,118
$ 9.77 $ 8.23 $ 7.72 $ 5.30 $ 5.37 16.06%
9.41 8.07 7.09 6.14 5.37 14.93%
0.00 0.00 0.00 0.00 0.00
16.88 12.00 8.00 7.25 18.88
1.25% 1.23% 1.09% 1.16% 1.68%
1.20% 1.32% 1.09% 1.24% 1.64%
12.13% 13.59% 12.17% 13.53% 14.10%
12.59% 13.86% 13.24% 11.68% 14.10%
11.73% 14.51% 12.20% 14.53% 13.76%
12.17% 14.79% 13.28% 12.54% 13.76%
18.45% 20.87% 22.96% 5.65% 5.92%
19.15% 21.28% 24.99% 4.88% 5.92%
15.2x 11.5x 9.1x 10.2x 23.8x
15.8x 10.8x 9.1x 9.5x 24.4x
1.73x 1.46x 1.04x 1.37x 3.52x
1.79x 1.49x 1.13x 1.18x 3.52x
$ 384,063 $ 251,699 $ 162,598 $ 146,302 $ 377,087
</TABLE>
- ------------------
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128
requires basic and diluted earnings per share. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. It excludes the
effects of options, warrants and convertible securities. Diluted earnings per
share is computed based on the weighted average number of shares outstanding
assuming that the proceeds from conversion of all stock options and warrants
shall be used to purchase common stock at the average market price during the
period. In accordance with SFAS No. 128, the Company has restated earnings per
share for the years 1993 through 1996.
7
Life USA Holding, Inc.
<PAGE>
GENERAL
GENERAL
COMPANY STRUCTURE
Life USA Holding, Inc. (the Company) is a national financial services
holding and marketing company with $5.46 billion in consolidated assets. LifeUSA
Insurance Company (LifeUSA Insurance), its largest wholly-owned subsidiary, is
licensed to write and sell life insurance and annuities through independent
field marketing organizations and agents in the District of Columbia and all
states except New York. LifeUSA Marketing, Inc. (LifeUSA Marketing) and LifeUSA
Securities, Inc. (LifeUSA Securities) are also wholly-owned subsidiaries of the
Company.
LifeUSA Insurance sells a variety of innovative life insurance and annuity
products that offer long-term retirement benefits to consumers who seek
protection against outliving their financial resources. The products are sold by
a national marketing and distribution system comprised of Field Marketing
Organizations (FMOs) with independent agents, and the products are serviced by
home office staff.
In July 1998, LTCAmerica Holding, Inc. (LTCAmerica) was formed for the
purpose of acquiring, managing and funding the operations of an insurance
company offering life insurance, annuity and health insurance products providing
long-term care benefits to consumers. LTCAmerica will seek to purchase, as a
subsidiary, either an existing long-term care insurance company or a shell
insurance company that will underwrite and issue long-term care products.
LTCAmerica is a majority-owned subsidiary of LifeUSA Insurance.
LifeUSA Marketing conducts a variety of marketing activities for the
Company, including the acquisition of and investment in national FMOs. In August
1996, LifeUSA Marketing acquired Tax Planning Seminars, a national marketing
organization that had been contracted with LifeUSA Insurance for seven years. In
addition, LifeUSA Marketing acquired minority equity interests in Creative
Marketing International Corporation in November 1996, Personalized Brokerage
Services, Inc. in May 1997, Ann Arbor Annuity Exchange in July 1997, Roster
Financial, LLC in December 1997, Life Sales LLC in March 1998 and Signature
Financial Services, Inc. in April 1998, all national FMOs.
LifeUSA Securities is a retail broker-dealer that distributes a full range
of securities products, including non-proprietary mutual funds, variable life
insurance and annuity contracts, and processes general securities transactions.
In April 1998, the Company purchased a minority interest in Windsor
Financial Group, LLC (Windsor), a Minneapolis-based investment management firm.
Windsor manages $3.7 billion of assets for financial institutions, foundations,
retirement plans and high net worth individuals, including $1.9 billion of
LifeUSA Insurance's portfolio.
Management has organized the Company into three business segments in order
to focus on the distinct functional revenue, expense and asset characteristics
associated with the activities performed by each. The segments include:
Insurance, Marketing and Corporate. Management's Discussion and Analysis on
Business Segments which follows on page 29, focuses on these segments and the
financial information used by management to make decisions and analyze the
results of operations.
MARKETING AND DISTRIBUTION
As of December 31, 1998, 140 independent FMOs and over 70,000 agents were
licensed to market LifeUSA Insurance policies and produce business for Allianz
Life Insurance Company of North America (Allianz Life). All FMOs and agents are
independent contractors and are responsible for their operating and marketing
expenses.
FMOs coordinate and pay for the marketing of LifeUSA Insurance products and
provide recruiting, training and management of the agents contracted through
them. Depending on the marketing techniques it uses and the market in which it
operates, an FMO may have as many as several thousand agents. LifeUSA Marketing
provides marketing support to FMOs through marketing training seminars, product
and business system demonstrations, product literature and home office support.
The FMO receives a gross cash commission from LifeUSA Insurance on business
produced and, within specified LifeUSA Insurance guidelines, allocates such
commissions among its agents.
Life USA Holding, Inc.
8
<PAGE>
GENERAL
Cash commissions as a percentage of first year premiums are higher for life
insurance sales than annuity sales. Commissions are based on a percentage of the
targeted annual premiums and consist of both a higher first year commission and
a lower renewal commission on premiums paid on a life insurance policy after the
first year. FMOs and agents are subject to a chargeback of all or a portion of
the commissions paid in the event a life insurance policy is canceled or
surrendered, including cancellations for the non-payment of premiums, within the
first 15 months of issuance. As is customary in the industry, LifeUSA Insurance
advances agents up to 50% of first year commissions when life insurance policies
are sold even though most of the premiums have not yet been received. LifeUSA
Insurance contracts include a financial guaranty by the FMOs for chargebacks and
advances to agents within the FMO's organization.
The Company has developed a strategy to generate additional premium and
deposit production from existing LifeUSA Insurance agents and from new
production sources by investing in FMOs. The amount of any investment relates to
the revenue currently generated by the FMO and the projected increase in
business produced for LifeUSA Insurance by the FMO. During 1998, the FMOs in
which LifeUSA Marketing has an equity interest produced 30% of the Company's
life insurance and annuity production. In addition, LifeUSA Marketing recruits
new FMOs to sell its products. During 1998, LifeUSA Insurance signed marketing
agreements with 15 FMOs to market LifeUSA Insurance life insurance and annuity
products for the first time. There can be no assurances that the Company's
premium and deposit volume or income will be enhanced by the investments in FMOs
or by the contracting of new FMOs.
Although LifeUSA Insurance's larger and more successful FMOs and agents
tend to produce a majority of their business with LifeUSA Insurance, there is no
requirement that they do so. FMOs and agents may also be contracted with other
life insurance companies. Each FMO essentially serves as a "wholesaler" for
LifeUSA Insurance. A typical FMO consists of one or more highly experienced
individuals who have demonstrated the ability to build, manage and supervise a
marketing organization that is producing, or has the potential to produce, a
minimum of $1.25 million in annual life insurance and annuity commissions.
During 1998, one FMO, Life Sales LLC, accounted for 14% of LifeUSA
Insurance's total production (which includes production for Allianz Life on
policy forms similar to LifeUSA Insurance's). LifeUSA Marketing owns 50% of Life
Sales LLC. Although no other single FMO accounted for more than 10% of LifeUSA
Insurance's total production, the top FMOs (including their respective agents)
produced the following portions of LifeUSA Insurance's total business during
1998:
PERCENT OF CPCS(1)
-------------------
Top 5 FMOs ................ 34%
Top 10 FMOs ............... 49%
Top 25 FMOs ............... 76%
- ------------------
(1) CPCs (Combined Production Credits) are a measurement of the life insurance
and annuity business produced.
PRODUCTS
LifeUSA Insurance's products compete against the products of other
insurance companies on the basis of long-term benefits. Policyholder persistency
is encouraged by LifeUSA Insurance through increased retirement income benefits
for long-term policyholders and lower benefits in case of early surrender or
lapse. LifeUSA Insurance's products are designed to permit long-term investment
of assets by LifeUSA Insurance during the time premiums are being paid, benefits
are accumulated and benefits are being paid out. This product design not only
makes the products attractive to certain consumers, but also allows LifeUSA
Insurance to purchase assets that have cash flows consistent with the liability.
The target market for LifeUSA Insurance's products are consumers with average
annual incomes of $25,000 to $60,000. Management believes that this market is
not adequately serviced by the insurance industry and that the features of
LifeUSA Insurance's products will be attractive to these consumers.
LifeUSA Insurance has designed its products to emphasize long-term value
and benefits. Management believes that this is a need of the "baby-boom"
generation and that the insurance industry is best suited to provide long-term
benefits in the form of income guaranteed for a lifetime. The economic concern
today is
9
Life USA Holding, Inc.
<PAGE>
GENERAL
not dying too soon, but living too long. By de-emphasizing short-term gain and
lump sum cash benefits to those who surrender their policies, LifeUSA
Insurance's products are less exposed to the disintermediation risk faced by
companies selling commodity-type products.
A disintermediation risk occurs when current interest rates are higher than
the interest rates earned by a company's existing investment portfolio. The risk
is that policyholders will move their funds away from the company to get higher,
short-term rates. If the assets supporting the policies are invested long-term
to support long-term rates of return and the liabilities offer short-term
liquidity, those who surrender their policies for cash take more than their fair
share from the company and from persisting policyholders.
Management believes that consumer demand for individually-funded retirement
products providing an adequate stream of retirement income is increasing and
will continue to increase in the future. This is due primarily to the aging of
the United States population, the reduction in employee-sponsored retirement
plans and consumer concerns as to whether government-sponsored retirement
programs, such as Social Security, will continue to provide meaningful
retirement benefits.
ANNUITY PRODUCTS LifeUSA Insurance's annuities are designed to offer
flexible premium deposit payments and a variety of annuitization options to the
annuitant. The product design also protects LifeUSA Insurance against the
negative effects of disintermediation and other lump sum withdrawals by
providing cash surrender values at amounts less than the annuitization values.
To encourage persistency, LifeUSA Insurance's annuities pay enhanced benefits to
policyholders that allow the annuity funds to accumulate over the long term and
then elect some form of income payout option rather than a lump sum cash
payment. At December 31, 1998, annuity account values in force (including
business produced by LifeUSA Insurance agents for Allianz Life) totaled $5.7
billion ($3.9 billion of which was ceded to reinsurers). Over 88% of the in
force annuities are single premium annuities. The following describes LifeUSA
Insurance's most significant annuity products:
ACCUMULATOR(TM) CLASSIC The Accumulator Classic has an 8% bonus and permits
the policyholder to elect to receive the entire policy value over as few as
five years. The Accumulator Classic accounted for approximately 16% of total
annuity deposits in 1998. Approximately 5.5% of such policies annuitize on
the first anniversary of the policy. The Accumulator Classic is marketed in
all states except Oregon and Washington and was introduced in 1988.
ACCUMULATOR(TM) CASH BONUS ANNUITY The Instant Cash Bonus Option is a feature
of the Accumulator Cash Bonus annuity that allows the policyholder to receive
the first-year annuity bonus in cash. The Accumulator Cash Bonus annuity,
introduced in 1993, accounted for approximately 29% of total annuity deposits
in 1998 and is marketed in all states except New Jersey, Oregon and
Washington.
ACCUMULATOR(TM) BONUS MAXXX(TM) ANNUITY The Accumulator Bonus MAXXX annuity
has an immediate 10% bonus on all premium payments in the first policy year.
It includes a nursing home benefit and the IDEA disability benefit that
provides a policyholder 60% additional monthly retirement income in the event
of total disability due to illness, accident or old age; the income increase
is 30% in the event of partial disability. The Accumulator Bonus MAXXX
annuity accounted for approximately 5% of total annuity deposits in 1998, the
year it was introduced. It is marketed in all states except Washington, D.C.,
New Jersey, North Dakota, Oklahoma, Oregon, South Carolina, Texas, Vermont
and Washington.
IDEA(R) The IDEA -- Individual Disability Escalating Annuity -- is a unique
concept in annuity product design providing a policyholder with 60%
additional monthly retirement income in the event of total disability due to
illness, accident or old age; the income increase is 30% in the event of
partial disability. The increased income benefit is paid as long as the
disability lasts, even for life. The IDEA is available on the Accumulator
Bonus MAXXX annuity and Universal Annuity Life products.
IDEAL(TM) ANNUITY The IDEAL annuity provides up to 10 years of protection
against interest rate changes (increases and decreases). When issued, the
IDEAL annuity offers a base credited rate, plus a 1.5% annual interest bonus,
both guaranteed for five years. At the end of the first five-year term, the
policyholder has the option to "re-enter" the policy at the interest rate
credited on new issues. The new credited rate, plus another 1.5% annual
interest bonus, is then guaranteed for a new five-year term, also protecting
the policyholder against a rise in interest rates. The IDEAL annuity,
introduced in 1997,
Life USA Holding, Inc.
10
<PAGE>
GENERAL
accounted for approximately 7% of total annuity deposits in 1998 and is
marketed in all states except New Jersey, North Dakota, Oklahoma, Oregon and
Washington.
IDEAL(TM) INDEX 50 ANNUITY The IDEAL Index 50 annuity combines the protection
against interest rate changes of the IDEAL annuity with an additional benefit
tied to the performance of the S&P 500(R) Index over the five-year term. The
IDEAL Index 50 annuity is a competitive fixed annuity, with principal and
interest guaranteed, which adds one half of the incremental growth of the S&P
500(R) Index to the value of the annuity if the S&P 500(R) Index outperforms
the annuity over a five-year period. While not an investment product, the
IDEAL Index 50 annuity is positioned as an alternative "safe haven" for
investment funds. By shifting from equity investments to the IDEAL Index 50
annuity, an investor can "lock-in" current equity gains and still
participate, should the stock market continue to rise. The IDEAL Index 50
annuity, introduced in 1997, accounted for approximately 11% of total annuity
deposits in 1998. It is marketed in all states except New Jersey, North
Dakota, Oklahoma, Oregon, South Carolina and Washington.
IDEAL(TM) INDEX 75 ANNUITY The IDEAL Index 75 annuity is similar to the IDEAL
Index 50 annuity except that three-fourths of the S&P 500(R) Index
incremental growth is added to the annuitization value of the annuity. The
IDEAL Index 75 annuity accounted for approximately 21% of total annuity
deposits in 1998, the year it was introduced. It is marketed in the same
states as the IDEAL Index 50 annuity.
LIFE INSURANCE PRODUCTS At December 31, 1998, life insurance account values
in force (including business produced by LifeUSA Insurance's agents for Allianz
Life) aggregated $333.6 million ($222.0 million of which was ceded to
reinsurers). The majority of in force life insurance business is paid in annual
or more frequent installments. The following describes LifeUSA Insurance's most
significant life insurance products:
UNIVERSAL ANNUITY LIFE(R) I AND UNIVERSAL ANNUITY LIFE(R) III The Universal
Annuity Life (UAL) products are specifically designed to pay the insured as
much for living as for dying. At younger ages, when the protection against
premature death is needed most, the UAL products provide tax-free benefits
for the policyholder's family or business. At retirement, there are a variety
of annuitization options available that provide significant additional
monthly income if a life-time payout is selected. The IDEA option (described
previously) is available as a rider. The UAL I and UAL III products are
marketed in all states except that product approval by regulatory authorities
is pending review in New Jersey for UAL I and New Jersey and Pennsylvania for
UAL III. In 1998, the UAL I and UAL III products accounted for 88% of total
life insurance premiums. The UAL I and UAL III were introduced in 1990 and
1991, respectively.
LIFEUSA SECURITIES LifeUSA Securities is a full service registered
broker-dealer in all 50 states. As a general securities dealer, LifeUSA
Securities offers virtually all types of securities on the listed and
over-the-counter markets. General securities purchases and trades are cleared
through Bear Stearns Securities Corporation. Other products available include:
mutual funds, unit investment trusts, variable life insurance and annuity
contracts, limited partnerships and long-term care insurance.
REINSURANCE
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 assumed business to
Allianz Life. During 1997 and 1998, the Company produced long-term care
insurance business for Allianz Life and received marketing and service fees for
that business.
The terms of an agreement announced in January 1998 ("the agreement with
Allianz Life") allow Allianz Life to acquire up to 35% of the outstanding common
stock of the Company and to 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, ending in 2002, by purchasing from the Company
$100 million of newly
11
Life USA Holding, Inc.
<PAGE>
GENERAL
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% of the
Company's six-month average book value per share (excluding Statement of
Financial Accounting Standards 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 at $24.625 per share, and in February 1999, Allianz Life acquired 395,062
shares at the mutually agreed upon purchase price of $25.3125 per share. If the
price at which Allianz Life would purchase the Company's common stock is more
that 200% of the current market price at the time the common stock is tendered,
Allianz Life can decline to purchase the stock, and the Company can require
Allianz Life to purchase a convertible debenture for a like amount of capital.
See Note 10 to the Consolidated Financial Statements.
Effective April 1, 1998 and in accordance with the agreement with Allianz
Life, Allianz Life, either as a direct writer or reinsurer, has the right to
retain 37.5% of the new life insurance and annuity business produced by the
Company's agents, up from 25% under the previous marketing agreement.
REINSURANCE CEDED 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):
o Employers Reassurance Corporation, a subsidiary of Employers Reinsurance
Corporation, a member of the General Electric Company group (Employers);
o Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies (Munich); and
o Republic-Vanguard Life Insurance Company, a member of PartnerRe Ltd., one
of the largest reinsurance companies (Republic-Vanguard).
Effective April 1, 1998, and in accordance with the agreement with Allianz
Life, Allianz Life began assuming a portion of LifeUSA Insurance's business.
Also effective April 1, 1998, Munich ceased assuming any new business from
LifeUSA Insurance and LifeUSA Insurance increased the retention of its annuity
business from 25% to 30% and its life insurance business from 25% to 50%.
The following table shows the percentages of new life insurance and annuity
business written by LifeUSA that have been ceded since inception:
LIFE INSURANCE ANNUITY
---------------- --------
September 1987 - December 1988 ........ 100% 100%
January 1989 - December 1989 .......... 95 100
January 1990 - December 1990 .......... 75 75
January 1991 - December 1992 .......... 70 75
January 1993 - June 1993 .............. 65 65
July 1993 - September 1995 ............ 50 50
October 1995 - March 1998 ............. 75 75
April 1998 - Present .................. 50 70
The Company receives commissions and expense allowances on the portions of
LifeUSA Insurance's life insurance and annuity products reinsured and service
fees on the Allianz/LUSA Business. The commissions and expense allowances and
service fees (combined together and shown on the Consolidated Statement of
Income as commission and expense allowances, net) received on life insurance
policies are approximately 150% of the first-year planned target premium and
range from 121/2% to 18% of renewal and first-year excess premiums. The Company
also receives commissions and expense allowances and service fees ranging from
61/2% to 22% on annuity deposits.
An additional allowance equal to .20% of the account value and renewal
premium deposits of LifeUSA Insurance annuities issued from April 1, 1991 until
December 31, 1996 is received as of the beginning of policy years two through
ten. For LifeUSA Insurance annuities issued from January 1, 1997 through
Life USA Holding, Inc.
12
<PAGE>
GENERAL
March 31, 1998, an additional allowance equal to .16% of the account value and
renewal premium deposits is received as of the beginning of policy years two
through the life of the policy. In April 1998, this additional allowance was
changed to .21%. In April 1998, the Company began earning an additional
allowance equal to .09% of the account value and renewal premium deposits of all
annuities produced for Allianz Life, which is received as of the beginning of
policy years two through the life of the policy.
Under the reinsurance agreements, $428.7 million, $545.8 million and $437.9
million of premiums and deposits were ceded to the Reinsurers by LifeUSA
Insurance for the years ended December 31, 1998, 1997 and 1996, respectively.
When a life insurance policy ceded to the Reinsurers lapses before the end of 15
months, LifeUSA Insurance has agreed to pay a chargeback equal to the excess of
the allowances received over the premiums received. As of December 31, 1998 and
1997, the reserve for lapsed policy chargebacks was $650,000. Assets and
liabilities related to reinsurance ceded are required to be reported on a gross
basis reflecting the possibility that reinsured risks could become a liability
to the Company in the event the Reinsurers become unable to meet the obligations
they have assumed. The reinsurance agreements require the Reinsurers' approval
of policy forms and terms of LifeUSA Insurance products reinsured by the
Reinsurers.
Any restriction, limitation or condition imposed by the Reinsurers could
have a material effect on LifeUSA Insurance's ability to write new business if
LifeUSA Insurance was not able to replace the current reinsurers, or obtain the
required capital to support the level of new business.
REINSURANCE ASSUMED LifeUSA Insurance assumes a portion of new Allianz/LUSA
Business directly from Allianz Life. Under this agreement, $116.1 million,
$146.0 million and $122.7 million of premiums and deposits were assumed by
LifeUSA Insurance from Allianz Life for the years ended December 31, 1998, 1997
and 1996, respectively.
The following table shows the percentages of new Allianz/LUSA Business for
Allianz Life that have been assumed by LifeUSA Insurance since inception:
LIFE INSURANCE ANNUITY
---------------- --------
September 1987 - December 1989 ........ -- % -- %
January 1990 - December 1990 .......... 25 25
January 1991 - December 1991 .......... 30 25
January 1992 - June 1993 .............. 50 30
July 1993 - September 1995 ............ 50 50
October 1995 - Present ................ 25 25
MAINTENANCE EXPENSES The Company is obligated to continue servicing the
underlying life insurance and annuity policies written directly by LifeUSA
Insurance and the Allianz/LUSA Business. It is possible that actual future
renewal allowances and servicing costs will not conform to the assumptions
inherent in the current estimation of allowances and costs. Management
continuously monitors actual renewal allowance and servicing cost experience as
it emerges and, should material changes in the assumptions occur, a liability
would be established to the extent that the present value of future servicing
costs is expected to exceed the present value of future renewal allowances.
13
Life USA Holding, Inc.
<PAGE>
GENERAL
LIFE INSURANCE AND ANNUITIES IN FORCE
The following table shows LifeUSA Insurance life insurance and annuities in
force information at December 31, 1998 and December 31, 1997 (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------
<S> <C> <C>
Life insurance account values:
All policies produced by LifeUSA Insurance agents(1) ....... $ 333.6 $ 299.1
Direct and assumed business(2) ............................. 286.2 257.0
Net of reinsurance(3) ...................................... 111.6 99.3
Life insurance face amounts:
All policies produced by LifeUSA Insurance agents(1) ....... 7,679.7 7,997.5
Direct and assumed business(2) ............................. 6,646.2 6,931.7
Net of reinsurance(3) ...................................... 2,333.6 2,277.7
Annuity account values:
All policies produced by LifeUSA Insurance agents(1) ....... 5,743.1 5,518.4
Direct and assumed business(2) ............................. 4,054.0 3,916.6
Net of reinsurance(3) ...................................... 1,825.0 1,781.1
</TABLE>
- ------------------
(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.
UNDERWRITING
All life insurance business is subject to standard underwriting procedures
as agreed to by the Reinsurers, using an underwriting manual from the
Reinsurers. Republic-Vanguard is the reinsurer currently charged with the
responsibility of reviewing the underwriting practices of LifeUSA Insurance and
performing periodic audits (every other year) of LifeUSA Insurance's compliance
with underwriting procedures and results. There are minimal underwriting
requirements with regard to annuity business.
LifeUSA Insurance can underwrite all life policies with a face amount up to
$500,000 without approval of Republic-Vanguard. Amounts above this level require
individual evaluation by Republic-Vanguard. As appropriate, varying
requirements, including tests, medical exams and personal financial statements,
may be required at higher ages and/or larger face amounts of insurance.
INVESTMENT POLICIES
The Company's long-term investment portfolio is comprised of U.S. Treasury
securities, U.S. Government agency securities, foreign government obligations
denominated in U.S. dollars and issued and traded in the United States,
mortgage-backed securities issued or guaranteed by U.S. government corporations
or agencies and investment grade corporate obligations. The Company has never
purchased real estate, private direct mortgages or below investment-grade
securities. The Company engages Windsor and Allianz Investment Corporation
(AIC), an affiliate of Allianz Life, to serve as the Company's investment
advisers. At December 31, 1998, assets managed for customers by Windsor and AIC
exceed $3.7 billion and $21.9 billion, respectively.
Windsor and AIC purchase investment securities for the Company based on the
Company's guidelines. The investment philosophy of LifeUSA Insurance is
reflected in investment guidelines adopted by the Board of Directors of the
Company annually, as follows:
SIZE: no more than 5% of the Company's invested assets in any issuer other
than direct or guaranteed United States obligations, no more than 25% of
invested assets in any industry, and no more than 2% of any issue other than
direct or guaranteed United States obligations;
QUALITY: minimum quality of purchase must be "BBB-" or better, average
quality "A" or better;
DURATION: match to liabilities, allow for sufficient liquidity and cash flow
matching; and
INCOME: manage to maintain or increase income, excluding capital gains.
Life USA Holding, Inc.
14
<PAGE>
GENERAL
AGENT AND EMPLOYEE OWNERSHIP
Historically, the Company has issued a variety of equity-based financial
instruments (common stock, convertible subordinated debentures and stock
options) to LifeUSA Insurance agents and the Company's home office employees in
order to provide these individuals with an ownership interest in the Company and
create an important incentive to produce premiums and maintain profitable
operations. From 1992 through March 31, 1997, the Company granted stock options
as commission bonuses to LifeUSA Insurance agents based on net earned
commissions on business written. The Company discontinued the granting of stock
options as production bonuses in the calendar quarter ended March 31, 1997. The
Company also has a stock option plan for employees under which employees on the
anniversary date of their employment receive options on a number of shares of
common stock equal to 1% of their annual salary at an exercise price per share
of not less than 150% of the market value of a share of common stock on the date
the option is issued. The Company expects to continue to grant stock options to
employees.
QUALITY OF SERVICE
Management believes that quality service, responsiveness and support to
agents and to policyholders have been and continue to be critical to agent
retention, policyholder satisfaction and cost-effective operations. As a result
of their ownership interests in the Company, home office employees have a
special commitment to their jobs and are referred to as "home office owners." An
example of home office responsiveness created by this commitment is the "48-hour
challenge." If an insurance application conforming to normal standards is not
completed within 48 hours, the agent receives $100. For 1998, 43,615
applications were submitted and only 47 challenges were paid.
At December 31, 1998, the Company employed 426 full-time and 29 part-time
persons, and the number of persons performing home office functions were as
follows:
NUMBER OF
HOME OFFICE FUNCTION EMPLOYEES
--------------------------------------- ----------
Executive ........................... 17
Operations .......................... 196
Support ............................. 84
Marketing ........................... 60
Information Services ................ 71
Owner Services ...................... 14
Securities .......................... 13
The Company's employees are not represented by a collective bargaining
unit. The Company considers its general relations with its employees to be
excellent.
COMPETITION
The industry in which the Company operates is highly competitive, with many
competitors offering diverse products through various alternative marketing or
distribution systems. The Company's products compete not only with life
insurance and annuities, but they also compete with other retirement-oriented
financial products, and stock and bond mutual funds. Competition for FMOs and
agents with demonstrated ability is also intense. However, management believes
that LifeUSA Insurance has been able to attract and will continue to be able to
attract, motivate and retain productive, independent FMOs and agents by
providing innovative products and quality service.
15
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
RESULTS OF OPERATIONS
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 Annual Report to Shareholders and Form 10-K.
In 1998, the Company's production of total collected premiums and deposits
decreased 18% compared to 1997. As a result, revenues from commission and
expense allowances and expenses for commissions paid decreased. The Company
generated increases in invested assets and annuities in force and as a result,
revenues from policyholder charges and net investment income and expenses for
interest credited to policyholder account values increased. Primarily as a
result of these factors, net income for 1998 decreased 19% compared to 1997.
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including
Allianz/LUSA Business, were $1.06 billion, $1.29 billion and $1.05 billion in
1998, 1997 and 1996, respectively, and represented a decrease of 18% in 1998
compared to 1997 and an increase of 23% in 1997 compared to 1996. The following
table shows the amounts of premiums and deposits collected, ceded and retained
for the three years (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Collected Premiums and Deposits(1):
LifeUSA Insurance:
Life:
First year ...................................... $ 5,611 $ 7,883 $ 12,731
Single and renewal .............................. 52,116 52,323 49,242
---------- ---------- ----------
Total Life .................................... 57,727 60,206 61,973
Annuities ....................................... 559,059 684,992 547,748
---------- ---------- ----------
Total LifeUSA Insurance collected premiums
and deposits ................................ 616,786 745,198 609,721
Allianz Life:
Life:
First year ...................................... 1,426 2,142 3,261
Single and renewal .............................. 15,164 14,961 14,817
---------- ---------- ----------
Total Life .................................... 16,590 17,103 18,078
Annuities ....................................... 422,582 532,151 424,659
---------- ---------- ----------
Total Allianz Life collected premiums
and deposits ................................ 439,172 549,254 442,737
---------- ---------- ----------
Total collected premiums and deposits ....... $1,055,958 $1,294,452 $1,052,458
========== ========== ==========
</TABLE>
- ------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
Life USA Holding, Inc.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and Deposits Not Retained or Assumed(2):
LifeUSA Insurance:
Life:
First year .................................... $ 3,801 $ 5,913 $ 8,416
Single and renewal ............................ 34,512 34,021 31,925
-------- -------- --------
Total Life .................................. 38,313 39,934 40,341
Annuities ..................................... 390,348 505,829 397,566
-------- -------- --------
Total LifeUSA Insurance premiums and
deposits not retained ..................... 428,661 545,763 437,907
Allianz Life:
Life:
First year .................................... 1,072 1,607 2,228
Single and renewal ............................ 9,177 8,833 8,596
-------- -------- --------
Total Life .................................. 10,249 10,440 10,824
Annuities ..................................... 312,832 392,807 309,198
-------- -------- --------
Total Allianz Life premiums and deposits
not assumed ................................ 323,081 403,247 320,022
-------- -------- --------
Total premiums and deposits not retained or
assumed ................................... $751,742 $949,010 $757,929
======== ======== ========
Retained or Assumed Premiums and Deposits(3):
LifeUSA Insurance:
Life:
First year .................................... $ 1,810 $ 1,970 $ 4,315
Single and renewal ............................ 17,604 18,302 17,317
-------- -------- --------
Total Life .................................. 19,414 20,272 21,632
Annuities ..................................... 168,711 179,163 150,182
-------- -------- --------
Total LifeUSA Insurance retained premiums
and deposits .............................. 188,125 199,435 171,814
Allianz Life:
Life:
First year .................................... 354 535 1,033
Single and renewal ............................ 5,987 6,128 6,221
-------- -------- --------
Total Life .................................. 6,341 6,663 7,254
Annuities ..................................... 109,750 139,344 115,461
-------- -------- --------
Total Allianz Life assumed premiums
and deposits .............................. 116,091 146,007 122,715
-------- -------- --------
Total retained or assumed premiums
and deposits .............................. $304,216 $345,442 $294,529
======== ======== ========
</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 not 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 the Reinsurance information under the caption
"General-Reinsurance" on pages 11-13 in this Annual Report and Form 10-K for
further details on the Company's reinsurance agreements.
17
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
REVENUES. Total revenues were $362.6 million, $369.9 million and $316.9
million in 1998, 1997 and 1996, respectively. The decrease in total revenues of
2% in 1998 compared to 1997 was primarily due to the decrease in net commissions
and expense allowances associated with decreased production of business. This
factor was partially offset by the increase in net investment income generated
by the growth of invested assets and by an increase in policyholder charges. The
increase in total revenues of 17% in 1997 compared to 1996 was primarily due to
the increase in net commissions and expense allowances associated with increased
production of business not retained or assumed. Also contributing to this
increase in revenues was the increase in net investment income generated by the
growth of invested assets and net realized gains on investments. The discussion
which follows gives a line-by-line comparison of revenue for the years ended
December 31, 1998, 1997 and 1996. 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 values for the cost of insurance, policy administration, annuitizations
and surrenders, increased 7%, or $3.6 million, in 1998 compared to 1997, and 6%,
or $2.6 million, in 1997 compared to 1996, reflecting the growth in and maturity
of LifeUSA Insurance net retained account values in force. The following table
shows the amounts of policyholder charges for 1998, 1997 and 1996 (in
thousands):
1998 1997 1996
----------- ------------ ------------
Direct .............. $ 105,390 $ 94,405 $ 82,904
Assumed ............. 19,026 18,187 16,540
Ceded ............... (71,355) (63,122) (52,602)
--------- --------- ---------
Net ................. $ 53,061 $ 49,470 $ 46,842
========= ========= =========
Increases in net investment income of 10%, or $13.8 million, in 1998
compared to 1997, and 11%, or $14.7 million, in 1997 compared to 1996, are
attributable to increases in invested assets (fixed maturity investments and
cash and cash equivalents) to $2.30 billion at December 31, 1998 from $2.17
billion at December 31, 1997 and $1.90 billion at December 31, 1996, which was
only partially offset by the reduction in yield on investments. The weighted
average annual yield on invested assets (exclusive of realized and unrealized
gains and losses) was 7.23%, 7.30% and 7.44% at December 31, 1998, 1997 and
1996, respectively.
Net realized gains on investments had the following impact on the
amortization of deferred policy acquisition costs, other benefits to
policyholders, net income and earnings per share for 1998, 1997 and 1996
(dollars in millions, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Net realized gains on investments ................ $ .8 $ 4.4 $ 1.8
Increase in:
Amortization of deferred policy acquisition costs .3 1.9 .7
Other benefits to policyholders ................. .2 1.4 .5
---- ----- -----
Income before income taxes ....................... .3 1.1 .6
Income taxes ..................................... .1 .4 .2
---- ----- -----
Net income ....................................... $ .2 $ .7 $ .4
==== ===== =====
Diluted earnings per share ....................... $ .01 $ .03 $ .02
===== ====== ======
</TABLE>
Net commissions and expense allowances on premiums and deposits collected
on reinsured policies and service fees on business produced for Allianz Life
decreased 15%, or $26.0 million, in 1998 compared to 1997. This decrease is
consistent with the 18% decrease in total collected premiums and deposits 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.
The increase in net commissions and expense allowances of 24%, or $32.4 million,
in 1997 compared to 1996, is consistent with the 23% increase in total collected
premiums and deposits.
Life USA Holding, Inc.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
The following table shows the amounts of net commissions and expense
allowances for 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
LifeUSA Insurance:
Life:
First year .............................................. $ 4,718 $ 7,153 $ 10,263
Single and renewal ...................................... 5,520 5,515 5,246
-------- -------- --------
Total Life ............................................. 10,238 12,668 15,509
Annuities ............................................... 64,292 77,145 59,003
-------- -------- --------
Total LifeUSA Insurance .............................. 74,530 89,813 74,512
Allianz/LUSA Business:
Life:
First year .............................................. 1,570 2,148 3,336
Single and renewal ...................................... 2,082 2,110 2,227
-------- -------- --------
Total Life ........................................... 3,652 4,258 5,563
Annuities ............................................... 66,603 76,955 58,431
-------- -------- --------
Total Allianz/LUSA Business .......................... 70,255 81,213 63,994
Lapse policy chargebacks ................................... (656) (908) (772)
-------- -------- --------
Total commissions and expense allowances, net ....... $144,129 $170,118 $137,734
======== ======== ========
</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 the Reinsurance information under the caption
"General-Reinsurance" on pages 11-13 in this Annual Report and Form 10-K for
further details on the Company's reinsurance agreements.
EXPENSES. Total expenses were $327.5 million, $326.8 million and $279.8
million in 1998, 1997 and 1996, respectively. Total expenses were relatively
flat in 1998 compared to 1997 which reflects the growth in and maturity of
annuities in force offset by the decline in premium production and the 1997
national advertising and sales promotion campaign. The increase in total
expenses of 17% in 1997 compared to 1996 was primarily due to increased sales in
1997 and the national advertising and sales promotion campaign. The discussion
that follows gives a line-by-line comparison of expenses for the years ended
December 31, 1998, 1997 and 1996. See also the Business Segments section that
follows for additional analysis of the results of operations.
Increases in interest credited to policyholder account values of 8%, or
$8.5 million, in 1998 compared to 1997 and 10%, or $10.0 million, in 1997
compared to 1996 reflect the growth in annuities in force. The following table
shows the amounts of interest credited to policyholder account values for 1998,
1997 and 1996 (in thousands):
1998 1997 1996
------------- ------------- -------------
Direct ......... $ 213,855 $ 191,538 $ 172,838
Assumed ........ 49,372 46,616 41,187
Ceded .......... (145,229) (128,647) (114,508)
---------- ---------- ----------
Net ............ $ 117,998 $ 109,507 $ 99,517
========== ========== ==========
Increases in other benefits to policyholders of 22%, or $5.1 million, in
1998 compared to 1997 reflect increased surrenders, additional reserves for
index-related benefits, accrual of bonuses to be paid to policyholders and
growth in and maturity of in force business. Increases in other benefits to
policyholders of
19
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
32%, or $5.6 million, in 1997 compared to 1996 reflect the accrual of bonuses to
be paid to policyholders that is generated by the production of new business and
the additional accrual of bonuses that is generated by the net realized gains on
investments described above.
Amortization of deferred policy acquisition costs increased 8%, or $2.3
million, in 1998 compared to 1997. This increase reflects an increase in gross
profits due to a growing and more mature block of in force business with
slightly increased surrenders. Amortization of deferred policy acquisition costs
increased 13%, or $3.3 million, in 1997 compared to 1996. This reflects the
combination of an increase in gross profits due to a growing, more mature block
of in force business and an increase in the amortization of deferred policy
acquisition costs as a result of the net realized gains on investments described
above.
LifeUSA Insurance uses models to estimate future gross profits and to
allocate current gross margins in order to amortize deferred policy acquisition
costs and accrue for bonuses to be paid to policyholders (the primary component
of other benefits to policyholders). LifeUSA Insurance is required to make
revisions to the estimates in these models and adjust amortization accordingly.
In 1998 and 1997, minor revisions were made to the estimates used in these
models, however, the impact on financial results was insignificant. During 1996,
revisions were made to the estimates in the models used to amortize deferred
policy acquisition costs and accrue for bonuses to be paid to policyholders. The
cumulative effect of these revisions increased pretax income by $2.7 million in
1996.
The following table shows comparative rates for lapses, surrenders and
annuitizations for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Annualized first year lapse rate for life insurance policies
(excluding single premium) ................................. 24.9% 22.7% 20.7%
Annualized first year (13 months) surrender rate for
annuities .................................................. 1.2 1.2 1.1
Annualized first year (13 months) annuitization rate for
annuities .................................................. 5.5 6.1 5.9
</TABLE>
The impact on estimated gross profits of actual policy experience,
including the rates shown above, is consistent with the assumptions in the
models used by LifeUSA Insurance to compute deferred policy acquisition cost
amortization. Utilizing the actual policy experience and appropriate assumptions
for future periods, these models indicate that deferred policy acquisition costs
are fully recoverable.
Commissions to agents decreased 15%, or $15.6 million, in 1998 compared to
1997. This decrease is consistent with the decrease 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. Commissions to agents increased 27%, or
$21.3 million, in 1997 compared to 1996. This increase was due to an increase in
total collected premiums and deposits discussed previously and a change in the
mix of deferred annuity products sold, both of which were partially offset by
the decline in collected first year life insurance premiums.
Taxes, licenses and fees (which consists primarily of premium taxes and
state guaranty fund assessments) decreased 31%, or $851,000, in 1998 compared to
1997. The decrease was primarily due to a general decline in overall industry
assessment liabilities and the decrease in premium production. Taxes, licenses
and fees decreased 24%, or $853,000, in 1997 compared to 1996. This decrease was
primarily due to a general decline in overall industry assessment liabilities
and a reduction in the Company's estimates for future assessment liabilities,
recoveries in the first quarter of 1997 of guaranty fund assessments and state
income taxes paid in 1996 and offsetting increases in premium taxes related to
increased production.
Operating expenses increased 2%, or $1.2 million, in 1998 compared to 1997.
The increase was due primarily to the growth of LifeUSA Insurance's in force
annuity business, partially offset by the expenditures for a national
advertising and sales promotion campaign during 1997. Operating expenses
increased 14%, or $7.7 million, in 1997 compared to 1996. The increase was due
primarily to the growth of LifeUSA Insurance in force annuity business and the
expenditures for the national advertising and sales promotion campaign in 1997.
Life USA Holding, Inc.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
Income taxes were $13.3 million in 1998, $16.1 million in 1997 and $13.6
million in 1996. The effective income tax rates for 1998, 1997 and 1996 were
37.7%, 37.4% and 36.7%, respectively.
NET INCOME. Net income was $21.9 million in 1998, $27.0 million in 1997,
and $23.5 million in 1996, which represents a decrease in net income of 19% in
1998 compared to 1997 and an increase of 15% in 1997 compared to 1996. Diluted
earnings per share was $.83 in 1998, $1.11 in 1997 and $1.04 in 1996 which
represents a decrease of 25% in 1998 compared to 1997 and an increase of 7% in
1997 compared to 1996. For 1998, the per share decrease is higher than the net
income decrease due primarily to the shares issued as a result of the agreement
with Allianz Life and option exercises partially offset by the repurchase of 1.8
million shares, which increased the number of shares used in the earnings per
share calculation. For 1997, the per share increase is lower than the net income
increase due to an increase of 1.8 million shares used in the earnings per share
calculations. (See Note 8 to the Consolidated Financial Statements for details).
The following table summarizes the operating highlights for 1998, 1997 and
1996 (dollars in millions, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- ---------------------
INCOME EPS INCOME EPS INCOME EPS
---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated net income and earnings per share $ 21.9 $ .83 $ 27.0 $ 1.11 $ 23.4 $ 1.04
Adjustments to arrive at consolidated net
operating income(1):
Net realized gains on investments ................... ( .2) (.01) ( .7) ( .03) ( .4) ( .02)
Charges (credits) for state guaranty fund
assessments ........................................ ( 1.0) (.04) ( .9) ( .04) 2.0 .09
Tax liability for prior years' activity ............. .1 .01 .7 .03 -- --
------- ------ ------- ------- ------- -------
Consolidated net operating income and earnings
per share ........................................... 20.8 .79 26.1 1.07 25.0 1.11
Impact of expenses associated with national
advertising campaign ................................ -- -- 2.0 .08 -- --
------- ------ ------- ------- ------- -------
Consolidated net operating income and earnings
per share excluding impact of expenses
associated with national advertising campaign ....... $ 20.8 $ .79 $ 28.1 $ 1.15 $ 25.0 $ 1.11
======= ====== ======= ======= ======= =======
</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) changes in tax liability for prior
years' activity.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company's primary available sources of cash were:
o service fees received by the Company for the Allianz/LUSA Business;
o management fees from LifeUSA Insurance;
o interest earned on invested assets;
o $10 million received from Allianz Life's stock purchase in August 1998;
o dividends totaling $2.5 million paid to the Company by LifeUSA Insurance;
o issuance of shares upon exercise of common stock options; and
o a $50 million long-term line of credit from its Reinsurers.
In September 1998, the Company borrowed $10 million under its line of
credit increasing the total outstanding balance to $15 million.
A substantial portion of the Company's operating expenses is attributable
to services provided to LifeUSA Insurance, such as employees, data processing,
facilities and supplies, which are reimbursed by LifeUSA Insurance through
management fees. LifeUSA Insurance is expected to have sufficient cash to
provide
21
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
reimbursement through 1999, based on currently anticipated life insurance and
annuity sales and on the continuation of acceptable reinsurance arrangements.
The extended marketing relationship with Allianz Life and related infusion
of $100 million in capital through 2002, along with the $50 million line of
credit from the Reinsurers and dividends from LifeUSA Insurance, provides
sufficient capital to fund the Company's needs.
The Company's cash needs consist of:
o operating expenses, including expenses in connection with efforts to
increase the production of existing agents and expand the size of the
field force;
o capital contributions to LifeUSA Marketing for investments in marketing
organizations expected to increase premium and deposit production volume
for LifeUSA Insurance and Allianz Life;
o repayments of borrowings under the line of credit to the Reinsurers; o
operating expenses of and potential contributions to LifeUSA Securities to
ensure compliance with NASD capital requirements;
o quarterly dividends to shareholders of record; o authorized repurchases of
its common stock;
o potential contributions to LTCAmerica to purchase an existing long-term
care insurance company or a "shell" insurance company and commence
operations; and
o 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.
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 represented
approximately 15% of the Company's 26.0 million shares outstanding. As of
December 31, 1998, 1.8 million shares have been repurchased by the Company at an
average price of $12.50 per share. Repurchased shares will be deemed to be
outstanding shares for purposes of calculating the 35% of the outstanding common
stock of the Company to be acquired over the next five years by Allianz Life.
Management believes that the available sources of cash will provide
sufficient capital resources to meet all the Company's cash needs in the
ordinary course of business during the next twelve months, based on currently
anticipated life insurance and annuity sales, expected levels of net retention
and acceptable reinsurance agreements.
For LifeUSA Insurance to retain or assume life insurance and annuity
business, LifeUSA Insurance must maintain a sufficient level of statutory
capital and surplus as established by the regulatory authorities in the
jurisdictions where LifeUSA Insurance is licensed to do business. As LifeUSA
Insurance retains and assumes business, it is required to expense commissions
and other policy issuance costs for statutory accounting purposes and to
establish statutory reserves for policy benefits, thereby creating a statutory
loss and reducing statutory surplus in the first year of the policy. The
anticipated profits from the retained or assumed business are realized over the
remaining period that the policies are in force. The combination of these
dynamics first produced statutory net income during 1995.
LifeUSA Insurance produced statutory net income of $17.2 million in 1998
compared to $18.4 million in 1997. As of December 31, 1998, LifeUSA Insurance
had statutory capital and surplus for regulatory purposes of $113.1 million
compared to $103.7 million at December 31, 1997. LifeUSA Insurance expects to
continue to satisfy statutory capital and surplus requirements through 1999
primarily through statutory profits on its maturing block of retained in force
business. Effective April 1, 1998, LifeUSA Insurance increased the retention of
its annuity business from 25 to 30% and its life insurance business from 25 to
50%. The changes in the retention levels did not produce a significant impact on
statutory capital in 1998.
In January 1999, the Company announced that its Board of Directors declared
a cash dividend of 2.5 cents per share for the fourth quarter of 1998, payable
on February 12, 1999, to shareholders of record as of January 28, 1999. The
Company declared similar dividends for the first, second and third quarters of
1998. It is the intention of the Board of Directors to pay regular quarterly
dividends in 1999 of 2.5 cents per share, or ten cents per share on an annual
basis.
Life USA Holding, Inc.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
Although the Board of Directors of the Company declares dividends 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). The Department of Commerce of the State of
Minnesota must permit 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
insurer's statutory earned surplus at the end of the preceding year or (ii) the
insurer's statutory net gain from operations, not including realized capital
gains, for the year preceding the distribution, both of which are determined in
accordance with Minnesota insurance laws and regulations. The Department of
Commerce of the State of Minnesota permitted LifeUSA Insurance to pay $2.5
million in extraordinary dividends to the Company during 1998 and 1997 and $5
million in January 1999.
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 considered how to better
support multiple benefit product designs, such as LifeUSA Insurance's two-tier
annuities and universal life insurance contracts with enhanced retirement
benefits. LifeUSA Insurance has been able to successfully demonstrate the
financial stability of such designs, which provide higher retirement benefits to
consumers while decreasing disintermediation and solvency risks to LifeUSA
Insurance.
As of December 31, 1998, the NAIC Life Insurance Illustration Model
Regulation was effective in twenty-seven 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. In December 1998, the
NAIC finalized a new annuity disclosure model regulation. Final NAIC adoption is
anticipated in March 1999, and adoption in each state is required before it
becomes law. The new model requires a product specific disclosure document and a
copy of the NAIC Buyer's Guide to Fixed Deferred Annuities be provided to the
consumer at the time of application. It does not regulate illustrations and does
not require self-support or lapse-support testing of annuity illustrations.
LifeUSA Insurance is monitoring these developments and no significant impact is
anticipated at this time.
NAIC committees are considering a new approach to statutory valuation of
liabilities (reserves) and regulations for equity-indexed products. LifeUSA
Insurance is monitoring these developments and no significant impact is
anticipated at this time.
Insurance laws also require LifeUSA Insurance to file detailed periodic
reports with the regulatory agencies in each of the states in which it writes
business, and these agencies may also examine LifeUSA Insurance's 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.
23
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
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 December 31, 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 excellent financial strength,
operating performance and market profile, on balance, 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 the
A.M. Best Company, 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 1998 agreement with Allianz Life.
In May 1998, Moody's Investors Service (Moody's) upgraded the rating
assigned to LifeUSA Insurance to A3 from Baa3. This rating falls within Moody's
"Strong Companies" category. According to Moody's, the upgrade reflects the
significant minority interest to be held by Allianz Life, as well as the
enhanced marketing, reinsurance and strategic ties between the Company and
Allianz Life.
In August 1998, Standard & Poor's (S&P) affirmed LifeUSA Insurance's
initial claims-paying ability rating of BBB+ (Adequate). S&P assigns the BBB+
rating to insurers which, in its opinion, offer adequate financial security, but
capacity to meet policyholder obligations is susceptible to adverse economic and
underwriting conditions.
INVESTMENTS As of December 31, 1998, the Company had cash, cash equivalents
and fixed maturity investments on a consolidated basis totaling $2.30 billion,
including $7.7 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 December 31, 1998
and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
AMORTIZED % OF CARRYING % OF FAIR % OF
1998 COST TOTAL VALUE TOTAL VALUE TOTAL
- --------------------------------------------------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ......................... $ 21,570 .96% $ 21,570 .94% $ 21,570 .92%
Government Treasury and Agency notes and
bonds ............................................ 84,532 3.76 89,927 3.91 98,178 4.17
Taxable municipals ................................ 11,073 .49 11,226 .49 11,239 .48
Mortgage pass throughs ............................ 51,520 2.29 53,947 2.34 53,947 2.29
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials ............................... 2,491 .11 2,491 .11 2,540 .11
CMO -- PACs ...................................... 613,703 27.31 618,159 26.86 634,303 26.92
CMO -- ADs ....................................... 21,619 .96 21,619 .94 22,514 .96
CMO -- TACs ...................................... 7,106 .32 7,106 .31 7,733 .33
Investment grade corporate securities:
AAA+ to AAA- ..................................... 73,975 3.29 74,668 3.24 77,237 3.28
AA+ to AA- ....................................... 190,650 8.49 197,282 8.57 203,387 8.63
A+ to A- ......................................... 687,305 30.59 708,241 30.78 723,494 30.71
BBB+ to BBB- ..................................... 456,726 20.34 472,717 20.54 477,820 20.25
Non investment grade corporate securities ......... 24,577 1.09 22,380 .97 22,308 .95
---------- ------ ---------- ------ ---------- ------
Total cash and invested assets .................... $2,246,847 100.00% $2,301,333 100.00% $2,356,270 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
Life USA Holding, Inc.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
AMORTIZED % OF CARRYING % OF FAIR % OF
1997 COST TOTAL VALUE TOTAL VALUE TOTAL
- --------------------------------------------------- ------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ......................... $ 34,139 1.60% $ 34,139 1.58% $ 34,139 1.55%
Government Treasury and Agency notes and
bonds ............................................ 74,338 3.49 77,740 3.59 83,441 3.78
Mortgage pass throughs ............................ 52,189 2.45 54,137 2.50 54,137 2.45
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials ............................... 5,098 .24 5,098 .24 5,138 .23
CMO -- PACs ...................................... 605,517 28.43 608,825 28.11 624,652 28.32
CMO -- ADs ....................................... 23,543 1.11 23,543 1.09 24,604 1.12
CMO -- TACs ...................................... 10,516 .49 10,516 .49 11,446 .52
Investment grade corporate securities:
AAA+ to AAA- ..................................... 42,765 2.01 43,091 1.99 44,962 2.04
AA+ to AA- ....................................... 178,360 8.37 182,162 8.41 185,460 8.41
A+ to A- ......................................... 590,210 27.71 603,158 27.85 609,665 27.64
BBB+ to BBB- ..................................... 508,511 23.87 519,695 23.98 524,593 23.77
Non investment grade corporate securities ......... 4,907 .23 3,682 .17 3,682 .17
---------- ------ ---------- ------ ---------- ------
Total cash and invested assets .................... $2,130,093 100.00% $2,165,786 100.00% $2,205,919 100.00%
========== ====== ========== ====== ========== ======
</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 December 31, 1998, the
weighted average credited interest rate for deferred annuities and life
insurance policies was 4.85% and the weighted average yield on the assets
backing liabilities was 7.26%. 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 $32.9 million during
1998. The investment portfolio is managed primarily by allocating new cash flows
into investments that have yield, maturity and other characteristics suitable
for LifeUSA Insurance's expected policyholder liabilities. Consistent with
LifeUSA Insurance's asset and liability management practices, as of December 31,
1998, the effective duration of LifeUSA Insurance's fixed income securities was
4.66 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 63% at December 31,
1998. With each corporate security acquisition, LifeUSA Insurance's external
managers perform a comprehensive analysis of the credit implications and outlook
of the issuing corporation and industry. Ongoing procedures for monitoring and
assessing any potential deterioration or downgrade in credit quality are also in
place. The Company's guidelines for the acquisition of corporate securities do
not allow the purchase of securities that are rated below investment grade by
Moody's Investors Service and Standard & Poor's.
Approximately 1% of the total fair value of the Company's portfolio was
comprised of non-investment grade corporate obligations at December 31, 1998.
The Company believes that there is no impairment to these investments, as they
will continue to receive principal and interest payments through maturity.
The remainder of the Company's portfolio is comprised of government and
government agency obligations. Government and government agency obligations are
primarily held in the form of Planned Amortization Class (PAC) Collateralized
Mortgage Obligations (CMOs), the most conservative type of CMO issued. These
CMOs are specifically structured to provide the highest degree of protection
against swings in repayments caused primarily by changes in interest rates, have
virtually no risk of default and 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 in which it invests
will allow the Company to maintain high quality, consistent yields and proper
maturities for the overall portfolio.
As of December 31, 1998, the Company held 44%, or $1.02 billion, of the
total fair value of its fixed maturity investments as available for sale. The
Company believes that this percentage is a prudent level that
25
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
will allow enough liquidity to meet any adverse cash flow experience. The
Company continues to classify a significant portion of its investment securities
as held to maturity based on its intent to hold such securities to maturity. A
key feature of LifeUSA Insurance's products is the provision of bonuses to
encourage terminating policyholders to withdraw their funds over settlement
periods lasting at least five years. Policyholders taking cash settlements do
not receive the bonuses. This feature allows the Company to hold a significant
amount of assets to maturity. Insurance regulations require LifeUSA Insurance to
perform an asset adequacy analysis each year to determine if the assets are
sufficient to fund future obligations. LifeUSA Insurance's asset adequacy
analysis indicates that the assets are sufficient to fund future obligations.
The Company continually monitors and modifies the allocation of new assets
between held to maturity and available for sale as deemed prudent based on the
continuing analysis of cash flow projections and liquidity needs.
At December 31, 1998, the Company's shareholders' equity and book value per
share were $280.0 million and $11.30, 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 $266.6 million and
$10.76, respectively, at December 31, 1998, compared to $214.3 million and
$9.41, respectively, at December 31, 1997.
MARKET RISK DISCLOSURE
Market risk is the risk of loss that may occur when fluctuations in
interest and currency exchange rates and equity and commodity prices change the
value of a financial instrument. Both derivative and nonderivative financial
instruments have market risk. The Company is primarily exposed to interest rate
risk.
INTEREST RATE RISK LifeUSA Insurance first manages interest rate risk
through the design of its deferred annuity products and secondarily through
asset and liability management.
LifeUSA Insurance's core two-tier annuity product structure significantly
reduces interest rate risk by encouraging long-term persistency and settlements
by the policyholder. Historically, more than two-thirds of LifeUSA Insurance's
annuity policyholders have elected to annuitize their benefits instead of
surrender for cash. This increases the Company's ability to predict and manage
cash flows relative to traditional annuity products. Changes in external
interest rates have had little discernible effect on surrender and annuitization
activity throughout the history of LifeUSA Insurance.
Projected liability cash flows reflect LifeUSA Insurance's experience and
actuarial projections of policyholder behavior based on product design. Assets
purchased to back the liabilities have cash flows consistent with the liability
structure. Asset cash flows are tightly structured through investment-grade
non-callable corporate obligations or Planned Amortization Class Collateralized
Mortgage Obligations. Currently 63% of the total fair value of the Company's
investments are corporate investment-grade fixed income maturity obligations and
35% are direct government and government agency mortgage-backed securities.
Liability duration measures are used as a guideline in establishing the
initial laddered purchase of assets. In addition, cash flow analysis of the in
force business using a combination of current and probable future interest rate
scenarios is used to monitor and, if needed, adjust the asset portfolio
accordingly. Investment guidelines are designed to maintain a stable portfolio
yield using a buy-and-hold strategy with long-term, fixed income securities.
As a result of the Company's approach to managing interest rate risk, if
interest rates on December 31, 1998 abruptly increased 100 basis points, there
would be no material effect on 1999 net income. This effect on net income does
not consider the possible effects a change in economic activity could have in
such an environment. The Company's customers and competitors would also respond
to these fluctuations, and regulators or legislators might act in ways the
Company cannot foresee. Because the Company cannot be certain what specific
actions would be taken and their effects, the sensitivity analysis above assumes
no significant changes in the Company's financial structure.
Life USA Holding, Inc.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
DERIVATIVES LifeUSA purchases 5-year and 7-year "over-the-counter"
European-Asian call option contracts based on the S&P 500 index. The option
contracts are used specifically to hedge the potential policyholder benefit
associated with the equity-indexed annuity policies sold by LifeUSA Insurance.
LifeUSA Insurance only purchases option contracts from counterparties rated AA-
or better and the option contracts are not used for trading purposes.
As of December 31, 1998, LifeUSA Insurance's investment in option contracts
is as follows (dollars in thousands):
YEAR OF NOTIONAL NUMBER OF WEIGHTED AVG. MARKET
EXPIRATION PAR UNITS STRIKE PRICE COST VALUE
- ------------ ---------- ----------- --------------- -------- ---------
2002 $ 3,076 3,239 $1,278 $ 444 $ 821
2003 44,826 41,107 1,418 7,727 9,759
2004 2,200 2,593 1,239 347 643
2005 662 657 1,393 164 161
------- ------ ------ -------
Totals $50,764 47,596 $8,682 $11,384
======= ====== ====== =======
The option contracts are reported at fair value in other assets on the
Consolidated Balance Sheet. Unrealized gains and losses on the option contracts
are recorded in other revenues to offset increases in the future policy benefits
liability for the index benefit that are shown in other benefits to
policyholders on the Consolidated Statement of Income. The cost of the option
contract is amortized over the life of the option contract and is reflected in
the future policy benefits liability for the index benefit. Any realized gains
at expiration are credited to policyholder reserves.
YEAR 2000 UPDATE
GENERAL A comprehensive analysis of the Year 2000 (Y2K) issue was completed
in 1997. This analysis established a plan for compliance of all Company
information systems and significant non-computer devices to ensure accurate
processing of date data from the twentieth and into the twenty-first centuries.
The project also included identification of key vendors and obtaining assurances
that their key systems are Y2K compliant. Because the Company has only been
operating since 1987, significant systems were already Y2K compliant. Total cost
of the project was estimated at $500,000. At the end of fourth quarter of 1998,
incurred costs totaled $616,000 with final costs expected to be approximately
$650,000, including upgrading of operating systems, development tools and
desktop applications.
SYSTEMS The Company continues to execute its plan to ensure that all
systems are Y2K compliant and expects to complete the plan by June 1999. All of
the Company's mainframe, local area network and voicemail systems are all Y2K
compliant with the exception of systems being upgraded in the normal course of
business. Full scale production level system testing was completed in September
1998. These tests covered key functional components of the systems and tested
conditions through the first quarter of 2001. The machine environment and
application software executed as expected into 2001. Complete documentation of
each test has been compiled and is being archived.
Full scale production level system testing for each of the personal
computer based applications was completed in January 1999. These tests covered
key functional components of the applications and tested conditions through the
first quarter of 2001. Complete documentation of each test has been compiled and
is being archived. The personal computer based applications executed as expected
into year 2001.
Applications being upgraded in the normal course of business include the
financial accounting application and the LifeUSA Insurance policy assembly
application. The financial accounting application is being upgraded to provide
more functionality. This application is Y2K compliant and installation by the
end of first quarter 1999 is on schedule. LifeUSA Insurance is automating its
policy assembly application during the first quarter of 1999, and that
application will be Y2K compliant. In addition, all personal computer hardware
and non-computer hardware is or will be Y2K compliant by June 1999.
ONGOING ACTIVITY Follow-up on compliance assurances by key vendors and
business partners was ongoing through the end of 1998 and will continue in 1999,
as is appropriate. Testing of data exchange with
27
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
key external business partners continues for purposes of date compliance with
testing being executed during the first quarter of 1999 as partners reach date
compliance. Contingency planning continues as additional back-up protection with
respect to key vendors who have provided assurances that their systems are Y2K
compliant.
SUMMARY At this time, the Company is aware of no Y2K compliance issues that
will negatively impact the key business processes of the Company or its
affiliated companies. All Y2K compliance plan activities are scheduled to be
completed by June 1999.
Life USA Holding, Inc.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
Management has organized the Company into three business segments in order
to focus on the distinct functional activities performed by each. The Insurance
Segment focuses on the administration, asset/liability management and
reinsurance of fixed insurance products. The Marketing Segment focuses its
efforts on the field force used to distribute fixed insurance products, product
design and promotion, advertising and the management of investments in marketing
subsidiaries. The Corporate Segment provides strategic direction for all
segments and includes the operations of LifeUSA Securities and LTCAmerica
because their results of operations 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 that follows.
The table on pages 32 and 33 summarizes the results of operations for each of
the three years in the period ended December 31, 1998 and total assets as of
December 31, 1998, 1997 and 1996.
The Company evaluates the performance of each business segment based on
profit or loss from operations. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in Note 1 to the Consolidated Financial Statements. The
asset and income statement items are allocated based on the functionality and
nature of the activities performed by each segment.
INSURANCE SEGMENT. The Insurance Segment develops fixed insurance products
for LifeUSA Insurance and Allianz Life, cedes a portion of the business written
by LifeUSA Insurance to reinsurers and assumes a portion of the Allianz/LUSA
Business. The Insurance Segment manages the assets and liabilities for business
retained or assumed by LifeUSA Insurance and administers all of the LifeUSA
Insurance and Allianz/LUSA Business.
The Insurance Segment's primary revenue sources are net investment income,
net commissions and expense allowances, service fees and policyholder charges.
The Insurance Segment's primary expenses are interest credited to policyholder
account values, other benefits to policyholders, amortization of deferred policy
acquisition costs, intersegment marketing fees paid to the Marketing Segment for
the production of LifeUSA Insurance and Allianz/LUSA Business and operating
expenses. The Insurance Segment's primary assets are investments, reinsurance
recoverables, deferred policy acquisition costs, accrued investment income and
policy loans. These assets represent approximately 98% of the total consolidated
assets. The Insurance Segment's profitability is derived from its ability to
effectively manage the assets and liabilities retained or assumed by LifeUSA
Insurance and to manage the operating expenses incurred in the administration of
all business produced.
REVENUES. Total revenues were $358.4 million, $368.3 million and $316.2
million in 1998, 1997 and 1996, respectively. Since the revenues reported by the
Insurance Segment account for the majority of the revenues reported by the
Company on a consolidated basis, the reasons for the changes are consistent with
those previously discussed in the Company's Results of Operations section.
EXPENSES. Total expenses were $330.5 million, $338.9 million and $293.6
million in 1998, 1997 and 1996, respectively. The decrease in total expenses of
2% in 1998 compared to 1997 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 and deposit 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 17% from 1997, is
calculated as a percentage of premium and will vary generally with the change in
premium and deposit production which decreased 18% from 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
fee to change by greater or lesser amounts than the change in premium and
deposit production. The increase in total expenses of 15% in 1997 compared to
1996 is primarily attributable to the 22% increase in the marketing fee as a
result of the 23% increase in premium production.
MARKETING SEGMENT. The Marketing Segment provides all services related to
the recruitment and development of agents and FMOs, support of agents producing
LifeUSA Insurance business and Allianz/LUSA
29
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
Business, and advertising, promotion 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 business and Allianz/LUSA Business. 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 assets, which
account for less than 1% of total consolidated assets, consist primarily of
investments in subsidiaries. The Marketing Segment's profitability is derived
from its ability to manage commissions and operating costs.
REVENUES. Total revenues were $133.8 million, $155.3 million and $129.2
million in 1998, 1997 and 1996, respectively. The decrease in total revenues of
14% in 1998 compared to 1997, and the increase in total revenues of 20% in 1997
compared to 1996, is primarily attributable to the marketing fee that 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.
EXPENSES. Total expenses were $126.8 million, $140.8 million and $114.8
million in 1998, 1997 and 1996, respectively. The decrease in total expenses of
10% in 1998 compared to 1997, and the increase in total expenses of 23% in 1997
compared to 1996, is primarily attributable to commissions incurred that are
based on premium and deposit production discussed previously. Differences in the
mix of production between annuities and life insurance and differences in the
mix of premium between single, first year and renewal will also cause
commissions to change.
CORPORATE SEGMENT. The Corporate Segment provides strategic direction for
the Company and its various business segments and includes the operations of
LifeUSA Securities and LTCAmerica because their results are not yet material and
do not warrant separate disclosure. The Corporate Segment charges a fee to all
other segments based on the revenues of those individual segments. The Corporate
Segment retains expenses of an enterprise-wide nature, such as the 1997 national
advertising campaign. Assets consist primarily of surplus investments and
investments in subsidiaries.
REVENUES. Total revenues were $10.8 million, $10.4 million and $8.0 million
for 1998, 1997 and 1996, respectively. The increase in total revenues of 4% in
1998 compared to 1997 is due to an increase in other revenues and equity income
in subsidiaries partially offset by the decrease in the corporate fee. The
increase in other revenues is due to an increase in LifeUSA Securities
concession revenue on sales of security products. Equity income in subsidiaries
is a result of the 40% minority interest in Windsor purchased in April 1998. The
corporate fee decrease is due to a decrease in 1998 revenues for the Marketing
and Insurance Segments. The increase in total revenues of 30% in 1997 compared
to 1996 is primarily related to the increases in the corporate fee that is
directly related to the increase in 1997 revenues for the Insurance Segment and
Marketing Segment. In addition, net investment income on the fixed maturity
investments held by the Company was first allocated to the Corporate Segment
beginning in 1997. Prior to 1997, net investment income was fully allocated to
the Insurance Segment.
EXPENSES. Total expenses were $10.6 million, $11.2 million and $8.0 million
for 1998, 1997 and 1996, respectively. The decrease of 6% in 1998 compared to
1997 is primarily attributable to the cost of a national advertising and sales
campaign that was completed in 1997 partially offset by an increase in LifeUSA
Securities commissions paid. The increase of 41% for 1997 compared to 1996 is
primarily attributable to the cost of the national advertising campaign.
Life USA Holding, Inc.
30
<PAGE>
(This page has been left blank intentionally.)
31
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
BUSINESS SEGMENTS RESULTS OF OPERATIONS. The following table summarizes the
results of operations and total assets reported by the three business segments
and reconciles to the Company's consolidated results of operations and
consolidated assets for the years ended 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
INSURANCE SEGMENT MARKETING SEGMENT
----------------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
------------- ------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges ................... $ 53,061 $ 49,470 $ 46,842 $ -- $ -- $ --
Net investment income .................. 156,895 143,263 129,410 22 -- --
Net realized gains (losses) on
investments ........................... 795 4,371 1,791 -- -- --
Commissions and expense
allowances, net ....................... 144,129 170,118 137,734 -- -- --
Marketing fee .......................... -- -- -- 131,753 154,500 128,481
Corporate fee .......................... -- -- -- -- -- --
Equity income in subsidiaries .......... -- -- -- 972 109 47
Other .................................. 3,565 1,090 429 1,074 658 643
---------- ---------- ---------- -------- -------- --------
Total revenues ...................... 358,445 368,312 316,206 133,821 155,267 129,171
Expenses:
Interest credited to policyholder
account values ........................ 117,998 109,507 99,517 -- -- --
Other benefits to policyholders ........ 28,052 23,001 17,414 -- -- --
Amortization of deferred policy
acquisition costs ..................... 30,120 27,789 24,495 -- -- --
Commissions and marketing fee .......... 111,092 134,348 109,879 103,930 119,896 97,157
Taxes, licenses and fees ............... 1,892 2,743 3,596 -- -- --
Operating expenses:
Salaries and employee benefits ....... 15,243 16,226 14,597 7,741 6,167 4,575
Data processing ...................... 3,630 3,311 4,306 1,424 1,260 1,873
Printing and office supplies ......... 932 972 779 1,387 1,360 1,261
Depreciation and amortization ........ 2,545 2,454 2,084 2,738 1,571 794
Other ................................ 18,996 18,577 16,940 9,567 10,500 9,104
---------- ---------- ---------- -------- -------- --------
Total expenses ...................... 330,500 338,928 293,607 126,787 140,754 114,764
---------- ---------- ---------- -------- -------- --------
Income before income taxes .............. 27,945 29,384 22,599 7,034 14,513 14,407
Income taxes ............................ 10,011 10,826 8,294 3,118 5,624 5,293
---------- ---------- ---------- -------- -------- --------
Net income .............................. $ 17,934 $ 18,558 $ 14,305 $ 3,916 $ 8,889 $ 9,114
========== ========== ========== ======== ======== ========
Assets:
Investment in equity method
subsidiaries ........................... -- -- -- $ 35,122 $ 21,131 $ 12,342
========== ========== ========== ======== ======== ========
Total assets ............................ $5,371,201 $5,004,303 $4,357,466 $ 37,456 $ 22,521 $ 12,569
========== ========== ========== ======== ======== ========
</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 deferred policy
acquisition costs and the corresponding amortization is recorded as an asset
and 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
Life USA Holding, Inc.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
<TABLE>
<CAPTION>
CORPORATE SEGMENT ELIMINATING ENTRIES(1) CONSOLIDATED
- ---------------------------------- ------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ---------- ---------- ---------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- $ -- $ -- $ -- $ 53,061 $ 49,470 $ 46,842
1,029 834 2 -- -- -- 157,946 144,097 129,412
(26) (24) -- -- -- -- 769 4,347 1,791
-- -- -- -- -- -- 144,129 170,118 137,734
-- -- -- (131,753) (154,500) (128,481) -- -- --
8,644 9,590 8,032 (8,644) (9,590) (8,032) -- -- --
271 -- -- -- -- -- 1,243 109 47
861 14 -- -- -- -- 5,500 1,762 1,072
------- ------- ------- ---------- ---------- ---------- ---------- ---------- ----------
10,779 10,414 8,034 (140,397) (164,090) (136,513) 362,648 369,903 316,898
-- -- -- -- -- -- 117,998 109,507 99,517
-- -- -- -- -- -- 28,052 23,001 17,414
-- -- -- -- -- -- 30,120 27,789 24,495
728 11 -- (129,967) (152,863) (126,943) 85,783 101,392 80,093
-- -- -- -- -- -- 1,892 2,743 3,596
3,767 3,142 4,452 (778) (700) (600) 25,973 24,835 23,024
222 183 77 (73) (60) (78) 5,203 4,694 6,178
142 130 196 (251) (218) (203) 2,210 2,244 2,033
333 166 95 -- -- -- 5,616 4,191 2,973
5,409 7,608 3,155 (9,328) (10,249) (8,689) 24,644 26,436 20,510
------- ------- ------- ---------- ---------- ---------- ---------- ---------- ----------
10,601 11,240 7,975 (140,397) (164,090) (136,513) 327,491 326,832 279,833
------- ------- ------- ---------- ---------- ---------- ---------- ---------- ----------
178 (826) 59 -- -- -- 35,157 43,071 37,065
121 (357) 24 -- -- -- 13,250 16,093 13,611
------- ------- ------- ---------- ---------- ---------- ---------- ---------- ----------
$ 57 $ (469) $ 35 $ -- $ -- $ -- $ 21,907 $ 26,978 $ 23,454
======= ======= ======= ========== ========== ========== ========== ========== ==========
$ 1,803 -- -- -- -- -- $ 36,925 $ 21,131 $ 12,342
======= ======= ======= ========== ========== ========== ========== ========== ==========
$36,710 $61,418 $58,889 $ 13,352 $ (25,468) $ (42,201) $5,458,719 $5,062,774 $4,386,723
======= ======= ======= ========== ========== ========== ========== ========== ==========
</TABLE>
- ------------------
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. Eliminations for assets consist primarily of adjustments
made to investments in wholly-owned subsidiaries, including dividends which
are assumed to be made from the Marketing Segment to the Corporate Segment.
33
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
Statements other than historical information contained in this Annual
Report and Form 10-K, including the statements involving hypothetical
events included in the "Market Risk Disclosure," are forward-looking
statements and, therefore, subject to risks and uncertainties, including
those identified below, which could cause the actual results to differ
materially from statements. In addition to statements which are
forward-looking by reason of context, the words "believe," "expect,"
"anticipate," "intend," "designed," "goal," "objective," "optimistic,"
"will" and similar expressions identify forward-looking statements.
Factors which could cause actual results to differ materially from the
forward-looking statements, thereby resulting in a material adverse
impact on the business, results of operations or financial condition of
the Company, include but are not limited to (i) the Company's ability to
develop or receive regulatory approval of new products intended to be
marketed as uniquely suited to meet identified needs for life insurance,
retirement income planning and long-term care; (ii) regulatory
constraints on existing or future products rendering the products
unmarketable or unprofitable; (iii) the Company's ability to favorably
differentiate its products and service levels from those of competitors,
including other insurance and financial services companies and various
investment vehicles readily available to consumers; (iv) loss of key
personnel; (v) the Company's ability to manage assets and produce
returns providing sufficient spread on invested assets backing
policyholder liabilities; (vi) the strength of the equity markets and
the interest rate environment; (vii) field marketing organization
investment in the education and support of agents selling the Company's
products; (viii) the ability of owned and minority-owned marketing
organizations to increase production and profitability; (ix) increase in
the size and improvement in the productivity of the Company's
distribution system; (x) continuation of mutually beneficial
relationships with Allianz Life and the Reinsurers; (xi) continued
access to capital at favorable rates; (xii) willingness of the private
market to identify and allocate significant resources to long-term care
coverage; (xiii) the Company's ability to attract and retain committed,
competent and creative home office owners and management; (xiv) the
Company's ability to ensure the continuous availability of technology at
levels necessary to efficiently process and maintain the business
produced for the entire enterprise and manage the assets of the
enterprise; (xv) litigation, with or without merit, claiming significant
resources of the enterprise; and (xvi) the ability of the Company to
adequately remediate all operational systems and non-computer devices
and internal computer software to avoid Year 2000 problems without
significant additional expense, and the reliability of assurances
obtained from and ongoing data exchange testing with key vendors and
business partners to address Year 2000 problems. Forward-looking
statements speak only as of the date on which they are made, and the
Company does not undertake an obligation to update or revise any
forward-looking statements.
Life USA Holding, Inc.
34
<PAGE>
(This page has been left blank intentionally.)
35
Life USA Holding, Inc.
<PAGE>
CONSOLIDATED BALANCE SHEET
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost: $966,205 at
December 31, 1998 and $846,466 at December 31, 1997) .................... $1,020,691 $ 882,159
Held to maturity, at amortized cost (fair value: $1,314,009 at
December 31, 1998 and $1,289,621 at December 31, 1997) .................. 1,259,072 1,249,488
Policy loans ............................................................... 34,939 29,003
---------- ----------
Total investments ....................................................... 2,314,702 2,160,650
Cash and cash equivalents ................................................... 21,570 34,139
Accrued investment income ................................................... 33,729 30,976
Future policy benefits recoverable and amounts due from reinsurers .......... 2,801,109 2,577,598
Deferred policy acquisition costs ........................................... 216,725 215,097
Other assets ................................................................ 70,884 44,314
---------- ----------
$5,458,719 $5,062,774
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits ..................................................... $5,030,833 $4,686,172
Other policyholders' funds ................................................. 9,839 9,208
Amounts due reinsurers ..................................................... 43,546 38,403
Accrued commissions to agents .............................................. 8,990 11,583
Taxes, licenses and fees payable ........................................... 6,023 8,415
Accounts payable ........................................................... 5,262 5,323
Long-term debt ............................................................. 15,000 5,000
Convertible subordinated debentures ........................................ 5,898 36,030
Deferred income taxes ...................................................... 19,172 16,513
Other liabilities .......................................................... 34,171 23,727
---------- ----------
Total liabilities ....................................................... 5,178,734 4,840,374
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized,
none issued ............................................................... -- --
Common stock, $.01 par value; 60,000,000 shares authorized,
24,752,156 shares issued and outstanding (22,723,830 shares at
December 31, 1997) ........................................................ 248 227
Common stock to be issued, 24,361 shares (35,458 shares at
December 31, l997) ........................................................ 328 565
Additional paid-in capital ................................................. 150,096 108,372
Notes receivable from stock sales .......................................... (4,266) (7,477)
Retained earnings .......................................................... 120,145 112,564
Accumulated other comprehensive income:
Net unrealized gain on fixed maturity investments -- available for sale .... 13,434 8,149
---------- ----------
Total shareholders' equity .............................................. 279,985 222,400
---------- ----------
$5,458,719 $5,062,774
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
Life USA Holding, Inc.
36
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Policyholder charges .................................... $ 53,061 $ 49,470 $ 46,842
Net investment income ................................... 157,946 144,097 129,412
Net realized gains on investments ....................... 769 4,347 1,791
Commissions and expense allowances, net ................. 144,129 170,118 137,734
Other ................................................... 6,743 1,871 1,119
----------- ----------- -----------
Total revenues ....................................... 362,648 369,903 316,898
Expenses:
Interest credited to policyholder account values ........ 117,998 109,507 99,517
Other benefits to policyholders ......................... 28,052 23,001 17,414
Amortization of deferred policy acquisition costs ....... 30,120 27,789 24,495
Commissions ............................................. 85,783 101,392 80,093
Taxes, licenses and fees ................................ 1,892 2,743 3,596
Operating expenses ...................................... 63,646 62,400 54,718
----------- ----------- -----------
Total expenses ....................................... 327,491 326,832 279,833
----------- ----------- -----------
Income before income taxes ............................... 35,157 43,071 37,065
Income taxes ............................................. 13,250 16,093 13,611
----------- ----------- -----------
Net income ............................................... $ 21,907 $ 26,978 $ 23,454
=========== =========== ===========
Basic earnings per common share .......................... $ .85 $ 1.24 $ 1.13
=========== =========== ===========
Diluted earnings per common share ........................ $ .83 $ 1.11 $ 1.04
=========== =========== ===========
Number of shares used in per share calculation:
Basic ................................................... 25,659,567 21,795,258 20,762,192
Diluted ................................................. 26,426,291 25,160,437 23,358,663
</TABLE>
SEE ACCOMPANYING NOTES.
37
Life USA Holding, Inc.
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER TOTAL
OF COMMON SHAREHOLDERS'
STOCK SHARES EQUITY
-------------- --------------
<S> <C> <C>
Balance at December 31, 1995 ........................................................... 20,324,747 $ 156,896
Comprehensive income
Net income ............................................................................ 23,454
Change in net unrealized gain (loss) on fixed maturity investments, net of effect
on deferred policy acquisition costs of $21,145 and net of tax of $4,855 .............
Reclassification adjustment for realized gains included in income net of effect
on deferred policy acquisition costs of $(1,200) and net of tax of $191 ..............
Other Comprehensive income ............................................................. (9,372)
---------
Total Comprehensive income ............................................................. 14,082
Issuance of common shares to Employee ..................................................
Savings Plan ........................................................................... 167,457 --
Issuance of shares through field marketing organization loan program, net .............. 478,262 --
Issuance of shares through exercise of options ......................................... 28,455 226
Common stock to be issued-shares, net of 674,174 shares issued ......................... (24,020) 1,411
---------- ---------
Balance at December 31, 1996 ........................................................... 20,974,901 172,615
Comprehensive income
Net income ............................................................................ 26,978
Change in net unrealized gain (loss) on fixed maturity investments, net of effect
on deferred policy acquisition costs of $(17,181) and net of tax of $3,466 ...........
Reclassification adjustment for realized gains included in income net of effect
on deferred policy acquisition costs of $(3,300) and net of tax of $347 ..............
Other Comprehensive income ............................................................. 4,814
---------
Total Comprehensive income ............................................................. 31,792
Issuance of common shares to Employee Savings Plan ..................................... 101,251 --
Issuance of shares through field marketing organization loan program, net .............. 263,652 (257)
Issuance of shares through exercise of options ......................................... 1,216,250 15,372
Issuance of shares through subsidiary acquisition ...................................... 132,188 1,450
Issuance of shares through warrants exercised .......................................... 57,615 --
Issuance of shares through conversion of convertible subordinated debentures ........... 110 --
Common stock to be issued-shares, net of 1,770,313 shares issued ....................... 13,321 1,428
---------- ---------
Balance at December 31, 1997 ........................................................... 22,759,288 222,400
Comprehensive income
Net income ............................................................................ 21,907
Change in net unrealized gain (loss) on fixed maturity investments, net of effect
on deferred policy acquisition costs of $(11,689) and net of tax of $2,388 ...........
Reclassification adjustment for realized gains included in income net of effect
on deferred policy acquisition costs of $(500) and net of tax of $69 .................
Other Comprehensive income ............................................................. 5,285
---------
Total Comprehensive income ............................................................. 27,192
Issuance of common shares to Employee Savings Plan ..................................... 118,482 (100)
Issuance (cancellation) of shares through field marketing organization loan program,
net ................................................................................... (83,094) (101)
Issuance of shares through exercise of options ......................................... 621,857 7,428
Issuance of shares through subsidiary acquisition ...................................... 85,345 3,261
Issuance of shares through conversion of convertible subordinated debentures ........... 380 11
Issuance of shares associated with Allianz agreement ................................... 3,079,056 42,619
Repurchase of common stock ............................................................. (1,793,700) (22,408)
Common stock to be issued-shares, net of 2,028,326 shares issued ....................... (11,097) 1,598
Dividends to shareholders .............................................................. (1,915)
---------
Balance at December 31, 1998 ........................................................... 24,776,517 $ 279,985
========== =========
</TABLE>
SEE ACCOMPANYING NOTES.
Life USA Holding, Inc.
38
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON ADDITIONAL RECEIVABLE OTHER
COMMON STOCK TO PAID-IN FROM COMPREHENSIVE RETAINED
STOCK BE ISSUED CAPITAL STOCK SALES INCOME EARNINGS
- ---------- ----------- ------------ ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
$203 $ 382 $ 80,931 $ -- $ 12,707 $ 62,673
23,454
(8,972)
(400)
--------
(9,372)
2 (1,436) 1,434
5 3,883 (3,888)
0 226
1,411
-------------------------------------------------------------------------------------
210 357 86,474 (3,888) 3,335 86,127
26,978
5,514
(700)
--------
4,814
1 (1,220) 1,219
3 3,586 (3,589) (257)
12 15,360
1 1,449
284 (284)
1,428
-------------------------------------------------------------------------------------
227 565 108,372 (7,477) 8,149 112,564
21,907
5,485
(200)
--------
5,285
1 (1,835) 1,734
(1) (783) 1,248 (565)
7 7,421
1 1,297 1,963
11
31 42,588
(18) (10,544) (11,846)
1,598
(1,915)
---------
$248 $ 328 $ 150,096 $ (4,266) $ 13,434 $ 120,145
====== ======== ========= ======== ======== =========
</TABLE>
SEE ACCOMPANYING NOTES.
39
Life USA Holding, Inc.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 21,907 $ 26,978 $ 23,454
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discount on investments, net ..................... (5,425) (2,970) (2,441)
Net realized gains on investments ............................. (769) (4,347) (1,791)
Policy acquisition costs deferred ............................. (42,937) (44,628) (38,992)
Amortization of deferred policy acquisition costs ............. 30,120 27,789 24,495
Deferred income tax (benefit) provision ....................... 340 470 (1,669)
Changes in operating assets and liabilities ................... (15,821) 3,116 (13,347)
Stock compensation ............................................ 1,741 1,220 1,436
---------- ---------- ----------
Net cash provided by (used in) operating activities .............. (10,844) 7,628 (8,855)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases ..................................................... (169,869) (191,093) (152,389)
Proceeds from sales ........................................... 26,288 196,818 42,542
Proceeds from maturities and principal payments on
mortgage-backed securities ................................... 24,854 17,088 9,081
Fixed maturity investments-held to maturity:
Purchases ..................................................... (92,937) (262,113) (102,603)
Proceeds from sales ........................................... 10,785 -- --
Proceeds from maturities and principal payments on
mortgage-backed securities ................................... 77,821 18,283 10,227
Investments in and loans to field marketing organizations ....... (12,756) (12,510) (10,469)
---------- ---------- ----------
Net cash used in investing activities ............................ (135,814) (233,527) (203,611)
Cash flows from financing activities:
Receipts from universal life and investment products ............ 304,216 345,442 294,529
Withdrawals on universal life and investment products ........... (318,371) (257,260) (208,529)
Interest credited to policyholders .............................. 117,998 109,507 99,517
Change in deferred liability and reserves ....................... 24,868 19,587 14,511
Proceeds from exercise of stock options ......................... 7,423 15,372 226
Proceeds from line of credit .................................... 10,000 5,000 --
Proceeds from common stock issuance to Allianz Life ............. 10,000 -- --
Repurchase of common stock ...................................... (22,408) -- --
Dividends paid .................................................. (1,915) -- --
Other financing activities ...................................... 2,278 1,401 (21)
---------- ---------- ----------
Net cash provided by financing activities ........................ 134,089 239,049 200,233
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents ............. (12,569) 13,150 (12,233)
Cash and cash equivalents at beginning of the year ............... 34,139 20,989 33,222
---------- ---------- ----------
Cash and cash equivalents at end of the year ..................... $ 21,570 $ 34,139 $ 20,989
========== ========== ==========
Cash paid during the year for interest ........................... $ 2,117 $ 2,148 $ 1,984
========== ========== ==========
Cash paid during the year for income taxes ....................... $ 12,941 $ 14,100 $ 16,263
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
Life USA Holding, Inc.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Life USA Holding, Inc. (the Company) was incorporated on February 26, 1987
in the State of Minnesota for the purpose of acquiring, managing and funding the
operations of a life insurance company. During 1987, the Company acquired
Financial Assurance, Incorporated (FAI), a Colorado domiciled stock life
insurance company, authorized to issue life insurance products in 40 states and
the District of Columbia. After the acquisition, the Company changed the name of
FAI to LifeUSA Insurance Company, which conducts its life insurance business
under the registered trade name of "LifeUSA."
During 1994, the Company acquired Fidelity Union Life Insurance Company
(FULICO), a Minnesota domiciled shell life insurance company authorized to issue
life insurance products in 49 states (excluding only New York) and the District
of Columbia, and subsequently merged LifeUSA Insurance and FULICO into a single
company. The surviving company retained the LifeUSA name and is domiciled in
Minnesota, where the Company is headquartered.
LifeUSA Insurance sells a variety of innovative life insurance and annuity
products that offer long-term retirement benefits to consumers who seek
protection against outliving their financial resources. The products of LifeUSA
Insurance are sold by a national marketing and distribution system comprised of
FMOs with independent agents and the products are serviced by home office staff.
During 1996, the Company formed two wholly-owned subsidiaries: LifeUSA
Securities and LifeUSA Marketing. LifeUSA Securities is a retail broker-dealer
that distributes a full range of securities products, including non-proprietary
mutual funds, variable life insurance and annuity contracts, and processes
general securities transactions. LifeUSA Marketing conducts a variety of
marketing activities for the Company, including the acquisition of and
investments in national FMOs.
In July 1998, LTCAmerica was formed for the purpose of acquiring, managing
and funding the operations of an insurance company offering life insurance,
annuity and health insurance products providing long-term care benefits to
consumers. LTCAmerica will seek to purchase, as a subsidiary, either an existing
long-term care insurance company or a shell insurance company that will
underwrite and issue long-term care insurance products. LTCAmerica is a
majority-owned subsidiary of LifeUSA Insurance.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
INVESTMENTS
The Company classifies investments at the time of purchase as held to
maturity or available for sale. Investments that the Company has the ability and
positive intent to hold to maturity are so classified and carried at amortized
cost. All other investments are classified as available for sale and carried at
fair value, with unrealized gains and losses reported as a separate component of
shareholders' equity.
The Company anticipates prepayments in the accounting for discounts and
premiums related to its CMO investments. As differences arise between actual and
anticipated prepayments, the effective yield of CMOs is recalculated to reflect
actual prepayments to date and anticipated future prepayments. The net
investment in the CMOs is then adjusted to the amount that would have existed
had the new effective yield been applied since the acquisition of the CMOs.
Realized gains and losses on sales of available for sale investments are
recorded as revenue using the specific identification method. In addition, the
amortization of deferred policy acquisition costs and other benefits to
policyholders are adjusted for gains and losses realized on sales of available
for sale investments that support policyholder liabilities. Changes in the fair
value of available for sale investments are reflected directly in shareholders'
equity, net of related adjustments for deferred policy acquisition costs and
deferred taxes and related valuation allowances that would have been recorded if
these investments would have been sold as of the balance sheet date.
41
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments that are determined to have a decline in value that is other
than temporary are written down to estimated fair value. This value becomes the
investment's new cost basis and the amount of the write down is recorded as a
realized loss. The Company does not own any such investments.
INVESTMENT IN EQUITY METHOD SUBSIDIARIES
The Company uses the equity method of accounting for the various
organizations in which it holds a minority interest. The excess of amounts
invested over the proportionate equity in the investees' net assets has been
accounted for as goodwill and is being amortized over a 15-year life. The
Company's investment in various companies is classified as investment in equity
method subsidiaries and is included in other assets on the Consolidated Balance
Sheet. Any gains or losses are reflected in the investment balance and are also
reflected in other income on the Consolidated Statement of Income.
CASH AND CASH EQUIVALENTS
The Company considers investments with maturity at the date of their
acquisition of three months or less to be cash equivalents. The carrying amounts
reported in the balance sheet for these financial instruments are based on cost
and approximate fair value.
ACCOUNTING FOR OPTION CONTRACTS
Certain LifeUSA Insurance annuity products provide an additional benefit
credited to the policy annuitization value based on the growth in the Standard &
Poor's (S&P) 500 Index. LifeUSA Insurance has analyzed the characteristics of
these benefits and has purchased option contracts tied to the S&P 500 Index with
similar characteristics to hedge these risks. Management monitors correlation of
in force amounts and option contract values to ensure proper matching. If
persistency assumptions were to deviate significantly from anticipated rates,
management would purchase or sell option contracts as deemed appropriate. As of
December 31, 1998, management believes a proper hedge exists.
The option contracts are reported at fair value in other assets on the
Consolidated Balance Sheet. Unrealized gains and losses on the option contracts
are recorded in other revenues on the Consolidated Statement of Income to offset
increases in the future policy benefits liability for the index benefit that are
shown in other benefits to policyholders on the Consolidated Statement of
Income. The cost of the option contract is amortized over the life of the option
contract and is reflected in the future policy benefits liability for the index
benefit. Any realized gains at expiration are credited to policyholder reserves.
LifeUSA Insurance purchases 5-year and 7-year "over-the-counter"
European-Asian call option contracts based on the S&P 500 index. LifeUSA
Insurance only purchases option contracts from counterparties rated AA- or
better and the option contracts are not used for trading purposes.
ACCOUNTING FOR CEDED COMMISSIONS AND EXPENSE ALLOWANCES Commissions and
expense allowances, and the expenses associated with these
revenues, are recognized in the period in which life insurance premiums and
annuity deposits are ceded. The net cost of reinsurance for life insurance
policies is realized ratably over the life of the affected business in relation
to gross profits.
ACCOUNTING FOR LIFE INSURANCE POLICIES AND ANNUITY CONTRACTS Revenues from
universal life insurance and annuities represent amounts
assessed against policyholders and are reported in the period that the amounts
are assessed. The liability for future policy benefits for universal life
insurance and annuities is equal to the sum of the balance that accrues to the
benefit of policyholders, any amounts that have been assessed to compensate the
insurer for services to be performed over future periods, an accrual for future
retirement bonuses and any amounts previously assessed against policyholders
that are refundable on termination of the contract. The liability for contracts
in a payout status is based on the 1983 Individual Annuity Table at interest
rates ranging from 5.25% to 10.25%.
For business written directly, LifeUSA Insurance defers the cost of
acquiring new business, principally sales compensation, policy issue costs,
underwriting and other related sales expenses. LifeUSA Insurance defers the same
proportion of costs of acquiring new business as the proportion of business
retained. For the Allianz/LUSA Business assumed by LifeUSA Insurance, the amount
of the allowance paid by LifeUSA
Life USA Holding, Inc.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Insurance to Allianz Life as the cost of acquiring new business is deferred.
These deferred costs are amortized over the lives of the policies in proportion
to the estimated gross profits expected to be realized on the policies.
STATE GUARANTY FUND ASSESSMENTS
The Company uses the accrual basis of accounting to record its liability
for state guaranty fund assessments. The liability recorded includes a provision
for anticipated assessments that is calculated using data available from various
industry sources that monitor the current status of open and closed insolvencies
and report the premium base utilized by each state in calculating amounts
assessed to individual insurers. Although additional provisions may be required,
the Company is currently unaware of any significant pending assessments
requiring accrual.
The Company has also established an asset for assessments expected to be
recovered through future premium tax offsets. Although changing legislative
initiatives may affect the right to offset, the Company is currently unaware of
any such initiatives affecting the recoverability of the asset recorded at
December 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
(AICPA) 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.
EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. It excludes the effects of options, warrants and convertible securities.
Diluted earnings per share is computed based on the weighted average number of
shares outstanding assuming that the proceeds from conversion of all stock
options and warrants shall be used to purchase common stock at the average
market price during the period. See Note 8 to the Consolidated Financial
Statements for the 1998, 1997, and 1996 calculation of basic and diluted
earnings per common share.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
The Company files a life-nonlife consolidated federal income tax return.
Allocation of consolidated federal income tax is based upon separate company
federal income tax provision calculations.
In 1998, the Internal Revenue Service completed the audit of the Company's
and LifeUSA Insurance's federal income tax returns for the years 1993 through
1996. There were no material adjustments as a result of the examination.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of
financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REINSURANCE
The Company reports assets and liabilities related to ceded life insurance
and annuity contracts on a gross basis. Specifically, account values ceded to
reinsurers are reflected as a receivable and the liability for future policy
benefits is recorded on a gross basis.
43
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 its 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 and statement of shareholders'
equity. The adoption of this statement had no impact on the amount of net
income, earnings per common share or total shareholders' equity reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise" and defines
financial and descriptive information about a company's operating segments that
is to be disclosed in financial statements. SFAS No. 131 was adopted by the
Company for the year ended December 31, 1998. Management currently has organized
the Company into three business segments in order to focus on the distinct
functional characteristics associated with the activities performed by each. The
results of operations for the Company's Insurance, Marketing and Corporate
business segments are presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations on Business Segments.
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal use." The Company plans
to adopt the SOP on January 1, 1999. The SOP will require the capitalization of
certain costs incurred after the date of adoption in connection with developing
or obtaining software for internal use. The Company currently expenses such
costs as incurred. As a result of adopting the new SOP, the Company expects to
capitalize approximately $1.3 million related to internal use software developed
projects in 1999 that otherwise would have been expensed as incurred.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities," which addresses the
accounting for derivative instruments, such as the option contracts owned by the
Company, used as hedges against changes in cash flow or the fair value of
specified assets or liabilities. This statement is required to be adopted in
years beginning after September 15, 1999. The Company has not yet determined the
impact of the new statement.
RECLASSIFICATIONS
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
Life USA Holding, Inc.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. INVESTMENTS
The amortized cost and fair value of fixed maturity investments as of
December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
1998:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ............ $ 12,485 $ 1,845 $ 3 $ 14,327
Foreign government obligations ................... 36,726 3,553 -- 40,279
Taxable municipals ............................... 6,062 154 -- 6,216
Investment grade corporate obligations ........... 707,388 45,151 900 751,639
Non investment grade corporate obligations ....... 21,581 -- 2,197 19,384
Mortgage-backed securities ....................... 181,963 6,883 -- 188,846
---------- ------- ------ ----------
$ 966,205 $57,586 $3,100 $1,020,691
========== ======= ====== ==========
HELD TO MATURITY
U.S. Treasury securities and obligations of U.S
government corporations and agencies ............ $ 24,751 $ 7,005 $ -- $ 31,756
Foreign government obligations ................... 10,570 1,247 -- 11,817
Taxable municipals ............................... 5,011 57 45 5,023
Investment grade corporate obligations ........... 701,268 31,476 2,446 730,298
Non investment grade corporate obligations ....... 2,996 -- 72 2,924
Mortgage-backed securities ....................... 514,476 17,788 73 532,191
---------- ------- ------ ----------
$1,259,072 $57,573 $2,636 $1,314,009
========== ======= ====== ==========
1997:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ............ $ 13,940 $ 1,317 $ 1 $ 15,256
Foreign government obligations ................... 26,395 2,086 -- 28,481
Investment grade corporate obligations ........... 623,303 30,057 1,797 651,563
Non investment grade corporate obligations ....... 4,907 -- 1,225 3,682
Mortgage-backed securities ....................... 177,921 5,305 49 183,177
---------- ------- ------ ----------
$ 846,466 $38,765 $3,072 $ 882,159
========== ======= ====== ==========
HELD TO MATURITY
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ............ $ 23,398 $ 4,911 $ -- $ 28,309
Foreign government obligations ................... 10,605 789 -- 11,394
Investment grade corporate obligations ........... 696,542 18,480 1,904 713,118
Mortgage-backed securities ....................... 518,943 18,027 170 536,800
---------- ------- ------ ----------
$1,249,488 $42,207 $2,074 $1,289,621
========== ======= ====== ==========
</TABLE>
Fair values for investments are based on quoted market prices. No holdings
of any issuer are greater than 5% of the Company's total investments in fixed
maturities, other than direct or guaranteed obligations of the United States
government or United States government corporations and agencies. The foreign
government obligations held are denominated in U.S. dollars and issued and
traded in the United States.
45
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturity investments at December
31, 1998, by contractual maturity, are as follows (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less ...................... $ 7,051 $ 7,106 $ 66,353 $ 66,571
Due after one year through five years ........ 103,940 109,283 256,887 259,997
Due after five years through ten years ....... 328,135 349,377 307,710 332,642
Due after ten years .......................... 345,116 366,079 113,646 122,608
-------- ---------- ---------- ----------
784,242 831,845 744,596 781,818
Mortgage-backed securities ................... 181,963 188,846 514,476 532,191
-------- ---------- ---------- ----------
Total ........................................ $966,205 $1,020,691 $1,259,072 $1,314,009
======== ========== ========== ==========
</TABLE>
Expected maturities in the foregoing table may differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
During 1998, 1997 and 1996, the Company sold certain investments classified
as available for sale. Proceeds from these sales were immediately reinvested in
investments of a high grade similar to those investments sold. Gross gains of
$1.3 million, $6.1 million and $1.9 million were realized on these sales in
1998, 1997 and 1996, respectively. Gross losses of $.5 million, $1.7 million and
$.1 million were realized on these sales in 1998, 1997 and 1996, respectively.
The recognition of these net realized gains resulted in an increase in the
amortization of deferred policy acquisition costs and an increase in other
benefits to policyholders of $.5 million, $3.3 million and $1.2 million in 1998,
1997 and 1996, respectively.
In June 1998, a fixed maturity investment classified as held to maturity
was sold with an amortized cost of $10 million. The realized gain on this sale
was not significant. The sale of this fixed maturity investment was due to
significant deterioration in the issuer's creditworthiness as indicated by
downgrades by Standard & Poor's and Moody's Investor Services just prior to the
sale.
The components of net investment income are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities ................ $156,430 $142,548 $128,629
Cash and cash equivalents ....... 2,409 2,222 1,403
Policy loans .................... 760 607 519
Other ........................... 109 68 94
-------- -------- --------
159,708 145,445 130,645
Investment expenses ............. (1,762) (1,348) (1,233)
-------- -------- --------
Net investment income ........... $157,946 $144,097 $129,412
======== ======== ========
</TABLE>
During 1998, the Company had investment management agreements with Windsor,
Investment Advisors, Inc. (IAI) and AIC, an affiliate of Allianz Life. For their
services in 1998, Windsor, IAI and AIC were paid a fee based on the market value
of investments at the end of each quarter. For the years ended December 31,
1998, 1997 and 1996, the Company paid an aggregate of $1.0 million, $1.1 million
and $1.0 million, respectively, for investment management services.
Fixed maturity investments with a total carrying value of $7.7 million are
on deposit with various states in support of statutory requirements as of
December 31, 1998.
Life USA Holding, Inc.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. INVESTMENTS (CONTINUED)
The net unrealized gain on fixed maturity investments -- available for sale
included in shareholders' equity consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Gross unrealized gain on fixed maturity
investments -- available for sale ......... $ 54,486 $ 35,693 $ 13,879
Adjustments for:
Deferred tax liability .................. (19,070) (12,835) (4,858)
Deferred policy acquisition costs ....... (33,818) (22,629) (8,748)
Deferred tax asset ...................... 11,836 7,920 3,062
--------- --------- --------
Net unrealized gain on fixed maturity
investments -- available for sale ......... $ 13,434 $ 8,149 $ 3,335
========= ========= ========
</TABLE>
The gross unrealized gain on fixed maturity investments -- available for
sale before adjustments for deferred taxes and deferred policy acquisition costs
increased (decreased) $18.8 million, $21.8 million and $(36.8) million for the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 3. EQUITY INTERESTS
In 1996, LifeUSA Marketing acquired Tax Planning Seminars (TPS), a field
marketing organization (FMO). In addition, LifeUSA Marketing holds minority
equity interests of 50% of Life Sales LLC (LS), 40% of Creative Marketing
International Corporation (CMIC), 45% of Personalized Brokerage Services, Inc.
(PBS), 35% of Ann Arbor Annuity Exchange (Ann Arbor), 40% of Roster Financial,
LLC (Roster) and 40% of Signature Financial Services, Inc (SF). In April 1998,
the Company purchased a 40% minority interest in Windsor, a Minneapolis-based
investment management firm. TPS is included in the consolidated financial
statements of the Company with elimination of intercompany profits and balances.
LifeUSA Marketing and the Company use the equity method of accounting for the
companies in which it holds a minority interest.
As of December 31, 1998 and 1997, LifeUSA Marketing and the Company had
invested $36.9 million and $21.1 million, respectively, in its various
companies. The excess of amounts invested over the proportionate equity in the
investees' net assets has been accounted for as goodwill and is being amortized
over a 15-year life. Total amortization for the years ended December 31, 1998,
1997 and 1996 was $2.1 million, $1.0 million and $200,000, respectively.
The LS, PBS, Ann Arbor, Roster and SF acquisition agreements contain
certain provisions which permit and could require LifeUSA Marketing to purchase
part or all of the remaining equity interests.
NOTE 4. LINE OF CREDIT
During 1996, the Company entered into a line of credit agreement with two
of the Reinsurers. The line of credit is available for use to fund certain
investments and acquisitions the Company may make, capital contributions to
LifeUSA Insurance, repurchase of common stock or capital expenditures. In 1997,
the maximum borrowing allowed under this agreement was increased to $50 million.
Borrowings under the line of credit, as amended, may be made through May 17,
2000, will mature on March 31, 2002 and will be subject to mandatory repayments
from 25% of excess cash flow (as defined) for the prior calendar year on June
30, 2000 and March 31, 2001. The line of credit agreement contains various
financial covenants, including maintenance of minimum levels of consolidated
tangible net worth for the Company and statutory capital and surplus and
risk-based capital for LifeUSA Insurance. The Company is required to pay a
commitment fee of 1/4 of 1% per quarter on the average daily unused portion of
the credit line. In September 1998, the Company borrowed $10 million under its
line of credit increasing the total outstanding balance to $15 million. The
Company has no other outstanding borrowings under this agreement.
NOTE 5. CONVERTIBLE SUBORDINATED DEBENTURES
During 1995, Allianz Life purchased a 15-year, $30 million convertible
subordinated debenture from the Company. In February 1998, Allianz Life
converted the $30 million debenture it purchased from the Company into shares of
common stock as described in Note 10 to the Consolidated Financial Statements.
47
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5. CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
Prior to 1993, the Company's agents and employees earned convertible
subordinated debentures as a portion of their compensation. At December 31,
1998, $5.9 million of these debentures were outstanding. The debentures bear an
8% fixed interest rate which is payable annually. The debentures mature on June
30, 2000 or sooner at the option of the Company or mandatorily upon the sale of
the Company. Subject to certain conditions, the debentures may be converted into
shares of the Company's common stock at a conversion price of $25.50 per share
through June 30, 1999. This conversion price increases by $1.50 per year up to a
maximum of $27.00 per share. The debentures are subordinate to all present and
future indebtedness of the Company, including lease obligations. During 1998 and
1997, $8,816 and $2,562 of debentures were converted to 380 and 110 shares of
common stock, respectively. No debentures were converted in 1996.
NOTE 6. LEASES
The Company leases office space, telephone equipment and furniture under
operating leases expiring in various years through February 2001, with rights to
lease additional office space at specified future dates and options to renew the
leases for office space for an additional nine years and ten months from the
expiration date. The office lease payments are subject to adjustment for real
estate taxes and maintenance expenses. Rent expense on these operating leases
charged to operations was $2.0 million, $1.9 million and $1.5 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1998 are as follows (in
thousands):
1999 .............. $2,334
2000 .............. 2,334
2001 .............. 389
------
$5,057
======
NOTE 7. CAPITAL STRUCTURE
PREFERRED STOCK
The Board of Directors has the authority to designate additional classes of
preferred stock and the rights and preferences of any class of preferred stock
from the 15 million authorized preferred shares. The issuance of preferred stock
may adversely affect various rights, including voting rights, of the common
shareholders and may be used as an anti-takeover device.
COMMON STOCK TO BE ISSUED
In connection with employee and Company contributions to the Life USA
Holding, Inc. Employee Savings Plan (Savings Plan), 24,361 shares of common
stock were to be issued at the price of $12.875 per share at December 31, 1998
and 35,458 shares of common stock were to be issued at prices ranging from
$16.125 to $16.875 per share at December 31, 1997 to employee accounts under the
Savings Plan.
NOTES RECEIVABLE FROM STOCK SALES
During 1998, 1997 and 1996, the Company issued common stock to several of
its FMOs in exchange for promissory notes in order to provide additional
incentives for the FMOs to increase the life insurance and annuity business
produced for LifeUSA Insurance or through LifeUSA Insurance under its agreement
with Allianz Life. The shares of common stock issued for the account of the FMO
are held in the possession of the Company as security for the repayment of the
promissory note. The promissory notes bear interest rates ranging from 8% to 10%
per annum compounded monthly and are payable at maturity (the fifth anniversary
of the date of the note).
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123
"Accounting for
Life USA Holding, Inc.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Stock-Based Compensation," requires the use of highly subjective option
valuation models that were developed for use in valuing publicly traded stock
options. Currently, under APB No. 25, no compensation cost is recognized since
the exercise price of the Company's stock options is equal to, or greater than,
the market price of the underlying stock on the date of grant.
In a recent proposed FASB Interpretation, the FASB limited the scope of APB
No. 25 to individuals who meet the common law definition of an employee. As a
result, options issued to directors and agents of the Company would have to be
accounted for under SFAS No. 123. The final FASB Interpretation, which is
expected to be issued in September 1999, is effective when issued. If adopted,
the Interpretation would be applied prospectively but would be applied to plan
modifications and grants that occur after December 15, 1998. The Company has not
yet determined the impact of the proposed Interpretation.
The binomial and Black and Scholes option valuation models were developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. To further facilitate the
use of the information disclosed, a range of reasonable values also is presented
with the Company's pro forma information to reflect the variability of the
results of the valuation process that would arise from changes made to the
assumptions.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined using binomial option valuation
models as if the Company had accounted for its employee stock options under the
fair value method of that Statement. The assumptions used for each stock option
plan are included in the discussion of that specific plan.
In 1990, the Company established the Life USA Holding, Inc. 1990 Stock
Option Plan (the 1990 Stock Option Plan). The 1990 Stock Option Plan provides
for the granting of stock options to employees and consultants of the Company.
An aggregate of five million shares of common stock is reserved for issuance
upon the exercise of the options granted. The purchase price of the shares of
common stock subject to options granted under the 1990 Stock Option Plan is
determined by a committee of the Board of Directors; the purchase price cannot
be less than 100% of the fair market value on the date the option is granted for
incentive stock options and cannot be less than 85% of the fair market value on
the date the option is granted for non-qualified options. No options may be
granted under the 1990 Stock Option Plan after September 2000. The option
vesting period and exercise period are determined by the committee at the date
of the grant. The vesting periods range from zero to four years. During 1996,
the committee determined that the life of all outstanding employee stock options
issued with a five year life would be extended to ten years and all future
employee stock option grants would be issued with a life of ten years. The
additional expense related to the grant extensions is disclosed separately in
the 1996 pro forma disclosures.
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the 1990 Stock Option Plan. The
volatility used was 36.37%, 37.47% and 38.03% for 1998, 1997 and 1996,
respectively; the risk free interest rates ranged from 4.39% to 4.86%, 5.07% to
5.70% and 5.04% to 6.38% for 1998, 1997 and 1996, respectively; and the expected
option life was seven years for 1998, 1997 and 1996. The dividend yield for 1998
was .58% to 1.00%.
49
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998 ranged from
$6.00 to $28.00. A summary of the Company's stock option activity for the 1990
Stock Option Plan, and related information for the years ended December 31
follows (in thousands, except exercise price amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year 3,231 $ 11.72 2,720 $ 10.21 2,289 $ 10.26
Granted equal to market ........ 217 13.27 714 13.98 373 8.77
Granted above market ........... 203 21.39 178 19.84 151 12.96
Exercised ...................... (547) 9.22 (360) 8.82 (29) 7.00
Canceled ....................... (53) 17.83 (21) 11.48 (64) 11.50
----- -------- ----- -------- ----- --------
Outstanding -- end of year ..... 3,051 $ 12.82 3,231 $ 11.72 2,720 $ 10.21
===== ======== ===== ======== ===== ========
Exercisable -- end of year ..... 2,426 $ 12.73 2,154 $ 11.53 1,858 $ 10.39
===== ======== ===== ======== ===== ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ 5.32 $ 6.55 $ 4.21
======== ======== ========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998 (in thousands, except exercise price
and remaining contractual life amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ----------------------------- ----------------------------
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES LIFE IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
- ------------------ ------------------ -------- ------------------ -------- -----------------
<S> <C> <C> <C> <C> <C>
$ 6.00 - 9.00 5.1 474 $ 7.54 388 $ 7.21
$ 9.01 - 13.50 6.3 1,564 11.21 1,295 11.07
$13.51 - 20.25 8.3 794 16.14 524 16.35
$20.26 - 28.00 8.2 219 23.72 219 23.72
</TABLE>
Beginning in 1992, the Company granted stock options as commission bonuses
to LifeUSA Insurance agents (Agent Option Plan) based on net earned commissions
on business written. The purchase price of shares of common stock subject to
these options is the greater of $10.00 per share or 150% of the average closing
bid price for the Company's common stock for the twenty days immediately
preceding the end of the calendar quarter for which the stock option is granted.
The options vest immediately upon issuance and expire on December 31 in the
fifth year following the date of grant. As a result, 646,438 options granted in
1993 and 166,808 options granted in 1992 expired in 1998 and 1997, respectively.
The Company discontinued the granting of stock options as production bonuses
following the calendar quarter ended March 31, 1997.
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the Agent Option Plan. The
volatility used was 34.58% and 36.89% for 1997 and 1996 respectively; the risk
free interest rates was 5.39% for 1997 and ranged from 6.10% to 6.15% for 1996;
and the expected option life was four years for 1997 and 1996.
Life USA Holding, Inc.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998 ranged from
$11.02 to $18.90. A summary of the Company's stock option activity for the Agent
Option Plan, and related information for the years ended December 31 follows (in
thousands, except exercise price amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year 3,256 $ 15.44 4,237 $ 14.58 3,482 $ 14.93
Granted equal to market ........ -- -- 101 15.71 862 13.38
Exercised ...................... (75) 12.19 (846) 11.83 -- --
Canceled ....................... (686) 21.49 (236) 13.11 (107) 16.37
----- -------- ----- -------- ----- --------
Outstanding -- end of year ..... 2,495 $ 13.87 3,256 $ 15.44 4,237 $ 14.58
===== ======== ===== ======== ===== ========
Exercisable -- end of year ..... 2,495 $ 13.87 3,256 $ 15.44 4,237 $ 14.58
===== ======== ===== ======== ===== ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ -- $ 1.89 $ 2.37
======== ======== ========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998 (in thousands, except exercise price
and remaining contractual life amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ----------------------------- ----------------------------
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES LIFE IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
- ------------------ ------------------ -------- ------------------ -------- -----------------
<S> <C> <C> <C> <C> <C>
$ 9.01 - 13.50 2.3 1,024 $ 12.24 1,024 $ 12.24
$13.51 - 20.25 1.9 1,471 15.00 1,471 15.00
</TABLE>
During 1993, the Company established the LifeUSA Director Option Plan
(Director Option Plan) which provides for the granting of stock options to
members of the Company's Board of Directors who are not and have not been
full-time employees of the Company or any of its subsidiaries. Each such
director receives a non-qualified stock option to purchase 1,000 shares of
common stock for each meeting of the Board of Directors attended. The exercise
price of the option is equal to the fair market value of the stock on the date
of the meeting. An aggregate of 200,000 shares of common stock is reserved for
issuance upon the exercise of the options granted. These options vest
immediately, are exercisable six months and one day after issuance, and expire
on the earlier of five years from issuance or one year after the director ceases
to be a member of the Board of Directors.
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the Director Option Plan. The
volatility used was 34.36%, 34.58% and 36.89% for 1998, 1997 and 1996
respectively; the risk free interest rates ranged from 4.58% to 4.62%, 4.97% to
5.21% and 6.03% to 6.10% for 1998, 1997 and 1996, respectively; and the expected
option life was four years for 1998, 1997 and 1996. The dividend yield for 1998
was .61% to .81%.
51
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998 ranged from
$8.25 to $18.13. A summary of the Company's stock option activity for the
Director Option Plan, and related information for the years ended December 31
follows (in thousands, except exercise price amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year 69 $ 11.61 65 $ 10.78 45 $ 11.67
Granted equal to market ........ 16 14.33 16 13.41 20 8.78
Canceled ....................... (6) 19.27 -- -- -- --
Exercised ...................... -- -- (12) 9.51 -- --
Outstanding -- end of year ..... 79 $ 11.58 69 $ 11.61 65 $ 10.78
==== ======== === ======== == ========
Exercisable -- end of year ..... 71 $ 11.43 62 $ 11.08 55 $ 11.12
==== ======== === ======== == ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ 4.81 $ 4.62 $ 3.28
======== ======== ========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998 (in thousands, except exercise price
and remaining contractual life amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ----------------------------- ----------------------------
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES LIFE IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
- ------------------- ------------------ -------- ------------------ -------- -----------------
<S> <C> <C> <C> <C> <C>
$ 6.00 - 9.00 1.9 24 $ 8.57 24 $ 8.57
$ 9.01 - 13.50 2.1 32 10.70 28 10.47
$13.51 - 20.25 3.4 23 15.96 19 16.43
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is charged to expense in the year of grant. During 1998, the expense has
been reduced by dividend payments to shareholders and by amounts deferred from
previous years' cost of acquiring new business. This amount has been calculated
using a method consistent with that utilized by LifeUSA Insurance to defer
commissions paid to agents. The Company's pro forma information follows (in
thousands, except for earnings per share information):
<TABLE>
<CAPTION>
1998 1997
----------------------------------- --------------------------------
RANGE OF VALUES RANGE OF VALUES
------------------------ ---------------------
SFAS 123 HIGH LOW SFAS 123 HIGH LOW
---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reported net income ............ $ 21,907 $ 21,907 $21,907 $ 26,978 $ 26,978 $ 26,978
Additional expense: ............
1990 Stock Option Plan:
Original grants .............. (1,217) (1,627) (443) (3,415) (4,275) (1,328)
Grant extensions ............. -- -- -- -- -- --
Agent Option Plan ............ (21) (32) (7) (158) (259) (60)
Director Option Plan ......... (41) (55) (27) (43) (56) (26)
-------- -------- -------- -------- -------- --------
Pro forma net income ........... $ 20,628 $ 20,193 $21,430 $ 23,362 $ 22,388 $ 25,564
======== ======== ======== ======== ======== ========
Pro forma earnings per share:
Basic ........................ $ .80 $ .79 $ .84 $ 1.07 $ 1.03 $ 1.17
======== ======== ======== ======== ======== ========
Diluted ...................... $ .78 $ .77 $ .81 $ .96 $ .92 $ 1.05
======== ======== ======== ======== ======== ========
</TABLE>
1996
--------------------------------
RANGE OF VALUES
---------------------
SFAS 123 HIGH LOW
---------- ---------- ----------
Reported net income ............ $ 23,454 $ 23,454 $23,454
Additional expense: ............
1990 Stock Option Plan:
Original grants .............. (1,273) (1,626) (444)
Grant extensions ............. (3,628) (5,091) (981)
Agent Option Plan ............ (998) (1,512) (320)
Director Option Plan ......... (38) (49) (21)
-------- -------- -------
Pro forma net income ........... $ 17,517 $ 15,176 $21,688
======== ======== =======
Pro forma earnings per share:
Basic ........................ $ .84 $ .73 $ 1.05
======== ======== =======
Diluted ...................... $ .79 $ .69 $ .97
======== ======== =======
Life USA Holding, Inc.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
SAVINGS PLAN
In 1990, the Company adopted the Savings Plan. An aggregate of 1,000,000
shares of common stock is reserved for issuance by the Savings Plan. All
permanent employees age 18 and over are eligible to participate in the Savings
Plan. Participants may contribute from 1% to 15% of their annual salary to the
Savings Plan, and the Company will match these contributions at a percentage to
be determined annually at the discretion of the Company. The Company may also
contribute a discretionary profit sharing amount, determined annually. Prior to
January 1, 1998, contributions made to the Savings Plan by the Company were
invested in common stock of the Company. Effective January 1, 1998, Company
contributions may be in the form of common stock of the Company or cash
contributions to the employee's elected mutual funds in the Savings Plan. During
the years of 1998, 1997 and 1996, the Company matched the participants'
contributions dollar-for-dollar up to 6% of their annual salaries. The Company's
expense for the years ended December 31, 1998, 1997 and 1996, was $1.2 million,
$1.1 million and $.9 million, respectively.
STOCK REPURCHASE PROGRAM
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 represented
approximately 15% of the Company's 26.0 million shares outstanding. As of
December 31, 1998, 1.8 million shares have been repurchased by the Company at an
average price of $12.50 per share. Repurchased shares will be deemed to be
outstanding shares for purposes of calculating the 35% of the outstanding common
stock of the Company to be acquired under the agreement with Allianz Life. See
Note 10 to the Consolidated Financial Statements for more details.
DIVIDENDS
In January 1999, the Company announced that its Board of Directors declared
a cash dividend of 2.5 cents per share for the fourth quarter of 1998, payable
on February 12, 1999 to shareholders of record as of January 28, 1999. The
Company declared similar dividends for the first, second and third quarters of
1998. It is the intention of the Board of Directors to pay regular quarterly
dividends in 1999 of 2.5 cents per share, or ten cents per share on an annual
basis.
The ability of the Company to pay dividends is limited because a majority
of the Company's revenues is produced by LifeUSA Insurance, and distributions by
LifeUSA Insurance to the Company are subject to permission and other limitations
imposed by the Department of Commerce of the State of Minnesota. LifeUSA
Insurance paid $2.5 million in extraordinary dividends to the Company during
1998 and 1997 and $5 million in January 1999, as permitted by the Department of
Commerce of the State of Minnesota.
53
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8. EARNINGS PER SHARE
Basic and diluted earnings per share for the years ended December 31, 1998,
1997 and 1996 were computed as follows (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
BASIC
Weighted-average shares outstanding ................. 25,659,567 21,795,258 20,762,192
========== ========== ==========
Net income .......................................... $ 21,907 $ 26,978 $ 23,454
============ ============ ============
Per common share amount ............................. $ .85 $ 1.24 $ 1.13
============ ============ ============
DILUTED
Average shares outstanding and to be issued ......... 25,665,658 21,808,351 20,767,538
Effect of dilutive securities: employee stock
options, convertible debentures and warrants ....... 760,633 929,208 171,714
Shares assuming conversion of convertible
subordinated debentures ............................ -- 2,422,878 2,419,411
------------ ------------ ------------
Adjusted weighted-average shares .................... 26,426,291 25,160,437 23,358,663
============ ============ ============
Net income .......................................... $ 21,907 $ 26,978 $ 23,454
Add convertible subordinated debenture interest,
net of federal income tax effect ................... 85 870 870
------------ ------------ ------------
Adjusted net income ................................. $ 21,992 $ 27,848 $ 24,324
============ ============ ============
Per common share amount ............................. $ .83 $ 1.11 $ 1.04
============ ============ ============
</TABLE>
NOTE 9. INCOME TAXES
Income taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current income taxes:
Federal ........................ $11,304 $15,346 $ 14,459
State .......................... 187 277 821
------- ------- --------
Total current income taxes ....... 11,491 15,623 15,280
Deferred income taxes ............ 1,759 470 (1,669)
------- ------- --------
Total income taxes ............ $13,250 $16,093 $ 13,611
======= ======= ========
</TABLE>
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate for the years ended December 31
is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
PROVISION RATE PROVISION RATE PROVISION RATE
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income taxes based on the statutory rate ....... $12,305 35.0% $15,075 35.0% $12,973 35.0%
State income tax, net of federal benefit ....... 266 .8 366 .8 453 1.2
Other taxes .................................... 679 1.9 652 1.1 185 .5
------- ---- ------- ---- ------- ----
Total income taxes ............................ $13,250 37.7% $16,093 37.4% $13,611 36.7%
======= ==== ======= ==== ======= ====
</TABLE>
Life USA Holding, Inc.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9. INCOME TAXES (CONTINUED)
The components of the deferred tax provision (benefit) for the years ended
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred policy acquisition costs ........ $ 3,784 $ 4,511 $ 3,548
Future policy benefits ................... (4,162) (5,279) (3,840)
Deferred agent compensation .............. 187 260 49
State guaranty fund assessments .......... 300 749 (1,109)
Other .................................... 1,650 229 (317)
-------- -------- --------
$ 1,759 $ 470 $ (1,669)
======== ======== ========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Future policy benefits ....................... $ 61,584 $57,422
Unrealized gains/losses on investments ....... 11,836 7,920
Deferred agent compensation .................. 2,217 2,404
State guaranty fund assessments .............. 1,109 1,109
Other ........................................ 10,637 7,978
-------- -------
Total gross deferred tax assets ................. 87,383 76,833
Deferred tax liabilities:
Deferred policy acquisition costs ............ 75,831 72,047
Unrealized gains/losses on investments ....... 19,070 12,835
State guaranty fund assessments .............. 1,524 1,013
Other ........................................ 10,130 7,451
-------- -------
Total gross deferred tax liabilities ............ 106,555 93,346
-------- -------
Net deferred tax liability ...................... $ 19,172 $16,513
======== =======
</TABLE>
NOTE 10. AGREEMENT WITH ALLIANZ LIFE
In an agreement announced in January 1998 ("the agreement with Allianz
Life"), Allianz Life will acquire up to 35 percent of the outstanding common
stock of the Company over the period ending 2002, and the marketing agreement
between the two companies was extended to December 31, 2000. Allianz Life will
acquire its interest in the Company as a result of several specific actions:
First, over a five-year period ending 2002, Allianz Life will purchase from
the Company $100 million of newly issued common stock in increments of $10
million semi-annually. The purchase of common stock will provide the Company
with $100 million of equity capital through the use of a financing vehicle
called a Sequentially Timed Equity Placement. The price at which Allianz Life
will purchase the common stock will be at 250 percent of the Company's book
value per share (excluding SFAS No. 115) at the time the common stock is issued.
If the price at which Allianz Life would purchase the Company's common stock,
calculated at 250 percent of the then current book value, is more than 200
percent of the current market price at the time the common stock is tendered,
Allianz Life can decline to purchase the stock. However, in such an event, the
Company may require Allianz Life to purchase a convertible debenture for a like
amount of capital. The convertible debenture would include a 10 year term,
interest only payments for the first five years, interest at a rate equal to the
10 year U.S. treasury bond, at the time of issue, conversion at 200 percent of
the market price at issue, and a mandatory conversion provision at 80 percent of
the conversion price. Second, in February 1998, 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
55
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10. AGREEMENT WITH ALLIANZ LIFE (CONTINUED)
a conversion price of $12.34 per share. Allianz Life also exercised its
preemptive rights and purchased 241,846 additional shares at $12.36 per share.
Third, Allianz Life purchased 925,000 shares from certain members of the
Company's management at $16.44 per share. In addition, Allianz Life may acquire
an additional 1,604,104 shares of the Company's common stock in open market
purchases through February 6, 2000.
In August 1998, Allianz Life acquired 406,092 shares of the Company's
common stock with the initial $10 million semi-annual installment. As of
December 31, 1998 Allianz Life had purchased an aggregate of 5,304,056 shares.
Allianz Life has nominated two individuals to the Company's Board of
Directors, and additional directors may be nominated proportional to Allianz
Life's percentage ownership. The agreement limits Allianz Life's ownership to
35% of the Company's common stock (excluding the effect of the Company's share
repurchase program), precludes it from making management changes and provides
certain other standstill protections.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company currently has investment management agreements with Windsor and
AIC. For their services in 1998, Windsor and AIC were paid a fee based on the
market value of investments at the end of each quarter. For the years ended
December 31, 1998, 1997 and 1996, the Company paid Windsor and AIC an aggregate
of $.4 million, $.2 million and $.1 million, respectively, for investment
management services.
The Company incurred legal fees of $.7 million, $.4 million and $.4 million
for the years ended December 31, 1998, 1997 and 1996, respectively, from the law
firm of which one of its directors and two officers of the Company are members.
Members of such firm beneficially owned 281,830 shares of the Company at
December 31, 1998, or approximately 1.1% of the then outstanding shares.
The Company incurred actuarial and other consulting fees of $.8 million,
$1.2 million and $.7 million for the years ended December 31, 1998, 1997 and
1996, respectively, from the firm of which one of its directors is a member.
The Company incurred legal and other consulting fees of $.1 million, $.2
million, and $.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively, from the firm of which one of its directors is a member.
Life USA Holding, Inc.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES Changes in operating
assets and liabilities consist of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Increase in policy loans ................................... $ (1,649) $ (1,628) $ (1,553)
Increase in accrued investment income ...................... (2,753) (3,142) (4,324)
Increase in recoverable on paid losses and amounts due
from reinsurers ........................................... (11,848) (10,791) (7,678)
(Increase) decrease in other assets ........................ (10,743) 8,551 2,636
Increase in other policyholders' funds ..................... 631 3,827 928
Increase (decrease) in amounts due reinsurers .............. 5,143 14,798 (3,698)
(Decrease) increase in accrued commissions to agents ....... (2,593) 1,340 (1,121)
Decrease in taxes, licenses and fees payable ............... (2,392) (9,453) (1,045)
(Decrease) increase in accounts payable .................... (61) (1,644) 2,196
Increase in other liabilities .............................. 10,444 1,258 312
--------- --------- ---------
$ (15,821) $ 3,116 $ (13,347)
========= ========= =========
Supplemental schedule of noncash financing activities:
Issuance of stock upon conversion of convertible
subordinated debentures ................................. $ 11 $ 3 $ --
Issuance of stock to employees as compensation ........... 1,835 1,220 1,436
Issuance of stock upon conversion of convertible
subordinated debenture and shares associated with
agreement with Allianz Life ............................. 42,619 -- --
</TABLE>
NOTE 13. STATUTORY CAPITAL AND SURPLUS
LifeUSA Insurance, domiciled in Minnesota, prepares its statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Department of Commerce of the State of Minnesota. LifeUSA Insurance does not
utilize any accounting practices in the preparation of its statutory financial
statements that differ from those prescribed by the Department of Commerce of
the State of Minnesota.
At December 31, 1998 and 1997, LifeUSA Insurance had statutory capital and
surplus of $113.1 million and $103.7 million, respectively, as reported to
regulatory authorities. The Company made no capital contributions to LifeUSA
Insurance in 1998 or 1997. LifeUSA Insurance paid $2.5 million in extraordinary
dividends to the Company during 1998 and 1997 and $5 million in January 1999.
The extraordinary dividends were permitted by the Department of Commerce of the
State of Minnesota. LifeUSA Insurance's ability to pay dividends in the future
is subject to compliance with Minnesota insurance laws and regulations.
Statutory net income for the years ended December 31, 1998, 1997 and 1996 was
$17.2 million, $18.4 million and $13.2 million, respectively. Differences
between net income and statutory net income arise primarily from deferred policy
acquisition costs, future policy benefits, deferred income taxes, amortization
of licenses and noncash transactions relating to agent advances.
57
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- --------- -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998:
Revenues ................. $92,078 $89,697 $ 88,767 $92,106
Net income ............... 6,009 5,574 5,168 5,156
Earnings per common share:
Basic .................. .23 .22 .20 .20
Diluted ................ .23 .21 .20 .20
1997:
Revenues ................. $79,352 $91,816 $107,187 $91,548
Net income ............... 5,145 5,331 9,628 6,874
Earnings per common share:
Basic ................... .24 .25 .44 .31
Diluted ................. .22 .23 .38 .27
</TABLE>
The results for the quarters ended December 31 were impacted by the
following items (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------------- -------------------------
NET INCOME PER SHARE NET INCOME PER SHARE
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net realized gains on investments ................. $ -- $ -- $ 76 $ .00
Credits for state guaranty fund assessments ....... 413 .01 977 .04
</TABLE>
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS AND POLICY LOANS
The carrying amounts reported in the Consolidated Balance Sheet for these
financial instruments approximate fair value.
DERIVATIVE FINANCIAL INSTRUMENTS
LifeUSA purchases 5-year and 7-year "over-the-counter" European-Asian call
option contracts based on the S&P 500 index. The Company only purchases option
contracts from counterparties rated AA- or better and the option contracts are
not used for trading purposes. The notional par amounts of the option contracts
were $51,000 and $5,000 at December 31, 1998 and 1997, respectively. Fair values
are based on quoted market prices.
INVESTMENT CONTRACTS
The fair value of the Company's liabilities for deferred annuity contracts
is estimated to be the cash surrender value of each contract. The cash surrender
value represents the policyholder's account balance less applicable surrender
charges. The fair value of liabilities for supplemental contracts without life
contingencies and in-benefit annuity contracts is estimated by discounting
estimated cash flows using appropriate market interest rates.
The fair value of the Company's deferred policy acquisition costs is not
required to be disclosed. However, in the event that the fair value of the
liabilities for deferred annuity contracts, supplemental contracts without life
contingencies and in-benefit annuity contracts were realized (i.e., the business
is sold or completely ceded to a third party), the deferred policy acquisition
cost asset with a carrying value of $195.8 million and $182.8 million at
December 31, 1998 and 1997, respectively, would have a fair value of $0.
Life USA Holding, Inc.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CONVERTIBLE SUBORDINATED DEBENTURES AND LONG-TERM DEBT
The fair value of convertible subordinated debentures and long-term debt is
estimated using discounted cash flow analyses, based on interest rates for
similar types of financial instruments with consistent maturities.
The carrying amounts and fair values of the Company's financial instruments
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- --------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
---------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturity investments:
Available for sale ...................... $1,020,691 $1,020,691 $ 882,159 $ 882,159
Held to maturity ........................ 1,259,072 1,314,009 1,249,488 1,289,621
Policy loans .............................. 34,939 34,939 29,003 29,003
Cash and cash equivalents ................. 21,570 21,570 34,139 34,139
Option contracts .......................... 11,384 11,384 848 848
Future policy benefits recoverable
and amounts due from reinsurers .......... 2,658,485 2,423,527 2,449,309 2,211,385
LIABILITIES
Investment contracts:
Deferred annuities ...................... $3,439,658 $3,014,152 $3,333,160 $2,873,536
Supplementary contracts and
in-benefit annuities ................... 1,275,773 1,296,468 1,076,337 1,118,775
Long-term debt ............................ 15,000 15,875 5,000 5,369
Convertible subordinated debentures ....... 5,898 6,314 36,030 46,955
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments without attempting to estimate the value of estimated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
NOTE 16. REINSURANCE
For details regarding life insurance and annuity reinsurance ceded and
assumed refer to the information under the caption "General-Reinsurance" on
pages 11 through 13 of this Annual Report and Form 10-K. Such information is
incorporated by reference into these Notes to Consolidated Financial Statements.
NOTE 17. CONTINGENCIES
For details of current legal proceedings outstanding, refer to LEGAL
PROCEEDINGS on page 66 of this Annual Report and Form 10-K. Such information is
incorporated by reference into these Notes to Consolidated Financial Statements.
59
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION
LIFE USA HOLDING, INC.
(PARENT ONLY)
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Fixed maturity investments -- available for sale, at fair value
(amortized cost: $3,271 at December 31, 1998 and $8,139 at
December 31, 1997) ............................................ $ 3,584 $ 7,161
Cash and cash equivalents ...................................... 8,817 9,009
Fixed assets and leasehold improvements, net ................... 5,459 5,828
Investments in subsidiaries, net ............................... 280,090 245,819
Deferred income taxes .......................................... 2,530 2,039
Other assets ................................................... 13,543 7,624
-------- --------
$314,023 $277,480
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Amounts due reinsurers ........................................ $ 211 $ 428
Accounts payable .............................................. 4,866 4,878
Accrued commissions to agents ................................. 3,534 4,575
Convertible subordinated debentures ........................... 5,898 36,030
Long-term debt ................................................ 15,000 5,000
Other policyholders' funds .................................... 13 15
Other liabilities ............................................. 4,516 4,154
-------- --------
Total liabilities ............................................ 34,038 55,080
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized,
none issued .................................................. -- --
Common stock, $.01 par value; 60,000,000 shares authorized,
24,752,156 shares issued and outstanding (22,723,830 shares at
December 31, 1997) ........................................... 248 227
Common stock to be issued, 24,361 shares (35,458 shares at
December 31, 1997) ........................................... 328 565
Additional paid-in capital .................................... 150,096 108,372
Notes receivable from stock sales ............................. (4,266) (7,477)
Retained earnings ............................................. 120,145 112,564
Accumulated other comprehensive income: Net unrealized gain
on fixed maturity investments -- available for sale .......... 13,434 8,149
-------- --------
Total shareholders' equity ................................... 279,985 222,400
-------- --------
$314,023 $277,480
======== ========
</TABLE>
Life USA Holding, Inc.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION
(CONTINUED)
LIFE USA HOLDING, INC.
(PARENT ONLY)
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Management fees ................................... $ 35,119 $ 34,976 $ 32,476
Net investment income ............................. 1,361 810 1,378
Commissions and expense allowances, net ........... 69,599 80,305 63,222
Equity in income of wholly-owned subsidiaries ..... 19,696 23,972 21,321
Other ............................................. 848 553 316
-------- -------- --------
Total revenues ................................... 126,623 140,616 118,713
Expenses:
Commissions ....................................... 43,276 50,381 38,133
Salaries and employee benefits .................... 26,910 25,456 24,720
Depreciation and amortization ..................... 2,023 1,705 1,246
Interest expense .................................. 1,386 2,194 1,982
Other ............................................. 29,465 31,763 27,609
-------- -------- --------
Total expenses ................................... 103,060 111,499 93,690
-------- -------- --------
Income before income taxes ......................... 23,563 29,117 25,023
Income taxes ....................................... 1,656 2,139 1,569
-------- -------- --------
Net income ......................................... $ 21,907 $ 26,978 $ 23,454
======== ======== ========
</TABLE>
61
Life USA Holding, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION
(CONTINUED)
LIFE USA HOLDING, INC.
(PARENT ONLY)
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 21,907 $ 26,978 $ 23,454
Adjustments to reconcile net income to net
cash provided by operating activities ............. (13,486) (22,060) (10,147)
--------- --------- ---------
Net cash provided by operating activities ........... 8,421 4,918 13,307
Cash flows from investing activities:
Fixed maturity investments -- available for sale:
Purchases ........................................ -- (4,907) --
Proceeds from sales .............................. 4,916 -- --
Proceeds from maturities and principal
payments on mortgage-backed securities .......... -- 2,000 --
Investment in LifeUSA Securities, Inc. ............. (1,605) (1,320) (285)
Investment in LifeUSA Marketing, Inc. .............. (16,047) (10,382) (9,250)
Loans to field marketing organizations ............. -- (1,605) (1,219)
Capital expenditures ............................... (1,255) (1,650) (2,629)
--------- --------- ---------
Net cash used in investing activities ............... (13,991) (17,864) (13,383)
Cash flows from financing activities:
Proceeds from exercise of stock options ............ 7,423 15,372 226
Proceeds from line of credit ....................... 10,000 5,000 --
Proceeds from common stock issuance to
Allianz Life ...................................... 10,000 -- --
Repurchase of common stock ......................... (22,408) -- --
Dividends paid ..................................... (1,915) -- --
Other financing activities ......................... 2,278 1,401 (25)
--------- --------- ---------
Net cash provided by financing activities ........... 5,378 21,773 201
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents ........................................ (192) 8,827 125
Cash and cash equivalents at beginning
of the year ........................................ 9,009 182 57
--------- --------- ---------
Cash and cash equivalents at end of the year ........ $ 8,817 $ 9,009 $ 182
========= ========= =========
Cash paid during the year for interest .............. $ 2,117 $ 2,148 $ 1,984
========= ========= =========
Cash paid during the year for income taxes .......... $ 12,604 $ 13,612 $ 15,782
========= ========= =========
Supplemental schedule of noncash investing and
financing activities:
Issuance of stock upon conversion of
convertible subordinated debentures ............... $ 11 $ 3 $ --
Issuance of stock to employees as compensation 1,835 1,220 1,436
Fixed assets contributed to LifeUSA Insurance
Company ........................................... -- -- 1,362
Issuance of stock upon conversion of
convertible subordinated debenture and shares
associated with agreement with Allianz Life ....... 42,619 -- --
</TABLE>
Life USA Holding, Inc.
62
<PAGE>
REPORT OF INDEPENDENT AUDITORS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Life USA Holding, Inc.
We have audited the accompanying consolidated balance sheets of Life USA
Holding, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Life USA
Holding, Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
January 29, 1999
63
Life USA Holding, Inc.
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Life USA Holding, Inc. is responsible for the
consolidated financial statements, accompanying notes and all other information
presented in this Annual Report to Shareholders and Form 10-K. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles appropriate in the circumstances and include amounts based
on the best estimates and judgments of management.
In order to safeguard assets and to maintain the integrity and objectivity
of data in these financial statements, Life USA Holding, Inc. maintains a
comprehensive system of internal accounting controls. These controls are
supported by the careful selection and training of qualified personnel and an
appropriate division of responsibilities. In addition, an integral part of the
comprehensive system of internal control is an effective internal audit
department. The Life USA Holding, Inc. internal audit department systematically
evaluates the adequacy and effectiveness of internal accounting controls and
measures adherence to established policies and procedures. The management of
Life USA Holding, Inc. believes that, as of December 31, 1998, its system of
internal control is adequate to accomplish the objectives discussed herein.
The financial statements for the years ended December 31, 1998, 1997 and
1996 have been audited by Ernst & Young LLP, independent auditors. The audits
were made in accordance with generally accepted auditing standards and included
a review of the system of internal controls to the extent necessary to express
an opinion on the financial statements.
The audit committee of the Board of Directors, comprised solely of outside
directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the audit committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of financial reporting.
/s/ Robert W. MacDonald
Robert W. MacDonald
Chairman and Chief Executive Officer
/s/ Mark A. Zesbaugh
Mark A. Zesbaugh
Executive Vice President and
Chief Financial Officer
Life USA Holding, Inc.
64
<PAGE>
ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT ON FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998
Life USA Holding, Inc.
Commission file number 0-18485
Incorporated in the State of Minnesota
IRS Employer Identification No. 41-1578384
Suite 95 Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
Telephone: (612) 546-7386
Securities registered pursuant to Section 12(g) of the Act (and listed on the
Nasdaq Stock Market):
Common Stock, $.01 par value
Life USA Holding, Inc. (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 and (2) has been subject to such filing requirements for the past 90
days.
Theaggregate market value of the voting and outstanding stock (17,603,796
shares) held by non-affiliates of the registrant as of February 12, 1999 was
$201,387,426.
This Annual Report to Shareholders and Form 10-K combines the disclosure
requirements of the Securities and Exchange Commission and generally accepted
accounting principles. Certain portions of the Annual Report to Shareholders
and Form 10-K as referenced in the table at right are incorporated in the
Form 10-K.
Portions of the proxy statement for the annual shareholders meeting to be held
April 13, 1999 are incorporated by reference into Part III.
FORM 10-K
CROSS-REFERENCE
TABLE OF CONTENTS PAGE(S)
- ----------------------------------------- -------------------------
PART I
Item 1. Business
General 8-15,41
Investments 14,18,24-27,
41,45-47
Reinsurance 11-13,17,19,59
Capital Resources 21-23
Marketing Organization
Ownership 8,42,47
The Agreement with
Allianz Life 2,11-13,22,55-56
Line of Credit 21,22,47
Regulatory Matters 23,24
Statutory Income and
Capital of LifeUSA
Insurance Company 22,27,57
Item 2. Properties 66
Item 3. Legal Proceedings 66
Item 4. Submission of Matters to a
Vote of Security Holders none
PART II.
Item 5. Market for Registrant's
Common Equity and
Related Stockholder
Matters 1,22,23,74
Item 6. Selected Financial Data 6-7
Item 7. Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 16-35
Item 7a. Quantitative and Qualitative
Disclosures about Market
Risk 26,27
Item 8. Financial Statements and 32,33,36-40,
Supplementary Data 57,69
Item 9. Changes in and
Disagreements
with Accountants on
Accounting and Financial
Disclosure None
PART III.
Item 10. Directors and Executive
Officers of the Registrants *
Item 11. Executive Compensation *
Item 12. Security Ownership of
Certain Beneficial Owners
and Management *
Item 13. Certain Relationships and
Related Transactions *
PART IV.
Item 14. Exhibits, Financial Statement
Schedules and Reports on
Form 8-K 66-73
*Life USA Holding, Inc.'s Proxy Statement for the 1999 Annual Meeting of
Shareholders is incorporated herein by reference.
65
Life USA Holding, Inc.
<PAGE>
ANNUAL REPORT ON FORM 10-K
PROPERTIES
Under leases expiring in February 2001, the Company leases approximately
141,000 square feet of office space at Interchange North Building, 300 South
Highway 169, Minneapolis, Minnesota. See Note 6 to the Consolidated Financial
Statements. Based on the Company's business plan, management believes the
Company's current facilities will be adequate through 1999.
LEGAL PROCEEDINGS
In July 1997, two policyholders of FULICO whose policies were assumed by
Allianz Life commenced an action against Allianz Life in state court in
California. LifeUSA Insurance was also named as a defendant in the lawsuit
because it is the successor of FULICO and a third plaintiff who is a
policyholder of LifeUSA Insurance asserted certain claims against LifeUSA
Insurance. This action is styled on behalf of the named plaintiffs and seeks
certification on behalf of a class of policyholders who had purchased insurance
products of Allianz/FULICO and LifeUSA Insurance. The plaintiffs allege that
they and other policyholders have been damaged due to certain alleged improper
life insurance sales practices relating to vanishing premiums, churning and
retirement plans, among other things. In 1994, Allianz sold the stock of FULICO
to the Company. The Company then merged its Colorado life insurance subsidiary
with FULICO and changed FULICO's corporate name to LifeUSA Insurance in order to
redomesticate its Colorado life insurance subsidiary to Minnesota and obtain
licenses in all states except for New York. As part of the transaction, Allianz
Life assumed all of the business written by FULICO prior to the sale of the
stock of FULICO to the Company and agreed to indemnify the Company and LifeUSA
Insurance against any liabilities of FULICO arising prior to the date on which
FULICO was sold to the Company. The case has been transferred to the United
States Federal Court for the District of Minnesota by agreement of the parties.
Allianz Life and the plaintiffs' attorneys have reached a tentative settlement
of the claims against Allianz Life. As part of the settlement, plaintiffs will
dismiss the claims against the Company without prejudice, but will have the
right to bring the claims again after further investigation. While it is not
possible to predict the outcome of the litigation, the Company does not
anticipate any material adverse financial result.
In December 1997, six annuity policyholders commenced a lawsuit against the
Company. The action is styled on behalf of the named plaintiffs and seeks
certification on behalf of a class of policyholders who purchased annuity
policies. The plaintiffs allege that they and other annuity policyholders have
been damaged due to certain alleged misrepresentations and alleged inadequate
disclosures at the times the annuities were purchased and from time to time
thereafter. The case was commenced in the United States Court for the Eastern
District of Pennsylvania. The litigation is in the discovery stage and is
currently scheduled to be available for trial as early as May 21, 1999. While it
is not possible to predict the outcome of the litigation, the Company does not
anticipate any material adverse financial result.
In June 1998, an action similar to the December 1997 lawsuit was commenced
against the Company by one annuity policyholder on behalf of herself seeking
certification on behalf of a class of all other New Jersey annuity policyholders
in New Jersey State Court. The case has been removed to United States Federal
Court for the District of New Jersey and the Company has moved to consolidate it
with the January 1998 case in the United States Federal Court for the Eastern
District of Pennsylvania. The plaintiff has moved to remand to state court and
has objected to the consolidation. The litigation is in the early stages and,
while it is not possible to predict the outcome of the litigation, the Company
does not anticipate any material adverse financial result.
Life USA Holding, Inc.
66
<PAGE>
ANNUAL REPORT ON FORM 10-K
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company, their ages and
titles:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------- ----- ---------------------------------------------------
<S> <C> <C>
Robert W. MacDonald 56 Chairman and Chief Executive Officer
Margery G. Hughes 48 President and Chief Operating Officer
Mark A. Zesbaugh 34 Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
Daniel J. Rourke 69 Senior Vice President and Chief Marketing Officer
Donald J. Urban 57 Senior Vice President and Director of Sales
Bradley E. Barks 39 Senior Vice President Finance
Michael W. Farley 36 Senior Vice President and Chief Actuary
Bruce D. Bengtson 49 Senior Vice President
Neil H. McKay 37 Vice President Financial Analysis
</TABLE>
67
Life USA Holding, Inc.
<PAGE>
ANNUAL REPORT ON FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Life USA HOLDING, INC.
By: /s/ MARK. A. ZESBAUGH
--------------------------------
Mark A. Zesbaugh
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/S/ ROBERT W. MACDONALD Chief Executive Officer March 8, 1999
- ------------------------- (Principal Executive Officer) and Director
Robert W. MacDonald
/S/ MARK A. ZESBAUGH Chief Financial Officer March 8, 1999
- ------------------------- (Principal Financial and Accounting
Mark A. Zesbaugh Officer) and Director
* Director * Director
- ------------------------- -------------------------
Hugh Alexander Barbara J. Lautzenheiser
* Director * Director
- ------------------------- -------------------------
Edward J. Bonach Daniel J. Rourke
* Director * Director
- ------------------------- -------------------------
Jack H. Blaine Ralph Strangis
* Director * Director
- ------------------------- -------------------------
Margery G. Hughes Donald J. Urban
* Director
- -------------------------
Robert S. James
*By: /s/ MARK A. ZESBAUGH March 8, 1999
Mark A. Zesbaugh
Attorney-in-fact
</TABLE>
* Mark A. Zesbaugh, on his own behalf and pursuant to Powers of Attorney, dated
prior to the date hereof, attested by the officers and directors listed above
and filed with the Securities and Exchange Commission, by signing his name
hereto does hereby sign and execute this Report of Life USA Holding, Inc. on
behalf of each of the officers and directors named above, in the capacities
in which the name of each appears above.
Life USA Holding, Inc.
68
<PAGE>
EXHIBITS
EXHIBITS
FINANCIAL STATEMENTS FILED PAGES
- -------------------------------------------------- --------
Life USA Holding, Inc.
Consolidated Financial Statements ............... 36-40
Notes to Consolidated Financial Statements ....... 41-62
Report of Independent Auditors ................... 63
Life USA Holding, Inc. Condensed
Financial Information (Parent Only) ............. 60-62
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X include information that is disclosed elsewhere in
the Annual Report and Form 10-K, or are inapplicable and therefore have been
omitted.
The following Exhibit Index lists the Exhibits to Annual Report and Form
10-K.
69
Life USA Holding, Inc.
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
- ---------------------------------------------------------------------------------------- ---------------
<S> <C>
Restated Articles of Incorporation of the Company ...................................... 3(7)
Amended and Restated Bylaws of the Company ............................................. 3(17)
Form of Stock Certificate .............................................................. 4(6)
Form of Option Certificate ............................................................. 4(7)
Service Agreement dated January 27, 1988 between the Company and North American
Life and Casualty Company ............................................................. 10(2)
Agreement dated April 6, 1987 with Transamerica Insurance Corporation of California .... 10(1)
Life Coinsurance Agreement effective September 1, 1987 between Transamerica
Occidental Life Insurance Company and Universal Security Assurance Life Insurance
Company and Addendum thereto .......................................................... 10(3)
Amendment to Life Coinsurance Agreement effective January 1, 1989 ...................... 10(20)
Addenda No. 2 through 8 to Life Coinsurance Agreement between LifeUSA Insurance
and Transamerica Occidental Life Insurance Company .................................... 10(20)
Life and ADB YRT Retrocession Agreement between LifeUSA Insurance and
Transamerica Occidental Life Insurance Company effective January 1, 1990 .............. 10(9)
Addendum No. 1 to Life and ADB YRT Retrocession Agreement between LifeUSA
Insurance and Transamerica Occidental Life Insurance Company .......................... 10(20)
Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance Company and
Transamerica Occidental Life Insurance Company effective January 1, 1995 .............. 10(15)
Retrocessional Agreement between LifeUSA Insurance and Transamerica Occidental Life
Insurance Company effective April 1, 1991 ............................................. 10(8)
Addenda No. 1, 2 and 3 to Retrocessional Agreement between LifeUSA Insurance and
Transamerica Occidental Life Insurance Company ........................................ 10(20)
Trust Agreement between Transamerica Occidental Life Insurance Company, LifeUSA
Insurance Company and State Street Bank and Trust Company effective October 28,
1996 .................................................................................. 10(20)
Form of Indemnification Agreement dated as of December 31, 1989 ........................ 10(2)
Life USA Holding, Inc. Employee Savings Plan effective January 1, 1990 ................. 10(4)
First through Seventh Amendment to Employee Savings Plan ............................... 10(20)
Restated Life USA Holding, Inc. Stock Option Plan ...................................... 10(7)
Life USA Director Option Plan .......................................................... 10(10)
Life and Annuity Coinsurance Agreement effective April 1, 1991 among LifeUSA
Insurance Company, Employers Reassurance Corporation, Munich American
Reassurance Company and Republic-Vanguard Life Insurance Company ...................... 10(5)
Addenda Nos. 1 through 13 to the Life and Annuity Coinsurance Agreement ................ 10(20)
Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance and the
Reinsurers effective January 1, 1993 .................................................. 10(8)
Addendum No. 1 through 2 to Life and ADB YRT Reinsurance Agreement between
LifeUSA Insurance and the Reinsurers .................................................. 10(20)
Life and Annuity Coinsurance Agreement effective January 1, 1995 between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ...................... 10(11)
Amendment to Life and Annuity Coinsurance Agreement between Allianz Life Insurance
Company of North America and LifeUSA Insurance Company ................................ 10(15)
</TABLE>
Life USA Holding, Inc.
70
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
- --------------------------------------------------------------------------------------- ---------------
<S> <C>
Joint Marketing Agreement entered into by and between Allianz Life Insurance Company
of North America and Life USA Holding, Inc. .......................................... 10(11)
Investment Management Agreement entered into by and between LifeUSA Insurance
Company and Allianz Investment Corporation ........................................... 10(11)
Investment Management Agreement entered into by and between Life USA Holding,
Inc. and Allianz Investment Corporation .............................................. 10(11)
Investment Management Agreement entered into by and between LifeUSA Insurance
Company and Windsor Financial Group, LLC ............................................. 10(19)
Investment Management Agreement entered into by and between Life USA Holding,
Inc. and Windsor Financial Group, LLC ................................................ 10(19)
Loan Agreement dated May 17, 1996 between Life USA Holding, Inc. and Employers
Reassurance Corporation and Named Lenders ............................................ 10(12)
Stock Pledge Agreement dated May 17, 1996 between Life USA Holding, Inc. and
Employers Reassurance Corporation .................................................... 10(12)
Amendment No. 1 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(20)
Amendment No. 2 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(20)
Amendment No. 3 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(16)
Amendment No. 4 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(19)
Amendment No. 5 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(19)
Claims Administration Agreement dated December 30, 1996 between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ..................... 10(13)
Amendment No. 1 to the Claims Administration Agreement between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ..................... 10(15)
Administration and Marketing Agreement dated December 30, 1996 between Allianz Life
Insurance Company of North America and Life USA Holding, Inc. ........................ 10(13)
Amendment No. 1 to the Administration and Marketing Agreement between Allianz Life
Insurance Company of North America and Life USA Holding, Inc. ........................ 10(15)
Stock Purchase Agreement dated January 13, 1998 between Life USA Holding, Inc. and
Allianz Life Insurance Company of North America ...................................... 10(14)
Amendment No. 1 to the Stock Purchase Agreement between Life USA Holding, Inc.
and Allianz Life Insurance Company of North America .................................. 10(18)
Amendment No. 2 to the Stock Purchase Agreement between Life USA Holding, Inc.
and Allianz Life Insurance Company of North America .................................. 10(18)
Amendment No. 3 to the Stock Purchase Agreement between Life USA Holding, Inc.
and Allianz Life Insurance Company of North America .................................. 10(19)
Reinsurance Agreement between Allianz Life Insurance Company of North America and
LifeUSA Insurance Company ............................................................ 10(15)
</TABLE>
71
Life USA Holding, Inc.
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
- ---------------------------------------------------------------------------------------- ---------------
<S> <C>
Employment Agreements dated January 1, 1998 between Life USA Holding, Inc. and
each of Robert W. MacDonald, Margery G. Hughes, Donald J. Urban, Mark A.
Zesbaugh, Bradley E. Barks and Charles M. Kavitsky .................................... 10(15)
First Amendments to Employment Agreements dated December 17, 1998 between Life
USA Holding, Inc. and each of Donald J. Urban and Bradley E. Barks .................... 10(19)
Employment Agreements dated December 17, 1998 between Life USA Holding, Inc. and
each of Hazel Reid and Robin Aeshliman ................................................ 10(19)
Credit Agreement dated December 22, 1998 between LTCAmerica Holding, Inc. and
Norwest Bank Minnesota, National Association .......................................... 10(19)
Revolving Note dated December 22, 1998 between LTCAmerica Holding, Inc. and
Norwest Bank Minnesota, National Association .......................................... 10(19)
Guaranty dated December 22, 1998 by Allianz Life Insurance Company of North
America, Inc. in favor of Norwest Bank Minnesota, National Association guaranteeing
account of LTCAmerica Holding, Inc. ................................................... 10(19)
Guaranty dated December 22, 1998 by LTCAmerica Holding, Inc. in favor of Allianz Life
Insurance Company of North America .................................................... 10(19)
Guaranty dated December 22, 1998 by Life USA Holding, Inc. in favor of Allianz Life
Insurance Company of North America .................................................... 10(19)
Pledge Agreement dated December 22, 1998 between LTCAmerica Holding, Inc. and
Allianz Life Insurance Company of North America ....................................... 10(19)
Security Agreement dated December 22, 1998 between Life USA Holding, Inc. and
Allianz Life Insurance Company of North America ....................................... 10(19)
Administration and Marketing Agreement dated January 1, 1999 between Allianz Life
Insurance Company of North America and LTCAmerica Holding, Inc. ....................... 10(19)
Administration and Marketing Agreement dated January 1, 1999 between LifeUSA
Insurance Company and LTCAmerica Holding, Inc. ........................................ 10(19)
Interests and Liabilities Agreement dated January 1, 1999 between LifeUSA Insurance
Company and Allianz Life Insurance Company of North America ........................... 10(19)
Retrocession Agreement effective January 1, 1999 issued to Allianz Life Insurance
Company of North America by LifeUSA Insurance Company ................................. 10(19)
Cash Management Agreement dated February 16, 1999 between LTCAmerica Holding,
Inc. and Norwest Bank Minnesota, National Association ................................. 10(19)
Service Agreement dated January 1, 1999 between LTCAmerica Holding, Inc. and Life
USA Holding, Inc. ..................................................................... 10(19)
Employee Leasing Agreement dated December 22, 1998 between LTCAmerica Holding,
Inc. and Life USA Holding, Inc. ....................................................... 10(19)
LTCAmerica Holding, Inc. 1998 Stock Option Plan ........................................ 10(19)
Statement of Computation of Per Share Earnings (Years Ended December 31, 1998,
1997 and 1996 -- see Note 8 of the Annual Report to Shareholders) ..................... 11(19)
1998 Annual Report to Shareholders ..................................................... 13(19)
Subsidiaries of the Registrant ......................................................... 21(19)
Consent of Ernst & Young LLP (electronic filing only) .................................. 21(19)
Powers of Attorney ..................................................................... 24(19)
Financial Data Schedule (electronic filing only) ....................................... 27(19)
</TABLE>
Life USA Holding, Inc.
72
<PAGE>
EXHIBITS
- ------------------
(1) Filed with the Company's Registration Statement No. 33-21989 and
incorporated by reference herein.
(2) Filed with the Company's 1989 Annual Report on Form 10-K, as amended, and
incorporated by reference herein.
(3) Filed with the Company's Registration Statement No. 33-30506, as amended by
Post-Effective Amendment No. 1, and incorporated by reference herein.
(4) Filed with the Company's Registration Statement No. 33-37981 and
incorporated by reference herein.
(5) Filed with the Company's 1990 Annual Report on Form 10-K and incorporated
by reference herein.
(6) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1992 and incorporated by reference herein.
(7) Filed with the Company's Registration Statement No. 33-52624 and
incorporated by reference herein.
(8) Filed with the Company's Registration Statement No. 33-68528 and
incorporated by reference herein.
(9) Filed with Amendment No. 1 to the Company's Registration Statement No.
33-68528 and incorporated by reference herein.
(10) Filed with the Company's 1993 Annual Report on Form 10-K and incorporated
by reference herein.
(11) Filed with the Company's Current Report on Form 8-K filed March 3, 1995 and
incorporated by reference herein.
(12) Filed with the Company's Current Report on Form 8-K filed June 17, 1996 and
incorporated by reference herein.
(13) Filed with the Company's 1996 Annual Report on Form 10-K and incorporated
by reference herein.
(14) Filed with the Company's Current Report on Form 8-K filed January 13, 1998
and incorporated by reference herein.
(15) Filed with the Company's 1997 Annual Report on Form 10-K and incorporated
by reference herein.
(16) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1998 and incorporated by reference herein.
(17) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1998 and incorporated by reference herein.
(18) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998 and incorporated by reference herein.
(19) Filed with this Annual Report on Form 10-K.
(20) Amendments and addenda made in the ordinary course of business available
from the Company upon request.
The exhibits filed with this Annual Report on Form 10-K may be obtained by
writing to:
Mark A. Zesbaugh
Executive Vice President, Chief Financial Officer and Treasurer
Life USA Holding, Inc.
300 South Highway 169 Suite 95
Minneapolis, MN 55426
During the three months ended December 31, 1998, the Company did not file any
Current Reports on Form 8-K.
73
Life USA Holding, Inc.
<PAGE>
LIFE USA HOLDING, INC.
BOARD OF DIRECTORS
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Margery G. Hughes
President
Chief Operating Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Donald J. Urban
Senior Vice President
Director of Sales
Ralph Strangis
Counsel to the Company
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A.
Jack H. Blaine
Former President
National Organization of Life
and Health Insurance
Guaranty Associations
Hugh Alexander
Member of
Alexander Law Firm, P.C.
Barbara J. Lautzenheiser
Lautzenheiser & Associates
Edward J. Bonach
Robert S. James
Allianz Life Insurance Company
of North America
OFFICERS
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Margery G. Hughes
President
Chief Operating Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Donald J. Urban
Senior Vice President
Director of Sales
Michael W. Farley, FSA, MAAA
Senior Vice President
Chief Actuary
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Jo-Anne S. Halek
Vice President
Kimberly A. Lees
Vice President
Neil H. McKay, FSA, MAAA
Vice President
Troy D. Auth, CPA, FLMI
Assistant Secretary
Catherine A. Bartlett
Bruce J. Parker
Assistant Secretary
Members of the Law Firm
Kaplan, Strangis and Kaplan, P.A.
CORPORATE INFORMATION
Corporate Office
300 South Highway 169
Minneapolis, Minnesota 55426
612-546-7386
General Counsel
Kaplan, Strangis and Kaplan, P.A.
Minneapolis, Minnesota
Independent Auditors
Ernst & Young LLP
Minneapolis, Minnesota
Transfer Agent
Harris Trust and Savings Bank
Chicago, Illinois
REINSURANCE PARTNERS
Allianz Life Insurance Company
of North America
Minneapolis, Minnesota
Employers Reassurance Corporation
Overland Park, Kansas
Munich American
Reassurance Company
Atlanta, Georgia
Republic-Vanguard Life
Insurance Company
Dallas, Texas
Transamerica Occidental Life
Insurance Company
Charlotte, North Carolina
ANNUAL MEETING
The annual meeting of the shareholders of Life USA Holding, Inc. will be held on
April 13, 1999 at the Interchange Tower, 600 South Highway 169, Minneapolis,
Minnesota 55426. All shareholders are invited to attend.
SHAREHOLDER INFORMATION
Life USA Holding, Inc. common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol LUSA. The Company paid a dividend of
2.5 cents per share in the second, third and fourth quarters of 1998.
Over-the-counter market quotations reflect inter-dealer prices without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
As of February 12, 1999, there were 8,251 holders of record of the Company's
common stock. On March 8, 1999, the closing sale price per share of the
Company's common stock as reported by Nasdaq was $12.75.
Life USA Holding, Inc.
74
<PAGE>
LIFEUSA INSURANCE COMPANY
BOARD OF DIRECTORS
Robert W. MacDonald, CLU
Chief Executive Officer
Daniel J. Rourke, CLU
Chairman
Donald J. Urban
President
Margery G. Hughes
Executive Vice President
Mark A. Zesbaugh, CPA, CFA, FLMI
Senior Vice President
Treasurer
Jacqueline K. Katrein, CPA
Senior Vice President
Support Division
Chief Financial Officer
Ralph Strangis
Counsel to the Company
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A.
Linda K. Burm
Senior Vice President
Chief Operating Officer
OFFICERS
Robert W. MacDonald, CLU
Chief Executive Officer
Daniel J. Rourke, CLU
Chairman
LifeUSA Insurance Company
Chairman
LifeUSA Marketing, Inc.
Donald J. Urban
President
Margery G. Hughes
Executive Vice President
Mark A. Zesbaugh, CPA, CFA, FLMI
Senior Vice President
Treasurer
Linda K. Burm
Senior Vice President
Chief Operating Officer
Jacqueline K. Katrein, CPA
Senior Vice President
Chief Financial Officer
Lane A. Kurle, FLMI
Senior Vice President
Secretary
VICE PRESIDENTS
Leo J. Anderson, FLMI
Robert M. Anderson, FLMI, ALHC
Kevin J. Boyce
Carolyn K. Cosgrove, FLMI
Brenda Z. Duenwald
Michael A. Eitel, CPA
Charles F. Field, FLMI, ALHC
Susan L. Kumpula
Lorraine M. Landram
Blaine T. McGuire, CPA
Robert L. Miller
Kathaleen A. Morrow
Janet M. Neary
Philip B. Rosenbaum, CPA, FLMI
David K. Sandberg, ASA, MAAA
Susan K. Swanson
Cathy H. Waldhauser, FSA, MAAA
Kevin E. Walker, FLMI
Deborah J. Wesenberg, FLMI,
FALU, CLU
Ann M. Yaggie
ASSISTANT VICE PRESIDENTS
Lisa M. Arneson, FLMI
Jill J. Bradley, FLMI
John R. Busse, FLMI
Jeffrey R. Girod
Christine M. Goebel, ACS
John R. Kraft
Amelia L. Lanier
Richard P. Lapcinski
Leslie J. LeQue
Julie A. Letner
Rodney D. Meyer, FLHC, FLMI
Julie Minnich
Denise A. Neumann
Lisa M. Nicholson
Kirsten A. Petsilis
Roxanne M. Watercott
75
Life USA Holding, Inc.
<PAGE>
LIFEUSA MARKETING, INC.
BOARD OF DIRECTORS
Daniel J. Rourke, CLU
Chairman
Charles M. Kavitsky
Chief Executive Officer
President
Denise M. Blizil
Senior Vice President
Chief Operating Officer
Ronald L. Berger, CPA
Senior Vice President
Chief Financial Officer
John A. Amann
Vice President, Sales
Linda K. Burm
Chief Operating Officer
LifeUSA Insurance Company
David A. Schliesman
Vice President, Sales
Raj K. Sinha, MS, MBS, CLU, CFP
Vice President, Marketing
Donald J. Urban
President and Chief Executive Officer
LTCAmerica Holding, Inc.
President
LifeUSA Insurance Company
Mark A. Zesbaugh, CPA, CFA, FLMI
Chief Financial Officer
Life USA Holding, Inc.
Robert J. Burskey
Ann Arbor Annuity Exchange, Inc.
Richard E. Griffith
CFC Insurance Marketing Corporation
Thomas R. Kestler, CSP, CLU, ChFC
Kestler Financial Group, Inc.
Joseph R. Lehman, CFP, CLU
Life Sales
Walter F. Lineberger III, CLU, ChFC
Annuity Masters at
Personalized Brokerage Services, Inc.
James A. Martin II, CLU, ChFC
Tax Planning Seminars
Edward A. Omert
Roster Financial, LLC
David A. Sunderland, CLU
The Sunderland Group
Thomas J. Wade
American Financial Marketing, Inc.
OFFICERS
Daniel J. Rourke, CLU
Chairman
Charles M. Kavitsky
Chief Executive Officer
President
Denise M. Blizil
Senior Vice President
Chief Operating Officer
Ronald L. Berger, CPA
Senior Vice President
Chief Financial Officer
Secretary
VICE PRESIDENTS
John A. Amann
John T. Helgerson, CLU
David A. Schliesman
Raj K. Sinha, MS, MBS, CLU, CFP
Mark A. Zesbaugh, CPA, CFA, FLMI
ASSISTANT VICE PRESIDENTS
Lisa B. Carlson
Susan M. Gengler
Sharyl L. Schultz, CLU
Life USA Holding, Inc.
76
<PAGE>
LIFEUSA SECURITIES, INC.
BOARD OF DIRECTORS
Robert W. MacDonald, CLU
Chairman
Life USA Holding, Inc.
Mark A. Zesbaugh, CPA, CFA, FLMI
President
Margery G. Hughes
President
Life USA Holding, Inc.
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Life USA Holding, Inc.
OFFICERS
Mark A. Zesbaugh, CPA, CFA, FLMI
President, Chief Executive Officer,
Secretary and Chief
Financial Officer
Tracy H. Gardner
Vice President
Chief Operating Officer
Philip B. Rosenbaum, CPA, FLMI
Treasurer
VICE PRESIDENTS
Kristi K. Bizer, CPA, FLMI
Timothy J. Lyle
Corey J. Walther
77
Life USA Holding, Inc.
<PAGE>
LTCAMERICA HOLDING, INC.
BOARD OF DIRECTORS
Donald J. Urban
President
Chief Executive Officer
Bradley E. Barks, FSA, MAAA, CPA
Chairman
Chief Financial Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
Life USA Holding, Inc.
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Life USA Holding, Inc.
Margery G. Hughes
President
Chief Operating Officer
Life USA Holding, Inc.
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Life USA Holding, Inc.
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Life USA Holding, Inc.
OFFICERS
Donald J. Urban
President
Chief Executive Officer
Robin L. Aeshliman
Vice President and Secretary
Chief Operating Officer
Bradley E. Barks, FSA, MAAA, CPA
Chairman
Chief Financial Officer
Hazel Reid
Vice President
Chief Marketing Officer
VICE PRESIDENTS
Darryl J. Chouinard, FLMI
ASSISTANT VICE PRESIDENTS
Sharon M. Friedrichsen
Troy A. Hamlin
Life USA Holding, Inc.
78
EXHIBIT 10.1
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of the 30th day of April, 1998 (the "Effective
Date"), by and between LifeUSA Insurance Company, a Minnesota corporation (the
"Client"), and Windsor Financial Group, LLC, a Minnesota limited liability
company ("WFG").
1. APPOINTMENT OF WFG AS ADVISOR. As of the Effective Date, the Client
hereby appoints WFG as investment advisor and delegates to it the authority to
manage, acquire and dispose of those assets of the Client which are described in
attached Exhibit A (the "Account") under the terms and conditions set forth in
this Agreement. The Client may direct additions to or withdrawals from the
Account upon 30 days' prior written notice to WFG (which notice may be waived by
WFG).
1.2 Custodial Functions. Unless otherwise agreed to in
writing, the Client or Client's agent (and not WFG or its agent) shall
have custody of all assets of the Account. The Custodian on the date
hereof is State Street Bank and Trust; the Custodian may be changed
from time to time by the Client, and Client shall thereafter give
prompt notice of such change to WFG.
2. DISCRETIONARY AUTHORITY - INVESTMENTS AND BROKERAGE.
2.1 WFG's Authority. WFG shall have full and complete
discretion to direct and manage the investment and reinvestment of
assets in the Account and any additions thereto. This Agreement shall
serve to appoint WFG as agent and attorney-in-fact with full power and
authority to act on behalf of the Account with respect to (a) the
purchase, sale, exchange, conversion or other transactions in any and
all stocks, bonds and other securities as WFG may select; and (b) to
establish accounts and execute transactions with one or more securities
broker/dealer firms as WFG may select (or as Client may direct),
including those which from time to time may furnish to WFG statistical
information, investment research information and other services.
2.2 Investment Policy. Notwithstanding the foregoing, the
Client shall furnish WFG a written statement of investment policy. Such
statement shall have the effect of limiting the investments WFG is
authorized to acquire and hold for the Account and shall be binding on
WFG upon WFG's receipt of such statement. The written statement of
investment policy may be modified by Client in writing at any time and
shall be effective upon WFG's receipt of such modification. The
original written statement of investment policy is attached hereto as
Exhibit B.
2.3 Non-Liability. WFG shall not be responsible for any acts
or omissions of any broker/dealer or Custodian acting for the Account
pursuant to this Section 2.
<PAGE>
3. APPRAISAL OF ACCOUNT.
3.1 Monthly Appraisal. WFG will provide the Client with a
monthly appraisal of the Account dated as of the last day on which the
New York Stock Exchange is open in any month (the "Appraisal Date").
Such appraisal shall be in the form of a written summary of assets of
the Account on the Appraisal Date.
3.2 Valuation Methods. Securities traded on national stock
exchanges will be valued at the composite price as published in the
Wall Street Journal. Listed Securities which are not traded and
over-the-counter securities will be valued at the closing bid price.
Other securities and all other assets will be valued at fair value as
determined in good faith by WFG.
4. FEES.
4.1 Calculation of Fees. As full compensation for services
rendered under this Agreement, WFG will be paid a quarterly fee in
accordance with the fee schedule set forth below based on the market
value of the assets in the Account as of the Appraisal Date occurring
in March, June, September and December in each year. For purposes of
the calculation of the fee, the value of the securities and cash in the
Account shall be determined as of the Appraisal Date at the end of each
fiscal quarter pursuant to Section 3 above.
<TABLE>
<CAPTION>
Available For Sale Assets Held to Maturity Assets
------------------------- -----------------------
<S> <C>
13 Basis Points on the first $200 Million 4 Basis Points on the first $800 Million
8 Basis Points on the next $300 Million 1 Basis Points thereafter
5 Basis Points on the next $500 Million
3 Basis Points thereafter
</TABLE>
4.2 Proration of Fees. Fees will be prorated for assets
deposited to or withdrawn from the Account during the quarter.
If WFG shall serve for less than the whole of any
quarterly period, its compensation (determined as provided above) shall
be calculated and payable on a pro rata basis for the portion of the
quarter for which it has served as an advisor hereunder.
4.3 Payment Method. The fees due hereunder shall be paid
directly by the Client promptly upon receipt of an invoice therefor,
but if not paid shall be a lien upon and payable out of the Account.
5. SERVICE TO OTHER CLIENTS. It is understood that WFG provides
investment advisory services for other clients. It is further understood that
WFG may take investment action on behalf of such other clients which differs
from investment action taken on behalf of the Account. If the purchase or sale
of securities for the Account and one or more such other clients is considered
at or about the same time, transactions in such securities will be allocated
among the several clients in a manner deemed equitable by WFG.
2
<PAGE>
6. REPRESENTATIONS.
6.1 Representations by WFG. WFG represents that it is duly
registered as an investment advisor with the Securities and Exchange
Commission pursuant to the Investment Advisers Act of 1940, as amended,
and that WFG has completed, obtained or performed all other acts,
registrations, filings, approvals, authorizations, consents or
examinations necessary to comply with the requirements of any
government or governmental authority for the performance of the acts
contemplated by this Agreement. WFG will deliver such documentation of
this compliance as the Client may from time to time reasonably request.
6.2 Form ADV. The Client represents that it has received a
copy of WFG's Form ADV-Part II as required by the Security and Exchange
Commission's "Brochure Rule".
7. ASSIGNMENT. No assignment (as defined in the Investment Advisers Act
of 1940) of this Agreement shall be made by WFG without consent of the Client.
8. TERMINATION. This Agreement may be terminated by either party upon
30 days' prior written notice.
9. NOTICE. Any notice or report to be given pursuant to this Agreement
shall be delivered or mailed:
(a) to WFG at:
Windsor Financial Group, LLC
222 South Ninth Street, Suite 2790
Minneapolis, MN 55402
Attn: Tyron K. Estlick, Chief Manager
(b) to the Client at:
LifeUSA Insurance Company
300 South Highway 169
Minneapolis, MN 55426
Attn: Mark A. Zesbaugh, Senior Vice President
10. CONSTRUCTION OF AGREEMENT. This Agreement shall be construed, and
the rights and obligations of the parties hereunder enforced, in accordance with
the laws of the State of Minnesota.
3
<PAGE>
Agreed to and Accepted by:
WINDSOR FINANCIAL GROUP, LLC LIFEUSA INSURANCE COMPANY
By: /s/ Tyron K. Estlick By: /s/ Mark A. Zesbaugh
------------------------------ --------------------
Tyron K. Estlick, Chief Manager Mark A. Zesbaugh, Senior Vice President
Date of Signature: April 30, 1998 Date of Signature: April 30, 1998
-------------- --------------
4
EXHIBIT 10.2
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of the 30th day of April, 1998 (the "Effective
Date"), by and between Life USA Holding, Inc., a Minnesota corporation (the
"Client"), and Windsor Financial Group, LLC, a Minnesota limited liability
company ("WFG").
1. APPOINTMENT OF WFG AS ADVISOR. As of the Effective Date, the Client
hereby appoints WFG as investment advisor and delegates to it the authority to
manage, acquire and dispose of those assets of the Client which are described in
attached Exhibit A (the "Account") under the terms and conditions set forth in
this Agreement. The Client may direct additions to or withdrawals from the
Account upon 30 days' prior written notice to WFG (which notice may be waived by
WFG).
1.2 Custodial Functions. Unless otherwise agreed to in
writing, the Client or Client's agent (and not WFG or its agent) shall
have custody of all assets of the Account. The Custodian on the date
hereof is State Street Bank and Trust; the Custodian may be changed
from time to time by the Client, and Client shall thereafter give
prompt notice of such change to WFG.
2. DISCRETIONARY AUTHORITY - INVESTMENTS AND BROKERAGE.
2.1 WFG's Authority. WFG shall have full and complete
discretion to direct and manage the investment and reinvestment of
assets in the Account and any additions thereto. This Agreement shall
serve to appoint WFG as agent and attorney-in-fact with full power and
authority to act on behalf of the Account with respect to (a) the
purchase, sale, exchange, conversion or other transactions in any and
all stocks, bonds and other securities as WFG may select; and (b) to
establish accounts and execute transactions with one or more securities
broker/dealer firms as WFG may select (or as Client may direct),
including those which from time to time may furnish to WFG statistical
information, investment research information and other services.
2.2 Investment Policy. Notwithstanding the foregoing, the
Client shall furnish WFG a written statement of investment policy. Such
statement shall have the effect of limiting the investments WFG is
authorized to acquire and hold for the Account and shall be binding on
WFG upon WFG's receipt of such statement. The written statement of
investment policy may be modified by Client in writing at any time and
shall be effective upon WFG's receipt of such modification. The
original written statement of investment policy is attached hereto as
Exhibit B.
2.3 Non-Liability. WFG shall not be responsible for any acts
or omissions of any broker/dealer or Custodian acting for the Account
pursuant to this Section 2.
<PAGE>
3. APPRAISAL OF ACCOUNT.
3.1 Monthly Appraisal. WFG will provide the Client with a
monthly appraisal of the Account dated as of the last day on which the
New York Stock Exchange is open in any month (the "Appraisal Date").
Such appraisal shall be in the form of a written summary of assets of
the Account on the Appraisal Date.
3.2 Valuation Methods. Securities traded on national stock
exchanges will be valued at the composite price as published in the
Wall Street Journal. Listed Securities which are not traded and
over-the-counter securities will be valued at the closing bid price.
Other securities and all other assets will be valued at fair value as
determined in good faith by WFG.
4. FEES.
4.1 Calculation of Fees. As full compensation for services
rendered under this Agreement, WFG will be paid a quarterly fee in
accordance with the fee schedule set forth below based on the market
value of the assets in the Account as of the Appraisal Date occurring
in March, June, September and December in each year. For purposes of
the calculation of the fee, the value of the securities and cash in the
Account shall be determined as of the Appraisal Date at the end of each
fiscal quarter pursuant to Section 3 above.
<TABLE>
<CAPTION>
Available For Sale Assets Held to Maturity Assets
------------------------- -----------------------
<S> <C>
13 Basis Points on the first $200 Million 4 Basis Points on the first $800 Million
8 Basis Points on the next $300 Million 1 Basis Points thereafter
5 Basis Points on the next $500 Million
3 Basis Points thereafter
</TABLE>
4.2 Proration of Fees. Fees will be prorated for assets
deposited to or withdrawn from the Account during the quarter.
If WFG shall serve for less than the whole of any
quarterly period, its compensation (determined as provided above) shall
be calculated and payable on a pro rata basis for the portion of the
quarter for which it has served as an advisor hereunder.
4.3 Payment Method. The fees due hereunder shall be paid
directly by the Client promptly upon receipt of an invoice therefor,
but if not paid shall be a lien upon and payable out of the Account.
5. SERVICE TO OTHER CLIENTS. It is understood that WFG provides
investment advisory services for other clients. It is further understood that
WFG may take investment action on behalf of such other clients which differs
from investment action taken on behalf of the Account. If the purchase or sale
of securities for the Account and one or more such other clients is considered
at or about the same time, transactions in such securities will be allocated
among the several clients in a manner deemed equitable by WFG.
2
<PAGE>
6. REPRESENTATIONS.
6.1 Representations by WFG. WFG represents that it is duly
registered as an investment advisor with the Securities and Exchange
Commission pursuant to the Investment Advisers Act of 1940, as amended,
and that WFG has completed, obtained or performed all other acts,
registrations, filings, approvals, authorizations, consents or
examinations necessary to comply with the requirements of any
government or governmental authority for the performance of the acts
contemplated by this Agreement. WFG will deliver such documentation of
this compliance as the Client may from time to time reasonably request.
6.2 Form ADV. The Client represents that it has received a
copy of WFG's Form ADV-Part II as required by the Security and Exchange
Commission's "Brochure Rule".
7. ASSIGNMENT. No assignment (as defined in the Investment Advisers Act
of 1940) of this Agreement shall be made by WFG without consent of the Client.
8. TERMINATION. This Agreement may be terminated by either party upon
30 days' prior written notice.
9. NOTICE. Any notice or report to be given pursuant to this Agreement
shall be delivered or mailed:
(a) to WFG at:
Windsor Financial Group, LLC
222 South Ninth Street, Suite 2790
Minneapolis, MN 55402
Attn: Tyron K. Estlick, Chief Manager
(b) to the Client at:
Life USA Holding, Inc.
300 South Highway 169
Minneapolis, MN 55426
Attn: Mark A. Zesbaugh, Senior Vice President
10. CONSTRUCTION OF AGREEMENT. This Agreement shall be construed, and
the rights and obligations of the parties hereunder enforced, in accordance with
the laws of the State of Minnesota.
3
<PAGE>
Agreed to and Accepted by:
WINDSOR FINANCIAL GROUP, LLC LIFE USA HOLDING, INC.
By: /s/ Tyron K. Estlick By: /s/ Mark A. Zesbaugh
----------------------------- --------------------
Tyron K. Estlick, Chief Manager Mark A. Zesbaugh, Senior Vice President
Date of Signature: April 30, 1998 Date of Signature: April 30, 1998
-------------- --------------
4
EXHIBIT 10.3
AMENDMENT NO. 4
TO
LOAN AGREEMENT
THIS AMENDMENT, is made and entered into as of September, 1998, but
effective as of July 15, 1998, among LIFE USA HOLDING, INC., as Borrower,
EMPLOYERS REASSURANCE CORPORATION, as Agent and one of the Lenders, and
REPUBLIC-VANGUARD LIFE INSURANCE COMPANY and WINTERTHUR LIFE RE INSURANCE
COMPANY, as the other Lenders.
W I T N E S S E T H:
WHEREAS, the parties hereto have entered into the Loan Agreement dated
as of May 17, 1996, as amended by Amendment No. 1 dated as of December 30, 1996,
Amendment No. 2 dated as of May 30, 1997, and Amendment No. 3 dated as of
January 30, 1998 (the "Agreement"), pursuant to which the Lenders have agreed to
make advances to Borrower on the terms and conditions set forth therein; and
WHEREAS, Borrower has advised the Agent and the Lenders that it has
obtained approval of its Board of Directors effective July 15, 1998 to initiate
a program to repurchase up to 4,000,000 shares of its outstanding Common Stock
in open market transactions (the "Stock Repurchase Plan"); and
WHEREAS, Borrower, the Agent and the Lenders wish to amend the
Agreement as provided in this Amendment in connection with the Stock Repurchase
Plan,
NOW, THEREFORE, in consideration of these premises and of the
covenants, conditions and promises hereinafter set forth and for One Dollar
($1.00) and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Intention of Amendment. The purpose of this Amendment is to
permit the use of the proceeds of any Term Loan Advance to
purchase Borrower's Common Stock pursuant to the Stock
Repurchase Plan and to make such other modifications to the
Agreement as are necessary or appropriate to permit such
application of proceeds. All terms defined in the Agreement
are used herein as defined in the Agreement.
2. Amendment of Section 1 of the Agreement. Section 1 of the
Agreement is hereby amended by adding a definition for "Stock
Repurchase Plan" as follows:
"Stock Repurchase Plan" shall mean the program to repurchase
up to 4,000,000 shares of the Borrower's outstanding Stock in
open market
<PAGE>
transactions, as approved by the Board of Directors of the
Borrower effective July 15, 1998.
3. Amendment of Section 2.4 of Agreement. Subsection 2.4 of the
Agreement is hereby amended in its entirety to read as
follows:
"2.4. Use of Proceeds. Borrower shall apply the proceeds of
each Term Loan Advance (i) to fund, or reimburse Borrower for
payments made after April 1, 1996 for, the cash portion of any
FMO Investment, (ii) to fund, or reimburse Borrower for
payments made after April 1, 1996 for, the Capital and Surplus
of LifeUSA, (iii) to make, or reimburse Borrower for payments
made after April 1, 1996 for, any Capital Expenditures
permitted pursuant to Section 7.10 hereof or investment
permitted pursuant to Section 7.2 hereof or (iv) to fund, or
reimburse Borrower for payments made for, purchases of
Borrower's Common Stock pursuant to the Stock Repurchase
Plan."
4. Amendment of Section 7.2 of Agreement. Subsection (b) of
Section 7.2 of the Agreement is hereby amended in its entirety
to read as follows:
"(b) Borrower shall not, and shall not permit any Subsidiary
to make or commit to make, any advance, loan, extension of
credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of any Person
(including, without limitation, any such Person which would
constitute a Subsidiary), or make any other investment in any
Person or otherwise engage in any investment activities,
except for (i) FMO Investments by Borrower or any Subsidiary,
provided that the aggregate amount of cash used by Borrower
and its Subsidiaries to make such investments shall not exceed
$25,000,000 outstanding at any one time, (ii) those
investments and investment activities set forth on Schedule
7.2 hereto (the "Investment Guidelines"), as such Investment
Guidelines are modified from time to time by the Board of
Directors of LifeUSA Insurance Company, (iii) as permitted by
subsection (a) hereof and (iv) purchases of Borrower's Common
Stock pursuant to the Stock Repurchase Plan, but subject to
compliance with Section 7.14 hereof."
5. Amendment of Section 7.5 of Agreement. Subsection (b) of
Section 7.5 of the Agreement is hereby amended in its entirety
to read as follows:
"(b) Borrower shall not make or permit any Subsidiary of
Borrower to make any changes in its capital structure, amend
its certificate of incorporation or bylaws, or make or permit
any Subsidiary or Borrower to make any changes in any of its
business objectives, purposes or operations which might in any
way adversely affect the repayment of the Obligations or have
a Material Adverse Effect, provided that any amendment to the
certificate of incorporation of Borrower to increase the
number of
2
<PAGE>
authorized shares of Common Stock shall not require the prior
written consent of the Required Lenders."
6. Amendment to Section 7.14 of Agreement. Section 7.14 of the
Agreement is hereby amended in its entirety to read as
follows:
"7.14 Restricted Payments. Borrower shall not and shall not
permit any Subsidiary of Borrower to make any Restricted
Payments, except that during any Fiscal Year commencing with
the year beginning January 1, 1998, Borrower may pay dividends
in an amount up to 25% of Excess Cash Flow for the prior
Fiscal Year, and Borrower may repurchase its Common Stock
pursuant to the Stock Repurchase Plan, provided, in each case,
(i) no Default or Event of Default has occurred and is
continuing or would result from the making of such Restricted
Payment and (ii) Borrower's Consolidated Net Worth after
giving effect to such Restricted Payment shall equal at least
$207,000,000."
7. Representations and Warranties. Borrower represents and
warrants to Agent and Lenders as follows:
(a) All of the representations and warranties of Borrower
contained in the Agreement or any of the Loan
Documents are true and correct in all material
respects on the date hereof as though made on such
date, except to the extent that any such
representation or warranty expressly relates to an
earlier date and for changes permitted or
contemplated by the Agreement, except as such
representations and warranties were modified or
supplemented since the date of the original
Agreement. As of the date hereof, no Default or Event
of Default under the Agreement as amended by this
Amendment has occurred which is continuing.
(b) The execution, delivery and performance by Borrower
of this Amendment have been duly authorized by all
necessary or proper corporate action and do not
require the consent or approval of any Person which
has not been obtained.
(c) This Amendment has been duly executed and delivered
by Borrower and constitutes a legal, valid and
binding obligation of Borrower, enforceable against
Borrower in accordance with its terms.
8. Fees and Expenses. Pursuant to Section 10.2 of the Agreement,
Borrower shall pay all reasonable out-of-pocket costs and
expenses of Agent in connection with the preparation of this
Amendment, including the reasonable fees and expenses of its
counsel.
3
<PAGE>
9. Full Force and Effect. Except as expressly set forth herein,
the Agreement, as amended hereby, shall continue in full force
and effect in accordance with its terms.
10. Counterparts. This Amendment may be executed in any number of
counterparts, and by different parties hereto in separate
counterparts, each of which, when so executed and delivered,
shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
11. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New
York, without regard to the principles thereof regarding
conflicts of laws.
[The balance of this page is intentionally blank.]
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, each as
of the date first above written.
LIFE USA HOLDING, INC., as Borrower
By: /s/ Mark A. Zesbaugh
-------------------------------------------
Mark A. Zesbaugh
Executive Vice President and
Chief Financial Officer
EMPLOYERS REASSURANCE CORPORATION,
as Agent and Lender
By: /s/ James D. Maughn
-------------------------------------------
Its: Executive Vice President & Actuary
REPUBLIC-VANGUARD LIFE INSURANCE
COMPANY, as Lender
By: /s/ John Brill
-------------------------------------------
Its: Senior Vice President & Treasurer
WINTERTHUR LIFE RE INSURANCE COMPANY,
as Lender
By: /s/ John Brill
-------------------------------------------
Its: Senior Vice President & Treasurer
SIGNATURE PAGE TO
AMENDMENT NO. 4 TO LOAN AGREEMENT
EXHIBIT 10.4
AMENDMENT NO. 5
TO
LOAN AGREEMENT
THIS AMENDMENT, is made and entered into as of February ___, 1999, but
effective as of April 30, 1998, among LIFE USA HOLDING, INC., as Borrower,
EMPLOYERS REASSURANCE CORPORATION, as Agent and one of the Lenders, and
REPUBLIC-VANGUARD LIFE INSURANCE COMPANY and WINTERTHUR LIFE RE INSURANCE
COMPANY, as the other Lenders.
W I T N E S S E T H:
WHEREAS, the parties hereto have entered into the Loan Agreement dated
as of May 17, 1996, as amended by Amendment No. 1 dated as of December 30, 1996,
Amendment No. 2 dated as of May 30, 1997, Amendment No. 3 dated as of January
30, 1998 and Amendment No. 4 dated September, 1998 (the "Agreement"), pursuant
to which the Lenders have agreed to make advances to Borrower on the terms and
conditions set forth therein; and
WHEREAS, Borrower has advised the Agent and the Lenders that it has
acquired 40% of the equity of Windsor Financial Group, L.L.C., a Minnesota
limited liability company and a registered investment advisor (the "Windsor
Investment"); and
WHEREAS, Borrower has advised the Agent and the Lenders that it has
formed a subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"),
for the purpose of acquiring a shell insurance company through which life
insurance, annuities and health insurance offering long-term care benefits will
be made available to consumers, that it subsequently transferred all of the
capital stock of LTCA to LifeUSA Insurance Company ("LifeUSA"); that LTCA
acquired all of the capital stock of Capitol Bankers Life Insurance Company
("Capitol Bankers"); that LTCA pledged the capital stock of Capitol Bankers to
Allianz Life Insurance Company of North America ("Allianz") to secure LTCA's
guaranty to Allianz to support the guaranty by Allianz of payment of a $15
million line of credit facility to LTCA by Norwest Bank Minnesota, National
Association (the "LTCA Line of Credit"); that the Borrower granted a security
interest in certain future payments to be made to the Borrower by Allianz to
secure payment of the Borrower's guaranty to Allianz to support the Allianz
guaranty of the LTCA Line of Credit; that Capitol Bankers, Allianz and LifeUSA
have entered into reinsurance contracts, retrocession agreements and excess loss
agreements with respect to the long term care business to be produced for each
of them on Capitol Bankers' policy forms; and that LTCA has entered into a
service agreement and employee leasing agreement with the Borrower, and LTCA and
Capitol Bankers have entered into a management agreement (the "Affiliate
Agreements;" all of the arrangements herein described being referred to as the
"LTCA Transactions"); and
<PAGE>
WHEREAS, Borrower, the Agent and the Lenders wish to amend the
Agreement as provided in this Amendment in connection with the Windsor
Investment and the LTCA Transactions,
NOW, THEREFORE, in consideration of these premises and of the
covenants, conditions and promises hereinafter set forth and for One Dollar
($1.00) and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Intention of Amendment. The purpose of this Amendment is to permit
the use of the proceeds of any Term Loan Advance to make the Windsor Investment
and to make such other modifications to the Agreement as are necessary or
appropriate to permit the LTCA Transactions. All terms defined in the Agreement
are used herein as defined in the Agreement.
2. Amendment of Section 1 of the Agreement. Section 1 of the Agreement
is hereby amended by adding the following sentence to the definition of
"Affiliate":
"It is understood that Capitol Bankers (to be known as
LTCAmerica Insurance Company) is an affiliate of the Borrower.
Section 1 of the Agreement is further amended by adding a definition for
"Windsor Investment" as follows:
"Windsor Investment" shall mean the acquisition of an equity
interest in Windsor Financial Group, L.L.C., a Minnesota
limited liability company and a registered investment advisor,
on the terms described in Schedule 2 hereto."
3. Amendment of Section 2.4 of the Agreement. Subsection 2.4 of the
Agreement is hereby amended in its entirety to read as follows:
"2.4. Use of Proceeds. Borrower shall apply the proceeds of
each Term Loan Advance (i) to fund, or reimburse Borrower for
payments made after April 1, 1996 for, the cash portion of any
FMO Investment or the Windsor Investment, (ii) to fund, or
reimburse Borrower for payments made after April 1, 1996 for,
the Capital and Surplus of LifeUSA, (iii) to make, or
reimburse Borrower for payments made after April 1, 1996 for,
any Capital Expenditures permitted pursuant to Section 7.10
hereof or investment permitted pursuant to Section 7.2 hereof
or (iv) to fund, or reimburse Borrower for payments made for,
purchases of Borrower's Common Stock pursuant to the Stock
Repurchase Plan."
4. Amendment of Section 6.3(b) of the Agreement. Clauses (ii) and (iii)
of Section 6.3(b) of the Agreement are hereby amended in their entirety to read
as follows:
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<PAGE>
"(ii) The Capital and Surplus plus AVR of LifeUSA as set forth in its
respective Annual Statements shall be equal to or greater than
$95,000,000, without regard to the Capital and Surplus plus AVR
attributable to LTCA and its Subsidiaries.
(iii) Borrower shall cause LifeUSA to maintain at all times, such
maintenance to be evidenced as at the end of each fiscal quarter of
LifeUSA, a Risk-Based Capital Ratio of at least 3.50 to 1.0, exclusive
of capital attributable to LTCA and its Subsidiaries. Borrower shall
cause Capitol Bankers to maintain at all times, such maintenance to be
evidenced as at the end of each fiscal quarter of Capitol Bankers, a
Risk-Based Capitol Ratio of least 3.50 to 1.0."
5. Amendment to Section 6.16 of the Agreement. Section 6.16 of the
Agreement is hereby amended in its entirety to read as follows:
"6.16 Pledge of FMO Investments and Windsor Investment. If
requested by Agent at any time after the date hereof, the
Borrower shall pledge to Agent for the ratable benefit of the
Lenders any or all of the FMO Investments and the Windsor
Investment pursuant to an amendment to the Pledge Agreement in
form and substance satisfactory to Agent and its counsel."
6. Amendment to Section 7.1 of the Agreement. Section 7.1 of the
Agreement is hereby amended in its entirety to read as follows:
"7.1 Mergers, Etc. Neither Borrower nor any Subsidiary of
Borrower shall directly or indirectly, by operation of law or
otherwise, merge with, consolidate with, acquire all or
substantially all of the assets or capital stock of, or
otherwise combine with, any Person or a division of any Person
nor form a subsidiary, except for the formation of LTCA and
permitted FMO Investments and the Windsor Investment pursuant
to Section 7.2 hereof."
7. Amendment of Subsection (b) of Section 7.2 of the Agreement.
Subsection (b) of Section 7.2 of the Agreement is hereby amended in its entirety
to read as follows:
"(b) Borrower shall not, and shall not permit any Subsidiary
to make or commit to make, any advance, loan, extension of
credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of any Person
(including, without limitation, any such Person which would
constitute a Subsidiary), or make any other investment in any
Person or otherwise engage in any investment activities,
except for (i) FMO Investments and the Windsor Investment by
Borrower or any Subsidiary, provided that the aggregate amount
of cash used by Borrower and its Subsidiaries to make such
investments shall not exceed $25,000,000 outstanding at any
one time, (ii) with respect to LifeUSA Insurance Company,
those investments and investment activities set forth
3
<PAGE>
on Schedule 7.2 hereto (the "LifeUSA Investment Guidelines"),
as such LifeUSA Investment Guidelines are modified from time
to time by the Board of Directors of LifeUSA Insurance
Company, which Investment Guidelines will be modified to
specifically permit the investment in LTCA, with respect to
Capitol Bankers, those investments and investment activities
set forth on Schedule 7.2A hereto (the "CB Investment
Guidelines"), as such CB Investment Guidelines are modified
from time to time by the Board of Directors of Capitol
Bankers, (iii) as permitted by subsection (a) hereof and (iv)
purchases of Borrower's Common Stock pursuant to the Stock
Repurchase Plan, but subject to compliance with Section 7.14
hereof."
8. Amendment to Subsection (a) of Section 7.3 of the Agreement.
Subsection (a) of Section 7.3 of the Agreement is hereby amended in its entirety
to read as follows:
"7.3. Indebtedness. (a) Except as otherwise expressly
permitted by this Section 7.3 or by any other section of this
Agreement, Borrower shall not, nor shall it permit any of its
Subsidiaries to, create, incur, assume or permit to exist any
Indebtedness, except (i) Indebtedness secured by Liens
permitted under Section 7.9 hereof, (ii) the Term Loan, (iii)
the Allianz Subordinated Debentures in an original principal
amount not to exceed $30,000,000, (iv) the Convertible
Subordinated Debentures in an original principal amount not to
exceed $15,000,000, (v) indebtedness incurred by LTCA pursuant
to a Credit Agreement dated as of December 22, 1998 between
LTCA and Norwest Bank Minnesota, National Association, (vi)
all deferred taxes, (vii) all unfunded pension fund and other
employee benefit plan obligations and liabilities but only to
the extent they are permitted to remain unfunded under
applicable law and (viii) any other Indebtedness incurred by
Borrower at any time after Fiscal Year 1996 in an outstanding
principal amount at the time of each such incurrence not in
excess of the lesser of (x) 2% of the Consolidated Net Worth
of Borrower at such time and (y) $5,000,000."
9. Amendment to Subsection (a) of Section 7.5 of the Agreement.
Subsection (a) of Section 7.5 of the Agreement is hereby amended in its entirety
to read as follows:
"7.5 Capital Structure. (a) Borrower shall not permit any
Subsidiary of Borrower to issue or agree to issue any of their
respective authorized but not outstanding shares of Stock
(including treasury shares) to any Person other than Borrower
or LifeUSA, except that LTCA is permitted to issue its shares
for not less than fair value and in accordance with the
provisions of applicable securities laws."
10. Amendment to Section 7.6 of the Agreement. The following sentence
is hereby added to Section 7.6 of the Agreement:
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<PAGE>
"The life insurance, annuities and health insurance proposed
to be produced by Capitol Bankers and by LifeUSA on Capitol
Bankers policy forms are acceptable to the Lenders."
11. Amendment of Section 7.7 of the Agreement. Section 7.7 of the
Agreement is hereby amended by adding thereto a new clause (d) reading as
follows:
"(d) The Affiliate Agreements between LTCA and the Borrower,
LifeUSA or Capitol Bankers are acceptable to the Lenders."
12. Amendment of Section 7.9 of the Agreement. Section 7.9 of the
Agreement is hereby amended to add the following clause (d):
"(d) the security interest given to Allianz by the Borrower
and the pledge given to Allianz by Capitol Bankers in
connection with the LTCA Line of Credit."
13. Amendment of Section 7.10 of the Agreement. Section 7.10 of the
Agreement is hereby amended in its entirety to read as follows:
"Borrower shall not and shall not permit any of its
Subsidiaries to make Capital Expenditures that, in the
aggregate, exceed (i) for the Fiscal Year 1996, $3,000,000
plus the cost of remodeling the leasehold improvements
incurred in such Fiscal Year, and (ii) for each Fiscal Year
thereafter, $3,000,000, excluding the effect of SOP 98-1,
"Accounting for Cost of Computer Software Developed or
Obtained for Internal Use" for purposes of such calculation."
14. Representations and Warranties. Borrower represents and warrants to
Agent and Lenders as follows:
(a) All of the representations and warranties of Borrower
contained in the Agreement or any of the Loan
Documents are true and correct in all material
respects on the date hereof as though made on such
date, except to the extent that any such
representation or warranty expressly relates to an
earlier date and for changes permitted or
contemplated by the Agreement, except as such
representations and warranties were modified or
supplemented since the date of the original
Agreement. As of the date hereof, no Default or Event
of Default under the Agreement as amended by this
Amendment has occurred which is continuing.
(b) The execution, delivery and performance by Borrower
of this Amendment have been duly authorized by all
necessary or proper corporate action and do not
require the consent or approval of any Person which
has not been obtained.
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<PAGE>
(c) This Amendment has been duly executed and delivered
by Borrower and constitutes a legal, valid and
binding obligation of Borrower, enforceable against
Borrower in accordance with its terms.
15. Fees and Expenses. Pursuant to Section 10.2 of the Agreement,
Borrower shall pay all reasonable out-of-pocket costs and expenses of Agent in
connection with the preparation of this Amendment, including the reasonable fees
and expenses of its counsel.
16. Full Force and Effect. Except as expressly set forth herein, the
Agreement, as amended hereby, shall continue in full force and effect in
accordance with its terms.
17. Counterparts. This Amendment may be executed in any number of
counterparts, and by different parties hereto in separate counterparts, each of
which, when so executed and delivered, shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
18. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the
principles thereof regarding conflicts of laws.
[The balance of this page is intentionally blank.]
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, each as
of the date first above written.
LIFE USA HOLDING, INC., as Borrower
By: /s/ Mark A. Zesbaugh
--------------------------------------------
Mark A. Zesbaugh
Executive Vice President and
Chief Financial Officer
EMPLOYERS REASSURANCE CORPORATION,
as Agent and Lender
By: /s/ James D. Maughn
--------------------------------------------
Its: Executive Vice President & Actuary
REPUBLIC-VANGUARD LIFE INSURANCE
COMPANY, as Lender
By: /s/ John Brill
--------------------------------------------
Its: Senior Vice President & Treasurer
WINTERTHUR LIFE RE INSURANCE COMPANY,
as Lender
By: /s/ John Brill
--------------------------------------------
Its: Senior Vice President & Treasurer
EXHIBIT 10.5
AMENDMENT NO. 3
TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT is made and entered into as of February __, 1998 between
LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and ALLIANZ
LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation ("Allianz").
W I T N E S S E T H:
WHEREAS, the parties hereto have entered into the Stock Purchase
Agreement dated January 13, 1998, as amended by Amendment No. 1 dated as of
January 30, 1998 and Amendment No. 2 dated as of July 15, 1998, (the "Agreement"
and all terms defined in the Agreement are used herein as defined in the
Agreement); and
WHEREAS, the parties wish to amend Section 11.2(a)(iii) of the
Agreement,
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Amendment to Section 11.2(a)(iii) of the Agreement. Section
11.2(a)(iii) of the Agreement is amended in its entirety to read as follows:
"(iii) open market purchases of up to 1,604,104 shares of Common Stock
within two (2) years after the date of the Initial Closing,"
2. Full Force and Effect. Except as expressly set forth herein, the
Agreement as amended hereby shall continue in full force and effect in
accordance with its terms.
3. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which, when so executed and delivered, shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
4. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Minnesota, without regard to the
principles thereof regarding conflict of laws.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, each as
of the date first above written.
LIFE USA HOLDING, INC.
By: /s/ Mark A. Zesbaugh
------------------------------------------
Mark A. Zesbaugh,
Executive Vice President and Chief
Financial Officer
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA
By: /s/ Michael T. Westermeyer
------------------------------------------
Michael T. Westermeyer, Vice President
EXHIBIT 10.6
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is made and entered into
as of December 17, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation
(the "Company"), and DONALD J. URBAN (the "Executive").
RECITALS
WHEREAS, the Executive entered into an Employment Agreement dated as of
January 1, 1998 (the "Employment Agreement"), providing the terms and conditions
for continued employment of the Executive by the Company, including without
limitation the service of the Executive as the Senior Vice President and
Director of Sales of the Company and the President of LifeUSA Insurance Company,
the Company's subsidiary ("LifeUSA");
WHEREAS, the Company's subsidiary, LifeUSA Insurance Company, has
formed a new subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation
("LTCA"), for the purpose of offering life insurance, annuity products and
health insurance; and
WHEREAS, LifeUSA wishes to make the services of the Executive available
to LTCA and its subsidiaries, permit assignment of the Employment Agreement to
LTCA, provide for the repurchase by LTCA of the securities of LTCA purchased by
the Executive in the event the Executive dies or is disabled, voluntarily
terminates his employment or is terminated for Cause and confirm noncompete and
nonsolicitation agreements,
NOW, THEREFORE, in consideration of the mutual premises and agreements
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Performance of Duties for LTCA. The parties desire that the
Executive provide services to LTCA as the President and Chief Executive Officer
of LTCA, with the duties and responsibilities attendant to such position, and
that the Executive provide services to subsidiaries of LTCA as agreed upon
between the Executive and LTCA. So long as the Executive provides services to
LTCA or its subsidiaries, the salary, other compensation and benefits provided
in the Agreement shall be reimbursed by LTCA in accordance with the Employee
Leasing Agreement between the Company and LTCA, until such time as the
Employment Agreement is assigned to LTCA pursuant to paragraph 7 hereof.
2. Term of Employment. The term of the Employment Agreement is hereby
extended to December 31, 2003, automatically extendable as provided in paragraph
2 of the Employment Agreement commencing December 31, 1999.
3. Modification of Paragraph 4(c) of the Employment Agreement.
Paragraph 4(c), clause (i) of the Employment Agreement is hereby amended to read
as follows: "...the Executive is not at all times a duly elected executive
officer of the Company or a Subsidiary...."
<PAGE>
4. Modification of Paragraph 4(d) of the Employment Agreement.
Paragraph 4(d) of the Employment Agreement is hereby modified to add the
following two sentences thereto:
"The Executive may voluntarily terminate his employment without Good
Reason prior to the expiration of the term of this Agreement by giving
the Company at least sixty (60) days prior written notice or such
shorter period of time as the Company's Board of Directors may
determine. In the event the Executive voluntarily resigns, the
Executive's rights to further Base Salary payments and the Annual Bonus
(to the extent not yet earned) shall terminate on the effective date of
such resignation, and the Executive's rights to other compensation and
benefits shall be determined under the Company's benefit plans and
policies applicable to executives of the Company then in effect."
5. LTCA Stock Buyback. In connection with the formation of LTCA and the
execution of this First Amendment to Employment Agreement, the Executive is
purchasing 400,000 shares of common stock of LTCA (the "Shares"). The Executive
agrees that he will not transfer the Shares or any right or interest therein
without the prior written consent of LTCA. In the event of the Executive's death
or disability (as defined in the Company's long term disability plan then in
effect), in the event the Executive voluntarily terminates his employment, or in
the event the Executive is terminated for Cause pursuant to Section 4(b) of the
Employment Agreement, the Executive acknowledges that LTCA may, but is not
obligated to, repurchase the Shares from the Executive at a price of ten cents
($.10) per share plus interest on the original purchase price of the Shares from
the date of purchase at the rate of ten percent 10% per annum (the "purchase
price"). In order to exercise its option to repurchase, LTCA must give notice of
its intention to the Executive within sixty (60) days of the event giving rise
to the repurchase option (or within one hundred twenty (120) days after the
death or disability of the Executive) and purchase the Shares within thirty (30)
days of giving such notice. The right of LTCA to repurchase the Shares pursuant
to this paragraph 5 shall terminate on December 31, 2001.
6. Confidentiality, Nonsolicitation and Noncompete Covenants. Without
limiting paragraph 5 of the Employment Agreement, the Executive acknowledges
that the covenants of the Executive in paragraph 5 of the Employment Agreement
extend in every respect to include LTCA and its subsidiaries and are enforceable
by LTCA and its subsidiaries.
7. Assignability. In the event that it is determined between LTCA and
the Company that the Executive should be a direct employee of LTCA, the
Employment Agreement shall be amended to reflect that relationship (including
without limitation the assumption by LTCA of the Company's obligations under
paragraphs 3 and 4 of the Employment Agreement) Company's obligations under
paragraphs 3 and 4 of , provided that the obligations of the Executive to the
Company under paragraph 5 of the Employment Agreement and the rights of the
parties in the event of a dispute with respect to such obligations shall
continue to be binding on the parties for so long as such obligations and rights
exist between LTCA and the Executive in accordance with the Employment
Agreement.
8. Notices. Any notice required to be given to LTCA shall be given to
its corporate headquarters, attention of the Secretary.
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<PAGE>
9. Successors. The Company's rights under the Employment Agreement
shall inure to the benefit of, and be enforceable by, the Company and its
Subsidiaries (including without limitation LTCA) and the successors and assigns
of any of them.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
LIFE USA HOLDING, INC.
By /s/ Robert W. MacDonald
-----------------------------
Robert W. MacDonald, Chairman
and Chief Executive Officer
/s/ Donald J. Urban
--------------------------------
Donald J. Urban
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is made and entered into
as of December 17, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation
(the "Company"), and BRADLEY E. BARKS (the "Executive").
RECITALS
WHEREAS, the Executive entered into an Employment Agreement dated as of
January 1, 1998 (the "Employment Agreement"), providing the terms and conditions
for continued employment of the Executive by the Company, including without
limitation the service of the Executive as the Senior Vice President-Finance of
the Company;
WHEREAS, the Company's subsidiary, LifeUSA Insurance Company, has
formed a new subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation
("LTCA"), for the purpose of offering life insurance, annuity products and
health insurance; and
WHEREAS, the Company wishes to make the services of the Executive
available to LTCA and its subsidiaries, permit assignment of the Employment
Agreement to LTCA, provide for the repurchase by LTCA of the securities of LTCA
purchased by the Executive in the event the Executive dies or is disabled,
voluntarily terminates his employment or is terminated for Cause and confirm
noncompete and nonsolicitation agreements,
NOW, THEREFORE, in consideration of the mutual premises and agreements
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Performance of Duties for LTCA. The parties desire that the
Executive provide services to LTCA as the Chairman and Chief Financial Officer
of LTCA, with the duties and responsibilities attendant to such position, and
that the Executive provide services to subsidiaries of LTCA as agreed upon
between the Executive and LTCA. So long as the Executive provides services to
LTCA or its subsidiaries, the salary, other compensation and benefits provided
in the Agreement shall be reimbursed by LTCA in accordance with the Employee
Leasing Agreement between the Company and LTCA, until such time as the
Employment Agreement is assigned to LTCA pursuant to paragraph 7 hereof.
2. Term of Employment. The term of the Employment Agreement is hereby
extended to December 31, 2003, automatically extendable as provided in paragraph
2 of the Employment Agreement commencing December 31, 1999.
3. Modification of Paragraph 4(c) of the Employment Agreement.
Paragraph 4(c), clause (i) of the Employment Agreement is hereby amended to read
as follows: "...the Executive is not at all times a duly elected executive
officer of the Company or a Subsidiary...."
<PAGE>
4. Modification of Paragraph 4(d) of the Employment Agreement.
Paragraph 4(d) of the Employment Agreement is hereby modified to add the
following two sentences thereto:
"The Executive may voluntarily terminate his employment without Good
Reason prior to the expiration of the term of this Agreement by giving
the Company at least sixty (60) days prior written notice or such
shorter period of time as the Company's Board of Directors may
determine. In the event the Executive voluntarily resigns, the
Executive's rights to further Base Salary payments and the Annual Bonus
(to the extent not yet earned) shall terminate on the effective date of
such resignation, and the Executive's rights to other compensation and
benefits shall be determined under the Company's benefit plans and
policies applicable to executives of the Company then in effect."
5. LTCA Stock Buyback. In connection with the formation of LTCA and the
execution of this First Amendment to Employment Agreement, the Executive is
purchasing 400,000 shares of common stock of LTCA (the "Shares"). The Executive
agrees that he will not transfer the Shares or any right or interest therein
without the prior written consent of LTCA. In the event of the Executive's death
or disability (as defined in the Company's long term disability plan then in
effect), in the event the Executive voluntarily terminates his employment, or in
the event the Executive is terminated for Cause pursuant to Section 4(b) of the
Employment Agreement, the Executive acknowledges that LTCA may, but is not
obligated to, repurchase the Shares from the Executive at a price of ten cents
($.10) per share plus interest on the original purchase price of the Shares from
the date of purchase at the rate of ten percent 10% per annum (the "purchase
price"). In order to exercise its option to repurchase, LTCA must give notice of
its intention to the Executive within sixty (60) days of the event giving rise
to the repurchase option (or within one hundred twenty (120) days after the
death of the Executive) and purchase the Shares within thirty (30) days of
giving such notice. The right of LTCA to repurchase the Shares pursuant to this
paragraph 5 shall terminate on December 31, 2001.
6. Confidentiality, Nonsolicitation and Noncompete Covenants. Without
limiting paragraph 5 of the Employment Agreement, the Executive acknowledges
that the covenants of the Executive in paragraph 5 of the Employment Agreement
extend in every respect to include LTCA and its subsidiaries and are enforceable
by LTCA and its subsidiaries.
7. Assignability. In the event that it is determined between LTCA and
the Company that the Executive should be a direct employee of LTCA, the
Employment Agreement shall be amended to reflect that relationship (including
without limitation the assumption by LTCA of the Company's obligations under
paragraphs 3 and 4 of the Employment Agreement), provided that the obligations
of the Executive to the Company under paragraph 5 of the Employment Agreement
and the rights of the parties in the event of a dispute with respect to such
obligations shall continue to be binding on the parties for so long as such
obligations and rights exist between LTCA and the Executive in accordance with
the Employment Agreement.
8. Notices. Any notice required to be given to LTCA shall be given to
its corporate headquarters, attention of the Secretary.
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<PAGE>
9. Successors. The Company's rights under the Employment Agreement
shall inure to the benefit of, and be enforceable by, the Company and its
Subsidiaries (including without limitation LTCA) and the successors and assigns
of any of them.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
LIFE USA HOLDING, INC.
By /s/ Robert W. MacDonald
-----------------------------
Robert W. MacDonald, Chairman
and Chief Executive Officer
/s/ Bradley E. Barks
--------------------------------
Bradley E. Barks
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of December 17, 1998 between
LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and HAZEL REID
(the "Executive").
R E C I T A L S
WHEREAS, the Executive is now and has been an employee of the Company
providing services to its marketing subsidiary;
WHEREAS, the Company's subsidiary, LifeUSA Insurance Company, has
formed a subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"),
for the purpose of offering life insurance, annuity products and health
insurance; and
WHEREAS, the Company and the Executive wish to enter into this
Agreement to provide for the continued employment of Executive and in connection
with making the services of the Executive available to LTCA and its
subsidiaries, all on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual premises and agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Employment and Duties. The parties hereby agree that, during the
term of this Agreement as set forth in paragraph 2 below, the Executive shall be
employed by the Company and will provide services to LTCA as the Senior Vice
President and Chief Marketing Officer with the duties and responsibilities
attendant to such position. In discharging such duties and responsibilities, the
Executive may also serve as an executive officer and/or director of any direct
or indirect subsidiary of the Company (collectively the "Subsidiaries"). The
salary, other compensation and benefits provided herein may be allocated among
the Company and the Subsidiaries based upon the portion of the Executive's
services provided to the Company and each of the Subsidiaries, respectively, and
the Executive shall assist the Company in making such allocation as the Company
may reasonably request. During the term of this Agreement, the Executive shall
apply on a full-time basis (allowing for usual vacations and sick leave) all of
the Executive's skill and experience to the performance of the Executive's
duties hereunder with the Company and the Subsidiaries. It is understood that
the Executive may have other business investments and participate in charitable
organizations which may, from time to time, require minor portions of
Executive's time, but which shall not interfere or be inconsistent with the
Executive's duties under this Agreement. The Executive shall perform the
Executive's duties at the Company's principal executive offices in Minneapolis,
Minnesota or at such other location as may be mutually agreed upon by the
Executive and the Company, provided that the Executive shall travel to other
locations at such times as may be necessary for the performance of the
Executive's duties under this Agreement.
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2. Term of Employment. Unless sooner terminated as provided in
paragraph 4 below, the term of this Agreement shall commence on the date hereof
and shall continue through December 31, 2001; provided that the term shall be
automatically extended for one year on each December 31st commencing December
31, 1999 unless either party gives written notice to the other prior to the date
on which the automatic extension would be effective, provided that the term
shall not be extended beyond Executive's sixty-fifth (65th) birthday.
3. Compensation and Benefits. During the term of this Agreement, the
Executive shall be entitled to the following compensation and benefits for
service to the Company and the Subsidiaries, including any services as a
director of the Company or its Subsidiaries:
(a) Base Salary. The Executive shall be paid a base salary at a minimum
annual rate of $110,000, payable in accordance with the Company's customary
payroll policy, which salary shall be reviewed and may be increased from time to
time at the discretion of the Board of Directors of the Company or the
Compensation Committee of the Board of Directors (the "Base Salary"), provided
that the amount of the Base Salary shall not be reduced after it has been
increased by the Board of Directors or the Compensation Committee without the
Executive's written consent. The performance of the Executive shall be reviewed
at least once each calendar year which may be at the same time as any adjustment
to the Base Salary of Executive. So long as the Executive performs services for
LTCA or its subsidiaries, the Base Salary and other benefits received by the
Executive hereunder shall be reimbursed by LTCA in accordance with the current
leasing agreement between LTCA and the Company, unless this Agreement is
assigned to LTCA pursuant to paragraph 5 hereof.
(b) Bonus. The Executive shall, in addition to the Base Salary, also be
entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by
the Company of performance goals established by the Board of Directors or the
Compensation Committee of the Company's Board of Directors.
(c) Stock Incentives. The Executive shall be eligible to receive stock
options under any stock based plan from time to time adopted by the Company (the
"Stock Plans"), as from time to time determined by the Board of Directors or
Stock Option Committee of the Company's Board of Directors.
(d) Reimbursement of Expenses. The Company shall reimburse the
Executive for all business expenses properly documented in accordance with the
Company's expense reimbursement policy.
(e) Other Benefits. The Executive shall be entitled to participate and
shall be included in any employee benefit plan, medical/dental coverage plan,
life insurance plan, disability coverage plan, or similar benefit plan of the
Company now existing or established hereafter which are generally applicable to
executives of the Company.
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4. Termination of Employment.
(a) Death or Disability. In the event of the Executive's death or
disability (as defined in the Company's long term disability plan then in
effect), the employment of the Executive hereunder shall terminate and the
Company's obligation to make further Base Salary and Annual Bonus (to the extent
not yet earned) payments hereunder shall thereupon terminate as of the end of
the month in which such death or disability occurs. The Executive's rights to
other compensation and benefits shall be determined under the Company's benefit
plans and policies applicable to Company executives then in effect.
(b) Termination for Cause by the Company. By following the procedure
set forth in paragraph 4(e), the Company shall have the right to terminate the
employment of the Executive for "Cause" in the event the Executive: (i) has
repeatedly failed to perform the Executive's duties under this Agreement, which
failure is willful and deliberate; (ii) has engaged in an act or acts of
dishonesty which is or are intended to result in substantial personal enrichment
for the Executive; (iii) has knowingly engaged in conduct which is materially
injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A)
any felony (other than any felony arising out of negligence), or (B) any crime
or offense involving dishonesty with respect to the Company or any of the
Subsidiaries; (v) has failed to comply with the covenants contained in paragraph
5 of this Agreement; or (vi) knowingly provides materially misleading
information concerning the Company to the Board of Directors of the Company or
any of its Subsidiaries, any governmental body or regulatory agency or to any
lender or other financing source or proposed financing source of the Company or
its Subsidiaries. If the employment of the Executive is terminated by the
Company for Cause, the Company's obligation to make further Base Salary and
Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon
terminate, except the Executive shall receive the Base Salary through the end of
the month during which such a termination occurs. The Executive's rights to
other compensation and benefits shall be determined under the Company's benefit
plans and policies applicable to executives of the Company then in effect.
(c) Termination for Good Reason by the Executive. By following the
procedure set forth in paragraph 4(e), the Executive shall have the right to
terminate the Executive's employment with the Company for "Good Reason" in the
event (i) the Executive is not at all times a duly elected executive officer of
the Company or a Subsidiary; (ii) there is any material reduction in the scope
of the Executive's authority and responsibility; (iii) there is a reduction in
the Executive's Base Salary, a material reduction in the amount of Annual Bonus
for which the Executive is eligible, an amendment to any Stock Plan or employee
retirement plan applicable to the Executive which is materially adverse to the
Executive, or a material reduction in the other benefits to which the Executive
is entitled under paragraph 3(e) above; (iv) the Company requires the
Executive's principal place of employment to be anywhere other than the
Company's principal executive offices, or there is a relocation of the Company's
principal executive offices outside of the Minneapolis/St. Paul, Minnesota
metropolitan area; or (v) the Company otherwise fails to perform its obligations
under this Agreement. If the employment of the Executive is terminated by the
Executive for Good Reason before a Change in Control (as defined below) or
following twenty-four (24) months after a Change in Control, the Executive shall
be entitled to the severance benefits set forth in paragraph 4(f) below. If the
employment of the Executive is terminated by the Executive for Good Reason upon
or within (and including) twenty-four (24) months after a Change in Control, the
Executive
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shall be entitled to the severance benefits set forth in paragraph 4(g) below.
In addition, in the event a Change in Control has occurred and the Executive
elects upon ten (10) days prior notice to the Company to terminate employment
with the Company within the sixty (60) day period following the first
anniversary of the Change in Control, such termination shall be considered a
termination by the Executive for Good Reason and the Executive shall be entitled
to the severance benefits under paragraph 4(g) below.
(d) Termination Without Cause; Voluntary Termination. The Company may
terminate the Executive's employment without Cause prior to the expiration of
the term of this Agreement. If the employment of the Executive is terminated by
the Company without Cause before a Change in Control or following twenty-four
(24) months after a Change in Control, the Executive shall be entitled to the
severance benefits set forth in paragraph 4(f) below. If the employment of the
Executive is terminated by the Company without Cause upon or within (and
including) twenty-four (24) months after a Change in Control, the Executive
shall be entitled to the severance benefits set forth in paragraph 4(g) below.
The Executive may voluntarily terminate his employment without Good Reason prior
to the expiration of the term of this Agreement by giving the Company at least
sixty (60) days prior written notice or such shorter period of time as the
Company's Board of Directors may determine. In the event the Executive
voluntarily resigns, the Executive's rights to further Base Salary payments and
the Annual Bonus (to the extent not yet earned) shall terminate on the effective
date of such resignation, and the Executive's rights to other compensation and
benefits shall be determined under the Company's benefit plans and policies
applicable to executives of the Company then in effect.
(e) Notice and Right to Cure.
(i) Termination by Company for Cause. If the Company proposes
to terminate the employment of the Executive for Cause under paragraph
4(b), the Company shall give written notice to the Executive specifying
the reasons for such proposed determination with particularity and, in
the case of a termination for Cause under paragraph 4(b)(i), the
Executive shall have a reasonable opportunity to correct any curable
situation to the reasonable satisfaction of the Board of Directors of
the Company, which period shall be no less than thirty (30) days from
the Executive's receipt of the notice of proposed termination.
Notwithstanding the foregoing, the Executive's employment shall not be
terminated for Cause unless and until there shall be delivered to the
Executive a copy of the resolution duly adopted by the affirmative vote
of not less than the majority of the members of the Board of Directors
of the Company at a meeting called and held for the purpose (after
reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's legal counsel, to be heard
before the Board of Directors) finding that, in the opinion of the
Company's Board of Directors, the Executive has engaged in conduct
justifying a termination for Cause.
(ii) Termination by Executive for Good Reason. If the
Executive proposes to terminate the Executive's employment for Good
Reason under paragraph 4(c) above (other than the last sentence of
paragraph 4(c) above), the Executive shall give written notice to the
Company, specifying the reason therefor with particularity. In the
event the Executive proposes to terminate employment for Good Reason
under paragraph 4(c)(i), (ii), (iii) or (iv)
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above, the termination shall be effective on the date of such notice.
In the event the Executive proposes to terminate employment for Good
Reason under paragraph 4(c)(v) above, the Company will have an
opportunity to correct any curable situation to the reasonable
satisfaction of the Executive within the period of time specified in
the notice which shall not be less than thirty (30) days. If such
correction is not so made or the circumstances or situation is such
that it is not curable, the Executive may, within thirty (30) days
after the expiration of the time so fixed within which to correct such
situation, give written notice to the Company that the Executive's
employment is terminated for Good Reason effective forthwith.
(f) Severance Benefits. If the Executive is entitled to severance
benefits under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a
Change in Control or following twenty-four months after a Change in Control, the
Executive shall be provided the following benefits (regardless of the death or
disability of the Executive after the Termination Date):
(i) Base Salary. The Company shall continue to pay to the
Executive the Base Salary when and as such Base Salary would have been
paid from the date of termination (the "Termination Date") through the
end of the term of this Agreement under paragraph 2 as if such
termination did not occur and there were no further automatic
extensions of the term pursuant to paragraph 2 (the "Severance Period")
as if the Executive continued to be employed by the Company during the
Severance Period and regardless of the death or disability of the
Executive subsequent to the Termination Date.
(ii) Annual Bonus. If the effective date of such termination
occurs before the Annual Bonus for any preceding calendar year has been
paid, the Company shall, within thirty (30) days after the Termination
Date, pay to the Executive the amount of the Executive's Annual Bonus
for such preceding calendar year when and as it would have been paid if
the Executive remained employed by the Company. In addition, for each
calendar year within the Severance Period (including the calendar year
in which the Termination Date occurs), the Company shall, within thirty
(30) days after the end of each such calendar year, pay the Executive a
bonus equal to the Deemed Bonus (as defined below). The "Deemed Bonus"
shall be an amount equal to (A) prior to a Change in Control, the
average of the Annual Bonus paid to the Executive for the two complete
calendar years prior to the Termination Date, or (B) upon or after a
Change in Control, the greater of (x) the average of the Annual Bonus
paid to the Executive for the calendar year(s) after the Change in
Control (including the calendar year in which a Change in Control
occurs) or (y) the average of the Annual Bonus paid or payable to the
Executive in respect of the two calendar years immediately preceding
the calendar year in which the Change in Control occurs.
(iii) Disability, Life Insurance and Medical/Dental Coverage.
The Executive shall be entitled to the disability coverage, life
insurance and medical/dental coverage which the Executive and the
Executive's family received under paragraph 3(e) as if the Executive
continued to be employed by the Company during the Severance Period;
provided that if Executive obtains new employment with comparable
benefits during the Severance Period, all entitlements under this
paragraph 4(f)(iii) shall cease. Nothing in this paragraph shall be
construed as providing Executive with coverage under any plan of the
Company to which
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Executive would not otherwise be entitled and in the event any coverage
is unavailable (e.g., if Executive is uninsurable), the Company's
obligations under this paragraph may be satisfied by paying to
Executive the cost of such coverage if it were available, as determined
in good faith by the Company.
(iv) Stock Options. Not later than thirty (30) days after the
date on which the Executive's employment terminates, the Company shall
pay the Executive a lump sum cash payment equal to the amount by which
the fair market value (determined as of the Termination Date) of the
number of shares of stock subject to any stock option granted under the
Stock Plans which was not exercisable on the Termination Date and which
would have become vested and exercisable during the Severance Period if
the Executive had remained employed by the Company during the Severance
Period.
(g) Severance Benefits for Change in Control. In the event of a Change
in Control and either upon or within (and including) twenty-four (24) months
after such Change in Control, the Executive terminates employment for Good
Reason or the Executive's employment is terminated by the Company for any reason
other than Cause, then (regardless of the death or disability of the Executive
after the Termination Date) the Company shall pay the Executive a lump sum cash
payment within five (5) days after the Termination Date, in an amount equal to
the amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of
the Deemed Bonus (as defined below), and the Company shall also provide the
Executive the severance benefits referred to in paragraph 4(f)(iii) as provided
therein.
(h) Excise Tax Gross-Up. If Executive is subject to any Excise Tax (as
defined below) as a result of the severance payments and/or benefits to which
Executive is entitled under paragraphs 4(f) or 4(g), the Company shall also pay
the Executive the Gross-Up Payment in accordance with the following provisions:
(i) Gross-Up Payment. Anything to the contrary
notwithstanding, in the event it shall be determined that any payment,
distribution or benefit made or provided by the Company to or for the
benefit of the Executive (whether pursuant to this Agreement or
otherwise) (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended, (the
"Code") or any interest or penalties with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
collectively referred to as the "Excise Tax"), then the Company shall
pay the Executive in cash an amount (the "Gross-Up Payment") such that
after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including but not
limited to income taxes (and any interest and penalties imposed with
respect thereto) and the Excise Tax, imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-up Payment equal to the
Excise Tax imposed on the Payments.
(ii) Determination of Gross-Up Payment. Subject to paragraph
4(h)(iii) below, all determinations required to be made under paragraph
4(h)(i), including whether a Gross-Up Payment is required and the
amount of the Gross-Up Payment, shall be made by the firm of
independent public accountants selected by the Company to audit its
financial statements for the year immediately preceding the Change in
Control (the "Accounting Firm") which
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shall provide detailed supporting calculations to the Company and the
Executive within thirty (30) days after the Termination Date. In the
event that the Accounting Firm is serving as accountant or auditor for
the individual, entity or group effecting the Change in Control, the
Executive shall appoint another nationally recognized accounting firm
to make the determinations required under this paragraph 4(h) (which
accounting firm shall then be referred to as the "Accounting Firm").
All fees and expenses of the Accounting Firm in connection with the
work it performs pursuant to this paragraph 4(h) shall be promptly paid
by the Company. Any Gross-Up Payment (as determined pursuant to
paragraph 4(h)(i) above) shall be paid by the Company to the Executive
within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a written
opinion that failure to report the Excise Tax on the Executive's
applicable federal income tax return would not result in the imposition
of a negligence or a similar penalty. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As
a result of the uncertainty in the application of Section 4999 of the
Code at the time of the initial determination by the Accounting Firm,
it is possible that Gross-up Payments which will not have been made by
the Company should have been made ("Underpayment"). In the event that
the Company exhausts its remedies pursuant to paragraph 4(h)(iii)
below, and the Executive is thereafter required to make a payment of
Excise Tax, the Accounting Firm shall promptly determine the amount of
the Underpayment that has occurred and any such Underpayment shall be
paid by the Company to the Executive within five (5) days after such
determination.
(iii) Contest. The Executive shall notify the Company in
writing of any claim made by the Internal Revenue Service that, if
successful, would require the Company to pay a Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than
ten (10) business days after the Executive knows of such claim and
shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the thirty (30) day period
following the date on which it gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in
writing prior to the expiration of such period that it desires to
contest such claim, the Employee shall:
(A) give the Company any information reasonably
requested by the Company relating to such claim;
(B) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, without limitation, accepting legal
representation with respect to such claim by an attorney
selected by the Company and reasonably acceptable to the
Executive;
(C) cooperate with the Company in good faith in order
effectively to contest such claim;
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(D) permit the Company to participate in any
proceedings relating to such claim; provided, however, that
the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax
or income tax, including interest and penalties with respect
thereto, imposed as a result of such representation and
payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph 4(h)(iii), the Company
shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forego any and
all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct the Executive to
pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company
shall advance the amount of such payment to the Executive, on
an interest-free basis, from any Excise Tax or income tax,
including interest or penalties with respect thereto, imposed
with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that
any extension of the statute of limitations relating to
payment of taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable
hereunder, and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(iv) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to paragraph 4(h)(iii), the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of paragraph 4(h)(iii)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to paragraph
4(h)(iii), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does
not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid, and the amount of such advance shall offset, to
the extent thereof, the amount of Gross-Up Payment required to be paid.
(i) Benefits in Lieu of Severance Pay Policy. The severance benefits
provided for in this paragraph 4 are in lieu of any benefits that would
otherwise be provided to the Executive under the Company's severance pay policy
and the Executive shall not be entitled to any benefits under the Company's
severance pay policy.
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(j) No Funding of Severance. Nothing contained in this Agreement or
otherwise shall require the Company to segregate, earmark or otherwise set aside
any funds or other assets to provide for any payments required to be made under
this paragraph 4 and the rights of the Executive to the severance benefits
hereunder shall be solely those of a general, unsecured creditor of the Company.
However, the Company may, in its discretion, deposit cash or property, or a
combination of both, equal in value to all or a portion of the amounts
anticipated to be payable hereunder into a trust, the assets of which are to be
distributed by such times as determined by the trustee of such trust; provided
that such assets shall be subject at all times to the rights of the Company's
general creditors.
(k) Definition of Change in Control. A "Change in Control" shall be
deemed to have occurred if, prior to the expiration of the term of this
Agreement:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than Allianz Life
Insurance Company of North America and its affiliates or the Company or
any of its Subsidiaries or any employee benefit plan of the Company or
any of its Subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 20% or more of
the voting power of all of the Company's then outstanding securities,
except for issuances of shares approved by a majority of the Incumbent
Directors (as defined below) then in office; or
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company (the "Incumbent Directors") together with any director
(the "New Incumbent Director") whose nomination or election was
approved by at least two-thirds of the Incumbent Directors and any New
Incumbent Director who was previously elected, in each case who are
directors at the time of the nomination or election of such director
cease, for any reason to constitute at least a majority of the Board of
Directors of the Company; or
(iii) the shareholders of the Company approve the sale of all,
or substantially all, of the business or assets of the Company or the
liquidation or dissolution of the Company.
5. Confidentiality; Non-Solicitation Covenant; and Covenant Not to
Compete.
(a) Confidentiality. The Executive agrees that, at all times, both
during the Executive's employment and after the termination thereof, the
Executive shall not divulge to any other person, firm or corporation, or in any
way use for the Executive's own benefit, except as required in the conduct of
the business of the Company or any of its Subsidiaries or as authorized in
writing on behalf of the Company, any trade secrets or confidential information
of the Company or its Subsidiaries obtained during the course of the Executive's
employment with the Company or its Subsidiaries. The Executive also agrees that
the Executive will not, either subsequent to termination of employment or during
employment, except as required in the conduct of the business of the Company or
any of its Subsidiaries, or as authorized in writing on behalf of the Company,
interfere with or disturb or attempt to interfere with or disturb any
employment, contractual or business arrangements of the Company or any of its
Subsidiaries with any of its employees, agents, suppliers,
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customers, reinsurers or other parties with which the Company or any of its
Subsidiaries has a contractual relationship, as the case may be.
(b) Non-Solicitation Covenant. While the Executive is actively employed
with the Company and, in the event of a termination of employment with the
Company for any reason, for a period of two years after the Termination Date,
the Executive agrees that, except with the prior written permission of the Board
of Directors of the Company, the Executive will not offer to hire, entice away,
or in any manner attempt to persuade any officer, employee, or agent of the
Company or any of the Subsidiaries to discontinue his or her relationship with
the Company or any of the Subsidiaries nor will the Executive directly or
indirectly solicit, divert, take away or attempt to solicit any business of the
Company or any of its Subsidiaries as to which Executive has acquired any
knowledge during the term of the Executive's employment with the Company.
(c) Covenant Not to Compete. The Executive acknowledges and agrees with
the Company that during the course of the Executive's employment with the
Company, the Executive has had and will continue to have the opportunity to
develop relationships with existing employees, customers and other business
associates of the Company and the Subsidiaries, which relationships constitute
goodwill of the Company, and the Executive acknowledges and agrees that the
Company would be irreparably damaged if the Executive were to take actions that
would damage or misappropriate such goodwill. The Executive acknowledges that
the Company and its Subsidiaries currently engages throughout the United States
(the "Territory"), the business of the development, sale, marketing and
administration of life insurance, annuities and extended care insurance products
(the "Subject Business"). Accordingly, during the term of the Executive's
employment with the Company and (i) prior to a Change of Control, and in the
case of a voluntary termination by the Executive under paragraph 4(d) or a
termination by the Company for Cause under paragraph 4(b), the balance of the
term of this Agreement under paragraph 2 as if no termination of employment
occurred but notice of termination of the automatic extension was given either
by the Executive at the time of his notice of voluntary resignation or given by
the Company at the time of its notice of termination for Cause, or (ii) after a
Change in Control, one year after the Termination Date (the "Noncompete
Period"), the Executive shall not, directly or indirectly, enter into, engage
in, assist, give or lend funds to or otherwise finance, be employed by or
consult with, or have a financial or other interest in, any business which
engages in the Subject Business, whether for or by himself or as an independent
contractor, agent, stockholder, partner or joint venturer for any other person,
provided that the aggregate ownership by the Executive of no more than two
percent of the outstanding equity securities of any person, which securities are
traded on a national or foreign securities exchange, quoted on the Nasdaq Stock
Market or other automated quotation system or, in the case of the Company, of no
more than ten percent of the Company's outstanding equity securities shall not
be deemed to be giving or lending funds to, otherwise financing or having a
financial interest in a competitor. In the event that any person in which the
executive has any financial or other interest directly or indirectly enters into
the Subject Business in the Territory during the Noncompete Period, the
Executive shall divest all of his interest (other than any amount permitted
under this paragraph) in such person within 30 days after such person enters
into the Subject Business in the Territory.
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(d) Remedies. If the Executive commits a breach, or threatens to commit
a breach, of any of the provisions of this paragraph 5, the Company shall have
the following rights and remedies, in addition to any rights and remedies
otherwise available at law or equity:
(i) The right and remedy to have the provisions of this
paragraph 5 specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed by the Executive that
any such breach or threatened breach will cause irreparable injury to
the Company and the Subsidiaries and that money damages will not
provide an adequate remedy to the Company and the Subsidiaries; and
(ii) The right and remedy to require the Executive to account
for and pay over to the Company all compensation, profits, monies,
accruals, increments, or other benefits, other than those payable under
this Agreement, derived or received by the Executive or the enterprise
in competition with the Company or any of the Subsidiaries as the
result of any transactions constituting a breach of any part of this
paragraph 5, and Executive agrees to account for and pay over to the
Company such amounts promptly upon demand therefor.
(e) Without limiting the provisions of this paragraph 5, the Executive
acknowledges that the covenants of the Executive in this paragraph 5 extend in
every respect to include LTCA and its subsidiaries and are enforceable by LTCA
and its subsidiaries.
6. Beneficiaries. In the event of the Executive's death after
termination of employment, any amount or benefit payable or distributable to him
pursuant to this Agreement shall be paid to the beneficiary designated by the
Executive for such purpose in the last written instrument received by the
Company prior to the Executive's death, if any, or, if no beneficiary has been
designated, to the Executive's estate, but such designation shall not be deemed
to supersede any beneficiary designation under any benefit plan of the Company.
Whenever this Agreement provides for the written designation of a beneficiary or
beneficiaries of the Executive, the Executive shall have the right to revoke
such designation and to redesignate a beneficiary or beneficiaries by written
notice to either the Company to such effect, except to the extent, if any,
restricted by law.
7. Rights in the Event of Dispute. In the event of a dispute between
the Company and the Executive regarding the Executive's employment or this
Agreement, it is the intention of this Agreement that the dispute shall be
resolved as expeditiously as possible, consistent with fairness to both sides,
and that during pendency of the dispute the Executive and the Company shall be
on equal footing, as follows:
(a) Arbitration. Any claim or dispute relating to the Executive's
employment or the terms and performance of this Agreement (other than
enforcement of paragraph 5) shall be resolved by binding private arbitration
before three arbitrators, and any award rendered by any arbitration panel, or a
majority thereof, may be filed and a judgment obtained in any court having
jurisdiction over the parties unless the relief granted in the award is
delivered within ten (10) days of the award. Either party may request
arbitration by written notice to the other party. Within thirty (30) days of
receipt of such notice by the opposing party, each party shall appoint a
disinterested arbitrator and the two arbitrators selected thereby shall appoint
a third neutral arbitrator; in the event the two arbitrators cannot agree upon
the third arbitrator within ten (10) days after their appointment, then
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the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County
(Minnesota) District Court. Any arbitration proceeding conducted hereunder shall
be in the City of Minneapolis and shall follow the procedures set forth in the
Rules of Commercial Arbitration of the American Arbitration Association, and
both sides shall cooperate in as expeditious a resolution of the proceeding as
is reasonable under the circumstances. The arbitration panel shall have the
power to enter any relief it deems fair and just on any claim, including interim
and final equitable relief, along with any procedural order that is reasonable
under the circumstances.
(b) Expenses of Prosecution/Defense of Claim. During the pendency of a
dispute between the Company and the Executive relating to the Executive's
employment or the terms or performance of this Agreement, the Company shall
promptly pay the Executive's reasonable expenses of representation upon delivery
of periodic billings for same, provided that (i) Executive (or a person claiming
on the Executive's behalf) shall promptly repay all amounts paid hereunder at
the conclusion of the dispute if the resolution thereof includes a finding that
the Executive did not act in good faith in the matter in dispute or in the
dispute proceeding itself, and (ii) no claim for expenses of representation
shall be submitted by the Executive or any person acting on the Executive's
behalf unless made in writing to the Board of Directors within one year of the
performance of the services for which such claim is made.
8. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive compensation or benefits subsequent to the
termination of the Executive's employment under this Agreement, the Executive
shall have no obligation to seek other employment in an effort to mitigate
damages. To the extent the Executive shall accept other employment after the
Executive's termination of employment, the compensation and benefits received
from such employment shall not reduce the compensation and benefits otherwise
due under this Agreement, except as provided in paragraph 4(f)(iii) above.
9. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company, or its Subsidiaries.
10. LTCA Stock Buyback. In connection with the formation of LTCA and
the execution of this Agreement, the Executive is purchasing 400,000 shares of
common stock of LTCA (the "Shares"). The Executive agrees that she will not
transfer the Shares or any right or interest therein without the prior written
consent of LTCA. In the event of the Executive's death or disability (as defined
in the Company's long term disability plan then in effect), in the event the
Executive voluntarily terminates his employment pursuant to paragraph 4(d), or
in the event the Executive is terminated for Cause pursuant to Section 4(b) of
this Agreement, the Executive acknowledges that LTCA may, but is not obligated
to, repurchase the Shares from the Executive at a price of ten cents ($.10) per
share plus interest on the original purchase price of the Shares from the date
of purchase at the rate of 10% per annum (the "purchase price"). LTCA must give
notice of its intention to the Executive within sixty (60) days of the event
giving rise to the repurchase option (or within one hundred (120) days after the
death of the Executive) and purchase the Shares within thirty (30) days of
giving such notice. The right of LTCA to repurchase the Shares pursuant to this
paragraph 10 shall terminate on December 30, 2001.
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<PAGE>
11. Successors. The Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to expressly
assume and agree to perform its obligations under this Agreement in the same
manner and to the same extent that the Company would be required to perform them
if no succession had taken place unless, in the opinion of legal counsel
mutually acceptable to the Company and the Executive, such obligations have been
assumed by the successor as a matter of law. Failure of the Company to obtain
such agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the Executive to
terminate the Executive's employment and to receive the payments provided for in
paragraphs 4(f), 4(g) and 4(h), as the case may be, as if the Executive
terminated this Agreement for Good Reason. The Executive's rights under this
Agreement shall inure to the benefit of, and shall be enforceable by, the
Executive's legal representative or other successors in interest, but shall not
otherwise be assignable or transferable. The Company's rights under this
Agreement shall inure to the benefit of, and shall be enforceable by, the
Company and its Subsidiaries' (including without limitation LTCA) successors and
assigns of any of them.
12. Assignability. In the event that it is determined between LTCA and
the Company that the Executive should be a direct employee of LTCA, this
Agreement shall be amended to reflect that relationship (including without
limitation the assumption by LTCA of the Company's obligations under paragraphs
3 and 4 hereof), provided that the obligations of the Executive to the Company
under paragraph 5 of the Agreement and the rights of the parties in the event of
a dispute with respect to such obligations shall continue to be binding on the
parties for so long as such obligations and rights exist between LTCA and the
Executive in accordance with this Agreement.
13. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable, the invalidity or unenforceability
thereof shall not affect any other provisions or applications of this Agreement
which can be given effect without the invalid or unenforceable provision or
application.
14. Survival. The rights and obligations of the parties pursuant to
this Agreement shall survive the term of the employment to the extent that any
performance is required hereunder after the expiration or termination of such
term.
15. Notices. All notices under this Agreement shall be in writing and
shall be deemed effective when delivered in person (in the Company's case, to
its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage
prepaid, addressed, in the case of the Executive, to the Executive's last known
address as carried on the personnel records of the Company and, in the case of
the Company, to the corporate headquarters, attention of the Secretary, or to
such other address as the party to be notified may specify by written notice to
the other party. Any notices required to be given to LTCA shall be given to its
corporate headquarters, attention of the Secretary.
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<PAGE>
16. Amendments and Construction. This Agreement may only be amended in
a writing signed by the parties hereto. This Agreement shall be construed under
the laws of the State of Minnesota. Paragraph headings are for convenience only
and shall not be considered a part of the terms and provisions of the Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
LIFE USA HOLDING, INC.
By: /s/ Robert W. MacDonald
-----------------------------
Robert W. MacDonald, Chairman
and Chief Executive Officer
/s/ Hazel Reid
---------------------------------
Hazel Reid
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of December 17, 1998 between
LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and ROBIN
AESHLIMAN (the "Executive").
R E C I T A L S
WHEREAS, the Executive is now and has been an employee of the Company
providing services to its marketing subsidiary;
WHEREAS, the Company's subsidiary, LifeUSA Insurance Company, has
formed a subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"),
for the purpose of offering life insurance, annuity products and health
insurance; and
WHEREAS, the Company and the Executive wish to enter into this
Agreement to provide for the continued employment of Executive and in connection
with making the services of the Executive available to LTCA and its
subsidiaries, all on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual premises and agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Employment and Duties. The parties hereby agree that, during the
term of this Agreement as set forth in paragraph 2 below, the Executive shall be
employed by the Company and will provide services to LTCA as the Senior Vice
President and Chief Operating Officer with the duties and responsibilities
attendant to such position. In discharging such duties and responsibilities, the
Executive may also serve as an executive officer and/or director of any direct
or indirect subsidiary of the Company (collectively the "Subsidiaries"). The
salary, other compensation and benefits provided herein may be allocated among
the Company and the Subsidiaries based upon the portion of the Executive's
services provided to the Company and each of the Subsidiaries, respectively, and
the Executive shall assist the Company in making such allocation as the Company
may reasonably request. During the term of this Agreement, the Executive shall
apply on a full-time basis (allowing for usual vacations and sick leave) all of
the Executive's skill and experience to the performance of the Executive's
duties hereunder with the Company and the Subsidiaries. It is understood that
the Executive may have other business investments and participate in charitable
organizations which may, from time to time, require minor portions of
Executive's time, but which shall not interfere or be inconsistent with the
Executive's duties under this Agreement. The Executive shall perform the
Executive's duties at the Company's principal executive offices in Minneapolis,
Minnesota or at such other location as may be mutually agreed upon by the
Executive and the Company, provided that the Executive shall travel to other
locations at such times as may be necessary for the performance of the
Executive's duties under this Agreement.
<PAGE>
2. Term of Employment. Unless sooner terminated as provided in
paragraph 4 below, the term of this Agreement shall commence on the date hereof
and shall continue through December 31, 2001; provided that the term shall be
automatically extended for one year on each December 31st commencing December
31, 1999 unless either party gives written notice to the other prior to the date
on which the automatic extension would be effective, provided that the term
shall not be extended beyond Executive's sixty-fifth (65th) birthday.
3. Compensation and Benefits. During the term of this Agreement, the
Executive shall be entitled to the following compensation and benefits for
service to the Company and the Subsidiaries, including any services as a
director of the Company or its Subsidiaries:
(a) Base Salary. The Executive shall be paid a base salary at a minimum
annual rate of $90,000, payable in accordance with the Company's customary
payroll policy, which salary shall be reviewed and may be increased from time to
time at the discretion of the Board of Directors of the Company or the
Compensation Committee of the Board of Directors (the "Base Salary"), provided
that the amount of the Base Salary shall not be reduced after it has been
increased by the Board of Directors or the Compensation Committee without the
Executive's written consent. The performance of the Executive shall be reviewed
at least once each calendar year which may be at the same time as any adjustment
to the Base Salary of Executive. So long as the Executive performs services for
LTCA or its subsidiaries, the Base Salary and other benefits received by the
Executive hereunder shall be reimbursed by LTCA in accordance with the current
leasing agreement between LTCA and the Company, unless this Agreement is
assigned to LTCA pursuant to paragraph 5 hereof.
(b) Bonus. The Executive shall, in addition to the Base Salary, also be
entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by
the Company of performance goals established by the Board of Directors or the
Compensation Committee of the Company's Board of Directors.
(c) Stock Incentives. The Executive shall be eligible to receive stock
options under any stock based plan from time to time adopted by the Company (the
"Stock Plans"), as from time to time determined by the Board of Directors or
Stock Option Committee of the Company's Board of Directors.
(d) Reimbursement of Expenses. The Company shall reimburse the
Executive for all business expenses properly documented in accordance with the
Company's expense reimbursement policy.
(e) Other Benefits. The Executive shall be entitled to participate and
shall be included in any employee benefit plan, medical/dental coverage plan,
life insurance plan, disability coverage plan, or similar benefit plan of the
Company now existing or established hereafter which are generally applicable to
executives of the Company.
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4. Termination of Employment.
(a) Death or Disability. In the event of the Executive's death or
disability (as defined in the Company's long term disability plan then in
effect), the employment of the Executive hereunder shall terminate and the
Company's obligation to make further Base Salary and Annual Bonus (to the extent
not yet earned) payments hereunder shall thereupon terminate as of the end of
the month in which such death or disability occurs. The Executive's rights to
other compensation and benefits shall be determined under the Company's benefit
plans and policies applicable to Company executives then in effect.
(b) Termination for Cause by the Company. By following the procedure
set forth in paragraph 4(e), the Company shall have the right to terminate the
employment of the Executive for "Cause" in the event the Executive: (i) has
repeatedly failed to perform the Executive's duties under this Agreement, which
failure is willful and deliberate; (ii) has engaged in an act or acts of
dishonesty which is or are intended to result in substantial personal enrichment
for the Executive; (iii) has knowingly engaged in conduct which is materially
injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A)
any felony (other than any felony arising out of negligence), or (B) any crime
or offense involving dishonesty with respect to the Company or any of the
Subsidiaries; (v) has failed to comply with the covenants contained in paragraph
5 of this Agreement; or (vi) knowingly provides materially misleading
information concerning the Company to the Board of Directors of the Company or
any of its Subsidiaries, any governmental body or regulatory agency or to any
lender or other financing source or proposed financing source of the Company or
its Subsidiaries. If the employment of the Executive is terminated by the
Company for Cause, the Company's obligation to make further Base Salary and
Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon
terminate, except the Executive shall receive the Base Salary through the end of
the month during which such a termination occurs. The Executive's rights to
other compensation and benefits shall be determined under the Company's benefit
plans and policies applicable to executives of the Company then in effect.
(c) Termination for Good Reason by the Executive. By following the
procedure set forth in paragraph 4(e), the Executive shall have the right to
terminate the Executive's employment with the Company for "Good Reason" in the
event (i) the Executive is not at all times a duly elected executive officer of
the Company or a Subsidiary; (ii) there is any material reduction in the scope
of the Executive's authority and responsibility; (iii) there is a reduction in
the Executive's Base Salary, a material reduction in the amount of Annual Bonus
for which the Executive is eligible, an amendment to any Stock Plan or employee
retirement plan applicable to the Executive which is materially adverse to the
Executive, or a material reduction in the other benefits to which the Executive
is entitled under paragraph 3(e) above; (iv) the Company requires the
Executive's principal place of employment to be anywhere other than the
Company's principal executive offices, or there is a relocation of the Company's
principal executive offices outside of the Minneapolis/St. Paul, Minnesota
metropolitan area; or (v) the Company otherwise fails to perform its obligations
under this Agreement. If the employment of the Executive is terminated by the
Executive for Good Reason before a Change in Control (as defined below) or
following twenty-four (24) months after a Change in Control, the Executive shall
be entitled to the severance benefits set forth in paragraph 4(f) below. If the
employment of the Executive is terminated by the Executive for Good Reason
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upon or within (and including) twenty-four (24) months after a Change in
Control, the Executive shall be entitled to the severance benefits set forth in
paragraph 4(g) below. In addition, in the event a Change in Control has occurred
and the Executive elects upon ten (10) days prior notice to the Company to
terminate employment with the Company within the sixty (60) day period following
the first anniversary of the Change in Control, such termination shall be
considered a termination by the Executive for Good Reason and the Executive
shall be entitled to the severance benefits under paragraph 4(g) below.
(d) Termination Without Cause; Voluntary Termination. The Company may
terminate the Executive's employment without Cause prior to the expiration of
the term of this Agreement. If the employment of the Executive is terminated by
the Company without Cause before a Change in Control or following twenty-four
(24) months after a Change in Control, the Executive shall be entitled to the
severance benefits set forth in paragraph 4(f) below. If the employment of the
Executive is terminated by the Company without Cause upon or within (and
including) twenty-four (24) months after a Change in Control, the Executive
shall be entitled to the severance benefits set forth in paragraph 4(g) below.
The Executive may voluntarily terminate his employment without Good Reason prior
to the expiration of the term of this Agreement by giving the Company at least
sixty (60) days prior written notice or such shorter period of time as the
Company's Board of Directors may determine. In the event the Executive
voluntarily resigns, the Executive's rights to further Base Salary payments and
the Annual Bonus (to the extent not yet earned) shall terminate on the effective
date of such resignation, and the Executive's rights to other compensation and
benefits shall be determined under the Company's benefit plans and policies
applicable to executives of the Company then in effect.
(e) Notice and Right to Cure.
(i) Termination by Company for Cause. If the Company proposes
to terminate the employment of the Executive for Cause under paragraph
4(b), the Company shall give written notice to the Executive specifying
the reasons for such proposed determination with particularity and, in
the case of a termination for Cause under paragraph 4(b)(i), the
Executive shall have a reasonable opportunity to correct any curable
situation to the reasonable satisfaction of the Board of Directors of
the Company, which period shall be no less than thirty (30) days from
the Executive's receipt of the notice of proposed termination.
Notwithstanding the foregoing, the Executive's employment shall not be
terminated for Cause unless and until there shall be delivered to the
Executive a copy of the resolution duly adopted by the affirmative vote
of not less than the majority of the members of the Board of Directors
of the Company at a meeting called and held for the purpose (after
reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's legal counsel, to be heard
before the Board of Directors) finding that, in the opinion of the
Company's Board of Directors, the Executive has engaged in conduct
justifying a termination for Cause.
(ii) Termination by Executive for Good Reason. If the
Executive proposes to terminate the Executive's employment for Good
Reason under paragraph 4(c) above (other than the last sentence of
paragraph 4(c) above), the Executive shall give written notice to the
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<PAGE>
Company, specifying the reason therefor with particularity. In the
event the Executive proposes to terminate employment for Good Reason
under paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination
shall be effective on the date of such notice. In the event the
Executive proposes to terminate employment for Good Reason under
paragraph 4(c)(v) above, the Company will have an opportunity to
correct any curable situation to the reasonable satisfaction of the
Executive within the period of time specified in the notice which shall
not be less than thirty (30) days. If such correction is not so made or
the circumstances or situation is such that it is not curable, the
Executive may, within thirty (30) days after the expiration of the time
so fixed within which to correct such situation, give written notice to
the Company that the Executive's employment is terminated for Good
Reason effective forthwith.
(f) Severance Benefits. If the Executive is entitled to severance
benefits under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a
Change in Control or following twenty-four months after a Change in Control, the
Executive shall be provided the following benefits (regardless of the death or
disability of the Executive after the Termination Date):
(i) Base Salary. The Company shall continue to pay to the
Executive the Base Salary when and as such Base Salary would have been
paid from the date of termination (the "Termination Date") through the
end of the term of this Agreement under paragraph 2 as if such
termination did not occur and there were no further automatic
extensions of the term pursuant to paragraph 2 (the "Severance Period")
as if the Executive continued to be employed by the Company during the
Severance Period and regardless of the death or disability of the
Executive subsequent to the Termination Date.
(ii) Annual Bonus. If the effective date of such termination
occurs before the Annual Bonus for any preceding calendar year has been
paid, the Company shall, within thirty (30) days after the Termination
Date, pay to the Executive the amount of the Executive's Annual Bonus
for such preceding calendar year when and as it would have been paid if
the Executive remained employed by the Company. In addition, for each
calendar year within the Severance Period (including the calendar year
in which the Termination Date occurs), the Company shall, within thirty
(30) days after the end of each such calendar year, pay the Executive a
bonus equal to the Deemed Bonus (as defined below). The "Deemed Bonus"
shall be an amount equal to (A) prior to a Change in Control, the
average of the Annual Bonus paid to the Executive for the two complete
calendar years prior to the Termination Date, or (B) upon or after a
Change in Control, the greater of (x) the average of the Annual Bonus
paid to the Executive for the calendar year(s) after the Change in
Control (including the calendar year in which a Change in Control
occurs) or (y) the average of the Annual Bonus paid or payable to the
Executive in respect of the two calendar years immediately preceding
the calendar year in which the Change in Control occurs.
(iii) Disability, Life Insurance and Medical/Dental Coverage.
The Executive shall be entitled to the disability coverage, life
insurance and medical/dental coverage which the Executive and the
Executive's family received under paragraph 3(e) as if the Executive
continued to be employed by the Company during the Severance Period;
provided that if
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<PAGE>
Executive obtains new employment with comparable benefits during the
Severance Period, all entitlements under this paragraph 4(f)(iii) shall
cease. Nothing in this paragraph shall be construed as providing
Executive with coverage under any plan of the Company to which
Executive would not otherwise be entitled and in the event any coverage
is unavailable (e.g., if Executive is uninsurable), the Company's
obligations under this paragraph may be satisfied by paying to
Executive the cost of such coverage if it were available, as determined
in good faith by the Company.
(iv) Stock Options. Not later than thirty (30) days after the
date on which the Executive's employment terminates, the Company shall
pay the Executive a lump sum cash payment equal to the amount by which
the fair market value (determined as of the Termination Date) of the
number of shares of stock subject to any stock option granted under the
Stock Plans which was not exercisable on the Termination Date and which
would have become vested and exercisable during the Severance Period if
the Executive had remained employed by the Company during the Severance
Period.
(g) Severance Benefits for Change in Control. In the event of a Change
in Control and either upon or within (and including) twenty-four (24) months
after such Change in Control, the Executive terminates employment for Good
Reason or the Executive's employment is terminated by the Company for any reason
other than Cause, then (regardless of the death or disability of the Executive
after the Termination Date) the Company shall pay the Executive a lump sum cash
payment within five (5) days after the Termination Date, in an amount equal to
the amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of
the Deemed Bonus (as defined below), and the Company shall also provide the
Executive the severance benefits referred to in paragraph 4(f)(iii) as provided
therein.
(h) Excise Tax Gross-Up. If Executive is subject to any Excise Tax (as
defined below) as a result of the severance payments and/or benefits to which
Executive is entitled under paragraphs 4(f) or 4(g), the Company shall also pay
the Executive the Gross-Up Payment in accordance with the following provisions:
(i) Gross-Up Payment. Anything to the contrary
notwithstanding, in the event it shall be determined that any payment,
distribution or benefit made or provided by the Company to or for the
benefit of the Executive (whether pursuant to this Agreement or
otherwise) (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended, (the
"Code") or any interest or penalties with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
collectively referred to as the "Excise Tax"), then the Company shall
pay the Executive in cash an amount (the "Gross-Up Payment") such that
after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including but not
limited to income taxes (and any interest and penalties imposed with
respect thereto) and the Excise Tax, imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-up Payment equal to the
Excise Tax imposed on the Payments.
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<PAGE>
(ii) Determination of Gross-Up Payment. Subject to paragraph
4(h)(iii) below, all determinations required to be made under paragraph
4(h)(i), including whether a Gross-Up Payment is required and the
amount of the Gross-Up Payment, shall be made by the firm of
independent public accountants selected by the Company to audit its
financial statements for the year immediately preceding the Change in
Control (the "Accounting Firm") which shall provide detailed supporting
calculations to the Company and the Executive within thirty (30) days
after the Termination Date. In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group
effecting the Change in Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations
required under this paragraph 4(h) (which accounting firm shall then be
referred to as the "Accounting Firm"). All fees and expenses of the
Accounting Firm in connection with the work it performs pursuant to
this paragraph 4(h) shall be promptly paid by the Company. Any Gross-Up
Payment (as determined pursuant to paragraph 4(h)(i) above) shall be
paid by the Company to the Executive within five (5) days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall
furnish the Executive with a written opinion that failure to report the
Excise Tax on the Executive's applicable federal income tax return
would not result in the imposition of a negligence or a similar
penalty. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm, it is possible that Gross-up
Payments which will not have been made by the Company should have been
made ("Underpayment"). In the event that the Company exhausts its
remedies pursuant to paragraph 4(h)(iii) below, and the Executive is
thereafter required to make a payment of Excise Tax, the Accounting
Firm shall promptly determine the amount of the Underpayment that has
occurred and any such Underpayment shall be paid by the Company to the
Executive within five (5) days after such determination.
(iii) Contest. The Executive shall notify the Company in
writing of any claim made by the Internal Revenue Service that, if
successful, would require the Company to pay a Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than
ten (10) business days after the Executive knows of such claim and
shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the thirty (30) day period
following the date on which it gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in
writing prior to the expiration of such period that it desires to
contest such claim, the Employee shall:
(A) give the Company any information reasonably
requested by the Company relating to such claim;
(B) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, without limitation,
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accepting legal representation with respect to such claim by
an attorney selected by the Company and reasonably acceptable
to the Executive;
(C) cooperate with the Company in good faith in order
effectively to contest such claim;
(D) permit the Company to participate in any
proceedings relating to such claim; provided, however, that
the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax
or income tax, including interest and penalties with respect
thereto, imposed as a result of such representation and
payment of costs and expenses. Without limitation on the
foregoing provisions of this paragraph 4(h)(iii), the Company
shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forego any and
all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct the Executive to
pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company
shall advance the amount of such payment to the Executive, on
an interest-free basis, from any Excise Tax or income tax,
including interest or penalties with respect thereto, imposed
with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that
any extension of the statute of limitations relating to
payment of taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable
hereunder, and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(iv) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to paragraph 4(h)(iii), the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of paragraph 4(h)(iii)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to paragraph
4(h)(iii), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does
not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall not be
required to be
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repaid, and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
(i) Benefits in Lieu of Severance Pay Policy. The severance benefits
provided for in this paragraph 4 are in lieu of any benefits that would
otherwise be provided to the Executive under the Company's severance pay policy
and the Executive shall not be entitled to any benefits under the Company's
severance pay policy.
(j) No Funding of Severance. Nothing contained in this Agreement or
otherwise shall require the Company to segregate, earmark or otherwise set aside
any funds or other assets to provide for any payments required to be made under
this paragraph 4 and the rights of the Executive to the severance benefits
hereunder shall be solely those of a general, unsecured creditor of the Company.
However, the Company may, in its discretion, deposit cash or property, or a
combination of both, equal in value to all or a portion of the amounts
anticipated to be payable hereunder into a trust, the assets of which are to be
distributed by such times as determined by the trustee of such trust; provided
that such assets shall be subject at all times to the rights of the Company's
general creditors.
(k) Definition of Change in Control. A "Change in Control" shall be
deemed to have occurred if, prior to the expiration of the term of this
Agreement:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) (other than Allianz Life
Insurance Company of North America and its affiliates or the Company or
any of its Subsidiaries or any employee benefit plan of the Company or
any of its Subsidiaries) becomes a beneficial owner, directly or
indirectly, of securities of the Company representing 20% or more of
the voting power of all of the Company's then outstanding securities,
except for issuances of shares approved by a majority of the Incumbent
Directors (as defined below) then in office; or
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company (the "Incumbent Directors") together with any director
(the "New Incumbent Director") whose nomination or election was
approved by at least two-thirds of the Incumbent Directors and any New
Incumbent Director who was previously elected, in each case who are
directors at the time of the nomination or election of such director
cease, for any reason to constitute at least a majority of the Board of
Directors of the Company; or
(iii) the shareholders of the Company approve the sale of all,
or substantially all, of the business or assets of the Company or the
liquidation or dissolution of the Company.
5. Confidentiality; Non-Solicitation Covenant; and Covenant Not to
Compete.
(a) Confidentiality. The Executive agrees that, at all times, both
during the Executive's employment and after the termination thereof, the
Executive shall not divulge to any other person, firm or corporation, or in any
way use for the Executive's own benefit, except as required in the
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conduct of the business of the Company or any of its Subsidiaries or as
authorized in writing on behalf of the Company, any trade secrets or
confidential information of the Company or its Subsidiaries obtained during the
course of the Executive's employment with the Company or its Subsidiaries. The
Executive also agrees that the Executive will not, either subsequent to
termination of employment or during employment, except as required in the
conduct of the business of the Company or any of its Subsidiaries, or as
authorized in writing on behalf of the Company, interfere with or disturb or
attempt to interfere with or disturb any employment, contractual or business
arrangements of the Company or any of its Subsidiaries with any of its
employees, agents, suppliers, customers, reinsurers or other parties with which
the Company or any of its Subsidiaries has a contractual relationship, as the
case may be.
(b) Non-Solicitation Covenant. While the Executive is actively employed
with the Company and, in the event of a termination of employment with the
Company for any reason, for a period of two years after the Termination Date,
the Executive agrees that, except with the prior written permission of the Board
of Directors of the Company, the Executive will not offer to hire, entice away,
or in any manner attempt to persuade any officer, employee, or agent of the
Company or any of the Subsidiaries to discontinue his or her relationship with
the Company or any of the Subsidiaries nor will the Executive directly or
indirectly solicit, divert, take away or attempt to solicit any business of the
Company or any of its Subsidiaries as to which Executive has acquired any
knowledge during the term of the Executive's employment with the Company.
(c) Covenant Not to Compete. The Executive acknowledges and agrees with
the Company that during the course of the Executive's employment with the
Company, the Executive has had and will continue to have the opportunity to
develop relationships with existing employees, customers and other business
associates of the Company and the Subsidiaries, which relationships constitute
goodwill of the Company, and the Executive acknowledges and agrees that the
Company would be irreparably damaged if the Executive were to take actions that
would damage or misappropriate such goodwill. The Executive acknowledges that
the Company and its Subsidiaries currently engages throughout the United States
(the "Territory"), the business of the development, sale, marketing and
administration of life insurance, annuities and extended care insurance products
(the "Subject Business"). Accordingly, during the term of the Executive's
employment with the Company and (i) prior to a Change of Control, and in the
case of a voluntary termination by the Executive under paragraph 4(d) or a
termination by the Company for Cause under paragraph 4(b), the balance of the
term of this Agreement under paragraph 2 as if no termination of employment
occurred but notice of termination of the automatic extension was given either
by the Executive at the time of his notice of voluntary resignation or given by
the Company at the time of its notice of termination for Cause, or (ii) after a
Change in Control, one year after the Termination Date (the "Noncompete
Period"), the Executive shall not, directly or indirectly, enter into, engage
in, assist, give or lend funds to or otherwise finance, be employed by or
consult with, or have a financial or other interest in, any business which
engages in the Subject Business, whether for or by himself or as an independent
contractor, agent, stockholder, partner or joint venturer for any other person,
provided that the aggregate ownership by the Executive of no more than two
percent of the outstanding equity securities of any person, which securities are
traded on a national or foreign securities exchange, quoted on the Nasdaq Stock
Market or other automated quotation system or, in the case of the Company, of no
more than ten percent of the Company's outstanding equity
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securities shall not be deemed to be giving or lending funds to, otherwise
financing or having a financial interest in a competitor. In the event that any
person in which the executive has any financial or other interest directly or
indirectly enters into the Subject Business in the Territory during the
Noncompete Period, the Executive shall divest all of his interest (other than
any amount permitted under this paragraph) in such person within 30 days after
such person enters into the Subject Business in the Territory.
(d) Remedies. If the Executive commits a breach, or threatens to commit
a breach, of any of the provisions of this paragraph 5, the Company shall have
the following rights and remedies, in addition to any rights and remedies
otherwise available at law or equity:
(i) The right and remedy to have the provisions of this
paragraph 5 specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed by the Executive that
any such breach or threatened breach will cause irreparable injury to
the Company and the Subsidiaries and that money damages will not
provide an adequate remedy to the Company and the Subsidiaries; and
(ii) The right and remedy to require the Executive to account
for and pay over to the Company all compensation, profits, monies,
accruals, increments, or other benefits, other than those payable under
this Agreement, derived or received by the Executive or the enterprise
in competition with the Company or any of the Subsidiaries as the
result of any transactions constituting a breach of any part of this
paragraph 5, and Executive agrees to account for and pay over to the
Company such amounts promptly upon demand therefor.
(e) Without limiting the provisions of this paragraph 5, the Executive
acknowledges that the covenants of the Executive in this paragraph 5 extend in
every respect to include LTCA and its subsidiaries and are enforceable by LTCA
and its subsidiaries.
6. Beneficiaries. In the event of the Executive's death after
termination of employment, any amount or benefit payable or distributable to him
pursuant to this Agreement shall be paid to the beneficiary designated by the
Executive for such purpose in the last written instrument received by the
Company prior to the Executive's death, if any, or, if no beneficiary has been
designated, to the Executive's estate, but such designation shall not be deemed
to supersede any beneficiary designation under any benefit plan of the Company.
Whenever this Agreement provides for the written designation of a beneficiary or
beneficiaries of the Executive, the Executive shall have the right to revoke
such designation and to redesignate a beneficiary or beneficiaries by written
notice to either the Company to such effect, except to the extent, if any,
restricted by law.
7. Rights in the Event of Dispute. In the event of a dispute between
the Company and the Executive regarding the Executive's employment or this
Agreement, it is the intention of this Agreement that the dispute shall be
resolved as expeditiously as possible, consistent with fairness to both sides,
and that during pendency of the dispute the Executive and the Company shall be
on equal footing, as follows:
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(a) Arbitration. Any claim or dispute relating to the Executive's
employment or the terms and performance of this Agreement (other than
enforcement of paragraph 5) shall be resolved by binding private arbitration
before three arbitrators, and any award rendered by any arbitration panel, or a
majority thereof, may be filed and a judgment obtained in any court having
jurisdiction over the parties unless the relief granted in the award is
delivered within ten (10) days of the award. Either party may request
arbitration by written notice to the other party. Within thirty (30) days of
receipt of such notice by the opposing party, each party shall appoint a
disinterested arbitrator and the two arbitrators selected thereby shall appoint
a third neutral arbitrator; in the event the two arbitrators cannot agree upon
the third arbitrator within ten (10) days after their appointment, then the
neutral arbitrator shall be appointed by the Chief Judge of Hennepin County
(Minnesota) District Court. Any arbitration proceeding conducted hereunder shall
be in the City of Minneapolis and shall follow the procedures set forth in the
Rules of Commercial Arbitration of the American Arbitration Association, and
both sides shall cooperate in as expeditious a resolution of the proceeding as
is reasonable under the circumstances. The arbitration panel shall have the
power to enter any relief it deems fair and just on any claim, including interim
and final equitable relief, along with any procedural order that is reasonable
under the circumstances.
(b) Expenses of Prosecution/Defense of Claim. During the pendency of a
dispute between the Company and the Executive relating to the Executive's
employment or the terms or performance of this Agreement, the Company shall
promptly pay the Executive's reasonable expenses of representation upon delivery
of periodic billings for same, provided that (i) Executive (or a person claiming
on the Executive's behalf) shall promptly repay all amounts paid hereunder at
the conclusion of the dispute if the resolution thereof includes a finding that
the Executive did not act in good faith in the matter in dispute or in the
dispute proceeding itself, and (ii) no claim for expenses of representation
shall be submitted by the Executive or any person acting on the Executive's
behalf unless made in writing to the Board of Directors within one year of the
performance of the services for which such claim is made.
8. No Obligation to Mitigate Damages. In the event the Executive
becomes eligible to receive compensation or benefits subsequent to the
termination of the Executive's employment under this Agreement, the Executive
shall have no obligation to seek other employment in an effort to mitigate
damages. To the extent the Executive shall accept other employment after the
Executive's termination of employment, the compensation and benefits received
from such employment shall not reduce the compensation and benefits otherwise
due under this Agreement, except as provided in paragraph 4(f)(iii) above.
9. Other Benefits. The benefits provided under this Agreement shall,
except to the extent otherwise specifically provided herein, be in addition to,
and not in derogation or diminution of, any benefits that Executive or the
Executive's beneficiary may be entitled to receive under any other plan or
program now or hereafter maintained by the Company, or its Subsidiaries.
10. LTCA Stock Buyback. In connection with the formation of LTCA and
the execution of this Agreement, the Executive is purchasing 400,000 shares of
common stock of LTCA (the "Shares"). The Executive agrees that she will not
transfer the Shares or any right or interest therein without the prior written
consent of LTCA. In the event of the Executive's death
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or disability (as defined in the Company's long term disability plan then in
effect), in the event the Executive voluntarily terminates his employment
pursuant to paragraph 4(d), or in the event the Executive is terminated for
Cause pursuant to Section 4(b) of this Agreement, the Executive acknowledges
that LTCA may, but is not obligated to, repurchase the Shares from the Executive
at a price of ten cents ($.10) per share plus interest on the original purchase
price of the Shares from the date of purchase at the rate of 10% per annum (the
"purchase price"). LTCA must give notice of its intention to the Executive
within sixty (60) days of the event giving rise to the repurchase option (or
within one hundred twenty (120) days after the death of the Executive) and
purchase the Shares within thirty (30) days of giving such notice. The right of
LTCA to repurchase the Shares pursuant to this paragraph 10 shall terminate on
December 30, 2001.
11. Successors. The Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company, to expressly
assume and agree to perform its obligations under this Agreement in the same
manner and to the same extent that the Company would be required to perform them
if no succession had taken place unless, in the opinion of legal counsel
mutually acceptable to the Company and the Executive, such obligations have been
assumed by the successor as a matter of law. Failure of the Company to obtain
such agreement prior to the effectiveness of any such succession (unless the
foregoing opinion is rendered to the Executive) shall entitle the Executive to
terminate the Executive's employment and to receive the payments provided for in
paragraphs 4(f), 4(g) and 4(h), as the case may be, as if the Executive
terminated this Agreement for Good Reason. The Executive's rights under this
Agreement shall inure to the benefit of, and shall be enforceable by, the
Executive's legal representative or other successors in interest, but shall not
otherwise be assignable or transferable. The Company's rights under this
Agreement shall inure to the benefit of, and shall be enforceable by, the
Company and its Subsidiaries' (including without limitation LTCA) successors and
assigns of any of them.
12. Assignability. In the event that it is determined between LTCA and
the Company that the Executive should be a direct employee of LTCA, this
Agreement shall be amended to reflect that relationship (including without
limitation the assumption by LTCA of the Company's obligations under paragraphs
3 and 4 hereof), provided that the obligations of the Executive to the Company
under paragraph 5 of the Agreement and the rights of the parties in the event of
a dispute with respect to such obligations shall continue to be binding on the
parties for so long as such obligations and rights exist between LTCA and the
Executive in accordance with this Agreement.
13. Severability. If any provision of this Agreement or the application
thereof is held invalid or unenforceable, the invalidity or unenforceability
thereof shall not affect any other provisions or applications of this Agreement
which can be given effect without the invalid or unenforceable provision or
application.
14. Survival. The rights and obligations of the parties pursuant to
this Agreement shall survive the term of the employment to the extent that any
performance is required hereunder after the expiration or termination of such
term.
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15. Notices. All notices under this Agreement shall be in writing and
shall be deemed effective when delivered in person (in the Company's case, to
its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage
prepaid, addressed, in the case of the Executive, to the Executive's last known
address as carried on the personnel records of the Company and, in the case of
the Company, to the corporate headquarters, attention of the Secretary, or to
such other address as the party to be notified may specify by written notice to
the other party. Any notices required to be given to LTCA shall be given to its
corporate headquarters, attention of the Secretary.
16. Amendments and Construction. This Agreement may only be amended in
a writing signed by the parties hereto. This Agreement shall be construed under
the laws of the State of Minnesota. Paragraph headings are for convenience only
and shall not be considered a part of the terms and provisions of the Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
LIFE USA HOLDING, INC.
By: /s/ Robert W. MacDonald
-----------------------------
Robert W. MacDonald, Chairman
and Chief Executive Officer
/s/ Robin Aeshliman
---------------------------------
Robin Aeshliman
EXHIBIT 10.8
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of December 22, 1998, and is by and between
LTCAMERICA HOLDING, INC., a Minnesota corporation (the 'Borrower") and NORWEST
BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association with
offices in Minneapolis, Minnesota (the "Bank").
RECITALS:
WHEREAS, the Borrower has requested the Bank to lend it up to the sum of FIFTEEN
MILLION AND NO/100 DOLLARS ($15,000,000.00), on a committed, revolving basis
(the "Revolving Line"); and
WHEREAS, the Bank is willing to extend such credit to Borrower upon the terms
and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises herein contained, and each
intending to be legally bound hereby, the parties agree as follows:
SECTION 1 Definitions
In addition to the terms used in the above Recitals, as used herein:
"Advance" means a borrowing hereunder consisting of the aggregate amount
outstanding under the Revolving Line of the same Interest Period.
"Agreement" shall mean this Credit Agreement and all amendments and supplements
hereto which may from time to time become effective hereafter in accordance with
the terms of this Agreement.
"Base Rate" shall mean the "base" or "prime" rate of interest as announced by
the Bank from time to time.
"Banking Day" shall mean any day other than a Saturday or Sunday on which banks
in Minneapolis are generally open for the conduct of substantially all of their
commercial lending activities and, with respect to LIBOR Advances, shall be a
day on which dealings in U.S. dollars are carried on in the London interbank
market.
"Borrowed Money" shall mean funds obtained by incurring contractual indebtedness
and shall not include trade accounts payable.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Contingent Obligation" of a person means any agreement, undertaking or
arrangement by which such person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other person.
"Default" shall mean an Event of Default as referred to in Section 6 hereof, or
an event which with notice or lapse of time or both would become an Event of
Default,
<PAGE>
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Generally Accepted Accounting Principles" or "GAAP" shall mean generally
accepted accounting principles applied on a basis consistent with those
reflected in the financial statements referred to in Section 4 hereof.
"Guarantor" shall mean Allianz Life Insurance Company of North America, Inc.
"Guaranty" shall mean the guaranty of the Guarantor in the form of Exhibit B.
"Indebtedness" of a person means such person's (i) obligations for borrowed
money, (ii) obligations representing the deferred purchase price of property or
services (other than accounts payable arising in the ordinary course of such
person's business payable on terms customary in the trade), (iii) obligations,
whether or not assumed, secured by Liens or payable out of the proceeds or
production from property now or hereafter owned or acquired by such person, (iv)
obligations which are evidenced by notes, acceptances, or other instruments, (v)
capitalized lease obligations, (vi) net liabilities under interest rate swap,
exchange or cap agreements, (vii) contingent obligations and (viii) obligations
for which such person is obligated pursuant to a letter of credit.
"Interest Period" means a LIBOR Interest Period.
"LIBOR Advance" means an Advance which bears interest at a LIBOR Rate.
"LIBOR Base Rate" means the rate determined by the Bank to be the rate at which
dollar deposits are offered to major banks in the London interbank market two
Banking Days prior to the first day of such LIBOR Interest Period, having a
maturity approximately equal to such LIBOR Interest Period.
"LIBOR Interest Period" means, with respect to a LIBOR Advance, a period of one,
two, or three months commencing on a Banking Day selected by the Borrower
pursuant to this Agreement. Such LIBOR Interest Period shall end on (but
exclude) the day which corresponds numerically to such date one, two or three
months thereafter, provided, however, that if there is no such numerically
corresponding day in such next, second or third succeeding month, such LIBOR
Interest Period shall end on the last Banking, Day of such next, second or third
succeeding month. If a LIBOR Interest Period would otherwise end on a day which
is not a Banking Day, such LIBOR Interest Period shall end on the next
succeeding Banking Day, provided, however, that if said next succeeding Banking
Day falls in a new calendar month, such LIBOR Interest Period shall end on the
immediately preceding Banking Day.
"LIBOR Rate" means, with respect to a LIBOR Advance for the relevant LIBOR
Interest Period, the sum of (i) the quotient of (a) the LIBOR Base Rate
applicable to such LIBOR Interest Period, divided by (b) one minus the Reserve
Requirement (expressed as a decimal) applicable to such LIBOR Interest Period,
plus (ii) 0.75% per annum.
"Material Adverse Effect" means a material adverse effect on (i) the business,
Property, condition (financial or otherwise), results of operations, or
prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the
ability of the Borrower to perform its obligations under the Loan Documents, or
(iii) the validity or enforceability of any of the Loan Documents or the rights
or remedies of the Bank thereunder.
<PAGE>
"NAIC" shall mean the National Association Of Insurance Commissioners or any
successor thereto, or in lieu thereof, any other association, agency or other
organization performing advisory, coordination or other like functions among
insurance departments, insurance commissions and similar governmental
authorities of the various states of the United States of America toward the
promotion of uniformity in the practices of such governmental authorities.
"Net Worth" shall mean, as of the date of any determination thereof, the sum of
the stockholders equity of the Borrower (including paid-in-capital and any
preferred stock to the extent included in stockholders equity in accordance with
GAAP, but net of treasury shares) plus (or minus in the case of a deficit) the
retained earnings of the Borrower determined in accordance with GAAP.
"Note" shall mean the Revolving Note.
"Reserve Requirement" means, with respect to a LIBOR Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on new
non-personal time deposits of $100,000 or more with a maturity equal to that of
such Eurocurrency liabilities (in the case of LIBOR Advances).
"Revolving Line Commitment" shall mean $15,000,000.00, subject to reduction
pursuant to Section 2.7 hereof.
"Revolving Line Termination Date" shall mean five years from the date of this
Agreement.
"Revolving Note" shall mean the promissory note of the Borrower in the form of
Exhibit A, evidencing borrowings under Section 2.1 hereof.
"Subordinated Indebtedness" of a Person means any Indebtedness of such Person
the payment of which is subordinated to payment of the indebtedness hereunder to
the written satisfaction of the Bank.
SECTION 2 Borrowings and Conditions of Lending
2.1 Revolving Line Commitment. The Bank agrees to lend to the Borrower from time
to time from the effective date hereof until the Revolving Line Termination
Date, sums not to exceed in the aggregate principal amount at any one time
outstanding the amount of the Revolving Line Commitment. Within the limits of
the Revolving Line Commitment and subject to the terms and conditions hereof,
prior to the Revolving Line Termination Date the Borrower may borrow, prepay and
reborrow pursuant to this Section 2. 1.
2.2 Advances and Selection of Interest Periods. Prior to each Advance, which
shall be in minimum amounts of $100,000.00, the Borrower shall select the
Interest Period applicable to such Advance, by giving irrevocable notice not
later than 2:00 p.m., Minneapolis time, at least three Banking Days before the
Borrowing Date. Such notice shall specify:
(i) the Borrowing Date, which shall be a Banking Day,
(ii) the amount of such Advance, and
(iii) the applicable Interest Period.
2.3 Continuation of Outstanding Advances. Advances for a particular LIBOR
Interest Period shall continue as such until the end of the then applicable
Interest Period, at which time such LIBOR Advance
<PAGE>
shall automatically renew for the same length of Interest Period unless the
Borrower has given the Bank notice otherwise. The Borrower may elect from time
to time to convert all or any part of an Advance of any Interest Period to a
different Interest Period, provided that such conversion shall be made only on
the last day of the applicable Interest Period. The Borrower shall give the Bank
irrevocable notice of such conversion not later than 2:00 p.m., Minneapolis
time, at least three Banking Days before the end of the applicable Interest
Period. Such notice shall specify:
(i) the date of such conversion, which shall be a Banking Day,
(ii) the amount to be converted, and
(iii) the applicable Interest Period.
2.4 Termination of Interest Periods. No Interest Period with respect to amounts
outstanding under the Revolving Line may end after the Revolving Line
Termination Date.
2.5 Interest Rates. All advances shall bear interest at the LIBOR Rate, except
that upon the occurrence of any Default, all Advances shall bear interest at a
rate 2.0% in excess of the otherwise applicable LIBOR Rate until the end of the
then current Interest Period and then at the Base Rate until such Default is
cured.
2.6 Interest Payment Dates. Interest accrued on each Advance shall be payable on
the last day of the applicable Interest Period, on any date on which the Advance
is prepaid, and at maturity. All interest and fees under this Agreement shall be
calculated on the basis of actual days elapsed in a year of 360 days.
2.7 Principal Reduction and Pavments. Notwithstanding any other provisions of
this Agreement, if the Revolving Line Commitment is not fully funded as of
December 31, 2000, the Revolving Line Commitment shall be reduced to such funded
amount effective January 1, 2001. Thereafter, the Revolving Line Commitment
shall reduce by $500,000 on the last day of each calendar quarter commencing
March 31, 2001 through December 31, 2001 and by $1,625,000 on the last day of
each calendar quarter commencing March 31, 2002. On each such reduction date the
Borrower shall repay such principal amount as may be necessary to reduce the
principal outstanding to the new maximum.
2.8 Optional Principal Payments. The Borrower may at any time, prepay the Note
in whole or in part on the last day of the applicable Interest Period without
premium or penalty. If any amount is prepaid on a date other than at the end of
an Interest Period, then such prepayment shall be accompanied by a premium equal
to the interest that would have been recoverable by the Bank by reinvesting the
amount of principal prepaid from the prepayment date to the last day of the
applicable Interest Period in U.S. Government Securities having a maturity date
on or about that date.
2.9 Method of Payment. All sums payable to the Bank hereunder shall be paid
directly to the Bank in immediately available funds. The Bank shall send the
Borrower statements of all amounts due hereunder, which statements shall be
considered correct and conclusively binding on the Borrower unless the Borrower
notifies the Bank to the contrary within thirty days of its receipt of any
statement which it deems to be incorrect. Alternatively, at its sole discretion,
the Bank may charge against any deposit account of the Borrower all or any part
of any amount due hereunder.
2.10 Fees. The Borrower shall pay to the Bank a one-time origination fee with
respect to the Revolving Line equal to 0. 10 % per annum of the Revolving Line
Commitment, payable on the date of this Agreement. In addition, the Borrower
shall pay to the Bank an annual facility fee with respect to the
<PAGE>
Revolving Line equal to 0.10% per annum of the unused portion of the Revolving
Line Commitment, payable in arrears on the last day of each quarter commencing
March 31, 1999.
2.11 Unavailabilitv of LIBOR Rate. If prior to commencement of any LIBOR
Interest Period the Bank shall determine that (i) deposits in the amount of the
Advance scheduled to be outstanding are not available to the Bank in the London
interbank market, or (ii) by reason of circumstances affecting the London
interbank market, adequate and reasonable means do not exist for ascertaining
the LIBOR Rate, or (iii) the LIBOR Rate does not accurately reflect the cost to
the Bank of making or continuing such loan, or (iv) that any applicable law or
regulation makes it unlawful to make or maintain the loan if bearing interest
based on the LIBOR Rate, then the Bank shall promptly give notice thereof to the
Borrower, and the obligation of the Bank to make, or continue the Advance based
on the LIBOR Rate shall terminate until deposits in such account shall again be
readily available in the London interbank market, adequate and reasonable means
shall exist for ascertaining the LIBOR Rate, the LIBOR Rate shall adequately
reflect the cost to the Bank of making or continuing any such Loan and such
illegality shall no longer exist. In such case all Advances shall bear interest
at a rate based on the Base Rate plus or minus such margin as will result in an
overall rate equivalent to the LIBOR Rate.
2.12 Yield Protection. If any law or any governmental or quasi-governmental
rule, regulation, policy, guideline or directive (whether or not having the
force of law), or any interpretation thereof, or the compliance of any Lender
therewith,
(i) subjects the Bank to any tax, duty, charge or withholding on or
from payments due from the Borrower (excluding federal taxation of the overall
net income of the Bank), or changes the basis of taxation of payments to the
Bank in respect of its Loans or other amounts due it hereunder, or
(ii) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by, the Bank (other than
reserves and assessments taken into account in determining the interest rate
applicable to LIBOR Advances), or
(iii) imposes any other condition the result of which is to increase
the cost to the Bank of making, funding or maintaining loans or reduces any
amount receivable by the Bank in connection with loans, or requires the Bank to
make any payment calculated by reference to the amount of loans held or interest
received by it, by an amount deemed material by the Bank,
then, within 15 days of demand by the Bank, the Borrower shall pay the Bank that
portion of such increased expense incurred or reduction in an amount received
which the Bank determines is attributable to making, funding and maintaining its
Loans and its Commitment.
SECTION 3 Conditions Precedent
The obligation of the Bank to make any advance hereunder is subject to the
following conditions precedent:
3.1 The Borrower shall have delivered to the Bank, prior to the disbursement of
the Loan (the "Closing") the following:
A. The Revolving Note in the form of Exhibit A;
<PAGE>
B. A certified copy of resolutions of the Borrower's board of directors
authorizing the execution, delivery and performance of this Agreement, the Note,
and each other document to be delivered pursuant hereto and certifying as to the
incumbency and signatures of the officers of the Borrower signing this
Agreement, the Note, and each other document to be delivered pursuant hereto;
C. A copy, certified as of the most recent date practicable, by the Secretary of
State of Minnesota, of the Borrower's certificate of incorporation;
D. The Guaranty of the Guarantor in the form of Exhibit B;
E. A certified copy of resolutions of the Guarantor's board of directors
authorizing the execution, delivery and performance of the Guaranty and
certifying as to the incumbency and signatures of the officers of the Borrower
signing the Guaranty;
F. A copy, certified as of the most recent date practicable, by the Secretary of
State of Minnesota, of the Guarantor's Articles of Incorporation;
G. Payment of all fees required under Sections 2. 1 0 and 8.4 hereof.
3.2 At the time of the Closing and of any subsequent request for an advance:
A. No Event of Default shall have occurred and be continuing, and no event shall
have occurred and be continuing that, with the giving of notice or passage of
time or both, would be an Event of Default; and
B. No change shall have occurred which has a Material Adverse Effect since the
date of this Agreement.
3.3 At the time of the Closing and each subsequent disbursement, all legal
matters incidental thereto shall be satisfactory to the Bank's legal counsel.
SECTION 4 Representations and Warranties
To induce the Bank to enter into this Agreement, the Borrower represents and
warrants to the Bank as follows:
4.1 The Borrower is a corporation duly organized, existing and in good standing
under the laws of the State of Minnesota.
4.2 The Borrower is duly qualified to do business and is in good standing in any
additional jurisdictions where, on advice of legal counsel, registration was
deemed necessary.
4.3 The execution, delivery and performance of this Agreement, and the issuance
of the Note by the Borrower are within its corporate powers, have been duly
authorized, and are not in contravention of law, or the terms of Borrower's
Articles of Incorporation or By-Laws or of any undertaking to which the Borrower
is a party or by which it is bound.
4.4 This Agreement is, and the Note when issued will be, valid and binding in
accordance with their terms.
<PAGE>
4.5 No consent, approval or authorization of or declaration or filing with any
governmental authority on the part of the Borrower is required in connection
with the execution and delivery of this Agreement or the borrowings by the
Borrower hereunder or on the part of the Borrower in connection with the
consummation of any transaction contemplated herebv.
4.6 No litigation or governmental proceeding is pending, or, to the knowledge of
the officers of the Borrower, threatened against the Borrower which could have a
material adverse effect on the Borrower's financial condition or business.
4.7 The Borrower is in compliance in all material respects with ERISA and has
received no notice to the contrary from any governmental body.
4.8 The Borrower is not in default with respect to any of its existing
Indebtedness.
SECTION 5 Covenants
During the term of this Agreement, unless the Bank shall otherwise consent in
writing:
5.1 Financial Reporting. The Borrower will maintain a system of accounting
established and administered in accordance with generally accepted accounting
principles, and furnish to the Bank:
(i) Within 90 days after the close of each of its fiscal years, an unqualified
(except for qualifications relating to changes in accounting principles or
practices reflecting changes in generally accepted principles of accounting and
required or approved by the Borrower's independent certified public accountants)
audit report of the Borrower certified by independent certified public
accountants, acceptable to the Bank, prepared in accordance with GAAP, including
balance sheets as of the end of such period, related profit and loss and
reconciliation of surplus statements, and a statement of cash flows, accompanied
by any management letter prepared by said accountants.
(ii) Within 90 days after the close of each of its fiscal years, an unqualified
(except for qualifications relating to changes in accounting principles or
practices reflecting changes in generally accepted principles of accounting and
required or approved by the Borrower's independent certified public accountants)
audit report of the Guarantor certified by independent certified public
accountants, acceptable to the Bank, prepared in accordance with GAAP, including
balance sheets as of the end of such period, related profit and loss and
reconciliation of surplus statements, and a statement of cash flows, accompanied
by any management letter prepared by said accountants.
(iii) Within 45 days after the close of the first three quarterly periods of
each of its fiscal years, unaudited balance sheets of the Borrower as at the
close of each such period and profit and loss and reconciliation of surplus
statements and a statement of cash flows for the period from the beginning of
such fiscal year to the end of such quarter, all certified by its chief
financial officer.
(iv) Within 45 days after the close of the first three quarterly periods of each
of its fiscal years, unaudited balance sheets of the Guarantor as at the close
of each such period and profit and loss and reconciliation of surplus statements
and a statement of cash flows for the period from the beginning of such fiscal
year to the end of such quarter, all certified by its chief financial officer.
(v) Together with the quarterly financial statements required hereunder, a
compliance certificate in substantially the form of Exhibit "C" hereto signed by
the chief financial officer of the Borrower
<PAGE>
showing the calculations necessary to determine compliance with this Agreement
and stating that no Default exists, or if any Default exists, stating the nature
and status thereof.
(vi) Such other information (including non-financial information) as the Bank
may from time to time reasonably request.
5.2 Use of Proceeds. Proceeds of the Revolving Line shall be used for working
capital purposes and refinancing thereof, including acquisitions.
5.3 Notice of Default. The Borrower will give prompt notice in writing to the
Bank of the occurrence of any Default and of any other development, financial or
otherwise, which could have a Material Adverse Effect.
5.4 Conduct of Business. The Borrower will carry on and conduct its business in
substantially the same manner and in substantially the same fields of enterprise
as it is presently conducted and to do all things necessary to remain duly
incorporated, validly existing and in good standing as a domestic corporation in
its jurisdiction of incorporation and maintain all requisite authority to
conduct its business in each jurisdiction in which its business is conducted.
5.5 Taxes. The Borrower will pay when due all taxes, assessments and
governmental charges and levies upon it or its income, profits or property,
except those which are being contested in good faith by appropriate proceedings
and with respect to which adequate reserves have been set aside.
5.6 Insurance. The Borrower will maintain with financially sound and reputable
insurance companies insurance on all of its property in such amounts and
covering such risks as is consistent with sound business practice, and the
Borrower will furnish to the Bank upon request full information as to the
insurance carried.
5.7 CompIiance with Laws. The Borrower will comply with all laws, rules,
regulations, orders, writs, judgments, injunctions, decrees or awards to which
it may be subject.
5.8 Inspection. The Borrower will permit the Bank, and its representatives and
agents, to inspect any of the Property, corporate books and financial records of
the Borrower and each Subsidiary, to examine and make, copies of the books of
accounts and other financial records of the Borrower and each subsidiary, and to
discuss the affairs, finances and accounts of the Borrower and each Subsidiary
with, and to be advised as to the same by, their respective officers at such
reasonable times and intervals as the Bank may designate.
5.9 Indebtedness. The Borrower will not create, incur, or suffer to exist any
Indebtedness other than Indebtedness outstanding as of the date of this
agreement and listed on Schedule 1 hereto.
5.10 Merger. The Borrower will not merge or consolidate with or into any other
person, except that a subsidiary may merge with the Borrower or a wholly-owned
subsidiary.
5.11 Invested Assets. The Borrower will maintain 100% of its invested assets in
instruments having a rating from Moody's Investors Service or Standard & Poors
Ratings Group of investment grade or higher.
<PAGE>
5.12 Guaranties. The Borrower will not, nor will it permit any subsidiary to,
make or suffer to exist any Contingent Obligations, except in favor of the
Guarantor with respect to the Guarantor's payment of the Borrower's obligations
under this Agreement and the Note.
5.13 Liens. The Borrower will not create, incur, or suffer to exist any Lien in,
of or on the property of the Borrower, except:
(i) Liens for taxes, assessments or governmental charges or levies on its
property if the same shall not at the time be delinquent or thereafter can be
paid without penalty, or are being contested in good faith and by appropriate
proceedings.
(ii) Liens imposed by law and liens arising in the ordinary course of business
which secure payment of obligations which are being contested in good faith by
appropriate proceedings and for which adequate reserves shall have been set
aside on its books.
(iii) Liens arising out of pledges or deposits under worker's compensation laws,
unemployment insurance, old age pensions, or other social security or retirement
benefits, or similar legislation.
(iv) Utility easements, building restrictions and such other encumbrances or
charges against real property as are of a nature generally existing with respect
to properties of a similar character and which do not in any material way affect
the marketability of the same or interfere with the use thereof in the business
of the Borrower or its subsidiaries.
(v) Liens in favor of the Guarantor to secure the Contingent Obligations to the
Guarantor as described in Section 5.12.
(vi) Liens existing on the date hereof and disclosed to the Bank in writing
(vii) Liens evidenced by mortgages on real estate and improvements thereto given
to secure Indebtedness representing the price of acquisition of real property
and improvements thereto, and all Liens given upon the renewal, extension or
refunding of such Indebtedness.
5.14 Affiliates. The Borrower will not, and will not permit any subsidiary to,
enter into any transaction (including, without limitation, the purchase or sale
of any property or service) with, or make any payment or transfer to, any
affiliate except in the ordinary course of business and pursuant to the
reasonable requirements of the Borrower's or such subsidiary's business and upon
fair and reasonable terms no less favorable to the Borrower or such subsidiary
than the Borrower or such subsidiary would obtain in a comparable arms-length
transaction.
5.15 Reinsurance Agreement. The Borrower shall maintain a written commitment
from the Guarantor to reinsure not less than 25% of Borrower's insurance
subsidiary's annual written premiums each Year.
5.16 Marketing Agreement. The Borrower shall maintain a written agreement with
Life USA Insurance Company granting the Borrower access to the national
marketing organization and agent structure of Life USA Insurance Company for
distribution of the Borrower's and its subsidiary's insurance products.
5.17 Minimum Net Worth. The Borrower will maintain at the end of each fiscal
quarter a Net Worth of not less than $4,000,000 for each quarter through
December 31, 1999 and not less than $5,000,000 for each quarter thereafter.
<PAGE>
5.18 Risk Adjusted Capital. The Borrower will not permit its ratio of its
insurance subsidiary's total adjusted capital to its authorized control level
risk-based capital, as at the end of any fiscal quarter, to be less than 200%.
The terms "total adjusted capital' and "authorized control level risk-based
capital" shall have the same meanings as in the Annual Statement of the Borrower
completed in accordance with the NAIC annual statement instructions and
accounting practices and procedures manuals.
SECTION 6 Events of Default
6.1 Upon the occurrence of any of the following events of default:
A. Default in any payment of principal on the Note when due, or default in the
payment of interest on the Note when due and continuance thereof for five days;
or
B. Default in the observance or performance of any other agreement of the
Borrower or any Subsidiary or Guarantor herein set forth or in any other
agreement between the Bank and the Borrower or such Subsidiary and continuance
thereof for 30 days following written notice from the Bank; or
C. Default by the Borrower or any Subsidiary in the payment of any other
Indebtedness or in the observance or performance of any term, covenant or
agreement of the Borrower or such Subsidiary in any agreement relating to any
Indebtedness of the Borrower or such Subsidiary, the effect of which default is
to permit the holder of such Indebtedness to declare the same due prior to the
date fixed for its payment under the terms thereof; or
D. Final judgment or judgments for the payment of money aggregating in excess of
$500,000 is or are outstanding against the Borrower or against any property or
assets of it and any one of such judgments has remained unpaid, unvacated,
unbonded or unstayed by appeal or otherwise for a period of 60 days from the
date of its entry; or
E. Any representation or warranty made by the Borrower herein, or by the
Guarantor under the Guaranty, or in any statement or certificate furnished by
the Borrower hereunder, is untrue in any material respect; or
F. The occurrence of a Material Adverse Change with respect to the Borrower; or
G. Guarantor's debt obligations are rated at "AA" or worse by Standard & Poors
Ratings Group or "A2" or worse by Moody's Investors Service, or Guarantor's
rating by A.M. Best is worse than "A" and Guarantor fails, within 10 Banking
Days after written notice from the Bank, to pledge investment grade marketable
securities to the Bank to secure Guarantor's obligations to the Bank under its
Guaranty, which pledge shall continue only until the earlier of (i) the date on
which the obligations of the Borrower under this Agreement and the Revolving
Note are paid in full, or (ii) the Guarantor's debt obligations rating by
Moody's Investors Service is "Al" or better.
then, or at any time thereafter, unless such event of default is remedied, the
Bank or the holder of the Note may, by notice in writing to the Borrower,
declare the Revolving Line to be terminated or the Note to be due and payable,
or both, whereupon the Revolving Line shall immediately terminate or the Note
shall immediately become due and payable, or both, as the case may be, subject
to the provisions of Section 6.3.
<PAGE>
6.2 Upon the occurrence of any of the following events of default:
The Borrower or any subsidiary becomes insolvent or bankrupt, or makes an
appointment for the benefit of creditors or consents to the appointment of a
custodian, trustee or receiver for itself or for the greater part of its
properties; or a custodian, trustee or receiver is appointed for the Borrower or
any subsidiary, or for the greater part of its properties without its consent
and is not discharged within 60 days; or bankruptcy, reorganization or
liquidation proceedings are instituted by or against the Borrower or any
subsidiary and, if instituted against it, are consented to by it or remain
undismissed for 60 days;
then the Revolving Line shall immediately terminate and the Note shall
automatically become immediately due and payable, without notice, subject to the
provisions of Section 6.3 hereof.
6.3 Upon the occurrence and during the continuance of any Event of Default
hereunder, the Bank shall provide written notice thereof to the Guarantor.
Within 10 Banking Days after receipt of such notice, the Guarantor may, but
shall not be required to, notify the Bank of its intent to purchase the
obligations of the Borrower to the Bank under this Agreement and the Revolving
Note from the Bank, without recourse. Prior to the expiration of such 10 Banking
Days period, the Bank agrees that it will not exercise any other right or remedy
under this Agreement, the Revolving Note, the Guaranty or any related document.
The Guarantor's purchase of such obligations of the Borrower shall occur within
30 calendar days of the Guarantor's notice to the Bank of its intent to purchase
such obligations, and during such period, the Bank shall not be entitled to
exercise any other right or remedy under this Agreement, the Revolving Note, the
Guaranty or any related document. Upon receipt by the Bank of payment of all
amounts owed to it under this Agreement and the Revolving Note, the Bank shall
assign this Agreement, the Revolving Note, and each related document to the
Guarantor, pursuant to agreements and instruments reasonably requested by the
Guarantor, whereupon the Guaranty shall be terminated and of no @er force or
effect.
SECTION 7 Change in Control.
7.1 Change of Control. In the event the Borrower has knowledge of a Change of
Control or an impending Change of Control, the Borrower will give written notice
(a "Control Change Notice") of such fact to the Bank at least 60 days prior to
any proposed Change of Control Date; provided, however, that if the Borrower
shall not then have knowledge of such fact, such Control Change Notice shall be
delivered promptly upon receipt of such knowledge, but in no event later than
three business days after the Change of Control Date. The Control Change Notice
shall (i) describe the facts and circumstances of such Change of Control
(including the Change of Control Date or proposed Change of Control Date) in
reasonable detail and (ii) make reference to this Section 7.1 and the right of
the Bank- to reduce or terminate the Commitment on the terms and conditions
provided for herein.
Upon the receipt of such Control Change Notice or, if no Control Change Notice
is given, upon receipt of actual knowledge of a Change of Control, the Bank
shall have the right, upon written notice (the "Declaration Notice") delivered
to the Borrower by the Bank of reducing or terminating the Commitment, which
reduction or termination shall be effective five Business Days following the
delivery of such written notice. Such Declaration Notice shall be served, if at
all, prior to 90 days after receipt of such Control Change Notice. In the event
that no Control Change Notice shall be given, such Declaration Notice may be
served at any time after the occurrence of the Change of Control in question.
As used herein, the term "Change of Control" shall mean Life USA Holding, Inc.
or Allianz Life Insurance Company of North America, Inc. ceasing to beneficially
own, directly or indirectly, a majority
<PAGE>
of the outstanding capital stock of the Borrower. As used herein, the term
"Change of Control Date' shall mean any date upon which a Change of Control
shall occur.
SECTION 8 Miscellaneous
8.1 The provisions of this Agreement shall be in addition to those of any note
or other evidence of liability held by the Bank, all of which shall be construed
as complementary to each other. Nothing herein contained shall prevent the Bank
from enforcing any or all other notes or other agreements in accordance with
their respective terms.
8.2 From time to time, the Borrower will execute and deliver to the Bank such
additional documents and will provide such additional information as the Bank
may reasonably require to carry out the terms of this Agreement and be informed
of the Borrower's status and affairs.
8.3 The Bank shall have the right at all times to enforce the provisions of this
Agreement in strict accordance with the terms hereof and thereof,
notwithstanding any conduct or custom on the part of the Bank in refraining from
so doing at any time or times. The failure of the Bank at any time or times to
enforce its rights under such provisions, strictly in accordance with the same,
shall not be construed as having created a custom in any way or manner contrary
to specific provisions of this Agreement or as having in any way or manner
modified or waived the same. All rights and remedies of the Bank are cumulative
and concurrent and the exercise of one right or remedy shall not be deemed a
waiver or release of any other right or remedy.
8.4 The Borrower will pay all expenses, including the reasonable fees and
expenses of legal counsel for the Bank, incurred in connection with the
preparation, administration, amendment, modification or enforcement of this
Agreement and the collection or attempted collection of the Note; provided that
the obligation to reimburse fees and expenses of legal counsel for the Bank
related to the preparation of this Agreement and related documents shall not
exceed $2,500.00.
8.5 Any notices or consents required or permitted by this Agreement shall be in
writing and shall be deemed delivered if delivered in person or if sent by
certified mail, postage prepaid, return receipt requested, or telegraph, as
follows. unless such address is changed by written notice hereunder:
A. If to the Borrower: LTCAmerica Holding, Inc.
300 South Highway 169
Minneapolis, Minnesota 55426
Attention: Brad Barks
With a copy to: Allianz Life Insurance Company
of North America, Inc.
1750 Hennepin Avenue South
Minneapolis, Minnesota 55403-2195
Attention: Robert S. James
B. If to the Bank: Norwest Bank Minnesota, N.A.
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
<PAGE>
Attention: Financial Institutions Division
8.6 The substantive laws of the State of Minnesota shall govern the construction
of this Agreement and the rights and remedies of the parties hereto.
8.7 This Agreement shall inure to the benefit of, and shall be binding upon, the
respective successors and permitted assigns of the parties hereto. The Borrower
has no right to assign any of its rights or obligations hereunder without the
prior written consent of the Bank. This Agreement, and the documents executed
and delivered pursuant hereto, constitute the entire agreement between the
parties, and may be amended only by a writing signed on behalf of each party.
8.8 If any provision of this Agreement shall be held invalid under any
applicable laws, such invalidity shall not affect any other provision of this
Agreement that can be given effect without the invalid provision, and, to this
end, the provisions hereof are severable.
8.9 All representations, warranties, covenants and agreements of the Borrower
hereunder shall survive the making of the Loan.
8.10 Whenever any installment of the interest on the Note becomes due and
payable on a day which is not a Banking Day, the maturity or due date thereof
shall be extended to the next succeeding Banking Day and, in the case of
principal of the Note, interest shall be payable thereon at the rate per annum
specified in the Note during such extension.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.
LTCAMERICA HOLDING, INC.
By: /s/ Bradley E. Barks
--------------------
Its CFO
NORWEST BANK MINNESOTA.
NATIONAL ASSOCIATION
By: /s/ Larry M. Lange
------------------
Its Vice President
EXHIBIT 10.9
REVOLVING NOTE
$15,000,000.00 December 22, 1998
FOR VALUE RECEIVED, LTCAMERICA HOLDING, INC. (the "Borrower") promises to pay on
December 22, 2003 to the order of Norwest Bank Minnesota, National Association
(the "Bank"), at its principal office in Minneapolis, Minnesota or such other
address as the Bank or holder may designate from time to time, the principal sum
of Fifteen Million and 00/100 Dollars ($15,000,000.00), or the amount shown on
the Bank's records to be outstanding, plus interest as set forth below.
PRINCIPAL. The outstanding principal balance of this Note shall be payable on
December 22, 2003 and also according to the terms of the Credit Agreement of
even date between the Bank and the Borrower (the "Agreement").
INTEREST. Interest on the unpaid principal balance of this Note shall accrue and
be payable according to the terms of the Agreement.
ADDITIONAL TERMS AND CONDITIONS. This Note is issued pursuant to the Agreement,
and any amendments or substitutions thereof, which Agreement contains additional
terms and conditions, including default and acceleration provisions, which are
incorporated into this Note by reference. Capitalized terms not expressly
defined herein shall have the meanings given them in the Agreement. The Borrower
agrees to pay all costs of collection, including reasonable attorneys' fees and
legal expenses incurred by the Bank if this Note is not paid as provided above.
This Note shall be governed by the substantive laws of the State of Minnesota.
WAIVER OF PRESENTMEENT AND NOTICE OF DISHONOR. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, hereby
waives presentment, demand for payment, notice of dishonor, protest, and any
notice relating to the acceleration of the maturity of this Note.
LTCAMERICA HOLDING, INC.
By: /s/ Bradley E. Barks
--------------------
Its CFO
EXHIBIT 10.10
GUARANTY
(By Organization)
Date
December 22, 1998
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and to induce NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
(herein, with its participants, successors and assigns, called "Bank"), at its
option, at any time or from time to time to make loans or extend other
accommodations to or for the account of LTCAMERICA HOLDING, INC. (herein called
"Borrower") or to engage in any other transactions with Borrower, the
undersigned a Minnesota corporation hereby absolutely and unconditionally
guarantees to the Bank the full and prompt payment when due, whether at maturity
or earlier by reason of acceleration or otherwise, of the debts, liabilities and
obligations described as follows:
a. If this ___ is checked, the undersigned guarantees to Bank the
payment and performance of each and every debt, liability and
obligation of every type and description which Borrower may
now or any time hereafter owe to Bank (whether such debt,
liability or obligation now exists or is hereafter created or
incurred, and whether it is or may be direct or indirect, due
or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, joint, several, or
joint and several; all such debts, liabilities and obligations
being hereinafter collectively referred to as "Indebtedness").
b. If this _X_ is checked, the undersigned guarantees to Bank the
payment and performance of the debt, liability or obligation
of Borrower to Bank evidenced by or arising out of the
following:
The Credit Agreement between Bank and Borrower dated
December 22, 1998 and the Revolving Note, as described
therein, in a principal amount not to exceed $15,000,000
plus accrued interest Thereon as provided in such Credit
Agreement and Revolving Note
and any extensions, renewals, replacements or modifications thereof
(hereinafter referred to as "Indebtedness").
The undersigned further acknowledges and agrees with Bank that:
1. No act or thing need occur to establish the liability of the
undersigned hereunder, and no act or thing, except full payment and
discharge of all the Indebtedness, shall in any way exonerate the
undersigned or modify, reduce, limit or release the liability of the
undersigned hereunder.
2. If paragraph A is checked, this is an absolute, unconditional and
continuing guaranty of payment of the Indebtedness and shall continue
to be in force and be binding upon the undersigned, whether or not all
Indebtedness is paid in full, until this Guaranty is revoked
prospectively as to future transactions, by written notice actually
received by the Bank, and such revocation shall not be effective as to
Indebtedness existing or committed for at the time of actual receipt of
such notice by the Bank, or as to any renewals, extensions and
refinancings thereof. The undersigned represents and warrants to the
Bank that the undersigned has a direct and substantial economic
interest in Borrower and expects to derive substantial benefits
therefrom and from any loans and financial accommodations resulting in
the creation of Indebtedness guaranteed hereby, and that this Guaranty
is given for a purpose that directly benefits the undersigned. The
undersigned agrees to rely exclusively on the right to revoke this
Guaranty prospectively as to future transactions, in accordance with
this paragraph, if at any time, in the opinion of the authorized
representative(s) of the undersigned, the benefits to the undersigned
then being received by the undersigned in connection with this Guaranty
are not sufficient to warrant the continuance of this Guaranty as to
future Indebtedness. Accordingly, so long as this Guaranty is not
revoked prospectively in accordance with this paragraph, the Bank may
rely conclusively on a continuing warranty, hereby made, that the
undersigned continues to be benefited by this Guaranty and the Bank
shall have no duty to inquire into or confirm the receipt of any such
benefits, and this Guaranty shall be effective and enforceable by the
Bank without regard to the receipt, nature or value of any such
benefits.
<PAGE>
3. If the undersigned (i) shall be dissolved or liquidated; or (ii) shall
be or become insolvent (however defined); or (iii) have a garnishment,
levy or writ of attachment, or any local, state or federal notice of
tax lien or levy served upon the Bank for attachment of property of the
guarantor that is in the Bank's possession or for indebtedness owed to
the guarantor by the Bank; or (iv) a custodian, trustee or receiver is
appointed, with or without the guarantor's consent, for any of the
guarantor's properties, or (v) the undersigned changes its legal form
of organization, without the Bank's consent; then the Bank shall have
the right to declare immediately due and payable, and the undersigned
will forthwith pay to the Bank, the full amount of all Indebtedness,
whether due and payable or unmatured. If the undersigned voluntarily
commences or there is commenced involuntarily against the undersigned a
case under the United States Bankruptcy Code, the fWl amount of all
Indebtedness, whether due and payable or unmatured, shall be
immediately due and payable without demand or notice thereof.
4. The liability of the undersigned hereunder shall be a principal amount
of $15,000,000.00, plus accrued interest thereon plus all attorneys'
fees, collection costs and enforcement expenses referable thereto.
Indebtedness may be created and continued in any amount, whether or not
in excess of such principal amount, without affecting or impairing the
liability of the undersigned hereunder. The Bank may apply any sums
received by or available to the Bank on account of the Indebtedness
from Borrower or any other person (except the undersigned), from their
properties, out of any collateral security or from any other source to
payment of the excess. Such application of receipts shall not reduce,
affect or impair the liability of the undersigned hereunder, If the
liability of the undersigned is limited to a stated amount pursuant to
this paragraph, any payment made by the undersigned under this Guaranty
shall be effective to reduce or discharge such liability only if
accompanied by a written transmittal document, received by the Bank,
advising the Bank that such payment is made under this Guaranty for
such purpose.
5. The undersigned will not exercise or enforce any right of contribution,
reimbursement, recourse or subroation available to the undersigned
against any person liable for payment of the Indebtedness, or as to any
collateral security therefor, unless and until all of the Indebtedness
shall have been fully paid and discharged.
6. The undersigned will pay or reimburse the Bank for all costs and
expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Bank in connection with the protection, defense or
enforcement of this Guaranty in any litigation or bankruptcy or
insolvency proceedings.
7. Whether or not any existing relationship between the undersigned and
Borrower has been changed or ended and whether or not this Guaranty has
been revoked, the Bank may, but shall not be obligated to, enter into
transactions resulting n the creation or continuance of Indebtedness,
without any consent or approval by the undersigned and without any
notice to the undersigned. The liability of the undersigned shall not
be affected or impaired by any of the following acts or things (which
the Bank is expressly authorized to do. omit or suffer from time to
time, both before and after revocation of this Guaranty, without notice
to or approval by the undersigned): (i) any acceptance of collateral
security, guarantors, accommodation parties or sureties for any or all
of the Indebtedness; (ii) any one or more extensions or renewals of
Indebtedness (whether or not for Ion-er than the original period) or
anv modification of the interest rates, maturities or other contractual
terms applicable to any Indebtedness; (iii) any waiver or indulgence
granted to Borrower, any delay or lack of diligence in the enforcement
of Indebtedness, or any failure to institute proceedings, file a claim,
-ive any required notices or otherwise protect any Indebtedness; (iv)
any full or partial release of, settlement with, or agreement not to
sue, Borrower or any other guarantor or other person liable in respect
of any Indebtedness; (v) any discharge of any evidence of Indebtedness
or the acceptance of any instrument in renewal thereof or substitution
therefor; (vi) any failure to obtain collateral security (including
rights of setoff) for the Indebtedness, or to see to the proper or
sufficient creation and perfection thereof, or to establish the
priority thereof, or to protect, insure, or enforce any collateral
security; or any modification, substitution, discharge, impairment, or
loss of any collateral security; (vii) any foreclosure or enforcement
of any collateral security; (viii) any transfer of any Indebtedness or
any evidence thereof, (ix) any order of application of any payments or
credits upon Indebtedness; and (x) any election by the Bank underss.I I
I I (b)(2) of the United States Bankruptcy Code.
8. The undersigned waives any and all defenses, claims and discharges of
Borrower, or any other obligor, pertaining to Indebtedness, except the
defense of discharge by payment in full. Without limiting the
Generality of the foregoing, the undersigned will not assert, plead or
enforce against the Bank any defense of waiver,
<PAGE>
release, discharge in bankruptcy, statute of limitations, res judicata,
statute of frauds, anti-deficiency statute, fraud, incapacity,
minority, usury, illegality or unenforceability which may be available
to Borrower or any other person liable in respect of any Indebtedness,
or any setoff available against the Bank to Borrower or anv such other
person, whether or not on account of a related transaction. The
undersigned expressly agrees that the undersigned shall be and remain
liable for any deficiency remaining, after foreclosure of any mortgage
or security interest securing the Indebtedness, whether or not the
liability of Borrower or any other obligor for such deficiency is
discharged pursuant to statute or judicial decision.
9. The undersigned waives presentment, demand for payment, notice of
dishonor or nonpayment, and protest of any instrument evidencing,
Indebtedness. The Bank shall not be required first to resort for
payment of Indebtedness to Borrower or other persons or their
properties, or first to enforce, realize upon or exhaust any collateral
security for Indebtedness, before enforcing this Guaranty.
10. If any payment applied by the Bank to Indebtedness is thereafter set
aside, recovered, rescinded or required to be returned for any reason
(including, without limitation, the bankruptcy, insolvency or
reorganization of Borrower or any other obligor), the Indebtedness to
which such payment was applied shall for the purposes of this Guaranty
be deemed to have continued in existence, notwithstanding such
application, and this Guaranty shall be enforceable as to such
Indebtedness as fully as if such application had never been made.
11. The liability of the undersigned under this Guaranty is in addition to
and shall be cumulative with all other liabilities of the undersigned
to the Bank as guarantor or otherwise, without any limitation as to
amount, unless the instrument or agreement evidencing or creating such
other liability specifically provides to the contrary. While the
undersigned has any liability to the Bank under this Guaranty, the
undersigned agrees to provide to the Bank the undersigned's annual
financial statements and such other financial information as the Bank
may request.
12. The undersigned represents and warrants to the Bank that (i) the
undersigned is duly organized and existing in good standing and has
full power and authority to make and deliver this Guaranty; (ii) the
execution, delivery and performance of this Guaranty by the undersigned
have been duly authorized by all necessary action of its governing body
and do not and will not violate the provisions of, or constitute a
default under, any presently Applicable law or its organizational
documents or any agreement presently binding on it; (iii) this Guaranty
has been duly executed and delivered by the authorized
representative(s) of the undersigned and constitutes its lawful,
binding and legally enforceable obligation (subject to the United
States Bankruptcy Code and other similar laws Generally affecting the
enforcement of creditors' rights); and (iv) the authorization,
execution, delivery and performance of this Guaranty do not require
notification to, registration with, or consent or approval by, any
federal, state or local regulatory body or administrative agency.
13. This Guaranty shall be effective upon delivery to the Bank, without
further act, condition or acceptance by the Bank, shall be binding upon
the undersigned and the successors and assigns of the undersigned and
shall inure to the benefit of the Bank and its participants, successors
and assigns. Any invalidity or unenforceability of any provision or
application of this Guaranty shall not affect other lawful provisions
and applications hereof, and to this end the provisions of this
Guaranty are declared to be severable. This Guaranty may not be waived,
modified, amended, terminated, released or otherwise changed except by
a writing signed by the undersigned and the Bank. This Guaranty is
issued in the state set forth above and shall be governed by its laws.
The undersigned waives notice of the Bank's acceptance hereof and
waives the right to a trial by jury in any action based on or
pertaining to this Guaranty.
14. Notwithstanding- the terms of this Guaranty to the contrary, upon the
occurrence and during the continuance of any Event of Default under the
Credit Agreement, the Bank, by its acceptance of this Guaranty, agrees
to provide written notice thereof to the undersigned. Within 10 Banking
Days, as such ten-n is defined in the Credit Agreement, after receipt
of such notice, the undersigned may, but shall not be required to,
notify the Bank of its intent to purchase the obligations of the
Borrower to the Bank under the Credit Agreement and the Revolving Note
from the Bank, without recourse. Prior to the expiration of such 1O
Banking- Days period, the Bank by its acceptance of this Guaranty,
agrees that it will not exercise any other right or remedy under the
Credit Agreement, the Revolving- Note, this Guaranty or any related
document. The undersigned's purchase of such obligations of the
Borrower shall occur within 30 calendar days of the undersigned's
notice to the Bank of its intent to purchase such obligations, and
during, such period, the Bank shall not be entitled to exercise any
other right or remedy under the Credit Agreement, the Revolving Note,
this Guaranty or any related document.
<PAGE>
Upon receipt by the Bank of payment of the Indebtedness, the Bank, by
its acceptance of this Guaranty, agrees that it shall assign the Credit
Agreement, the Revolving Note, and each related document to the
undersigned, pursuant to agreements and instruments reasonably
requested by the undersigned, whereupon this Guaranty shall be
terminated and of no further force or effect.
15. The undersigned represent and warrants to the Bank that the financial
statements of the undersigned for the fiscal year end in December 31,
1997, prepared by the undersigned and accompanied by an opinion of a
certified public accountant, and for the period ending June 30, 1998
prepared by the undersigned, copies of which financial statements have
been furnished to the Bank, and present fairly the financial condition
of the undersigned as of such dates, and the results of their
operations for the periods covered thereby in accordance with Generally
Accepted Accounting Principles. There has been no change which
constitutes a Material Adverse Effect, since June 30, 1998. "Material
Adverse Effect" means a material adverse effect on (i) the business.
Property, condition (financial or otherwise), results of operations, or
prospects of the undersigned, (ii) the ability of the undersigned to
perform its obligations under this Guaranty, or (iii) the validity or
enforceability of this Guaranty or the rights or remedies of the Bank
thereunder.
16. The undersigned acknowledges that it has reviewed the Credit Agreement
described in the introductory section of this Guaranty and is aware of
and has no objection to the terms and conditions thereof.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
This Guaranty is _X_ unsecured; __ secured by a(n) ______ dated ______.
Signatures
Guarantor's Name
ALLIANZ LIFE INSURANCE COMPANY
OF NQRTH AMERICA, INC.
Signature: /s/ Robert S. James
--------------------
Name and Title: Robert S. James, President
Signature: /s/ Michael T. Westermeyer
Name and Title: Michael T. Westermeyer, Secretary
Street Address: 1750 Hennepin Avenue South
City, State, Zip Code: Minneapolis, Minnesota 55403-2195
EXHIBIT 10.11
GUARANTY
THIS GUARANTY, dated as of December 22, 1998, is made and given by
LTCAMERICA HOLDING, INC., a Minnesota corporation (the "Guarantor"), in favor of
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the
"Creditor").
RECITALS
A. Guarantor will or may become, or is now, indebted (the "Norwest
Debt") to Norwest Bank Minnesota, National Association (the "Lender").
B. The Creditor has guarantied the Norwest Debt pursuant to a Guaranty
(By Organization) of even date herewith executed by the Creditor in favor of the
Lender (as the same may be amended, restated or otherwise modified, the
"Creditor Guaranty").
C. As a condition to providing the Creditor Guaranty, the Creditor has
required that this Guaranty be executed and delivered by the Guarantor and the
Guarantor is willing to do so.
NOW, THEREFORE, For good and valuable consideration, the Guarantor
hereby covenants and agrees with the Creditor as follows:
Section 1. Defined Terms. As used in this Guaranty, the following terms
shall have the meaning indicated:
"Creditor" shall have the meaning indicated in the opening paragraph
hereof.
"Creditor Default" shall mean the occurrence and continuance of an
Event of Default under paragraph G. of Section 6.1 of the Norwest Agreement, if
and only if no other Event of Default has occurred and is continuing under the
Norwest Agreement.
"Event of Default" shall have the meaning given to such term in the
Norwest Agreement.
<PAGE>
"Guarantor" shall have the meaning indicated in the opening paragraph
hereof.
"Norwest Agreement" shall mean that certain Credit Agreement by and
between Guarantor and Lender dated as of December 22, 1998, as amended as
permitted under this Guaranty.
"Norwest Loan Documents" shall mean the Norwest Agreement and all other
instruments and agreements evidencing the Norwest Debt, as amended as permitted
under this Guaranty.
"Norwest Obligations" shall mean any indebtedness, liabilities and
obligations of the Guarantor of every kind, nature or description under the
Norwest Loan Documents, in all cases whether due or to become due, and whether
now existing or hereafter arising or incurred.
"Obligations" shall mean any indebtedness, liabilities and obligations
of the Creditor of every kind, nature or description under the Creditor
Guaranty, in all cases whether due or to become due, and whether now existing or
hereafter arising or incurred.
"Person" shall mean any individual, corporation, partnership, joint
venture, firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
Section 2. The Guaranty. The Guarantor hereby absolutely and
unconditionally guarantees and agrees to pay to the Creditor the amount of any
payment made by the Creditor with respect to the Obligations.
Section 3. Continuing Guaranty. This Guaranty is an unconditional and
continuing guaranty of payment and agreement to pay to the Creditor the amount
of any payment made by the Creditor of the Obligations, and the obligations of
the Guarantor hereunder shall not be released, in whole or in part, by any
action or thing which might, but for this provision of this Guaranty, be deemed
a legal or equitable discharge of a surety or guarantor, other than irrevocable
payment to the Creditor by the Guarantor in full of the Obligations. No notice
of any renewal or extension of the Obligations need be given to the Guarantor.
The Guarantor hereby expressly waives (a) demand of payment,
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<PAGE>
presentment, protest, notice of dishonor, nonpayment or nonperformance on any
and all forms of the Obligations or the Norwest Debt; (b) notice of acceptance
of this Guaranty and notice of any liability to which it may apply; (c) all
other notices and demands of any kind and description relating to the
Obligations or the Norwest Debt now or hereafter provided for by any agreement,
statute, law, rule or regulation; and (d) any and all defenses of the Creditor
pertaining to the Obligations or of the Guarantor with respect to the Norwest
Debt. The Guarantor shall be and remain liable for any deficiency remaining
after foreclosure of any mortgage, deed of trust or security agreement securing
all or any part of the Obligations. Notwithstanding the terms of this Guaranty
to the contrary, the Guarantor shall not be liable under this Guaranty at any
time when (A) either (I) a Creditor Default has occurred and is continuing or
(II) the Norwest Obligations have been assigned to the Creditor, and (B) the
Debtor is in compliance with the Norwest Obligations which have been assigned or
otherwise transferred from the Lender to the Creditor by contract, subrogation
or any other means, provided that, after such assignment or transfer has
occurred, at any time any Event of Default other than a Creditor Default occurs
and is continuing, the Guarantor shall thereafter be liable under this Guaranty.
Section 4. Other Transactions. The Creditor is expressly authorized (a)
to exchange or release with or without consideration any or all collateral for
any of the Obligations and to deal with any such collateral in such manner as
the Creditor may elect without notice to the Guarantor; and (b) to amend,
modify, extend or supplement the Creditor Guaranty or other agreement or
instrument evidencing the Obligations or any part thereof, waive compliance by
the Lender or any other Person with the respective terms thereof and settle or
compromise any of the Obligations without notice to the Guarantor and without in
any manner affecting the absolute liabilities of the Guarantor hereunder. No
invalidity or unenforceability of all or any part of the Obligations or of any
security therefor shall affect, impair or be a defense to this Guaranty. The
liabilities of the Guarantor hereunder shall not be affected or impaired by any
failure, delay, neglect or omission on the part of the Creditor to realize upon
any collateral or security for any or all of the Obligations, nor by the taking
by the Creditor of (or the failure to take) any other guaranty or guaranties to
secure the
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<PAGE>
Obligations, nor by the taking by the Creditor of (or the failure to take or the
failure to perfect its security interest in or other Lien on) collateral or
security of any kind. The Guarantor acknowledges that this Guaranty is in effect
and binding without reference to whether this Guaranty is signed by any other
Person or Persons and that this Guaranty shall continue in full force and
effect, both as to the Obligations then existing and/or thereafter created,
notwithstanding the release of or extension of time to any other guarantor of
the Obligations.
Section 5. Actions Not Required. The Guarantor hereby waives any and
all right to cause the Creditor to proceed against any security for the
Obligations or any other recourse which the Creditor may have with respect
thereto and further waives any and all requirements that the Creditor institute
any action or proceeding at law or in equity, or obtain any judgment, against
any other Person, or with respect to any collateral security for the
Obligations, as a condition precedent to making demand on or bringing an action
or obtaining and/or enforcing a judgment against, the Guarantor upon this
Guaranty.
Section 6. No Subrogation. Notwithstanding any payment or payments made
by the Guarantor hereunder, the Guarantor waives all rights of subrogation to
any of the rights of the Creditor against the Guarantor or any other Person
liable for payment of any of the Obligations or any collateral security or
guaranty held by the Creditor for the payment of the Obligations.
Section 7. Application of Payments. Any and all payments upon the
Obligations made by the Guarantor or by any other Person, and/or the proceeds of
any or all collateral or security for any of the Obligations, may be applied by
the Creditor on such items of the Obligations as the Creditor may elect.
Section 8. Recovery of Payment. If any payment received by the Creditor
and applied to the Obligations is subsequently set aside, recovered, rescinded
or required to be returned for any reason (including, without limitation, the
bankruptcy, insolvency or reorganization of the Guarantor or any other obligor),
the Obligations to which such payment was applied shall for the purposes of this
Guaranty be deemed to have
-4-
<PAGE>
continued in existence, notwithstanding such application, and this Guaranty
shall be enforceable as to such Obligations as fully as if such application had
never been made. References in this Guaranty to amounts "irrevocably paid" or to
"irrevocable payment" refer to payments that cannot be set aside, recovered,
rescinded or required to be returned for any reason.
Section 9. Financial Conditions. The Guarantor has executed and
delivered this Guaranty based on the Guarantor's own judgment and not in
reliance upon any statement or representation of the Creditor. The Creditor
shall have no obligation to provide the Guarantor with any advice whatsoever or
to inform the Guarantor at any time of the Creditor's actions, evaluations or
conclusions on the financial condition or any other matter concerning the
Lender.
Section 10. Remedies. All remedies afforded to the Creditor by reason
of this Guaranty are separate and cumulative remedies. Mere delay or failure to
act shall not preclude the exercise or enforcement of any rights and remedies
available to the Creditor.
Section 11. Bankruptcy of the Guarantor. The Guarantor expressly agrees
that the obligations of the Guarantor under this Guaranty shall not in any way
be impaired or otherwise affected by the institution by or against the Guarantor
or any other Person of any bankruptcy, reorganization, arrangement, insolvency
or liquidation proceedings, or any other similar proceedings for relief under
any bankruptcy law or similar law for the relief of debtors and that any
discharge of any of the Obligations pursuant to any such bankruptcy or similar
law or other law shall not diminish, discharge or otherwise affect in any way
the obligations of the Guarantor under this Guaranty, and that upon the
institution of any of the above actions, such obligations shall be enforceable
against the Guarantor.
Section 12. Costs and Expenses. The Guarantor will pay or reimburse the
Creditor on demand for all out-of-pocket expenses (including in each case all
reasonable fees and expenses of counsel) incurred by the Creditor in connection
with the enforcement of this Guaranty against the Guarantor.
-5-
<PAGE>
Section 13. Waivers and Amendments. This Guaranty can be waived,
modified, amended, terminated or discharged only explicitly in a writing signed
by the Creditor. A waiver so signed shall be effective only in the specific
instance and for the specific purpose given.
Section 14. Notices. Any notice or other communication to any party in
connection with this Guaranty shall be in writing and shall be sent by manual
delivery, telefacsimile transmission, overnight courier or United States mail
(postage prepaid) addressed to such party at the address specified on the
signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telefacsimile transmission, from the first
business day after the date of sending if sent by overnight courier, or from
four days after the date of mailing if mailed.
Section 15. Representations and Warranties. The Guarantor hereby
represents and warrants to the Creditor that:
(a) It is a Minnesota corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization and has the power and authority and the legal right to own
and operate its properties and to conduct the business in which it is
currently engaged.
(b) It has the power and authority and the legal right to
execute and deliver, and to perform its obligations under, this
Guaranty and has taken all necessary corporate action to authorize such
execution, delivery and performance.
(c) This Guaranty constitutes its legal, valid and binding
obligation enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles
(whether enforcement is sought by proceedings in equity or at law).
-6-
<PAGE>
(d) The execution, delivery and performance of this Guaranty
will not (i) violate any provision of any law, statute, rule or
regulation or any order, writ, judgment, injunction, decree,
determination or award of any court, governmental agency or arbitrator
presently in effect having applicability to it, (ii) violate or
contravene any provision of its organizational documents, or (iii)
result in a breach of or constitute a default under any indenture, loan
or credit agreement or any other agreement, lease or instrument to
which it is a party or by which it or any of its properties may be
bound or result in the creation of any lien thereunder. It is not in
default under or in violation of any such law, statute, rule or
regulation, order, writ, judgment, injunction, decree, determination or
award or any such indenture, loan or credit agreement or other
agreement, lease or instrument in any case in which the consequences of
such default or violation could have a material adverse effect on its
business, operations, properties, assets or condition (financial or
otherwise).
(e) No order, consent, approval, license, authorization or
validation of, or filing, recording or registration with, or exemption
by, any governmental or public body or authority is required on its
part to authorize, or is required in connection with the execution,
delivery and performance of, or the legality, validity, binding effect
or enforceability of, this Guaranty.
(f) There are no actions, suits or proceedings pending or, to
its knowledge, threatened against or affecting it or any of its
properties before any court or arbitrator, or any governmental
department, board, agency or other instrumentality which, if determined
adversely to it, would have a material adverse effect on its business,
operations, property or condition (financial or otherwise) or on its
ability to perform its obligations hereunder.
(g) It expects to derive benefits from the transactions
resulting in the creation of the Obligations and the Norwest Debt. The
Creditor may rely conclusively on the continuing warranty, hereby made,
that the Guarantor continues to be benefitted by the Creditor Guaranty
and the Norwest Debt, and the Creditor shall have no duty to inquire
-7-
<PAGE>
into or confirm the receipt of any such benefits, and this Guaranty
shall be effective and enforceable by the Creditor without regard to
the receipt, nature or value of any such benefits.
Section 16. Continuing Guaranty. This Guaranty shall (a) remain in full
force and effect until irrevocable payment in full by the Guarantor of the
Obligations or the irrevocable payment in full of the Norwest Debt other than by
payment by the Creditor under the Creditor Guaranty, (b) be binding upon the
Guarantor, its successors and assigns and (c) inure to the benefit of, and be
enforceable by, the Creditor and its respective successors, transferees, and
assigns.
Section 17. Amendment to Norwest Loan Documents. The Guarantor will not
amend or otherwise modify, or waive any terms under the Norwest Loan Documents
without the prior written consent of the Creditor.
Section 18. Revocation. Notwithstanding any other provision hereof, the
Guarantor may revoke this Guaranty prospectively as to future transactions by
written notice to that effect actually received by the Creditor. No such
revocation shall release, impair or affect in any manner any liability hereunder
with respect to Obligations created, contracted, assumed or incurred prior to
receipt by the Creditor of written notice of revocation, or any renewals or
extensions thereof, theretofore or thereafter made, or all other costs, expenses
and attorneys' fees arising from such Obligations.
Section 19. Governing Law and Construction. THE VALIDITY, CONSTRUCTION
AND ENFORCEABILITY OF THIS GUARANTY SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.
Section 20. Consent to Jurisdiction. AT THE OPTION OF THE CREDITOR,
THIS GUARANTY MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT
SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE GUARANTOR CONSENTS TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN
SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GUARANTOR COMMENCES ANY ACTION
IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING
DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP
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<PAGE>
CREATED BY THIS GUARANTY, THE CREDITOR AT ITS OPTION SHALL BE ENTITLED TO HAVE
THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE- DESCRIBED, OR
IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE
DISMISSED WITHOUT PREJUDICE.
Section 21. Waiver of Jury Trial. EACH OF THE GUARANTOR AND THE
CREDITOR, BY ITS ACCEPTANCE OF THIS GUARANTY, IRREVOCABLY WAIVES ANY AND ALL
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 22. General. All representations and warranties contained in
this Guaranty or in any other agreement between the Guarantor and the Creditor
shall survive the execution, delivery and performance of this Guaranty and the
creation and payment of the Obligations. Captions in this Guaranty are for
reference and convenience only and shall not affect the interpretation or
meaning of any provision of this Guaranty.
-9-
<PAGE>
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the
date first above written.
GUARANTOR:
LTCAMERICA HOLDING, INC.
By /s/ Bradley E. Barks
-----------------------------
Title CFO
--------------------------
Address:
Attention: Bradley E. Barks
300 South Highway 169, Suite 95
Minneapolis, Minnesota 55426
Telefacsimile No. 612-525-6553
Address for the Creditor:
Allianz Life Insurance Company of North America
Attention: Robert S. James
1750 Hennepin Avenue
Minneapolis, Minnesota 55403-2195
Telecopier Number: 612-337-6355
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EXHIBIT 10.12
GUARANTY
THIS GUARANTY, dated as of December 22, 1998, is made and given by LIFE
USA HOLDING, INC., a Minnesota corporation (the "Guarantor"), in favor of
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the
"Creditor").
RECITALS
A. LTCAmerica Holding, Inc., a Minnesota corporation (the "Debtor"),
will or may become, or is now, indebted (the "Norwest Debt") to Norwest Bank
Minnesota, National Association (the "Lender").
B. The Creditor has guarantied the Norwest Debt pursuant to a Guaranty
(By Organization) of even date herewith executed by the Creditor in favor of the
Lender (as the same may be amended, restated or otherwise modified, the
"Creditor Guaranty").
C. As a condition to providing the Creditor Guaranty, the Creditor has
required that this Guaranty be executed and delivered by the Guarantor and the
Guarantor is willing to do so.
D. Guarantor currently owns 100% of the issued and outstanding capital
stock of LifeUSA Insurance Company, a Minnesota corporation, which owns 100% of
the issued and outstanding capital stock of the Debtor, and finds it is in its
best interest to provide this Guaranty.
NOW, THEREFORE, For good and valuable consideration, the Guarantor
hereby covenants and agrees with the Creditor as follows:
Section 1. Defined Terms. As used in this Guaranty, the following terms
shall have the meaning indicated:
"Creditor" shall have the meaning indicated in the opening paragraph
hereof.
"Creditor Default" shall mean the occurrence and continuance of an
Event of Default under paragraph G. of Section 6.1 of the Norwest Agreement, if
and only if no other Event of
<PAGE>
Default has occurred and is continuing under the Norwest Agreement.
"Debtor" shall have the meaning indicated in Recital A.
"Event of Default" shall have the meaning given to such term in the
Norwest Agreement.
"Guarantor" shall have the meaning indicated in the opening paragraph
hereof.
"Norwest Agreement" shall mean that certain Credit Agreement by and
between the Debtor and Lender dated as of December 22, 1998, as amended as
permitted under this Guaranty.
"Norwest Loan Documents" shall mean the Norwest Agreement and all other
instruments and agreements evidencing the Norwest Debt, as amended as permitted
under this Guaranty.
"Norwest Obligations" shall mean any indebtedness, liabilities and
obligations of the Debtor of every kind, nature or description under the Norwest
Loan Documents, in all cases whether due or to become due, and whether now
existing or hereafter arising or incurred.
"Obligations" shall mean any indebtedness, liabilities and obligations
of the Creditor of every kind, nature or description under the Creditor
Guaranty, in all cases whether due or to become due, and whether now existing or
hereafter arising or incurred.
"Person" shall mean any individual, corporation, partnership, joint
venture, firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
Section 2. The Guaranty. The Guarantor hereby absolutely and
unconditionally guarantees and agrees to pay to the Creditor the amount of any
payment made by the Creditor with respect to the Obligations.
Section 3. Continuing Guaranty. This Guaranty is an unconditional and
continuing guaranty of payment and agreement to pay to the Creditor the amount
of any payment made by the
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Creditor of the Obligations, and the obligations of the Guarantor hereunder
shall not be released, in whole or in part, by any action or thing which might,
but for this provision of this Guaranty, be deemed a legal or equitable
discharge of a surety or guarantor, other than irrevocable payment to the
Creditor by the Guarantor in full of the Obligations. No notice of any renewal
or extension of the Obligations need be given to the Guarantor. The Guarantor
hereby expressly waives (a) demand of payment, presentment, protest, notice of
dishonor, nonpayment or nonperformance on any and all forms of the Obligations
or the Norwest Debt; (b) notice of acceptance of this Guaranty and notice of any
liability to which it may apply; (c) all other notices and demands of any kind
and description relating to the Obligations or the Norwest Debt now or hereafter
provided for by any agreement, statute, law, rule or regulation; and (d) any and
all defenses of the Creditor pertaining to the Obligations or of the Debtor with
respect to the Norwest Debt. The Guarantor shall be and remain liable for any
deficiency remaining after foreclosure of any mortgage, deed of trust or
security agreement securing all or any part of the Obligations. Notwithstanding
the terms of this Guaranty to the contrary, the Guarantor shall not be liable
under this Guaranty at any time when (A) either (I) a Creditor Default has
occurred and is continuing or (II) the Norwest Obligations have been assigned to
the Creditor, and (B) the Debtor is in compliance with the Norwest Obligations
which have been assigned or otherwise transferred from the Lender to the
Creditor by contract, subrogation or any other means, provided that, after such
assignment or transfer has occurred, at any time any Event of Default other than
a Creditor Default occurs and is continuing, the Guarantor shall thereafter be
liable under this Guaranty.
Section 4. Other Transactions. The Creditor is expressly authorized (a)
to exchange or release with or without consideration any or all collateral for
any of the Obligations and to deal with any such collateral in such manner as
the Creditor may elect without notice to the Guarantor; and (b) to amend,
modify, extend or supplement the Creditor Guaranty or other agreement or
instrument evidencing the Obligations or any part thereof, waive compliance by
the Lender or any other Person with the respective terms thereof and settle or
compromise any of the Obligations without notice to the Guarantor and without in
any manner affecting the absolute liabilities of the Guarantor
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hereunder. No invalidity or unenforceability of all or any part of the
Obligations or of any security therefor shall affect, impair or be a defense to
this Guaranty. The liabilities of the Guarantor hereunder shall not be affected
or impaired by any failure, delay, neglect or omission on the part of the
Creditor to realize upon any collateral or security for any or all of the
Obligations, nor by the taking by the Creditor of (or the failure to take) any
other guaranty or guaranties to secure the Obligations, nor by the taking by the
Creditor of (or the failure to take or the failure to perfect its security
interest in or other Lien on) collateral or security of any kind. The Guarantor
acknowledges that this Guaranty is in effect and binding without reference to
whether this Guaranty is signed by any other Person or Persons and that this
Guaranty shall continue in full force and effect, both as to the Obligations
then existing and/or thereafter created, notwithstanding the release of or
extension of time to any other guarantor of the Obligations.
Section 5. Actions Not Required. The Guarantor hereby waives any and
all right to cause the Creditor to proceed against any security for the
Obligations or any other recourse which the Creditor may have with respect
thereto and further waives any and all requirements that the Creditor institute
any action or proceeding at law or in equity, or obtain any judgment, against
the Debtor or any other Person, or with respect to any collateral security for
the Obligations, as a condition precedent to making demand on or bringing an
action or obtaining and/or enforcing a judgment against, the Guarantor upon this
Guaranty.
Section 6. No Subrogation. Notwithstanding any payment or payments made
by the Guarantor hereunder, the Guarantor waives all rights of subrogation to
any of the rights of the Creditor against the Debtor or any other Person liable
for payment of any of the Obligations or any collateral security or guaranty
held by the Creditor for the payment of the Obligations, and the Guarantor
waives all rights to seek any recourse to or contribution or reimbursement from
the Debtor or any other Person liable for payment of any of the Obligations in
respect of payments made by the Guarantor hereunder unless and until all of the
Obligations have been irrevocably paid in full.
Section 7. Application of Payments. Any and all payments upon the
Obligations made by the Guarantor or by any
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other Person, and/or the proceeds of any or all collateral or security for any
of the Obligations, may be applied by the Creditor on such items of the
Obligations as the Creditor may elect.
Section 8. Recovery of Payment. If any payment received by the Creditor
and applied to the Obligations is subsequently set aside, recovered, rescinded
or required to be returned for any reason (including, without limitation, the
bankruptcy, insolvency or reorganization of the Debtor or any other obligor),
the Obligations to which such payment was applied shall for the purposes of this
Guaranty be deemed to have continued in existence, notwithstanding such
application, and this Guaranty shall be enforceable as to such Obligations as
fully as if such application had never been made. References in this Guaranty to
amounts "irrevocably paid" or to "irrevocable payment" refer to payments that
cannot be set aside, recovered, rescinded or required to be returned for any
reason.
Section 9. Debtor's Financial Condition. The Guarantor is familiar with
the financial condition of the Debtor, and the Guarantor has executed and
delivered this Guaranty based on the Guarantor's own judgment and not in
reliance upon any statement or representation of the Creditor. The Creditor
shall have no obligation to provide the Guarantor with any advice whatsoever or
to inform the Guarantor at any time of the Creditor's actions, evaluations or
conclusions on the financial condition or any other matter concerning the Debtor
or the Lender.
Section 10. Remedies. All remedies afforded to the Creditor by reason
of this Guaranty are separate and cumulative remedies. Mere delay or failure to
act shall not preclude the exercise or enforcement of any rights and remedies
available to the Creditor.
Section 11. Bankruptcy of the Debtor. The Guarantor expressly agrees
that the obligations of the Guarantor under this Guaranty shall not in any way
be impaired or otherwise affected by the institution by or against the Debtor or
any other Person of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or any other similar proceedings for relief under any
bankruptcy law or similar law for the relief of
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debtors and that any discharge of any of the Obligations pursuant to any such
bankruptcy or similar law or other law shall not diminish, discharge or
otherwise affect in any way the obligations of the Guarantor under this
Guaranty, and that upon the institution of any of the above actions, such
obligations shall be enforceable against the Guarantor.
Section 12. Costs and Expenses. The Guarantor will pay or reimburse the
Creditor on demand for all out-of-pocket expenses (including in each case all
reasonable fees and expenses of counsel) incurred by the Creditor in connection
with the enforcement of this Guaranty against the Guarantor.
Section 13. Waivers and Amendments. This Guaranty can be waived,
modified, amended, terminated or discharged only explicitly in a writing signed
by the Creditor. A waiver so signed shall be effective only in the specific
instance and for the specific purpose given.
Section 14. Notices. Any notice or other communication to any party in
connection with this Guaranty shall be in writing and shall be sent by manual
delivery, telefacsimile transmission, overnight courier or United States mail
(postage prepaid) addressed to such party at the address specified on the
signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telefacsimile transmission, from the first
business day after the date of sending if sent by overnight courier, or from
four days after the date of mailing if mailed.
Section 15. Representations and Warranties. The Guarantor hereby
represents and warrants to the Creditor that:
(a) It is a Minnesota corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization and has the power and authority and the legal right to own
and operate its properties and to conduct the business in which it is
currently engaged.
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(b) It has the power and authority and the legal right to
execute and deliver, and to perform its obligations under, this
Guaranty and has taken all necessary corporate action to authorize such
execution, delivery and performance.
(c) This Guaranty constitutes its legal, valid and binding
obligation enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles
(whether enforcement is sought by proceedings in equity or at law).
(d) The execution, delivery and performance of this Guaranty
will not (i) violate any provision of any law, statute, rule or
regulation or any order, writ, judgment, injunction, decree,
determination or award of any court, governmental agency or arbitrator
presently in effect having applicability to it, (ii) violate or
contravene any provision of its organizational documents, or (iii)
result in a breach of or constitute a default under any indenture, loan
or credit agreement or any other agreement, lease or instrument to
which it is a party or by which it or any of its properties may be
bound or result in the creation of any lien thereunder. It is not in
default under or in violation of any such law, statute, rule or
regulation, order, writ, judgment, injunction, decree, determination or
award or any such indenture, loan or credit agreement or other
agreement, lease or instrument in any case in which the consequences of
such default or violation could have a material adverse effect on its
business, operations, properties, assets or condition (financial or
otherwise).
(e) No order, consent, approval, license, authorization or
validation of, or filing, recording or registration with, or exemption
by, any governmental or public body or authority is required on its
part to authorize, or is required in connection with the execution,
delivery and performance of, or the legality, validity, binding effect
or enforceability of, this Guaranty.
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<PAGE>
(f) There are no actions, suits or proceedings pending or, to
its knowledge, threatened against or affecting it or any of its
properties before any court or arbitrator, or any governmental
department, board, agency or other instrumentality which, if determined
adversely to it, would have a material adverse effect on its business,
operations, property or condition (financial or otherwise) or on its
ability to perform its obligations hereunder.
(g) It expects to derive benefits from the transactions
resulting in the creation of the Obligations and the Norwest Debt. The
Creditor may rely conclusively on the continuing warranty, hereby made,
that the Guarantor continues to be benefitted by the Creditor Guaranty
and the Norwest Debt, and the Creditor shall have no duty to inquire
into or confirm the receipt of any such benefits, and this Guaranty
shall be effective and enforceable by the Creditor without regard to
the receipt, nature or value of any such benefits.
Section 16. Continuing Guaranty. This Guaranty shall (a) remain in full
force and effect until irrevocable payment in full by the Guarantor of the
Obligations or the irrevocable payment in full of the Norwest Debt other than by
payment by the Creditor under the Creditor Guaranty, (b) be binding upon the
Guarantor, its successors and assigns and (c) inure to the benefit of, and be
enforceable by, the Creditor and its respective successors, transferees, and
assigns.
Section 17. Amendment to Norwest Loan Documents. The Guarantor will not
permit the Debtor to amend or otherwise modify, or waive any terms under the
Norwest Loan Documents without the prior written consent of the Creditor.
Section 18. Revocation. Notwithstanding any other provision hereof, the
Guarantor may revoke this Guaranty prospectively as to future transactions by
written notice to that effect actually received by the Creditor. No such
revocation shall release, impair or affect in any manner any liability hereunder
with respect to Obligations created, contracted, assumed or incurred prior to
receipt by the Creditor of written notice of revocation, or any renewals or
extensions thereof,
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<PAGE>
theretofore or thereafter made, or all other costs, expenses and attorneys' fees
arising from such Obligations.
Section 19. Governing Law and Construction. THE VALIDITY, CONSTRUCTION
AND ENFORCEABILITY OF THIS GUARANTY SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.
Section 20. Consent to Jurisdiction. AT THE OPTION OF THE CREDITOR,
THIS GUARANTY MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT
SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE GUARANTOR CONSENTS TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN
SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GUARANTOR COMMENCES ANY ACTION
IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING
DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS GUARANTY, THE
CREDITOR AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF
THE JURISDICTIONS AND VENUES ABOVE- DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
Section 21. Waiver of Jury Trial. EACH OF THE GUARANTOR AND THE
CREDITOR, BY ITS ACCEPTANCE OF THIS GUARANTY, IRREVOCABLY WAIVES ANY AND ALL
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 22. General. All representations and warranties contained in
this Guaranty or in any other agreement between the Guarantor and the Creditor
shall survive the execution, delivery and performance of this Guaranty and the
creation and payment of the Obligations. Captions in this Guaranty are for
reference and convenience only and shall not affect the interpretation or
meaning of any provision of this Guaranty.
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the
date first above written.
GUARANTOR:
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GUARANTOR:
LIFE USA HOLDING, INC.
By /s/ Mark A. Zesbaugh
-------------------------------------
Title CFO
----------------------------------
Attention: Mark A. Zesbaugh
300 South Highway 169, Suite 95
Minneapolis, Minnesota 55426
Telefacsimile No. 612-525-6102
Address for the Creditor:
Allianz Life Insurance Company of North America
Attention: Robert S. James
1750 Hennepin Avenue
Minneapolis, Minnesota 55403-2195
Telefacsimile Number: 612-337-6355
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EXHIBIT 10.13
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT, dated as of December 22, 1998, is made and given
by LTCAMERICA HOLDING, INC., a Minnesota corporation (the "Pledgor"), to ALLIANZ
LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the
"Creditor").
RECITALS
A. The Pledgor will or may become, or is now, indebted to the Creditor
under a Guaranty of even date made by Pledgor in favor of the Creditor
(the"Guaranty").
B. Upon the acquisition by Pledgor of the capitol stock of Capitol
Bankers Life Insurance Company, the Pledgor will be the owner of the personal
property described on Schedule I attached hereto and made a part hereof.
C. The Creditor has requested and the Pledgor agrees that such property
shall be pledged to the Creditor to secure the obligations of the Pledgor to the
Creditor as hereinafter provided.
D. The Pledgor finds it advantageous, desirable and in the best
interests of the Pledgor to comply with the requirement that this Agreement be
executed and delivered to the Creditor.
NOW, THEREFORE, for good and valuable consideration, the Pledgor hereby
agrees with the Creditor for the Creditor's benefit as follows:
Section 1. Defined Terms.
1(a) As used in this Agreement, the following terms shall have the
meanings indicated:
"Collateral" shall have the meaning given to such term in Section 2.
<PAGE>
"Creditor" shall have the meaning indicated in the opening paragraph
hereof.
"Event of Default" shall have the meaning given to such term in Section
11.
"Initial Collateral" shall have the meaning given to such term in
Section 2.
"Lien" shall mean any security interest, mortgage, pledge, lien,
charge, encumbrance, title retention agreement or analogous instrument or device
(including the interest of the lessors under capitalized leases), in, of or on
any assets or properties of the Person referred to.
"Obligations" shall mean (a) all indebtedness, liabilities and
obligations of the Pledgor to the Creditor of every kind, nature or description
under the Guaranty, including the Pledgor's obligation on any instrument
evidencing indebtedness pursuant thereto and any other instrument hereafter
issued in substitution or replacement thereof, (b) all liabilities of the
Pledgor under this Agreement, and (c) in all of the foregoing cases whether due
or to become due, and whether now existing or hereafter arising or incurred.
"Person" shall mean any individual, corporation, partnership, joint
venture, firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
"Related Collateral" shall have the meaning given to such term in
Section 2.
"Security Interest" shall have the meaning given to such term in
Section 2.
1(b) Terms Defined in Uniform Commercial Code. All other terms used in
this Agreement that are not specifically defined herein or the definitions of
which are not incorporated herein by reference shall have the meaning assigned
to such terms in the Uniform Commercial Code in effect in the State of MINNESOTA
as of the date first above written to the extent such other terms are defined
therein.
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1(c) Singular/Plural, Etc. Unless the context of this Agreement
otherwise clearly requires, references to the plural include the singular, the
singular, the plural and "or" has the inclusive meaning represented by the
phrase "and/or." The words "include", "includes" and "including" shall be deemed
to be followed by the phrase "without limitation." The words "hereof," "herein,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. References to
Sections are references to Sections in this Pledge Agreement unless otherwise
provided.
Section 2. Pledge. As security for the payment and performance of all
of the Obligations, the Pledgor hereby pledges to the Creditor and grants to the
Creditor a security interest (the "Security Interest") in the following, whether
now owned or hereafter acquired (the "Collateral"):
2(a) The property described on Schedule I hereto (the "Initial
Collateral").
2(b) All shares, dividends, interest, cash, instruments and other
property from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Initial Collateral.
2(c) Any and all collateral security (the "Related Collateral") now
or hereafter securing all or any items of the Initial Collateral or securing any
proceeds thereof and all rights, remedies, powers and privileges of the Pledgor
under all of the foregoing.
2(d) All proceeds of any and all of the foregoing (including
proceeds that constitute property of types described above).
Pledgor's grant of a security interest in the Initial Collateral and all
covenants and representations under this Agreement with respect to the Initial
Collateral are deemed to speak as of and from the date of the acquisition
thereof as set forth in Recital B, above, as appropriate.
Section 3. Delivery of Collateral. Any certificates and instruments
representing or evidencing the Initial Collateral
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owned by the Pledgor as of the date of this Agreement shall be delivered to the
Creditor contemporaneously with the execution of this Agreement. All
certificates and instruments representing or evidencing Collateral received by
the Pledgor after the execution of this Agreement shall be delivered to the
Creditor promptly upon the Pledgor's receipt thereof. All such certificates and
instruments shall be held by or on behalf of the Creditor pursuant hereto and
shall be in suitable form for transfer by delivery, or shall be accompanied by
duly executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Creditor. The Creditor shall have the right at any
time, whether before or after an Event of Default, to cause any or all of the
Collateral to be transferred of record into the name of the Creditor or its
nominee (but subject to the rights of the Pledgor under Section 6) and to
exchange certificates representing or evidencing Collateral for certificates of
smaller or larger denominations. The Pledgor shall execute and deliver to the
Creditor such items of assignment and transfer (including, without limitation,
assignments of financing statements and recordable assignments of mortgages and
deeds of trust) of any Related Collateral as the Creditor may from time to time
reasonably request. Notwithstanding any of the foregoing, as to any Collateral
consisting of book-entry or uncertificated securities or securities which are
held by a third Person, the Pledgor shall deliver to the Creditor evidence
satisfactory to the Creditor that such Collateral has been registered in the
name of, or as pledged to, the Creditor. Such evidence shall include the
acknowledgment of the issuer or Person holding such Collateral that such issuer
or Person holds such Collateral as agent for the Creditor and that such
Collateral is identified on the books of such issuer or third Person as
belonging to or pledged to the Creditor.
Section 4. Certain Warranties and Covenants. The Pledgor makes the
following warranties and covenants:
4(a) The Pledgor has title to the Initial Collateral and will have
title to each other item of Collateral hereafter acquired, free of all Liens
except the Security Interest.
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4(b) The Pledgor has full power and authority to execute this
Pledge Agreement, to perform the Pledgor's obligations hereunder and to subject
the Collateral to the Security Interest created hereby.
4(c) No financing statement covering all or any part of the
Collateral is on file in any public office (except for any financing statements
filed by the Creditor, and any financing statements or other documents filed or
recorded by the Pledgor with respect to its Lien on any Related Collateral).
4(d) Any shares of stock included in the Initial Collateral have
been duly authorized and validly issued by the issuer thereof and are fully paid
and non-assessable. Any debt instrument included in the Initial Collateral has
been duly authorized, issued and delivered and is the legal, valid and binding
obligation of the issuer thereof, and is not in default. No debt instrument
included in the Initial Collateral is subject to any offset or similar right or
claim of the issuer thereof.
4(e) The Pledgor shall not forgive, cancel, subordinate,
compromise, modify, amend or extend the time for payment of, or waive any
default under, any debt instrument included in the Collateral, or modify or
amend, or waive any default under any agreement with respect to the Related
Collateral, or consent to or acquiesce in any of the foregoing, without in each
case the prior written consent of the Creditor.
4(f) The Initial Collateral represents all of the issued and
outstanding shares of all classes of capital stock of the issuer identified on
Schedule I as of the Closing Date.
Section 5. Further Assurances. The Pledgor agrees that at any time and
from time to time, at the expense of the Pledgor, the Pledgor will promptly
execute and deliver all further instruments and documents, and take all further
action that may be necessary or that the Creditor may reasonably request, in
order to perfect and protect the Security Interest or to enable the Creditor to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral (but any failure to request or assure that the Pledgor execute and
deliver such instruments or documents or to take such action shall not affect or
impair the validity, sufficiency or enforceability of this
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Agreement and the Security Interest, regardless of whether any such item was or
was not executed and delivered or action taken in a similar context or on a
prior occasion).
Section 6. Voting Rights; Dividends; Etc.
6(a) Subject to paragraph (d) of this Section 6, the Pledgor shall
be entitled to exercise or refrain from exercising any and all voting and other
consensual rights pertaining to the Collateral or any part thereof for any
purpose not inconsistent with the terms of this Agreement; provided, however,
that the Pledgor shall not exercise or shall refrain from exercising any such
right if such action could reasonably be expected to have a material adverse
effect on the value of the Collateral or any material part thereof and actions
which shall be deemed to have a material adverse effect shall include, without
limitation, voting to issue any shares of capital stock of the issuer identified
on Schedule I in addition to the Initial Collateral.
6(b) Subject to paragraph (e) of this Section 6, the Pledgor shall
be entitled to receive, retain, and use in any manner any and all interest and
dividends paid in respect of the Collateral; provided, however, that any and all
(i) dividends paid or payable other than in cash in respect of, and
instruments and other property received, receivable or otherwise distributed in
respect of, or in exchange for, any Collateral,
(ii) dividends and other distributions paid or payable in cash in
respect of any Collateral in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in-surplus, and
(iii) cash paid, payable or otherwise distributed in respect of
principal of, or in redemption of, or in exchange for, any Collateral, shall be,
and shall be forthwith delivered to the Creditor to hold as, Collateral and
shall, if received by the Pledgor, be received in trust for the benefit of the
Creditor, be segregated from the other property or funds of the Pledgor, and be
forthwith
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delivered to the Creditor as Collateral in the same form as so received (with
any necessary indorsement or assignment). The Pledgor shall, upon request by the
Creditor, promptly execute all such documents and do all such acts as may be
necessary or desirable to give effect to the provisions of this Section 6 (b).
6(c) The Creditor shall execute and deliver (or cause to be
executed and delivered) to the Pledgor all such proxies and other instruments as
the Pledgor may reasonably request for the purpose of enabling the Pledgor to
exercise the voting and other rights that it is entitled to exercise pursuant to
Section 6 (a) hereof and to receive the dividends and interest that it is
authorized to receive and retain pursuant to Section 6 (b) hereof.
6(d) Upon the occurrence and during the continuance of any Event of
Default, the Creditor shall have the right in its sole discretion, and the
Pledgor shall execute and deliver all such proxies and other instruments as may
be necessary or appropriate to give effect to such right, to terminate all
rights of the Pledgor to exercise or refrain from exercising the voting and
other consensual rights that it would otherwise be entitled to exercise pursuant
to Section 6 (a) hereof, and all such rights shall thereupon become vested in
the Creditor who shall thereupon have the sole right to exercise or refrain from
exercising such voting and other consensual rights; provided, however, that the
Creditor shall not be deemed to possess or have control over any voting rights
with respect to any Collateral unless and until the Creditor has given written
notice to the Pledgor that any further exercise of such voting rights by the
Pledgor is prohibited and that the Creditor and/or its assigns will henceforth
exercise such voting rights; and provided, further, that neither the
registration of any item of Collateral in the Creditor's name nor the exercise
of any voting rights with respect thereto shall be deemed to constitute a
retention by the Creditor of any such Collateral in satisfaction of the
Obligations or any part thereof.
6(e) Upon the occurrence and during the continuance of any Event of
Default:
(i) all rights of the Pledgor to receive the dividends and interest
that it would otherwise be authorized to receive and
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retain pursuant to Section 6(b) hereof shall cease, and all such rights shall
thereupon become vested in the Creditor who shall thereupon have the sole right
to receive and hold such dividends as Collateral, and
(ii) all payments of interest and dividends that are received by the
Pledgor contrary to the provisions of paragraph (i) of this Section 6 (e) shall
be received in trust for the benefit of the Creditor, shall be segregated from
other funds of the Pledgor and shall be forthwith paid over to the Creditor as
Collateral in the same form as so received (with any necessary indorsement).
Section 7. Transfers and Other Liens. The Pledgor agrees that it will
not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of,
or grant any option with respect to, any of the Collateral, or (ii) create or
permit to exist any Lien, upon or with respect to any of the Collateral.
Section 8. Creditor Appointed Attorney-in-Fact. The Pledgor hereby
appoints the Creditor the Pledgor's attorney-in-fact, with full authority in the
place and stead of the Pledgor and in the name of the Pledgor or otherwise, from
time to time in the Creditor's good-faith discretion, to take any action and to
execute any instrument that the Creditor may reasonably believe necessary or
advisable to accomplish the purposes of this Agreement (subject to the rights of
the Pledgor under Section 6 hereof), in a manner consistent with the terms
hereof, including, without limitation, to receive, indorse and collect all
instruments made payable to the Pledgor representing any dividend or other
distribution in respect of the Collateral or any part thereof and to give full
discharge for the same.
Section 9. Creditor May Perform. If the Pledgor fails to perform any
agreement contained herein, the Creditor may itself perform, or cause
performance of, such agreement, and the reasonable expenses of the Creditor
incurred in connection therewith shall be payable by the Pledgor under Section
13 hereof.
Section 10. The Creditor's Duties. The powers conferred on the Creditor
hereunder are solely to protect its interest in the Collateral and shall not
impose any duty upon it
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<PAGE>
to exercise any such powers. The Creditor shall be deemed to have exercised
reasonable care in the safekeeping of any Collateral in its possession if such
Collateral is accorded treatment substantially equal to the safekeeping which
the Creditor accords its own property of like kind. Except for the safekeeping
of any Collateral in its possession and the accounting for monies and for other
properties actually received by it hereunder, the Creditor shall have no duty,
as to any Collateral, as to ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to any
Collateral, whether or not the Creditor has or is deemed to have knowledge of
such matters, or as to the taking of any necessary steps to preserve rights
against any Persons or any other rights pertaining to any Collateral. The
Creditor will take action in the nature of exchanges, conversions, redemption,
tenders and the like requested in writing by the Pledgor with respect to any of
the Collateral in the Creditor's possession if the Creditor in its reasonable
judgment determines that such action will not impair the Security Interest or
the value of the Collateral, but a failure of the Creditor to comply with any
such request shall not of itself be deemed a failure to exercise reasonable
care.
Section 11. Default. Each of the following occurrences shall constitute
an Event of Default under this Agreement: (a) the failure of the Pledgor to pay
when due any of the Obligations; (b) the failure of the Pledgor to perform any
agreement of the Pledgor contained herein or in any other agreement with the
Creditor; (c) any statement, representation or warranty of the Pledgor made
herein or at any time furnished to the Creditor is untrue in any respect as of
the date made; (d) the entry of any judgment against the Pledgor for an amount
equal to or greater than $1,000,000 in monetary damages or which prohibits the
Pledgor from conducting its business substantially as conducted on the date of
this Agreement; (e) the Pledgor becomes insolvent or is generally not paying its
debts as they become due; (f) the appointment of or assignment to a custodian,
as that term is defined in the United States Bankruptcy Code, for any property
of the Pledgor, or encumbrance, levy, seizure or attachment of any portion of
the Collateral; (g) the commencement of any proceeding or the filing of a
petition by or against the Pledgor under the provisions of the United States
Bankruptcy Code for liquidation, reorganization or adjustment of debts or under
-9-
<PAGE>
any insolvency law or other statute or law providing for the modification or
adjustment of the rights of creditors; or (h) dissolution, consolidation, or
merger, or transfer of a substantial part of the property of the Pledgor.
Section 12. Remedies upon Default. If any Event of Default shall have
occurred and be continuing, and the Obligations remain due and owing for more
than 30 days after such occurrence:
12(a) The Creditor may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein or otherwise available
to it, all the rights and remedies of a secured party on default under the
Uniform Commercial Code of the State of MINNESOTA (the "Code") in effect at that
time (whether or not the Code then applies to the affected Collateral), and may,
without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any exchange,
broker's board or at any of the Creditor's offices or elsewhere, for cash, on
credit or for future delivery, and upon such other terms as the Creditor may
reasonably believe are commercially reasonable. The Pledgor agrees that, to the
extent notice of sale shall be required by law, at least ten days' prior notice
to the Pledgor of the time and place of any public sale or the time after which
any private sale is to be made shall constitute reasonable notification. The
Creditor may arrange a sale of Collateral which would qualify as exempt from
registration under the Securities Act of 1933, as amended, including the sale of
Collateral privately to purchasers who will agree to take the Collateral for
investment and not with a view to distribution and who will agree to the
imposition of restrictive legends on the certificates representing the
Collateral. The Pledgor agrees that the Creditor shall not incur any liability,
and any liability of the Pledgor for any deficiency shall not be impaired, as a
result of the sale of the Collateral or any portion thereof at any such private
sale.
12(b) The Creditor may notify any Person obligated on any of the
Collateral that the same has been assigned or transferred to the Creditor and
that the same should be performed as requested by, or paid directly to, the
Creditor, as the case may be. The Pledgor shall join in giving such notice, if
the Creditor so requests. The Creditor may, in the
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<PAGE>
Creditor's name or in the Pledgor's name, demand, sue for, collect or receive
any money or property at any time payable or receivable on account of, or
securing, any such Collateral or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify, amend or change the
obligation of any such Person.
12(c) Any cash held by the Creditor as Collateral and all cash
proceeds received by the Creditor in respect of any sale of, collection from, or
other realization upon all or any part of the Collateral may, in the discretion
of the Creditor, be held by the Creditor as collateral for, or then or at any
time thereafter be applied in whole or in part by the Creditor against, all or
any part of the Obligations (including any expenses of the Creditor payable
pursuant to Section 13 hereof).
Section 13. Costs and Expenses; Indemnity. The Pledgor will pay or
reimburse the Creditor on demand for all out-of-pocket expenses (including in
each case all filing and recording fees and taxes and all reasonable fees and
expenses of counsel and of any experts and agents) incurred by the Creditor in
connection with the protection, satisfaction, foreclosure or enforcement of the
Security Interest and the enforcement of this Agreement, and all such costs and
expenses shall be part of the Obligations secured by the Security Interest.
Section 14. Waivers and Amendments; Remedies. This Agreement can be
waived, modified, amended, terminated or discharged, and the Security Interest
can be released, only explicitly in a writing signed by the Creditor. A waiver
so signed shall be effective only in the specific instance and for the specific
purpose given. Mere delay or failure to act shall not preclude the exercise or
enforcement of any rights and remedies available to the Creditor. All rights and
remedies of the Creditor shall be cumulative and may be exercised singly in any
order or sequence, or concurrently, at the Creditor's option, and the exercise
or enforcement of any such right or remedy shall neither be a condition to nor
bar the exercise or enforcement of any other.
Section 15. Notices. Any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery,
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<PAGE>
telegram, telex, facsimile transmission, overnight courier or United States mail
(postage prepaid) addressed to such party at the address specified on the
signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telegram, telex or facsimile transmission, from
the first business day after the date of sending if sent by overnight courier,
or from four days after the date of mailing if mailed.
Section 16. Representations and Warranties. The Pledgor hereby
represents and warrants to the Creditor that:
16(a) The Pledgor is a corporation duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority and the legal right to
own and operate its properties and to conduct the business in which it is
currently engaged.
16(b) The Pledgor has the corporate power and authority and the
legal right to execute and deliver, and to perform its obligations under, this
Agreement and has taken all necessary corporate action to authorize such
execution, delivery and performance.
16(c) This Agreement constitutes a legal, valid and binding
obligation of the Pledgor enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
16(d) The Pledgor's correct tax identification number is set forth
on the signature page of this Agreement.
Section 17. Continuing Security Interest. This Agreement shall create a
continuing security interest in the Collateral and shall (a) remain in full
force and effect until the payment in full of the Obligations and the expiration
of the obligation, if any, of the Creditor to extend credit
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<PAGE>
accommodations to the Pledgor, (b) be binding upon the Pledgor, its successors
and assigns, and (c) inure, together with the rights and remedies of the
Creditor hereunder, to the benefit of, and be enforceable by, the Creditor and
its successors, transferees and assigns.
Section 18. Termination of Security Interest. Upon payment in full of
the Obligations or the irrevocable payment in full of the Norwest Debt, as such
term is defined in the Guaranty, other than by payment by the Creditor under the
Creditor Guaranty, as such term is defined in the Guaranty, and the expiration
of any obligation of the Lender, as such term is defined in the Guaranty, to
extend credit accommodations to the Debtor, the security interest granted hereby
shall terminate and all rights to the Collateral shall revert to the Pledgor.
Upon any such termination, the Creditor will return to the Pledgor such of the
Collateral as shall not have been sold or otherwise applied pursuant to the
terms hereof and execute and deliver to the Pledgor such documents as the
Pledgor shall reasonably request to evidence such termination. Any reversion or
return of the Collateral upon termination of this Agreement and any instruments
of transfer or termination shall be at the expense of the Pledgor and shall be
without warranty by, or recourse on, the Creditor. As used in this Section,
"Pledgor" includes any assigns of Pledgor, any Person holding a subordinate
security interest in any part of the Collateral or whoever else may be lawfully
entitled to any part of the Collateral.
SECTION 19. GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION
AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF MINNESOTA; PROVIDED, HOWEVER, THAT NO EFFECT SHALL BE GIVEN TO CONFLICT OF
LAWS PRINCIPLES OF THE STATE OF MINNESOTA, EXCEPT TO THE EXTENT THAT THE
VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY
THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA. Whenever possible,
each provision of this Agreement and any other statement, instrument or
transaction contemplated hereby or relating hereto shall be interpreted in such
manner as to be effective and valid under such applicable law, but, if any
provision of this Agreement or any other statement, instrument or transaction
contemplated hereby or relating hereto shall be held to be prohibited or invalid
under
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<PAGE>
such applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement or any other statement,
instrument or transaction contemplated hereby or relating hereto.
SECTION 20. CONSENT TO JURISDICTION. AT THE OPTION OF THE CREDITOR,
THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT
SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE PLEDGOR CONSENTS TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN
SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE PLEDGOR COMMENCES ANY ACTION IN
ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY
OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE CREDITOR AT
ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE
JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
Section 21. Waiver of Jury Trial. EACH OF THE PLEDGOR AND THE CREDITOR,
BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 22. Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument.
Section 23. General. All representations and warranties contained in
this Agreement or in any other agreement between the Pledgor and the Creditor
shall survive the execution, delivery and performance of this Agreement and the
creation and payment of the Obligations. The Pledgor waives notice of the
acceptance of this Agreement by the Creditor. Captions in this Agreement are for
reference and convenience only and shall not affect the interpretation or
meaning of any provision of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Pledgor has caused this Pledge Agreement to be
duly executed and delivered by its officer thereunto duly authorized as of the
date first above written.
PLEDGOR:
LTCAMERICA HOLDING, INC.
By /s/ Bradley E. Barks
-----------------------------------
Title CFO
--------------------------------
Address for Pledgor:
Attention: Bradley E. Barks
300 South Highway 169, Suite 95
Minneapolis, Minnesota 55426
Telefacsimile No. 612-525-6553
Pledgor's Tax ID #: 41-1920187
Address for Creditor:
Allianz Life Insurance Company of North America
Attention: Robert S. James
1750 Hennepin Avenue
Minneapolis, Minnesota 55403-2195
Telecopier Number: 612-337-6355
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<PAGE>
SCHEDULE I
TO
PLEDGE AGREEMENT
Class of Number Certificate Par
Issuer Stock of Shares Number Value
- ------ ----- --------- ------ -----
Capitol Common 1,405,000 170 $1.34
Bankers Life
Insurance
Company
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EXHIBIT 10.14
SECURITY AGREEMENT
DEBTOR: LIFEUSA HOLDING, INC.
SECURED PARTY: ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Security Interest And Collateral. To secure the debt, liability or obligation of
the Debtor to Secured Party evidenced by that certain Guaranty of even date
herewith made by the Debtor in favor of the Secured Party (the "Guaranty"), and
any extensions, renewals or replacements thereof (herein referred to as the
"Obligations"), Debtor hereby grants Secured Party a security interest (herein
called the "Security Interest") in the following property (herein called
"Collateral"): the last $10,000,000 purchase of obligations of Secured Party
pursuant to Section 2 of that certain Stock Purchase Agreement dated as of
January 13, 1998, as amended (the "Purchase Agreement"), by and between Debtor
and Secured Party, and Debtor hereby authorized Secured Party to retain such
purchase price as of the date it is to be made for the purpose of perfecting
Secured Party's security interest therein.
The Collateral shall include (i) all substitutions and replacements for and
proceeds and products of any and all of the foregoing property, and (ii) all
books, records, manuals, programs, software, systems and storage media relating
to any of the foregoing property.
DEBTOR WARRANTS, REPRESENTS AND AGREES THAT:
1. Title, Etc. Debtor has (or will have at the time it acquires rights
in Collateral hereafter acquired or arising) and will maintain so long as the
Security Interest remains outstanding, title to each item of Collateral
(including the proceeds and products thereof), free and clear of all security
interests, mortgages, liens or encumbrances ("Liens") except the Security
Interest. Debtor will defend the Collateral against all claims or demands of all
individuals, corporations or other entities ("Persons") (other than the Secured
Party) claiming the Collateral or any interest therein. All costs of keeping the
Collateral free of Liens prohibited by this Agreement will be borne and paid by
Debtor. Debtor will not sell, lease or otherwise dispose of any Collateral.
<PAGE>
2. Location. Debtor's chief place of business and chief executive
office are located at its address indicated on the signature page hereof. Debtor
will not permit any item of Collateral or any records pertaining thereto to be
located in any state or area in which, in the event of such location, a
financing statement covering such Collateral would be required to be, but has
not in fact been, filed in order to perfect the Security Interest.
3. Further Assurance. Debtor will at any time or times hereafter
execute such financing statements and other documents and instruments and
perform such acts as the Secured Party may from time to time request to
establish, maintain, perfect and enforce a valid security interest in the
Collateral, and will pay all costs of filing and recording. Debtor will furnish
to the Secured Party from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Secured Party may reasonably request.
4. Books, Records, Inspection. Debtor will keep accurate books, records
and accounts with respect to the Collateral, and with respect to the general
business of Debtor, and will make the same available to the Secured Party at its
request for examination and inspection; and will permit any authorized
representative of the Secured Party to examine and inspect, during normal
business hours, any and all premises where the Collateral is or may be kept or
located.
5. Action by Secured Party. If Debtor at any time fails to perform or
observe any of its obligations and agreements hereunder, the Secured Party shall
have the authority, but shall not be obligated to perform or observe such
agreement and to take any and all other actions which the Secured Party may deem
necessary to cure or correct such failure (including without limitation, the
payment of taxes, the satisfaction of Liens, the execution of financing
statements and the indorsement of instruments). All sums so advanced or paid by
the Secured Party shall be payable by Debtor on demand with interest at the
highest lawful rate permitted under applicable law which shall not, in any
event, exceed a per annum rate equal to 3% in excess of the rate then applicable
to the Norwest Obligations, as such term is defined in the Guaranty.
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<PAGE>
6. Events of Default. Each of the following occurrences shall
constitute an event of default under this Agreement (herein called "Event of
Default"): (i) Debtor shall fail to pay any or all of the Obligations when due
or (if payable on demand) on demand, shall fail to observe or perform any
covenant or agreement herein binding on it or shall be in default under the
Guaranty; (ii) any representation or warranty by Debtor set forth in this
Agreement or made to Secured Party in any financial statements or reports
submitted to Secured Party by or on behalf of Debtor shall prove materially
false or misleading; or (iii) Debtor or any other guarantor of any Obligation
shall (A) be or become insolvent (however defined); or (B) voluntarily file, or
have filed against it involuntarily, a petition under the United States
Bankruptcy Code; or (C) if a corporation, partnership, or organization, be
dissolved or liquidated or, if a partnership, suffer the death of a partner or,
if an individual, die; or (D) go out of business.
7. Remedies. If any Event of Default shall have occurred and be
continuing, and the Obligations remain due and owing for more than 30 days after
such occurrence, Secured Party may exercise any one or more of the following
rights and remedies: (i) declare all unmatured Obligations to be immediately due
and payable, and the same shall thereupon be immediately due and payable,
without presentment or other notice or demand; (ii) exercise and enforce any or
all rights and remedies available upon default to a secured party under the
Uniform Commercial Code, including but not limited to the right to take
possession of any Collateral, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which Debtor hereby
expressly waives), and the right to dispose of any or all of the Collateral, and
in connection therewith Secured Party may require Debtor to make the Collateral
available to Secured Party at a place to be designated by Secured Party which is
reasonably convenient to both parties, and if notice to Debtor of any intended
disposition of collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonably if
given (in the manner specified in Section 9) at least 10 calendar days prior to
the date of intended disposition or other action; (iii) exercise or enforce any
or all other rights or remedies available to Secured Party by law or agreement
against the Collateral, against Debtor or against any other person or property.
If any payments
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<PAGE>
on any Collateral are received by Debtor after an Event of Default has occurred,
such payments shall be held in trust by Debtor as the property of the Secured
Party and shall not be commingled with any funds or property of Debtor and shall
be forthwith remitted to the Secured Party for application on the Obligations.
8. Costs and Expenses. Debtor will pay or reimburse the Secured Party
on demand for all out-of-pocket expenses (including in each case all filing and
recording fees and taxes and all reasonable fees and expenses of counsel and of
any experts and agents) incurred by the Secured Party in connection with the
protection, satisfaction, foreclosure or enforcement of the Security Interest
and the enforcement of this Agreement, and all such costs and expenses shall be
part of the Obligations secured by the Security Interest.
9. Notices. Any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, telefacsimile transmission, overnight courier or United States mail
(postage prepaid) addressed to such party at the address specified on the
signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telefacsimile transmission, from the first
business day after the date of sending if sent by overnight courier, or from
four days after the date of mailing if mailed.
10. Termination of Security Interest. Upon payment in full of the
Obligations or the irrevocable payment in full of the Norwest Debt, as such term
is defined in the Guaranty, other than by payment by the Creditor under the
Creditor Guaranty, as such term is defined in the Guaranty, and the expiration
of any obligation of the Lender, as such term is defined in the Guaranty, to
extend credit accommodations to the, the security granted hereunder shall
terminate, all rights to the Collateral shall revert to the Debtor, and the
Secured Party shall be obligated to complete its purchase obligation under
Section 2 of the Purchase Agreement to the extent that the Collateral has not
been applied to the satisfaction of the Obligations pursuant to the terms of
this Agreement. The Secured Party shall execute and
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<PAGE>
deliver to the Debtor such documents as the Debtor shall reasonably request to
evidence such termination.
11. Governing Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT
GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, EXCEPT TO THE EXTENT THAT
THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY
THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA.
12. Consent to Jurisdiction. AT THE OPTION OF THE SECURED PARTY, THIS
AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING
IN HENNEPIN COUNTY, MINNESOTA; AND THE DEBTOR CONSENTS TO THE JURISDICTION AND
VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT
CONVENIENT. IN THE EVENT THE DEBTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION
OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM
THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SECURED PARTY AT ITS OPTION
SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND
VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER
APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.
13. Waiver of Jury Trial. EACH OF THE DEBTOR AND THE SECURED PARTY, BY
ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL
BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
14. Miscellaneous. This Agreement can be waived, modified, amended,
terminated or discharged only explicitly in a writing signed by the Secured
Party. A waiver so signed shall be effective only in the specific instance and
for the specific purpose given and shall not impair or effect the rights of the
Secured Party or the provisions of this Agreement in any other respect at any
other time. This Agreement shall be binding upon and inure to the benefit of
Debtor and Secured Party and their respective heirs, representatives, successors
and assigns. This Agreement shall take effect when signed by Debtor and
delivered to Secured Party. Debtor waives notice of the Secured Party's
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<PAGE>
acceptance hereof. If any provision or application of this Agreement is held
unlawful or unenforceable in any respect, such illegality or unenforceability
shall not effect other provisions or applications which can be given effect, and
this Agreement shall be construed as if the unlawful or unenforceable provision
or application had never been contained herein or prescribed hereby.
Executed as of December 22, 1998.
DEBTOR
LIFEUSA HOLDING, INC.
By /s/ Mark A. Zesbaugh
------------------------------------
Title CFO
---------------------------------
Address for Debtor:
Attention: Mark A. Zesbaugh
300 South Highway 169, Suite 95
Minneapolis, Minnesota 55426
Telefacsimile No. 612-525-6102
Debtor Tax ID #41-1578384
Address for the Secured Party:
Allianz Life Insurance Company of North America
Attention: Robert S. James
1750 Hennepin Avenue
Minneapolis, Minnesota 55403-2195
Telefacsimile Number: 612-337-6355
-6-
EXHIBIT 10.15
ADMINISTRATION AND MARKETING AGREEMENT
ENTERED INTO BY AND BETWEEN
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
OF MINNEAPOLIS, MINNESOTA
(THE "COMPANY")
AND
LTCAMERICA HOLDING, INC.
OF MINNEAPOLIS, MINNESOTA
("HOLDING")
DATED AS OF JANUARY 1, 1999
WHEREAS, Holding, through its subsidiary, Capitol Bankers Life
Insurance Company ("Insurance"), proposes to offer a line of life insurance,
annuity and health insurance products, and the Company desires to provide
similar products utilizing Holding's skills in product design and underwriting;
and
NOW, THEREFORE, in consideration for the mutual promises and
undertakings set forth herein and for other good and valuable consideration, the
parties hereby agree as follows:
SECTION 1 - DEFINITIONS
1.1 "Covered Products" shall mean ordinary life insurance policies,
annuities and health insurance issued on the forms listed on Exhibit 1 hereto.
It is expressly understood and agreed that Exhibit 1 may be amended from time to
time to add New Insurance Products.
1.2 "Marketing Services" shall mean identifying prospective agents
("Prospective Agents") of the Company for purposes of marketing the Covered
Products and New Insurance Products, notifying the Company of Prospective
Agents, and processing agent appointments and cancellations on behalf of the
Company, and training and supervising all agents appointed with respect to the
Covered Products and New Insurance Products. "Marketing Services" shall also
include, subject to such limitations as the Company may from time to time deem
appropriate, seeking approval on behalf of the Company by appropriate insurance
departments, wherever required, of appointments of Prospective Agents.
1.3 "New Insurance Products" shall be life insurance, annuity products
and health insurance developed by Holding or its subsidiary, Insurance, which
are, with the approval of the Company added to those listed on Exhibit 1. New
Insurance Products shall be products similar to those of Insurance written on
the Company's paper.
<PAGE>
1.4 "Operating Manuals" shall mean all written rules, regulations,
instructions and directives of the Company regarding its operations, as are in
effect from time to time.
1.5 "Policy Administration Services" shall mean, with respect to the
Covered Products and New Insurance Products, (a) preparation and filing with
state insurance departments, as appropriate all policy form filings, including
premium rates, subject to such limitations as the Company may from time to time
deem appropriate, (b) provision of full administration services, including
billing and collecting premium, monthly processing, loan processing, valuation,
policyholder statements, maintenance of policy records, processing policy
cancellations, policy changes, contractual changes, reinstatements and customer
inquiries, (c) designing, printing and distribution of administrative forms as
they become necessary, and (d) all other administrative activities in connection
with the Covered Products and New Insurance Products, including, but not limited
to, maintaining necessary records and the producing of required reports such
that the cash payments made between Holding and the Company, and between the
Company and its reinsurers, can be accurately computed and recorded. "Policy
Administrative Services" shall not include any activities related to (i)
adjusting or paying claims or (ii) negotiating reinsurance on behalf of the
Company.
1.6 "Services" shall mean Underwriting Services, Policy Administration
Services and Marketing Services.
1.7 "Underwriting Guidelines" shall mean the Company's underwriting
guidelines as in effect from time to time. Holding may recommend changes to the
Underwriting Guidelines, which changes shall be subject to the Company's
approval, which approval shall not be unreasonably withheld.
1.8 "Underwriting Services" shall mean, with respect to the Covered
Products and New Insurance Products, processing and accepting applications and
proposals for insurance, underwriting (including determination of appropriate
rates), policy issuance, policy printing, processing of unscheduled policy
changes, policy cancellations, routing of applications and other papers required
in the underwriting process, routing of issued policies for delivery to
policyholders, and all other related services.
SECTION 2 - SERVICES
2.1 Holding shall provide the Services in the name of and on behalf of
the Company with respect to the Covered Products and New Insurance Products in
the territory described in Schedule A hereto. Holding shall provide the Services
in the name of and on behalf of the Company only as provided in this Agreement
or as directed by the Company in writing. Except as specifically set forth in
this Agreement or as authorized by the Company in writing, Holding shall not
have authority to enter into any agreements on the Company's behalf or to alter
or amend any of the policies relating to the Covered Products and New Insurance
Products or to modify, waive or extend any of their provisions.
2
<PAGE>
2.2 In connection with the Policy Administration Services provided by
Holding under this Agreement, Holding shall:
a. be responsible for all Company policies entrusted to it whether
issued or not, and shall only issue policies in series;
b. be responsible for making, or causing to be made, any
modifications to administrative systems required for the ongoing administration
of all policies in force or new policies being issued;
c. maintain all records, including but not limited to statistical
and accounting records, that a life and health insurance company would maintain
with respect to the Covered Products and New Insurance Products so as to allow
the Company to make only general ledger entries in its books and records; and
d. maintain all other data which are necessary to enable the
Company to prepare its annual convention statement and any other reports
required by any governmental agency or reporting bureau or which are reasonably
required by the Company in order that the Company may properly analyze and
manage the business included under this Agreement, provided that such data will
be provided by Holding to the Company upon request by the Company.
2.3 In connection with the Marketing Services provided by Holding under
this Agreement, and subject to such limitations as the Company may from time to
time determine, Holding shall have the authority, on behalf of the Company, to
appoint agents of the Company for the purpose of soliciting and producing the
Covered Products and New Insurance Products and to remove any of such agents.
Holding shall pay all costs of licensing and appointing such agents on behalf of
the Company.
2.4 The Covered Products and the New Insurance Products shall be
differentiated from Insurance products through terms as the Company and Holding
mutually agree. The Company will commit to annual first year and single premium
goals for the Covered Products and the New Insurance Products prior to the
beginning of each calendar year during the term of this Agreement. The goal for
1999 is $10,000,000 in first year and single premium. Six months prior to the
beginning of each calendar year commencing with respect to the calendar year
2000, the Company and Holding will mutually agree to the amount of first year
and single premium which can be written on the Covered Products and the New
Insurance Products for the next calendar year.
3
<PAGE>
2.5 Holding shall not:
a. accept applications for, bind or issue any insurance covering
any risk prohibited in writing by the Company or excluded (whether by exclusion
or warranty) from Exhibit 1, as amended or replaced from time to time;
b. have any authority, right or responsibility with respect to any
of the following activities related to the business produced under this
Agreement: (i) adjusting or paying any claims, or (ii) negotiating reinsurance
on behalf of the Company;
c. mass cancel policies in force that are Covered Products or New
Insurance Products except upon written instructions from the Company to do so;
d. bind the Company in contravention of its Operating Manuals or
Underwriting Guidelines; or
e. issue any advertising or promotional material bearing the
Company's name without first obtaining the written approval of the Company,
except where such material is consistent with agreed upon written criteria.
2.6 Holding shall provide the Services (a) in accordance with all
applicable laws, regulations, bulletins and insurance department requirements,
(b) in accordance with applicable Operating Manuals, or such other service
standards as the parties shall mutually agree in writing from time to time, and
(c) in accordance with Sections 2.1 through 2.5 of this Agreement.
2.7 Holding shall be liable to the Company for any losses to the
Company caused by negligent or intentional acts of Holding, its officers,
employees or agents.
2.8 Holding agrees to indemnify and hold the Company harmless from and
against any and all losses, costs, damages and expenses (including attorney's
fees) which the Company may incur by reason of any demand or action by any
person arising out of the negligence or intentional acts of Holding, and the
Company agrees to indemnify and hold Holding harmless from and against any and
all losses, costs, damages and expenses (including attorney's fees) which
Holding may incur by reason of any demand or action by any person arising out of
the negligence or intentional acts of the Company.
2.9 If Holding does not perform all of its duties and responsibilities
under this Agreement after written notice and a reasonable opportunity to
perform, the Company may adjust the compensation paid under Section 5 of this
Agreement, or other remittances to Holding, in order to restore the Company to
the position it would have occupied had Holding performed all of its duties and
responsibilities.
2.10 This Agreement is not exclusive. The Company reserves the right to
appoint agents in the territory covered by this Agreement for the purpose of
producing business other than the Covered Products and New Insurance Products.
Holding reserves, on behalf of its
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<PAGE>
subsidiaries, the right of such subsidiaries to appoint agents, including agents
appointed with respect to the Covered Products and New Insurance Products
pursuant to this Agreement, for the purpose of producing business for such
subsidiaries.
SECTION 3 - PREMIUMS
3.1 All premiums received by Holding with respect to the Covered
Products and New Insurance Products, either before or after termination of this
Agreement, shall be held by Holding as trustee for the Company. Holding shall
have the authority to draw against said funds held for and on behalf of the
Company, but only for one or more of the following purposes:
a. Payment of return premiums;
b. Payment of policy claims and benefits; or
c. Payment of reinsurance premiums for any related reinsurance the
Company has obtained with respect to any of the Company's policies issued under
this Agreement.
3.2 Premiums temporarily held by Holding as trustee for the Company may
be invested by Holding in demand or time bank accounts as may be authorized by
the Minnesota Insurance Codes as legal bank investments for Life Insurance
Companies, until drawn on for one or more of the purposes set forth in Section
3.1. Holding shall promptly remit all premiums to the Company's reinsurer in
accordance with the terms of the Reinsurance Contract dated as of
______________, 199___, by and between Holding and the Company (the "Reinsurance
Contract").
3.3 The Company hereby assigns to Holding all income derived from
premiums invested on behalf of the Company by Holding pursuant to the authority
granted herein.
3.4 The keeping of an account with Holding on the Company's books in
the form of a debtor-creditor account is to be deemed merely a record of
business transacted. Neither the keeping of an account in such form, nor the
rendering of same, nor failure to enforce prompt remittance, nor alteration in
compensation rate, nor compromise or settlement, shall be held to waive
assertion of the trust relationship as to premiums collected by Holding. It is
further understood and agreed that Holding is responsible for, and guarantees to
the Company, payment of all premiums on policies due and received on behalf of
the Company with respect to the Covered Products and the New Insurance Products.
Should Holding fail to pay the Company any such premiums received when due,
Holding agrees to bear any collection or other expense, including reasonable
attorney's fees and costs, expended by the Company to enforce collection from
Holding.
5
<PAGE>
SECTION 4 - OPERATION AND ACQUISITION EXPENSES
Holding shall be responsible for all operation and acquisition expenses
incurred in connection with the Covered Products and New Insurance Products
subject to this Agreement, including, by way of illustration and not of
limitation, such items as rentals, salaries, supplies not furnished by the
Company, postage, advertising, local license fees, attorney's fees, utilities,
cost of equipment, agents' fees or commissions and assessments or assignments,
if any, lawfully made by governmental authority, the sole liability of the
Company being payment of premium taxes and payment to Holding of the
compensation stipulated in Section 5 hereof
SECTION 5 -- COMPENSATION
5.1 The Company agrees to allow Holding a service fee equal to (a) the
reinsurance allowance or ceding commission (expressed as a percentage) allowed
the Company under the Reinsurance Contract, less 0.1%, multiplied by (b) the
amount of business to which such allowance or commission is applicable. Holding
shall be responsible for paying all commissions due agents appointed by the
Company with respect to business written by the Company and reinsured under the
Reinsurance Contract.
5.2 Holding agrees to reimburse the Company for premium taxes on all
business subject hereto.
5.3 If a policy reinsured under the Reinsurance Contract lapses at any
point in time during the first 13 months, Holding agrees to reimburse the
Company an amount equal to the excess, if any, of the total first year service
fee paid by the Company under Section 5.1 on that policy over the total first
year "initial" premium paid on that policy, as defined in the Reinsurance
Contract.
5.4 The Company will pay all payments assessed by the various state
guaranty associations based on the Covered Products business. The Company and
Holding agree that assessments will be sought to be recovered either through
future premium tax offsets or additional margins or inforce business.
SECTION 6 - REPORTS AND REMITTANCES
6.1 Within 10 days after the end of each month, Holding shall provide
the Company with a copy of the report Insurance sends the reinsurer under the
Reinsurance Agreement.
6.2 Within 10 days after the end of each month, Holding shall report
the net written premium hereunder for the month of account and remit the
provision for premium taxes as stipulated in Section 5.
6
<PAGE>
SECTION 7 - STATUS OF HOLDING, ITS EMPLOYEES AND AGENTS
While performing its authorities granted herein, Holding shall be
deemed an independent contractor, as the Company reserves no authority or right
to control Holding's method of performance of its duties and responsibilities
hereunder. No employees of Holding shall be regarded as employees of the
Company, except as may be required by governing statutes.
SECTION 8 - EXAMINATION OF BOOKS AND RECORDS
Holding shall, as often as reasonably requested by the Company, submit
all books and records maintained by Holding pursuant hereto for examination and
review by any authorized representative of the Company and/or its quota share
reinsurers; and Holding shall in all things cooperate and render assistance in
such examination. Holding shall make copies of any such books and records and
furnish them to the Company as may be requested by the Company's
representatives.
SECTION 9 - OWNER OF POLICY FORMS, SUPPLIES AND LICENSES
All policy forms, records and supplies furnished by the Company to
Holding, as well as any policy forms or other supplies on which the Company's
name appears, whether supplied by the Company or not, shall be and remain the
property of the Company and shall be turned over to the Company promptly upon
demand. All licenses and other material relating to governmental licensing or
authorization of the Company with respect to this Agreement shall be and remain
the property of the Company and shall be turned over to the Company by Holding
promptly upon demand.
SECTION 10 - COMMENCEMENT AND TERMINATION
10.1 The effective date of commencement of this Agreement shall be
January 1, 1999, and this Agreement shall continue for a minimum of one year and
will be subject to termination upon either party giving one year advance notice
of cancellation, provided that this Agreement may not be terminated by Holding
so long as the Company remains a guarantor with respect to Holding's revolving
credit facility. In the event of the termination of this Agreement, the Company
shall not directly or indirectly (through reinsurance or otherwise) sell any
life or annuity products similar to the Covered Products or the New Insurance
Products during the one year following such termination.
In the event of a termination of this Agreement, Holding may not
directly or indirectly (through reinsurance or otherwise) sell any products
similar to products of the Company other than Covered Products during one year
following such termination.
10.2 If either party fails to perform substantially and materially the
duties and responsibilities set forth in this Agreement or fails to make
required payments hereunder and such failure continues for more than 30 days
after written notice delivered by the other party, the other party may terminate
this Agreement notwithstanding any other provisions to the contrary.
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<PAGE>
SECTION 11 - MISCELLANEOUS
11.1 This Agreement, and all rights and interests arising herefrom,
shall be binding upon, and shall inure to the benefit of, the parties hereto,
their representatives, successors and assigns, provided that the authorities,
duties and responsibilities of either Holding or the Company may not be assigned
by either of such parties without the written consent of the other.
11.2 This Agreement may not be modified verbally, nor may it be
modified by any subsequent practice or course of dealing by the parties, or in
any manner other than in writing signed by the parties hereto. No forbearance or
neglect on the part of the Company to enforce any of the provisions of this
Agreement shall be construed as a waiver of any of its rights or privileges
hereunder, unless in each instance a written memorandum specifically expressing
such waiver be made and subscribed by the President or a Vice President of the
Company. No such waiver shall modify this Agreement or affect the rights of the
Company with respect to any subsequent default or failure or performance by
Holding.
11.3 This Agreement shall be deemed to be a Minnesota contract and
construed in accordance with the laws of the State of Minnesota.
11.4 This Agreement supersedes all previous agreements with respect to
the subject matter herein, either oral or written, between the parties hereto.
IN WITNESS WHEREOF, the parties hereto by their respective duly
authorized representatives have caused this Agreement to be executed as of
January 1, 1999.
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA
By: Robert S. James
---------------
Its: President of Individual Marketing
LTCAMERICA HOLDING, INC.
By: Bradley E. Barks
----------------
Its: CFO
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<PAGE>
EXHIBIT 1
POLICY FORMS
The format of EXHIBIT 1 includes only Policy Forms and Plan Codes. However, this
Agreement shall cover all state variations and qualified and non-qualified
versions of the Policy Forms and Plan Codes in EXHIBIT 1.
PLAN CODE DESCRIPTION
1C-P-Y-A 2101X Ideal Care - Comprehensive
1F-P-Y-A 2102X Ideal Care - Facility Care
1H-P-Y-A 2103X Ideal Care - Home and Community Based
Care
Y = "N" for non-qualified and "Q" for qualified versions
X = State variation code
9
<PAGE>
SCHEDULE A
TO THE
ADMINISTRATION AND MARKETING AGREEMENT
BETWEEN
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
AND
LTCAMERICA HOLDING, INC.
DATED AS OF JANUARY 1, 1999
ALL POLICIES IN 1999:
The territory covered by this Agreement includes the following
jurisdictions:
All states* except: New York
No other jurisdiction shall be included in the territory covered without the
express written agreement of both parties.
*LTCAmerica Holding, Inc. (and its affiliates) will not act as Allianz Life
Insurance Company of North America's general agent for insurance sales in the
State of Connecticut and will not perform duties nor have responsibilities
related thereto under this Agreement.
ALL POLICIES AFTER 1999:
The territory covered by the appointment under this Agreement includes the
following jurisdictions:
All states*except New York and States where Insurance has a
license to sell long term care insurance.
No other jurisdiction shall be included in the territory covered by the
appointment under this Service Agreement without the express written agreement
of both parties.
EXHIBIT 10.16
ADMINISTRATION AND MARKETING AGREEMENT
ENTERED INTO BY AND BETWEEN
LIFEUSA INSURANCE COMPANY
OF MINNEAPOLIS, MINNESOTA
(THE "COMPANY")
AND
LTCAMERICA HOLDING, INC.
OF MINNEAPOLIS, MINNESOTA
( "HOLDING")
DATED AS OF JANUARY 1, 1999
WHEREAS, Holding, through its subsidiary, Capitol Bankers Life
Insurance Company ("Insurance"), proposes to offer a line of life insurance,
annuity and health insurance products, and the Company desires to provide
similar products utilizing Holding's skills in product design and underwriting;
NOW, THEREFORE, in consideration for the mutual promises and
undertakings set forth herein and for other good and valuable consideration, the
parties hereby agree as follows:
SECTION 1 - DEFINITIONS
1.1 "Covered Products" shall mean ordinary life insurance policies,
annuities and health insurance issued on Exhibit 1 hereto. It is expressly
understood and agreed that Exhibit 1 may be amended from time to time to add New
Insurance Products.
1.2 "Marketing Services" shall mean identifying prospective agents
("Prospective Agents") of the Company for purposes of marketing the Covered
Products and New Insurance Products, notifying the Company of Prospective
Agents, and processing agent appointments and cancellations on behalf of the
Company, and training and supervising all agents appointed with respect to the
Covered Products and New Insurance Products. "Marketing Services" shall also
include, subject to such limitations as the Company may from time to time deem
appropriate, seeking approval on behalf of the Company by appropriate insurance
departments, wherever required, of appointments of Prospective Agents.
1.3 "New Insurance Products" shall be life insurance, annuity products
and health insurance developed by Holding or its subsidiary, Insurance, which
are, with the approval of the Company added to those listed on Exhibit 1. New
Insurance Products shall be products similar to those of Insurance written on
the Company's paper.
<PAGE>
1.4 "Operating Manuals" shall mean all written rules, regulations,
instructions and directives of the Company regarding its operations, as are in
effect from time to time.
1.5 "Policy Administration Services" shall mean, with respect to the
Covered Products and New Insurance Products, (a) preparation and filing with
state insurance departments, as appropriate all policy form filings, including
premium rates, subject to such limitations as the Company may from time to time
deem appropriate, (b) provision of full administration services, including
billing and collecting premium, monthly processing, loan processing, valuation,
policyholder statements, maintenance of policy records, processing policy
cancellations, policy changes, contractual changes, reinstatements and customer
inquiries, (c) designing, printing and distribution of administrative forms as
they become necessary, and (d) all other administrative activities in connection
with the Covered Products and New Insurance Products, including, but not limited
to, maintaining necessary records and the producing of required reports such
that the cash payments made between Holding and the Company, and between the
Company and its reinsurers, can be accurately computed and recorded. "Policy
Administrative Services" shall not include any activities related to (i)
adjusting or paying claims or (ii) negotiating reinsurance on behalf of the
Company.
1.6 "Services" shall mean Underwriting Services, Policy Administration
Services and Marketing Services.
1.7 "Underwriting Guidelines" shall mean the Company's underwriting
guidelines as in effect from time to time. Holding may recommend changes to the
Underwriting Guidelines, which changes shall be subject to the Company's
approval, which approval shall not be unreasonably withheld.
1.8 "Underwriting Services" shall mean, with respect to the Covered
Products and New Insurance Products, processing and accepting applications and
proposals for insurance, underwriting (including determination of appropriate
rates), policy issuance, policy printing, processing of unscheduled policy
changes, policy cancellations, routing of applications and other papers required
in the underwriting process, routing of issued policies for delivery to
policyholders, and all other related services.
SECTION 2 - SERVICES
2.1 Holding shall provide the Services in the name of and on behalf of
the Company with respect to the Covered Products and New Insurance Products in
the states listed in Schedule A hereto. Holding shall provide the Services in
the name of and on behalf of the Company only as provided in this Agreement or
as directed by the Company in writing. Except as specifically set forth in this
Agreement or as authorized by the Company in writing, Holding shall not have
authority to enter into any agreements on the Company's behalf or to alter or
amend any of the policies relating to the Covered Products and New Insurance
Products or to modify, waive or extend any of their provisions.
2
<PAGE>
2.2 In connection with the Policy Administration Services provided by
Holding under this Agreement, Holding shall:
a. be responsible for all Company policies entrusted to it whether
issued or not, and shall only issue policies in series;
b. be responsible for making, or causing to be made, any
modifications to administrative systems required for the ongoing
administration of all policies in force or new policies being issued;
c. maintain all records, including but not limited to statistical
and accounting records, that a life and health insurance company would
maintain with respect to the Covered Products and New Insurance
Products so as to allow the Company to make only general ledger entries
in its books and records; and
d. maintain all other data which are necessary to enable the
Company to prepare its annual convention statement and any other
reports required by any governmental agency or reporting bureau or
which are reasonably required by the Company in order that the Company
may properly analyze and manage the business included under this
Agreement, provided that such data will be provided by Holding to the
Company upon request by the Company.
2.3 In connection with the Marketing Services provided by Holding under
this Agreement, and subject to such limitations as the Company may from time to
time determine, Holding shall have the authority, on behalf of the Company, to
appoint agents of the Company for the purpose of soliciting and producing the
Covered Products and New Insurance Products and to remove any of such agents.
The purpose of such agent appointment is to enable the agents to sell the
Covered Products and New Insurance Products in those states in which they are
licensed and authorized to sell products for Insurance in all jurisdictions
listed in Schedule B hereto. Holding will also use its best efforts to cause
such agents to sell the Covered Products and the New Insurance Products. Holding
shall pay all costs of licensing and appointing such agents on behalf of the
Company.
2.4 The Covered Products and the New Insurance Products shall be
differentiated from the Company products through terms as the Company and
Holding mutually agree. The Company will commit to annual first year and single
premium goals for the calendar year during the term of this Agreement. The goal
for 1999 is $10,000,000 in first year and single premium. Six months prior to
the beginning of each calendar year commencing with respect to the calendar year
2000, the Company and Holding will mutually agree to the amount of first year
and single premium which can be written on the Covered Products and the New
Insurance Products for the next calendar year.
3
<PAGE>
2.5 Holding shall not:
a. accept applications for, bind or issue any insurance covering
any risk prohibited in writing by the Company or excluded (whether by
exclusion or warranty) from Exhibit 1, covering business produced under
this Agreement;
b. have any authority, right or responsibility with respect to any
of the following activities related to the business produced under this
Agreement: (i) adjusting or paying any claims; or (ii) negotiating
reinsurance on behalf of the Company;
c. mass cancel policies in force that are Covered Products or New
Insurance Products except upon written instructions from the Company to
do so;
d. bind the Company in contravention of its Operating Manuals or
Underwriting Guidelines; or
e. issue any advertising or promotional material bearing the
Company's name without first obtaining the written approval of the
Company, except where such material is consistent with agreed upon
written criteria.
2.6 Holding shall provide the Services (a) in accordance with all
applicable laws, regulations, bulletins and insurance department requirements,
(b) in accordance with applicable Operating Manuals, or such other service
standards as the parties shall mutually agree in writing from time to time, and
(c) in accordance with Sections 2.1 through 2.5 of this Agreement.
2.7 Holding shall be liable to the Company for any losses to the
Company caused by negligent or intentional acts of Holding, its officers,
employees or agents.
2.8 Holding agrees to indemnify and hold the Company harmless from and
against any and all losses, costs, damages and expenses (including attorney's
fees) which the Company may incur by reason of any demand or action by any
person arising out of the negligence or intentional acts of Holding, and the
Company agrees to indemnify and hold Holding harmless from and against any and
all losses, costs, damages and expenses (including attorney's fees) which
Holding may incur by reason of any demand or action by any person arising out of
the negligence or intentional acts of the Company.
2.9 If Holding does not perform all of its duties and responsibilities
under this Agreement after written notice and a reasonable opportunity to
perform, the Company may adjust the compensation paid under Section 5 of this
Agreement, or other remittances to Holding, in order to restore the Company to
the position it would have occupied had Holding performed all of its duties and
responsibilities.
2.10 This Agreement is not exclusive. The Company reserves the right to
appoint agents in the territory covered by this Agreement for the purpose of
producing business other than the Covered Products and New Insurance Products.
Holding reserves, on behalf of its
4
<PAGE>
subsidiaries, the right of such subsidiaries to appoint agents, including agents
appointed with respect to the Covered Products and New Insurance Products
pursuant to this Agreement, for the purpose of producing business for such
subsidiaries.
SECTION 3 - PREMIUMS
3.1 All premiums received by Holding with respect to the Covered
Products and New Insurance Products, either before or after termination of this
Agreement, shall be held by Holding as trustee for the Company. Holding shall
have the authority to draw against said funds held for and on behalf of the
Company, but only for one or more of the following purposes:
a. Payment of return premiums;
b. Payment of policy claims and benefits; or
c. Payment of reinsurance premiums for any related reinsurance the
Company has obtained with respect to any of the Company's policies
issued under this Agreement.
3.2 Premiums temporarily held by Holding as trustee for the Company may
be invested by Holding in demand or time bank accounts as may be authorized by
the Minnesota Insurance Codes as legal bank investments for Life Insurance
Companies, until drawn on for one or more of the purposes set forth in Section
3.1. Holding shall promptly remit all premiums to the Company's reinsurer in
accordance with the terms of the Reinsurance Contract dated as of ____________,
199___, by and between the Company and Allianz Life Insurance Company of North
America, as amended or replaced from time to time (the "Reinsurance Contract").
3.3 The Company hereby assigns to Holding all income derived from
premiums invested on behalf of the Company by Holding pursuant to the authority
granted herein.
3.4 The keeping of an account with Holding on the Company's books in
the form of a debtor-creditor account is to be deemed merely a record of
business transacted. Neither the keeping of an account in such form, nor the
rendering of same, nor failure to enforce prompt remittance, nor alteration in
compensation rate, nor compromise or settlement, shall be held to waive
assertion of the trust relationship as to premiums collected by Holding. It is
further understood and agreed that Holding is responsible for, and guarantees to
the Company, payment of all premiums on policies due and received on behalf of
the Company with respect to the Covered Products and the New Insurance Products.
Should Holding fail to pay the Company any such premiums received when due,
Holding agrees to bear any collection or other expense, including reasonable
attorney's fees and costs, expended by the Company to enforce collection from
Holding.
SECTION 4 - OPERATION AND ACQUISITION EXPENSES
Holding shall be responsible for all operation and acquisition expenses
incurred in connection with the Covered Products and New Insurance Products
subject to this Agreement,
5
<PAGE>
including, by way of illustration and not of limitation, such items as rentals,
salaries, supplies not furnished by the Company, postage, advertising, local
license fees, attorney's fees, utilities, cost of equipment, agents' fees or
commissions and assessments or assignments, if any, lawfully made by
governmental authority, the sole liability of the Company being payment of
premium taxes and payment to Holding of the compensation stipulated in Section 6
hereof
SECTION 5 - COMPENSATION
5.1 The Company agrees to allow Holding a service fee equal to (a) the
reinsurance allowance or ceding commission (expressed as a percentage) allowed
the Company under the Reinsurance Contract, less 0.1%, multiplied by (b) the
amount of business to which such allowance or commission is applicable. Holding
shall be responsible for paying all commissions due agents appointed by the
Company with respect to business written by the Company and reinsured under the
Reinsurance Contract.
5.2 Holding agrees to reimburse the Company for premium taxes on all
business subject hereto.
5.3 If a policy reinsured under the Reinsurance Contract lapses at any
point in time during the first 13 months, Holding agrees to reimburse the
Company an amount equal to the excess, if any, of the total first year service
fee paid by the Company under Section 5.1 on that policy over the total first
year "initial" premium paid on that policy, as defined in the Reinsurance
Contract.
5.4 The Company will pay all payments assessed by the various state
guaranty associations based on the Covered Products business. The Company and
Holding agree that assessments will be sought to be recovered either through
future premium tax offsets or additional margins or inforce business.
SECTION 6 - REPORTS AND REMITTANCES
6.1 Within 10 days after the end of each month, Holding shall provide
the Company with a copy of the report the Company the reinsurer under the
Reinsurance Agreement.
6.2 Within 10 days after the end of each month, Holding shall report
the net written premium hereunder for the month of account and remit the
provision for premium taxes as stipulated in Section 5.
SECTION 7 - STATUS OF HOLDING, ITS EMPLOYEES AND AGENTS
While performing its authorities granted herein, Holding shall be
deemed an independent contractor, as the Company reserves no authority or right
to control Holding's method of performance of its duties and responsibilities
hereunder. No employees of Holding shall be regarded as employees of the
Company, except as may be required by governing statutes.
6
<PAGE>
SECTION 8 - EXAMINATION OF BOOKS AND RECORDS
Holding shall, as often as reasonably requested by the Company, submit
all books and records maintained by Holding pursuant hereto for examination and
review by any authorized representative of the Company and/or its quota share
reinsurers; and Holding shall in all things cooperate and render assistance in
such examination. Holding shall make copies of any such books and records and
furnish them to the Company as may be requested by the Company's
representatives.
SECTION 9 - OWNER OF POLICY FORMS, SUPPLIES AND LICENSES
All policy forms, records and supplies furnished by the Company to
Holding, as well as any policy forms or other supplies on which the Company's
name appears, whether supplied by the Company or not, shall be and remain the
property of the Company and shall be turned over to the Company promptly upon
demand. All licenses and other material relating to governmental licensing or
authorization of the Company with respect to this Agreement shall be and remain
the property of the Company and shall be turned over to the Company by Holding
promptly upon demand.
SECTION 10 - COMMENCEMENT AND TERMINATION
10.1 The effective date of commencement of this Agreement shall be
January 1, 1999, and this Agreement shall continue for a minimum of one year and
will be subject to termination upon either party giving one year advance notice
of cancellation. In the event of the termination of this Agreement, the Company
shall not directly or indirectly (through reinsurance or otherwise) sell any
life or annuity products similar to the Covered Products or the New Insurance
Products during the one year following such termination.
In the event of a termination of this Agreement, Holding may not
directly or indirectly (through reinsurance or otherwise) sell any products
similar to products of the Company other than Covered Products during one year
following such termination.
10.2 If either party fails to perform substantially and materially the
duties and responsibilities set forth in this Agreement or fails to make
required payments hereunder and such failure continues for more than 30 days
after written notice delivered by the other party, the other party may terminate
this Agreement notwithstanding any other provisions to the contrary.
SECTION 11 - ACCESS TO AGENTS
The Company hereby grants to Holding and Insurance the right and
privilege of recruiting the agents of the Company for the purpose of contracting
those agents to sell the products of Insurance in all states in which Insurance
is licensed to sell such products, whether or not the Company is licensed to
sell similar products in those states.
7
<PAGE>
SECTION 12 - MISCELLANEOUS
12.1 This Agreement, and all rights and interests arising herefrom,
shall be binding upon, and shall inure to the benefit of, the parties hereto,
their representatives, successors and assigns, provided that the authorities,
duties and responsibilities of either Holding or the Company may not be assigned
by either of such parties without the written consent of the other.
12.2 This Agreement may not be modified verbally, nor may it be
modified by any subsequent practice or course of dealing by the parties, or in
any manner other than in writing signed by the parties hereto. No forbearance or
neglect on the part of the Company to enforce any of the provisions of this
Agreement shall be construed as a waiver of any of its rights or privileges
hereunder, unless in each instance a written memorandum specifically expressing
such waiver be made and subscribed by the President or a Vice President of the
Company. No such waiver shall modify this Agreement or affect the rights of the
Company with respect to any subsequent default or failure or performance by
Holding.
12.3 This Agreement shall be deemed to be a Minnesota contract and
construed in accordance with the laws of the State of Minnesota.
12.4 This Agreement supersedes all previous agreements with respect to
the subject matter herein, either oral or written, between the parties hereto.
IN WITNESS WHEREOF, the parties hereto by their respective duly
authorized representatives have caused this Agreement to be executed as of
January 1, 1999.
LIFEUSA INSURANCE COMPANY
By: /s/ Mark A. Zesbaugh
----------------
Its Senior Vice President
LTCAMERICA HOLDING, INC.
By: Bradley E. Barks
----------------
Its CFO
8
<PAGE>
EXHIBIT 1
POLICY FORMS
The format of EXHIBIT 1 includes only Policy Forms and Plan Codes. However, this
Agreement shall cover all state variations and qualified and non-qualified
versions of the Policy Forms and Plan Codes in EXHIBIT 1.
PLAN CODE DESCRIPTION
1C-P-Y 1101X Ideal Care - Comprehensive
1F-P-Y 1102X Ideal Care - Facility Care
1H-P-Y 1103X Ideal Care - Home and Community Based
Care
Y = "N" for non-qualified and "Q" for qualified versions
X = State variation code
<PAGE>
SCHEDULE A
TO THE
ADMINISTRATION AND MARKETING AGREEMENT
BETWEEN
LIFEUSA INSURANCE COMPANY
AND
LTCAMERICA HOLDING, INC.
The territory covered by this Agreement includes the following jurisdictions:
All states* except: New York
No other jurisdictions shall be included in the territory covered without the
express written agreement of both parties.
*LTCAmerica Holding, Inc. (and its affiliates) will not act as LifeUSA Insurance
Company's general agent for insurance sales in the State of Connecticut and will
not perform duties nor have responsibilities related thereto under this
Agreement.
EXHIBIT 10.17
INTERESTS AND LIABILITIES AGREEMENT
entered into by and between
LIFEUSA INSURANCE COMPANY
and
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Minneapolis, Minnesota
(hereinafter referred to as the "SUBSCRIBING REINSURER")
IT IS HEREBY AGREED that the SUBSCRIBING REINSURER shall have a 100% share as
respects policies in the interests and liabilities of the "Reinsurer" as set
forth in the attached Coinsurance Agreement entitled:
COINSURANCE AGREEMENT
Effective: January 1, 1999
IT IS FURTHER AGREED that this Interests and Liabilities Agreement shall become
effective on January 1, 1999, with respect to policies issued on or after that
date, and shall continue in force until terminated in accordance with the
provisions of the attached Coinsurance Agreement.
IT IS ALSO AGREED that the SUBSCRIBING REINSURER'S share in the attached
Coinsurance Agreement shall be separate and apart from the shares of the other
reinsurers, and shall not be joint with the shares of the other reinsurers, it
being understood that the SUBSCRIBING REINSURER shall in no event participate in
the interests and liabilities of the other reinsurers.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Interest and Liabilities Agreement as of the
dates undermentioned at:
Minneapolis, Minnesota, this 22nd day of December 1998.
/s/ Linda K. Burm, Senior Vice President and COO
------------------------------------------------------
LIFEUSA INSURANCE COMPANY
Minneapolis, Minnesota, this 22nd day of December 1998.
/s/ Robert S. James, President of Individual Marketing
------------------------------------------------------
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
<PAGE>
COINSURANCE AGREEMENT
Effective: January 1, 1999
between
LIFEUSA INSURANCE COMPANY
Minneapolis, Minnesota
And
The subscribing reinsurers whose respective
INTERESTS AND LIABILITIES AGREEMENTS
ARE ATTACHED HERETO
<PAGE>
TABLE OF CONTENTS
ARTICLE PAGE
- ------- ----
I REINSURANCE COVERAGE.............................................1
II REINSURANCE PREMIUMS.............................................3
III CLAIMS...........................................................3
IV REPORTS AND REMITTANCES..........................................4
V EXPENSES.........................................................6
VI INTEREST ON STATEMENTS AND CLAIMS................................6
VII DAC TAX..........................................................6
VIII OVERSIGHTS.......................................................6
IX REDUCTIONS, TERMINATIONS AND CHANGES.............................6
X ACCESS TO RECORDS................................................7
XI UNAUTHORIZED REINSURERS..........................................8
XII INSOLVENCY.......................................................8
XIII ARBITRATION......................................................8
XIV RECAPTURE........................................................9
XV REINSTATEMENTS...................................................9
XVI PARTIES TO THE AGREEMENT.........................................9
XVII SCOPE AND DURATION OF AGREEMENT..................................9
XVIII OFFSET..........................................................10
XIX WRITTEN AGREEMENT...............................................10
XX INTERMEDIARY....................................................10
EXHIBIT I.......................................................11
EXHIBIT II......................................................12
EXHIBIT III.....................................................13
EXHIBIT IV......................................................14
EXHIBIT V.......................................................16
<PAGE>
COINSURANCE AGREEMENT
Effective: January 1, 1999
between
LIFEUSA INSURANCE cOMPANY
Minneapolis, Minnesota
(hereinafter referred to as the "Company")
and
THE SUBSCRIBING REINSURERS WHOSE RESPECTIVE
INTERESTS AND LIABILITIES AGREEMENTS
ARE ATTACHED HERETO
(hereinafter referred to as the "Reinsurer")
This Agreement, effective January 1, 1999, is made between the Company and the
Reinsurer as follows:
ARTICLE I - REINSURANCE COVERAGE
A. The Company's individual life insurance, annuities and health insurance,
with a focus towards long term care, issued on the policy forms
specified in Exhibit I shall be reinsured automatically with the
Reinsurer, provided it meets the following requirements:
1. Policy issued according to the Company's then existing regular
new risk underwriting rules.
2. Mortality ratings from Standard to Table 16 (P), inclusive.
3. Issue age 80 or below for life insurance, issue age 85 or below
for annuities, and issue age between 18 and 84 for long term
care insurance.
4. Resident of the United States or Canada.
5. Risk has not been submitted to the Reinsurer for facultative
reinsurance.
6. Company retains the coinsurance percentage specified in Exhibit
II.
7. The face amount of life insurance then applied for in all
companies, including the Company on the life, when added to the
face amount then in force in all companies including the Company
on that life, shall not exceed $2,500,000. For accidental death
benefits, the amount shall not exceed $300,000.
8. The maximum amount to be reinsured automatically on any one life
shall not exceed $500,000 for life insurance and $1,000,000 for
annuities.
<PAGE>
B. If the insurance does not meet the automatic requirements specified in
paragraph A, the Company may submit an application for facultative
reinsurance. An application for facultative reinsurance shall be made by
submitting to the Reinsurer a "Preliminary Application for Reinsurance,"
Exhibit III, together with copies of all papers pertaining to the
insurability of the risk. The Reinsurer shall have the option of
accepting or rejecting or rating any application for facultative
reinsurance. The Reinsurer shall promptly notify the Company of its
underwriting action after the Reinsurer has examined the evidence of
insurability submitted.
If the amounts of life insurance issued and applied for in all companies
is less than $1,500,000, the Company shall submit the information
required in the preceding paragraph to Allianz Life Insurance Company of
North America as the designated lead underwriter for the Reinsurer, and
Allianz Life's underwriting decision shall be binding on the Reinsurer.
If the amount of life insurance issued and applied for in all companies
is $1,500,000 or more, the Company shall submit the information required
in the second preceding paragraph to each reinsurer with an Interests
and Liabilities Agreement to this Agreement, and each reinsurer shall
promptly notify the Company of its underwriting action.
C. The liability of the Reinsurer shall begin on the effective date of the
Company's liability on each policy reinsured hereunder. A policy
reinsured hereunder shall be any policy for which the Company assigned
its policy number after the effective date of this Agreement. However,
the Reinsurer's liability for facultative reinsurance on a risk shall
not commence before the Reinsurer has accepted the application for
reinsurance. In no event shall the reinsurance be in force and binding
unless the issuance and delivery of such insurance constituted the doing
of business in the United States of America in a jurisdiction in which
the Company was properly licensed.
D. Reinsurance shall be coinsurance and shall follow the policy forms and
rates of the Company. The Company has furnished the Reinsurer with
copies of its policy forms, applications, rates and values and shall
submit to the Reinsurer policy modifications or new policy forms before
reinsurance shall become effective hereunder.
E. The Reinsurer's share of a policy reinsured hereunder shall remain
unchanged so long as the policy issued by the Company remains in force,
except as provided in ARTICLE VIII - REDUCTIONS, TERMINATIONS AND
CHANGES.
F. Receipt by the Reinsurer of the initial reinsurance premium and of each
subsequent reinsurance premium, in accordance with the provisions of
ARTICLE IV - REPORTS AND REMITTANCES of this Agreement shall be a
condition to the Reinsurer's continuing liability for reinsurance of
each policy reinsured.
G. The Company shall inform the Reinsurer of any reinsurance by means of
the monthly accounting report as described in ARTICLE IV - REPORTS AND
REMITTANCES.
H. If a policy reinsured is changed to a plan of insurance not included in
Exhibit I, reinsurance under this Agreement shall continue only with the
written agree-
- 2 - 02/23/99
<PAGE>
ment of the Reinsurer, except as provided in paragraph A of ARTICLE VIII
- REDUCTIONS, TERMINATIONS AND CHANGES.
I. The Reinsurer shall establish and assume liability for all statutory
reserves, as required under law by the State of Minnesota, in proportion
to the Reinsurer's liability for reinsurance on each policy reinsured.
ARTICLE II - REINSURANCE PREMIUMS
A. The Company shall pay the Reinsurer as reinsurance premiums, the
reinsured portion of the premiums and deposits received by the Company
from its insureds, including the policy fee.
B. The Reinsurer shall pay the Company the allowances described in Exhibit
IV.
C. The Reinsurer shall not reimburse the Company for the amount of any
premium taxes.
D. The Company will pay all payments assessed by the various state guaranty
associations based on the Covered Products business. The Reinsurer will
reimburse the Company for the Reinsurer's share of such assessments and
participate in any premium tax offsets based on the coinsurance
percentages in Exhibit II. The Company and Reinsurer agree that
assessments will be sought to be recovered either through future premium
tax offsets or additional margins on inforce business.
ARTICLE III - CLAIMS
The Reinsurer shall reimburse the Company for the reinsured portion of all
claims. Reinsured claims shall be reported by the Company and paid by the
Reinsurer on the following basis:
A. The Reinsurer shall be liable to the Company for the insurance benefits
reinsured under this Agreement as the Company shall be liable for such
benefits. All reinsurance claim settlements shall be subject to the
terms and conditions of the particular form of contract under which the
Company is liable.
B. When the Company is advised of a claim, it shall promptly notify the
Reinsurer.
C. The Company shall submit to the Reinsurer a copy of each paper connected
with the claim to the extent that such papers are requested by the
Reinsurer in accordance with criteria established from time to time by
the Reinsurer. After reviewing such claim papers, the Reinsurer shall
give its opinion as to how it would have handled the claim had it been a
claim of the Reinsurer. The Reinsurer shall give its opinion within ten
working days after the Reinsurer shall have received a copy of each
paper connected with the claim. If no response is received within this
ten-day period, it will be presumed the Reinsurer is agreeable to
payment of the claim.
D. Payment of reinsurance proceeds shall be on the same basis as settlement
is made by the Company under the policy reinsured hereunder.
- 3 - 02/23/99
<PAGE>
E. The Company shall promptly notify the Reinsurer of its intention to
contest insurance reinsured under this Agreement or to assert defenses
to a claim for such insurance. If the Company's contest of such
insurance results in the reduction of its liability, the Reinsurer's
share of such reduction shall be the percentage set forth in Exhibit II,
based on the date the policy was first reinsured under this Agreement.
If the Reinsurer should decline to participate in the contest or
assertion of defenses, the Reinsurer then shall discharge all of its
liability by the payment of the full amount of reinsurance to the
Company, and the Reinsurer shall not share in any subsequent reduction
in liability.
F. If the amount of insurance provided by a policy reinsured under this
Agreement is increased or reduced because of a misstatement of age or
sex established at claim of the insured, the Reinsurer's share of such
increase or reduction shall be the percentage set forth in Exhibit II,
based on the date the policy was first reinsured under this Agreement.
G. The Company alone shall pay the routine expenses incurred in connection
with settling claims. These expenses may include compensation of agents
and employees and the cost of routine investigations.
H. The Reinsurer shall share with the Company all expenses which are not
routine. Expenses which are not routine shall be those directly incurred
in connection either with the contest of insurance or the assertion of
defenses to insurance or with the possibility of a contest or assertion
of defenses. The Reinsurer's share of these expenses shall be the
percentage set forth in Exhibit II, based on the date the policy was
first reinsured under this Agreement. However, if the Reinsurer has
discharged its liability under paragraph E of this Article, the
Reinsurer shall not share in any expenses incurred after the date it has
discharged its liability. The term "claim expenses" shall mean statutory
interest payable on insurance proceeds, court costs, interest upon
judgments, and allocated investigation, adjustment and legal expenses,
but the term "claim expenses" shall not include salaries paid to
employees of the Company.
I. Any particular reinsurer shall be obligated to reimburse the Company for
the percentage set forth in that reinsurer's Interests and Liabilities
Agreement of any amount paid by the Company for punitive, exemplary or
compensatory damages arising out of the conduct of the Company in the
investigation, trial or settlement of any claim or failure to pay or
delay in payment of any benefit under a policy reinsured by this
Agreement, but only if that particular reinsurer shall have, in advance
of any such conduct by the Company, counseled with the Company and
concurred in the Company's course of conduct.
ARTICLE IV - REPORTS AND REMITTANCES
The following rules for Monthly Reinsurance Accounting are required:
A. The reinsurance premiums required under this Agreement shall be payable
to the Reinsurer on the same basis as the insurance premiums and
deposits are payable to the Company.
- 4 - 02/23/99
<PAGE>
B. Within ten days following the close of each month, the Company shall
provide the Reinsurer with a statement listing the total and the
reinsured portions of all premiums, deposits, refunds, allowances,
claims, surrender benefits, policy loans, reserves and other mutually
agreed upon items applicable to the month just ended. The format and
methods of calculation of such items shall be in a form mutually
acceptable to all parties.
C. For administrative purposes only, if a statement shows that a net
balance is payable to the Reinsurer, the Company shall include with the
statement its payment for the amount of the net balance due the
Reinsurer. If payment for the full amount of the net balance due the
Reinsurer is not included with the statement, the reinsurance premiums
for all of the risks listed on the statement shall be in default. If a
statement shall not be received by the Reinsurer within thirty days
after the close of the month, the reinsurance premiums for all of the
risks that would have been listed on such a statement shall be in
default.
Also for administrative purposes only, if a statement shows that a net
balance is payable to the Company, the Reinsurer shall pay to the
Company the amount of the net balance within thirty days after the day
on which the Reinsurer receives the monthly statement from the Company.
D. It is the understanding of both parties that both parties desire the
payment of net balances due no less frequently than weekly. Either party
may, at its option and with the cooperation and consent of the other
party, implement appropriate procedures designed to accomplish such
transfers along with the appropriate statements. Such procedures may
involve the establishment of special bank accounts and the use of wires,
express mail or equivalent means. The establishment of such procedures,
however, does not remove from either party any of the rights or
obligations set forth in the other paragraphs of this Article.
E. The Reinsurer shall have the right to terminate the reinsurance on risks
for which reinsurance premiums are in default by giving ninety days
written notice of termination to the Company. As of the close of the
last day of this ninety-day notice period, all of the Reinsurer's
liability for reinsurance on risks which are the subject of the
termination notice shall terminate unless the Reinsurer shall have been
paid the amount in default prior to that time.
Notwithstanding termination of reinsurance as provided by this
paragraph, the Company shall continue to be liable to the Reinsurer for
all unpaid reinsurance premiums earned by the Reinsurer under this
Agreement.
F. There shall be no reinstatement of reinsurance terminated under
paragraph E of this Article.
G. The first day of the ninety-day notice of termination under paragraph E
of this Article shall be the day the notice shall be deposited in the
mail addressed to the Company's Home Office, or, if the mail is not
used, the day it is delivered to the Company's Home Office or to an
Officer of the Company.
H. Within thirty days following the close of each calendar quarter, the
Company shall prepare and submit to the Reinsurer an in force listing of
all risks reinsured under this Agreement setting forth pertinent data
mutually agreed upon by all parties.
- 5 - 02/23/99
<PAGE>
I. All amounts payable under this Agreement shall be payable in the lawful
money of the United States; except, however, that they shall be payable
in the lawful money of Canada if the Company's insurance is based on
Canadian currency.
ARTICLE V - EXPENSES
The Company shall bear the expense of all medical examinations, inspection fees
and other charges incurred in connection with the issuance of the Company's
insurance policies reinsured.
ARTICLE VI - INTEREST ON STATEMENTS AND CLAIMS
A. Interest accrual on all amounts owed from one party to the other begins
on the tenth day following the end of the month. All interest credited
shall be simple interest.
B. This arrangement shall take effect beginning with the January 1999
statement. Interest accrual for the January 1999 statement shall begin
on February 10, 1999.
C. On the twentieth day of the month preceding the end of each calendar
quarter (on the following business day if the twentieth day falls on a
weekend or holiday), the interest rate shall be established which shall
apply to any statements or claims due during the following calendar
quarter.
D. The interest rate shall be the three-month Treasury Bill rate as stated
in the Wall Street Journal.
ARTICLE VII - DAC TAX
The Company and the Reinsurer hereby agree that any DAC tax paid and credits
received pursuant to Section 848 of the Internal Revenue Code of 1986 as a
result of the Reinsured Policies will be shared proportionally according to the
coinsurance percentages in Exhibit II.
ARTICLE VIII - OVERSIGHTS
It is understood and agreed that if failure to comply with the terms of this
Agreement is shown to be unintentional and the result of a misunderstanding or
oversight on the part of either the Company or the Reinsurer, both the Company
and the Reinsurer shall be restored to the positions they would have occupied
had no such misunderstanding or oversight occurred, provided the failure is
rectified within a reasonable time after discovery.
ARTICLE IX - REDUCTIONS, TERMINATIONS AND CHANGES
A. If there is a contractual or non-contractual replacement or change in
the insurance reinsured under this Agreement, the insurance shall
continue to be reinsured with the Reinsurer.
B. If the insurance reinsured under this Agreement increases and:
- 6 - 02/23/99
<PAGE>
1. The increase is subject to new underwriting evidence, the
provisions of ARTICLE I - REINSURANCE COVERAGE shall apply to
the increase in reinsurance.
2. The increase is not subject to new underwriting evidence, the
Reinsurer shall accept automatically the increase in
reinsurance, provided that the total amount ceded does not
exceed the Reinsurer's automatic binding limit.
C. If the amount of insurance provided by a policy reinsured under this
Agreement is increased or reduced, the Reinsurer's share of such
increase or reduction shall be the percentage set forth in Exhibit II,
based on the date the policy was first reinsured under this Agreement.
D. If insurance reinsured under this Agreement is increased or reduced, the
Reinsurer's share of any adjustments to cash values, reserves, policy
loans, or other shared values shall be the percentage set forth in
Exhibit II, based on the date the policy was first reinsured under this
Agreement.
E. If insurance reinsured under this Agreement is terminated, the
reinsurance for the individual risk involved shall be terminated on the
effective date of termination.
F. On facultative reinsurance, if the Company wishes to reduce the
mortality rating, this reduction shall be reunderwritten on a
facultative basis under the facultative provisions of this Agreement.
G. The Reinsurer shall refund to the Company all unearned reinsurance
premiums not including policy fees, less applicable allowances, arising
from reductions, terminations and changes as described in this Article.
H. If there is a contractual or non-contractual replacement or change in
the insurance reinsured under this Agreement, the reinsurance allowances
set forth in Exhibit IV shall be calculated, based on policy duration
from the original date of issue, unless full new underwriting evidence
according to the Company's regular underwriting rules is required. If
such evidence is required, then the reinsurance allowance shall be based
on the effective date of the replacement or change, but only in the
proportion and to the extent that full first year compensation is
payable, and subject to approval of the Reinsurer.
ARTICLE X - ACCESS TO RECORDS
A. The Reinsurer, by its duly authorized and appointed representatives,
shall have the right at any reasonable time to examine at the office of
the Company or the offices of any of the agencies which produce business
for the Company, all papers and documents relating to reinsurance under
this Agreement.
B. At least once each year, the independent auditors of the Company shall
perform certain confirmation procedures, agreed upon by the Company and
the Reinsurer, in connection with the reinsurance. A copy of the report
of the independent auditor shall be furnished to the Reinsurer.
- 7 - 02/23/99
<PAGE>
ARTICLE XI - UNAUTHORIZED REINSURERS
The Reinsurer agrees to fund its share of the Company's ceded statutory reserves
by:
1. Escrow or trust accounts for the benefit of the Company; and/or
2. Cash advances;
if, without such funding, a penalty would accrue to the Company on any financial
statement it is required to file with the insurance regulatory authorities
involved.
ARTICLE XII - INSOLVENCY
A. In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company or to its liquidator, receiver,
conservator or statutory successor immediately upon demand, with
reasonable provision for verification, on the basis of the liability of
the Company without diminution because of the insolvency of the Company
or because the liquidator, receiver, conservator or statutory successor
of the Company has failed to pay all or a portion of any claim. It is
agreed, however, that the liquidator, receiver, conservator or statutory
successor of the Company shall give written notice to the Reinsurer of
the pendency of a claim against the Company indicating the policy or
bond reinsured which claim would involve a possible liability on the
part of the Reinsurer within a reasonable time after such claim is filed
in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its liquidator,
receiver, conservator or statutory successor. The expense thus incurred
by the Reinsurer shall be chargeable, subject to the approval of the
Court, against the Company as part of the expense of conservation or
liquidation to the extent of a pro rata share of the benefit which may
accrue to the Company solely as a result of the defense undertaken by
the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the
expense shall be apportioned in accordance with the terms of this
Agreement as though such expense had been incurred by the Company.
ARTICLE XIII - ARBITRATION
A. It is the intention of the parties that customs and usages of the
business of reinsurance shall be given full effect in the interpretation
of this Agreement. The parties shall act in all things with the highest
good faith. A dispute or difference between the parties with respect to
the operation or interpretation of this Agreement on which an amicable
understanding cannot be reached shall be decided by arbitration. The
arbitrators are empowered to decide all questions or issues and shall be
free to reach their decisions from the standpoint of equity and
customary practices of the insurance and reinsurance industry rather
than from that of strict law.
B. There shall be three arbitrators who shall be active or retired officers
of life insurance companies other than the contracting companies or
their affiliates.
- 8 - 02/23/99
<PAGE>
Each of the contracting companies shall appoint one of the arbitrators
and these two arbitrators shall select the third. In the event that
either contracting company should fail to choose an arbitrator within
thirty days after the other contracting company has given notice of its
arbitrator appointment, that contracting company may choose two
arbitrators, who shall in turn choose a third arbitrator before entering
arbitration. If the two arbitrators are unable to agree upon the
selection of a third arbitrator within thirty days following their
appointment, each arbitrator shall nominate three candidates within ten
days thereafter, two of whom the other shall decline and the decision
shall be made by drawing lots.
C. The arbitrators shall decide by a majority of votes and from their
written decision there can be no appeal. Within 45 days after the
closing of the arbitration hearings, the decisions of the arbitrators
will be presented to the parties to the arbitration. The cost of
arbitration, including the fees of the arbitrators, shall be borne by
the losing party unless the arbitrators decide otherwise.
ARTICLE XIV - RECAPTURE
Unless otherwise mutually agreed by the parties to this Agreement, insurance
reinsured under this Agreement shall not be eligible for recapture.
ARTICLE XV - REINSTATEMENTS
If insurance shall lapse for nonpayment of premium and if it is reinstated in
accordance with its terms and the rules of the Company, the applicable
reinsurance shall be reinstated by the Reinsurer, subject to the condition that
the Company shall pay to the Reinsurer all reinsurance premiums in the same
manner as the Company shall receive its premiums under its policy.
ARTICLE XVI - PARTIES TO THE AGREEMENT
This Agreement is for indemnity reinsurance solely between the Company and the
Reinsurer. The acceptance of reinsurance shall not create any right or legal
relation whatever between the Reinsurer and the insured or any other person
having an interest in any kind of insurance issued by the Company.
ARTICLE XVII - SCOPE AND DURATION OF AGREEMENT
A. This Agreement shall be effective on January 1, 1999. This Agreement
will remain in place at least as long as the Credit Agreement, dated
December 22, 1998, between CAPITAL BANKERS LIFE INSURANCE COMPANY and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION remains in place. During
this period, ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA will
reinsure at least 25% of the business written by CAPITAL BANKERS LIFE
INSURANCE COMPANY. This Agreement may be terminated with respect to new
business to be reinsured thereafter at any time, subject to paragraph B
of this Article, by either party giving ninety days written notice of
termination to the other party. Reinsurance of policies in force on the
date of termination shall remain in force until the extinction of the
Company's liability under the policies reinsured.
- 9 - 02/23/99
<PAGE>
B. Notwithstanding the provisions of paragraph A of this Article, if the
Reinsurer terminates this Agreement with respect to new reinsurance and
the Company has not arranged for a replacement reinsurer for new
reinsurance prior to the date of termination under paragraph A of this
Article, the Company may, by written notice to the Reinsurer prior to
expiration of the ninety day period referred to in paragraph A of this
Article, require that this Agreement shall continue in effect for up to
an additional ninety days.
ARTICLE XVIII - OFFSET
Any debts or credits, liquidated or unliquidated, in favor of or against either
the Reinsurer or the Company with respect to this Agreement only shall be
set-off and only the balance shall be allowed or paid.
ARTICLE XIX - WRITTEN AGREEMENT
A. This Agreement shall constitute the entire Agreement between the parties
with respect to the business being reinsured hereunder, and there are no
other understandings between the parties other than as expressed in this
Agreement.
B. Any change or modification to this Agreement shall be null and void
unless made by amendment to this Agreement and signed by both parties.
ARTICLE XX - INTERMEDIARY
Reinsurance Alternatives - Reinsurance Intermediaries, 7900 Xerxes Avenue South,
Minneapolis, Minnesota 55431, is hereby recognized as the intermediary with
regard to this Agreement.
- 10 - 02/23/99
<PAGE>
EXHIBIT I
COINSURANCE AGREEMENT
Effective: January 1, 1999
between
LIFEUSA INSURANCE COMPANY
Minneapolis, Minnesota
And The Reinsurers
The format of EXHIBIT I includes only Policy Forms and Plan Codes. However, this
Agreement shall coinsure all state variations and qualified and non-qualified
versions of the Policy Forms and Plan Codes in EXHIBIT I.
PLAN CODE DESCRIPTION
1C - P - Y 1101X Ideal Care - Comprehensive
1F - P - Y 1102X Ideal Care - Facility Care
1H - P - Y 1103X Ideal Care - Home and Community
Based Care
Y = "N" for non-qualified and "Q" for qualified versions
X = State variation code
- 11 - 02/23/99
<PAGE>
EXHIBIT II
COINSURANCE AGREEMENT
Effective: January 1, 1999
between
LIFEUSA INSURANCE COMPANY
Minneapolis, Minnesota
And The Reinsurers
COINSURANCE PERCENTAGES
For all policies reinsured under this Agreement, the Company and the Reinsurer
shall share the risks in accordance with the following schedule of coinsurance
percentages:
Policies First Company's Reinsurer's
Reinsured Between: Share Share
----------------------- --------- -----------
01/01/99 and Thereafter 0.00% 100.0%
- 12 - 02/23/99
<PAGE>
EXHIBIT III
COINSURANCE AGREEMENT
Effective: January 1, 1999
between
LIFEUSA INSURANCE COMPANY
Minneapolis, Minnesota
And The Reinsurers
Exhibit III will consist of the Preliminary Application for Reinsurance to be
agreed by the Reinsurers. Copy of the Preliminary Application for Reinsurance
used by LifeUSA Insurance Company will be Exhibit III.
- 13 - 02/23/99
<PAGE>
EXHIBIT IV
COINSURANCE AGREEMENT
Effective: January 1, 1999
between
LIFEUSA INSURANCE COMPANY
Minneapolis, Minnesota
And The Reinsurers
ALLOWANCES
The REINSURER shall pay to the COMPANY an allowance equal to the coinsurance
percentage reinsured multiplied by the following allowances:
I. Ideal Care - Comprehensive, Facility Care, Home and Community Based Care
1. Per policy allowances
A. ISSUE ALLOWANCE
----------------------- -----------------------------
ISSUE AGE ALLOWANCE AT ISSUE
----------------------- -----------------------------
< 65 $35
----------------------- -----------------------------
65 - 74 $105
----------------------- -----------------------------
75+ $245
----------------------- -----------------------------
B. MAINTENANCE ALLOWANCE: $30 All Years
- 14 - 02/23/99
<PAGE>
2. Percent of premium allowances
A. PLANS OTHER THAN COMPOUND INFLATION PLAN:
- ------------------- ------------------ ------------------ ------------------
ISSUE AGE YR 1 YRS 2-10 YRS 11+
--------- ---- -------- -------
- ------------------- ------------------ ------------------ ------------------
40-44 119.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
45-49 114.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
50-54 109.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
55-59 104.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
60-64 99.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
65-69 94.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
70-74 89.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
75-79 84.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
80+ 79.7% 23.0% 13.0%
- ------------------- ------------------ ------------------ ------------------
B. COMPOUND INFLATION PLANS:
- ------------------- ------------------ ------------------ ------------------
ISSUE AGE YR 1 YRS 2-10 YRS 11+
--------- ---- -------- -------
- ------------------- ------------------ ------------------ ------------------
40-44 116.8% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
45-49 111.8% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
50-54 106.8% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
55-59 101.8% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
60-64 96.8% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
65-69 92.2% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
70-74 87.5% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
75-79 82.9% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
80+ 78.2% 22.3% 12.3%
- ------------------- ------------------ ------------------ ------------------
3. Claim Allowance: 5% of incurred claims
- 15 - 02/23/99
<PAGE>
EXHIBIT V
COINSURANCE AGREEMENT
Effective: January 1, 1999
between
LIFEUSA INSURANCE COMPANY
Minneapolis, Minnesota
And The Reinsurers
LINESLIP
As of January 1, 1999, LifeUSA Insurance Company of Minneapolis, Minnesota,
entered into a Coinsurance Agreement (the "Agreement") with Allianz Life
Insurance Company of North America of Minneapolis, Minnesota. For the purposes
of this Letter of Understanding, the reinsurer will be referred to as the
LifeUSA Lineslip ("Lineslip").
The Agreement provides, among other things, for reinsurance commissions and
reinsurance allowances to be paid by the Lineslip to LifeUSA, as provided in
Exhibit IV to the Agreement. This Letter of Understanding acknowledges that
those allowances were developed in such a way as to provide the Lineslip with an
agreed rate of return, based on assumptions provided by LifeUSA and based on a
methodology agreed to by the Lineslip.
The Lineslip reinsurers will participate in certain aspects of managing the
profitability of the policies reinsured under the Agreement as members of a
Product Management Committee which will, among other things, advise LifeUSA as
to investment strategy, agree to an algorithm for determining the rate of
interest to be credited to policyholders by LifeUSA, agree to underwriting
guidelines by LifeUSA, and agree to the cost of insurance and premium rates
charged to new and existing policyholders by LifeUSA.
This Letter of Understanding acknowledges that if LifeUSA unilaterally decides
to take an action, or to not take an action, which is outside the agreed
parameters, without agreement by the Product Management Committee, and if such
action or inaction continues for three months after the Product Management
Committee has notified LifeUSA of its recommendation, the reinsurance shall be
repriced. LifeUSA shall have an obligation to adjust ongoing reinsurance terms
to reestablish the rates of return to the Lineslip as originally agreed.
If the terms of this Letter of Understanding are in conflict with any state
insurance regulations which would preclude LifeUSA from taking reserve credits
in its Statutory Annual Statement for the reinsurance under the Agreement, the
terms of this Letter of Understanding will be deemed to conform with those
statutes in such a way that (1) LifeUSA may take full credit for the reinsured
statutory reserves and (2) the spirit of this Letter of Understanding is
maintained consistent with (1).
- 16 - 02/23/99
EXHIBIT 10.18
RETROCESSION AGREEMENT
EFFECTIVE: JANUARY 1, 1999
ISSUED TO
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
MINNEAPOLIS, MINNESOTA
(HEREINAFTER REFERRED TO AS THE "REINSURER")
BY
LIFEUSA INSURANCE COMPANY
MINNEAPOLIS, MINNESOTA
(HEREINAFTER REFERRED TO AS THE "RETROCESSIONAIRE")
BY THIS AGREEMENT, the Reinsurer obligates itself to retrocede to the
Retrocessionaire and the Retrocessionaire obligates itself to accept a quota
share part of the Reinsurer's interests and liabilities, as respects Life
Insurance, Annuity and Health Insurance business under the Coinsurance
Agreement, effective January 1, 1999, issued to LifeUSA Insurance Company and
the Coinsurance Agreement effective January 1, 1999 issued to Capitol Bankers
Life Insurance Company (hereinafter referred to as the "Original Contracts").
The quota share part shall be 25% with respect to all business. Copies of the
Original Contracts are attached to and forms part of this Agreement.
ARTICLE I - COMMENCEMENT AND TERMINATION
A. This Agreement shall become effective on January 1, 1999, with
respect to policies reinsured under the Original Contracts on or after that
date, and it shall continue in force thereafter until terminated.
B. This Agreement shall terminate with respect to new business written
under the Original Contracts on the dates that the Original Contracts terminate
with respect to new business. Business covered under the Original Contracts and
retroceded hereunder on or prior to the effective date of termination shall
remain in full force and effect until expiration or cancellation of such
business, whichever first occurs. However, it is understood and agreed that if
the Original Contracts are terminated for any reason, coverage under this
Agreement, as respects the terminated Contract, shall expire automatically at
the same time and in the same manner.
ARTICLE II - CONCURRENCY OF CONDITIONS
This Agreement shall follow in all respects the terms and conditions of
the Original Contracts (including addenda thereto when accepted by the
Retrocessionaire), provided the terms and conditions of the Original Contracts
are not inconsistent with the terms and conditions of this Agreement. The
Reinsurer agrees to transmit all notices and information pertaining to the
<PAGE>
subject matter of this Agreement as promptly as possible after receipt thereof
on forms mutually agreed as requested by the Retrocessionaire.
ARTICLE III - PREMIUM AND COMMISSIONS
A. As premium for the reinsurance provided hereunder, the Reinsurer
shall retrocede the Retrocessionaire's pro rata share of the premiums ceded to
the Reinsurer under the Original Contracts.
B. The Retrocessionaire shall allow the Reinsurer retrocession
allowances equal to those granted under the Original Contracts.
C. The premium due the Retrocessionaire (less retrocession allowances
thereon) shall be remitted by the Reinsurer as promptly as possible after the
Reinsurer receives its premiums under the Original Contracts.
ARTICLE IV - CLAIMS AND BENEFITS
A. The Retrocessionaire shall be liable for its pro rata share of all
policy claims and benefits the Reinsurer pays or allows under the Original
Contracts, and the Retrocessionaire shall pay its pro rata share of any such
policy claims and benefits promptly following receipt of reasonable evidence of
the amount paid (or scheduled to be paid) by the Reinsurer as requested by the
Retrocessionaire.
B. The Retrocessionaire shall receive its pro rata share of all
recoveries made by the Reinsurer in respect of policy claims and benefits
subject to this Agreement.
C. The Retrocessionaire will be liable for or shall receive its pro
rata share of DAC Tax, Guaranty Fund Assessments and corresponding offsets and
credits as described under the Original Contracts.
ARTICLE V - ACCESS TO RECORDS
The Retrocessionaire, by its duly appointed representatives, shall have
the right at any reasonable time to examine all papers in the possession of the
Reinsurer referring to business effected hereunder.
ARTICLE VI - UNAUTHORIZED RETROCESSIONAIRES
The Retrocessionaire agrees to fund its share of the Reinsurer's
retroceded statutory reserves by:
1. Escrow or trust accounts for the benefit of the
Reinsurer; and/or
2. Cash advances;
2
<PAGE>
if, without such funding, a penalty would accrue to the Reinsurer on any
financial statement it is required to file with the insurance regulatory
authorities involved.
ARTICLE VII - INSOLVENCY
A. In the event of the insolvency of the Reinsurer, all reinsurance
shall be payable on the basis of the policies reinsured directly to its
liquidator, receiver, conservator or statutory successor, without diminution
because of the insolvency of the Reinsurer or because such liquidator, receiver,
conservator or statutory successor has failed to pay all or a portion of any
claim.
B. In the event of the insolvency of the Reinsurer, the liquidator,
receiver, conservator or statutory successor shall give the Retrocessionaire
written notice of the pendency of a claim on a policy reinsured within a
reasonable time after such claim is filed in the insolvency proceeding. During
the pendency of a claim, the Retrocessionaire may investigate such claim and
interpose in the name of the Reinsurer, its liqudator, receiver, conservator or
statutory successor, but at its own expense, in the proceeding where such claim
is to be adjudicated, any defense or defenses which the Retrocessionaire may
deem available to the Reinsurer or its liquidator, receiver, conservator or
statutory successor.
C. The expense thus incurred by the Retrocessionaire shall be
chargeable, subject to court approval, against the Reinsurer as part of the
expenses of conservation, liquidation or insolvency to the extent of a
proportionate share of the benefit which may accrue to the Reinsurer solely as a
result of the defense undertaken by the Retrocessionaire. Where two or more
retrocessionaires are involved in the same claim and a majority in interest
elect to interpose a defense or defenses to such claim, the expense shall be
apportioned as though such expense had been incurred by the Reinsurer.
ARTICLE VIII - ARBITRATION
A. It is the intention of the parties that customs and usages of the
business of reinsurance shall be given full effect in the interpretation of this
Agreement. The parties shall act in all things with the highest good faith. A
dispute or difference between the parties with respect to the operation or
interpretation of this Agreement on which an amicable understanding cannot be
reached shall be decided by arbitration. The arbitrators are empowered to decide
all questions or issues and shall be free to reach their decisions from the
standpoint of equity and customary practices of the insurance and reinsurance
industry rather than from that of strict law.
B. There shall be three arbitrators who shall be active or retired
officers of life insurance companies other than the contracting companies or
their affiliates. Each of the contracting companies shall appoint one of the
arbitrators and these two arbitrators shall select the third. In the event that
either contracting company should fail to choose an arbitrator within thirty
days after the other contracting company has given notice of its arbitrator
appointment, that contracting company may choose two arbitrators, who shall in
turn choose a third arbitrator
3
<PAGE>
before entering arbitration. If the two arbitrators are unable to agree upon the
selection of a third arbitrator within thirty days following their appointment,
each arbitrator shall nominate three candidates within ten days thereafter, two
of whom the other shall decline and the decision shall be made by drawing lots.
C. The arbitrators shall decide by a majority of votes and from their
written decision there can be no appeal. The cost of arbitration, including the
fees of the arbitrators, shall be borne by the losing party unless the
arbitrators decide otherwise.
ARTICLE IX - INTERMEDIARY
Reinsurance Alternatives - Reinsurance Intermediaries, 7900 Xerxes
Avenue South, Minneapolis, Minnesota 55431, is hereby recognized as the
intermediary with regard to this Agreement.
IN WITNESS WHEREOF, the parties hereto by their respective duly
authorized representatives have executed this Agreement as of the date
undermentioned at:
Minneapolis, Minnesota, this 22nd day of December, 1998.
ALLIANZ LIFE INSURANCE
COMPANY OF NORTH AMERICA
By: Robert S. James
-----------------------------------
Its: President of Individual Marketing
-----------------------------------
LifeUSA INSURANCE COMPANY
By: Mark A. Zesbaugh
-----------------------------------
Its: Senior Vice President
-----------------------------------
4
EXHIBIT 10.19
MASTER AGREEMENT
for
CASH MANAGEMENT SERVICES
This Master Agreement for Cash Management Services ("Agreement") is entered into
this 17th day of February, 1999 between NORWEST BANK SOTA, NATIONAL ASSOCIATION
(the "Bank") and the undersigned customer LTCAmerica Holding, Inc. ("the
Company").
The Bank offers and provides certain cash management services to its commercial
customers, and the Company anticipates that it will from time to time engage the
Bank to perform all or some cash management services under this Agreement (the
"Services").
The Bank and the Company agree:
1. SCOPE OF THE SERVICES. The Bank shall provide the Company with the cash
management services set forth below and those additional Services
subsequently agreed to by the Bank. The Services are described in
general terms in separate writings which are specifically incorporated
into this Agreement (the "Product Descriptions"). The Company agrees to
the terms and conditions contained in the applicable Product
Description(s); the Bank's user guide (the "Guide"), if any, for each
Service it requests; and the Bank's terms and conditions applicable to
each account affected by the Services (the "Account Terms"). Delivery
and use of a Service shall be conclusively deemed to be agreement to
the provisions contained in the applicable Product Description and
Guide. The Bank may amend a Product Description, a Guide, or the
Account Terms from time to time upon fourteen (14) days prior written
notice. The Company acknowledges receiving a copy of the Account Terms
and of the Product Description and Guide, if any, for the Services it
has initially requested.
2. PERFORMANCE OF THE SERVICES. The Bank shall perform the Services in
accordance with reasonable commercial standards applicable to the
Bank's business, in conformity with rules, regulations or laws
governing the activities of the Bank, and in accordance with this
Agreement.
3. TERM. This agreement shall continue in effect unless terminated by
either party upon sixty (60) days prior written notice. The Bank may
immediately terminate this Agreement without notice to the Company if
the Company files, or has filed against it, a petition under the U.S.
Bankruptcy Code or a similar state or federal law. Each additional
Service shall commerce within a reasonable time after the Bank agrees
to provide it and shall continue in effect until terminated by written
notice or termination of this Agreement.
4. SERVICE FEES; TAXES; INVOICE; PAYMENT. The Company agrees to pay the
Bank for the Services in accordance with the Bank's fee schedule(s).
The Bank may modify its fee schedule(s) at any time upon prior notice.
The Company also agrees to pay an amount equal to any taxes applicable
to the Services, however designated, exclusive of taxes
<PAGE>
based on the net income of the Bank. Except as otherwise agreed in
writing, all fees and taxes shall be charged monthly against the
Company's accrued earnings allowance. The Bank may debit the Company's
account(s) with the Bank for, or may bill the Company and the Company
agrees promptly to pay, any amount by which the fees or taxes exceed
such earnings allowance.
5. LIABILITY; INDEMNIFICATION. The Bank shall be responsible only for
performing the Services as expressly provided for in this Agreement,
and shall be liable only for claims, demands, judgements, expenses and
losses incurred by the Company, its directors, officers, employees and
agents directly resulting from the Bank's failure to perform in
accordance with the Product Description and Guide or the negligence or
intentional misconduct of the Bank or its affiliates and agents, in
performing those Services (including reasonable attorneys' fees and
legal expenses). The Bank shall have no liability for failure to
perform or delay in performing the Services if such failure or delay-is
due to circumstances beyond the Bank's reasonable control. Each party
agrees to make reasonable efforts to prevent such occurrences. In no
event shall the Bank have any liability for any consequential, special,
punitive or indirect loss or damage. The Company shall promptly furnish
proof of loss in written form to the Bank, and shall provide the Bank
all reasonable assistance in recovering a loss. If the Company is
reimbursed by or on behalf of the Bank, the Bank or its designee shall
be subrogated to all rights of the Company. Except to the extent that
the Bank is liable under the terms of this Agreement, the Company
agrees to indemnify and hold the Bank, its directors, officers,
employees and agents harmless form all claims, demands, judgements, and
expenses (including their reasonable attorneys' fees and legal
expenses) arising out of or in any way connected with the performance
of the Services. The Bank and the Company agree that the provisions of
this paragraph 5 shall survive termination of this Agreement
6. AFFILIATES. Present and future Bank affiliates may from time to time
provide one or more Services under the terms of this Agreement. In that
event, the Bank shall notify the Company that the affiliate has agreed
to provide the Service(s), the term "Bank" shall include the affiliate
with respect to the Service, and the Bank and the affiliate may share
any information helpful in providing the Service. The Company
acknowledges that its consent to the release of information is not a
condition of doing business with the Bank or its affiliates.
7. GENERAL. The laws of the state in which the principal office of the
particular Bank providing the Service is located shall govern for all
purposes. This Agreement shall constitute the entire agreement between
the Bank and the Company and supersede prior oral or written
representations, conditions, warranties, understandings, proposals or
agreements regarding the Services. Headings do not constitute a part of
this Agreement. Any notice or other communication may be sent to the
Company at its then current address on file with the Bank. The Bank and
the Company will have reasonable time after receipt of any notice or
other communication to act on it. No provision may be modified except
in writing signed by the party against whom the modification is to be
enforced. No waiver of any right on one occasion will be a waiver of
the same or any
<PAGE>
other right on a subsequent occasion. The Bank or the Company may
assign this Agreement to any successor by merger, consolidation or
corporate reorganization. Any invalidity, in whole or in part of any
provision shall not affect the validity of any other provision. The
Bank may grant credit to the Company in connection with the Services,
but is not required to do so. Delivery and use of any informational
Service occurs when the information is provided. The Bank may, without
notice, refuse to honor any payment transfer or withdrawal order which
would result in an overdraft, even if it has previously allowed
overdrafts. The Bank may establish cut-off times, and may change those
cut-off times upon reasonable notice to the Company. Unless
specifically defined in the applicable Product Description or Guide,
the term "banking day" means that part of a business day occurring
prior to the cut off time stated in the Bank's funds availability
policy, and the term "business day" means that part of every calendar
day except Saturdays, Sundays and federal holidays, during which the
Bank is open to the public for carrying on substantially all of its
banking function. The Bank may disclose any information which in its
opinion facilitates the performance of a Service. The Bank may at any
time use agents and/or independent contractors to provide all or any
portion of a Service upon reasonable notice to the Company.
The parties have caused this Agreement to be executed and warrant that their
respective signatory, whose signature(s) appears below, has been and is on the
date of the Agreement duly authorized by all necessary action in accordance with
its governing instruments to execute this Agreement.
AGREED TO AND ACCEPTED BY. AGREED TO AND ACCEPTED BY:
NORWEST BANK MINNESOTA, LTCAMERICA HOLDING, INC.
NATIONAL ASSOCIATION ("COMPANY")
("BANK")
By: /s/ Larry M. Lange By: /s/ Bradley E. Barks
------------------ --------------------
Name: Larry M. Lange Name: Bradley E. Barks
Title: Vice President Title: Chairman and CFO
Date: February 18, 1999 Date: February 17, 1999
<PAGE>
PRODUCT DESCRIPTION
CONTROLLED DISBURSEMENT AND
OPTIONAL DEFERRED FUNDING SERVICES
This Product Description contains provisions which, in addition to the
provisions contained in the Master Agreement for Cash Management Services
entered into between the Bank and the Company (the "Agreement"), shall govern
the controlled disbursement and optional deferred funding services to be
provided by the Bank (the "Services").
1. Optional Deferred Funding Service. The Company may chose to use the
deferred funding Service by separately notifying the Bank in writing.
2. Accounts. The Company will execute all documents necessary to establish
and will maintain a checking account (the "Checking Account") with the
Bank's affiliate separately identified in writing (the "Disbursing
Bank"). The Company will obtain balance reporting services from the
Bank or an affiliate and authorizes the Bank to access those services.
The Company will also execute all documents necessary to establish and
will maintain a transaction account with the Bank (the "Funding
Account").
3. Determination of Amount of Presentment. Each banking day of the
Disbursing Bank, ih-e Bank and the Company will determine, by means of
the balance reporting service, the total dollar amount of checks drawn
on the Checking Account that have been presented that day. If the
Company has chosen to use the deferred funding Service and if a second
Federal Reserve Bank presentment is made on any banking day, the
Company will be notified of the total Dollar amount of checks that have
been presented with each Federal Reserve Bank presentment.
4. Contingent Funding. If the daily, information is not available by the
applicable deadline, the Company will use an estimate based on
historical in-formation to determine tge amount that will be required
to fund the Checking Account. If the Company over funds the Funding
Account, earnings credit will be provided on the excess balances at the
adjusted earnings credit rate. If the Funding Account is under funded
and an overdraft is allowed, the Company will be charged for the amount
of the overdraft at the borrowing rate separately agreed to by the
Company and the Bank.
5. Transfer Funds to the Checking Account. Neither the Bank nor the
Disbursing Bank intends to make a loan to the Company. Upon receipt of
(a) notice of the total dollar amount of checks presented as described
in Section 3, or (b) determination of an amount that will be required
to fund as described in Section 4, the Bank is authorized to charge the
Funding Account for the amount(s) and to transfer that amount to the
Disbursing Bank in good and collected funds for credit to the Checking
Account. If this occurs after a cut-off time established by the Bank,
the Bank will make a good faith attempt to transfer sufficient funds to
the Disbursing Bank prior to the close of that business day. However,
the Bank shall not incur any liability as a result of the Disbursing
Bank's nonpayment of a check, unless nonpayment results directly and
proximately from the Bank's willful misconduct.
<PAGE>
6. Deposit Funds to the Funding Account. Each banking day the Company will
deposit good and collected funds to the Funding Account sufficient to
cover the amount to be transferred in accordance with Section 5. The
Bank may require that the funds be deposited to the Funding Account
before the transfer is made. The Bank will determine the amount of good
and collected funds in accordance with its applicable published funds
availability policy. The Bank may require that any funds to be
deposited under this Section 6 be deposited before funds are
transferred to the Disbursing Bank. If (i) the Bank has transferred
funds for credit to the Checking Account and the Company does not
comply with this Section 6 or the Bank has reason to believe that the
Company may not comply, or (ii) the Company has chosen to use the
deferred funding Service, and the Bank has reason to believe that a
deposit made by the Bank on behalf of the Company will be returned
unpaid, the Bank is authorized to instruct the Disbursing Bank to
return the funds. If the Company has chosen to use the deferred funding
Service:
6.1. For checks presented after the first Federal Reserve Bank
presentment and prior to the Bank's cutoff time for
presentment, the Bank will on behalf of the Company deposit
sufficient funds to the Funding Account.
6.2. Deposits made by the Bank on behalf of the Company, may be
made at the Bank's discretion, by either depository transfer
check or by an entry initiated through an automated
clearinghouse (the "ACH").
6.3. If a deposit is made by ACH, the Bank agrees to give the
Company ledger credit on the day the entry is initiated;
however, under the ACH rules, ledger credit is provisional and
subject to revocation if settlement never becomes final.
7. Protection Against Counterfeit Checks. The Company and the Bank
acknowledge that there is a growing risk of loss resulting from the
increasing use of counterfeit checks. The Company recognizes that
controlled disbursement customers are susceptible to losses from
counterfeit checks. The Company is aware that the Bank offers, without
charge, a service known as "Positive Pay" which is an effective means
of controlling this risk. The Bank has advised the Company that if it
does not use the Positive ray service, the Bank will be unable to
prevent losses from counterfeit checks and the Company will be treated
as having assumed the risk of those losses.
EXHIBIT 10.20
SERVICE AGREEMENT
THIS SERVICE AGREEMENT is entered into as of January 1, 1999 between
LTCAMERICA HOLDING, INC., a Minnesota corporation ("LTCA"), and LIFE USA
HOLDING, INC., a Minnesota corporation ("LUSA").
RECITALS
WHEREAS, LUSA is experienced in the provision of a variety of services
to its insurance company subsidiary; and
WHEREAS, LTCA desires to obtain certain of those services for itself
and its insurance company subsidiary, LTCAmerica Insurance Company ("LTCA
Insurance");
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Description of Services. LUSA agrees to perform the following
services for LTCA:
(a) Accounting Services. LUSA shall provide LTCA with any
accounting services requested by LTCA, including without limitation services
relating to taxes, keeping the general books of account and preparation of any
other accounting or statistical records or financial reports.
(b) Owners' Services. LUSA shall provide the following services as
requested by LTCA: training and education, facilities management and
administration of human resources and risk management.
(c) Treasury and Investment Services. LUSA shall provide all
treasury and investment services requested by LTCA, including without limitation
bank and cash management services (including cash receipts), disbursements and
policy suspense maintenance and investment operations management and reporting
(including asset liability analysis).
(d) Data Processing and Information Systems Services. LUSA shall
provide all data processing and information systems services requested by LTCA,
including without limitation the provision of hardware and software required to
develop and administer products and compensate agents.
(e) Actuarial Services. LUSA shall provide all services in
connection with financial actuarial information necessary for statutory and GAAP
financial statements, product development services and services in connection
with year end certification of an appointed actuary.
1
<PAGE>
(f) Compliance Services. LUSA shall provide services in connection
with filing corporate documents necessary to do business in all states in which
LTCA Insurance is licensed to do business, filing LTCA products and products
similar to LTCA products on the paper of other insurance companies, advertising
review and other regulatory activities.
(g) Internal Audit Services. LUSA shall provide services required
to document the controls in all critical systems and to audit cash.
(h) Marketing Services. LUSA shall provide services in connection
with the preparation of marketing materials as needed, handling of agent
telephone inquiries as needed, and promotion of LTCA in meetings and seminars.
(i) Mail and Supply Services. LUSA shall provide LTCA with services
in connection with the receiving and sending of mail and the distribution of
supplies.
2. Term; Termination. The term of this Agreement shall commence on the
date hereof and shall expire on the third anniversary hereof unless sooner
terminated or extended. The term of this Agreement shall be automatically
extended for successive periods of three years each unless either party gives
written notice of cancellation at least 120 days prior to expiration of this
Agreement, as extended. In the event that LUSA does not provide the services
required hereunder in accordance with this Agreement, LTCA shall so notify LUSA
in writing and LUSA shall have ten business days in which to remedy the
deficiency. If LUSA has not remedied the deficiency within the cure period, LTCA
may terminate this Agreement in whole or with respect to the specific service,
and such termination shall be effective as of the date on which written notice
is given to LUSA.
3. Relationship. The services provided by LUSA pursuant to this
Agreement shall be rendered as an independent contractor, and nothing herein
shall be deemed to create a joint venture, partnership or employment
relationship between LUSA and LTCA.
4. Compensation. LTCA shall compensate LUSA for the services provided
pursuant to this Agreement in accordance with Schedule A hereto, as such
schedule is modified from time to time by an amendment thereto executed by the
parties. LUSA shall pay all costs incurred by LUSA to provide LTCA with the
services provided pursuant to this Agreement.
5. Service Standards; Access. During the term of this Agreement, LUSA
will accord LTCA a "most favored customer" status to ensure that the services
provided to LTCA by LUSA are of at least the same level (quality, quantity,
reliability and response time) of similar services provided by LUSA to its
insurance subsidiary. LUSA will permit LTCA and its auditors access to the
premises, books and records of LUSA from time to time during normal business
hours to review or audit the services provided hereunder, including without
limitation adherence to generally accepted accounting principles where
applicable.
6. Confidentiality and Security. LUSA acknowledges the confidential
nature of all information it may obtain or acquire concerning LTCA, its business
and the business of its affiliates during the provision of the services under
this Agreement, including without limitation financial information, including
but not limited to information concerning products, revenues,
2
<PAGE>
profits, markets, sales, trade secrets, agents, key personnel, pricing policies,
operational methods, policyholder lists, supplier lists, marketing,
distribution, studies, analyses, plans for future development and all other
business affairs and methods of the LTCA or any affiliate and any supplier to or
customer of LTCA or any affiliate, which is not readily available to the public,
whether or not obtained with the permission of the Company. LUSA agrees to
maintain in the strictest of confidence all such information, and LUSA will not
permit access to such information to any person other than LTCA or its employees
or agents, except employees of LUSA who require access to such information to
perform the services under this Agreement. LUSA will instruct its employees that
such information of LTCA be maintained in the strictest of confidence.
7. Insurance. LUSA, at its expense, will maintain insurance for all
risks on the computer equipment and other property used to provide the services
provided hereunder for risks customarily covered.
8. Proprietary Rights. LUSA recognizes that LTCA owns the proprietary
rights to any reports, plans, products, programs and other property designed by
LUSA at LTCA's request, including computer source and object code) established
for LTCA during the term of this Agreement, and such property shall remain the
exclusive property of LTCA.
9. Indemnification. LUSA agrees to indemnify, defend and hold LTCA and
its affiliates harmless from any and all claims, demands, suits, liabilities,
costs and expenses (including attorneys' fees) arising from or in any way
connected with the performance of the services contemplated hereunder by LUSA,
except to the extent such nonperformance is the result of the gross negligence
or willful misconduct of LTCA.
10. Arbitration. The parties hereto agree that all disputes arising
under or relating to this Agreement or the transactions contemplated hereunder
shall be subject solely to binding and nonappealable arbitration to be held in
Minneapolis, Minnesota, in accordance with the rules of the American Arbitration
Association under the commercial rules then in effect. The AAA shall recommend
three arbitrators who are knowledgeable in the field of life insurance. The
parties shall agree upon one of the three arbitrators or, if no arbitrator is
mutually agreed upon within 15 days of submission, the AAA shall appoint one of
the three arbitrators within 30 days after such selection period. The award
rendered by the arbitrator shall include costs of arbitration and reasonable
attorneys' fees and fees of experts and other witnesses, but shall not include
punitive damages against either party. Notwithstanding this provision,
appropriate injunctive relief may be sought by LTCA with respect to the
obligations of LUSA under Section 6 hereof.
11. Survival. Notwithstanding any termination of this Agreement, the
confidentiality obligations of LUSA under Section 6 and the indemnification
obligations of LUSA under Section 9 shall survive any such termination.
12. Assignment. Neither LTCA nor LUSA, directly or indirectly, may
sell, assign or transfer any of its rights or obligations contemplated under
this Agreement without first obtaining the written consent of the other party.
This Agreement shall inure to the benefit of and be binding upon the parties,
their successors, trustees, permitted assigns, receivers and legal
representatives but shall not inure to the benefit of any other person or
entity.
3
<PAGE>
13. Entire Agreement. This Agreement contains the entire and only
agreement between the parties with respect to the subject matter hereof, and no
oral statements or representations or prior written matter not contained herein
or therein shall have any force or effect. This Agreement shall not be modified
in any way except by a writing subscribed by the parties by their duly
authorized representatives. No amendment of this Agreement or its exhibits or
schedules shall be of any force or effect unless reduced to writing and executed
by a writing of the parties in the same manner as the present Agreement.
14. Notices. All notices under this Agreement must be in writing and
shall be addressed as follows:
To LTCA:
LTCAmerica Holding, Inc
300 South County Highway 169, Suite 95
Minneapolis, MN 55426
Attention: Chief Financial Officer
Telephone: 612-525-6009
Facsimile: 612-525-6553
To LUSA:
Life USA Holding, Inc.
300 South County Highway 169, Suite 95
Minneapolis, MN 55426
Attention: Chief Financial Officer
Telephone: 612-525-6013
Facsimile: 612-525-6102
All notices, consents, waivers, and other communications under this Agreement
shall be deemed to have been duly given when (i) delivered by hand (with written
confirmation of receipt), (ii) sent by facsimile (with written confirmation of
receipt), provided that a copy is mailed by registered mail, return receipt
requested, or (iii) when received by the addressee, if sent by a nationally
recognized overnight delivery service (receipt requested), in each case to the
appropriate addresses and facsimile numbers set forth above (or to such other
addresses and facsimile numbers as a party may designate by notice to the other
party).
15. Governing Law; Jurisdiction. This Agreement shall be governed by
and construed and enforced in all respects according to the internal laws of the
State of Minnesota, determined without reference to conflict of law principles.
16. Severability. In the event that any of the provisions of this
Agreement are held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
thereof and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein and the parties hereto
shall to the fullest extent possible modify any such provision to the
4
<PAGE>
extent required to carry out the general intention of this Agreement and to
impart validity thereto.
17 No Waiver. No forbearance, indulgence, or relaxation or inaction by
any party at any time to require performance of any provisions of this Agreement
shall in any way affect, diminish or prejudice the right of a party hereto to
require performance of that provision, and any waiver or acquiescence by any
party hereto in any breach of any provision of this Agreement shall not be
construed as a waiver or acquiescence in any continuing or succeeding breach of
such provision, a waiver or an amendment of the provision itself or a waiver of
any right under or arising out of this Agreement or acquiescence in or
recognition of rights and/or positions other than as expressly stipulated in
this Agreement.
18. Counterparts; Headings This Agreement may be executed in any number
of counterparts each of which shall be deemed to be an original and all of which
shall constitute one and the same Agreement. No heading or caption contained in
this Agreement shall be considered in interpreting any of its terms or
provisions.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
LIFEUSA HOLDING, INC.
By: /s/ Mark A. Zesbaugh
--------------------
Name:
Title: CFO
LTCAMERICA HOLDING, INC.
By: /s/ Bradley E. Barks
--------------------
Name:
Title: CFO
6
<PAGE>
SCHEDULE A
SERVICES AND COMPENSATION
<TABLE>
<CAPTION>
Service
Area Service Provided Method of Charge Rate
<S> <C> <C> <C>
Actuarial (33)
Product Development Hourly by project 95
Product Filing Hourly by project 95
Monthly Reporting Monthly Retainer 3,563
Year-end Reporting Monthly Retainer 100
Compliance (34)
Product Filing and Approval Hourly by project 61
Advertising Approval Monthly Retainer 1,220
Regulatory Monthly Retainer 610
Corp. Filings Monthly Retainer 1,845
Overhead Monthly Retainer 1,288
Corp. Accounting (22)
Sr. Mgmt - Ins. Co. Monthly Retainer 5,000
Internal Audit (12)
Documentation Monthly Retainer 3,206
Audit - Internal Monthly Retainer
Security Monthly Retainer 529
Other Monthly Retainer 266
Investment (27)
Accounting and Reporting Monthly Retainer 3,355
Analysis Monthly Retainer 600
ALM Annual year end 4,550
Policies and Design Once in January 5,800
Treasury (23)
401(k) & Stock Options Monthly Retainer 303
Financial Reporting - Shares Monthly Retainer 69
Cash Management Monthly Retainer 1,210
Suspense Processing Monthly Retainer 4,400
Info. Services (92,75,94)
Development Hourly by project 75
Telecommunication - Not LD Actual Cost per month 6,700
Telecommunication - LD Actual Cost per month 10,000
Technical Services Monthly Retainer 23,920
Info. Management (93)
Development Hourly by project 75
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Service
Area Service Provided Method of Charge Rate
<S> <C> <C> <C>
Mail/Supply (87)
Workshops By Piece 44.000
Supply Orders By Piece 6.250
Starter Kits Per Kit 0.900
Mailings (1 per Qtr) By Piece 0.030
Out-going Mail By Piece 0.115
In-coming Mail By Piece 0.070
Marketing (86)
Prepare marketing material By Piece 4,000
FASTeam - overflow Phone per Call -
Commercials on the road per Workshop 60
Software Monthly Retainer 10,000
Owners Services (73,74)
Training (73) Monthly Retainer 1,000
Facilities (74) per Sq. Ft. 24.00
Owners Council/CBO Monthly Retainer 2,282
Holding Co. Svc Fee % of Ceded Revenue 2.5%
% of Retained Revenue 1.0%
</TABLE>
8
EXHIBIT 10.21
EMPLOYEE LEASING AGREEMENT
THIS EMPLOYEE LEASING AGREEMENT is entered into as of December 22,
1998, between LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"), and
Life USA Holding, Inc., a Minnesota corporation ("LUSA"),
RECITALS
WHEREAS, LUSA employs persons with knowledge and experience in the
administration of insurance products, including without limitation underwriting,
marketing, agent compensation, policy administration, claims processing,
compliance, actuarial services and benefits and claims and information services;
and
WHEREAS, LTCA is a newly formed insurance holding company which desires
to lease certain employees from LUSA to provide administrative services to LTCA
and an insurance subsidiary to be acquired by LTCA and known as Capitol Bankers
Life Insurance Company ("Insurance"),
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
LEASED EMPLOYEES
SECTION 1.1. GENERAL PARAMETERS. It is the intention of the parties to
this Agreement that LUSA shall make available for lease by LTCA those employees
required by LTCA to provide certain services to market and administer the
business of LTCA and Insurance, subject at all times to the business
requirements of LUSA (the "Leased Employees"). Nothing herein shall require LTCA
to accept any employee identified by LUSA, and LTCA shall at all times be free
to hire its own employees or enter into separate arrangements with LUSA or third
parties for the outsourcing of services.
SECTION 1.2. SPECIFICATION OF LEASED EMPLOYEES. LTCA shall specify to
LUSA the positions for which it requires Leased Employees, including the skill
sets and experience for each position. Promptly following receipt of such
information, LUSA shall prepare and submit to LTCA a list of employees of LUSA
satisfying LTCA's requirements and information with respect to the skill set and
experience of each such employee. If LUSA does not currently have employees with
the appropriate skill sets and experience, it shall secure such employees as
expeditiously as practicable.
SECTION 1.3. SELECTION OF LEASED EMPLOYEES. Upon receipt of information
identifying those persons available for lease by LTCA, LTCA shall determine the
employees of LUSA that it wishes to lease under this Agreement, which
determination shall be made by LTCA in its sole discretion.
<PAGE>
SECTION 1.4. CONTROL AND DIRECTION OF LEASED EMPLOYEES. Nothing herein
shall be construed as altering the employer/employee relationship of LUSA and
the Leased Employees and the ultimate right of LUSA to control and direct the
services provided by the Leased Employees pursuant to this Agreement, provided
that LTCA shall be solely responsible for the means and details by which those
services are provided, including without limitation the authority to set work
rules and hours, establish job descriptions, allocate and reallocate job
responsibilities, review performance and change job assignments. If at any time
LTCA determines that it no longer needs the services of a particular Leased
Employee, whether by reason of a change in LTCA's requirements, dissatisfaction
of the services of a Leased Employee or any other reason, LTCA may notify LUSA
that the particular Leased Employee is no longer subject to the provisions of
this Agreement and is therefore solely the responsibility of LUSA.
SECTION 1.5. COMPENSATION OF LEASED EMPLOYEES. LUSA shall be solely
responsible for compensating all Leased Employees, including salary and
benefits, required premiums for unemployment and workers' compensation insurance
and employer FICA contributions, and shall be solely responsible for all lawful
payroll deductions including federal and state income taxes and employee's FICA
contributions. All Leased Employees shall be entitled to all incidents of
employment by LUSA, including without limitation LUSA stock options, bonuses,
personal days, health and medical benefits and 401(k) contributions. Salaries of
Leased Employees shall be established by LUSA, subject to such modifications as
are mutually acceptable to LUSA and LTCA.
SECTION 1.6. PAYMENT FOR LEASED EMPLOYEES. LTCA shall provide LUSA with
all information reasonably requested by it in order to provide compensation to
Leased Employees, including identification of work and personal leave days. LTCA
shall reimburse LUSA for all costs attributable to compensation and the
administration of employees and employee records of the Leased Employees on or
before the 15th and the last day of each calendar month based on a statement
provided to LTCA by LUSA containing such information as is reasonably required
by LTCA.
SECTION 1.7. NONDISCRIMINATION. LTCA agrees that no Leased Employee
will be denied work or subject to different treatment under this Agreement on
the grounds of race, color, national origin or sex. LTCA further agrees that it
will comply with the provisions of the Civil Rights Act of 1964 and other
applicable local, state and federal employment laws and the regulations which
implement such laws.
SECTION 1.8. MUTUAL COOPERATION. Notwithstanding anything herein to the
contrary, LTCA and LUSA will cooperate with each other in the defense of any
claim brought by a Leased Employee against either party.
2
<PAGE>
ARTICLE II
INSURANCE
SECTION 2.1. GENERAL LIABILITY INSURANCE. During the term of this
Agreement, the Leased Employees shall be covered by LTCA's general liability
insurance with limits reasonably acceptable to LUSA. LUSA shall be named as an
additional insured on such insurance. At the request of LUSA, LTCA shall provide
LUSA with a certificate or other proof that such insurance is in effect. The
requirements of this Section 2.1 may be satisfied by inclusion of LTCA under
LUSA's insurance policies with the appropriate reimbursement by LTCA to LUSA.
SECTION 2.2. PROFESSIONAL LIABILITY INSURANCE. During the term of this
Agreement, LUSA shall carry and pay the premiums on professional liability
insurance providing coverage and protection for LTCA and LUSA with respect to
acts or omissions in connection with services performed by the Leased Employees.
LUSA shall have control over the settlement of any claims or litigation brought
against it or LTCA as a result of the acts or omissions of the Leased Employees
while providing services to LTCA. Settlement of any such claim or litigation
against LUSA or LTCA will not be made without the prior written consent of LTCA.
LUSA agrees to indemnify and hold LTCA harmless from and against any liability,
claim, loss, attorneys' fees, interest or other costs or expenses of whatever
kind or nature incurred by LTCA as a result of either of the deductible under
any policy of professional liability insurance or the coverage or limits of
coverage under any such policy. At the request of LTCA, LUSA shall provide LTCA
with a certificate or other proof that the insurance required by this Section
2.2 is in effect. The insurance required by this Section shall be deemed to be
primary as against any insurance carried by LTCA, including self-insurance by
LTCA. The requirements of this Section 2.2 with respect to professional
liability insurance may be satisfied by inclusion of LTCA under LUSA's insurance
policies with appropriate reimbursement by LTCA to LUSA.
ARTICLE III
INDEMNIFICATION
SECTION 3.1. INDEMNIFICATION BY LUSA. LUSA agrees to indemnify and hold
LTCA harmless from any and all liability, loss, expense (including reasonable
attorneys' fees and costs), or other claims for injury or damages arising out of
the performance of duties by the Leased Employees for LTCA, including without
limitation, those related to legally required employment taxes, alleged
violations of the Fair Labor Standards Act or alleged violations of any other
law, regulation or ordinance applicable to the employment of employees, except
for those claims which arise out of the gross negligence or intentional
misconduct of LTCA, its officers, agents or employees.
SECTION 3.2. INDEMNIFICATION BY LTCA. LTCA agrees to indemnify and hold
LUSA harmless from any and all liability, loss, expense (including reasonable
attorneys' fees and costs), or other claims for injury or damages arising out of
the performance of this Agreement by LTCA, including without limitation those
related to the supervision and work conditions of the
3
<PAGE>
Leased Employees, except for those claims which arise out of the gross
negligence or intentional misconduct of LUSA, its officers, agents or employees.
ARTICLE IV
TERM AND TERMINATION OF AGREEMENT
SECTION 3.1. TERM. This Agreement shall commence on the date hereof and
shall continue for a term ending on December 31, 1999, unless terminated earlier
pursuant to Section 3.2 hereof.
SECTION 3.2. TERMINATION OF AGREEMENT. This Agreement is subject to
termination upon the occurrence of any one of the following events:
(a) At any time by the mutual written agreement of LTCA and LUSA, or
(b) At the end of the initial term or any extension thereof if either
party gives notice of termination not later than December 1 of any year.
(c) By the nondefaulting party upon a material default by the other
party of any condition of this Agreement and failure to cure such default within
5 days after written notice to the defaulting party specifying the default,
provided that the nondefaulting party shall inform the defaulting party of such
termination by written notice.
ARTICLE 5
MISCELLANEOUS PROVISIONS
SECTION 5.1. NONCREATION OF THIRD PARTY RIGHTS. Nothing in this
Agreement confers upon or creates any rights or claims for any person or entity
not a party to this Agreement, including, but not limited to, any Leased
Employee, and this Agreement may not be the basis for any claim of any nature
whatsoever by any such person or entity against LTCA and/or LUSA. Further,
nothing in this Agreement is intended in any way to create any contractual or
other rights for any Leased Employee against either LTCA or LUSA. This Agreement
shall not constitute an express or implied contract, promise, commitment or
guarantee of employment, for any period or duration, by either LTCA and/or LUSA
with any Leased Employee.
SECTION 5.2. RELATIONSHIP OF PARTIES. In making and performing this
Agreement, the parties hereto act and shall act at all times as independent
contractors, and nothing contained in this Agreement shall be construed or
implied to create a partnership or joint venture between the parties. LUSA and
LTCA each expressly reserve the right to enter into the same or similar
arrangements with other individuals or organizations.
SECTION 5.3. BINDING EFFECT; ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their successors
and assigns and may not be assigned to any other person without the prior
written consent of the other party.
4
<PAGE>
SECTION 5.4. ENTIRE AGREEMENT. This Agreement represents the entire
understanding between the parties and cannot be amended, altered, supplemented,
modified or waived, in whole or in part, except by a writing duly signed by both
parties.
SECTION 5.5. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person or received by confirmed facsimile or by
registered or certified mail (postage prepaid, return receipt requested)
addressed to the respective parties, as follows:
If to LUSA: Life USA Holding, Inc.
300 South Highway 169, Suite 95
Minneapolis, Minnesota 55426-1191
Attn: Margery Hughes, Chief Operating Officer
If to LTCA: LTCAmerica Holding, Inc.
300 South Highway 169, Suite 95
Minneapolis, Minnesota 55426-1191
Attn: Robin Aeshliman, Chief Operating Officer
SECTION 5.6. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed effective as of the date set forth above.
LIFE USA HOLDING, INC.
By: /s/ Mark A. Zesbaugh
-----------------------------------
Name:
---------------------------------
Title: CFO
--------------------------------
LTCAMERICA, INC.
By: /s/ Bradley E. Barks
-----------------------------------
Name:
---------------------------------
Title: CFO
--------------------------------
EXHIBIT 10.22
LTCAMERICA HOLDING, INC.
1998 STOCK OPTION PLAN
------------------------------
PART I
PURPOSES; DEFINITIONS; SHAREHOLDER APPROVAL;
RESERVATION OF SHARES; AND PARTICIPATION IN PLAN
ARTICLE I
Purposes
1.1 Purposes of Plan. The purpose of this LTCAmerica Holding, Inc. 1998
Stock Option Plan (the "Plan") is to provide incentives to employees of and
consultants to of the Company and/or its Subsidiaries who contribute, and are
expected to contribute, to the success of the Company and its Subsidiaries, to
provide a means of rewarding outstanding performance, and to enhance the
interest of such employees and consultants in the Company's continued success
and progress by providing them with a proprietary interest in the Company.
Further, this Plan is designed to enhance the Company's ability to maintain a
competitive position in attracting and retaining qualified personnel and
consultants necessary for the continued success and progress of the Company.
ARTICLE II
Definitions
2.1 Certain terms used herein shall have the meaning below stated,
subject to the provisions of Section 7.1.
"Board" or "Board of Directors" means the Board of Directors of the
Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to administer
this Plan pursuant to Article VII or, if no Committee is appointed by the Board,
means the Board.
"Common Stock" means, subject to the provisions of Section 9.3, the
presently authorized common stock of the Company, par value $.01 per share.
"Company" means LTCAmerica Holding, Inc., a Minnesota corporation.
<PAGE>
"Consultant" means any person providing services to the Company or any
Subsidiary who is not an Employee of the Company.
"Disability" means (subject to Section 6.2) a physical or mental
impairment of sufficient severity such that an Employee is permanently unable to
continue his employment with the Company as determined by the Committee.
"Employee" means an employee (including an officer) of the Company or
of any Subsidiary of the Company.
"Fair Market Value" means the fair market value of the Company's Common
Stock as determined by the Committee on the basis of available prices for such
Common Stock or in such manner as may be authorized by applicable regulations
under the Code.
"Incentive Stock Option" means an option to purchase Common Stock,
granted by the Company to an Employee pursuant to Section 5.1, which is intended
to meet the requirements of Section 422A of the Code and which is designated at
the time of the award of an Incentive Stock Option.
"Non-Statutory Option" means an option to purchase Common Stock,
granted by the Company to an Optionee or a Consultant pursuant to Section 5.1,
which is not an Incentive Stock Option.
"Option" means an Incentive Stock Option or a Non-Statutory Option.
"Optionee" means the holder of an Option granted under the Plan.
"Plan" means the LTCAmerica Holding, Inc. 1998 Stock Option Plan, as
set forth herein and as from time to time amended.
"Subsidiary" means a subsidiary or parent corporation, as defined in
Section 425(e) and (f) of the Code, with respect to the Company.
ARTICLE III
Shareholder Approval; Reservations of Shares
3.1 Shareholder Approval. This Plan shall be subject to approval by the
affirmative vote of the holders of a majority of the Company's Common Stock
present or represented and entitled to vote thereon at a meeting of
shareholders, which approval must be obtained no later than December 7, 1999.
3.2 Shares Reserved Under Plan. Subject to adjustment under the
provisions of Section 9.3 hereof, the maximum number of shares of Common Stock
which may be issued and sold under this Plan is 2,000,000 shares. Such shares
may be either authorized and unissued shares or shares issued and thereafter
acquired by the Company. Shares issued pursuant to this Plan shall be subject
2
<PAGE>
to all applicable provisions of the Articles of Incorporation and Bylaws of the
Company in existence at the time of issuance of such shares and at all times
thereafter. If Options granted under this Plan shall terminate or cease to be
exercisable by reason of expiration, surrender for cancellation or otherwise
without having been wholly exercised, new Options may be granted under this Plan
covering the number of shares to which such termination or cessation relates. At
no time may the sum of the maximum number of shares issuable under outstanding
Options granted under this Plan and the number of shares previously issued under
Options granted under this Plan exceed the maximum number of shares that may be
issued and sold under this Plan, as above stated.
ARTICLE IV
Participation in Plan
4.1 Eligibility to Receive Options. Options under this Plan may be
granted only to (a) Employees who are employed by the Company or a Subsidiary on
the date the Option is granted and who the Committee believes are in a position
to make an important contribution to the success of the Company, and (b)
Consultants of the Company or a Subsidiary who the Committee believes are in a
position to make important contributions to the success of the Company, all as
determined by the Committee.
4.2 Participation Not Guarantee of Employment. Nothing in this Plan or
in the instrument evidencing the grant of an Option shall in any manner be
construed to limit in any way the right of the Company or a Subsidiary to
terminate an Employee's employment at any time without regard to the effect of
such termination on any rights such Employee would otherwise have under this
Plan, or give any right to such an Employee to remain employed by the Company or
a Subsidiary thereof in any particular position or at any particular rate of
compensation.
PART II
OPTIONS;
TERMINATION OF EMPLOYMENT AND DEATH
ARTICLE V
Options
5.1 Grants of Options.
(a) Grant. The Committee may grant Incentive Stock Options and/or
Non-Statutory Options to Employees and Non-Statutory Options to Consultants,
subject to the limitations provided in Section 7.1. All Options under this Plan
shall be granted within ten years of December 7, 1998, the date on which this
Plan was adopted by the Board of Directors subject to approval of the Plan by
shareholders.
3
<PAGE>
(b) Option Price. The purchase price per share of Common Stock
under each Incentive Stock Option and Non-Statutory Option shall be determined
by the Committee but shall be not less than 100% of the Fair Market Value per
share of such Common Stock on the date the Option is granted for Incentive Stock
Options and 85% of the Fair Market Value per share of such Common Stock on the
date the Option is granted for Non-Statutory Options; provided that no more than
ten percent (10%) of the Non-Statutory Options granted under the Plan
(determined at the time of grant) shall be granted at an exercise price below
Fair Market Value per share. The purchase price per share may be subject to
adjustment in accordance with the provisions of Section 9.3 hereof.
(c) Options Agreements. Options shall be evidenced by option
agreements in such form and containing such terms and conditions as the
Committee shall approve, which terms and conditions need not be the same for all
Options.
(d) Options Nontransferable. An Option granted under this Plan
shall by its terms be nontransferable by the Optionee otherwise than by will or
the laws of descent and distribution, and, during the lifetime of the Optionee,
shall be exercisable only by such Optionee. No transfer of an Option by an
Optionee by will or by the laws of descent and distribution shall be effective
to bind the Company unless the Company shall have been furnished with written
notice thereof and a copy of the will and/or such other evidence as the
Committee may determine necessary to establish the validity of the transfer.
(e) Substitution and Cancellation. The Committee, in its sole
discretion, may grant to an Optionee who has been granted an Option under this
Plan, in exchange for the surrender and cancellation of such Option, a new
Option having a purchase price lower (or higher) than the purchase price
provided in the Option so surrendered and cancelled and containing such other
terms as the Committee may deem appropriate, subject to Section 5.1(b) and such
other limitations or restrictions with respect to an Incentive Stock Option as
may be imposed by the Code; provided that the number of outstanding Options
under the Plan which have been issued in the exchange referred to in this
sentence shall not exceed ten percent (10%) of the outstanding Options under the
Plan (determined at the time of such exchange).
5.2 Exercise.
(a) Term of Options; Vesting; and Exercise. The term of each Option
granted under this Plan shall not exceed ten (10) years from the date of grant.
An Option granted under this Plan shall become vested at such rate and on such
conditions as the Committee shall determine at the time such Option is granted.
(b) Exercise; Payment on Exercise. Options shall be
exercised by delivering to the Company an exercise notice in the form
prescribed by the Committee. No shares of Common Stock shall be issued on the
exercise of an Option unless paid for in full at the time of purchase as
provided in the next sentence and until the provisions of 9.4 shall have been
satisfied. Payment for shares of Common Stock purchased upon the exercise of an
Option shall be made (i) in cash, or (ii) in whole or in part in shares of
Common Stock held by the Optionee for at least six months and valued at the then
Fair Market Value thereof, or (iii) by delivery to the Company of irrevocable
4
<PAGE>
instructions to the Optionee's broker, which instructions and broker shall be
satisfactory to the Company, to promptly deliver to the Company the total
purchase price for the shares of the Option being exercised from the sale
proceeds for such shares or the loan proceeds for such shares or any other
securities which the Optionee may have in his account with such broker, and the
Company will deliver such shares directly to such broker in accordance with such
procedures as the Committee may establish, which alternative forms of payment
may be permitted by the Committee at the time the Option is granted or at any
time thereafter during the term of the Option. Stock certificates for the shares
of Common Stock so paid for will be issued and delivered to the person entitled
thereto only at the Company's office in Minneapolis, Minnesota. No Optionee
shall have any rights as a shareholder with respect to any share of Common Stock
covered by an Option unless and until such Optionee shall have become the holder
of record of such share and, except as otherwise permitted in Section 9.3
hereof, no adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property or distributions or other rights)
in respect of such share for which the record date is prior to the date on which
such Optionee shall have become the holder of record thereof.
(c) Dissolution, Liquidation, Etc. If at any time after an Option
has become exercisable and prior to its exercise and expiration, a voluntary
dissolution, liquidation (other than a liquidation into another corporation
which agrees to continue this Plan) or winding up of the affairs of the Company
shall be proposed, the Company shall cause notice in writing to be mailed to
each person holding an Option under this Plan, which notice shall be mailed not
less than twenty days prior to the closing of the transfer books of the Company
or the record date for determination of the holders of Common Stock of the
Company entitled to participate in such dissolution, liquidation or winding up,
as the case may be, to the end that during such notice period the holder of any
Option, to the extent that the same is then exercisable by such holder, subject
to the terms of Article V hereof, may purchase Common Stock in accordance with
the terms of the Option and be entitled, in respect of the number of shares so
purchased, to all the rights of the other holders of Common Stock of the Company
with respect to such proposed dissolution, liquidation or winding up of the
affairs of the Company. Each Option at the time outstanding and all rights
thereunder shall terminate at the close of business on the twentieth day after
mailing of such notice to the holder of such Option or on the record date for
determination of holders of Common Stock entitled to participate in such
dissolution, liquidation or winding up, whichever date is later.
(d) Exercise of Options. In the event that an Optionee exercises
Options, such Optionee shall comply with all requirements set forth in the
option agreement for such Options in connection with the purchase of shares of
Common Stock under this Plan.
5.3 Incentive Stock Options.
(a) Annual Limitation. In no event shall any Optionee be granted an
Incentive Stock Option under this Plan or any other plan of the Company or any
Subsidiary if such option would, during the calendar year in which the option
first becomes exercisable when combined with other Incentive Stock Options which
first become exercisable in such calendar year, entitle such Optionee, to
purchase shares of Common Stock or shares of any Subsidiary having an aggregate
fair market value (determined as of the time such option or options were
granted) in excess of $100,000. In the event an option granted hereunder is
designated an Incentive Stock Option and exceeds the
<PAGE>
limitations set forth in this Section 5.4(a), whether at the time of grant or
thereafter, such option shall be an Incentive Stock Option only to the extent
permitted hereby and the balance thereof shall be a Non-Statutory Option for the
purposes of this Plan.
(b) Incentive Stock Options Granted to Ten Percent Shareholders. No
Incentive Stock Option shall be granted to any Employee who owns, directly or
indirectly pursuant to Section 425(d) of the Code, stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or any Subsidiary, unless at the time such Incentive Stock Option is
granted, the price of the Incentive Stock Option is at least 110% of the Fair
Market Value of the Common Stock subject to the Incentive Stock Option and such
Incentive Stock Option, by its terms, is not exercisable after the expiration of
five (5) years from the date such Incentive Stock Option is granted.
(c) Notice. Each Optionee shall give prompt notice to the Company
of any disposition of shares acquired upon exercise of an Incentive Stock Option
if such disposition occurs within either two years after the date of grant or
one year after the date of transfer of such shares to the Optionee upon the
exercise of such Incentive Stock Option.
(d) Consent. To the extent appropriate to avoid a "modification" or
other event described in Section 425(h) of the Code, a Optionee's rights under
an Incentive Stock Option (including the rights to pay the exercise price in
Common Stock) shall be set forth in the option agreement for such Option entered
into at the date of grant, so as to preclude any requirement that further
Committee consent be given after the date of grant.
ARTICLE VI
Termination of Employment
6.1 Termination of Employment. Unless earlier terminated in accordance
with its terms, an Option shall terminate 30 days after any termination of the
Optionee's employment with the Company or any Subsidiary if the Optionee is an
Employee or, in the case of death or disability of any Optionee, 90 days after
the death or disability of such Optionee. Notwithstanding the previous sentence,
the Committee shall be authorized to extend the period of time within which an
Option may be exercised, provided that such date is no later than ten years from
the date of the grant of such Option.
6.2 Employment. For all purposes of this Plan, and any Option granted
hereunder, "employment" shall be defined in accordance with the provisions of
Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations).
6
<PAGE>
PART III
ADMINISTRATION, AMENDMENT AND TERMINATION
OF PLAN; MISCELLANEOUS
ARTICLE VII
Administration of Plan
7.1 The Committee. This Plan shall be administered by a Committee
(which shall be the Board unless the Board appoints a committee pursuant hereto)
of three or more persons, all of whom shall be members of the Board and shall be
appointed by, and serve at the pleasure of, the Board. No person shall serve as
a member of the Committee if such person is eligible, or at any time within one
year prior to appointment as a member was granted any Options under this Plan or
granted or awarded equity securities under any other plan of the Company or any
of its affiliates. A majority of the Committee shall constitute a quorum thereof
and the actions of a majority of the Committee at a meeting at which a quorum is
present, or actions unanimously approved in writing by all members of the
Committee, shall be the actions of the Committee. Vacancies occurring on the
Committee shall be filled by the Board. The Committee shall have full and final
authority to interpret this Plan and the agreements evidencing Options granted
hereunder (which agreements need not be identical), to prescribe, amend and
rescind rules and regulations, if any, relating to this Plan and to make all
determinations necessary or advisable for the administration of this Plan. The
Committee's determination in all matters referred to herein shall be conclusive
and binding for all purposes and upon all persons including, but without
limitation, the Company, the shareholders of the Company, the Committee and each
of the members thereof, and the Employees and Consultants of the Company or a
Subsidiary, and their respective successors in interest.
7.2 Liability of Committee. No member of the Committee shall be liable
for anything done or omitted to be done by such member or by any other member of
the Committee in connection with this Plan, except for the willful misconduct or
gross negligence of such member. The Committee shall have power to engage
outside consultants, auditors or other professional help to assist in the
fulfillment of the Committee's duties under this Plan at the Company's expense.
7.3 Determinations of the Committee. In making its determinations
concerning the Employees and Consultants, who shall receive Options as well as
the number of shares to be covered thereby and time or times at which they shall
be granted, the Committee shall take into account the nature of the services
rendered by the respective Employees and Consultants, their past, present, and
potential contribution to the Company's success and such other factors as the
Committee may deem relevant. The Committee shall also determine the form of
option agreements to be issued under this Plan and the terms and conditions to
be included therein, provided such terms and conditions are not inconsistent
with the terms of this Plan. In its discretion or in accordance with a direction
from the Board, the Committee may waive any provisions of any option agreement,
provided such waiver is not inconsistent with the terms of this Plan as then in
effect.
7
<PAGE>
ARTICLE VIII
Amendment and Termination of Plan
8.1 Amendment of Plan.
(a) Generally. The Plan may be amended at any time and from time to
time by the Board of Directors of the Company but no amendment which (i)
increases the aggregate number of shares of Common Stock which may be issued and
sold under this Plan other than adjustments pursuant to Section 9.3, (ii)
decreases the minimum option price provided in this Plan, (iii) extends the
period during which Options may be granted under this Plan, or (vi) changes the
class of Employees eligible to receive Options, shall be effective unless and
until the same is approved by the affirmative vote, in person or by proxy, of
the holders of a majority of the shares of Common Stock of the Company present
and entitled to vote at a meeting held to take such action at which a quorum is
present. No termination or amendment of this Plan, without the consent of the
holder of any Option then existing, may terminate such holder's Option or
materially and adversely affect such holder's rights thereunder.
(b) Amendments Relating to Incentive Stock Options. To the extent
applicable, this Plan is intended to permit the issuance of Incentive Stock
Options in accordance with the provisions of Section 422A of the Code. The Plan
may be modified or amended at any time, both prospectively and retroactively,
and in such manner as to affect Incentive Stock Options previously granted
(after taking into account Section 425(h) of the Code, relating to
"modifications," etc.), if such amendment or modification is necessary for this
Plan and the Incentive Stock Options granted hereunder to qualify under said
provisions of the Code.
8.2 Termination. The Board of Directors of the Company may at any time
terminate this Plan as of any date specified in a resolution adopted by the
Board. If not earlier terminated, this Plan shall terminate on the tenth
anniversary of the effective date of the Plan. No Options may be granted after
this Plan has terminated. After this Plan shall terminate, the function of the
Committee will be limited to supervising the administration of Options
previously granted.
ARTICLE IX
Miscellaneous Provisions
9.1 Restrictions Upon Grant of Options. The registration or
qualification under any Federal or state law of any shares of Common Stock to be
granted pursuant to this Plan (whether to permit the grant of Options or the
resale or other disposition of any such shares of Common Stock by or on behalf
of the Optionees receiving such shares) may be necessary or desirable and, in
any such event, delivery of the certificates for such shares of Common Stock
shall, if the Board of Directors, in its sole discretion, shall determine, not
be made until such listing, registration or qualification shall have been
completed.
9.2 Restrictions upon Resale of Unregistered Stock. If the shares of
Common Stock that have been transferred to a Optionee pursuant to the terms of
this Plan are not registered under the
8
<PAGE>
1933 Act, pursuant to an effective registration statement, such Optionee, if the
Committee shall deem it advisable, may be required to represent and agree in
writing (i) that any shares of Common Stock acquired by such Optionee pursuant
to this Plan will not be sold except pursuant to an effective registration
statement under the 1933 Act, or pursuant to an exemption from registration
under the 1933 Act and (ii) that such Optionee is acquiring such shares of
Common Stock for such Optionee's own account and not with a view to the
distribution thereof.
9.3 Adjustments. In the event of any change (through recapitalization,
merger, consolidation, stock dividend, split-up, or amount of the Company's
capital stock (or any other transaction described in Section 425(a) of the Code)
after any Option is granted hereunder and prior to the exercise thereof, the
Option, to the extent that it has not been exercised, shall entitle the holder
to such number and kind of securities as such holder would have been entitled to
had such holder actually owned the stock subject to the Option at the time of
the occurrence of such change. If any such event should occur, the number of
shares subject to Options which are authorized to be issued hereunder, but which
have not been issued, shall be similarly adjusted. If any other event shall
occur, prior to the exercise of an Option granted to an Optionee hereunder,
which shall increase or decrease the amount of capital stock outstanding and
which the Committee, in its sole discretion, shall determine equitably requires
an adjustment in the number of shares which the holder should be permitted to
acquire, such adjustment as the Committee shall determine may be made, and when
so made shall be effective and binding for all purposes of this Plan.
9.4 Withholding of Taxes. Each Optionee who exercises an Option to
purchase Common Stock shall, prior to the issuance of any shares or payment of
any amounts to the Optionee, pay to the Company, or make arrangements (including
withholding of shares of Common Stock purchased upon exercise of the Option at
the Fair Market Value thereof) satisfactory to the Committee regarding payment
of, any taxes of any kind required by law to be withheld with respect to the
transfer to such Optionee of such shares of Common Stock and/or amounts upon
exercise of such Option.
9.5 Use of Proceeds. The proceeds from the sale of Common Stock
pursuant to Options granted under this Plan shall constitute general funds of
the Company and may be used for such corporate purposes as the Company may
determine.
9.6 Other Grants. Options may be granted under this Plan from time to
time in substitution for stock options held by employees of other corporations
who are or are about to become employees of the Company or a Subsidiary as the
result of a merger or consolidation of the employing corporation with the
Company or a Subsidiary, or the acquisition by the Company or a Subsidiary of
the assets of the employing corporation, or the acquisition by the Company or a
Subsidiary of stock of the employing corporation as the result of which it
becomes a Subsidiary of the Company. The terms and conditions of the substituted
Options so granted may vary from the terms and conditions set forth in Part II
to such extent as the Committee may deem appropriate to conform, in whole or in
part, to the provisions of the substituted stock incentives.
9.7 Other Benefits. Nothing contained herein shall prevent the Company
from establishing other incentive plans in which Employees and Consultants under
the Plan may also participate. No award under this Plan shall be considered as
compensation in calculating any
9
<PAGE>
insurance, pension or other benefit for which the recipient is eligible unless
any such insurance, pension or other benefit is granted under a plan which
expressly provides that compensation under this Plan (and specifying the type of
such compensation) shall be considered as compensation under such plan.
10
<PAGE>
OPTION EXERCISE FORM
LTCAmerica Holding, Inc.
Suite 99, Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
Attention: Corporate Secretary
Dear Sir:
I hereby exercise the following Stock Options granted under LTCAmerica
Holding, Inc.'s (the "Company") 1998 Stock Option Plan (the "Plan"):
Date of Options Exercise Number of
Grant Awarded Price Shares Exercised
----- ------- ----- ----------------
As payment for the exercise of the above listed stock options and for
the amount of federal, state and local tax which the Company is required by law
or believes appropriate to withhold and the cost of any applicable state or
federal documentary tax stamps, I am enclosing and elect the following method of
payment (check appropriate box):
[ ] Cashier's or certified check in the amount of $_________
[ ] Shares of the Company's Common Stock which have been held by me for at
least six months and which are valued at Fair Market Value (as defined in the
Plan) listed below.
Certificate Acquisition Fair Market
Number Date Number of Shares Value
------ ---- ---------------- -----
NOTE: All shares of Common Stock must be transferred to LTCAmerica
Holding, Inc. on the reverse side of each certificate.
11
<PAGE>
[ ] Irrevocable instructions, a copy of which is attached hereto and is
subject to the Company's approval, to my broker who must be acceptable to you to
promptly deliver to the Company an amount sufficient to pay such amounts from
either (i) the proceeds of sale through the broker of a sufficient number of
shares purchased by me upon exercise of the Option as set forth above or (ii)
the loan proceeds from borrowings by me from the broker, and the Company is
hereby instructed to issue and deliver the shares purchased by me upon exercise
of the option as set forth above directly to and in the name of the broker.
Unless the third payment option above is selected, in which case the
shares will be issued and delivered as described therein, please have ________
certificates issued in blocks of ________ shares per certificate and the
certificates should be registered as follows:
Name
-------------------------------------------
Mailing Address
--------------------------------
Social Security Number
-------------------------
I agree to give prompt notice to the Company of any disposition of the
shares acquired hereby if such disposition occurs within either two years after
the date of grant or one year after the date of acquisition of the shares.
Very truly yours,
-----------------------------------
Signature
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State or other jurisdiction of
Name of subsidiary incorporation or organization
- ------------------ -----------------------------
LifeUSA Insurance Company Minnesota
LifeUSA Securities, Inc. Minnesota
LifeUSA Marketing, Inc. Minnesota
LTCAmerica Holding, Inc. Minnesota
Tax Planning Seminars New Jersey
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-67997) pertaining to the Life USA Holding, Inc. Employee Stock
Option Plan, the Registration Statement (Form S-8 No. 333-67999) pertaining to
the Life USA Holding, Inc. Employee Savings Plan, and the Registration Statement
(Form S-8 No. 333-67831) pertaining to the Life USA Holding, Inc. Director Stock
Option Plan of our report dated January 29, 1999 with respect to the
consolidated financial statements of Life USA Holding, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 19, 1999
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that LIFE USA HOLDING, INC., a
Minnesota corporation (the "Company"), and each of the undersigned directors of
the Company, hereby constitutes and appoints Robert W. MacDonald and Mark A.
Zesbaugh and each of them (with full power to each of them to act alone) its/his
true and lawful attorney-in-fact and agent, for it/him and on its/his behalf in
its/his name, place and stead, in any and all capacities to sign, execute, affix
its/his seal thereto and file the Annual Report on Form 10-K for the year ended
December 31, 1998 under the Securities Exchange Act of 1934, as amended,
including any amendment or amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority.
There is hereby granted to said attorneys, and each of them, full power
and authority to do and perform each and every act and thing, requisite and
necessary to be done in respect of the foregoing as fully as it/he or
itself/himself might or could do if personally present, thereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in any number of counterparts,
each of which shall be an original, but all of which taken together shall
constitute one and the same instrument and any of the undersigned directors may
execute this Power of Attorney by signing any such counterpart.
IN WITNESS WHEREOF, LIFE USA HOLDING, INC. has caused this Power of
Attorney to be executed in its name by its President on the 23rd day of
February, 1999.
LIFE USA HOLDING, INC.
By /s/ Margery G. Hughes
---------------------
Margery G. Hughes, President
<PAGE>
The undersigned directors of LIFE USA HOLDING, INC. have hereunto set
their hands as of the 23rd day of February, 1999.
/s/ Hugh Alexander /s/ Jack H. Blaine
- ------------------------------------- -------------------------------------
Hugh Alexander Jack H. Blaine
/s/ Margery G. Hughes /s/ Barbara J. Lautzenheiser
- ------------------------------------- -------------------------------------
Margery G. Hughes Barbara J. Lautzenheiser
/s/ Robert W. MacDonald /s/ Daniel J. Rourke
- ------------------------------------- -------------------------------------
Robert W. MacDonald Daniel J. Rourke
/s/ Ralph Strangis /s/ Donald J. Urban
- ------------------------------------- -------------------------------------
Ralph Strangis Donald J. Urban
/s/ Mark A. Zesbaugh /s/ Edward J. Bonach
- ------------------------------------- -------------------------------------
Mark A. Zesbaugh Edward J. Bonach
/s/ Robert S. James
- -------------------------------------
Robert S. James
2
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<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,020,691
<DEBT-CARRYING-VALUE> 1,259,072
<DEBT-MARKET-VALUE> 1,314,009
<EQUITIES> 0
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<REAL-ESTATE> 0
<TOTAL-INVEST> 2,314,702
<CASH> 21,570
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 216,725
<TOTAL-ASSETS> 5,458,719
<POLICY-LOSSES> 5,030,833
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 9,839
<NOTES-PAYABLE> 20,898
0
0
<COMMON> 248
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<TOTAL-LIABILITY-AND-EQUITY> 5,458,719
0
<INVESTMENT-INCOME> 157,946
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<BENEFITS> 146,050
<UNDERWRITING-AMORTIZATION> 30,120
<UNDERWRITING-OTHER> 151,321
<INCOME-PRETAX> 35,157
<INCOME-TAX> 13,250
<INCOME-CONTINUING> 21,907
<DISCONTINUED> 0
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<NET-INCOME> 21,907
<EPS-PRIMARY> .85
<EPS-DILUTED> .83
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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