Document/Exhibit Description Pages Size
1: 10-K Annual Report 78 410K
2: EX-10 Reinsurance Agreement 139 530K
3: EX-21 Subsidiaries of the Registrant 1 4K
4: EX-23 Consent of Independent Auditors 1 6K
5: EX-24 Power of Attorney 2 10K
6: EX-27 Financial Data Schedule 2± 7K
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, l997.
[ ] 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 (25,758,123 shares) held by
non-affiliates of the registrant as of February 13, 1998 was $434,797,116.
The number of shares outstanding of the issuer's classes of common stock as of
February 13, l998:
Common stock, $.01 Par Value - 25,758,123 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to
be held April 14, 1998 are incorporated by reference into Part III.
CONTENTS
================================================================================
PAGE
-----
Letter to Shareholders .............. 2
Company and Business Description .... 6
Management's Discussion & Analysis --
Consolidated ....................... 15
Management's Discussion & Analysis --
Segment Reporting .................. 27
Consolidated Financial Statements and
Notes .............................. 34
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 $5.06 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 150 marketing
organizations 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
which distributes a family of LifeUSA mutual funds as well as other established
mutual funds and distributes variable life insurance and annuity contracts. Life
USA Holding, Inc. common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol LUSA.
HIGHLIGHTS OF 1997
================================================================================
* Consolidated total revenues increased to $369.9 million in 1997 from $316.9
million in 1996.
* Consolidated net income increased to $27.0 million in 1997 from $23.5
million in 1996.
* Collected premiums and deposits for 1997 (including business produced for
Allianz Life) increased to $1.29 billion from $1.05 billion in 1996.
* Consolidated assets increased to $5.06 billion at December 31, 1997 from
$4.39 billion at December 31, 1996.
* LifeUSA Securities, Inc. received its retail authority from the NASD in May
1997.
* LifeUSA Marketing, Inc. acquired minority interests in Personalized
Brokerage Services in May 1997, Ann Arbor Annuity Exchange in July 1997 and
Roster Financial, LLC in December 1997.
* LifeUSA Insurance Company received the 1997 Business Ethics Award.
FINANCIAL SUMMARY
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[Enlarge/Download Table]
PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 CHANGE
----------------------------------------------- ------------ ------------ ------
Consolidated Results of Operations
Revenues ..................................... $ 369,903 $ 316,898 17%
Net income ................................... 26,978 23,454 15
Net operating income ......................... 26,078 25,044 4
Consolidated Financial Position
Total assets ................................. $ 5,062,774 $ 4,386,723 15%
Invested assets .............................. 2,165,786 1,902,465 14
Debt ......................................... 36,030 36,030 0
Shareholders' equity (excluding SFAS 115) .... 214,251 169,280 27
Financial Ratios
Return on invested assets .................... 1.25% 1.23% --
Return on equity (excluding SFAS 115) ........ 12.59% 13.86% --
Debt to equity (excluding SFAS 115) .......... 16.82% 21.28% --
Per Share Data
Diluted net income per share ................. $ 1.11 $ 1.04 7%
Diluted net operating income per share ....... 1.07 1.11 (4)
Book value (excluding SFAS 115) .............. 9.41 8.07 17
Diluted shares ............................... 25,160,437 23,358,663 8
Shares issued, outstanding and to be issued .. 22,759,288 20,974,901 9
Share price
High
1st Quarter ................................ $ 11.88 $ 9.88
2nd Quarter ................................ 14.25 9.38
3rd Quarter ................................ 17.25 9.25
4th Quarter ................................ 18.00 12.00
Low
1st Quarter ................................ 9.00 7.63
2nd Quarter ................................ 9.13 7.63
3rd Quarter ................................ 13.75 7.75
4th Quarter ................................ 16.00 8.63
[Enlarge/Download Table]
BOOK VALUE PER SHARE
TOTAL REVENUE NET INCOME INVESTED ASSETS PREMIUM & DEPOSITS (excluding SFAS 115)
$ MILLIONS $ MILLIONS $ BILLIONS $ BILLIONS DOLLARS
93 200 15 0.9 1.1 5.37
94 206 14 1.2 0.9 6.14
95 273 19 1.8 1.0 7.09
96 317 23 1.9 1.1 8.07
97 370 27 2.2 1.3 9.41
1
LETTER TO SHAREHOLDERS
================================================================================
Life USA marched through 1997 like an army on a sacred mission. Indeed,
that may be the most appropriate simile to describe the activities and success
achieved by our company. With sales of fixed income insurance products facing
the stiff resistance generated by steadily declining interest rates and a stock
market that defended its position from the heights of record prices, Life USA
trudged forward to deliver absolutely phenomenal results.
Total premium collections in 1997 were $1.29 billion, an increase of 23% or
$242 million over 1996. Even in good times, growth of such magnitude would be
reason to crow. To achieve that level of growth in such an adverse environment,
almost makes one want to go back and check the numbers. It just can't be, but
it's true!
Though not as spectacular as the sales results, consolidated net income
increased a healthy 15% to $27 million, or $1.11 per share, compared to $23.5
million or $1.04 per share in 1996.
During 1997, total assets expanded to $5.1 billion, compared to $4.4
billion reported at the end of 1996. The book value per share of the company
(excluding the effects of SFAS No. 115) increased 17% to $9.41 at the end of
1997, from $8.07 at the end of 1996. Total shareholders' equity increased 29%,
from $172.6 million at the end of 1996 to $222.4 million at the end of 1997. The
total number of independent agents under contract to LifeUSA at the end of 1997
was 54,000.
Operating earnings growth in 1997 was limited by a number of factors. These
included the expenses of a national advertising campaign, continued investment
in the development of LifeUSA Securities, amortization of the investment in
marketing companies not yet in full production and increased regulatory and
litigation expenses.
LifeUSA Insurance Company, the wholly-owned subsidiary of Life USA,
delivered record statutory earnings in 1997. Life insurance company statutory
earnings increased 39%, to $18.4 million in 1997, from $13.2 million in 1996.
The statutory capital and surplus of the life insurance company increased to
$103.7 million at the end of 1997, from $87.3 million at the end of 1996.
A number of factors contributed to the success of our company in 1997. The
strategic focus on distribution, and controlling the access to it, certainly was
a key to the increase in sales. Just as the army with the best logistics and
supply of materials usually wins the war, we believe that access to, and control
of, distribution is critical to survival and success in the battle for financial
services supremacy.
For that reason, Life USA continues to aggressively expand and strengthen
its distribution system. Access to distribution is important, but that's only
half the battle. The real ticket to long-term success is the assurance that
access to distribution is controlled by the company, not by an external force.
To that end, in 1997, Life USA acquired an equity interest in two large,
national marketing companies, Personalized Brokerage Services and Ann Arbor
Annuity Exchange. While still in the process of building production for LifeUSA,
both groups have the potential to become company leaders. Most important,
investment in these companies assures the company of long-term favorable access
to a large base of annuity and life producers not previously writing business
with Life USA.
Late in 1997, Life USA acquired a significant minority interest in Roster
Financial, the third largest marketing organization representing Life USA. While
the investment in Roster does not offer the same new business leverage as do
investments in marketing companies not contracted with Life USA, the investment
does assure long-term continued production and a significant share of the
profitability of Roster. Along that line, Life USA may pursue an equity
investment in other leading marketing companies already doing business with the
company.
The two organizations that Life USA invested in during 1996 performed very
well in 1997. Tax Planning Seminars and Creative Marketing International
Corporation produced a total of $79.2 million of premium and ranked number 6 and
10, respectively, with the company. In addition, the direct recruiting of new
marketing groups was prolific in 1997. During the year, a total of 21 new groups
contracted to represent Life USA as Field Marketing Organizations (FMOs). It's
good news to note that production from FMOs contracted with LifeUSA for less
than two years amounted to 13% of our total production in 1997. This performance
by new FMOs sets a good base for future growth.
Of course, it's one thing to attract marketing groups. The trick is to
provide the products and support that will encourage increasing production with
Life USA. To put emphasis on developing new production,
2
LETTER TO SHAREHOLDERS (CONTINUED)
================================================================================
LifeUSA Marketing, Inc. was formed in 1996 as a wholly-owned subsidiary of Life
USA Holding. The marketing company will serve as the umbrella organization to
acquire other marketing companies and support the entire marketing efforts of
the company. Life USA has the desire to make LifeUSA Marketing one of the
largest and most potent distribution powers in the financial services industry.
Probably the crowning achievement of 1997 was reaching agreement (announced
in early 1998) with Allianz Life Insurance Company of North America to expand
and extend our current marketing and administrative agreement and for Allianz
Life to provide $100 million of capital to Life USA over the next five years.
This is a significant milestone for Life USA. The guaranteed access to capital
is obviously important. Of even more importance, however, may be that this
agreement assures the independence of Life USA and signals that the company will
continue to increase its influence as a new leader in the life insurance
industry.
As for 1998, the environment for the sale of fixed income insurance
products continues to be difficult, with no signs of improvement. The only way
to offset the constrictions of a shrinking market is to take a larger share.
The best way to do that is to have more people working the market. We call it,
"Building a Bigger Army!"
And, that is just what we will attempt to do. Our major emphasis in 1998
will be to place a larger LifeUSA "army" in the field. We will do this by
working closely with new marketing companies to get them into production,
placing heavy emphasis on recruiting new agents to represent LifeUSA, and
investing in more marketing companies.
Tied to this recruiting effort will be continued efforts to provide what
has been described as, "the best service offered by any company in the
industry," and the introduction of new products and promotions that will
encourage sales, even in a low interest rate environment.
There are a few other points of interest.
* EXPENSES -- The company will make a concerted effort to control expenses
in 1998. The target is to hold the increase in operating expenses to less
than 5%, on a projected 15% increase in production.
* YEAR 2000 -- A comprehensive analysis of the Year 2000 issues was
completed in 1997. As a result of the analysis, programming changes were
determined for all key transaction systems that will be used into the Year
2000. All programming changes on thse system are expected to be completed
by the end ofthe second quarter in 1998. Additionally, procedures are in
place to test and certify all new application systems and other software
applications used by the Company. Finally, Year 2000 compliance assurances
will be obtained from all vendors, and contingent vendors will be
identified. Management believes that the Company, which has only been
operating since 1987, has significantly fewer complex year 2000 issues
than many other insurance companies.
* LITIGATION -- It is unfortunate, but increased litigation activity is a
way of life in business today. The company is currently a defendant in two
potential class action complaints. One as part of a larger Allianz Life
action and another specifically related to annuity sales in Pennsylvania.
We do not believe there is merit to either action, and the company will
vigorously defend itself. However, the nature of the actions means that
Life USA will have to divert resources, time and capital to defend the
company and our actions.
On balance, we are pleased with the performance of our company in 1997. We
are confident that the company is as well positioned as possible to deal with
the challenges of a changing business environment and to continue our record of
growth and success. Thank you for your interest and continued support.
/s/ Robert W. MacDonald
Robert W. MacDonald
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Life USA Holding, Inc.
CHIEF EXECUTIVE OFFICER
LifeUSA Insurance Company
3
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
LIFE USA HOLDING, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
[Enlarge/Download Table]
AS OF AND FOR THE YEAR ENDED DECEMBER 31 1997
--------------------------------------------------------------------------------------------------
Consolidated results of operations:
Revenues ....................................................................... $ 369,903
Net income ..................................................................... 26,978
Adjustments to arrive at net operating income(1):
Net realized gains on investments ............................................. (670)
Charges (credits) for state guaranty fund assessments ......................... (930)
Changes in tax liability for prior years' activity ............................ 700
-----------
Net operating income(1) ........................................................ 26,078
Per share data:
Diluted shares ................................................................. 25,160,437
Convertible subordinated debenture interest addback, net of tax ................ $ 870
Net income ..................................................................... 1.11
Net operating income(1) ........................................................ 1.07
Consolidated financial position:
Assets ......................................................................... $ 5,062,774
Invested assets (fixed maturity investments and cash and cash equivalents) ..... 2,165,786
Debt (convertible subordinated debentures) ..................................... 36,030
Shareholders' equity:
As reported ................................................................... 222,400
Excluding SFAS No. 115 ........................................................ 214,251
Common stock data:
Shares issued, outstanding and to be issued .................................... 22,759,288
Book value per share:
As reported ................................................................... $ 9.77
Excluding SFAS No. 115 ........................................................ 9.41
Closing price .................................................................. 16.88
Financial ratios and other data:
Return on invested assets--net income .......................................... 1.25%
Return on invested assets--net operating income(1) ............................. 1.20%
Return on equity--net income:
As reported ................................................................... 12.13%
Excluding SFAS No. 115 ........................................................ 12.59%
Return on equity--net operating income(1):
As reported ................................................................... 11.73%
Excluding SFAS No. 115 ........................................................ 12.17%
Debt to equity:
As reported ................................................................... 16.20%
Excluding SFAS No. 115 ........................................................ 16.82%
Closing price to net income per share (P/E ratio) .............................. 15.2x
Closing price to net operating income per share(1) ............................. 15.8x
Closing price to book value per share:
As reported ................................................................... 1.73x
Excluding SFAS No. 115 ........................................................ 1.79x
Total market capitalization .................................................... $ 384,063
------------------
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.
4
================================================================================
FIVE YEAR
AVERAGE
COMPOUND
1996 1995 1994 1993 GROWTH RATE
------------- --------------- --------------- --------------- -----------
$ 316,898 $ 272,781 $ 206,313 $ 199,685 20.47%
23,454 19,097 14,469 15,115 22.28%
(408) (1,828) (641) (989)
1,998 1,877 1,704 624
0 0 0 0
-----------------------------------------------------------------
25,044 19,146 15,532 14,750 23.84%
23,358,663 22,524,396 20,409,047 19,055,286
$ 870 $ 757 N/A N/A
1.04 0.88 $ 0.71 $ 0.79 10.79%
1.11 0.88 0.76 0.77 12.23%
$ 4,386,723 $ 3,867,539 $ 3,065,271 $ 2,394,471 26.92%
1,902,465 1,754,087 1,249,321 899,998 37.08%
36,030 36,030 6,041 6,351
172,615 156,896 106,916 107,204 41.72%
169,280 144,189 123,836 107,204 40.67%
20,974,901 20,324,747 20,179,617 19,978,118
$ 8.23 $ 7.72 $ 5.30 $ 5.37 29.08%
8.07 7.09 6.14 5.37 28.12%
12.00 8.00 7.25 18.88
1.23% 1.09% 1.16% 1.68%
1.32% 1.09% 1.24% 1.64%
13.59% 12.17% 13.53% 14.10%
13.86% 13.24% 11.68% 14.10%
14.51% 12.20% 14.53% 13.76%
14.79% 13.28% 12.54% 13.76%
20.87% 22.96% 5.65% 5.92%
21.28% 24.99% 4.88% 5.92%
11.5x 9.1x 10.2x 23.8x
10.8x 9.1x 9.5x 24.4x
1.46x 1.04x 1.37x 3.52x
1.49x 1.13x 1.18x 3.52x
$ 251,699 $ 162,598 $ 146,302 $ 377,087
------------------
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.
5
COMPANY AND BUSINESS DESCRIPTION
LIFE USA HOLDING, INC.
================================================================================
COMPANY AND BUSINESS DESCRIPTION
COMPANY STRUCTURE
Life USA Holding, Inc. (the Company) is a national financial services
holding and marketing company with $5.06 billion in consolidated assets. LifeUSA
Insurance Company (LifeUSA Insurance), its largest and most significant
wholly-owned subsidiary, is licensed to write and sell life insurance and
several forms of annuities through independent field marketing organizations and
agents in the District of Columbia and all states except New York. Universal
Benefits Life, which markets and administers employee payroll deduction plans,
is a division of LifeUSA Insurance. In 1997 Universal Benefits Life, a division
of LifeUSA Insurance, administered supplemental employee retirement plans
through payroll deduction, to 39,000 employees participating in 5,000 plans.
LifeUSA Insurance sells a variety of innovative life insurance and annuity
products which offer long-term retirement benefits to consumers who seek
protection against outliving their financial resources. These products are sold
by a national marketing and distribution system comprised of Field Marketing
Organizations (FMOs) with independent agents and serviced by home office staff.
The Company has two additional subsidiaries: LifeUSA Securities, Inc.
(LifeUSA Securities) and LifeUSA Marketing, Inc. (LifeUSA Marketing). LifeUSA
Securities is a retail broker-dealer which distributes a family of LifeUSA
mutual funds as well as other established mutual funds and distributes variable
life insurance and annuity contracts. LifeUSA Marketing conducts a variety of
marketing activities for the Company. 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 and Roster Financial, LLC in December
1997, all national FMOs.
Management has organized the Company into three business segments in order
to focus on the distinct functional revenue and expense characteristics
associated with the activities performed by each. The segments include:
Insurance, Marketing and Corporate. Management's Discussion and Analysis on
Business Segments which follows on page 27, 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 February 2, 1998, 151 independent FMOs and 55,000 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 a few agents or as many as several thousand agents.
LifeUSA Insurance provides marketing support to FMOs through marketing training
seminars, product demonstrations, product literature and home office support.
The FMO receives a gross cash commission from LifeUSA Insurance on business
produced and, within specified LifeUSA Insurance guidelines, allocates such
commissions among its agents.
Cash commissions as a percentage of first year premiums are higher for life
insurance sales than annuity sales. Commissions are based on a percentage of the
targeted annual premiums and consist of both a higher first year commission and
a lower renewal commission on premiums paid on a 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
6
COMPANY AND BUSINESS DESCRIPTION (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
premiums, within the first 15 months of issuance. As is customary in the
industry, LifeUSA Insurance advances agents up to an aggregate of 50% of first
year commissions when life insurance policies are sold even though most of the
premiums have not yet been received. LifeUSA 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 LifeUSA Insurance's existing agents and from new
production sources by making loans to or investing in FMOs and by recruiting new
FMOs to sell its products. The amount of any loan or investment relates to the
revenue currently generated by the FMO and the projected increase in business
produced for LifeUSA Insurance by the FMO. To date, the Company has outstanding
loans to marketing organizations whose production accounted for 41% of the
Company's life insurance and annuity new business during 1997. The loans include
incentives of possible interest and principal forgiveness for achieving
increased production. During 1997, the FMOs in which LifeUSA Marketing has an
equity interest produced 13% of the Company's life insurance and annuity
production. In addition, during 1997, LifeUSA Insurance signed marketing
agreements with 21 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 loans to or
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 $500,000 in annual life and annuity commissions. During 1997, one FMO
accounted for 13% of LifeUSA Insurance total production. Although no other
single FMO accounted for more than 10% of LifeUSA Insurance total production,
the top FMOs (including their respective agents) produced the following portions
of LifeUSA Insurance's total business during 1997:
PERCENT OF CPCS(1)
-------------------
Top 5 FMOs .............. 34%
Top 10 FMOs .............. 50%
Top 25 FMOs .............. 80%
------------------
(1) CPCs (Combined Production Credits) are a measurement of the life insurance
and annuity business produced.
7
COMPANY AND BUSINESS DESCRIPTION (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
PRODUCTS
LifeUSA Insurance products compete against the products of other insurance
companies on the basis of long-term benefits. Policyholder persistency is
encouraged by LifeUSA Insurance's increased retirement income benefit for
long-term policyholders and lower benefits in case of early surrender or lapse.
LifeUSA Insurance products are designed to permit long-term investment of assets
by LifeUSA Insurance during the time premiums are being paid, the time benefits
are accumulated and the time benefits are being paid out. This product design
not only makes the products attractive to certain consumers, but also permits
LifeUSA Insurance to invest exclusively in high quality, long-term securities
which tend to provide higher yields than short-term securities. The target
market for the Company's products are consumers with average annual incomes of
$25,000 to $60,000. Management believes that this market is not adequately
serviced by the insurance industry and that the features of the Company's
products will be attractive to these consumers.
LifeUSA Insurance has designed its products to emphasize long-term value
and benefits. This is what management believes the "baby-boom" generation needs
most and the insurance industry is best suited to provide -- long-term benefits
in the form of income guaranteed for a lifetime. The economic concern today is
not dying too soon, but living too long. By de-emphasizing short-term gain and
lump sum cash benefits to those who surrender their policies, LifeUSA Insurance
products are less exposed to the disintermediation risk faced by companies
selling commodity-type products.
A disintermediation risk occurs when current interest rates are higher than
the interest rates being earned by a company's existing investment portfolio.
The risk is that policyholders will move their funds away from the company to
get higher, short-term rates. If the assets supporting the policies are invested
long-term to support long-term rates of return and the liabilities offer
short-term liquidity, those who surrender their policies for cash take more than
their fair share from the company and from persisting policyholders.
Management believes that consumer demand for products that meet retirement
needs is increasing and will continue to increase in the future due primarily to
the aging of the United States population. Management also believes that LifeUSA
Insurance products are well-situated to take advantage of this increasing
demand.
The United States Census Bureau (Census Bureau) reports that persons in the
45-64 age group, as a percentage of the total United States population, will
grow from 18.8% in 1990 to 28.0% in 2010. Persons over 65 years old are
projected by the Census Bureau to be approximately 59 million, or 20.0% of the
total United States population, by the year 2020. Despite this increase, the
percentage of employed persons covered by employer-sponsored retirement plans
has declined. According to the Census Bureau, only 40% of employed persons are
currently covered by an employer-sponsored retirement plan. Moreover, management
believes that there is increasing consumer concern as to whether
government-sponsored retirement programs, such as Social Security, will continue
to provide meaningful retirement benefits. There is, therefore, a growing need
for individually-funded financial products to provide a stream of adequate
retirement income.
ANNUITY PRODUCTS. LifeUSA Insurance 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 annuities pay enhanced benefits to
policyholders who allow the annuity funds to accumulate over the long term and
then elect some form of income payout option rather than a lump sum cash
payment. At December 31, 1997, annuity account values in force (including
business produced for Allianz Life) totaled $5.5 billion ($3.7 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(SM) CLASSIC The Accumulator Classic (formerly the Accumulator 8)
is ideal for the policyholder seeking an excellent return and relatively
high liquidity. The policyholder receives an 8% bonus, and after just one
year, can elect to receive the entire policy value over as few as five
years. The
8
COMPANY AND BUSINESS DESCRIPTION (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
Accumulator Classic accounted for approximately 31% of total annuity deposits
in 1997. Approximately 5.9% of such policies annuitize on the first
anniversary of the policy. The average deposit paid during 1997 on
Accumulator Classic annuities issued in 1997 was $24,000. The Accumulator
Classic is marketed by LifeUSA Insurance agents in all states except Oregon
and Washington. The average age of the insured at the issuance of the
Accumulator Classic annuity is 57. The Accumulator Classic was introduced in
1988.
ACCUMULATOR(SM) CASH BONUS ANNUITY The Accumulator Cash Bonus annuity offers
both high return and flexible liquidity options. The Instant Cash Bonus
Option is a permanent feature of the Accumulator Cash Bonus annuity which
allows the policyholder to receive the first-year annuity bonus in cash. The
Accumulator Cash Bonus annuity accounted for approximately 34% of total
annuity deposits in 1997 and is marketed by LifeUSA Insurance agents in all
states except New Jersey, Oregon and Washington. The Accumulator Cash Bonus
annuity was introduced in 1993.
IDEAL(SM) ANNUITY The IDEAL annuity is unique in that it provides up to 10
years of protection against interest rate changes (increases and decreases).
When issued, the IDEAL annuity offers a base credited rate, plus a 1.5%
annual interest bonus, both guaranteed for five years. Thus, the policyholder
is protected against a decline in interest rates for the next five years. At
the end of the first five-year term, the policyholder has the option to
"re-enter" the policy at the interest rate being credited on new issues. The
new credited rate, plus another 1.5% annual interest bonus, is then
guaranteed for a new five-year term. Thus, the policyholder is also protected
against a rise in interest rates. The IDEAL annuity accounted for
approximately 18% of total annuity deposits in 1997 and is marketed by
LifeUSA Insurance agents in all states except New Jersey, North Dakota,
Oklahoma, Oregon and Washington. The IDEAL annuity was introduced in 1997.
IDEAL(SM) INDEX ANNUITY The IDEAL Index 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
appeal of the product is that one can buy a competitive fixed annuity, with
principal and interest guaranteed, and should the S&P 500(R) Index outperform
the annuity over a five-year period, one-half of the incremental growth is
added to the value of the annuity. While not an investment product, the IDEAL
Index annuity is positioned as an alternative "safe haven" for investment
funds. An investor can "lock-in" current gains and still participate, should
the stock market continue to rise, all with no down-side exposure. The IDEAL
Index annuity accounted for approximately 2% of total annuity deposits in
1997 and is marketed by LifeUSA Insurance agents in all states except
Connecticut, Delaware, Illinois, Maryland, Minnesota, Missouri, New Jersey,
North Dakota, Oklahoma, Oregon, South Carolina, Texas, Virginia and Wyoming.
The IDEAL Index annuity was introduced in 1997.
IDEA(R) The IDEA -- Individual Disability Escalating Annuity -- is a
revolutionary concept in single premium deferred annuity product design. With
the IDEA, a policyholder will receive 60% more monthly retirement income in
the event of total disability due to illness, accident or old age; the income
increase is 30% in the event of partial disability. The increased income
benefit is paid as long as the disability lasts, even for life. The IDEA
accounted for less than 1% of total annuity deposits in 1997 and is marketed
by LifeUSA Insurance agents in all states except New Jersey, Oregon,
Pennsylvania and Washington. In late 1992, the IDEA feature was added to all
new UAL I and UAL III policies, with the exception of policies sold in New
Jersey, Pennsylvania and Washington. The IDEA was introduced in 1992.
LIFE INSURANCE PRODUCTS. At December 31, 1997, life insurance account
values in force (including business produced for Allianz Life) aggregated
$299.1 million ($199.8 million of which was ceded to
9
COMPANY AND BUSINESS DESCRIPTION (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
reinsurers). The majority of in force life insurance business is paid in annual
or more frequent installments. The following describes LifeUSA Insurance most
significant life insurance product:
UNIVERSAL ANNUITY LIFE(R) I AND UNIVERSAL ANNUITY LIFE(R) III The Universal
Annuity Life (UAL) products are policies specifically designed to pay the
insured as much for living as for dying. At younger ages, when the protection
against premature death is needed most, the UAL products provide tax-free
death benefits for the policyholder's family or business. At retirement,
there are a variety of annuitization options available which provide
significant additional monthly income if a lifetime payout is selected. Also
available is the IDEA(R) (see "IDEA" section shown above for further
discussion) option which allows payments to increase by as much as 60% if the
insured becomes fully disabled. The UAL I and UAL III products are marketed
by LifeUSA Insurance agents in all states except that product approval by
regulatory authorities is pending review in New Jersey for UAL I and New
Jersey and Pennsylvania for UAL III. In 1997, 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 PRODUCTS. LifeUSA Securities is the primary distributor
for LifeUSA Funds, a fund of funds managed by Investment Advisers, Inc. of
Minneapolis. In the fund are six portfolios to meet investment objectives
ranging from aggressive growth to principal preservation. These portfolios
provide immediate diversification into as many as ten underlying funds with a
single minimum investment and the benefits of active portfolio rebalancing with
no additional fees assessed to the portfolio. In addition, LifeUSA Securities
also distributes 22 other established mutual funds.
LifeUSA Securities also has an agreement with United Investors Life
Insurance Company and its affiliate, Waddell & Reed, Inc. to distribute on a
wholesale basis a variable annuity contract, ADVANTAGE II. ADVANTAGE II is
issued by United Investors Life Insurance Company and the underlying investment
portfolios are managed by Waddell & Reed, Inc.
REINSURANCE
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 regulatory
restrictions based on the amount of its statutory capital and surplus.
Since April 1, 1991, LifeUSA Insurance has ceded a substantial portion of
its new life insurance and annuity business to the following three reinsurers
(the Reinsurers):
* Employers Reassurance Corporation, a subsidiary of Employers Reinsurance
Corporation, a member of the General Electric Company group (Employers);
* Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies (Munich); and
* Republic-Vanguard Life Insurance Company, a member of the Winterthur Swiss
Insurance Group, one of the largest Swiss insurance companies
(Republic-Vanguard).
10
COMPANY AND BUSINESS DESCRIPTION (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
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 - Present ............... 75 75
The Company receives commissions and expense allowances on the portions of
the LifeUSA Insurance life insurance and annuity products reinsured and service
fees on business produced for Allianz Life. 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|M/2% to 18% of renewal and first-year excess
premiums. The Company also receives commissions and expense allowances and
service fees ranging from 61|M/2% to 22% on annuity deposits. An additional
allowance equal to .20% of the cash value of all annuities issued after April 1,
1991 until December 31, 1996 is received as of the beginning of policy years two
through ten. For annuities issued after January 1, 1997, an additional allowance
equal to .16% of the account value of all annuities is received as of the
beginning of policy year two through the life of the policy.
The reinsurance agreements require the Reinsurers' approval of policy forms
and terms of LifeUSA Insurance products reinsured by the Reinsurers. Under these
agreements, $545.8 million, $437.9 million and $350.8 million of premiums and
deposits were ceded to the Reinsurers by LifeUSA Insurance for the years ended
December 31, 1997, 1996 and 1995, respectively.
When a life insurance policy ceded to the Reinsurers lapses before the end
of 15 months, the Company has agreed to pay a chargeback equal to the excess of
the allowances received over the premiums received. As of December 31, 1997 and
1996, the reserve for lapsed policy chargebacks was $650,000 and $700,000,
respectively.
Assets and liabilities related to reinsurance ceded are 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. 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.
REINSURANCE ASSUMED LifeUSA Insurance assumes directly from Allianz Life, a
portion of new life insurance and annuity business written on policy forms
similar to those of LifeUSA Insurance. Under this agreement, $146.0 million,
$122.7 million and $175.5 million of premiums and deposits were assumed by
LifeUSA Insurance from Allianz Life for the years ended December 31, 1997, 1996
and 1995, respectively.
The following table shows the percentages of new life insurance and annuity
business produced for Allianz Life that have been assumed by LifeUSA since
inception:
LIFE INSURANCE ANNUITY
---------------- --------
September 1987 - December 1989 ....... --% --%
January 1990 - December 1990 ......... 25 25
January 1991 - December 1991 ......... 30 25
January 1992 - June 1993 ............. 50 30
July 1993 - September 1995 ........... 50 50
October 1995 - Present ............... 25 25
11
COMPANY AND BUSINESS DESCRIPTION (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
AGREEMENT 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 service fees
for the Allianz/LUSA Business, and the Company has provided all administrative
and other home office services and paid commissions due agents and premium taxes
on the Allianz/LUSA Business. During 1997, long-term care business was produced
for Allianz Life, and the Company received service and administration fees for
that business.
MAINTENANCE EXPENSES The Company is obligated to continue servicing the
LifeUSA Insurance life insurance and annuity policies and the Allianz/LUSA
Business. For policies issued prior to 1991, the Company believes that the
present value of anticipated future expenses required to service policies that
have been ceded will exceed the present value of anticipated future renewal
allowances by $250,000, and has accrued a liability for that amount. This
requires estimating renewal allowances and servicing costs many years into the
future, and it is possible that actual future renewal allowances and servicing
costs will not conform to the assumptions inherent in the current estimation of
allowances and costs. Management continuously monitors actual renewal allowance
and servicing cost experience as it emerges and, should material changes in the
assumptions occur, the liability will be modified to the extent that the present
value of future servicing costs is expected to exceed the present value of
future renewal allowances.
LIFE INSURANCE AND ANNUITIES IN FORCE
The following table shows LifeUSA Insurance life insurance and annuity in
force information at December 31, 1997 and December 31, 1996 (in millions):
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- ------------------
Life insurance account values:
All policies(1) ................. $ 299.1 $ 260.1
Direct and assumed business(2) .. 257.0 223.4
Net of reinsurance(3) ........... 99.3 85.5
Life insurance face amounts:
All policies(1) ................. 7,997.5 8,204.2
Direct and assumed business(2) .. 6,931.7 7,132.5
Net of reinsurance(3) ........... 2,277.7 2,385.2
Annuity account values:
All policies(1) ................. 5,518.4 4,876.7
Direct and assumed business(2) .. 3,916.6 3,496.3
Net of reinsurance(3) ........... 1,781.1 1,655.5
------------------
(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 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
12
COMPANY AND BUSINESS DESCRIPTION (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
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 Investment Advisers, Inc. (IAI), a
Minneapolis-based investment advisory firm, and Allianz Investment Corporation
(AIC), an affiliate of Allianz Life, to serve as the Company's investment
advisers. At December 31, 1997, assets managed for customers by IAI and AIC
exceed $14 billion and $20 billion, respectively.
IAI and AIC effect purchases of investment securities for the Company based
on the Company's guidelines. The investment philosophy of LifeUSA Insurance is
reflected by investment guidelines adopted by the Board of Directors of the
Company in 1990 and reaffirmed annually, as follows:
SIZE: no more than 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 "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.
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 will 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 1997, over 57,000
applications were submitted and only 53 challenges were paid.
13
COMPANY AND BUSINESS DESCRIPTION (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
At December 31, 1997, the Company employed 435 full-time and 26 part-time
persons, and the number of persons performing home office functions were as
follows:
NUMBER OF
HOME OFFICE FUNCTION EMPLOYEES
----------------------------------------------- ----------
Executive .................................... 19
Operations ................................... 188
Support ...................................... 89
Marketing .................................... 61
Information Services ......................... 59
Universal Benefits Life (payroll deduction) .. 39
Securities ................................... 6
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 with other retirement-oriented financial products.
Management believes that LifeUSA Insurance's unique and innovative products will
continue to attract policyholders to LifeUSA Insurance. 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.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
LIFE USA HOLDING, INC.
================================================================================
RESULTS OF OPERATIONS
The following analysis of the results of operations and financial condition
of the Company and its wholly-owned subsidiaries, LifeUSA Insurance, LifeUSA
Securities and LifeUSA Marketing, 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 1997, the Company generated increases in total collected annuity
deposits, invested assets and annuities in force. As a result, revenues from
policyholder charges, net investment income and commissions and expense
allowances increased. Expenses incurred for interest credited to policyholder
account values and commissions also increased during 1997 for similar reasons.
In addition, the Company incurred operating expenses relating to the 1997
national advertising campaign. Primarily as a result of these factors, net
income for 1997 increased 15% compared to 1996.
In addition, the combination of two non-operating income items (net
realized gains on investments and credits for state guaranty fund assessments)
partially offset by a change in tax liability for prior years' activity, had a
positive effect on 1997 net income.
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including
premiums and deposits on policies produced by LifeUSA Insurance agents for
Allianz Life, were $1.29 billion, $1.05 billion and $1.04 billion in 1997, 1996
and 1995, respectively, and represented an increase of 23% in 1997 compared to
1996 and an increase of 1% in 1996 compared to 1995. The following table shows
the amounts of premiums and deposits collected, ceded and retained for the three
years (in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Collected Premiums and Deposits(1):
LifeUSA Insurance:
Life:
First year .................................. $ 7,883 $ 12,731 $ 16,451
Single and renewal .......................... 52,323 49,242 44,418
---------- ---------- ----------
Total Life ................................. 60,206 61,973 60,869
Annuities ................................... 684,992 547,748 585,739
---------- ---------- ----------
Total LifeUSA Insurance collected premiums
and deposits ............................ 745,198 609,721 646,608
Allianz Life:
Life:
First year .................................. 2,142 3,261 4,693
Single and renewal .......................... 14,961 14,817 13,010
---------- ---------- ----------
Total Life ................................. 17,103 18,078 17,703
Annuities ................................... 532,151 424,659 379,588
---------- ---------- ----------
Total Allianz Life collected premiums
and deposits ............................ 549,254 442,737 397,291
---------- ---------- ----------
Total collected premiums and deposits .... $1,294,452 $1,052,458 $1,043,899
========== ========== ==========
------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
Premiums and Deposits Not Retained or Assumed(2):
LifeUSA Insurance:
Life:
First year .................................. $ 5,913 $ 8,416 $ 8,351
Single and renewal .......................... 34,021 31,925 30,167
-------- -------- --------
Total Life ................................. 39,934 40,341 38,518
Annuities ................................... 505,829 397,566 312,325
-------- -------- --------
Total LifeUSA Insurance premiums and
deposits not retained ................... 545,763 437,907 350,843
Allianz Life:
Life:
First year .................................. 1,607 2,228 2,377
Single and renewal .......................... 8,833 8,596 7,722
-------- -------- --------
Total Life ................................. 10,440 10,824 10,099
Annuities ................................... 392,807 309,198 211,731
-------- -------- --------
Total Allianz Life premiums and deposits
not assumed ............................. 403,247 320,022 221,830
-------- -------- --------
Total premiums and deposits not retained
or assumed ............................. $949,010 $757,929 $572,673
======== ======== ========
Retained or Assumed Premiums and Deposits(3):
LifeUSA Insurance:
Life:
First year .................................. $ 1,970 $ 4,315 $ 8,100
Single and renewal .......................... 18,302 17,317 14,251
-------- -------- --------
Total Life ................................. 20,272 21,632 22,351
Annuities ................................... 179,163 150,182 273,414
-------- -------- --------
Total LifeUSA Insurance retained
premiums and deposits ................... 199,435 171,814 295,765
Allianz Life:
Life:
First year .................................. 535 1,033 2,316
Single and renewal .......................... 6,128 6,221 5,288
-------- -------- --------
Total Life ................................. 6,663 7,254 7,604
Annuities ................................... 139,344 115,461 167,857
-------- -------- --------
Total Allianz Life assumed premiums
and deposits ............................ 146,007 122,715 175,461
-------- -------- --------
Total retained or assumed premiums
and deposits ........................... $345,442 $294,529 $471,226
======== ======== ========
------------------
(2) Includes premiums and deposits related to LifeUSA Insurance ceded by LifeUSA
Insurance to the Reinsurers and premiums and deposits related to
Allianz/LUSA Business that have not been assumed by LifeUSA Insurance.
(3) Includes premiums and deposits related to LifeUSA Insurance retained by
LifeUSA Insurance and premiums and deposits related to Allianz/LUSA Business
assumed by LifeUSA Insurance. LifeUSA Insurance invests these premiums and
deposits for the purpose of providing future benefits to its policyholders.
Reference is made to Reinsurance in the Company and Business Description section
on pages 10 -12 in this Annual Report to Shareholders and Form 10-K for further
details on the Company's reinsurance agreements.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
REVENUES. Total revenues were $369.9 million, $316.9 million and $272.8
million in 1997, 1996 and 1995, respectively. 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 the increase in revenues
was the increase in net investment income generated by the growth of invested
assets and net realized gains on investments. The increase in total revenues of
16% in 1996 compared to 1995 was due primarily to the increase in policyholder
charges and net investment income generated by the growth in annuities in force
and invested assets and the increase in commissions and expense allowances
associated with the October 1, 1995 reduction in LifeUSA Insurance net
retention. The discussion which follows gives a line-by-line comparison of
revenue for the years ended December 31, 1997, 1996 and 1995. See also the
Business Segments section which follows on page 27 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 6%, or $2.6 million, in 1997 compared to 1996, and
30%, or $10.9 million, in 1996 compared to 1995, reflecting the growth in and
maturity of LifeUSA Insurance net retained account values in force.
Increases in net investment income of 11%, or $14.7 million, in 1997
compared to 1996, and 19%, or $20.3 million, in 1996 compared to 1995, are
attributable to increases in invested assets (fixed maturity investments and
cash and cash equivalents) to $2.17 billion at December 31, 1997 from $1.90
billion at December 31, 1996 and $1.75 billion at December 31, 1995, 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 7.30%, 7.44% and 7.46% at December 31, 1997, 1996 and
1995, 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 1997, 1996 and 1995
(dollars in millions, except per share amounts):
1997 1996 1995
---------------------
Net realized gains on investments .................. $4.4 $1.8 $7.6
Increase in:
Amortization of deferred policy acquisition costs .. 1.9 .7 2.8
Other benefits to policyholders .................... 1.4 .5 2.0
---------------------
Income before income taxes ......................... 1.1 .6 2.8
Income taxes ....................................... .4 .2 .9
---------------------
Net income ......................................... $.7 $.4 $1.9
=====================
Diluted earnings per share ......................... $.03 $.02 $.08
=====================
Net commissions and expense allowances on premiums and deposits collected
on reinsured policies and service fees on business produced for Allianz Life
increased 24%, or $32.4 million, in 1997 compared to 1996. This increase is
consistent with the 23% increase in total collected premiums and deposits. The
increase in net commissions and expense allowances of 15%, or $17.9 million, in
1996 compared to 1995, was due primarily to the October 1, 1995 reduction in
LifeUSA Insurance's net retention.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
The following table shows the amounts of net commissions and expense
allowances for 1997, 1996 and 1995 (in thousands):
[Enlarge/Download Table]
1997 1996 1995
--------- --------- ---------
LifeUSA Insurance:
Life:
First year ...................................... $ 7,153 $ 10,263 $ 9,746
Single and renewal .............................. 5,515 5,246 5,039
Total Life ..................................... 12,668 15,509 14,785
Annuities ....................................... 77,145 59,003 45,776
--------- --------- ---------
Total LifeUSA Insurance ....................... 89,813 74,512 60,561
Allianz Life:
Life:
First year ...................................... 2,148 3,336 4,746
Single and renewal .............................. 2,110 2,227 1,941
--------- --------- ---------
Total Life ..................................... 4,258 5,563 6,687
Annuities ....................................... 76,955 58,431 53,344
--------- --------- ---------
Total Allianz Life ............................ 81,213 63,994 60,031
Lapse policy chargebacks ........................... (908) (772) (746)
--------- --------- ---------
Total commissions and expense allowances, net $ 170,118 $ 137,734 $ 119,846
========= ========= =========
------------------
The above table includes commissions and expense allowances related to LifeUSA
Insurance policies that have been ceded by LifeUSA Insurance to the Reinsurers
and service fees related to Allianz/LUSA Business.
The Company pays a lapse policy chargeback to the Reinsurers when a life
insurance policy that has been ceded lapses before the end of 15 months. The
chargeback paid for each policy is equal to the excess of the allowances
received over the premiums received.
Reference is made to Reinsurance in the Company and Business Description section
on pages 10 -12 in this Annual Report to Shareholders and Form 10-K for further
details on the Company's reinsurance agreements.
EXPENSES. Total expenses were $326.8 million, $279.8 million and $242.8
million in 1997, 1996 and 1995, respectively. 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 increase in total
expenses of 15% in 1996 compared to 1995 was primarily due to growth in and
maturity of life insurance and annuities in force. The discussion which follows
gives a line-by-line comparison of expenses for the years ended December 31,
1997, 1996 and 1995. See also the Business Segments section on page 27 which
follows for additional analysis of the results of operations.
Increases in interest credited to policyholder account values of 10%, or
$10.0 million, in 1997 compared to 1996 and 18%, or $14.9 million, in 1996
compared to 1995 reflect the growth in and maturity of annuities in force.
Increases in other benefits to policyholders of 32%, or $5.6 million, in 1997
compared to 1996 reflect the accrual of bonuses to be paid to policyholders (the
primary component of other benefits 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. Other
benefits to policyholders increased 18%, or $2.7 million, in 1996 compared to
1995 for the same reasons, as well as revisions made to the estimates in the
models used to accrue for bonuses to be paid to policyholders described below.
Amortization of deferred policy acquisition costs increased 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. Amortization of
deferred policy acquisition costs increased
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
11%, or $2.4 million, in 1996 compared to 1995 for the same reasons, as well as
revisions made to the estimates in the models used to amortize deferred policy
acquisition costs described below.
LifeUSA Insurance uses models to estimate future gross profits and allocate
current gross margins in order to amortize deferred policy acquisition costs and
accrue for bonuses to be paid to policyholders (the primary component of other
benefits to policyholders). In accordance with Statement of Financial Accounting
Standards (SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments," LifeUSA Insurance is required to make revisions to the
estimates in these models and adjust amortization accordingly. In 1997 and 1995
minor revisions were made to the estimates used in these models, however, the
effect 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 1997, 1996 and 1995:
[Enlarge/Download Table]
1997 1996 1995
---- ---- ----
Annualized first year lapse rate for life insurance policies
(excluding single premium) ......................................... 22.7% 20.7% 21.1%
Annualized first year (13 months) surrender rate for annuities ...... 1.2 1.1 1.1
Annualized first year (13 months) annuitization rate for annuities .. 6.1 5.9 6.0
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 increased 27%, or $21.3 million, in 1997 compared to
1996. These increases were 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 which earn the highest commission rates paid
by LifeUSA Insurance. Commissions to agents increased 12%, or $8.5 million, in
1996 compared to 1995 due to the increase in collected premiums and deposits
discussed previously and the October 1, 1995 reduction in LifeUSA Insurance net
retention which resulted in less commissions being deferred in 1996 than were
deferred in 1995, partially offset by the decline in collected first year life
premiums.
Taxes, licenses and fees (which consists primarily of premium taxes and
state guaranty fund assessments) 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. Taxes, licenses and fees
decreased 54%, or $4.1 million, in 1996 compared to 1995. This decrease was
primarily due to the combined impact of a refund of state premium taxes paid in
prior years that was received during 1996 and changes made in the method of
accruing for premium taxes, partially offset by the slight increase in charges
for state guaranty fund assessments recorded during 1996.
Operating expenses increased 14%, or $7.7 million, in 1997 compared to
1996. The increase was due primarily to the growth of LifeUSA Insurance annuity
in force business and expenditures for a national advertising and sales
promotion campaign completed during the first and second quarters of 1997.
Operating expenses increased 30%, or $12.7 million, in 1996 compared to 1995.
This increase was primarily due to the growth in LifeUSA Insurance life
insurance and annuities in force and the October 1, 1995 reduction in LifeUSA
Insurance net retention which resulted in less operating expenses being deferred
in 1996 than were deferred in 1995.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
A comprehensive analysis of Year 2000 issues was completed during 1997. As
a result of the analysis, programming changes were determined for all key
transaction systems that will be used into the Year 2000. Management expects all
programming changes to be completed on these systems by the end of the second
quarter 1998 at a cumulative cost of approximately $500,000. Additionally,
procedures are in place to test and certify all new application systems and
other software applications used by the Company. Finally, Year 2000 compliance
assurances will be obtained from all vendors, and contingent vendors will be
identified. Management believes that the Company, which has only been operating
since 1987, has significantly fewer complex year 2000 issues than many other
insurance companies.
Income taxes were $16.1 million in 1997, $13.6 million in 1996 and $10.9
million in 1995. The effective income tax rates for 1997, 1996 and 1995 were
37.4%, 36.7% and 36.3%, respectively.
NET INCOME. Net income was $27.0 million in 1997, $23.5 million in 1996,
and $19.1 million in 1995, which represents an increase in net income of 15% in
1997 compared to 1996 and 23% in 1996 compared to 1995. Diluted earnings per
share was $1.11 in 1997, $1.04 in 1996 and $.88 in 1995 which represents an
increase of 7% in 1997 compared to 1996 and 18% in 1996 compared to 1995. For
1997 and 1996, the per share increase is lower than the net income increase due
to an increase of 1.8 million and .8 million shares used in the earnings per
share calculations for 1997 and 1996, respectively (see Note 8 to the
Consolidated Financial Statements for details).
The following table summarizes the operating highlights for 1997, 1996 and
1995 (dollars in millions, except per share amounts):
[Enlarge/Download Table]
1997 1996 1995
----------------------------------------------------
INCOME EPS INCOME EPS INCOME EPS
----------------------------------------------------
Consolidated net income and diluted earnings
per share .......................................... $ 27.0 $ 1.11 $ 23.4 $ 1.04 $ 19.1 $ .88
Adjustments to arrive at consolidated net
operating income(1):
Net realized gains on investments ................... (.7) (.03) (.4) (.02) (1.9) (.08)
Charges (credits) for state guaranty fund
assessments ........................................ (.9) (.04) 2.0 .09 1.9 .08
Changes in tax liability for prior years' activity .. .7 .03 -- -- -- --
----------------------------------------------------
Consolidated net operating income and earnings
per share .......................................... 26.1 1.07 25.0 1.11 19.1 .88
Impact of:
Expenses associated with national advertising
campaign .......................................... 2.0 .08 -- -- -- --
Revisions made to the estimates in the models
used to amortize deferred policy acquisition
costs and accrue for bonuses to be paid to
policyholders ..................................... -- -- (1.4) (.06) -- --
Reduction of state premium tax expense ............. -- -- (1.8) (.08) -- --
----------------------------------------------------
Consolidated net operating income and earnings
per share excluding impact of expenses
associated with national advertising campaign
and items related to prior periods ................. $ 28.1 $ 1.15 $ 21.8 $ .97 $ 19.1 $ .88
====================================================
------------------
(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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company's primary available sources of cash were (i)
service fees received by the Company for the Allianz/LUSA Business, (ii)
management fees from LifeUSA Insurance, (iii) proceeds remaining from the $30
million convertible subordinated debenture purchased by Allianz Life in February
1995, (iv) interest earned on invested assets, (v) a dividend of $2.5 million
paid by LifeUSA Insurance in the first quarter of 1997, (vi) issuance of shares
upon exercise of common stock options, and (vii) a $50 million long-term line of
credit from two of its reinsurers. A substantial portion of the Company's
operating expenses is attributable to services provided to LifeUSA Insurance,
such as employees, data processing, facilities and supplies, which are
reimbursed by LifeUSA Insurance through management fees. LifeUSA Insurance is
expected to have sufficient cash to provide reimbursement through 1998, based on
currently anticipated life insurance and annuity sales and on the continuation
of acceptable reinsurance arrangements. LifeUSA Insurance's ability to pay
dividends in the future is subject to compliance with Minnesota insurance laws
and regulations.
The Company has entered into an agreement with two of its Reinsurers which
provides a long-term line of credit in the amount of $50 million. Funds drawn
against the line of credit can be used to fund certain investments and
acquisitions which the Company may make, capital contributions to LifeUSA
Insurance or capital expenditures. On July 15, 1997, the Company borrowed $5.0
million under this line of credit. The Company has no other outstanding
borrowings under this agreement.
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, and the marketing agreement between the two companies will
be extended to December 31, 2000. See Note 10 to the Consolidated Financial
Statements for more information on the agreement with Allianz Life.
The extended marketing relationship with Allianz Life and related infusion
of capital gives the Company additional opportunity to expand its distribution
system and take advantage of marketing opportunities. As part of the
transaction, Allianz Life will also increase its participation, either as a
direct writer or reinsurer, from 25 percent to 37.5 percent of the new life and
annuity business produced by the Company's agents. Also, LifeUSA Insurance will
increase the retention of its annuity business from 25 to 30 percent and its
life insurance business from 25 to 50 percent.
The Company's cash needs consist of (i) operating expenses, including
expenses in connection with the efforts to increase the production of LifeUSA
Insurance existing agents and expand the size of the LifeUSA Insurance field
force, (ii) investments in and additional purchase payments to marketing
organizations expected to increase premium and deposit production volume for
LifeUSA Insurance, (iii) commission advances to agents, (iv) payment of interest
on the Company's convertible subordinated debenture and borrowings under the
line of credit, (v) potential contributions to LifeUSA Securities to ensure
compliance with NASD capital requirements, and (vi) potential capital
contributions to LifeUSA Insurance to permit increases in sales volume and
retention or assumption of new life insurance and annuity business produced by
LifeUSA Insurance agents and to provide LifeUSA Insurance sufficient capital and
surplus to maintain adequate capital ratios. Management believes that the
combination of (i) the statutory profits generated by LifeUSA Insurance on the
mature business which it has retained or assumed, (ii) the sale of newly issued
stock for $100 million over the next five years under the agreement with Allianz
Life, (iii) borrowings under the $50 million line of credit from two of the
Reinsurers, (iv) cash generated by operations, (v) issuance of shares upon
exercise of common stock options, and (vi) dividends from LifeUSA Insurance,
will provide sufficient capital resources to support the capital needs of
LifeUSA Insurance and meet all the Company's cash needs in the ordinary course
of business through 1998, based on currently anticipated life insurance and
annuity sales, 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
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
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 a statutory net income of $18.4 million in 1997
compared to $13.2 million in 1996. As a result, the Company did not make capital
contributions to LifeUSA Insurance during 1997. As of December 31, 1997, LifeUSA
Insurance had statutory capital and surplus for regulatory purposes of $103.7
million compared to $87.3 million at December 31, 1996. LifeUSA Insurance
expects to continue to satisfy statutory capital and surplus requirements
through 1998 primarily through statutory profits on its maturing block of
retained inforce business. In 1998 under the terms of the agreement with Allianz
Life, LifeUSA Insurance will increase the retention of its annuity business from
25 to 30 percent and its life business from 25 to 50 percent. The Company does
not anticipate a significant impact on statutory capital as a result of the
changes in retention levels.
Since its inception, the Company has not paid any dividends on its common
stock. In addition, there are statutory and regulatory limitations upon the
extent to which dividends may be paid to the Company from an insurance
subsidiary, including the restriction that an insurance company may only pay
ordinary dividends out of unassigned funds (earned surplus). Approval by the
Department of Commerce of the State of Minnesota is required for LifeUSA
Insurance to pay dividends in any 12-month period in an amount exceeding the
lesser of (i) 10% of the insured's statutory earned surplus at the end of the
preceding year or (ii) the insured's statutory net gain from operations, not
including realized capital gains, for the year preceding the distribution, both
of which are determined in accordance with the Minnesota insurance laws and
regulations. LifeUSA Insurance paid a $2.5 million extraordinary dividend to the
Company during 1997 and has been permitted by the Department of Commerce to pay
a $2.5 million extraordinary dividend to the Company during the first quarter
1998.
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
determines its current capital requirements. These standards continue to be
reviewed by the NAIC. LifeUSA Insurance's current percentage of actual total
adjusted capital to authorized control level risk-based capital is well in
excess of regulatory requirements.
The NAIC continues to consider changes to model laws based on innovative
product designs. Nonforfeiture law discussions have been considering how to
better support multiple benefit product designs, such as LifeUSA Insurance
two-tier annuities or universal life contracts with enhanced retirement
benefits. LifeUSA Insurance has been able to successfully demonstrate the
financial stability of such designs, which provide higher retirement benefits to
consumers while decreasing disintermediation and solvency risks to LifeUSA
Insurance.
By the end of 1997, twenty-one states have adopted the NAIC Life Insurance
Illustration Model Regulation. A requirement of the regulation is that
prescribed tests be satisfied to demonstrate illustrated benefits are self
supporting and not lapse supported. The requirements of this regulation have
been successfully implemented by LifeUSA Insurance. NAIC committees are also
considering a new annuity
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
illustration model regulation. It proposes to establish disclosure requirements,
illustration formats, and rules for testing the supportability of illustrated
benefits. LifeUSA Insurance is monitoring these developments and no significant
impact is anticipated at this time.
A new approach to statutory valuation of liabilities (reserves) and
regulations for equity-indexed products is also being considered by NAIC
committees. LifeUSA Insurance is monitoring these developments and no
significant impact is anticipated at this time.
Insurance laws also require LifeUSA Insurance to file detailed periodic
reports with the regulatory agencies in each of the states in which it writes
business, and these agencies may also examine LifeUSA Insurance business
operations and financial statements at any time. Under NAIC rules, one or more
of the regulatory agencies will periodically examine LifeUSA Insurance, normally
at three-year intervals, on behalf of the states in which LifeUSA Insurance is
licensed. During 1996, the Minnesota Department of Commerce conducted a
triennial examination of LifeUSA Insurance for the three years ended December
31, 1995. The Company expects to receive the final examination report in the
near future and has not been made aware of any issues or recommendations that
are material individually or in the aggregate to its business operations or
financial statements.
LifeUSA Securities, as a registered broker and dealer in securities, is
subject to the Securities and Exchange Commission's Uniform Net Capital Rule. As
of December 31, 1997, LifeUSA Securities' net capital exceeded the minimum
required balance.
In June 1997, the B++ (Very Good) rating assigned to LifeUSA Insurance was
reaffirmed by the A. M. Best Company. The A. M. Best Company assigns the B++
rating to companies which, in its opinion, have achieved very good overall
performance when compared to the standards established by the A. M. Best
Company. B++ companies have a good ability to meet their obligations to
policyholders over a long period of time.
In December 1996, Standard & Poor's assigned LifeUSA Insurance an initial
claims-paying ability rating of BBB+ (Adequate). Standard & Poor's assigns the
BBB+ rating to insurers which, in its opinion, offer adequate financial
security, but capacity to meet policyholder obligations is susceptible to
adverse economic and underwriting conditions.
In September 1997, Moody's Investors Service assigned a Baa3 (adequate)
rating to LifeUSA Insurance. This rating falls within Moody's "Strong Companies"
category and reflects LifeUSA Insurance's high asset quality, good
administrative efficiency and strong tie with its distribution network.
As a result of the agreement with Allianz Life, A.M. Best Company, Standard
& Poor's and Moody's Investors Service have agreed during 1998 to reexamine
their ratings assigned to LifeUSA Insurance.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
INVESTMENTS. As of December 31, 1997, the Company had cash, cash
equivalents and fixed maturity investments on a consolidated basis totaling
$2.17 billion, including $7.5 million in restricted deposits with state
insurance authorities regulating LifeUSA Insurance. The following table
summarizes the amortized cost, carrying and fair values of each investment
category held at December 31 (dollars in thousands):
[Enlarge/Download Table]
AMORTIZED % OF CARRYING % OF FAIR % OF
1997 COST TOTAL VALUE TOTAL VALUE TOTAL
----------------------------------------------- ------------- ---------- ------------- ---------- ------------- ----------
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%
========== ====== ========== ====== ========== ======
AMORTIZED % OF CARRYING % OF FAIR % OF
1996 COST TOTAL VALUE TOTAL VALUE TOTAL
----------------------------------------------- ------------- ---------- ------------- ---------- ------------- ----------
Cash and cash equivalents ..................... $ 20,989 1.11% $ 20,989 1.10% $ 20,989 1.10%
Government Treasury and Agency notes
and bonds .................................... 98,982 5.24 100,909 5.30 104,537 5.56
Mortgage pass throughs ........................ 46,085 2.44 46,804 2.46 46,836 2.45
Agency Collateralized Mortgage
Obligations:
CMO -- Sequentials .......................... 6,260 .33 6,260 .33 6,284 .33
CMO -- PACs ................................. 615,995 32.63 615,556 32.36 616,286 32.22
CMO -- ADs .................................. 23,484 1.24 23,484 1.23 23,672 1.24
CMO -- TACs ................................. 11,970 .63 11,970 .63 12,675 .66
Investment grade corporate securities:
AAA+ to AAA- ................................ 36,749 1.95 36,900 1.94 37,930 1.98
AA+ to AA- .................................. 153,408 8.12 153,276 8.06 154,056 8.05
A+ to A- .................................... 485,766 25.72 491,040 25.81 493,102 25.78
BBB+ to BBB- ................................ 388,898 20.59 395,277 20.78 396,662 20.73
Non investment grade corporate securities ..... -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------
Total cash and invested assets ................ $1,888,586 100.00% $1,902,465 100.00% $1,913,029 100.00%
========== ====== ========== ====== ========== ======
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, 1997, the
weighted average credited interest rate for deferred annuities and life
insurance policies was 5.00% and the weighted average yield on the assets
backing liabilities was 7.34%. As of December 31, 1996, the weighted average
credited interest rate was 5.00% and the weighted average yield on the assets
backing liabilities was 7.48%. The decrease in the weighted average yield on
assets backing
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
liabilities is attributable, in part, to LifeUSA Insurance repositioning of a
portion of the available for sale investment portfolio as discussed below. This
decrease in yield was offset by the gains realized on the repositioning.
Investment income from the assets backing liabilities exceeded interest credited
to policyholders by $28.1 million during 1997. The investment portfolio is
managed primarily by allocating new cash flows into investments which have
yield, maturity and other characteristics suitable for LifeUSA Insurance
expected policyholder liabilities. Consistent with LifeUSA Insurance asset and
liability management practices, as of December 31, 1997, the effective duration
of LifeUSA Insurance fixed income securities was 5.03 years, compared to 5.88
years as of December 31, 1996.
The percentage of the total fair value of the Company's portfolio that was
comprised of investment grade corporate obligations was 62% at December 31,
1997. With each corporate security acquisition, LifeUSA Insurance external
managers perform a comprehensive analysis of the credit implications and outlook
of the issuing corporation and industry. Ongoing procedures for monitoring and
assessing any potential deterioration or downgrade in credit quality are also in
place. The Company's guidelines for the acquisition of corporate securities do
not allow the purchase of securities that are rated below investment grade by
Moody's Investors Service and Standard & Poor's.
The remainder of the Company's portfolio is comprised of government and
government agency obligations. Government and government agency obligations are
primarily held in the form of Planned Amortization Class (PAC) Collateralized
Mortgage Obligations (CMOs), the most conservative type of CMO issued. These
CMOs are specifically structured to provide the highest degree of protection
against swings in repayments caused primarily by changes in interest rates and
have virtually no risk of default. These securities are well-suited to fund the
payment of the liabilities they support.
Currently, the decision of the asset type in which to invest is dictated by
market conditions and relative values within the respective markets at the time
of purchase. Management believes that the types of assets invested in will allow
the Company to maintain high quality, consistent yields and proper maturities
for the overall portfolio.
As of December 31, 1997, the Company held 41%, or $882.2 million, of the
total fair value of its fixed maturity investments as available for sale. The
Company believes that this percentage is a prudent level that will allow enough
liquidity to meet any adverse cash flow experience. The Company continues to
classify a significant portion of its investment securities as held to maturity
based on its intent to hold such securities to maturity. A key feature of
LifeUSA Insurance products is the provision of bonuses to encourage terminating
policyholders to withdraw their funds over settlement periods lasting at least
five years. Policyholders taking cash settlements do not receive the bonuses.
This feature allows the Company to hold a significant amount of assets to
maturity. Insurance regulations require LifeUSA Insurance to perform an asset
adequacy analysis each year to determine if the assets are sufficient to fund
future obligations. The asset adequacy analysis indicates that the assets are
sufficient to fund future obligations. The Company continually monitors and
modifies the allocation of new assets between held to maturity and available for
sale as deemed prudent based on the continuing analysis of cash flow projections
and liquidity needs.
In 1997, LifeUSA Insurance repositioned a portion of its available for sale
investment portfolio to achieve a more efficient matching of asset maturities to
expected policyholder payments. The repositioning, completed in October,
resulted in the disposal of bonds with an amortized cost of approximately $157.3
million with maturities of 6 to 11 years, and purchasing a like amount of
investment grade corporate obligations with maturities of 2 to 5 years in
length. By targeting these specific maturities, this repositioning provided a
better match with the expected cash flows of LifeUSA Insurance expected
liabilities. These transactions resulted in only minor changes in overall yields
and a net realized gain of approximately $2.9 million.
During the third quarter of 1997, the Company entered a securities lending
program with the custodial bank of the Company's fixed maturity investment
portfolio. Under this program, the Company has made
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
available approximately 50% of its portfolio to be used in a pool of securities
available for lending transactions, however, the Company anticipates that only
6% of its portfolio will be on loan at any point in time. The custodial bank
provides the securities to borrowers in exchange for cash collateral of at least
102% of the daily market value of securities on loan. Since the Company retains
effective control of all securities on loan, no accounting recognition of these
transactions is required. Fees earned by the Company under the arrangement are
reported with net investment income and are currently immaterial.
At December 31, 1997, the Company's shareholders' equity and book value per
share were $222.4 million and $9.77, respectively, compared to $172.6 million
and $8.23, respectively, at December 31, 1996. Excluding the effect of the net
unrealized gain on fixed maturity investments -- available for sale reported as
a separate component of shareholders' equity in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company's shareholders' equity and book value per share were $214.3 million and
$9.41, respectively, at December 31, 1997, compared to $169.3 million and $8.07,
respectively, at December 31, 1996.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
LIFE USA HOLDING, INC.
================================================================================
Management has organized the Company into three business segments in order
to focus on the distinct functional revenue and expense characteristics
associated with the activities performed by each. The Insurance Segment focuses
on the administration, management and reinsurance of fixed insurance products.
The Marketing Segment focuses on the management of the field force used to
distribute fixed insurance products and the management of investments in
marketing subsidiaries. The Corporate Segment provides strategic direction for
all segments and includes the operations of LifeUSA Securities because the
results of operations of LifeUSA Securities are not yet material and do not
warrant separate disclosure. The results of operations for the Company's
Insurance, Marketing and Corporate Segments are presented in the discussion
which follows. The Company did not perform the allocations required for segment
reporting for 1995 as the Company was not then managed under its current
organizational structure. Management continues to analyze the proper allocation
of identifiable assets and liabilities to the business segments.
INSURANCE SEGMENT. The Insurance Segment develops fixed insurance products
for LifeUSA Insurance and Allianz Life, cedes a portion of the business written
by LifeUSA Insurance to the Reinsurers, assumes a portion of the Allianz/LUSA
Business, manages the assets and liabilities for business retained or assumed by
LifeUSA Insurance and administers all of the Allianz/LUSA Business.
The Insurance Segment's primary revenue sources are policyholder charges,
net investment income and net commissions and expense allowances. The Insurance
Segment's primary expenses are interest credited to policyholder account values,
other benefits to policyholders, amortization of deferred policy acquisition
costs, intersegment marketing fees paid to the Marketing Segment for the
production of LifeUSA Insurance and Allianz Life annuity deposits and life
insurance premium and operating expenses. The Insurance Segment's profitability
is derived from its ability to effectively manage the assets and liabilities
retained or assumed by LifeUSA Insurance and manage the operating expenses
incurred to administer all of the Allianz/LUSA Business.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
The following table summarizes the Insurance Segment's revenues, expenses
and net income for the years ended December 31, 1997 and 1996 (dollars in
thousands):
YEAR ENDED DECEMBER 31,
-------------------
1997 1996
-------- --------
Revenues:
Policyholder charges ............................... $ 49,470 $ 46,842
Net investment income .............................. 143,263 129,410
Net realized gains on investments .................. 4,371 1,791
Commissions and expense allowances, net ............ 170,118 137,734
Other .............................................. 1,090 429
-------- --------
Total revenues .................................... 368,312 316,206
Expenses:
Interest credited to policyholder account values ... 109,507 99,517
Other benefits to policyholders .................... 23,001 17,414
Amortization of deferred policy acquisition costs .. 27,789 24,495
Marketing fee ...................................... 134,348 109,879
Taxes, licenses and fees ........................... 2,743 3,596
Operating expenses:
Salaries and employee benefits .................... 16,226 14,597
Data processing ................................... 3,311 4,306
Printing and office supplies ...................... 972 779
Other ............................................. 21,031 19,024
-------- --------
Total expenses .................................... 338,928 293,607
-------- --------
Income before income taxes .......................... 29,384 22,599
Income taxes ........................................ 10,826 8,294
-------- --------
Net income .......................................... $ 18,558 $ 14,305
======== ========
REVENUES. Total revenues were $368.3 million and $316.2 million in 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 increase are consistent with those previously
discussed in the Results of Operations section.
EXPENSES. Total expenses were $338.9 million and $293.6 million in 1997 and
1996, respectively. The increase in total expenses of 15% is primarily
attributable to the increase in the marketing fee paid to the Marketing Segment,
net of deferral, as a result of the increase in premium production. The
marketing fee, which increased 22% in 1997 compared to 1996, is calculated as a
percentage of premium and will vary generally with the change in premium
production which increased 23% in 1997 compared to 1996. 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.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
MARKETING SEGMENT. The Marketing Segment provides all services related to
the recruitment of agents and FMOs, support of agents contracted to sell LifeUSA
Insurance and Allianz Life annuities, life insurance and Allianz Life long-term
care products and incentive programs to increase production. The Marketing
Segment also manages all acquisitions of and investments in field marketing
organizations.
The Marketing Segment's primary revenue source is the intersegment
marketing fee assessed to the Insurance Segment for the production of LifeUSA
Insurance and Allianz Life annuities, life insurance and Allianz Life long-term
care premiums and deposits. This fee is calculated as a percentage of the
premiums and deposits produced with varying rates for annuity and life
production and for first year, single and renewal premium and deposits. The
amount assessed is comparable to commissions earned by large national FMOs
performing similar services. The Marketing Segment's profitability is derived
from its ability to manage commissions and operating costs.
The following table summarizes the Marketing Segment's revenues, expenses
and net income for the years ended December 31, 1997 and 1996 (dollars in
thousands):
YEAR ENDED DECEMBER 31,
-------------------
1997 1996
-------- --------
Revenues:
Marketing fee ..................... $154,500 $128,481
Other ............................. 767 690
-------- --------
Total revenues .................. 155,267 129,171
Expenses:
Commissions ....................... 119,896 97,157
Operating expenses:
Salaries and employee benefits .. 6,167 4,575
Data processing ................. 1,260 1,873
Printing and office supplies .... 1,360 1,261
Other ........................... 12,071 9,898
-------- --------
Total expenses ................. 140,754 114,764
-------- --------
Income before income taxes ......... 14,513 14,407
Income taxes ....................... 5,624 5,293
-------- --------
Net income ......................... $ 8,889 $ 9,114
======== ========
REVENUES. Total revenues were $155.3 million and $129.2 million in 1997 and
1996, respectively. The increase in total revenues of 20% is primarily
attributable to the increase in the marketing fee which is based on premium and
deposit production. Total collected premiums and deposits increased 23% in 1997
compared to 1996 for the same reasons. The entire amount of the marketing fee is
charged to the Insurance Segment and is eliminated in consolidation.
EXPENSES. Total expenses were $140.8 million and $114.8 million in 1997 and
1996, respectively. The increase in total expenses of 23% is primarily
attributable to the 23% increase in commissions incurred due to the increase in
premium and deposit production. Commissions are also calculated as a percentage
of premiums and deposits and will vary generally with the change in premium and
deposit production. Differences in the mix of production between annuities and
life insurance and differences in the mix of premium between single, first year
and renewal will also cause commissions to change.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
CORPORATE SEGMENT. The Corporate Segment provides strategic direction for
the Company and its various business segments and includes the operations of
LifeUSA Securities because the results of LifeUSA Securities are not yet
material and do not warrant separate disclosure. The Corporate Segment charges a
fee to all other segments based on the revenues of those individual segments.
Expenses of an enterprise-wide nature such as the 1997 national advertising
campaign are retained by the Corporate Segment.
The following table summarizes the Corporate Segment's revenues, expenses
and net income for the years ended December 31, 1997 and 1996 (dollars in
thousands):
YEAR ENDED DECEMBER 31,
--------------------
1997 1996
-------- --------
Revenues:
Corporate fee ...................................... $ 9,590 $ 8,032
Net investment income .............................. 834 2
Net realized gains (losses) on disposal of assets .. (24) --
Other .............................................. 14 --
-------- --------
Total revenues ................................... 10,414 8,034
Expenses:
Commissions ........................................ 11 --
Operating expenses:
Salaries and employee benefits ................... 3,142 4,452
Data processing .................................. 183 77
Printing and office supplies ..................... 130 196
Other ............................................ 7,774 3,250
-------- --------
Total expenses .................................. 11,240 7,975
-------- --------
Income (loss) before income taxes ................... (826) 59
Income taxes ........................................ (357) 24
-------- --------
Net income (loss) ................................... $ (469) $ 35
======== ========
REVENUES. Total revenues were $10.4 million and $8.0 million for 1997 and
1996, respectively. The increase in total revenues of 30% for 1997 compared to
1996 is primarily related to the increases in the Corporate fee which is
directly related to the increase in revenues for the Insurance Segment and
Marketing Segment. Total revenues of the Insurance Segment increased 16% for
1997 compared to 1996. Total revenues of the Marketing Segment increased 20% for
1997 compared to 1996. These increases produced increases in the Corporate fee
of 19% for 1997 compared to 1996. Net investment income on the fixed maturity
investments held by the Company was first allocated to the Corporate Segment
beginning in 1997. Prior to 1997, net investment income was fully allocated to
the Insurance Segment.
EXPENSES. Total expenses were $11.2 million and $8.0 million for 1997 and
1996, respectively. The increase of 41% for 1997 compared to 1996 is primarily
attributable to the cost of a national advertising campaign that occurred over
the first six months of 1997.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
RECONCILIATION OF OPERATING SEGMENTS TO CONSOLIDATED RESULTS OF OPERATIONS.
The following tables reconcile the results of operations reported by the three
business segments to the Company's consolidated results of operations for the
years ended December 31, 1997 and 1996 (in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------
INSURANCE MARKETING CORPORATE ELIMINATING
SEGMENT SEGMENT SEGMENT ENTRIES(1) CONSOLIDATED
--------- --------- --------- --------- ---------
Revenues:
Policyholder charges .............. $ 49,470 $ 49,470
Net investment income ............. 143,263 $ 834 144,097
Net realized gains (losses) on
investments ...................... 4,371 (24) 4,347
Commissions and expense
allowances, net .................. 170,118 170,118
Marketing fee ..................... $ 154,500 $(154,500) --
Corporate fee ..................... 9,590 (9,590) --
Other ............................. 1,090 767 14 1,871
--------- --------- --------- --------- ---------
Total revenues .................. 368,312 155,267 10,414 (164,090) 369,903
Expenses:
Interest credited to policyholder
account values ................... 109,507 109,507
Other benefits to policyholders ... 23,001 23,001
Amortization of deferred policy
acquisition costs ................ 27,789 27,789
Commissions and marketing fee ..... 134,348 119,896 11 (152,863) 101,392
Taxes, licenses and fees .......... 2,743 2,743
Operating expenses:
Salaries and employee benefits .. 16,226 6,167 3,142 (700) 24,835
Data processing ................. 3,311 1,260 183 (60) 4,694
Printing and office supplies .... 972 1,360 130 (218) 2,244
Other ........................... 21,031 12,071 7,774 (10,249) 30,627
--------- --------- --------- --------- ---------
Total expenses ................. 338,928 140,754 11,240 (164,090) 326,832
--------- --------- --------- --------- ---------
Income (loss) before income taxes .. 29,384 14,513 (826) -- 43,071
Income taxes ....................... 10,826 5,624 (357) -- 16,093
--------- --------- --------- --------- ---------
Net income (loss) .................. $ 18,558 $ 8,889 $ (469) -- $ 26,978
========= ========= ========= ========= =========
------------------
(1) On a consolidated basis, the Company defers the costs of acquiring new
business and amortizes these costs over the lives of the policies in
proportion to the estimated gross profits expected to be realized on the
policies. For business segment reporting purposes, the amortization of
deferred policy acquisition costs is recorded as an expense of the Insurance
Segment. In addition, expenses allocated to the Marketing Segment and
Corporate Segment for business segment reporting purposes that are deferred
by the Company on a consolidated basis are reported direct (gross of the
amounts deferred) by each of these segments. The Insurance Segment reports
the impact of these deferrals as a reduction in the marketing service and
corporate fees paid to the Marketing Segment and Corporate Segment,
respectively. The differences between the total of the expenses reported by
all of the segments and the expenses (net of deferrals) reported by the
Company on a consolidated basis appear as intersegment eliminations in the
tables presented above.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------
INSURANCE MARKETING CORPORATE ELIMINATING
SEGMENT SEGMENT SEGMENT ENTRIES(1) CONSOLIDATED
--------- --------- --------- --------- ---------
Revenues:
Policyholder charges ............... $ 46,842 $ 46,842
Net investment income .............. 129,410 $ 2 129,412
Net realized gains on investments .. 1,791 1,791
Commissions and expense
allowances, net ................... 137,734 137,734
Marketing fee ...................... $ 128,481 $(128,481) --
Corporate fee ...................... 8,032 (8,032) --
Other .............................. 429 690 1,119
--------- --------- --------- --------- ---------
Total revenues ................... 316,206 129,171 8,034 (136,513) 316,898
Expenses:
Interest credited to policyholder
account values .................... 99,517 99,517
Other benefits to policyholders .... 17,414 17,414
Amortization of deferred policy
acquisition costs ................. 24,495 24,495
Commissions and marketing fee ...... 109,879 97,157 (126,943) 80,093
Taxes, licenses and fees ........... 3,596 3,596
Operating expenses:
Salaries and employee benefits ... 14,597 4,575 4,452 (600) 23,024
Data processing .................. 4,306 1,873 77 (78) 6,178
Printing and office supplies ..... 779 1,261 196 (203) 2,033
Other ............................ 19,024 9,898 3,250 (8,689) 23,483
--------- --------- --------- --------- ---------
Total expenses .................. 293,607 114,764 7,975 (136,513) 279,833
--------- --------- --------- --------- ---------
Income before income taxes .......... 22,599 14,407 59 -- 37,065
Income taxes ........................ 8,294 5,293 24 -- 13,611
--------- --------- --------- --------- ---------
Net income .......................... $ 14,305 $ 9,114 $ 35 -- $ 23,454
========= ========= ========= ========= =========
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
Statements other than historical information contained in this Annual
Report to Shareholders and Form 10-K are considered forward-looking and
involve a number of risks and uncertainties. In addition to the factors
discussed in this Annual Report to Shareholders and Form 10-K, there are
other factors that could cause actual results to differ materially from
expected results including, but not limited to, development and
acceptance of new products, impact of changes in federal and state
regulation, dependence upon key personnel, distribution system
expansion, changes in interest rates generally and credited rates on the
new business retained or assumed by LifeUSA Insurance, sales volume,
failure of the Company and its subsidiaries or significant third parties
to achieve year 2000 compliance or material expense in connection with
such compliance, competition and other risks described from time to time
in the Company's Securities and Exchange Commission filings, including
but not limited to this Annual Report to Shareholders and Form 10-K.
33
LIFE USA HOLDING, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
================================================================================
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31,
1997 1996
----------- -----------
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost: $846,466 at
December 31, 1997 and $864,400 at December 31, 1996) ........ $ 882,159 $ 878,279
Held to maturity, at amortized cost (fair value: $1,289,621 at
December 31, 1997 and $1,013,761 at December 31, 1996) ...... 1,249,488 1,003,197
Policy loans ................................................... 29,003 23,908
----------- -----------
Total investments ........................................... 2,160,650 1,905,384
Cash and cash equivalents ....................................... 34,139 20,989
Accrued investment income ....................................... 30,976 27,834
Future policy benefits recoverable and amounts due
from reinsurers ................................................ 2,577,598 2,179,999
Deferred policy acquisition costs ............................... 215,097 212,138
Other assets .................................................... 44,314 40,379
----------- -----------
$ 5,062,774 $ 4,386,723
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits ......................................... $ 4,686,172 $ 4,078,621
Other policyholders' funds ..................................... 9,208 5,381
Amounts due reinsurers ......................................... 38,403 23,605
Accrued commissions to agents .................................. 11,583 10,243
Taxes, licenses and fees payable ............................... 8,415 17,868
Accounts payable ............................................... 5,323 6,967
Convertible subordinated debentures ............................ 36,030 36,030
Deferred income taxes .......................................... 16,513 12,924
Other liabilities .............................................. 28,727 22,469
----------- -----------
Total liabilities ........................................... 4,840,374 4,214,108
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized,
none issued ................................................... -- --
Common stock, $.01 par value; 45,000,000 shares authorized,
22,723,830 shares issued and outstanding (20,953,517 shares at
December 31, 1996) ............................................ 227 210
Common stock to be issued, 35,458 shares (21,384 shares at
December 31, l996) ............................................ 565 357
Additional paid-in capital ..................................... 108,372 86,474
Notes receivable from stock sales .............................. (7,477) (3,888)
Net unrealized gain on fixed maturity investments --
available for sale ............................................ 8,149 3,335
Retained earnings .............................................. 112,564 86,127
----------- -----------
Total shareholders' equity .................................. 222,400 172,615
----------- -----------
$ 5,062,774 $ 4,386,723
=========== ===========
SEE ACCOMPANYING NOTES.
34
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
================================================================================
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues:
Policyholder charges ............................... $ 49,470 $ 46,842 $ 35,983
Net investment income .............................. 144,097 129,412 109,092
Net realized gains on investments .................. 4,347 1,791 7,634
Commissions and expense allowances, net ............ 170,118 137,734 119,846
Other .............................................. 1,871 1,119 226
----------- ----------- -----------
Total revenues .................................. 369,903 316,898 272,781
Expenses:
Interest credited to policyholder account values ... 109,507 99,517 84,665
Other benefits to policyholders .................... 23,001 17,414 14,698
Amortization of deferred policy acquisition costs .. 27,789 24,495 22,096
Commissions ........................................ 101,392 80,093 71,575
Taxes, licenses and fees ........................... 2,743 3,596 7,734
Operating expenses ................................. 62,400 54,718 42,052
----------- ----------- -----------
Total expenses .................................. 326,832 279,833 242,820
----------- ----------- -----------
Income before income taxes .......................... 43,071 37,065 29,961
Income taxes ........................................ 16,093 13,611 10,864
----------- ----------- -----------
Net income .......................................... $ 26,978 $ 23,454 $ 19,097
=========== =========== ===========
Basic earnings per common share ..................... $ 1.28 $ 1.17 $ .98
=========== =========== ===========
Diluted earnings per common share ................... $ 1.11 $ 1.04 $ .88
=========== =========== ===========
Number of shares used in per share calculation:
Basic .............................................. 21,795,258 20,762,192 20,254,838
Diluted ............................................ 25,160,437 23,358,663 22,524,396
SEE ACCOMPANYING NOTES.
35
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
================================================================================
[Enlarge/Download Table]
NUMBER
OF COMMON COMMON
STOCK SHARES STOCK
----------- -----------
Balance at December 31, 1994 ...................................... 20,179,617 $ 202
Issuance of common shares to Employee Savings Plan ................ 95,028 1
Issuance of shares through conversion of convertible
subordinated debentures .......................................... 571 0
Issuance of shares through exercise of options .................... 26,627 0
Common stock to be issued-shares, net of
122,226 shares issued ............................................ 22,904
Change in net unrealized gain (loss) on fixed maturity
investments -- available for sale
Net income
----------- -----------
Balance at December 31, 1995 ...................................... 20,324,747 203
Issuance of common shares to Employee Savings Plan ................ 167,457 2
Issurance of shares through field marketing organization
loan program ..................................................... 478,262 5
Issuance of shares through exercise of options .................... 28,455 0
Common stock to be issued-shares, net of 674,174 shares issued .... (24,020)
Change in net unrealized gain (loss) on fixed maturity
investments -- available for sale
Net income
----------- -----------
Balance at December 31, 1996 ...................................... 20,974,901 210
Issuance of common shares to Employee Savings Plan ................ 101,251 1
Issuance of shares through field marketing organization
loan program, net ................................................ 263,652 3
Issuance of shares through exercise of options .................... 1,216,250 12
Issuance of shares through 1996 acquisition of subsidiary ......... 132,188 1
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
Change in net unrealized gain on fixed maturity
investments -- available for sale
Net income
----------- -----------
Balance at December 31, 1997 ...................................... 22,759,288 $ 227
=========== ===========
SEE ACCOMPANYING NOTES.
36
================================================================================
[Enlarge/Download Table]
NET UNREALIZED
NOTES GAIN (LOSS) ON
COMMON ADDITIONAL RECEIVABLE FIXED MATURITY TOTAL
STOCK TO PAID-IN FROM INVESTMENTS- RETAINED SHAREHOLDERS'
BE ISSUED CAPITAL STOCK SALES AVAILABLE FOR SALE EARNINGS EQUITY
----------- ------------ ------------- -------------------- ------------ --------------
$ 163 $ 79,895 $ -- $ (16,920) $ 43,576 $106,916
(831) 830 --
11 11
195 195
1,050 1,050
29,627 29,627
19,097 19,097
-------- -------- -------- --------- -------- --------
382 80,931 -- 12,707 62,673 156,896
(1,436) 1,434 --
3,883 (3,888) --
226 226
1,411 1,411
(9,372) (9,372)
23,454 23,454
-------- -------- -------- --------- -------- --------
357 86,474 (3,888) 3,335 86,127 172,615
(1,220) 1,219 --
3,586 (3,589) (257) (257)
15,360 15,372
1,449 1,450
284 (284) --
--
1,428 1,428
4,814 4,814
26,978 26,978
-------- -------- -------- --------- -------- --------
$ 565 $108,372 $ (7,477) $ 8,149 $112,564 $222,400
======== ======== ======== ========= ======== ========
SEE ACCOMPANYING NOTES.
37
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
================================================================================
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income ................................................... $ 26,978 $ 23,454 $ 19,097
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discount on investments, net .................. (2,970) (2,441) (4,344)
Net realized gains on investments .......................... (4,347) (1,791) (7,634)
Policy acquisition costs deferred .......................... (44,628) (38,992) (65,460)
Amortization of deferred policy acquisition costs .......... 27,789 24,495 22,096
Convertible subordinated debentures ........................ -- -- (11)
Deferred income tax provision (benefit) .................... 470 (1,669) 2,180
Changes in operating assets and liabilities ................ 8,116 (13,347) (7,594)
Stock compensation ......................................... 1,220 1,436 831
--------- --------- ---------
Net cash provided by (used in) operating activities ........... 12,628 (8,855) (40,839)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases .................................................. (191,093) (152,389) (397,171)
Proceeds from sales ........................................ 196,818 42,542 382,606
Proceeds from maturities and principal payments on
mortgage-backed securities ................................ 17,088 9,081 4,984
Transfer from fixed maturity investments-held to maturity .. -- -- (339,470)
Fixed maturity investments-held to maturity:
Purchases .................................................. (262,113) (102,603) (442,085)
Proceeds from maturities and principal payments on
mortgage-backed securities ................................ 18,283 10,227 9,532
Transfer to fixed maturity investments-available for sale .. -- -- 339,470
Investments in and loans to field marketing organizations .. (12,510) (10,469) --
--------- --------- ---------
Net cash used in investing activities ......................... (233,527) (203,611) (442,134)
Cash flows from financing activities:
Receipts from universal life and investment products ......... 345,442 294,529 471,226
Withdrawals on universal life and investment products ........ (257,260) (208,529) (140,462)
Interest credited to policyholders ........................... 109,507 99,517 84,665
Proceeds from exercise of stock options ...................... 15,372 226 195
Proceeds from convertible subordinated debenture issuance .... -- -- 30,000
Other financing activities ................................... 20,988 14,490 12,851
--------- --------- ---------
Net cash provided by financing activities ..................... 234,049 200,233 458,475
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .......... 13,150 (12,233) (24,498)
Cash and cash equivalents at beginning of the year ............ 20,989 33,222 57,720
--------- --------- ---------
Cash and cash equivalents at end of the year .................. $ 34,139 $ 20,989 $ 33,222
========= ========= =========
Cash paid during the year for interest ........................ $ 2,148 $ 1,984 $ 1,223
========= ========= =========
Cash paid during the year for income taxes .................... $ 14,100 $ 16,263 $ 8,000
========= ========= =========
SEE ACCOMPANYING NOTES.
38
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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.
During 1996, the Company formed two wholly-owned subsidiaries: LifeUSA
Securities and LifeUSA Marketing. LifeUSA Securities is a retail broker-dealer
which distributes a family of LifeUSA mutual funds as well as other established
mutual funds and distributes variable life insurance and annuity contracts.
LifeUSA Marketing conducts a variety of marketing activities for the Company.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, LifeUSA Insurance, LifeUSA
Securities and LifeUSA Marketing. 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 which the Company has the ability
and positive intent to hold to maturity are so classified and carried at
amortized cost. All other investments are classified as available for sale and
carried at fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity.
The Company anticipates prepayments in the accounting for discounts and
premiums related to its Collateralized Mortgage Obligation (CMO) investments. As
differences arise between actual and anticipated prepayments, the effective
yield of CMOs is recalculated to reflect actual prepayments to date and
anticipated future prepayments. The net investment in the CMOs is then adjusted
to the amount that would have existed had the new effective yield been applied
since the acquisition of the CMOs.
Realized gains and losses on sales of available for sale investments are
recorded as revenue using the specific identification method. In addition, the
amortization of deferred policy acquisition costs and other benefits to
policyholders are adjusted for gains and losses realized on sales of available
for sale investments which support policyholder liabilities. Changes in the fair
value of available for sale investments are reflected directly in shareholders'
equity, net of related adjustments for deferred policy acquisition costs and
deferred taxes and related valuation allowances that would have been recorded if
these investments would have been sold as of the balance sheet date.
Investments that are determined to have a decline in value that is other
than temporary are written down to estimated fair value. This value becomes the
investment's new cost basis and the amount of the write down is recorded as a
realized loss.
39
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. The carrying amounts
reported in the balance sheet for these financial instruments are based on cost
and approximate fair value.
ACCOUNTING FOR OPTION CONTRACTS
The Company sells single premium deferred annuity products with an
additional benefit credited to the policy annuitization value based on the
growth in the Standard & Poor's 500 Index. The Company has analyzed the
characteristics of these benefits and has purchased option contracts with
similar characteristics to hedge these risks. These options are reported at fair
value in other assets on the consolidated balance sheet. Unrealized gains and
losses on the contracts are recorded in other revenues to offset the expense of
increases in the future policy benefits liability for the index benefit.
The Financial Accounting Standards Board (FASB) has issued an exposure
draft, "Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities," which addresses the accounting for derivative instruments,
such as the options owned by the Company, used as hedges against changes in the
fair value of specified assets or liabilities. The Company's use of option
contracts to hedge against increases in the future policy benefits liability and
the Company's accounting treatment of these contracts fully meet the criteria
for fair value hedge accounting defined in this exposure draft. A final
statement from the FASB could be issued in 1998, and would be effective for
financial statements issued for periods beginning January 1, 2000. The Company's
accounting treatment is also consistent with the fair value treatment prescribed
by Statement of Financial Accounting Standards (SFAS) No. 80, "Accounting for
Futures Contracts" for hedges of liabilities carried at fair value.
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 5.5% to 8.5%.
The Company reports assets and liabilities related to ceded life insurance
and annuity contracts on a gross basis. Specifically, account values ceded to
reinsurers are reflected as a receivable and the liability for future policy
benefits is recorded on a gross basis.
For business written directly, LifeUSA 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 business produced by LifeUSA Insurance agents for Allianz Life and
assumed by LifeUSA Insurance, the amount of the allowance paid by LifeUSA
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.
40
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applies Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its stock option plans. See Note 7 to the
Consolidated Financial Statements for a summary of the pro forma effects to
reported net income and earnings per share for 1997, 1996 and 1995 as if the
Company had elected to recognize compensation cost based on the fair value of
the options granted as prescribed by SFAS No. 123.
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, 1997.
In December 1997, the American Institute of Certified Public Accountants
released Statement of Position 97-3 (SOP) titled "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." This SOP will be adopted
by the Company in the first quarter of 1998. Because this statement is generally
consistent with the Company's current method of accounting for assessments, the
Company does not expect the adoption of this SOP to have a material impact on
its financial statements.
INCOME PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
for all entities with complex capital structures. SFAS No. 128 was adopted by
the Company in the fourth quarter of 1997 and 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. See Note 8 to the
Consolidated Financial Statements for the 1997, 1996, and 1995 calculation of
basic and diluted earnings per 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.
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.
41
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
defines the accounting treatment and disclosure requirements for securities
lending programs. During the third quarter of 1997, the Company entered a
securities lending program with the custodial bank of the Company's fixed
maturity investment portfolio. The Company currently reports fees earned under
this arrangement in net investment income. The effective date of the securities
lending provisions of SFAS No. 125 was amended by SFAS No. 127 to apply to
transactions occurring after December 31, 1997 and will be adopted by the
Company in the first quarter of 1998. The Company does not expect the adoption
of this statement to have any impact on its financial statements.
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 will be adopted
by the Company in the first quarter of 1998. Because the statement is merely a
change in presentation, the Company does not expect the adoption of this
statement to have any impact on the amount of net income, earnings per share or
total shareholders' equity reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise" and defines
financial and descriptive information about a company's operating segments that
is to be disclosed in financial statements. SFAS No. 131 will be adopted by the
Company in the first quarter of 1998.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
42
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 2. INVESTMENTS
The amortized cost and fair value of fixed maturity investments as of
December 31 are as follows (in thousands):
[Enlarge/Download Table]
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
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 2,806 -- 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 70 536,800
---------- ---------- ---------- ----------
$1,249,488 $ 42,207 $ 2,074 $1,289,621
========== ========== ========== ==========
1996:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies .......... $ 11,839 $ 1,023 $ 19 $ 12,843
Foreign government obligations ................. 59,096 1,432 509 60,019
Investment grade corporate obligations ......... 611,958 19,264 7,592 623,630
Mortgage-backed securities ..................... 181,507 1,969 1,689 181,787
---------- ---------- ---------- ----------
$ 846,400 $ 23,688 $ 9,809 $ 878,279
========== ========== ========== ==========
HELD TO MATURITY
U.S. Treasury securities and obligations of U.S.
government corporations and agencies .......... $ 17,409 $ 3,382 $ -- $ 20,791
Foreign government obligations ................. 10,638 325 79 10,884
Investment grade corporate obligations ......... 452,863 7,768 2,511 458,120
Mortgage-backed securities ..................... 522,287 8,791 7,112 523,966
---------- ---------- ---------- ----------
$1,003,197 $ 20,266 $ 9,702 $1,013,761
========== ========== ========== ==========
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.
43
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturity investments at December
31, 1997, by contractual maturity, are as follows (in thousands):
[Enlarge/Download Table]
AVAILABLE FOR SALE HELD TO MATURITY
----------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
Due in one year or less ................. $ 4,769 $ 4,784 $ 48,131 $ 48,122
Due after one year through five years ... 64,072 64,912 279,401 279,859
Due after five years through ten years .. 290,633 307,295 272,597 286,985
Due after ten years ..................... 309,071 321,991 130,416 137,855
---------- ---------- ---------- ----------
668,545 698,982 730,545 752,821
Mortgage-backed securities .............. 177,921 183,177 518,943 536,800
---------- ---------- ---------- ----------
Total ................................... $ 846,466 $ 882,159 $1,249,488 $1,289,621
========== ========== ========== ==========
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 1997, 1996 and 1995, 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
$6.1 million, $1.9 million and $9.4 million were realized on these sales in
1997, 1996 and 1995, respectively. Gross losses of $1.7 million, $.1 million and
$1.8 million were realized on these sales in 1997, 1996 and 1995, 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 $3.3 million, $1.2 million and $4.8 million in
1997, 1996 and 1995, respectively.
The components of net investment income are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Fixed maturities ........... $ 142,548 $ 128,629 $ 106,566
Cash and cash equivalents .. 2,222 1,403 3,090
Policy loans ............... 607 519 356
Agent advances ............. 58 94 133
Securities lending ......... 10 -- --
--------- --------- ---------
145,445 130,645 110,145
Investment expenses ........ (1,348) (1,233) (1,053)
--------- --------- ---------
Net investment income ...... $ 144,097 $ 129,412 $ 109,092
========= ========= =========
The Company has entered into investment management agreements with
Investment Advisers, Inc. (IAI) and Allianz Investment Corporation, an affiliate
of Allianz Life. For their services, IAI and Allianz Investment Corporation are
paid a fee based on the market value of investments at the end of each quarter.
For the years ended December 31, 1997, 1996 and 1995, the Company paid a total
of $1.1 million, $1.0 million and $.8 million, respectively, for investment
management services.
Fixed maturity investments with a total carrying value of $7.5 million are
on deposit with various states in support of statutory requirements as of
December 31, 1997.
44
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
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):
1997 1996 1995
-------- -------- --------
Gross unrealized gain on fixed maturity
investments -- available for sale .... $ 35,693 $ 13,879 $ 50,642
Adjustments for:
Deferred tax liability ............. (12,835) (4,858) (17,725)
Deferred policy acquisition costs .. (22,629) (8,748) (31,093)
Deferred tax asset ................. 7,920 3,062 10,883
-------- -------- --------
Net unrealized gain on fixed maturity
investments -- available for sale .... $ 8,149 $ 3,335 $ 12,707
======== ======== ========
The gross unrealized gain on fixed maturity investments -- available for
sale before adjustments for deferred taxes and deferred policy acquisition costs
increased (decreased) $21.8 million, $(36.8) million and $75.2 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 3. EQUITY INTERESTS IN MARKETING ORGANIZATIONS
In 1996, LifeUSA Marketing acquired Tax Planning Seminars (TPS), a field
marketing organization (FMO). In addition, in 1996 LifeUSA Marketing acquired
minority equity interests of 40% of Creative Marketing International Corporation
(CMIC), and in 1997 minority equity interests of 45% of Personalized Brokerage
Services, Inc. (PBS), 35% of Ann Arbor Annuity Exchange (Ann Arbor) and 40% of
Roster Financial, LLC (Roster). TPS is included in the consolidated financial
statements of the Company with elimination of intercompany profits and balances.
LifeUSA Marketing uses the equity method of accounting for the FMOs in which it
holds a minority interest.
As of December 31, 1997 and 1996, LifeUSA Marketing had invested $21.2
million and $11.5 million, respectively, in its various FMOs. 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, 1997 and 1996 was $1.0 million and
$200,000, respectively.
The PBS, Ann Arbor and Roster 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 which is available for use to fund certain investments and
acquisitions the Company may make, capital contributions to LifeUSA Insurance 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 regulatory 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. On July 15,
1997, the Company borrowed $5.0 million under this line of credit. The Company
has no other outstanding borrowings under this agreement.
45
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
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.
Prior to 1993, the Company's agents and employees earned convertible
subordinated debentures as compensation. At December 31, 1997, $6.0 million of
these debentures are outstanding. The debentures bear an 8% fixed interest rate
which is payable annually. The debentures mature on June 30, 2000 or sooner at
the option of the Company or mandatorily upon the sale of the Company. Subject
to certain conditions, the debentures may be converted into shares of the
Company's common stock at a conversion price of $24.00 per share through June
30, 1998. 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 1997 and 1995,
$2,562 and $11,000 of debentures were converted to 110 and 571 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 eight years and ten months from the
expiration date. The office lease payments are subject to adjustment for real
estate taxes and maintenance expenses. Rent expense on these operating leases
charged to operations was $1.9 million, $1.5 million and $1.3 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1997 are as follows (in
thousands):
1998 ...................... $1,994
1999 ...................... 2,125
2000 ...................... 2,125
2001 ...................... 354
------
$6,598
======
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), 35,458 shares of common
stock are to be issued at prices ranging from $16.125 to $16.875 per share at
December 31, 1997 and 21,384 shares of common stock were to be issued at a price
of $12.00 per share at December 31, 1996 to employee accounts under the Savings
Plan.
46
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
NOTES RECEIVABLE FROM STOCK SALES
During 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 joint marketing
agreement with Allianz Life. The shares of common stock issued for the account
of the FMO are held in the possession of the Company as security for the
repayment of the promissory note. The promissory notes bear interest at the rate
of 8% per annum compounded monthly and are payable at maturity (the fifth
anniversary of the date of the note).
STOCK OPTION PLANS
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123 requires the use of highly
subjective option valuation models that were developed for use in valuing
publicly traded stock options. Under APB No. 25, no compensation cost is
recognized since the exercise price of the Company's stock options is equal to,
or greater than, the market price of the underlying stock on the date of grant.
The binomial and Black and Scholes option valuation models were developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. To further facilitate the
use of the information disclosed, a range of reasonable values also is presented
with the Company's pro forma information to reflect the variability of the
results of the valuation process that would arise from changes made to the
assumptions.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined using binomial option valuation
models as if the Company had accounted for its employee stock options under the
fair value method of that Statement. The assumptions used for each stock option
plan are included in the discussion of that specific plan.
In 1990, the Company established the Life USA Holding, Inc. 1990 Stock
Option Plan (the 1990 Stock Option Plan). The 1990 Stock Option Plan provides
for the granting of stock options to employees and consultants of the Company.
An aggregate of 4 million shares of common stock is reserved for issuance upon
the exercise of the options granted. The purchase price of the shares of common
stock subject to options granted under the 1990 Stock Option Plan is determined
by a committee of the Board of Directors; 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 37.47%, 38.03% and 36.89% for 1997, 1996 and 1995,
respectively; the risk free interest rates ranged from 5.07% to 5.70%, 5.04% to
6.38% and 5.88% to 6.05% for 1997, 1996 and 1995, respectively; and the expected
option life was seven years for 1997 and 1996 and four years for 1995.
47
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1997 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):
[Enlarge/Download Table]
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
Outstanding -- beginning of year 2,720 $ 10.21 2,289 $ 10.26 2,103 $ 10.10
Granted equal to market ........ 714 13.98 373 8.77 67 8.88
Granted above market ........... 178 19.84 151 12.96 165 12.76
Exercised ...................... (360) 8.82 (29) 7.00 (27) 6.05
Canceled ....................... (21) 11.48 (64) 11.50 (19) 15.48
----- -------- ----- -------- ----- --------
Outstanding -- end of year ..... 3,231 11.72 2,720 $ 10.21 2,289 $ 10.26
===== ======== ===== ======== ===== ========
Exercisable -- end of year ..... 2,154 $ 11.53 1,858 $ 10.39 1,376 $ 10.27
===== ======== ===== ======== ===== ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ 6.55 $ 4.21 $ 2.70
======== ======== ========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997 (in thousands, except exercise price
and remaining contractual life amounts):
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ----------------------------- ----------------------------
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
------------------ ------------------ -------- ------------------ -------- -----------------
$ 6.00 - 9.00 6.1 770 $ 7.61 558 $ 7.17
$ 9.01 - 13.50 7.0 1,681 11.05 1,121 11.02
$13.51 - 20.25 8.9 649 15.89 344 15.60
$20.26 - 28.00 8.5 131 23.76 131 23.76
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. An aggregate of 4,647,548 shares of the Company's common
stock is reserved for issuance upon the exercise of these options. The purchase
price of shares of common stock subject to these options is the greater of
$10.00 per share or 150% of the average closing bid price for the Company's
common stock for the twenty days immediately preceding the end of the calendar
quarter for which the stock option is granted. These options vest immediately
upon issuance and expire on December 31st in the fifth year following the date
of grant. As a result, 166,808 options granted in 1992 that were not exercised
by December 31, 1997, expired. 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%, 36.89% and 36.89% for 1997, 1996 and 1995
respectively; the risk free interest rates was 5.39% for 1997, and ranged from
6.10% to 6.15% and 5.95% to 6.05% for 1996 and 1995, respectively; and the
expected option life was four years for 1997, 1996 and 1995.
48
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1997 ranged from
$10.00 to $27.28. A summary of the Company's stock option activity for the Agent
Option Plan, and related information for the years ended December 31 follows (in
thousands, except exercise price amounts):
[Enlarge/Download Table]
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
Outstanding -- beginning of year 4,237 $ 14.58 3,482 $ 14.93 2,406 $ 15.60
Granted equal to market ........ 101 15.71 862 13.38 1,088 13.48
Exercised ...................... (846) 11.83 -- -- -- --
Canceled ....................... (236) 13.11 (107) 16.37 (12) 15.88
----- -------- ----- -------- ----- --------
Outstanding -- end of year ..... 3,256 15.44 4,237 $ 14.58 3,482 $ 14.93
===== ======== ===== ======== ===== ========
Exercisable -- end of year ..... 3,256 $ 15.44 4,237 $ 14.58 3,482 $ 14.93
===== ======== ===== ======== ===== ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ 1.89 $ 2.37 $ 1.93
======== ======== ========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997 (in thousands, except exercise price
and remaining contractual life amounts):
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ----------------------------- ----------------------------
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
------------------ ------------------ -------- ------------------ -------- -----------------
$ 9.01 - 13.50 3.3 1,096 $ 12.21 1,096 $ 12.21
$13.51 - 20.25 2.6 1,823 15.55 1,823 15.55
$20.26 - 28.00 1.0 337 25.33 337 25.33
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 100,000 shares of common stock is reserved for
issuance upon the exercise of the options granted. These options vest
immediately, are exercisable six months and one day after issuance, and expire
on the earlier of five years from issuance or one year after the director ceases
to be a member of the Board of Directors.
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the Director Option Plan. The
volatility used was 34.58%, 36.89% and 36.89% for 1997, 1996 and 1995
respectively; the risk free interest rates ranged from 4.97% to 5.21%, 6.03% to
6.10% and 5.88% to 5.99% for 1997, 1996 and 1995, respectively; and the expected
option life was four years for 1997, 1996 and 1995.
49
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1997 ranged from
$8.25 to $19.50. A summary of the Company's stock option activity for the
Director Option Plan, and related information for the years ended December 31
follows (in thousands, except exercise price amounts):
[Enlarge/Download Table]
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
Outstanding -- beginning of year 65 $ 10.78 45 $ 11.67 25 $ 13.88
Granted equal to market ........ 16 13.41 20 8.78 20 8.92
Exercised ...................... (12) 9.51 -- -- -- --
--- -------- -- -------- -- --------
Outstanding -- end of year ..... 69 11.61 65 $ 10.78 45 $ 11.67
=== ======== == ======== == ========
Exercisable -- end of year ..... 62 $ 11.08 55 $ 11.12 35 $ 12.55
=== ======== == ======== == ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ 4.62 $ 3.28 $ 3.32
======== ======== ========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997 (in thousands, except exercise price
and remaining contractual life amounts):
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ----------------------------- ----------------------------
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
------------------- ------------------ -------- ------------------ -------- -----------------
$ 6.00 - 9.00 2.9 24 $ 8.57 24 $ 8.57
$ 9.01 - 13.50 2.7 28 10.47 28 10.47
$13.51 - 20.25 2.4 17 17.79 10 18.81
For purposes of pro forma disclosures, the estimated fair value of the
options is charged to expense in the year of grant. The expense generated as a
result of the grant of agent options has been reduced by the amount that would
be deferred as a cost of acquiring new business. This amount has been calculated
using a method consistent with that utilized by LifeUSA Insurance to defer
commissions paid to agents. The Company's pro forma information follows (in
thousands, except for earnings per share information):
[Enlarge/Download Table]
1997 1996 1995
-------------------------------- -------------------------------- -------------------------------
RANGE OF VALUES RANGE OF VALUES RANGE OF VALUES
--------------------- --------------------- --------------------
SFAS 123 HIGH LOW SFAS 123 HIGH LOW SFAS 123 HIGH LOW
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Reported net income ............ $ 26,978 $ 26,978 $ 26,978 $ 23,454 $ 23,454 $23,454 $19,097 $ 19,097 $19,097
Additional expense:
1990 Stock Option Plan:
Original grants ............ (3,415) (4,275) (1,328) (1,273) (1,626) (444) (362) (512) (154)
Grant extensions ........... -- -- -- (3,628) (5,091) (981) -- -- --
Agent Option Plan ............ (158) (259) (60) (998) (1,512) (320) (867) (1,393) (225)
Director Option Plan ......... (43) (56) (26) (38) (49) (21) (38) (50) (21)
-------- -------- -------- -------- -------- ------- ------- -------- -------
Pro forma net income ........... $ 23,362 $ 22,388 $ 25,564 $ 17,517 $ 15,176 $21,688 $17,830 $ 17,142 $18,697
======== ======== ======== ======== ======== ======= ======= ======== =======
Pro forma earnings per share:
Basic ........................ $ 1.11 $ 1.07 $ 1.21 $ .89 $ .77 $ 1.09 $ .92 $ .88 $ .96
======== ======== ======== ======== ======== ======= ======= ======== =======
Diluted ...................... $ .96 $ .92 $ 1.05 $ .79 $ .69 $ .97 $ .83 $ .79 $ .86
======== ======== ======== ======== ======== ======= ======= ======== =======
50
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
SAVINGS PLAN
In 1990, the Company adopted the Savings Plan. An aggregate of 700,000
shares of common stock is reserved for issuance by the Savings Plan. All
permanent employees age 18 and over are eligible to participate in the Savings
Plan. Participants may contribute from 1% to 15% of their annual salary to the
Savings Plan, and the Company will match these contributions at a percentage to
be determined annually at the discretion of the Company. The Company may also
contribute a discretionary profit sharing amount, determined annually.
Contributions made to the Savings Plan by the Company are invested in common
stock of the Company. Effective January 1, 1998, company contributions may be in
the form of common stock of the Company or as cash contributions to the
employee's elected mutual funds in the Savings Plan. During the years of 1997,
1996 and 1995, 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, 1997, 1996 and 1995, was $1.1 million, $.9 million
and $.7 million, respectively.
DIVIDENDS
The ability of the Company to pay dividends is limited because a majority
of the Company's revenues is produced by LifeUSA Insurance, and distributions by
LifeUSA Insurance to the Company are subject to approval and other limitations
imposed by the Department of Commerce of the State of Minnesota. LifeUSA
Insurance paid a $2.5 million extraordinary dividend to the Company during 1997
and has been permitted by the Department of Commerce of the State of Minnesota
to pay a $2.5 million extraordinary dividend to the Company during 1998.
51
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 8. EARNINGS PER SHARE
Basic and diluted earnings per share for the years ended December 31, 1997,
1996 and 1995 were computed as follows (dollars in thousands, except per share
amounts):
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
BASIC
Weighted-average shares outstanding .............. 21,795,258 20,762,192 20,254,838
=========== =========== ===========
Net income ....................................... $ 26,978 $ 23,454 $ 19,097
Add convertible subordinated debenture
interest, net of federal income tax effect ...... 870 870 757
----------- ----------- -----------
Adjusted net income .............................. $ 27,848 $ 24,324 $ 19,854
=========== =========== ===========
Per common share amount .......................... $ 1.28 $ 1.17 $ .98
=========== =========== ===========
DILUTED
Average shares outstanding and to be issued ...... 21,808,351 20,767,538 20,270,532
Net effect of dilutive stock options and warrants,
having exercise prices of the average market
price of the common stock using the treasury
stock method .................................... 929,209 171,714 169,490
Shares assuming conversion of convertible
subordinated debentures ......................... 2,422,878 2,419,411 2,084,384
----------- ----------- -----------
Adjusted weighted-average shares ................. 25,160,437 23,358,663 22,524,396
=========== =========== ===========
Net income ....................................... $ 26,978 $ 23,454 $ 19,097
Add convertible subordinated debenture interest,
net of federal income tax effect ................ 870 870 757
----------- ----------- -----------
Adjusted net income .............................. $ 27,848 $ 24,324 $ 19,854
=========== =========== ===========
Per common share amount .......................... $ 1.11 $ 1.04 $ .88
=========== =========== ===========
52
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 9. INCOME TAXES
Income taxes consist of the following (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- --------
Current income taxes: .......
Federal ................... $ 15,346 $ 14,459 $ 8,312
State ..................... 277 821 372
-------- -------- --------
Total current income taxes .. 15,623 15,280 8,684
Deferred income taxes ....... 470 (1,669) 2,180
-------- -------- --------
Total income taxes ....... $ 16,093 $ 13,611 $ 10,864
======== ======== ========
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):
[Enlarge/Download Table]
1997 1996 1995
--------------------------------------------------
PROVISION RATE PROVISION RATE PROVISION RATE
------- ---- ------- ---- ------- ----
Income taxes based on the statutory rate .. $15,075 35.0% $12,973 35.0% $10,486 35.0%
State income tax, net of federal benefit .. 366 .8 453 1.2 183 .6
Other taxes ............................... 652 1.1 185 .5 195 .7
------- ---- ------- ---- ------- ----
Total income taxes ....................... $16,093 37.4% $13,611 36.7% $10,864 36.3%
======= ==== ======= ==== ======= ====
The components of the deferred tax provision (benefit) for the years ended
December 31 are as follows (in thousands):
1997 1996 1995
-------- -------- --------
Deferred policy acquisition costs .. $ 4,511 $ 3,548 $ 12,810
Future policy benefits ............. (5,279) (3,840) (10,173)
Deferred agent compensation ........ 260 49 (534)
State guaranty fund assessments .... 749 (1,109) (729)
Other .............................. 229 (317) 806
-------- -------- --------
$ 470 $ (1,669) $ 2,180
======== ======== ========
53
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
DECEMBER 31,
-----------------
1997 1996
------- -------
Deferred tax assets:
Future policy benefits .................. $57,422 $52,143
Unrealized gains/losses on investments .. 7,920 3,062
Deferred agent compensation ............. 2,404 2,664
State guaranty fund assessments ......... 1,109 1,723
Other ................................... 7,978 5,930
------- -------
Total gross deferred tax assets ............ 76,833 65,522
Deferred tax liabilities:
Deferred policy acquisition costs ....... 72,047 67,536
Unrealized gains/losses on investments .. 12,835 4,858
State guaranty fund assessments ......... 1,013 878
Other ................................... 7,451 5,174
------- -------
Total gross deferred tax liabilities ....... 93,346 78,446
------- -------
Net deferred tax liability ................. $16,513 $12,924
======= =======
The Company began filing life-nonlife consolidated federal income tax
returns in 1994.
In 1997, the Internal Revenue Service completed the audit of the Company's
and LifeUSA Insurance's federal income tax returns for the years 1992 and 1991.
There were no material adjustments as a result of the examination.
The Internal Revenue Service is currently auditing the Company's and
LifeUSA Insurance's federal income tax returns for the years 1996, 1995, 1994
and 1993. The outcome of the examination is not known at this time.
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 next five years, and the marketing agreement
between the two companies will be extended to December 31, 2000.
Allianz Life will acquire its interest in the Company as a result of
several specific actions. First, over the next five years, Allianz Life will
purchase from the Company $100 million of newly issued common stock in
increments of $10 million semi-annually. The price at which Allianz Life will
purchase the common stock will be at 250 percent of the Company's book value per
share (excluding SFAS No. 115), at the time the common stock is issued. Second,
on February 6, 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 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 in the next year.
The purchase of $100 million 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 (STEP). Under the provisions of the STEP,
Allianz Life has committed to provide equity capital to the Company in
sequential
54
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 10. AGREEMENT WITH ALLIANZ LIFE (CONTINUED)
purchases of common stock over a five-year period. 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.
Initially, Allianz Life has the right to nominate 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%, precludes it from making management changes and
provides certain other standstill protections.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company incurred legal fees of $.4 million, $.4 million and $.4 million
for the years ended December 31, 1997, 1996 and 1995, 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 309,480 shares of the Company at
December 31, 1997, or approximately 1.2% of the then outstanding shares.
The Company incurred actuarial and other consulting fees of $1.2 million,
$.7 million and $.9 million for the years ended December 31, 1997, 1996 and
1995, respectively, from the firm of which one of its directors is a member.
The Company incurred legal and other consulting fees of $.2 million, $.1
million, and $.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively, from the firm of which one of its directors is a member.
55
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 12. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
Changes in operating assets and liabilities consist of (in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Increase in policy loans ................................. $ (1,628) $ (1,553) $ (1,666)
Increase in accrued investment income .................... (3,142) (4,324) (14,091)
Increase in recoverable on paid losses
and amounts due from reinsurers ......................... (10,791) (7,678) (5,768)
Decrease (increase) in other assets ...................... 8,551 2,636 (14,867)
Increase (decrease) in other policyholders' funds ........ 3,827 928 (48)
Increase (decrease) in amounts due reinsurers ............ 14,798 (3,698) 12,242
Increase (decrease) in accrued commissions to agents ..... 1,340 (1,121) 2,859
(Decrease) increase in taxes, licenses and fees payable .. (9,453) (1,045) 13,542
(Decrease) increase in accounts payable .................. (1,644) 2,196 565
Increase (decrease) in other liabilities ................. 6,258 312 (362)
-------- -------- --------
$ 8,116 $(13,347) $ (7,594)
======== ======== ========
Supplemental schedule of noncash financing activities: ...
Issuance of stock upon conversion of convertible
subordinated debentures ............................... $ -- $ -- $ 11
Issuance of stock to employees as compensation ......... 1,220 1,436 831
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 which differ from those prescribed by the Department of Commerce of
the State of Minnesota.
At December 31, 1997 and 1996, LifeUSA Insurance had statutory capital and
surplus of $103.7 million and $87.3 million, respectively, as reported to
regulatory authorities. During 1996, the Company contributed to LifeUSA
Insurance a total of $1.4 million to increase LifeUSA Insurance statutory
capital and surplus. No contributions were made by the Company to LifeUSA
Insurance in 1997. LifeUSA Insurance paid a $2.5 million extraordinary dividend
to the Company during 1997 and has been permitted by the Department of Commerce
of the State of Minnesota to pay a $2.5 million extraordinary dividend in 1998.
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, 1997, 1996 and 1995 was $18.4 million, $13.2
million and $.4 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.
56
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
---------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 .................. .25 .26 .45 .32
Diluted ................ .22 .23 .38 .27
1996:
Revenues ................. $ 73,554 $ 77,429 $ 84,032 $ 81,883
Net income ............... 4,621 5,666 6,762 6,404
Earnings per common share:
Basic ................... .24 .28 .33 .32
Diluted ................. .21 .25 .30 .28
The results for the quarters ended December 31 were impacted by the
following items (dollars in thousands, except per share amounts):
[Enlarge/Download Table]
1997 1996
---------------------- -----------------------
INCREASE (DECREASE) INCREASE (DECREASE)
---------------------- -----------------------
NET INCOME PER SHARE NET INCOME PER SHARE
---------- --------- ---------- ---------
Net realized gains on investments ....... $ 76 $.00 $ 22 $.00
Credits (charges) for state guaranty fund
assessments ............................ 977 .04 (1,487) (.06)
Reduction of state premium tax expense .. -- -- 1,838 .08
Revisions made to the estimates in the
models used to amortize deferred policy
acquisition costs and accrue for bonuses
to be paid to policyholders ............ -- -- 1,184 .05
Adjustments made to annual production
based accruals ......................... -- -- (938) (.04)
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 balance sheet for these financial
instruments approximate fair value.
INVESTMENT CONTRACTS
The fair value of the Company's liabilities for deferred annuity contracts
is estimated to be the cash surrender value of each contract. The cash surrender
value represents the policyholder's account balance less applicable surrender
charges. The fair value of liabilities for supplemental contracts without life
contingencies and in-benefit annuity contracts is estimated by discounting
estimated cash flows using appropriate market interest rates.
57
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 $182.8 million and $167.9 million at
December 31, 1997 and 1996, respectively, would have a fair value of $0.
FUTURE POLICY BENEFITS RECOVERABLE AND AMOUNTS DUE FROM REINSURERS
Only the portions of future policy benefits recoverable and amounts due
from reinsurers related to investment contracts are considered to be financial
instruments. The fair value has been determined using methods consistent with
methods used to fair value the related investment contracts and represents the
amount that would be recoverable from the Reinsurers if the related investment
contract fair value were realized.
CONVERTIBLE SUBORDINATED DEBENTURES
The fair value of convertible subordinated debentures is estimated using
discounted cash flow analyses, based on interest rates for similar types of
financial instruments with maturities consistent with those remaining for the
debentures.
The carrying amounts and fair values of the Company's financial instruments
are as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ --------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
---------------- ------------ ---------------- -------------
ASSETS
Fixed maturity investments:
Available for sale ................. $ 882,159 $ 882,159 $ 878,279 $ 878,279
Held to maturity ................... 1,249,488 1,289,621 1,003,197 1,013,761
Policy loans ......................... 29,003 29,003 23,908 23,908
Cash and cash equivalents ............ 34,139 34,139 20,989 20,989
Future policy benefits recoverable
and amounts due from reinsurers ..... 2,449,309 2,211,385 2,065,817 1,999,158
LIABILITIES
Investment contracts:
Deferred annuities ................. $3,333,160 $2,873,536 $2,884,403 $2,562,624
Supplementary contracts and
in-benefit annuities .............. 1,076,337 1,118,775 954,150 984,832
Convertible subordinated debentures .. 36,030 46,955 36,030 39,633
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
58
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 Reinsurance on pages 10 through 12. 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. Such information is incorporated by reference into these
Notes to Consolidated Financial Statements.
59
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
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)
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31,
1997 1996
--------- ---------
ASSETS
Fixed maturity investments -- available for sale, at fair value
(amortized cost: $8,139 at December 31, 1997 and $5,190 at
December 31, 1996) ........................................... $ 7,161 $ 5,392
Cash and cash equivalents ..................................... 9,009 182
Fixed assets and leasehold improvements, net .................. 5,828 5,652
Investments in subsidiaries, net .............................. 245,819 206,722
Deferred income taxes ......................................... 2,039 1,937
Other assets .................................................. 7,624 6,382
--------- ---------
$ 277,480 $ 226,267
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Amounts due reinsurers ....................................... $ 428 $ 231
Accounts payable ............................................. 4,878 6,617
Accrued commissions to agents ................................ 4,575 4,029
Convertible subordinated debentures .......................... 36,030 36,030
Long term debt ............................................... 5,000 --
Other policyholders' funds ................................... 15 3,028
Other liabilities ............................................ 4,154 3,717
--------- ---------
Total liabilities ........................................... 55,080 53,652
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized,
none issued -- Common stock, $.01 par value; 45,000,000
shares authorized, 22,723,830 shares issued and outstanding
(20,953,517 shares at December 31, 1996) .................... 227 210
Common stock to be issued, 35,458 shares (21,384 shares at
December 31, 1996) .......................................... 565 357
Additional paid-in capital ................................... 108,372 86,474
Notes receivable from stock sales ............................ (7,477) (3,888)
Unrealized gain on fixed maturity investments --
available for sale .......................................... 8,149 3,335
Retained earnings ............................................ 112,564 86,127
--------- ---------
Total shareholders' equity .................................. 222,400 172,615
--------- ---------
$ 277,480 $ 226,267
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
60
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION (CONTINUED)
LIFE USA HOLDING, INC.
(PARENT ONLY)
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Revenues:
Management fees ............................. $ 34,976 $ 32,476 $ 29,389
Net investment income ....................... 810 1,378 1,825
Commissions and expense allowances, net ..... 80,305 63,222 59,286
Equity in income of wholly-owned subsidiaries 23,972 21,321 16,083
Other ....................................... 553 316 8
-------- -------- --------
Total revenues ............................. 140,616 118,713 106,591
Expenses:
Commissions ................................. 50,381 38,133 36,483
Salaries and employee benefits .............. 25,456 24,720 19,189
Depreciation and amortization ............... 1,705 1,246 676
Interest expense ............................ 2,194 1,982 1,785
Other ....................................... 31,763 27,609 27,168
-------- -------- --------
Total expenses ............................. 111,499 93,690 85,301
-------- -------- --------
Income before income taxes ................... 29,117 25,023 21,290
Income taxes ................................. 2,139 1,569 2,193
-------- -------- --------
Net income ................................... $ 26,978 $ 23,454 $ 19,097
======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
61
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
================================================================================
NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION (CONTINUED)
LIFE USA HOLDING, INC.
(PARENT ONLY)
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income ...................................... $ 26,978 $ 23,454 $ 19,097
Adjustments to reconcile net income to net
cash provided by operating activities .......... (22,060) (10,147) (1,660)
-------- -------- --------
Net cash provided by operating activities ........ 4,918 13,307 17,437
Cash flows from investing activities:
Fixed maturity investments -- available for sale:
Purchases ..................................... (4,907) -- (22,954)
Proceeds from maturities and principal
payments on mortgage-backed securities ....... 2,000 -- 1,660
Investment in LifeUSA Insurance Company ......... -- -- (23,675)
Investment in LifeUSA Securities, Inc. .......... (1,320) (285) --
Investment in LifeUSA Marketing, Inc. ........... (10,382) (9,250) --
Loans to field marketing organizations .......... (1,605) (1,219) --
Capital expenditures ............................ (1,650) (2,629) (3,079)
-------- -------- --------
Net cash used in investing activities ............ (17,864) (13,383) (48,048)
Cash flows from financing activities:
Proceeds from exercise of stock options and
warrants ....................................... 15,656 226 195
Proceeds from line of credit .................... 5,000 -- --
Proceeds from convertible subordinated
debenture issuance ............................. -- -- 30,000
Other financing activities ...................... 1,117 (25) 230
-------- -------- --------
Net cash provided by financing activities ........ 21,773 201 30,425
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents ..................................... 8,827 125 (186)
Cash and cash equivalents at beginning of the
year ............................................ 182 57 243
-------- -------- --------
Cash and cash equivalents at end of the year ..... $ 9,009 $ 182 $ 57
======== ======== ========
Cash paid during the year for interest ........... $ 2,194 $ 1,984 $ 1,223
======== ======== ========
Cash paid during the year for income taxes ....... $ 830 $ 2,032 $ 2,550
======== ======== ========
Supplemental schedule of noncash investing and
financing activities:
Issuance of stock upon conversion of
convertible subordinated debentures ............ $ 3 $ -- $ 11
Issuance of stock to employees as compensation .. 1,220 1,436 831
Fixed assets contributed to LifeUSA Insurance
Company ........................................ -- 1,362 1,766
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
62
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
January 30, 1998
except for Note 10 as to which the date is
February 6, 1998
63
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, 1997, its system of
internal control is adequate to accomplish the objectives discussed herein.
The financial statements for the years ended December 31, 1997, 1996 and
1995 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
64
ANNUAL REPORT ON FORM 10-K
LIFE USA HOLDING, INC.
================================================================================
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, 1997
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.
The aggregate market value of the voting and outstanding stock (25,758,123
shares) held by non-affiliates of the registrant as of February 13, 1998 was
$434,797,116.
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 14, 1998 are incorporated by reference into Part III.
FORM 10-K
CROSS-REFERENCE
TABLE OF CONTENTS PAGE(S)
-------------------------------------------- ------------------
PART I
Item 1. Business
General 6-14,40
Investments 13,17,24-26,
39-40,43-45
Reinsurance 10-12, 17-18
Capital Resources 21-22
Marketing Organization
Ownership 2,6,13,45
The Agreement with Allianz Life 3,12,21,54
Line of Credit 21,45
Regulatory Matters 22,57
Statutory Income and Capital of
LifeUSA Insurance Company 22,56
Item 2. Properties 65
Item 3. Legal Proceedings 65
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 1,22,73
Item 6. Selected Financial Data 4-5
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 15-33
Item 8. Financial Statements and
Supplementary Data 34-38,57,68
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 68-72
*Life USA Holding, Inc.'s Proxy Statement for the 1998 Annual Meeting of
Shareholders is incorporated herein by reference.
65
ANNUAL REPORT ON FORM 10-K (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
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 1998.
LEGAL PROCEEDINGS
In July 1997, two policyholders of Fidelity Union Life Insurance Company
(FULICO) whose policies were assumed by Allianz Life commenced an action against
Allianz Life in state court in California. LifeUSA Insurance was also named 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 plaintiffs and
seeks certification on behalf of a class of policyholders who had purchased
FULICO and LifeUSA Insurance insurance products. The plaintiffs allege that they
and other policyholders have been damaged due to certain alleged improper sales
practices relating to vanishing premiums, churning and retirement plans, 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 Minnesota federal court by
agreement of the parties. The litigation is at an early stage and, while it is
not possible to predict the outcome of the litigation, the Company does not
anticipate any material adverse financial result.
In January 1998, six annuity policyholders commenced a lawsuit against the
Company. The action is styled on behalf of the plaintiffs and 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 Company made a motion to dismiss the case for failure to plead fraud with
particularity. The litigation is at an early stage and, while it is not possible
to predict the outcome of the litigation, the Company does not anticipate any
material adverse financial result.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company, their ages and
titles:
NAME AGE TITLE
--------------------- ----- ------------------------------------------------
Robert W. MacDonald 55 Chairman and Chief Executive Officer
Margery G. Hughes 47 President and Chief Operating Officer
Mark A. Zesbaugh 33 Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
Daniel J. Rourke 68 Senior Vice President and Chief Marketing Officer
Donald J. Urban 56 Senior Vice President and Director of Sales
Bradley E. Barks 38 Senior Vice President Finance
Bruce D. Bengtson 48 Senior Vice President and Chief Actuary
66
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.
[Enlarge/Download Table]
/S/ ROBERT W. MACDONALD Chief Executive Officer March 6, 1998
---------------------------- (Principal Executive Officer) and Director
Robert W. MacDonald
/S/ MARK A. ZESBAUGH Chief Financial Officer March 6, 1998
---------------------------- (Principal Financial and Accounting
Mark A. Zesbaugh Officer) and Director
* Director
----------------------------
Hugh Alexander
* Director
----------------------------
Jack H. Blaine
* Director
----------------------------
Margery G. Hughes
* Director
----------------------------
Barbara J. Lautzenheiser
* Director
----------------------------
Daniel J. Rourke
* Director
----------------------------
Ralph Strangis
* Director
----------------------------
Donald J. Urban
*By: /S/ MARK A. ZESBAUGH March 6, 1998
-------------------------
Mark A. Zesbaugh
Attorney-in-fact
* Mark A. Zesbaugh, on his own behalf and pursuant to Powers of Attorney, dated
prior to the date hereof, attested by the officers and directors listed above
and filed with the Securities and Exchange Commission, by signing his name
hereto does hereby sign and execute this Report of Life USA Holding, Inc. on
behalf of each of the officers and directors named above, in the capacities
in which the name of each appears above.
67
EXHIBITS
LIFE USA HOLDING, INC.
================================================================================
FINANCIAL STATEMENTS FILED PAGES
--------------------------------------------------------------------------------
Life USA Holding, Inc. ......................
Consolidated Financial Statements .......... 34-38
Notes to Consolidated Financial Statements .. 39-62
Report of Independent Auditors .............. 63
Life USA Holding, Inc. Condensed
Financial Information (Parent Only) ........ 59-62
Schedules to the consolidated financial statements required by Article 7 of
Regulation S-X are omitted since the required information is included in the
footnotes or is not applicable.
The following Exhibit Index lists the Exhibits to Annual Report to
Shareholders and Form 10-K.
68
EXHIBITS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
[Enlarge/Download Table]
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
---------------------------------------------------------------------------------------- ---------------
Restated Articles of Incorporation of the Company .................................... 3(10)
Bylaws of the Company ................................................................ 3(3)
Amendment to Bylaws of the Company ................................................... 3(6)
Form of Stock Certificate ............................................................ 4(9)
Form of Option Certificate ........................................................... 4(10)
Form of Debenture filed as part of Indenture between the Company and Continental
Bank, National Association .......................................................... 4(7)
Indenture between the Company and Continental Bank, National Association, as trustee,
dated as of April 1, 1991 ........................................................... 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(2)
Addenda No. 2 through 8 to Life Coinsurance Agreement between LifeUSA Insurance
and Transamerica Occidental Life Insurance Company .................................. 10(19)
Life and ADB YRT Retrocession Agreement between LifeUSA Insurance and
Transamerica Occidental Life Insurance Company effective January 1, 1990 ............ 10(12)
Addendum No. 1 to Life and ADB YRT Retrocession Agreement between LifeUSA
Insurance and Transamerica Occidental Life Insurance Company ........................ 10(19)
Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance Company and
Transamerica Occidental Life Insurance Company effective January 1, 1995 ........... 10(18)
Retrocessional Agreement between LifeUSA Insurance and Transamerica Occidental Life
Insurance Company effective April 1, 1991 ........................................... 10(11)
Addenda No. 1, 2 and 3 to Retrocessional Agreement between LifeUSA Insurance and
Transamerica Occidental Life Insurance Company ...................................... 10(19)
Trust Agreement between Transamerica Occidental Life Insurance Company, LifeUSA
Insurance Company and State Street Bank and Trust Company effective October 28,
1996 ................................................................................ 10(19)
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(19)
Restated Life USA Holding, Inc. Stock Option Plan .................................... 10(10)
Life USA Director Option Plan ........................................................ 10(13)
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(19)
69
EXHIBITS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
[Enlarge/Download Table]
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
-------------------------------------------------------------------------------------- ---------------
Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance and the
Reinsurers effective January 1, 1993 ............................................... 10(11)
Addendum No. 1 through 2 to Life and ADB YRT Reinsurance Agreement between
LifeUSA Insurance and the Reinsurers ............................................... 10(19)
Investment Management Agreement between the Company and Investment Advisers,
Inc. dated April 9, 1991 ........................................................... 10(8)
Debenture Purchase Agreement dated February 17, 1995 among Life USA Holding, Inc. ...
and Allianz Life Insurance Company of North America ................................ 10(14)
Variable Rate Convertible Subordinated Debenture .................................... 10(14)
Conversion Protection Warrant Certificate for Purchase of Shares of Common Stock of
Life USA Holding, Inc. ............................................................. 10(14)
Life and Annuity Coinsurance Agreement effective January 1, 1995 between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ................... 10(14)
Amendment to Life and Annuity Coinsurance Agreement between Allianz Life Insurance
Company of North America and LifeUSA Insurance Company ............................. 10(18)
Joint Marketing Agreement entered into by and between Allianz Life Insurance Company
of North America and Life USA Holding, Inc. ........................................ 10(14)
Trust Agreement between Transamerica Occidental Life Insurance Company, LifeUSA
Insurance Company and State Street Bank and Trust Company effective October 28,
1996 ............................................................................... 10(19)
Investment Management Agreement entered into by and between LifeUSA Insurance
Company and Allianz Investment Corporation ......................................... 10(14)
Investment Management Agreement entered into by and between Life USA Holding,
Inc. and Allianz Investment Corporation ............................................ 10(14)
Loan Agreement dated May 17, 1996 between Life USA Holding, Inc. and Employers
Reassurance Corporation and Named Lenders .......................................... 10(15)
Stock Pledge Agreement dated May 17, 1996 between Life USA Holding, Inc. and
Employers Reassurance Corporation .................................................. 10(15)
Amendment No. 1 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders ................................ 10(19)
Amendment No. 2 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders ................................ 10(18)
Claims Administration Agreement dated December 30, 1996 between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ................... 10(16)
Amendment No. 1 to the Claims Administration Agreement between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ................... 10(18)
Administration and Marketing Agreement dated December 30, 1996 between Allianz Life
Insurance Company of North America and Life USA Holding, Inc. ...................... 10(16)
Amendment No. 1 to the Administration and Marketing Agreement between Allianz Life
Insurance Company of North America and Life USA Holding, Inc. ...................... 10(18)
70
EXHIBITS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
[Enlarge/Download Table]
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
----------------------------------------------------------------------------------- ---------------
Stock Purchase Agreement dated January 13, 1998 between Life USA Holding, Inc. and
Allianz Life Insurance Company of North America ................................. 10(17)
Reinsurance Agreement between Allianz Life Insurance Company of North America and
LifeUSA Insurance Company ....................................................... 10(18)
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(18)
Statement of Computation of Per Share Earnings (Years Ended December 31, 1997,
1996 and 1995 -- see Note 8 of the Annual Report to Shareholders) ............... 11(18)
1997 Annual Report to Shareholders ............................................... 13(18)
Subsidiaries of the Registrant ................................................... 21(18)
Consent of Ernst & Young LLP (electronic filing only) ............................ 21(18)
Powers of Attorney ............................................................... 24(18)
Financial Data Schedule (electronic filing only) ................................. 27(18)
------------------
(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,
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 Pre-Effective Amendment No. 1 to the Company's Registration
Statement No. 33-41359 and incorporated by reference herein.
(7) Filed with Pre-Effective Amendment No. 2 to the Company's Registration
Statement No. 33-41359 and incorporated by reference herein.
(8) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1991 and incorporated by reference herein.
(9) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1992 and incorporated by reference herein.
(10) Filed with the Company's Registration Statement No. 33-52624 and
incorporated by reference herein.
(11) Filed with the Company's Registration Statement No. 33-68528 and
incorporated by reference herein.
(12) Filed with Amendment No. 1 to the Company's Registration Statement No.
33-68528 and incorporated by reference herein.
(13) Filed with the Company's 1993 Annual Report on Form 10-K and incorporated
by reference herein.
(14) Filed with the Company's Current Report on Form 8-K filed March 3, 1995,
incorporated by reference herein.
(15) Filed with the Company's Current Report on Form 8-K filed June 17, 1996,
incorporated by reference herein.
(16) Filed with the Company's 1996 Annual Report on Form 10-K and incorporated
by reference herein.
(17) Filed with the Company's Current Report on Form 8-K filed January 13, 1998
and incorporated by reference herein.
71
EXHIBITS (CONTINUED)
LIFE USA HOLDING, INC.
================================================================================
(18) Filed with this Annual Report on Form 10-K.
(19) 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, 1997, the Company did not file any
Current Reports on Form 8-K.
72
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 L. 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
Lautzenhieser & Associates
OFFICERS
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Margery G. Hughes
President
Chief Operating Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Donald J. Urban
Senior Vice President
Director of Sales
Bradley E. Barks, FSA, MAAA, CPA
Senior Vice President Finance
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Chief Actuary
Catherine A. Bartlett
Bruce J. Parker
Assistant Secretary
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A
=========================================
VICE PRESIDENTS
Jo-Anne S. Halek
Kimberly A. Lees
=========================================
ANNUAL MEETING
The annual meeting of the shareholders of Life USA Holding, Inc. will be held on
April 14, 1998 at the Interchange Tower, 600 South Highway 169, Minneapolis,
Minnesota 55426. All shareholders are invited to attend.
CORPORATE INFORMATION
Corporate Office
300 South Highway 169
Minneapolis, Minnesota 55426
612-546-7386
General Counsel
Kaplan, Strangis and Kaplan, P.A
Minneapolis, Minnesota
Independent Auditors
Ernst & Young LLP
Minneapolis, Minnesota
Transfer Agent
Harris Trust and Savings Bank
Chicago, Illinois
=========================================
REINSURANCE PARTNERS
Allianz Life Insurance Company
of North America
Minneapolis, Minnesota
Employers Reassurance Corporation
Overland Park, Kansas
Munich American
Reassurance Company
Atlanta, Georgia
Republic-Vanguard Life
Insurance Company
Dallas, Texas
Transamerica Occidental Life
Insurance Company
Charlotte, North Carolina
================================================================================
SHAREHOLDER INFORMATION
Life USA Holding, Inc. common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol: "LUSA." No dividends have been paid
since inception. Over-the-counter quotations reflect inter-dealer prices without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
As of February 13, 1998, there were 7,950 holders of record of the Company's
common stock. On March 4, 1998, the closing sale price per share of the
Company's common stock as reported by Nasdaq was $15.00.
73
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 and
Chief Executive Officer
Universal Benefits Life Division
Donald J. Urban
President
Margery G. Hughes
Executive Vice President
Mark A. Zesbaugh, CPA, CFA, FLMI
Senior Vice President
Treasurer and Secretary
Linda K. Burm
Senior Vice President
Chief Operating Officer
Jacqueline K. Katrein, CPA
Senior Vice President
Support Division
Chief Financial Officer
Lane A. Kurle, FLMI
Senior Vice President
Operating Division
VICE PRESIDENTS
Robin Aeshliman
Leo J. Anderson, FLMI
Robert M. Anderson, FLMI, ALHC
Bradley E. Barks, CPA, FSA, MAAA
Bruce D. Bengtson, FSA, MAAA
Kristi K. Bizer, CPA, FLMI
Kevin J. Boyce
Darryl J. Chouinard, FLMI
Carolyn K. Cosgrove, FLMI
Brenda Z. Duenwald
Michael A. Eitel, CPA
Charles F. Field, FLMI, ALHC
Lorraine M. Frankewicz
Susan L. Kumpula
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
=========================================
ASSISTANT VICE PRESIDENTS
Lisa M. Diers, FLMI
Jeffrey R. Girod
Christine M. Goebel, ACS
Amelia L. Jensen
John R. Kraft
Richard P. Lapcinski
Leslie J. LeQue
Neil H. McKay, FSA, MAAA
Rodney D. Meyer, FLHC, FLMI
Denise A. Neumann
Lisa M. Nicholson
Roxanne M. Watercott
Ann M. Yaggie
74
LIFEUSA MARKETING, INC.
================================================================================
BOARD OF DIRECTORS
Donald J. Urban
Chairman
Charles M. Kavitsky
Chief Executive Officer
President
Daniel J. Rourke, CLU
Chairman
LifeUSA Insurance Company
Denise M. Blizil
Senior Vice President
Chief Operating Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Chief Financial Officer
Life USA Holding, Inc.
Ronald L. Berger, CPA
Senior Vice President
Chief Financial Officer
Linda K. Burm
Chief Operating Officer
LifeUSA Insurance Company
John A. Amann
Vice President Sales
David A. Schliesman
Vice President Sales
Raj K. Sinha, MS, MBS, CLU, CFP
Vice President Marketing
James M. Brown Jr., CPA
American Financial Marketing, Inc.
Robert J. Burskey
Ann Arbor Annuity Exchange, Inc.
Stephen M. Kerns
InsurMark
Joseph R. Lehman, CFP, CLU
Life Sales
Walter F. Lineberger II, 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 R. Kestler, CSP, CLU, ChFC
Kestler Financial Group, Inc.
=========================================
OFFICERS
Donald J. Urban
Chairman
Charles M. Kavitsky
Chief Executive Officer
President
Daniel J. Rourke, CLU
Chairman
LifeUSA Insurance Company
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
Scott A. Wheeler, CPA, CLU, FLMI
Mark A. Zesbaugh, CPA, CFA, FLMI
=========================================
ASSISTANT VICE PRESIDENTS
Lisa B. Carlson
Sharyl L. Schultz, CLU
75
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.
Bardea C. Huppert, CLU, CMA, ChFC, FLMI
Senior Vice President
Chief Operating Officer
Bradley E. Barks, FSA, MAAA, CPA
Senior Vice President
Life USA Holding, Inc.
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Life USA Holding, Inc.
OFFICERS
Mark A. Zesbaugh, CPA, CFA, FLMI
Chairman, President, Chief Executive Officer, Secretary, and Chief
Financial Officer
Bardea C. Huppert, CLU, CMA, ChFC, FLMI
Senior Vice President
Chief Operating Officer
Philip B. Rosenbaum, CPA, FLMI
Treasurer
VICE PRESIDENTS
Tracy H. Gardner
Claudia R. Johnson
Jeffrey A. Robinson
76
Dates Referenced Herein and Documents Incorporated by Reference
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