-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mh3PxPo0GB+StnpGZ3Z6QhYxkUHZOLSbEM2ZvOT8OxGJzsSnI10Xyg3mRBiznZWe wsbngo1gFOhjEwb/O2vmrA== 0000897101-98-000301.txt : 19980323 0000897101-98-000301.hdr.sgml : 19980323 ACCESSION NUMBER: 0000897101-98-000301 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFE USA HOLDING INC /MN/ CENTRAL INDEX KEY: 0000832989 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 411578384 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-18485 FILM NUMBER: 98570300 BUSINESS ADDRESS: STREET 1: STE 95 INTERCHANGE N BLDG STREET 2: 300 S HWY 169 CITY: MINNEAPOLIS STATE: MN ZIP: 55426 BUSINESS PHONE: 6125467386 MAIL ADDRESS: STREET 1: SUITE 95 INTERCHANGE NORTH BUILDING STREET 2: 300 SOUTH HIGHWAY 169 CITY: MINNEAPOLIS STATE: MN ZIP: 55426 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [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 ================================================================================
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
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) ================================================================================
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):
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):
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:
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):
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):
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):
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. ================================================================================
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) ================================================================================
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) ================================================================================
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 ..................... $ 1.24 $ 1.13 $ .94 =========== =========== =========== 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) ================================================================================
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 ================================================================================
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) ================================================================================
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):
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):
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):
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):
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):
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):
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):
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):
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):
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 ........................ $ 1.07 $ 1.03 $ 1.17 $ .84 $ .73 $ 1.05 $ .88 $ .85 $ .92 ======== ======== ======== ======== ======== ======= ======= ======== ======= 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):
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 =========== =========== =========== Per common share amount .......................... $ 1.24 $ 1.13 $ .94 =========== =========== =========== 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):
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):
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 .................. .24 .25 .44 .31 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 ................... .23 .27 .32 .31 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):
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):
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)
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)
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 Form 10-K/A 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 Form 10-K/A has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ ROBERT W. MACDONALD Chief Executive Officer March 20, 1998 - ---------------------------- (Principal Executive Officer) and Director Robert W. MacDonald /S/ MARK A. ZESBAUGH Chief Financial Officer March 20, 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 20, 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 Form 10-K/A 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. ================================================================================
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. ================================================================================
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. ================================================================================
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 EX-10 2 REINSURANCE AGREEMENT EXHIBIT 10 LIFE AND ADB YRT REINSURANCE AGREEMENT Effective: January 1, 1995 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota by TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY Los Angeles, California TABLE OF CONTENTS ARTICLE PAGE PREAMBLE..............................................1 I COMMENCEMENT AND TERMINATION..........................1 II CONCURRENCY OF CONDITIONS.............................1 III PREMIUM...............................................2 IV CLAIMS AND BENEFITS...................................2 V ACCESS TO RECORDS.....................................2 VI UNAUTHORIZED REINSURERS...............................2 VII INSOLVENCY............................................2 VIII ARBITRATION...........................................3 IX OFFSET................................................3 X WRITTEN AGREEMENT.....................................4 EXHIBIT I.............................................5 EXHIBIT II............................................6 EXHIBIT III...........................................7 LIFE AND ADB YRT REINSURANCE AGREEMENT Effective: January 1, 1995 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota (hereinafter referred to as the "Company") by TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY Los Angeles, California (hereinafter referred to as the "Reinsurer") PREAMBLE BY THIS YRT AGREEMENT the Company obligates itself to cede to the Reinsurer on a YRT basis, and the Reinsurer obligates itself to accept a quota share part of the Company's net excess risk (as defined in Exhibit I, attached to and forming part of this YRT Agreement), as respects Life Insurance and Accidental Death Benefit (ADB) business assumed as coinsurance by the Company under a Life and Annuity Coinsurance Agreement, effective January 1, 1995, between the Company and Allianz Life Insurance Company of North America, Minneapolis, Minnesota (hereinafter referred to as the "Underlying Contract"). The quota share part shall be 100%. A copy of the Underlying Contract is attached to and forms part of this YRT Agreement. ARTICLE I - COMMENCEMENT AND TERMINATION A. This YRT Agreement shall become effective on January 1, 1995, with respect to policies reinsured under the Underlying Contract on or after that date, and it shall continue in force until 12:01 A.M., January 1, 1998. B. YRT reinsurance on policies ceded hereunder as of 12:01 A.M., January 1, 1998 shall terminate as of that date, or such reinsurance shall remain in force through the month just prior to the beginning of the eighth policy year for each policy reinsured hereunder, if later, and shall terminate at that time. C. At such time as YRT reinsurance on the last policy ceded hereunder is terminated, this Agreement shall terminate in its entirety. ARTICLE II - CONCURRENCY OF CONDITIONS This YRT Agreement shall follow in all respects the terms and conditions of the Underlying Contract, provided the terms and conditions of the Underlying Contract are not inconsistent with the terms and conditions of this YRT Agreement. ARTICLE III - PREMIUM A. As premium for the reinsurance provided hereunder, the Company shall pay to the Reinsurer the YRT Reinsurance Premiums described in Exhibit III, attached to and forming part of this YRT Agreement. B. The premium due the Reinsurer shall be remitted by the Company with the reports required by Exhibit II, attached to and forming part of this YRT Agreement. ARTICLE IV - CLAIMS AND BENEFITS A. The Reinsurer shall be liable for its 100% of the net excess risk on all policy claims and benefits the Company pays or allows subject to the Underlying Contract, and the Reinsurer shall pay its 100% of any such policy claims and benefits promptly following receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company as requested by the Reinsurer. B. The Reinsurer shall receive its 100% of all recoveries made by the Company in respect of policy claims and benefits subject to this YRT Agreement. ARTICLE V - ACCESS TO RECORDS The Reinsurer, by its duly appointed representatives, shall have the right at any reasonable time to examine all papers in the possession of the Company referring to business effected hereunder. ARTICLE VI - UNAUTHORIZED REINSURERS The Reinsurer agrees to fund its share of the Company's reinsured statutory reserves by: 1. Escrow or trust accounts for the benefit of the Reinsurer; and/or 2. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. ARTICLE VII - INSOLVENCY In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. ARTICLE VIII - ARBITRATION A. It is the intention of the parties that customs and usage of the business of reinsurance shall be given full effect in the interpretation of this YRT Agreement. The parties shall act in all things with the highest good faith. A dispute or difference between the parties with respect to the operation or interpretation of this YRT Agreement on which an amicable understanding cannot be reached shall be decided by arbitration. The arbitrators are empowered to decide all questions or issues and shall be free to reach their decisions from the standpoint of equity and customary practices of the insurance and reinsurance industry rather than from that of strict law. B. There shall be three arbitrators who shall be active or retired officers of life insurance companies other than the contracting companies or their affiliates. Each of the contracting companies shall appoint one of the arbitrators and these two arbitrators shall select the third. In the event that either contracting company should fail to choose an arbitrator within thirty days after the other contracting company has given notice of its arbitrator appointment, that contracting company may choose two arbitrators, who shall in turn choose a third arbitrator before entering arbitration. If the two arbitrators are unable to agree upon the selection of a third arbitrator within thirty days following their appointment, each arbitrator shall nominate three candidates within ten days thereafter, two of whom the other shall decline and the decision shall be made by drawing lots. C. The arbitrators shall decide by a majority of votes and from their written decision there can be no appeal. Within 45 days after the closing of the arbitration hearings, the decisions of the arbitrators will be presented to the parties to the arbitration. The cost of arbitration, including the fees of the arbitrators, shall be borne by the losing party unless the arbitrators decide otherwise. ARTICLE IX - OFFSET Any debts or credits, liquidated or unliquidated, in favor of or against either the Reinsurer or the Company with respect to this YRT Agreement only shall be set-off and only the balance shall be allowed or paid. ARTICLE X - WRITTEN AGREEMENT A. This YRT Agreement shall constitute the entire YRT Agreement between the parties with respect to the business being reinsured hereunder, and there are no other understandings between the parties other than as expressed in this YRT Agreement. B. Any change or modification to this YRT Agreement shall be null and void unless made by amendment to this YRT Agreement and signed by both parties. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this YRT Agreement as of the dates undermentioned at: Minneapolis, Minnesota, this 20th day of January 1998. /s/ Mark Zesbaugh -------------------------------------- LIFEUSA INSURANCE COMPANY Charlotte, North Carolina, this 9th day of February 1998. TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY /s/ David Fairhall -------------------------------------- -------------------------------------- EXHIBIT I to the LIFE AND ADB YRT REINSURANCE AGREEMENT Effective: January 1, 1995 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota BUSINESS CEDED NET EXCESS RISK The net excess risk reinsured by the Reinsurer hereunder shall be the Company's retained amount of life insurance and ADB on a life, for all policies reinsured hereunder as described in the Preamble to this YRT Agreement, which is in excess of the statutory policy reserves, to the extent that such excess exceeds the Company's risk retention limit. The Company's risk retention limit per life for this YRT Agreement equals $50,000. However, it is specifically agreed that the Company's risk retention limit shall include on all policies coinsured under the Underlying Contract, whether such risk was obtained through retrocession, by direct coinsurance, or by directly retaining such risk. The ratio of life insurance and ADB applicable to the Company's risk retention limit per life shall be the same as the ratio of total life insurance and total ADB on the policies reinsured hereunder. The maximum net excess risk amount of ADB ceded hereunder shall be $300,000 on any one life. EXHIBIT II to the LIFE AND ADB YRT REINSURANCE AGREEMENT Effective: January 1, 1995 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota CEDING REPORTS Ceding reports shall be on monthly listings by individual policy for new, in force and terminated business, where the net retained liability of the Company exceeds the Company's risk retention limit described in Exhibit I, showing the net excess risk amounts, YRT premiums, claims, other items and any net amount due either party. These reports shall be separate from billing reports as mutually agreed. EXHIBIT III to the LIFE AND ADB YRT REINSURANCE AGREEMENT Effective: January 1, 1995 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota REINSURANCE PREMIUMS The monthly reinsurance premiums payable to the Reinsurer per $100,000 of net excess risk (difference between face amount and policy reserve) shall be as shown below: (1) The monthly premiums for the ADB portion of the net excess risk reinsured shall be $2.00 per $100,000 per month in the first policy year and shall be $8.00 per $100,000 per month thereafter; (2) The monthly premiums for the life insurance portion of the net excess risk reinsured shall be those rates as specified in Schedule A attached to and forming part of this Exhibit. The premium rate to be used shall be calculated from the issue date and issue age and duration of the policy reinsured. Rate Guarantee. While the Reinsurer anticipates continuing to accept premiums on the rate basis given below, the Reinsurer can only guarantee that the life reinsurance premiums under this YRT Agreement shall not exceed the one-year term net premiums on the mortality and interest valuation basis currently applicable to policies reinsured hereunder. AMENDMENT TO LIFE AND ANNUITY COINSURANCE AGREEMENT THIS AMENDMENT, made and entered into as of February 6, 1998 between LIFEUSA INSURANCE COMPANY, a Minnesota corporation ("Reinsurer"), and ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the "Company"). W I T N E S S E T H: WHEREAS, Reinsurer and the Company have entered into the Life and Annuity Coinsurance Agreement effective January 1, 1995, as heretofore amended, (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement as provided in this Amendment, NOW, THEREFORE, in consideration for the mutual promises and undertakings set forth herein and for other good and valuable consideration, the parties hereby agree as follows: 1. Exhibit II. Exhibit II to the Agreement is hereby amended in its entirety and replaced by Exhibit II attached to this Amendment. 2. Use of Stock to Pay Allowances. During the five year period beginning July 1, 1998 and ending on June 30, 2003 (the "Five Year Period"), Reinsurer may use shares of common stock, par value $.01 per share, (the "Common Stock") of its parent company, Life USA Holding, Inc., a Minnesota corporation (the "Parent"), to pay the amounts owing by Reinsurer to the Company under Exhibit IV of this Agreement (the "Allowances"), subject to the provisions of this paragraph. For each six month period beginning July 1 or January 1 (the "Six Month Period") during the Five Year Period, the maximum amount of shares of Common Stock which can be used to pay the Allowances shall be $10 million. For each Six Month Period, the value (the "Purchase Price Per Share") of the shares of Common Stock used to pay the Allowances will be an amount equal to the Average Book Value Per Share (as defined herein) for the respective Six Month Period, multiplied by two and one-half (2-1/2). The term "Average Book Value Per Share" for each Six Month Period shall mean the average of the Book Value Per Share (as herein defined) as of December 31 and June 30 (each a "Determination Date") immediately preceding the Six Month Period. For the purposes of this Agreement, the term "Book Value Per Share" shall mean (a) total assets minus total liabilities of the Parent, based on the Parent's consolidated balance sheet as of the Determination Date, determined in accordance with generally accepted accounting principles in effect on the date hereof and used by the Parent in the preparation of its audited consolidated financial statements as of and for the year ended December 31, 1996 unless the parties mutually agree to any change after the date hereof, excluding any adjustment under Statement of Financial Standards No. 115, divided by (b) the actual number of issued and outstanding shares of Common Stock as of the Determination Date. 3. Continuing Binding Effect. Except as expressly set forth herein, the Agreement as amended hereby shall continue in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered. LIFEUSA INSURANCE COMPANY By:/s/Robert W. MacDonald ---------------------- Robert W. MacDonald Chief Executive Officer ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/Michael T. Westermeyer ------------------------- Michael T. Westermeyer Vice President, Secretary, and Corporate Legal Officer EXHIBIT II LIFE AND ANNUITY COINSURANCE AGREEMENT Effective: January 1, 1995 between ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Minneapolis, Minnesota and LifeUSA INSURANCE COMPANY Minneapolis, Minnesota COINSURANCE PERCENTAGES For all policies reinsured under this Agreement, the Company and the Reinsurer shall share the risks in accordance with the following schedule of coinsurance percentages: LIFE ---- Policies First Reinsured Company's Reinsurer's Between: Share Share - ------------------------ --------- ----------- 01/01/95 through 9/30/95 50.0% 50.0% 10/1/95 and thereafter 75.0% 25.0% ANNUITIES --------- Policies First Reinsured Company's Reinsurer's Between: Share Share - ------------------------ --------- ----------- 01/01/95 through 9/30/95 50.0% 50.0% 10/1/95 and thereafter 75.0% 25.0% AMENDMENT NO. 2 TO LOAN AGREEMENT THIS AMENDMENT, made and entered into as of May 30, 1997 among LIFE USA HOLDING, INC., as Borrower, EMPLOYERS REASSURANCE CORPORATION ("ERC"), as Agent and one of the Lenders, REPUBLIC-VANGUARD LIFE INSURANCE COMPANY ("Republic"), as one of the Lenders, and WINTERTHUR LIFE RE INSURANCE COMPANY ("Winterthur"), as an additional Lender W I T N E S S E T H: WHEREAS, the parties hereto (other than Winterthur) have entered into the Loan Agreement dated as of May 17, 1996 and as amended by Amendment No. 1 thereto dated as of December 30, 1996 (the "Agreement" and all terms defined in the Agreement are used herein as defined in the Agreement) pursuant to which the Lenders have agreed to make advances to Borrower on the terms and conditions set forth therein; and WHEREAS, the parties desire to amend and modify the Agreement as provided in this Amendment, NOW, THEREFORE, in consideration of these premises and of the covenants, conditions and promises hereinafter set forth and for One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Intention of Amendment. The purpose of this Amendment is to: (a) add Winterthur as a Lender, (b) increase the amount of the Lenders' Term Loan Commitments to $50,000,000, (c) extend by one year through May 17, 2000 the period during which Borrower may request Term Loan Advances under the Agreement, (d) extend by one year the maturity of the Term Loan Notes to March 31, 2002, and (e) make other changes necessary to conform the Agreement for the foregoing changes and as otherwise agreed by the parties. Winterthur hereby agrees to be a Lender with a Term Loan Commitment as provided in Section 3 below, and the other parties hereto hereby consent thereto. 2. Definitions. The following definitions from Section 1 of the Agreement are hereby amended in their entirety as follows: "Allianz Agreement" shall mean the joint marketing agreement dated February 16, 1995 between Borrower and Allianz, as such agreement may be amended, supplemented or modified from time to time in accordance with the terms of this Agreement or, when approved by the Department, the administrative and marketing agreement dated as of December 30, 1996 between Borrower and Allianz which replaces said joint marketing agreement when such approval is received. "Applicable Rate" shall mean, at any date of determination, the sum of (i) 3.15% plus (ii) the annual yield for treasury notes of the United States of America maturing May 2001 (constant maturity) (or the average of such yields if more than one is published), as published by the Federal Reserve Bank of New York in the issue of The Wall Street Journal (Eastern Edition) five Business Days prior to the date of any Term Loan Advance or in the event such report shall not so appear, in such other nationally recognized publication as the Agent, may, from time to time, specify to Borrower. "Commitment Termination Date" shall mean the earlier of (i) May 17, 2000, or (ii) the date of the termination of the Term Loan Commitments pursuant to Section 8.2. "Disposition" means any sale, lease or other disposition, or series of sales or dispositions of any assets of Borrower or its Subsidiaries (including, without limitation, by merger or consolidation, and whether by operation of law or otherwise) other than in the ordinary course of business of Borrower and its Subsidiaries or the issuance or sale of any Stock or debt of Borrower or of any Stock of any Subsidiary of Borrower except for the issuance of Common Stock or debt in connection with any FMO Investment or upon the conversion and/or exercise of (i) the Allianz Warrant, (ii) the Allianz Debenture, (iii) the Convertible Subordinated Debentures or (iv) any option or warrant now outstanding or hereafter granted in the ordinary course of Borrower's business. "FMO" shall mean an independent marketing organization primarily engaged in the business of marketing life insurance or annuity products. 3. Term Loan Commitments; Maximum Term Loan; Replacement Term Loan Note; and Repayment. Section 2.1 of the Agreement is amended to provide that the Term Loan Commitment for ERC shall be $25,000,000, for Republic shall be $12,500,000 and for Winterthur shall be $12,500,000, as set forth on the signature page hereto, and the Maximum Term Loan shall be $50,000,000. The Term Loan Advances of each Lender shall be evidenced by a promissory note to be executed and delivered by Borrower upon execution and delivery of this Amendment, the form of which is attached hereto as Exhibit A which shall replace the promissory notes originally executed and delivered by Borrower pursuant to the Agreement and, as used in the Agreement after the effectiveness of this Amendment, the "Term Loan Note" shall mean such promissory note. Section 2.1(h) of the Agreement is amended in its entirety to read as follows: (h) Borrower shall repay the principal amount of each Term Loan Note in eight (8) quarterly payments commencing June 30, 2000, in an amount equal to 12.5% of the principal amount of the Term Loan outstanding on the Commitment Termination Date. 4. Mandatory Prepayment. Section 2.2(a) of the Agreement is amended in its entirety to read as follows: (a) No later than June 30, 2000 and March 31, 2001, Borrower shall prepay the unpaid principal amount of the Term Loan, together with accrued interest to the date of such prepayment, in an amount equal to 25% of the Excess Cash Flow of Borrower for the prior Fiscal Year. 5. Interest on Term Loan. Section 2.5(a) and (c) are amended in their entirety to read as follows: (a) Borrower shall pay interest to the Lenders on the unpaid principal amount of each Term Loan Advance until the principal amount thereof shall have been paid in full, quarterly in arrears on the last day of each calendar quarter, commencing on the first such date after the date of the initial Term Loan Advance (each, an "Interest Payment Date"), at a rate per annum equal to (i) on or prior to March 31, 2002, the Applicable Rate determined as of the date of each Term Loan Advance or (ii) after March 31, 2002, the higher of (x) the Applicable Rate for each Term Loan Note plus 2% and (y) the Index Rate in effect from time to time plus 4% (collectively, the "Stated Rate"). Such interest shall be calculated based on the daily outstanding balance of the Term Loan and on a year of 360 days for the actual number of days elapsed. . . . (c) So long as an Event of Default shall be continuing prior to April 1, 2002, the interest rate applicable to the Term Loan shall be increased by 2% per annum above the rate otherwise applicable and, to the extent permitted by applicable law, shall be payable at such rate on any overdue interest payments. 6. Extension Fee. A new subsection (c) is hereby added to Section 2.6 of the Agreement and provides as follows: (c) Upon the execution by the Lenders of Amendment No. 2 to this Agreement, Borrower shall pay an extension fee of $200,000 to General Electric Capital Corporation for the account of its Equity Capital Group. 7. FMO Investment Guidelines; and Lender Addresses. Schedules 1 and 2 attached to this Amendment hereby supersede and replace Schedules 1 and 2 which were originally delivered in connection with the execution of the Agreement and sets forth the guidelines for FMO Investments and Lender addresses, respectively. 8. Representations and Warranties. Borrower represents and warrants to Agent and Lenders as follows: (a) All of the representations and warranties of Borrower contained in the Agreement or in any of the Loan Documents are true and correct in all material respects on the date hereof as though made on such date, except to the extent that any such representation or warranty expressly relates to an earlier date and for changes permitted or contemplated by the Agreement, except as such representations and warranties are modified or supplemented as follows: (i) Subsidiaries. Schedule 4.3 attached hereto supersedes and replaces Schedule 4.3 which was originally delivered in connection with the execution of the Agreement and lists all of the Subsidiaries of Borrower as of the date of this Amendment. (ii) Financial Statements. The representations and warranties contained in Section 4.6(a) as to audited consolidated financial statements of Borrower and its Subsidiaries are also made as to the audited consolidated financial statements of Borrower and its Subsidiaries as of and for the year ended December 31, 1996 which financial statements have been previously delivered to the Lenders. The representations and warranties contained in Section 4.6(b)(i) as to annual statutory financial statements of Borrower and its Subsidiaries are also made as to the annual (audited) statutory financial statements of Borrower and its Subsidiaries as of and for the fiscal years ended December 31, 1995 and 1996 which financial statements have been previously delivered to the Lenders. (iii) Projections. The representations and warranties contained in Section 4.7 as to projections provided by Borrower are also made as to the projections provided by Borrower for the fiscal years ending on December 31, 1997 through 2002 which have been previously provided to the Lenders. In addition, Borrower represents and warrants that, as of the date hereof, no Default or Event of Default has occurred and is continuing. (b) The execution, delivery and performance by Borrower of this Amendment and the replacement Term Loan Notes to be executed and delivered by Borrower pursuant to this Amendment have been duly authorized by all necessary or proper corporate action and do not require the consent or approval of any Person which has not been obtained. (c) This Amendment and the replacement Term Loan Notes to be executed and delivered by Borrower pursuant to this Amendment have been duly executed and delivered by Borrower and each of this Amendment, the Agreement as amended hereby and the replacement Term Loan Notes to be executed and delivered by Borrower pursuant to this Amendment constitutes a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms. 9. Fees and Expenses. Pursuant to Section 10.2, Borrower shall pay all reasonable out-of-pocket costs and expenses of Agent in connection with the preparation of this Amendment, including the reasonable fees and expenses of its counsel. 10. Conditions to Effectiveness of this Amendment. This Amendment shall not become effective until, and shall become effective when, each and every one of the following conditions shall have been satisfied: (a) executed counterparts of this Amendment, duly executed by Borrower and the Lenders, shall have been delivered to the Agent; (b) the replacement Term Loan Notes in the form of Exhibit A to this Amendment, duly executed by Borrower, shall have been delivered to the Agent; (c) the Agent shall have received a copy of the resolutions of the Board of Directors of Borrower authorizing the execution, delivery and performance by Borrower of this Amendment, certified by the Secretary or any Assistant Secretary of Borrower, together with a certificate of the Secretary or any Assistant Secretary of Borrower certifying as to the incumbency and true signatures of the officers of Borrower authorized to execute this Amendment and the replacement Term Loan Notes on behalf of Borrower; (d) the Agent shall have received the favorable opinion of counsel to Borrower, covering the matters set forth in paragraph 8(b) and (c); and (e) the extension fee referred to in paragraph 6 above has been paid. 11. Full Force and Effect. Except as expressly set forth herein, the Agreement as amended hereby shall continue in full force and effect in accordance with its terms. 12. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which, when so executed and delivered, shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 13. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without regard to the principles thereof regarding conflict of laws. [The balance of this page is intentionally blank] IN WITNESS WHEREOF, the parties have executed this Agreement, each as of the date first above written. LIFE USA HOLDING, INC., as Borrower By /s/ Mark A. Zesbaugh ---------------------------------- Mark A. Zesbaugh, Executive Vice President and Chief Financial Officer Term Loan Commitment $25,000,000 EMPLOYERS REASSURANCE CORPORATION, as Agent and Lender By /s/ Robert Cross ---------------------------------- Its President $12,500,000 REPUBLIC-VANGUARD LIFE INSURANCE COMPANY, AS LENDER By /s/ John Brill ---------------------------------- Its SVP & Treasurer $12,500,000 WINTERTHUR LIFE RE INSURANCE COMPANY, AS LENDER By /s/ John Brill ---------------------------------- Its SVP & Treasurer EXHIBIT A FORM OF REPLACEMENT TERM LOAN NOTE $____________ New York, New York ____________, 1997 FOR VALUE RECEIVED, the undersigned LIFE USA HOLDING, INC., a Minnesota corporation (hereinafter referred to as "Borrower"), hereby unconditionally promises to pay to the order of [NAME OF LENDER], a ________________ corporation ("Lender"), at the office of Lender at __________________, or at such other place as the holder of this Term Loan Note may designate from time to time in writing, in lawful money of the United States of America and in immediately available funds, the principal amount of _____________________ DOLLARS ($_______), or such lesser principal amount as may be outstanding pursuant to the Loan Agreement (as hereinafter defined), together with interest on the unpaid principal amount of this Term Loan Note outstanding from time to time from the date hereof, at the rate provided in the Loan Agreement. This Term Loan Note is issued pursuant to that certain Loan Agreement dated as of May 17, 1996, as amended, among Borrower, Lender and certain other lenders and EMPLOYERS REASSURANCE CORPORATION, as agent ("Agent") for Lender and such other lenders (the "Loan Agreement"), and is entitled to the benefit and security of the Loan Documents provided for therein, to which reference is hereby made for a statement of all of the terms and conditions under which the loan evidenced hereby is made. All capitalized terms, unless otherwise defined herein, shall have the meanings ascribed to them in the Loan Agreement. The principal amount of the indebtedness evidenced hereby shall be payable in installments in the amounts and on the dates specified in the Loan Agreement and, if not sooner paid in full, on March 31, 2002. Interest thereon shall be paid until such principal amount is paid in full at such interest rates and at such times as are specified in the Loan Agreement. If any payment on this Term Loan Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. Upon and after the occurrence of an Event of Default, this Term Loan Note may, as provided in the Loan Agreement, and without demand, notice or legal process of any kind, be declared, and immediately shall become, due and payable. Demand, presentment, protest and notice of nonpayment and protest are hereby waived by Borrower. This Term Loan Note has been executed, delivered and accepted at New York, New York and shall be interpreted, governed by and construed in accordance with, the laws of the State of New York. LIFE USA HOLDING, INC. By: _______________________________ Name: Title: SCHEDULE 1 FMO INVESTMENT GUIDELINES Borrower will loan, acquire or advance to Field Marketing Organizations (FMOs), whether currently contracted with LifeUSA or potential LifeUSA, FMO, utilizing proceeds received under the revolving line of credit based upon the following general guidelines: 1. Borrower will determine the aggregate value of a FMO based upon earnings multiples, an appropriate discount factor, current premium production and/or potential increased production for LifeUSA and Allianz, overall FMO growth, and other intangible factors deemed of value to Borrower. Based upon this valuation, Borrower will determine an offering amount, loadable amount, or advance amount appropriate for the transactions. 2. Whether the transaction takes the form of a loan, acquisition or advance, Borrower will limit the up front cash payment (Initial Installment) to the FMO to an amount that is less than 50% of the aggregate valuation. 3. The proceeds for the initial installment will take the form of cash, Borrower's stock, or a combination thereof determined by Borrower when negotiating an offer to a FMO. 4. The aggregate valuation less the initial installment to the extent payable in cash will be paid out over a reasonable period of not less than three years. Amounts earned in subsequent periods will be primarily in the form of Borrower's stock, however, provisions in the agreement may specify that Borrower has the option to pay cash in lieu of stock. 5. Borrower will include for each loan or advance transaction appropriate representations and warranties, affirmative, negative and financial covenants, conditions of default, remedies upon default and rights upon. Security for a loan or advance will be the FMO contract with Borrower and Allianz, and may also include up to 100% ownership of the FMO. 6. Borrower will include in each acquisition transaction, whether 100% ownership or portion thereof, representations and warranties, positive, negative and financial covenants, conditions of default, remedies upon default and rights upon default deemed necessary and appropriate for each agreement negotiated. Attached is exhibit 1, a form of loan agreement for FMO Investments. The actual loan documentation may differ based upon the specific terms and negotiation of the documentation. (exhibit 1 has not been changed) SCHEDULE 2 LENDER ADDRESSES 1. Employers Reassurance Corporation 5200 Metcalf, Overland Park, Kansas 66201-1391 Telephone: (913) 676-5881 Telecopy: (913) 676-6273 Attention: James D. Maughn 2. Republic-Vanguard Life Insurance Company 2727 Turtle Creek Dallas, Texas 75205 Telephone: (214) 559-1802 Telecopy: (214) 522-8417 Attention: John Brill 3. Winterthur Life Re Insurance Company 2727 Turtle Creek Dallas, Texas 75205 Telephone: (214) 559-1802 Telecopy: (214) 522-8417 Attention: John Brill SCHEDULE 4.3 LIST OF SUBSIDIARIES LifeUSA Insurance Company Minnesota corporation; 25,000 shares of common stock authorized; 25,000 shares of common stock outstanding; 100% of the outstanding shares are owned by Borrower LifeUSA Securities, Inc. Minnesota corporation; 100,000 shares of capital stock authorized; 100 shares of common stock outstanding; 100% of the outstanding shares are owned by Borrower LifeUSA Marketing, Inc. Minnesota corporation; 1,000 shares of capital stock authorized; 100 shares of common stock outstanding; 100% of the outstanding shares are owned by Borrower Tax Planning Seminars, Inc. Minnesota corporation; 100,000 shares of common stock authorized; 100 shares of common stock outstanding; 100% of outstanding shares are owned by LifeUSA Marketing, Inc. AMENDMENT NO. 1 TO CLAIMS ADMINISTRATION AGREEMENT THIS AMENDMENT NO. 1, made and entered into as of February 6, 1998 between LIFEUSA INSURANCE COMPANY, a Minnesota corporation ("LifeUSA"), and ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the "Company"). W I T N E S S E T H: WHEREAS, LifeUSA and the Company have entered into the Claims Administration Agreement effective January 1, 1997 (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement as provided in this Amendment No. 1, NOW, THEREFORE, in consideration for the mutual promises and undertakings set forth herein and for other good and valuable consideration, the parties hereby agree as follows: 1. Term. Section 11.1 of the Agreement is hereby amended in its entirety to read as follows: "11.1 The effective date of commencement of this Agreement shall be January 1, 1997, and this Agreement shall continue indefinitely for a minimum of four years and will be subject to termination upon either party giving one year advance notice of cancellation, provided that such notice of termination may not be given prior to December 31, 1999. In the event of the termination of this Agreement, the Company shall not directly or indirectly (through reinsurance or otherwise) sell any life or annuity products similar to the Covered Products or the New Insurance Products during the one year following such termination. In the event of a termination of this Agreement, LifeUSA may not directly or indirectly (through reinsurance or otherwise) sell any products similar to products of the Company other than Covered Products during one year following such termination." 2. Continuing Binding Effect. Except as expressly set forth herein, the Agreement as amended hereby shall continue in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered. LIFEUSA INSURANCE COMPANY By:/s/Robert W. MacDonald Robert W. MacDonald Chief Executive Officer ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/Michael T. Westermeyer Michael T. Westermeyer Vice President, Secretary, and Corporate Legal Officer AMENDMENT NO. 1 TO ADMINISTRATION AND MARKETING AGREEMENT THIS AMENDMENT NO. 1, made and entered into as of February 6, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation ("Holding"), and ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the "Company"). W I T N E S S E T H: WHEREAS, Holding and the Company have entered into the Administration and Marketing Agreement effective January 1, 1997 (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement as provided in this Amendment No. 1, NOW, THEREFORE, in consideration for the mutual promises and undertakings set forth herein and for other good and valuable consideration, the parties hereby agree as follows: 1. Term. Section 11.1 of the Agreement is hereby amended in its entirety to read as follows: "11.1 The effective date of commencement of this Agreement shall be January 1, 1997, and this Agreement shall continue indefinitely for a minimum of four years and will be subject to termination upon either party giving one-year advance notice of cancellation, provided that such notice of termination may not be given prior to December 31, 1999. In the event of the termination of this Agreement, the Company shall not directly or indirectly (through reinsurance or otherwise) sell any life or annuity products similar to the Covered Products or the New Insurance Products during the one year following such termination. In the event of a termination of this Agreement, Holding may not directly or indirectly (through reinsurance or otherwise) sell any products similar to products of the Company other than Covered Products during one year following such termination. In the event of a termination of this Agreement, Holding shall cause LifeUSA to take and Allianz shall take all reasonable business measures to keep in full force and effect the Covered Products serviced under this Agreement." 2. Continuing Binding Effect. Except as expressly set forth herein, the Agreement as amended hereby shall continue in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered. LIFE USA HOLDING, INC. By:/s/Robert W. MacDonald Robert W. MacDonald Chairman and Chief Executive Officer ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/Michael T. Westermeyer Michael T. Westermeyer Vice President, Secretary, and Corporate Legal Officer REINSURANCE AGREEMENT THIS AGREEMENT, made and entered into as of February 6, 1998, between LIFEUSA INSURANCE COMPANY, a Minnesota stock life insurance company (the "Company"), and ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota stock life insurance company (the "Reinsurer"). W I T N E S S E T H: WHEREAS, the parties hereto desire to enter into this Agreement to provide for the reinsurance of certain policies written by the Company as provided in this Agreement, NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Reinsurer agree as follows: ARTICLE I - REINSURANCE COVERAGE A. The Company's individual life insurance and annuities issued on the policy forms specified in Exhibit I shall be reinsured automatically with the Reinsurer, provided it meets the following requirements: 1. Policy issued according to the Company's then existing regular new risk underwriting rules. 2. Mortality ratings from Standard to Table 16 (P), inclusive. 3. Issue age 80 or below for life insurance and issue age 85 or below for annuities. 4. Resident of the United States or Canada. 5. Risk has not been submitted to the Reinsurer for facultative reinsurance. 6. Company retains the coinsurance percentage specified in Exhibit II. 7. The face amount of life insurance then applied for in all companies, including the Company on the life, when added to the face amount then in force in all companies including the Company on that life, shall not exceed $2,500,000. For accidental death benefits, the amount shall not exceed $300,000. 8. The maximum amount to be reinsured automatically on any one life shall not exceed $500,000 for life insurance and $1,000,000 for annuities. B. If the insurance does not meet the automatic requirements specified in paragraph A, the Company may submit an application for facultative reinsurance. An application for facultative reinsurance shall be made by submitting to the Reinsurer a "Preliminary Application for Reinsurance", Exhibit III, together with copies of all papers pertaining to the insurability of the risk. The Reinsurer shall have the option of accepting or rejecting or rating any application for facultative reinsurance. The Reinsurer shall promptly notify the Company of its underwriting action after the Reinsurer has examined the evidence of insurability submitted. If the amounts of life insurance issued and applied for in all companies is less than $1,500,000, the Company shall submit the information required in the preceding paragraph to Republic-Vanguard Life Insurance Company as the designated lead underwriter for the Reinsurer, and Republic-Vanguard Life's underwriting decision shall be binding on the Reinsurer. If the amount of life insurance issued and applied for in all companies is $1,500,000 or more, the Company shall submit the information required in the second preceding paragraph to each reinsurer with an Interests and Liabilities Agreement to this Agreement, and each reinsurer shall promptly notify the Company of its underwriting action. C. The liability of the Reinsurer shall begin on the effective date of the Company's liability on each policy reinsured hereunder. However, the Reinsurer's liability for facultative reinsurance on a risk shall not commence before the Reinsurer has accepted the application for reinsurance. In no event shall the reinsurance be in force and binding unless the issuance and delivery of such insurance constituted the doing of business in the United States of America in a jurisdiction in which the Company was properly licensed. D. Reinsurance shall be coinsurance and shall follow the policy forms and rates of the Company. The Company has furnished the Reinsurer with copies of its policy forms, applications, rates and values and shall submit to the Reinsurer policy modifications or new policy forms before reinsurance shall become effective hereunder. E. The Reinsurer's share of a policy reinsured hereunder shall remain unchanged so long as the policy issued by the Company remains in force, except as provided in ARTICLE VIII - REDUCTIONS, TERMINATIONS AND CHANGES. F. Receipt by the Reinsurer of the initial reinsurance premium and of each subsequent reinsurance premium, in accordance with the provisions of ARTICLE IV - REPORTS AND REMITTANCES of this Agreement shall be a condition to the Reinsurer's continuing liability for reinsurance of each policy reinsured. G. The Company shall inform the Reinsurer of any reinsurance by means of the monthly accounting report as described in ARTICLE IV - REPORTS AND REMITTANCES. H. If a policy reinsured is changed to a plan of insurance not included in Exhibit I, reinsurance under this Agreement shall continue only with the written agreement of the Reinsurer, except as provided in paragraph A of ARTICLE VIII - REDUCTIONS, TERMINATIONS AND CHANGES. I. The Reinsurer shall establish and assume liability for all statutory reserves, as required under law by the State of Minnesota, in proportion to the Reinsurer's liability for reinsurance on each policy reinsured. ARTICLE II - REINSURANCE PREMIUMS A. The Company shall pay the Reinsurer as reinsurance premiums, the reinsured portion of the premiums and deposits received by the Company from its insureds, including the policy fee. B. The Reinsurer shall pay the Company the allowances described in Exhibit IV. C. The Reinsurer shall not reimburse the Company for the amount of any premium taxes. ARTICLE III - CLAIMS The Reinsurer shall reimburse the Company for the reinsured portion of all claims. Reinsured claims shall be reported by the Company and paid by the Reinsurer on the following basis: A. The Reinsurer shall be liable to the Company for the insurance benefits reinsured under this Agreement as the Company shall be liable for such benefits. All reinsurance claim settlements shall be subject to the terms and conditions of the particular form of contract under which the Company is liable. B. When the Company is advised of a claim, it shall promptly notify the Reinsurer. C. The Company shall submit to the Reinsurer a copy of each paper connected with the claim to the extent that such papers are requested by the Reinsurer in accordance with criteria established from time to time by the Reinsurer. After reviewing such claim papers, the Reinsurer shall give its opinion as to how it would have handled the claim had it been a claim of the Reinsurer. The Reinsurer shall give its opinion within ten working days after the Reinsurer shall have received a copy of each paper connected with the claim. If no response is received within this ten-day period, it will be presumed the Reinsurer is agreeable to payment of the claim. D. Payment of reinsurance proceeds shall be on the same basis as settlement is made by the Company under the policy reinsured hereunder. E. The Company shall promptly notify the Reinsurer of its intention to contest insurance reinsured under this Agreement or to assert defenses to a claim for such insurance. if the Company's contest of such insurance results in the reduction of its liability, the Reinsurer's share of such reduction shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. If the Reinsurer should decline to participate in the contest or assertion of defenses, the Reinsurer then shall discharge all of its liability by the payment of the full amount of reinsurance to the Company, and the Reinsurer shall not share in any subsequent reduction in liability. F. If the amount of insurance provided by a policy reinsured under this Agreement is increased or reduced because of a misstatement of age or sex established after the death of the insured, the Reinsurer's share of such increase or reduction shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. G. The Company alone shall pay the routine expenses incurred in connection with settling claims. These expenses may include compensation of agents and employees and the cost of routine investigations. H. The Reinsurer shall share with the Company all expenses which are not routine. Expenses which are not routine shall be those directly incurred in connection either with the contest of insurance or the assertion of defenses to insurance or with the possibility of a contest or assertion of defenses. The Reinsurer's share of these expenses shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. However, if the Reinsurer has discharged its liability under paragraph E of this Article, the Reinsurer shall not share in any expenses incurred after the date it has discharged its liability. The term "claim expenses" shall mean statutory interest payable on insurance proceeds, court costs, interest upon judgments, and allocated investigation, adjustment and legal expenses, but the term "claim expenses" shall not include salaries paid to employees of the Company. I. Any particular reinsurer shall be obligated to reimburse the Company for the percentage set forth in that reinsurer's interests and Liabilities Agreement of any amount paid by the Company for punitive, exemplary or compensatory damages arising out of the conduct of the Company in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefit under a policy reinsured by this Agreement, but only if that particular reinsurer shall have, in advance of any such conduct by the Company, counseled with the Company and concurred in the Company's course of conduct. ARTICLE IV - REPORTS & REMITTANCES The following rules for Monthly Reinsurance Accounting are required: A. The reinsurance premiums required under this Agreement shall be payable to the Reinsurer on the same basis as the insurance premiums and deposits are payable to the Company. B. Within ten days following the close of each month, the Company shall provide the Reinsurer with a statement listing the total and the reinsured portions of all premiums, deposits, refunds, allowances, claims, surrender benefits, policy loans, reserves and other mutually agreed upon items applicable to the month just ended. The format and methods of calculation of such items shall be in a form mutually acceptable to all parties. C. For administrative purposes only, if a statement shows that a net balance is payable to the Reinsurer, the Company shall include with the statement its payment for the amount of the net balance due the Reinsurer. If payment for the full amount of the net balance due the Reinsurer is not included with the statement, the reinsurance premiums for all of the risks listed on the statement shall be in default. If a statement shall not be received by the Reinsurer within thirty days after the close of the month, the reinsurance premiums for all of the risks that would have been listed on such a statement shall be in default. Also for administrative purposes only, if a statement shows that a net balance is payable to the Company, the Reinsurer shall pay to the Company the amount of the net balance within thirty days after the day on which the Reinsurer receives the monthly statement from the Company. D. It is the understanding of both parties that both parties desire the payment of net balances due no less frequently than weekly. Either party may, at its option and with the cooperation and consent of the other party, implement appropriate procedures designed to accomplish such transfers along with the appropriate statements. Such procedures may involve the establishment of special bank accounts and the use of wires, express mail or equivalent means. The establishment of such procedures, however, does not remove from either party any of the rights or obligations set forth in the other paragraphs of this Article. E. The Reinsurer shall have the right to terminate the reinsurance on risks for which reinsurance premiums are in default by giving ninety days written notice of termination to the Company. The Insurance Department of the State of Minnesota shall be sent a copy of such written notice by registered mail. As of the close of the last day of this ninety-day notice period, all of the Reinsurer's liability for reinsurance on risks which are the subject of the termination notice shall terminate unless the Reinsurer shall have been paid the amount in default prior to that time. Notwithstanding termination of reinsurance as provided by this paragraph, the Company shall continue to be liable to the Reinsurer for all unpaid reinsurance premiums earned by the Reinsurer under this Agreement. F. There shall be no reinstatement of reinsurance terminated under paragraph E of this Article. G. The first day of the ninety-day notice of termination under paragraph E of this Article shall be the day the notice shall be deposited in the mail addressed to the Company's Home Office, or, if the mail is not used, the day it is delivered to the Company's Home Office or to an officer of the Company. H. Within thirty days following the close of each calendar quarter, the Company shall prepare and submit to the Reinsurer an in force listing of all risks reinsured under this Agreement setting forth pertinent data mutually agreed upon by all parties. I. All amounts payable under this Agreement shall be payable in the lawful money of the United States; except, however, that they shall be payable in the lawful money of Canada if the Company's insurance is based on Canadian currency. ARTICLE V - EXPENSES The Company shall bear the expense of all medical examinations, inspection fees and other charges incurred in connection with the issuance of the Company's insurance policies reinsured. The Reinsurer will reimburse the Company for the Reinsurer's share of any guaranty fund assessments with respect to the policies reinsured hereunder based on the percentage of the policies reinsured hereunder. ARTICLE VI - INTEREST ON STATEMENTS AND CLAIMS A. Interest accrual on all amounts owed from one party to the other begins on the tenth day following the end of the month. All interest credited shall be simple interest. B. This arrangement shall take effect beginning with the [MONTH AND YEAR] statement. Interest accrual for the [MONTH AND YEAR] statement shall begin on [10TH OF THE NEXT FOLLOWING MONTH]. C. On the twentieth day of the month preceding the end of each calendar quarter (on the following business day if the twentieth day falls on a weekend or holiday), the interest rate shall be established which shall apply to any statements or claims due during the following calendar quarter. D. The interest rate shall be the three-month Treasury Bill rate as stated in The Wall Street Journal. ARTICLE VII - OVERSIGHTS It is understood and agreed that if failure to comply with the terms of this Agreement is shown to be unintentional and the result of a misunderstanding or oversight on the part of either the Company or the Reinsurer, both the Company and the Reinsurer shall be restored to the positions they would have occupied had no such misunderstanding or oversight occurred, provided the failure is rectified within a reasonable time after discovery. ARTICLE VIII - REDUCTIONS, TERMINATIONS AND CHANGES A. If there is a contractual or non-contractual replacement or change in the insurance reinsured under this Agreement, the insurance shall continue to be reinsured with the Reinsurer. B. If the insurance reinsured under this Agreement increases and; 1. The increase is subject to new underwriting evidence, the provisions of ARTICLE I - REINSURANCE COVERAGE shall apply to the increase in reinsurance. 2. The increase is not subject to new underwriting evidence, the Reinsurer shall accept automatically the increase in reinsurance, provided that the total amount ceded does not exceed the Reinsurer's automatic binding limit. C. If the amount of insurance provided by a policy reinsured under this Agreement is increased or reduced, the Reinsurer's share of such increase or reduction shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. D. If insurance reinsured under this Agreement is increased or, reduced, the Reinsurer's share of any adjustments to cash values, reserves, policy loans, or other shared values shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. E. If insurance reinsured under this Agreement is terminated, the reinsurance for the individual risk involved shall be terminated on the effective date of termination. F. On facultative reinsurance, if the Company wishes to reduce the mortality rating, this reduction shall be reunderwritten on a facultative basis under the facultative provisions of this Agreement. G. The Reinsurer shall refund to the Company all unearned reinsurance premiums not including policy fees, less applicable allowances, arising from reductions, terminations and changes as described in this Article. H. If there is a contractual or non-contractual replacement or change in the insurance reinsured under this Agreement, the reinsurance allowances set forth in Exhibit IV shall be calculated, based on policy duration from the original date of issue, unless full new underwriting evidence according to the Company's regular underwriting rules is required. If such evidence is required, then the reinsurance allowance shall be based on the effective date of the replacement or change, but only in the proportion and to the extent that full first year compensation is payable, and subject to approval of the Reinsurer. ARTICLE IX - ACCESS TO RECORDS A. The Reinsurer, by its duly authorized and appointed representatives, shall have the right at any reasonable time to examine at the office of the Company or the offices of any of the agencies which produce business for the Company, all papers and documents relating to reinsurance under this Agreement. B. At least once each year, the independent auditors of the Company shall perform certain confirmation procedures, agreed upon by the Company and the Reinsurer, in connection with the reinsurance. A copy of the report of the independent auditor shall be furnished to the Reinsurer. ARTICLE X - UNAUTHORIZED REINSURERS The Reinsurer agrees to fund its share of the Company's ceded statutory reserves by: 1. Escrow or trust accounts for the benefit of the Company; and/or 2. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. ARTICLE XI - INSOLVENCY A. In the event of the insolvency of the Company, all reinsurance shall be payable on the basis of the policies reinsured directly to its liquidator, receiver, conservator or statutory successor, without diminution because of the insolvency of the Company or because such liquidator, receiver, conservator or statutory successor has failed to pay all or a portion of any claim. B. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor shall give the Reinsurer written notice of the pendency of a claim on a policy reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of a claim, the Reinsurer may investigate such claim and interpose in the name of the Company, its liquidator, receiver, conservator or statutory successor, but at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which the Reinsurer may deem available to the Company or its liquidator, receiver, conservator or statutory successor. C. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expenses of conservation, liquidation or insolvency to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more reinsurers are involved in the same claim and a majority in Interest elect to interpose a defense or defenses to such claim, the expense shall be apportioned as though such expense had been incurred by the Company. ARTICLE XII - ARBITRATION A. It is the intention of the parties that customs and usages of the business of reinsurance shall be given full effect in the interpretation of this Agreement. The parties shall act in all things with the highest good faith. A dispute or difference between the parties with respect to the operation or interpretation of this Agreement on which an amicable understanding cannot be reached shall be decided by arbitration. The arbitrators are empowered to decide all questions or issues and shall be free to reach their decisions from the standpoint of equity and customary practices of the insurance and reinsurance industry rather than from that of strict law. B. There shall be three arbitrators who shall be active or retired officers of life insurance companies other than the contracting parties or their affiliates. Each of the contracting companies shall appoint one of the arbitrators and these two arbitrators shall select the third. In the event that either contracting party should fail to choose an arbitrator within thirty days after the other contracting party has given notice of its arbitrator appointment, that contracting company may choose two arbitrators, who shall in turn choose a third arbitrator before entering arbitration. If the two arbitrators are unable to agree upon the selection of a third arbitrator within thirty days following their appointment, each arbitrator shall nominate three candidates within ten days thereafter, two of whom the other shall decline and the decision shall be made by drawing lots. C. The arbitrators shall decide by a majority of votes and from their written decision there can be no appeal. The cost of arbitration, including the fees of the arbitrators, shall be borne by the losing party unless the arbitrators decide otherwise. ARTICLE XIII - RECAPTURE Insurance reinsured under this Agreement shall not be eligible for recapture. ARTICLE XIV - REINSTATEMENTS If insurance shall lapse for nonpayment of premium and if it is reinstated in accordance with its terms and the rules of the Company, the applicable reinsurance shall be reinstated by the Reinsurer, subject to the condition that the Company shall pay to the Reinsurer all reinsurance premiums in the same manner as the Company shall receive its premiums under its policy. ARTICLE XV - PARTIES TO THE AGREEMENT This Agreement is for indemnity reinsurance solely between the Company and the Reinsurer. The acceptance of reinsurance shall not create any right or legal relation whatever between the Reinsurer and the insured or any other person having an interest in any kind of insurance issued by the Company. ARTICLE XVI - SCOPE AND DURATION OF AGREEMENT A. This Agreement shall be effective on April 1, 1998. This Agreement may be terminated with respect to new business to be reinsured thereafter at any time, subject to paragraph B of this Article, by either party giving both the following two written notices: 1. Ninety days notice of termination to the other party; and 2. Ninety days notice of termination to the Department of Insurance of the State of Minnesota, by registered mail. Reinsurance of policies in force on the date of termination shall remain in force until the extinction of the Company's liability under the policies reinsured. B. The first day of the ninety-day notice period in subparagraph 2 of paragraph A of this Article shall be: 1. The day immediately following the day in which the notice is deposited as registered mail; or 2. If delivered by means other than mail, the day the notice is delivered at the office of the Minnesota Insurance Department. C. Notwithstanding the provisions of paragraph A of this Article, if the Reinsurer terminates this Agreement with respect to new reinsurance and the Company has not arranged for a replacement reinsurer for new reinsurance prior to the date of termination under paragraph A of this Article, the Company may, by written notice to the Reinsurer prior to expiration of the ninety day period referred to in paragraph A of this Article, require that this Agreement shall continue in effect for up to an additional ninety days. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered. LIFEUSA INSURANCE COMPANY By:/s/Robert W. MacDonald Robert W. MacDonald Chief Executive Officer ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/Michael T. Westermeyer Michael T. Westermeyer Vice President, Secretary, and Corporate Legal Officer EXHIBIT I LIFE AND ANNUITY COINSURANCE AGREEMENT Effective: April 1, 1991 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota The format of EXHIBIT I was changed as of September 1, 1993, to include only Policy Forms and Plan Codes. However, this Agreement shall continue to coinsure all state variations of the Policy Forms and Plan Codes in EXHIBIT I. Any state variations of Policy Forms and Plan Codes which may have inadvertently not been included in a previous EXHIBIT I to this Agreement shall be deemed to have been reinsured under this Agreement, according to the terms for that Policy Form and Plan Code, as at the date such policies were issued. PLAN CODE DESCRIPTION POLICIES 1000 Security Assuror 1100 Security Planner 1200 Universal Annuity Life 1250 Universal Annuity Life with idea 1300 Asset Protector 1400 Universal Annuity Life III 1450 Universal Annuity Life III with idea 2000 Single Premium Security Assuror 2100 Single Premium Security Planner 2200 DUALife I 2400 DUALifeIII 4000 Assuror Annuity 4100 Planner Annuity 4200 Accumulator Annuity 4203 Buffet 5 4208 Accumulator Annuity 4214 Accumulator Classic with 10% Bonus and 4% Guarantee 4250 Single Premium Accumulator Annuity 4253 Single Premium Buffet 5 4255 Accumulator V Annuity 4258 Single Premium Accumulator Annuity EXHIBIT I - Continued PLAN CODE DESCRIPTION POLICIES (CONTINUED) 4300 Single Premium Immediate Annuity 4400 EXCELerator Annuity - Ages 64 and under 4410 EXCELerator Annuity - Ages 65 and over 4500 Idea Annuity - Ages 64 and under 4510 Idea Annuity - Ages 65 and over 4600 Accumulator X Annuity 4650 Single Premium Accumulator X Annuity 4700 Universal Retirement Plan 4800 Accumulator Classic 4810 Accumulator Classic with 10% Bonus 4850 Single Premium Accumulator Classic 4900 Annuitizer 4950 Single Premium Annuitizer 6000 Step Rate Annuity 6050 Single Premium Step Rate Annuity 6100 Total Security Annuity 6150 Single Premium Total Security Annuity 6200 ANNU-A-DEX Single Premium Annuity 6300 Ideal Annuity 6350 Ideal Annuity GRO Conversion 63009 Ideal Index Annuity 63109 Ideal Index Annuity GRO without Index Rider 63509 Ideal Index Annuity GRO with Index Rider 14004 UAL III with higher commissions 14504 UAL III with higher commissions and idea 42006 Buffet 6 42007 Buffet 7 42008 Buffet 8 42009 Buffet 9 42010 Buffet 10 42012 Buffet 12 42506 Single Premium Buffet 6 42507 Single Premium Buffet 7 42508 Single Premium Buffet 8 42509 Single Premium Buffet 9 42510 Single Premium Buffet 10 42512 Single Premium Buffet 12 42514 SP Accumulator Classic-10% Bonus-4% Guarantee 48510 SP Accumulator Classic with 10% Bonus 92000 Senior Assuror EXHIBIT I - Continued PLAN CODE DESCRIPTION RIDERS 31001 Waiver of Monthly Deduction 31002 Disability Income 31003 Accidental Death Benefit 31004 Guaranteed Insurability 31005 Children's Insurance Rider 31006 Family Insurance Rider 31007 Waiver of Monthly Premium 310011 Waiver of Monthly Premium (Unisex) 310061 Family Insurance Rider (Unisex) 31008 DUAL Waiver of Monthly Premium 31009 DUAL Disability Income on Insured Two EXHIBIT II LIFE AND ANNUITY COINSURANCE AGREEMENT Effective: April 1, 1991 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota COINSURANCE PERCENTAGES For all policies reinsured under this Agreement, the Company and the Reinsurer shall share the risks in accordance with the following schedule of coinsurance percentages: LIFE ---- Policies First Company's Reinsurer's Reinsured Between: Share Share ------------------ --------- ----------- 04/01/91 and 12/31/91 30.0% 70.0% 01/01/92 and 12/31/92 30.0% 70.0% 01/01/93 and 06/30/93 35.0% 65.0% 07/01/93 and 09/30/95 50.0% 50.0% 10/01/95 and thereafter 25.0% 75.0% ANNUITIES --------- 04/01/91 and 12/31/91 25.0% 75.0% 01/01/92 and 12/31/92 25.0% 75.0% 01/01/93 and 06/30/93 35.0% 65.0% 07/01/93 and 09/30/95 50.0% 50.0% 10/01/95 and thereafter 25.0% 75.0% EXHIBIT III LIFE AND ANNUITY COINSURANCE AGREEMENT Effective: April 1, 1991 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota Exhibit III will consist of the Preliminary Application for Reinsurance to be agreed by the Reinsurers. A copy of the Preliminary Application for Reinsurance used by Republic-Vanguard Life will be Exhibit III. EXHIBIT IV LIFE AND ANNUITY COINSURANCE AGREEMENT Effective: April 1, 1991 issued to LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota ALLOWANCES 1. The Reinsurer shall pay the Company allowances on "policy", "initial", and "renewal" premiums as set forth in Sections 2, 3, 4, 5, 6, 7 and 8 of this Exhibit. In all cases, allowances shall apply to the policy described, including any riders attached thereto. 2. The Reinsurer shall pay to the Company an allowance equal to a percentage of the reinsured portion of each policy's "policy" premium. The "policy" premium is the annualized first year planned target premium, as determined on the date of issue. The percentage, for policies issued after the effective date of this Agreement, shall be 30.0% for Plans 1000, 1200, 1250, 1400, 1450, 2200, 2400, 14004, and 14504 (and all state variations), the Security Assuror, Universal Annuity Life, Universal Annuity Life with idea, Universal Annuity Life III, Universal Annuity Life III with idea, DUALife, DUALife III, Universal Annuity Life III with higher commissions, and Universal Annuity Life III with higher commissions and idea, respectively, and 35.0% for Plan 1100 (and all state variations), the Security Planner. 3. The Reinsurer shall pay to the Company an allowance equal to 120.0% of the reinsured portion of each policy's "initial" premium for Plans 1000, 1100, 1200, 1250, 1400, 1450, 2200, and 2400 (and all state variations) and 135.0% for Plans 14004 and 14504 (and all state variations). The "initial" premium is the fully commissionable portion of the first year premium actually received, within the first fifteen months, by the Company from the insured. 4. For Plans 1000, 1100, 1200, 1250, 1400, 1450, 2200, 2400, 14004, and 14504, the Reinsurer shall pay to the Company an allowance equal to a percentage of the reinsured portion of each policy's "renewal" premium. The "renewal" premium is any deposit or premium actually received by the Company from the insured, which does not qualify as "initial" premium as defined in Section 3 of this Exhibit. The percentage shall be 18% for deposits and premium received prior to the fifth policy anniversary, 15.5% for deposits on the fifth through ninth policy anniversaries, and 12-1/2% for deposits and premiums received on or after the tenth policy anniversary. "Renewal" premium may include premiums or deposits received prior to the first policy anniversary. 5. The Reinsurer shall pay to the Company an allowance equal to a percentage of the reinsured portion of any policy's "single" premium. The single premium is the fully commissionable portion of the premium or the excess premium actually received by the Company from the insured for Plans 2000 and 2100. The percentage shall be 20% for Plan 2000 (and all state variations) and 18% for Plan 2100 (and all state variations). 6. The Reinsurer shall pay to the Company the following reinsurance allowances, which are equal to a percentage of the reinsured portion of any policy's total collected premium for the policy year: ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-5 YEARS 6+ ---------- -------- ---------- --------- -------- 4000 Below 61 17.50% 15.0% 10.0% 4000 Above 60 15.00% 10.0% 7.5% 4100 Below 61 12.50% 10.0% 7.5% 4100 Above 60 12.50% 8.0% 6.0% 4400 Below 56 15.25% 4400 56 through 64 14.30% 4500 Below 56 15.25% 4500 56 through 64 14.30% 4410 Above 64 13.05% 4510 Above 64 13.05% 4900 Below 56 22.00% 22.0% 13.0% 4950 56 through 64 18.50% 18.5% 11.5% 6000 Below 56 17.00% 17.0% 13.0% 6050 56 through 64 14.50% 14.5% 11.5% 6300 Below 56 19.50% 6300 56 through 80 17.30% 6350 Below 56 0.00% 6350 56 through 80 0.00% 63009 Below 56 19.50% 63009 56 through 64 17.30% 63109 All 0.00% 63509 All 0.00% For policies issued through December 31, 1996, the Reinsurer shall grant additional ceding allowances equal to 0.20% of any policy's total collected premium for policy years two through ten plus 0.20% of any policy's account value as of the beginning of policy years two through ten. For policies issued on or after January 1, 1997, the Reinsurer shall grant additional ceding allowances equal to 0.16% of any policy's total collected premium for policy years two and thereafter plus 0.16% of any policy's account value as of the beginning of policy years two and thereafter. 7. The Reinsurer shall pay to the Company the following reinsurance allowances, which are equal to a percentage of the reinsured portion of any policy's total collected premium for the policy year, separate percentages applying to that portion of the total collected premium for the policy year up to the planned premium called for in the policy and to that portion of the total collected premium for the policy year which is in excess of the planned premium called for in the policy: Portion of Collected Premium Up to Planned Premium ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-5 YEARS 6+ - ---------- -------- ---------- --------- -------- 4200 Below 56 22.0% 22.0% 13.0% 4200 Above 55 18.5% 18.5% 11.5% 4203 Below 56 22.0% 22.0% 13.0% 4203 Above 55 18.5% 18.5% 11.5% 4208 Below 56 22.0% 22.0% 13.0% 4208 Above 55 18.5% 18.5% 11.5% 4214 Below 56 22.0% 22.0% 13.0% 4214 Above 55 18.5% 18.5% 11.5% 4250 Below 56 15.5% 15.5% 7.0% 4250 Above 55 13.0% 13.0% 7.0% 4253 Below 56 15.5% 15.5% 7.0% 4253 Above 55 13.0% 13.0% 7.0% 4255 Below 56 15.5% 15.5% 7.0% 4255 Above 55 13.0% 13.0% 7.0% 4258 Below 56 15.5% 15.5% 7.0% 4258 Above 55 13.0% 13.0% 7.0% 4300 All 8.5% 0.0% 0.0% 4600 Below 56 15.5% 15.5% 13.0% 4600 Above 55 13.0% 13.0% 11.5% 4650 Below 56 15.5% 15.5% 7.0% 4650 Above 55 13.0% 13.0% 7.0% 4800 Below 56 22.0% 22.0% 13.0% 4800 Above 55 18.5% 18.5% 11.5% 4810 Below 56 22.0% 22.0% 13.0% 4810 Above 55 18.5% 18.5% 11.5% 4850 Below 56 15.5% 15.5% 7.0% 4850 Above 55 13.0% 13.0% 7.0% 6100 All 17.5% 17.5% 17.5% 6150 All 17.5% 17.5% 17.5% ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-5 YEARS 6+ - ---------- -------- ---------- --------- -------- CONTINUED. . . 42006 Below 56 22.0% 22.0% 13.0% 42006 Above 55 18.5% 18.5% 11.5% 42007 Below 56 22.0% 22.0% 13.0% 42007 Above 55 18.5% 18.5% 11.5% 42008 Below 56 22.0% 22.0% 13.0% 42008 Above 55 18.5% 18.5% 11.5% 42009 Below 56 22.0% 22.0% 13.0% 42009 Above 55 18.5% 18.5% 11.5% 42010 Below 56 22.0% 22.0% 13.0% 42010 Above 55 18.5% 18.5% 11.5% 42012 Below 56 22.0% 22.0% 13.0% 42012 Above 55 18.5% 18.5% 11.5% 42506 Below 56 15.5% 15.5% 7.0% 42506 Above 55 13.0% 13.0% 7.0% 42507 Below 56 15.5% 15.5% 7.0% 42507 Above 55 13.0% 13.0% 7.0% 42508 Below 56 15.5% 15.5% 7.0% 42508 Above 55 13.0% 13.0% 7.0% 42509 Below 56 15.5% 15.5% 7.0% 42509 Above 55 13.0% 13.0% 7.0% 42510 Below 56 15.5% 15.5% 7.0% 42510 Above 55 13.0% 13.0% 7.0% 42512 Below 56 15.5% 15.5% 7.0% 42512 Above 55 13.0% 13.0% 7.0% 42514 Below 56 15.5% 15.5% 7.0% 42514 Above 55 13.0% 13.0% 7.0% 48510 Below 56 15.5% 15.5% 7.0% 48510 Above 55 13.0% 13.0% 7.0% Portion of Collected Premium in Excess of Planned Premium ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-5 YEARS 6+ - ---------- -------- ---------- --------- -------- 4200 Below 56 15.5% 15.5% 7.0% 4200 Above 55 13.0% 13.0% 7.0% 4203 Below 56 15.5% 15.5% 7.0% 4203 Above 55 13.0% 13.0% 7.0% 4208 Below 56 15.5% 15.5% 7.0% 4208 Above 55 13.0% 13.0% 7.0% 4214 Below 56 15.5% 15.5% 7.0% 4214 Above 55 13.0% 13.0% 7.0% ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-5 YEARS 6+ - ---------- -------- ---------- --------- -------- CONTINUED. . . 4250 Below 56 15.5% 15.5% 7.0% 4250 Above 55 13.0% 13.0% 7.0% 4253 Below 56 15.5% 15.5% 7.0% 4253 Above 55 13.0% 13.0% 7.0% 4255 Below 56 15.5% 15.5% 7.0% 4255 Above 55 13.0% 13.0% 7.0% 4258 Below 56 15.5% 15.5% 7.0% 4258 Above 55 13.0% 13.0% 7.0% 4300 All 8.5% 0.0% 0.0% 4600 Below 56 15.5% 15.5% 7.0% 4600 Above 55 13.0% 13.0% 7.0% 4650 Below 56 15.5% 15.5% 7.0% 4650 Above 55 13.0% 13.0% 7.0% 4800 Below 56 15.5% 15.5% 7.0% 4800 Above 55 13.0% 13.0% 7.0% 4810 Below 56 15.5% 15.5% 7.0% 4810 Above 55 13.0% 13.0% 7.0% 4850 Below 56 15.5% 15.5% 7.0% 4850 Above 55 13.0% 13.0% 7.0% 6100 All 17.5% 17.5% 6.5% 6150 All 17.5% 17.5% 6.5% 42006 Below 56 15.5% 15.5% 7.0% 42006 Above 55 13.0% 13.0% 7.0% 42007 Below 56 15.5% 15.5% 7.0% 42007 Above 55 13.0% 13.0% 7.0% 42008 Below 56 15.5% 15.5% 7.0% 42008 Above 55 13.0% 13.0% 7.0% 42009 Below 56 15.5% 15.5% 7.0% 42009 Above 55 13.0% 13.0% 7.0% 42010 Below 56 15.5% 15.5% 7.0% 42010 Above 55 13.0% 13.0% 7.0% 42012 Below 56 15.5% 15.5% 7.0% 42012 Above 55 13.0% 13.0% 7.0% 42506 Below 56 15.5% 15.5% 7.0% 42506 Above 55 13.0% 13.0% 7.0% 42507 Below 56 15.5% 15.5% 7.0% 42507 Above 55 13.0% 13.0% 7.0% 42508 Below 56 15.5% 15.5% 7.0% 42508 Above 55 13.0% 13.0% 7.0% 42509 Below 56 15.5% 15.5% 7.0% 42509 Above 55 13.0% 13.0% 7.0% ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-5 YEARS 6+ - ---------- -------- ---------- --------- -------- CONTINUED. . . 42510 Below 56 15.5% 15.5% 7.0% 42510 Above 55 13.0% 13.0% 7.0% 42512 Below 56 15.5% 15.5% 7.0% 42512 Above 55 13.0% 13.0% 7.0% 42514 Below 56 15.5% 15.5% 7.0% 42514 Above 55 13.0% 13.0% 7.0% 48510 Below 56 15.5% 15.5% 7.0% 48510 Above 55 13.0% 13.0% 7.0% For policies issued through December 31, 1996, the Reinsurer shall grant additional ceding allowances equal to 0.20% of any policy's total collected premium for policy years two through ten plus 0.20% of any policy's account value as of the beginning of policy years two through ten. For policies issued on or after January 1, 1997, the Reinsurer shall grant additional ceding allowances equal to 0.16% of any policy's total collected premium for policy years two and thereafter plus 0.16% of any policy's account value as of the beginning of policy years two and thereafter. 8. For policies issued through December 31, 1994, the Reinsurer shall pay to the Company reinsurance allowances for Plan 4700, the Universal Retirement Plan, which shall be according to the following two schedules, the reinsurance allowances being dependent on whether the policy reinsured was sold through the Universal Benefits Life Division (UBL) or the General Market Division (GM). UBL policies are administered on the FIMMAS computer system, and the GM policies are administered on the VersaTUL computer system. SCHEDULE ONE: GENERAL MARKET DIVISION Portion of Collected Premium Up to Planned Premium ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-5 YEARS 6-10 YEARS 11+ - ---------- ---------- ---------- --------- ---------- --------- 4700 15 - 40 80.0% 17.0% 9.0% 6.0% 4700 41 - 65 62.5% 15.0% 9.0% 6.0% Portion of Collected Premium In Excess of Planned Premium ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-5 YEARS 6-10 YEARS 11+ - ---------- ---------- ---------- --------- ---------- --------- 4700 15 - 40 14.0% 17.0% 9.0% 6.0% 4700 41 - 65 12.0% 15.0% 9.0% 6.0% SCHEDULE TWO: UNIVERSAL BENEFITS LIFE DIVISION Portion of Collected Premium Up to Planned Premium ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-10 YEARS 11+ - ---------- -------- ---------- ---------- --------- 4700 15 - 40 80.0% 9.0% 6.0% 4700 41 - 65 62.5% 9.0% 6.0% Portion of Collected Premium in Excess of Planned Premium ANNUITY ISSUE FIRST YEAR RENEWAL ALLOWANCES PLAN AGE ALLOWANCE YEARS 2-10 YEARS 11+ - ---------- -------- ---------- ---------- --------- 4700 15 - 40 14.0% 9.0% 6.0% 4700 41 - 65 12.0% 9.0% 6.0% For policies issued prior to January 1, 1995, for UBL business only, the Reinsurer shall grant additional ceding allowances equal to 0.35% of any policy's annuitization value at the beginning of each renewal policy year, beginning with policy year two. For policies issued on or after January 1, 1995, the Reinsurer shall pay to the Company reinsurance allowances for all policies issued as Plan 4700 the reinsurance allowances specified in Schedule One of this Section. 9. The Reinsurer shall pay to the Company an allowance equal to 145% of "Control Premium" actually received by the Company from the insured for Plan 1300, the Asset Protector. The Control Premiums are shown on the attached Schedule A to this Exhibit. The Reinsurer shall pay to the Company an allowance equal to 11% of premiums actually received by the Company from the insured in excess of the Control Premium. 10. For the Single Premium Annu-A-Dex Annuity, Plan 6200, the Reinsurer shall pay to the Company the following reinsurance allowances, which are equal to a percentage of any policy's total collected premium for the policy year: ANNUITY ISSUE FIRST YEAR PLAN AGE ALLOWANCE ---------- -------- ---------- 6200 Below 61 12.25% 6200 61 through 75 11.25% For Plan 6200, the Reinsurer shall pay to the Company additional reinsurance allowances equal to the following: a. 3.00% of the annuitization value at the beginning of policy year eight, policy year fifteen, and at the beginning of each seventh policy year thereafter, if the policy is in deferral at the time; plus, b. 0.25% of the annuitization value as of the beginning of policy years two and thereafter; plus, c. 0.16% of any policy's account value as of the beginning of policy years two and thereafter. SCHEDULE A to EXHIBIT IV (Effective: April 1, 1990) CONTROL PREMIUMS ISSUE MALE FEMALE AGE RATES* RATES* ----- ------ ------ 50 23.00 19.00 51 23.00 19.00 52 24.00 20.00 53 26.00 21.00 54 28.00 22.00 55 30.00 23.00 56 31.50 24.00 57 33.00 25.00 58 34.50 26.50 59 36.00 28.00 60 37.50 29.50 61 39.00 31.00 62 40.50 32.50 63 42.00 34.00 64 43.50 35.50 65 45.00 37.00 66 46.00 38.00 67 47.00 39.00 68 48.00 40.00 69 49.00 41.00 70 50.00 42.00 71 50.00 43.00 72 50.00 44.00 73 50.00 45.00 74 50.00 45.00 75 50.00 45.00 76 50.00 45.00 77 50.00 45.00 78 50.00 45.00 79 50.00 45.00 80 50.00 45.00 *Plus $90.00 policy fee EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of January 1, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and ROBERT W. MACDONALD (the "Executive"). R E C I T A L S: WHEREAS, the Executive is now and has been a director and the Chairman and Chief Executive Officer of the Company and the Chief Executive Officer of LifeUSA Insurance Company, the Company's wholly-owned stock life insurance subsidiary ("LifeUSA"), and serves as an officer and/or director of certain other subsidiaries of the Company; WHEREAS, the Executive and the Company wish to enter into this Agreement to provide for the continued employment of Executive; and WHEREAS, the Executive and the Company are willing to enter into this Agreement upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Duties. The parties hereby agree that, during the term of this Agreement as set forth in paragraph 2 below, the Executive shall be employed as the Chairman and Chief Executive Officer of the Company and the Chief Executive Officer of LifeUSA with the duties and responsibilities attendant to such positions. In discharging such duties and responsibilities, the Executive may also serve as an executive officer and/or director of any direct or indirect subsidiary of the Company (collectively the "Subsidiaries"). The salary, other compensation and benefits provided herein may be allocated among the Company and the Subsidiaries based upon the portion of the Executive's services provided to the Company and each of the Subsidiaries, respectively, and the Executive shall assist the Company in making such allocation as the Company may reasonably request. During the term of this Agreement, the Executive shall apply on a full-time basis (allowing for usual vacations and sick leave) all of the Executive's skill and experience to the performance of the Executive's duties hereunder with the Company and the Subsidiaries. It is understood that the Executive may have other business investments and participate in charitable organizations which may, from time to time, require minor portions of Executive's time, but which shall not interfere or be inconsistent with the Executive's duties under this Agreement. The Executive shall perform the Executive's duties at the Company's principal executive offices in Minneapolis, Minnesota or at such other location as may be mutually agreed upon by the Executive and the Company; provided that the Executive shall travel to other locations at such times as may be necessary for the performance of the Executive's duties under this Agreement. 2. Term of Employment. Unless sooner terminated as provided in paragraph 4 below, the term of this Agreement shall commence on the date hereof and shall continue through December 31, 2002; provided that the term shall be automatically extended for one year on each December 31st commencing December 31, 1998 unless either party gives written notice to the other prior to the date on which the automatic extension would be effective; provided that the term shall not be extended beyond Executive's sixty-fifth (65th) birthday. 3. Compensation and Benefits. During the term of this Agreement, the Executive shall be entitled to the following compensation and benefits for service to the Company and the Subsidiaries, including service as a director of the Company or its Subsidiaries: (a) Base Salary. The Executive shall be paid a base salary at a minimum annual rate of $775,000 payable in accordance with the Company's customary payroll policy, which salary shall be reviewed and may be increased from time to time at the discretion of the Board of Directors of the Company or the Compensation Committee of the Board of Directors (the "Base Salary"); provided that the amount of the Base Salary shall not be reduced after it has been increased by the Board of Directors or the Compensation Committee without the Executive's written consent. The performance of the Executive shall be reviewed at least once each calendar year which may be at the same time as any adjustment to the Base Salary of Executive. (b) Bonus. The Executive shall, in addition to the Base Salary, also be entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by the Company of performance goals established by the Board of Directors or the Compensation Committee of the Company's Board of Directors. (c) Stock Incentives. The Executive shall be eligible to receive stock options under any stock based plan from time to time adopted by the Company (the "Stock Plans"), as from time to time determined by the Board of Directors or Stock Option Committee of the Company's Board of Directors. (d) Reimbursement of Expenses. The Company shall reimburse the Executive for all business expenses properly documented in accordance with the Company's expense reimbursement policy. (e) Other Benefits. The Executive shall be entitled to participate and shall be included in any employee benefit plan, medical/dental coverage plan, life insurance plan, disability coverage plan, or similar benefit plan of the Company now existing or established hereafter which are generally applicable to executives of the Company. (f) Deferred Compensation. As an incentive for his continued employment with the Company, a deferred compensation plan on the terms of this paragraph 3(f) (the "Deferred Compensation") is hereby established for executive on the terms set forth in this paragraph 3(f). The following amounts will be added to the Deferred Compensation as of December 31st of each complete year beginning December 31, 1998 through December 31, 2002 that Executive has continued to be employed by the Company under this Agreement: Date Amount Added to Deferred Compensation ----------------- ------------------------------------- December 31, 1998 $100,000 December 31, 1999 $200,000 December 31, 2000 $300,000 December 31, 2001 $400,000 December 31, 2002 $500,000 When an amount is added to the Deferred Compensation hereunder, the Executive shall designate one of a type of annuities issued by LifeUSA (such designated annuity is referred as the "Selected Annuity") and upon termination of his employment for any reason he or his designated beneficiary in the event of his death will receive a monthly payment during the ten years immediately following such termination equal to the monthly payment which would be then made under the Selected Annuity (as if purchased on the date on which the respective amounts were added to Deferred Compensation and taking into consideration the interest and any bonuses payable with respect to the Selected Annuity) for a ten year certain payment option. The Deferred Compensation shall be an unsecured obligation of the Company. When Executive designates the Selected Annuity and an amount is added to the Deferred Compensation under this paragraph, the Company shall purchase the Selected Annuity from LifeUSA for the purpose of determining payment of its obligations under this paragraph 3(f). The Selected Annuity shall continue its interest accumulation until the termination of Executive's employment and such interest accumulation shall be taken into account in determining the payments due Executive after termination of his employment. 4. Termination of Employment. (a) Death or Disability. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), the employment of the Executive hereunder shall terminate and the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate as of the end of the month in which such death or disability occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in paragraph 4(e), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event the Executive: (i) has repeatedly failed to perform the Executive's duties under this Agreement, which failure is willful and deliberate; (ii) has engaged in an act or acts of dishonesty which is or are intended to result in substantial personal enrichment for the Executive; (iii) has knowingly engaged in conduct which is materially injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A) any felony (other than any felony arising out of negligence), or (B) any crime or offense involving dishonesty with respect to the Company or any of the Subsidiaries; (v) has failed to comply with the covenants contained in paragraph 5 of this Agreement; or (vi) knowingly provides materially misleading information concerning the Company to the Board of Directors of the Company or any of its Subsidiaries, any governmental body or regulatory agency or to any lender or other financing source or proposed financing source of the Company or its Subsidiaries. If the employment of the Executive is terminated by the Company for Cause, the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate, except the Executive shall receive the Base Salary through the end of the month during which such a termination occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in paragraph 4(e), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times the duly elected the Chairman and Chief Executive Officer of the Company and Chief Executive Officer of LifeUSA; (ii) there is any material reduction in the scope of the Executive's authority and responsibility; (iii) there is a reduction in the Executive's Base Salary, a material reduction in the amount of Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan or employee retirement plan applicable to the Executive which is materially adverse to the Executive, or a material reduction in the other benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis/St. Paul, Minnesota metropolitan area; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason before a Change in Control (as defined below) or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Executive for Good Reason upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. In addition, in the event a Change in Control has occurred and the Executive elects upon ten (10) days prior notice to the Company to terminate employment with the Company within the sixty (60) day period following the first anniversary of the Change in Control, such termination shall be considered a termination by the Executive for Good Reason and the Executive shall be entitled to the severance benefits under paragraph 4(g) below. (d) Termination Without Cause. The Company may terminate the Executive's employment without Cause prior to the expiration of the term of this Agreement. If the employment of the Executive is terminated by the Company without Cause before a Change in Control or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Company without Cause upon or within (and including) twenty- four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. (e) Notice and Right to Cure. (i) Termination by Company for Cause. If the Company proposes to terminate the employment of the Executive for Cause under paragraph 4(b), the Company shall give written notice to the Executive specifying the reasons for such proposed determination with particularity and, in the case of a termination for Cause under paragraph 4(b)(i), the Executive shall have a reasonable opportunity to correct any curable situation to the reasonable satisfaction of the Board of Directors of the Company, which period shall be no less than thirty (30) days from the Executive's receipt of the notice of proposed termination. Notwithstanding the foregoing, the Executive's employment shall not be terminated for Cause unless and until there shall be delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than the majority of the members of the Board of Directors of the Company at a meeting called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's legal counsel, to be heard before the Board of Directors) finding that, in the opinion of the Company's Board of Directors, the Executive has engaged in conduct justifying a termination for Cause. (ii) Termination by Executive for Good Reason. If the Executive proposes to terminate the Executive's employment for Good Reason under paragraph 4(c) above (other than the last sentence of paragraph 4(c) above), the Executive shall give written notice to the Company, specifying the reason therefor with particularity. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination shall be effective on the date of such notice. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(v) above, the Company will have an opportunity to correct any curable situation to the reasonable satisfaction of the Executive within the period of time specified in the notice which shall not be less than thirty (30) days. If such correction is not so made or the circumstances or situation is such that it is not curable, the Executive may, within thirty (30) days after the expiration of the time so fixed within which to correct such situation, give written notice to the Company that the Executive's employment is terminated for Good Reason effective forthwith. (f) Severance Benefits. If the Executive is entitled to severance benefits under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a Change in Control or following twenty-four months after a Change in Control, the Executive shall be provided the following benefits (regardless of the death or disability of the Executive after the Termination Date): (i) Base Salary. The Company shall continue to pay to the Executive the Base Salary when and as such Base Salary would have been paid from the date of termination (the "Termination Date") through the end of the term of this Agreement under paragraph 2 as if such termination did not occur and there were no further automatic extensions of the term pursuant to paragraph 2 (the "Severance Period") as if the Executive continued to be employed by the Company during the Severance Period and regardless of the death or disability of the Executive subsequent to the Termination Date. (ii) Annual Bonus. If the effective date of such termination occurs before the Annual Bonus for any preceding calendar year has been paid, the Company shall, within thirty (30) days after the Termination Date, pay to the Executive the amount of the Executive's Annual Bonus for such preceding calendar year when and as it would have been paid if the Executive remained employed by the Company. In addition, for each calendar year within the Severance Period (including the calendar year in which the Termination Date occurs), the Company shall, within thirty (30) days after the end of each such calendar year, pay the Executive a bonus equal to the Deemed Bonus (as defined below). The "Deemed Bonus" shall be an amount equal to (A) prior to a Change in Control, the average of the Annual Bonus paid to the Executive for the two complete calendar years prior to the Termination Date, or (B) upon or after a Change in Control, the greater of (x) the average of the Annual Bonus paid to the Executive for the calendar year(s) after the Change in Control (including the calendar year during which a Change in Control occurs) or (y) the average of the Annual Bonus paid or payable to the Executive in respect of the two calendar years immediately preceding the calendar year in which the Change in Control occurs. (iii) Disability, Life Insurance and Medical/Dental Coverage. The Executive shall be entitled to the disability coverage, life insurance and medical/dental coverage which the Executive and the Executive's family received under paragraph 3(e) as if the Executive continued to be employed by the Company during the Severance Period; provided that if Executive obtains new employment with comparable benefits during the Severance Period, all entitlements under this paragraph 4(f)(iii) shall cease. Nothing in this paragraph shall be construed as providing Executive with coverage under any plan of the Company to which Executive would not otherwise be entitled, and in the event any coverage is unavailable (e.g., if Executive is uninsurable), the Company's obligations under this paragraph may be satisfied by paying to Executive the cost of such coverage if it were available, as determined in good faith by the Company. (iv) Stock Options. Not later than thirty (30) days after the date on which the Executive's employment terminates, the Company shall pay the Executive a lump sum cash payment equal to the amount by which the fair market value (determined as of the Termination Date) of the number of shares of stock subject to any stock option granted under the Stock Plans which was not exercisable on the Termination Date and which would have become vested and exercisable during the Severance Period if the Executive had remained employed by the Company during the Severance Period. (v) Deferred Compensation. Any remaining amount of Deferred Compensation shall be considered earned as of the Termination and the payments under the paragraph 3(f) shall commence upon the Termination Date. (g) Severance Benefits for Change in Control. In the event of a Change in Control and either upon or within (and including) twenty-four (24) months after such Change in Control, the Executive terminates employment for Good Reason or the Executive's employment is terminated by the Company for any reason other than Cause, then (regardless of the death or disability of the Executive after the Termination Date) the Company shall pay the Executive a lump sum cash payment within five (5) days after the Termination Date, in an amount equal to the amounts referred to in paragraph 4(f)(i), (ii) and (iv), and the Company shall also provide the Executive the severance benefits referred to in paragraph 4(f)(iii) as provided therein. (h) Excise Tax Gross-Up. If Executive is subject to any Excise Tax (as defined below) as a result of the severance payments and/or benefits to which Executive is entitled under paragraphs 4(f) or 4(g), the Company shall also pay the Executive the Gross-Up Payment in accordance with the following provisions: (i) Gross-Up Payment. Anything to the contrary notwithstanding, in the event it shall be determined that any payment, distribution or benefit made or provided by the Company to or for the benefit of the Executive (whether pursuant to this Agreement or otherwise) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Company shall pay the Executive in cash an amount (the "Gross-Up Payment") such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including but not limited to income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed on the Payments. (ii) Determination of Gross-Up Payment. Subject to paragraph 4(h)(iii) below, all determinations required to be made under paragraph 4(h)(i), including whether a Gross-Up Payment is required and the amount of the Gross-Up Payment, shall be made by the firm of independent public accountants selected by the Company to audit its financial statements for the year immediately preceding the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations to the Company and the Executive within thirty (30) days after the Termination Date. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required under this paragraph 4(h) (which accounting firm shall then be referred to as the "Accounting Firm"). All fees and expenses of the Accounting Firm in connection with the work it performs pursuant to this paragraph 4(h) shall be promptly paid by the Company. Any Gross-Up Payment (as determined pursuant to paragraph 4(h)(i) above) shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or a similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm, it is possible that Gross-up Payments which will not have been made by the Company should have been made ("Underpayment"). In the event that the Company exhausts its remedies pursuant to paragraph 4(h)(iii) below, and the Executive is thereafter required to make a payment of Excise Tax, the Accounting Firm shall promptly determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to the Executive within five (5) days after such determination. (iii) Contest. The Executive shall notify the Company in writing of any claim made by the Internal Revenue Service that, if successful, would require the Company to pay a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive; (C) cooperate with the Company in good faith in order effectively to contest such claim; (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 4(h)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph 4(h)(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid, and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (i) Benefits in Lieu of Severance Pay Policy. The severance benefits provided for in this paragraph 4 are in lieu of any benefits that would otherwise be provided to the Executive under the Company's severance pay policy, and the Executive shall not be entitled to any benefits under the Company's severance pay policy. (j) No Funding of Severance. Nothing contained in this Agreement or otherwise shall require the Company to segregate, earmark or otherwise set aside any funds or other assets to provide for any payments required to be made under this paragraph 4, and the rights of the Executive to the severance benefits hereunder shall be solely those of a general, unsecured creditor of the Company. However, the Company may, in its discretion, deposit cash or property, or a combination of both, equal in value to all or a portion of the amounts anticipated to be payable hereunder into a trust, the assets of which are to be distributed by such times as determined by the trustee of such trust; provided that such assets shall be subject at all times to the rights of the Company's general creditors. (k) Definition of Change in Control. A "Change in Control" shall be deemed to have occurred if, prior to the expiration of the term of this Agreement: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than Allianz Life Insurance Company of North America and its affiliates or the Company or any of its Subsidiaries or any employee benefit plan of the Company or any of its Subsidiaries) becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the voting power of all of the Company's then outstanding securities, except for issuances of shares approved by a majority of the Incumbent Directors (as defined below) then in office; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (the "Incumbent Directors") together with any director (the "New Incumbent Director") whose nomination or election was approved by at least two-thirds of the Incumbent Directors and any New Incumbent Director who was previously elected, in each case who are directors at the time of the nomination or election of such director, cease for any reason to constitute at least a majority of the Board of Directors of the Company; or (iii) the shareholders of the Company approve the sale of all, or substantially all, of the business or assets of the Company or the liquidation or dissolution of the Company. 5. Confidentiality; Non-Solicitation Covenant; and Covenant Not to Compete. (a) Confidentiality. The Executive agrees that, at all times, both during the Executive's employment and after the termination thereof, the Executive shall not divulge to any other person, firm or corporation, or in any way use for the Executive's own benefit, except as required in the conduct of the business of the Company or any of its Subsidiaries or as authorized in writing on behalf of the Company, any trade secrets or confidential information of the Company or its Subsidiaries obtained during the course of the Executive's employment with the Company or its Subsidiaries. The Executive also agrees that the Executive will not, either subsequent to termination of employment or during employment, except as required in the conduct of the business of the Company or any of its Subsidiaries, or as authorized in writing on behalf of the Company, interfere with or disturb or attempt to interfere with or disturb any employment, contractual or business arrangements of the Company or any of its Subsidiaries with any of its employees, agents, suppliers, customers, reinsurers or other parties with which the Company or any of its Subsidiaries has a contractual relationship, as the case may be. (b) Non-Solicitation Covenant. While the Executive is actively employed with the Company and, in the event of a termination of employment with the Company for any reason, for a period of two years after the Termination Date, the Executive agrees that, except with the prior written permission of the Board of Directors of the Company, the Executive will not offer to hire, entice away, or in any manner attempt to persuade any officer, employee, or agent of the Company or any of the Subsidiaries to discontinue his or her relationship with the Company or any of the Subsidiaries nor will the Executive directly or indirectly solicit, divert, take away or attempt to solicit any business of the Company or any of its Subsidiaries as to which Executive has acquired any knowledge during the term of the Executive's employment with the Company. (c) Covenant Not to Compete. The Executive acknowledges and agrees with the Company that during the course of the Executive's employment with the Company, the Executive has had and will continue to have the opportunity to develop relationships with existing employees, customers and other business associates of the Company and the Subsidiaries, which relationships constitute goodwill of the Company, and the Executive acknowledges and agrees that the Company would be irreparably damaged if the Executive were to take actions that would damage or misappropriate such goodwill. The Executive acknowledges that the Company and its Subsidiaries currently engages throughout the United States (the "Territory"), the business of the development, sale, marketing and administration of life insurance, annuities and extended care insurance products (the "Subject Business"). Accordingly, during the term of the Executive's employment with the Company and (i) prior to a Change of Control, the balance of the term of this Agreement under paragraph 2 as if no termination of employment occurred but notice of termination of the automatic extension was given either by the Executive or the Company on the Termination Date, or (ii) after a Change in Control, one year after the Termination Date (the "Noncompete Period"), the Executive shall not, directly or indirectly, enter into, engage in, assist, give or lend funds to or otherwise finance, be employed by or consult with, or have a financial or other interest in, any business which engages in the Subject Business, whether for or by himself or as an independent contractor, agent, stockholder, partner or joint venturer for any other person, provided that the aggregate ownership by the Executive of no more than two percent of the outstanding equity securities of any person, which securities are traded on a national or foreign securities exchange, quoted on the Nasdaq Stock Market or other automated quotation system or, in the case of the Company, of no more than ten percent of the Company's outstanding equity securities shall not be deemed to be giving or lending funds to, otherwise financing or having a financial interest in a competitor. In the event that any person in which the executive has any financial or other interest directly or indirectly enters into the Subject Business in the Territory during the Noncompete Period, the Executive shall divest all of his interest (other than any amount permitted under this paragraph) in such person within 30 days after such person enters into the Subject Business in the Territory. If the Termination Date is before a Change in Control and the Executive is entitled to severance under paragraph 4(f), the Executive may, at Executive's option, reduce the Noncompete Period if Executive agrees to forego the severance benefits under paragraph 4(f)(i) and (ii) for the period that Executive elects to shorten the Noncompete Period except that the Noncompete Period may not be shortened to be less than three years. (d) Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of this paragraph 5, the Company shall have the following rights and remedies, in addition to any rights and remedies otherwise available at law or equity: (i) The right and remedy to have the provisions of this paragraph 5 specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by the Executive that any such breach or threatened breach will cause irreparable injury to the Company and the Subsidiaries and that money damages will not provide an adequate remedy to the Company and the Subsidiaries; and (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments, or other benefits, other than those payable under this Agreement, derived or received by the Executive or the enterprise in competition with the Company or any of the Subsidiaries as the result of any transactions constituting a breach of any part of this paragraph 5, and Executive agrees to account for and pay over to the Company such amounts promptly upon demand therefor. 6. Beneficiaries. In the event of the Executive's death after termination of employment, any amount or benefit payable or distributable to him pursuant to this Agreement shall be paid to the beneficiary designated by the Executive for such purpose in the last written instrument received by the Company prior to the Executive's death, if any, or, if no beneficiary has been designated, to the Executive's estate, but such designation shall not be deemed to supersede any beneficiary designation under any benefit plan of the Company. Whenever this Agreement provides for the written designation of a beneficiary or beneficiaries of the Executive, the Executive shall have the right to revoke such designation and to redesignate a beneficiary or beneficiaries by written notice to either the Company to such effect, except to the extent, if any, restricted by law. 7. Rights in the Event of Dispute. In the event of a dispute between the Company and the Executive regarding the Executive's employment or this Agreement, it is the intention of this Agreement that the dispute shall be resolved as expeditiously as possible, consistent with fairness to both sides, and that during pendency of the dispute the Executive and the Company shall be on equal footing, as follows: (a) Arbitration. Any claim or dispute relating to the Executive's employment or the terms and performance of this Agreement (other than enforcement of paragraph 5) shall be resolved by binding private arbitration before three arbitrators, and any award rendered by any arbitration panel, or a majority thereof, may be filed and a judgment obtained in any court having jurisdiction over the parties unless the relief granted in the award is delivered within ten (10) days of the award. Either party may request arbitration by written notice to the other party. Within thirty (30) days of receipt of such notice by the opposing party, each party shall appoint a disinterested arbitrator and the two arbitrators selected thereby shall appoint a third neutral arbitrator; in the event the two arbitrators cannot agree upon the third arbitrator within ten (10) days after their appointment, then the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding conducted hereunder shall be in the City of Minneapolis and shall follow the procedures set forth in the Rules of Commercial Arbitration of the American Arbitration Association, and both sides shall cooperate in as expeditious a resolution of the proceeding as is reasonable under the circumstances. The arbitration panel shall have the power to enter any relief it deems fair and just on any claim, including interim and final equitable relief, along with any procedural order that is reasonable under the circumstances. (b) Expenses of Prosecution/Defense of Claim. During the pendency of a dispute between the Company and the Executive relating to the Executive's employment or the terms or performance of this Agreement, the Company shall promptly pay the Executive's reasonable expenses of representation upon delivery of periodic billings for same, provided that (i) Executive (or a person claiming on the Executive's behalf) shall promptly repay all amounts paid hereunder at the conclusion of the dispute if the resolution thereof includes a finding that the Executive did not act in good faith in the matter in dispute or in the dispute proceeding itself, and (ii) no claim for expenses of representation shall be submitted by the Executive or any person acting on the Executive's behalf unless made in writing to the Board of Directors within one year of the performance of the services for which such claim is made. 8. No Obligation to Mitigate Damages. In the event the Executive becomes eligible to receive compensation or benefits subsequent to the termination of the Executive's employment under this Agreement, the Executive shall have no obligation to seek other employment in an effort to mitigate damages. To the extent the Executive shall accept other employment after the Executive's termination of employment, the compensation and benefits received from such employment shall not reduce the compensation and benefits otherwise due under this Agreement, except as provided in paragraph 4(f)(iii) above. 9. Other Benefits. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein, be in addition to, and not in derogation or diminution of, any benefits that Executive or the Executive's beneficiary may be entitled to receive under any other plan or program now or hereafter maintained by the Company, or its Subsidiaries. 10. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Executive, such obligations have been assumed by the successor as a matter of law. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (unless the foregoing opinion is rendered to the Executive) shall entitle the Executive to terminate the Executive's employment and to receive the payments provided for in paragraph 4(f), 4(g) and 4(h), as the case may be, as if the Executive terminated this Agreement for Good Reason. The Executive's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Executive's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. The Company's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Company's successors and assigns, including any person which may acquire LifeUSA. 11. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 12. Survival. The rights and obligations of the parties pursuant to this Agreement shall survive the term of the employment to the extent that any performance is required hereunder after the expiration or termination of such term. 13. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Executive, to the Executive's last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. 14. Amendments and Construction. This Agreement may only be amended in a writing signed by the parties hereto. This Agreement shall be construed under the laws of the State of Minnesota. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By /s/Margery G. Hughes ---------------------------- Margery G. Hughes, President /s/Robert W. MacDonald ------------------------------- Robert W. MacDonald AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED AGREEMENT is made and entered into as of January 1, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and MARGERY G. HUGHES (the "Executive"). R E C I T A L S: WHEREAS, the Company and the Executive have entered into the employment agreement dated as of January 1, 1997 (the "1997 Agreement"); WHEREAS, in connection with the anticipated investment in the Company by Allianz Life Insurance Company of North America ("Allianz") pursuant to the stock purchase agreement dated as of January 13, 1998 (the "Allianz Agreement") between the Company and Allianz, Allianz has requested certain changes in the 1997 Agreement; WHEREAS, the Executive desires to facilitate the investment by Allianz in the Company by amending and restating the 1997 Agreement in its entirety as set forth in this Agreement; and WHEREAS, Allianz has agreed to purchase certain shares of the Company's common stock owned by Executive pursuant to the stock purchase agreement dated January 13, 1998 between Allianz and Executive, and, as a condition of Allianz's obligations thereunder, Executive has agreed to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Duties. The parties hereby agree that, during the term of this Agreement as set forth in paragraph 2 below, the Executive shall be employed as the President and Chief Operating Officer of the Company with the duties and responsibilities attendant to such position. In discharging such duties and responsibilities, the Executive may also serve as an executive officer and/or director of any direct or indirect subsidiary of the Company (collectively the "Subsidiaries"). The salary, other compensation and benefits provided herein may be allocated among the Company and the Subsidiaries based upon the portion of the Executive's services provided to the Company and each of the Subsidiaries, respectively, and the Executive shall assist the Company in making such allocation as the Company may reasonably request. During the term of this Agreement, the Executive shall apply on a full-time basis (allowing for usual vacations and sick leave) all of the Executive's skill and experience to the performance of the Executive's duties hereunder with the Company and the Subsidiaries. It is understood that the Executive may have other business investments and participate in charitable organizations which may, from time to time, require minor portions of Executive's time, but which shall not interfere or be inconsistent with the Executive's duties under this Agreement. The Executive shall perform the Executive's duties at the Company's principal executive offices in Minneapolis, Minnesota or at such other location as may be mutually agreed upon by the Executive and the Company; provided that the Executive shall travel to other locations at such times as may be necessary for the performance of the Executive's duties under this Agreement. 2. Term of Employment. Unless sooner terminated as provided in paragraph 4 below, the term of this Agreement shall commence on the date hereof and shall continue through December 31, 2000; provided that the term shall be automatically extended for one year on each December 31st commencing December 31, 1998 unless either party gives written notice to the other prior to the date on which the automatic extension would be effective; provided that the term shall not be extended beyond Executive's sixty-fifth (65th) birthday. 3. Compensation and Benefits. During the term of this Agreement, the Executive shall be entitled to the following compensation and benefits for service to the Company and the Subsidiaries, including service as a director of the Company or its Subsidiaries: (a) Base Salary. The Executive shall be paid a base salary at a minimum annual rate of $349,375, payable in accordance with the Company's customary payroll policy, which salary shall be reviewed and may be increased from time to time at the discretion of the Board of Directors of the Company or the Compensation Committee of the Board of Directors (the "Base Salary"); provided that the amount of the Base Salary shall not be reduced after it has been increased by the Board of Directors or the Compensation Committee without the Executive's written consent. The performance of the Executive shall be reviewed at least once each calendar year which may be at the same time as any adjustment to the Base Salary of Executive. (b) Bonus. The Executive shall, in addition to the Base Salary, also be entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by the Company of performance goals established by the Board of Directors or the Compensation Committee of the Company's Board of Directors. (c) Stock Incentives. The Executive shall be eligible to receive stock options under any stock based plan from time to time adopted by the Company (the "Stock Plans"), as from time to time determined by the Board of Directors or Stock Option Committee of the Company's Board of Directors. (d) Reimbursement of Expenses. The Company shall reimburse the Executive for all business expenses properly documented in accordance with the Company's expense reimbursement policy. (e) Other Benefits. The Executive shall be entitled to participate and shall be included in any employee benefit plan, medical/dental coverage plan, life insurance plan, disability coverage plan, or similar benefit plan of the Company now existing or established hereafter which are generally applicable to executives of the Company. 4. Termination of Employment. (a) Death or Disability. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), the employment of the Executive hereunder shall terminate and the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate as of the end of the month in which such death or disability occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in paragraph 4(e), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event the Executive: (i) has repeatedly failed to perform the Executive's duties under this Agreement, which failure is willful and deliberate; (ii) has engaged in an act or acts of dishonesty which is or are intended to result in substantial personal enrichment for the Executive; (iii) has knowingly engaged in conduct which is materially injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A) any felony (other than any felony arising out of negligence), or (B) any crime or offense involving dishonesty with respect to the Company or any of the Subsidiaries; (v) has failed to comply with the covenants contained in paragraph 5 of this Agreement; or (vi) knowingly provides materially misleading information concerning the Company to the Board of Directors of the Company or any of its Subsidiaries, any governmental body or regulatory agency or to any lender or other financing source or proposed financing source of the Company or its Subsidiaries. If the employment of the Executive is terminated by the Company for Cause, the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate, except the Executive shall receive the Base Salary through the end of the month during which such a termination occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in paragraph 4(e), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected President and Chief Operating Officer of the Company; (ii) there is any material reduction in the scope of the Executive's authority and responsibility; (iii) there is a reduction in the Executive's Base Salary, a material reduction in the amount of Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan or employee retirement plan applicable to the Executive which is materially adverse to the Executive, or a material reduction in the other benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis/St. Paul, Minnesota metropolitan area; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason before a Change in Control (as defined below) or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Executive for Good Reason upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. In addition, in the event a Change in Control has occurred and the Executive elects upon ten (10) days prior notice to the Company to terminate employment with the Company within the sixty (60) day period following the first anniversary of the Change in Control, such termination shall be considered a termination by the Executive for Good Reason and the Executive shall be entitled to the severance benefits under paragraph 4(g) below. (d) Termination Without Cause. The Company may terminate the Executive's employment without Cause prior to the expiration of the term of this Agreement. If the employment of the Executive is terminated by the Company without Cause before a Change in Control or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Company without Cause upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. (e) Notice and Right to Cure. (i) Termination by Company for Cause. If the Company proposes to terminate the employment of the Executive for Cause under paragraph 4(b), the Company shall give written notice to the Executive specifying the reasons for such proposed determination with particularity and, in the case of a termination for Cause under paragraph 4(b)(i), the Executive shall have a reasonable opportunity to correct any curable situation to the reasonable satisfaction of the Board of Directors of the Company, which period shall be no less than thirty (30) days from the Executive's receipt of the notice of proposed termination. Notwithstanding the foregoing, the Executive's employment shall not be terminated for Cause unless and until there shall be delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than the majority of the members of the Board of Directors of the Company at a meeting called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's legal counsel, to be heard before the Board of Directors) finding that, in the opinion of the Company's Board of Directors, the Executive has engaged in conduct justifying a termination for Cause. (ii) Termination by Executive for Good Reason. If the Executive proposes to terminate the Executive's employment for Good Reason under paragraph 4(c) above (other than the last sentence of paragraph 4(c) above), the Executive shall give written notice to the Company, specifying the reason therefor with particularity. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination shall be effective on the date of such notice. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(v) above, the Company will have an opportunity to correct any curable situation to the reasonable satisfaction of the Executive within the period of time specified in the notice which shall not be less than thirty (30) days. If such correction is not so made or the circumstances or situation is such that it is not curable, the Executive may, within thirty (30) days after the expiration of the time so fixed within which to correct such situation, give written notice to the Company that the Executive's employment is terminated for Good Reason effective forthwith. (f) Severance Benefits. If the Executive is entitled to severance benefits under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a Change in Control or following twenty-four months after a Change in Control, the Executive shall be provided the following benefits (regardless of the death or disability of the Executive after the Termination Date): (i) Base Salary. The Company shall continue to pay to the Executive the Base Salary when and as such Base Salary would have been paid from the date of termination (the "Termination Date") through the end of the term of this Agreement under paragraph 2 as if such termination did not occur and there were no further automatic extensions of the term pursuant to paragraph 2 (the "Severance Period") as if the Executive continued to be employed by the Company during the Severance Period and regardless of the death or disability of the Executive subsequent to the Termination Date. (ii) Annual Bonus. If the effective date of such termination occurs before the Annual Bonus for any preceding calendar year has been paid, the Company shall, within thirty (30) days after the Termination Date, pay to the Executive the amount of the Executive's Annual Bonus for such preceding calendar year when and as it would have been paid if the Executive remained employed by the Company. In addition, for each calendar year within the Severance Period (including the calendar year in which the Termination Date occurs), the Company shall, within thirty (30) days after the end of each such calendar year, pay the Executive a bonus equal to the Deemed Bonus (as defined below). The "Deemed Bonus" shall be an amount equal to (A) prior to a Change in Control, the average of the Annual Bonus paid to the Executive for the two complete calendar years prior to the Termination Date, or (B) upon or after a Change in Control, the greater of (x) the average of the Annual Bonus paid to the Executive for the calendar year(s) after the Change in Control (including the calendar year in which a Change in Control occurs) or (y) the average of the Annual Bonus paid or payable to the Executive in respect of the two calendar years immediately preceding the calendar year in which the Change in Control occurs. (iii) Disability, Life Insurance and Medical/Dental Coverage. The Executive shall be entitled to the disability coverage, life insurance and medical/dental coverage which the Executive and the Executive's family received under paragraph 3(e) as if the Executive continued to be employed by the Company during the Severance Period; provided that if Executive obtains new employment with comparable benefits during the Severance Period, all entitlements under this paragraph 4(f)(iii) shall cease. Nothing in this paragraph shall be construed as providing Executive with coverage under any plan of the Company to which Executive would not otherwise be entitled and in the event any coverage is unavailable (e.g., if Executive is uninsurable), the Company's obligations under this paragraph may be satisfied by paying to Executive the cost of such coverage if it were available, as determined in good faith by the Company. (iv) Stock Options. Not later than thirty (30) days after the date on which the Executive's employment terminates, the Company shall pay the Executive a lump sum cash payment equal to the amount by which the fair market value (determined as of the Termination Date) of the number of shares of stock subject to any stock option granted under the Stock Plans which was not exercisable on the Termination Date and which would have become vested and exercisable during the Severance Period if the Executive had remained employed by the Company during the Severance Period. (g) Severance Benefits for Change in Control. In the event of a Change in Control and either upon or within (and including) twenty-four (24) months after such Change in Control, the Executive terminates employment for Good Reason or the Executive's employment is terminated by the Company for any reason other than Cause, then (regardless of the death or disability of the Executive after the Termination Date) the Company shall pay the Executive a lump sum cash payment within five (5) days after the Termination Date, in an amount equal to the amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of the Deemed Bonus (as defined below), and the Company shall also provide the Executive the severance benefits referred to in paragraph 4(f)(iii) as provided therein. (h) Excise Tax Gross-Up. If Executive is subject to any Excise Tax (as defined below) as a result of the severance payments and/or benefits to which Executive is entitled under paragraphs 4(f) or 4(g), the Company shall also pay the Executive the Gross-Up Payment in accordance with the following provisions: (i) Gross-Up Payment. Anything to the contrary notwithstanding, in the event it shall be determined that any payment, distribution or benefit made or provided by the Company to or for the benefit of the Executive (whether pursuant to this Agreement or otherwise) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Company shall pay the Executive in cash an amount (the "Gross-Up Payment") such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including but not limited to income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed on the Payments. (ii) Determination of Gross-Up Payment. Subject to paragraph 4(h)(iii) below, all determinations required to be made under paragraph 4(h)(i), including whether a Gross-Up Payment is required and the amount of the Gross-Up Payment, shall be made by the firm of independent public accountants selected by the Company to audit its financial statements for the year immediately preceding the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations to the Company and the Executive within thirty (30) days after the Termination Date. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required under this paragraph 4(h) (which accounting firm shall then be referred to as the "Accounting Firm"). All fees and expenses of the Accounting Firm in connection with the work it performs pursuant to this paragraph 4(h) shall be promptly paid by the Company. Any Gross-Up Payment (as determined pursuant to paragraph 4(h)(i) above) shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or a similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm, it is possible that Gross-up Payments which will not have been made by the Company should have been made ("Underpayment"). In the event that the Company exhausts its remedies pursuant to paragraph 4(h)(iii) below, and the Executive is thereafter required to make a payment of Excise Tax, the Accounting Firm shall promptly determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to the Executive within five (5) days after such determination. (iii) Contest. The Executive shall notify the Company in writing of any claim made by the Internal Revenue Service that, if successful, would require the Company to pay a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive; (C) cooperate with the Company in good faith in order effectively to contest such claim; (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 4(h)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph 4(h)(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid, and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (i) Benefits in Lieu of Severance Pay Policy. The severance benefits provided for in this paragraph 4 are in lieu of any benefits that would otherwise be provided to the Executive under the Company's severance pay policy and the Executive shall not be entitled to any benefits under the Company's severance pay policy. (j) No Funding of Severance. Nothing contained in this Agreement or otherwise shall require the Company to segregate, earmark or otherwise set aside any funds or other assets to provide for any payments required to be made under this paragraph 4 and the rights of the Executive to the severance benefits hereunder shall be solely those of a general, unsecured creditor of the Company. However, the Company may, in its discretion, deposit cash or property, or a combination of both, equal in value to all or a portion of the amounts anticipated to be payable hereunder into a trust, the assets of which are to be distributed by such times as determined by the trustee of such trust; provided that such assets shall be subject at all times to the rights of the Company's general creditors. (k) Definition of Change in Control. A "Change in Control" shall be deemed to have occurred if, prior to the expiration of the term of this Agreement: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than Allianz Life Insurance Company of North America and its affiliates or the Company or any of its Subsidiaries or any employee benefit plan of the Company or any of its Subsidiaries) becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the voting power of all of the Company's then outstanding securities, except for issuances of shares approved by a majority of the Incumbent Directors (as defined below) then in office; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (the "Incumbent Directors") together with any director (the "New Incumbent Director") whose nomination or election was approved by at least two-thirds of the Incumbent Directors and any New Incumbent Director who was previously elected, in each case who are directors at the time of the nomination or election of such director cease, for any reason to constitute at least a majority of the Board of Directors of the Company; or (iii) the shareholders of the Company approve the sale of all, or substantially all, of the business or assets of the Company or the liquidation or dissolution of the Company. 5. Confidentiality; Non-Solicitation Covenant; and Covenant Not to Compete. (a) Confidentiality. The Executive agrees that, at all times, both during the Executive's employment and after the termination thereof, the Executive shall not divulge to any other person, firm or corporation, or in any way use for the Executive's own benefit, except as required in the conduct of the business of the Company or any of its Subsidiaries or as authorized in writing on behalf of the Company, any trade secrets or confidential information of the Company or its Subsidiaries obtained during the course of the Executive's employment with the Company or its Subsidiaries. The Executive also agrees that the Executive will not, either subsequent to termination of employment or during employment, except as required in the conduct of the business of the Company or any of its Subsidiaries, or as authorized in writing on behalf of the Company, interfere with or disturb or attempt to interfere with or disturb any employment, contractual or business arrangements of the Company or any of its Subsidiaries with any of its employees, agents, suppliers, customers, reinsurers or other parties with which the Company or any of its Subsidiaries has a contractual relationship, as the case may be. (b) Non-Solicitation Covenant. While the Executive is actively employed with the Company and, in the event of a termination of employment with the Company for any reason, for a period of two years after the Termination Date, the Executive agrees that, except with the prior written permission of the Board of Directors of the Company, the Executive will not offer to hire, entice away, or in any manner attempt to persuade any officer, employee, or agent of the Company or any of the Subsidiaries to discontinue his or her relationship with the Company or any of the Subsidiaries nor will the Executive directly or indirectly solicit, divert, take away or attempt to solicit any business of the Company or any of its Subsidiaries as to which Executive has acquired any knowledge during the term of the Executive's employment with the Company. (c) Covenant Not to Compete. The Executive acknowledges and agrees with the Company that during the course of the Executive's employment with the Company, the Executive has had and will continue to have the opportunity to develop relationships with existing employees, customers and other business associates of the Company and the Subsidiaries, which relationships constitute goodwill of the Company, and the Executive acknowledges and agrees that the Company would be irreparably damaged if the Executive were to take actions that would damage or misappropriate such goodwill. The Executive acknowledges that the Company and its Subsidiaries currently engages throughout the United States (the "Territory"), the business of the development, sale, marketing and administration of life insurance, annuities and extended care insurance products (the "Subject Business"). Accordingly, during the term of the Executive's employment with the Company and (i) prior to a Change of Control, and in the case of a voluntary termination by the Executive under paragraph 4(d) or a termination by the Company for Cause under paragraph 4(b), the balance of the term of this Agreement under paragraph 2 as if no termination of employment occurred but notice of termination of the automatic extension was given either by the Executive at the time of his notice of voluntary resignation or given by the Company at the time of its notice of termination for Cause, or (ii) after a Change in Control, one year after the Termination Date (the "Noncompete Period"), the Executive shall not, directly or indirectly, enter into, engage in, assist, give or lend funds to or otherwise finance, be employed by or consult with, or have a financial or other interest in, any business which engages in the Subject Business, whether for or by himself or as an independent contractor, agent, stockholder, partner or joint venturer for any other person, provided that the aggregate ownership by the Executive of no more than two percent of the outstanding equity securities of any person, which securities are traded on a national or foreign securities exchange, quoted on the Nasdaq Stock Market or other automated quotation system or, in the case of the Company, of no more than ten percent of the Company's outstanding equity securities shall not be deemed to be giving or lending funds to, otherwise financing or having a financial interest in a competitor. In the event that any person in which the executive has any financial or other interest directly or indirectly enters into the Subject Business in the Territory during the Noncompete Period, the Executive shall divest all of his interest (other than any amount permitted under this paragraph) in such person within 30 days after such person enters into the Subject Business in the Territory. (d) Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of this paragraph 5, the Company shall have the following rights and remedies, in addition to any rights and remedies otherwise available at law or equity: (i) The right and remedy to have the provisions of this paragraph 5 specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by the Executive that any such breach or threatened breach will cause irreparable injury to the Company and the Subsidiaries and that money damages will not provide an adequate remedy to the Company and the Subsidiaries; and (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments, or other benefits, other than those payable under this Agreement, derived or received by the Executive or the enterprise in competition with the Company or any of the Subsidiaries as the result of any transactions constituting a breach of any part of this paragraph 5, and Executive agrees to account for and pay over to the Company such amounts promptly upon demand therefor. 6. Beneficiaries. In the event of the Executive's death after termination of employment, any amount or benefit payable or distributable to him pursuant to this Agreement shall be paid to the beneficiary designated by the Executive for such purpose in the last written instrument received by the Company prior to the Executive's death, if any, or, if no beneficiary has been designated, to the Executive's estate, but such designation shall not be deemed to supersede any beneficiary designation under any benefit plan of the Company. Whenever this Agreement provides for the written designation of a beneficiary or beneficiaries of the Executive, the Executive shall have the right to revoke such designation and to redesignate a beneficiary or beneficiaries by written notice to either the Company to such effect, except to the extent, if any, restricted by law. 7. Rights in the Event of Dispute. In the event of a dispute between the Company and the Executive regarding the Executive's employment or this Agreement, it is the intention of this Agreement that the dispute shall be resolved as expeditiously as possible, consistent with fairness to both sides, and that during pendency of the dispute the Executive and the Company shall be on equal footing, as follows: (a) Arbitration. Any claim or dispute relating to the Executive's employment or the terms and performance of this Agreement (other than enforcement of paragraph 5) shall be resolved by binding private arbitration before three arbitrators, and any award rendered by any arbitration panel, or a majority thereof, may be filed and a judgment obtained in any court having jurisdiction over the parties unless the relief granted in the award is delivered within ten (10) days of the award. Either party may request arbitration by written notice to the other party. Within thirty (30) days of receipt of such notice by the opposing party, each party shall appoint a disinterested arbitrator and the two arbitrators selected thereby shall appoint a third neutral arbitrator; in the event the two arbitrators cannot agree upon the third arbitrator within ten (10) days after their appointment, then the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding conducted hereunder shall be in the City of Minneapolis and shall follow the procedures set forth in the Rules of Commercial Arbitration of the American Arbitration Association, and both sides shall cooperate in as expeditious a resolution of the proceeding as is reasonable under the circumstances. The arbitration panel shall have the power to enter any relief it deems fair and just on any claim, including interim and final equitable relief, along with any procedural order that is reasonable under the circumstances. (b) Expenses of Prosecution/Defense of Claim. During the pendency of a dispute between the Company and the Executive relating to the Executive's employment or the terms or performance of this Agreement, the Company shall promptly pay the Executive's reasonable expenses of representation upon delivery of periodic billings for same, provided that (i) Executive (or a person claiming on the Executive's behalf) shall promptly repay all amounts paid hereunder at the conclusion of the dispute if the resolution thereof includes a finding that the Executive did not act in good faith in the matter in dispute or in the dispute proceeding itself, and (ii) no claim for expenses of representation shall be submitted by the Executive or any person acting on the Executive's behalf unless made in writing to the Board of Directors within one year of the performance of the services for which such claim is made. 8. No Obligation to Mitigate Damages. In the event the Executive becomes eligible to receive compensation or benefits subsequent to the termination of the Executive's employment under this Agreement, the Executive shall have no obligation to seek other employment in an effort to mitigate damages. To the extent the Executive shall accept other employment after the Executive's termination of employment, the compensation and benefits received from such employment shall not reduce the compensation and benefits otherwise due under this Agreement, except as provided in paragraph 4(f)(iii) above. 9. Other Benefits. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein, be in addition to, and not in derogation or diminution of, any benefits that Executive or the Executive's beneficiary may be entitled to receive under any other plan or program now or hereafter maintained by the Company, or its Subsidiaries. 10. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Executive, such obligations have been assumed by the successor as a matter of law. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (unless the foregoing opinion is rendered to the Executive) shall entitle the Executive to terminate the Executive's employment and to receive the payments provided for in paragraphs 4(f), 4(g) and 4(h), as the case may be, as if the Executive terminated this Agreement for Good Reason. The Executive's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Executive's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. The Company's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Company's successors and assigns, including any person which may acquire LifeUSA Insurance Company. 11. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 12. Survival. The rights and obligations of the parties pursuant to this Agreement shall survive the term of the employment to the extent that any performance is required hereunder after the expiration or termination of such term. 13. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Executive, to the Executive's last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. 14. Amendments and Construction. This Agreement may only be amended in a writing signed by the parties hereto. This Agreement shall be construed under the laws of the State of Minnesota. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. 15. Amended and Restated Agreement. This Agreement amends and restates in its entirety the 1997 Agreement and the 1997 Agreement shall have no further force or effect. IN WITNESS WHEREOF, the parties have duly executed this Amended and Restated Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By /s/Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/Margery G. Hughes -------------------------------- Margery G. Hughes EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of January 1, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and DONALD J. URBAN (the "Executive"). R E C I T A L S: WHEREAS, the Executive is now and has been a director and the Senior Vice President and Director of Sales of the Company and the President of LifeUSA Insurance Company, the Company's wholly-owned stock life insurance subsidiary ("LifeUSA"), and serves as an officer and/or director of certain other subsidiaries of the Company; WHEREAS, the Executive and the Company wish to enter into this Agreement to provide for the continued employment of Executive; and WHEREAS, the Executive and the Company are willing to enter into this Agreement upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Duties. The parties hereby agree that, during the term of this Agreement as set forth in paragraph 2 below, the Executive shall be employed as the Senior Vice President and Director of Sales of the Company and the President of LifeUSA with the duties and responsibilities attendant to such positions. In discharging such duties and responsibilities, the Executive may also serve as an executive officer and/or director of any direct or indirect subsidiary of the Company (collectively the "Subsidiaries"). The salary, other compensation and benefits provided herein may be allocated among the Company and the Subsidiaries based upon the portion of the Executive's services provided to the Company and each of the Subsidiaries, respectively, and the Executive shall assist the Company in making such allocation as the Company may reasonably request. During the term of this Agreement, the Executive shall apply on a full-time basis (allowing for usual vacations and sick leave) all of the Executive's skill and experience to the performance of the Executive's duties hereunder with the Company and the Subsidiaries. It is understood that the Executive may have other business investments and participate in charitable organizations which may, from time to time, require minor portions of Executive's time, but which shall not interfere or be inconsistent with the Executive's duties under this Agreement. The Executive shall perform the Executive's duties at the Company's principal executive offices in Minneapolis, Minnesota or at such other location as may be mutually agreed upon by the Executive and the Company; provided that the Executive shall travel to other locations at such times as may be necessary for the performance of the Executive's duties under this Agreement. 2. Term of Employment. Unless sooner terminated as provided in paragraph 4 below, the term of this Agreement shall commence on the date hereof and shall continue through December 31, 2000; provided that the term shall be automatically extended for one year on each December 31st commencing December 31, 1998 unless either party gives written notice to the other prior to the date on which the automatic extension would be effective; provided that the term shall not be extended beyond Executive's sixty-fifth (65th) birthday. 3. Compensation and Benefits. During the term of this Agreement, the Executive shall be entitled to the following compensation and benefits for service to the Company and the Subsidiaries, including service as a director of the Company or its Subsidiaries: (a) Base Salary. The Executive shall be paid a base salary at a minimum annual rate of $333,900, payable in accordance with the Company's customary payroll policy, which salary shall be reviewed and may be increased from time to time at the discretion of the Board of Directors of the Company or the Compensation Committee of the Board of Directors (the "Base Salary"); provided that the amount of the Base Salary shall not be reduced after it has been increased by the Board of Directors or the Compensation Committee without the Executive's written consent. The performance of the Executive shall be reviewed at least once each calendar year which may be at the same time as any adjustment to the Base Salary of Executive. (b) Bonus. The Executive shall, in addition to the Base Salary, also be entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by the Company of performance goals established by the Board of Directors or the Compensation Committee of the Company's Board of Directors. (c) Stock Incentives. The Executive shall be eligible to receive stock options under any stock based plan from time to time adopted by the Company (the "Stock Plans"), as from time to time determined by the Board of Directors or Stock Option Committee of the Company's Board of Directors. (d) Reimbursement of Expenses. The Company shall reimburse the Executive for all business expenses properly documented in accordance with the Company's expense reimbursement policy. (e) Other Benefits. The Executive shall be entitled to participate and shall be included in any employee benefit plan, medical/dental coverage plan, life insurance plan, disability coverage plan, or similar benefit plan of the Company now existing or established hereafter which are generally applicable to executives of the Company. 4. Termination of Employment. (a) Death or Disability. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), the employment of the Executive hereunder shall terminate and the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate as of the end of the month in which such death or disability occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in paragraph 4(e), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event the Executive: (i) has repeatedly failed to perform the Executive's duties under this Agreement, which failure is willful and deliberate; (ii) has engaged in an act or acts of dishonesty which is or are intended to result in substantial personal enrichment for the Executive; (iii) has knowingly engaged in conduct which is materially injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A) any felony (other than any felony arising out of negligence), or (B) any crime or offense involving dishonesty with respect to the Company or any of the Subsidiaries; (v) has failed to comply with the covenants contained in paragraph 5 of this Agreement; or (vi) knowingly provides materially misleading information concerning the Company to the Board of Directors of the Company or any of its Subsidiaries, any governmental body or regulatory agency or to any lender or other financing source or proposed financing source of the Company or its Subsidiaries. If the employment of the Executive is terminated by the Company for Cause, the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate, except the Executive shall receive the Base Salary through the end of the month during which such a termination occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in paragraph 4(e), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected Senior Vice President of the Company and the President of LifeUSA; (ii) there is any material reduction in the scope of the Executive's authority and responsibility; (iii) there is a reduction in the Executive's Base Salary, a material reduction in the amount of Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan or employee retirement plan applicable to the Executive which is materially adverse to the Executive, or a material reduction in the other benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis/St. Paul, Minnesota metropolitan area; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason before a Change in Control (as defined below) or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Executive for Good Reason upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. In addition, in the event a Change in Control has occurred and the Executive elects upon ten (10) days prior notice to the Company to terminate employment with the Company within the sixty (60) day period following the first anniversary of the Change in Control, such termination shall be considered a termination by the Executive for Good Reason and the Executive shall be entitled to the severance benefits under paragraph 4(g) below. (d) Termination Without Cause. The Company may terminate the Executive's employment without Cause prior to the expiration of the term of this Agreement. If the employment of the Executive is terminated by the Company without Cause before a Change in Control or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Company without Cause upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. (e) Notice and Right to Cure. (i) Termination by Company for Cause. If the Company proposes to terminate the employment of the Executive for Cause under paragraph 4(b), the Company shall give written notice to the Executive specifying the reasons for such proposed determination with particularity and, in the case of a termination for Cause under paragraph 4(b)(i), the Executive shall have a reasonable opportunity to correct any curable situation to the reasonable satisfaction of the Board of Directors of the Company, which period shall be no less than thirty (30) days from the Executive's receipt of the notice of proposed termination. Notwithstanding the foregoing, the Executive's employment shall not be terminated for Cause unless and until there shall be delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than the majority of the members of the Board of Directors of the Company at a meeting called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's legal counsel, to be heard before the Board of Directors) finding that, in the opinion of the Company's Board of Directors, the Executive has engaged in conduct justifying a termination for Cause. (ii) Termination by Executive for Good Reason. If the Executive proposes to terminate the Executive's employment for Good Reason under paragraph 4(c) above (other than the last sentence of paragraph 4(c) above), the Executive shall give written notice to the Company, specifying the reason therefor with particularity. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination shall be effective on the date of such notice. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(v) above, the Company will have an opportunity to correct any curable situation to the reasonable satisfaction of the Executive within the period of time specified in the notice which shall not be less than thirty (30) days. If such correction is not so made or the circumstances or situation is such that it is not curable, the Executive may, within thirty (30) days after the expiration of the time so fixed within which to correct such situation, give written notice to the Company that the Executive's employment is terminated for Good Reason effective forthwith. (f) Severance Benefits. If the Executive is entitled to severance benefits under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a Change in Control or following twenty-four months after a Change in Control, the Executive shall be provided the following benefits (regardless of the death or disability of the Executive after the Termination Date): (i) Base Salary. The Company shall continue to pay to the Executive the Base Salary when and as such Base Salary would have been paid from the date of termination (the "Termination Date") through the end of the term of this Agreement under paragraph 2 as if such termination did not occur and there were no further automatic extensions of the term pursuant to paragraph 2 (the "Severance Period") as if the Executive continued to be employed by the Company during the Severance Period and regardless of the death or disability of the Executive subsequent to the Termination Date. (ii) Annual Bonus. If the effective date of such termination occurs before the Annual Bonus for any preceding calendar year has been paid, the Company shall, within thirty (30) days after the Termination Date, pay to the Executive the amount of the Executive's Annual Bonus for such preceding calendar year when and as it would have been paid if the Executive remained employed by the Company. In addition, for each calendar year within the Severance Period (including the calendar year in which the Termination Date occurs), the Company shall, within thirty (30) days after the end of each such calendar year, pay the Executive a bonus equal to the Deemed Bonus (as defined below). The "Deemed Bonus" shall be an amount equal to (A) prior to a Change in Control, the average of the Annual Bonus paid to the Executive for the two complete calendar years prior to the Termination Date, or (B) upon or after a Change in Control, the greater of (x) the average of the Annual Bonus paid to the Executive for the calendar year(s) after the Change in Control (including the calendar year during which a Change in Control occurs) or (y) the average of the Annual Bonus paid or payable to the Executive in respect of the two calendar years immediately preceding the calendar year in which the Change in Control occurs. (iii) Disability, Life Insurance and Medical/Dental Coverage. The Executive shall be entitled to the disability coverage, life insurance and medical/dental coverage which the Executive and the Executive's family received under paragraph 3(e) as if the Executive continued to be employed by the Company during the Severance Period; provided that if Executive obtains new employment with comparable benefits during the Severance Period, all entitlements under this paragraph 4(f)(iii) shall cease. Nothing in this paragraph shall be construed as providing Executive with coverage under any plan of the Company to which Executive would not otherwise be entitled and in the event any coverage is unavailable (e.g., if Executive is uninsurable), the Company's obligations under this paragraph may be satisfied by paying to Executive the cost of such coverage if it were available, as determined in good faith by the Company. (iv) Stock Options. Not later than thirty (30) days after the date on which the Executive's employment terminates, the Company shall pay the Executive a lump sum cash payment equal to the amount by which the fair market value (determined as of the Termination Date) of the number of shares of stock subject to any stock option granted under the Stock Plans which was not exercisable on the Termination Date and which would have become vested and exercisable during the Severance Period if the Executive had remained employed by the Company during the Severance Period. (g) Severance Benefits for Change in Control. In the event of a Change in Control and either upon or within (and including) twenty-four (24) months after such Change in Control, the Executive terminates employment for Good Reason or the Executive's employment is terminated by the Company for any reason other than Cause, then (regardless of the death or disability of the Executive after the Termination Date) the Company shall pay the Executive a lump sum cash payment within five (5) days after the Termination Date, in an amount equal to the amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of the Deemed Bonus (as defined below), and the Company shall also provide the Executive the severance benefits referred to in paragraph 4(f)(iii) as provided therein. (h) Excise Tax Gross-Up. If Executive is subject to any Excise Tax (as defined below) as a result of the severance payments and/or benefits to which Executive is entitled under paragraphs 4(f) or 4(g), the Company shall also pay the Executive the Gross-Up Payment in accordance with the following provisions: (i) Gross-Up Payment. Anything to the contrary notwithstanding, in the event it shall be determined that any payment, distribution or benefit made or provided by the Company to or for the benefit of the Executive (whether pursuant to this Agreement or otherwise) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Company shall pay the Executive in cash an amount (the "Gross-Up Payment") such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including but not limited to income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed on the Payments. (ii) Determination of Gross-Up Payment. Subject to paragraph 4(h)(iii) below, all determinations required to be made under paragraph 4(h)(i), including whether a Gross-Up Payment is required and the amount of the Gross-Up Payment, shall be made by the firm of independent public accountants selected by the Company to audit its financial statements for the year immediately preceding the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations to the Company and the Executive within thirty (30) days after the Termination Date. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required under this paragraph 4(h) (which accounting firm shall then be referred to as the "Accounting Firm"). All fees and expenses of the Accounting Firm in connection with the work it performs pursuant to this paragraph 4(h) shall be promptly paid by the Company. Any Gross-Up Payment (as determined pursuant to paragraph 4(h)(i) above) shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or a similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm, it is possible that Gross-up Payments which will not have been made by the Company should have been made ("Underpayment"). In the event that the Company exhausts its remedies pursuant to paragraph 4(h)(iii) below, and the Executive is thereafter required to make a payment of Excise Tax, the Accounting Firm shall promptly determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to the Executive within five (5) days after such determination. (iii) Contest. The Executive shall notify the Company in writing of any claim made by the Internal Revenue Service that, if successful, would require the Company to pay a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive; (C) cooperate with the Company in good faith in order effectively to contest such claim; (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 4(h)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph 4(h)(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid, and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (i) Benefits in Lieu of Severance Pay Policy. The severance benefits provided for in this paragraph 4 are in lieu of any benefits that would otherwise be provided to the Executive under the Company's severance pay policy, and the Executive shall not be entitled to any benefits under the Company's severance pay policy. (j) No Funding of Severance. Nothing contained in this Agreement or otherwise shall require the Company to segregate, earmark or otherwise set aside any funds or other assets to provide for any payments required to be made under this paragraph 4, and the rights of the Executive to the severance benefits hereunder shall be solely those of a general, unsecured creditor of the Company. However, the Company may, in its discretion, deposit cash or property, or a combination of both, equal in value to all or a portion of the amounts anticipated to be payable hereunder into a trust, the assets of which are to be distributed by such times as determined by the trustee of such trust; provided that such assets shall be subject at all times to the rights of the Company's general creditors. (k) Definition of Change in Control. A "Change in Control" shall be deemed to have occurred if, prior to the expiration of the term of this Agreement: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than Allianz Life Insurance Company of North America and its affiliates or the Company or any of its Subsidiaries or any employee benefit plan of the Company or any of its Subsidiaries) becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the voting power of all of the Company's then outstanding securities, except for issuances of shares approved by a majority of the Incumbent Directors (as defined below) then in office; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (the "Incumbent Directors") together with any director (the "New Incumbent Director") whose nomination or election was approved by at least two-thirds of the Incumbent Directors and any New Incumbent Director who was previously elected, in each case who are directors at the time of the nomination or election of such director cease, for any reason to constitute at least a majority of the Board of Directors of the Company; or (iii) the shareholders of the Company approve the sale of all, or substantially all, of the business or assets of the Company or the liquidation or dissolution of the Company. 5. Confidentiality; Non-Solicitation Covenant; and Covenant Not to Compete. (a) Confidentiality. The Executive agrees that, at all times, both during the Executive's employment and after the termination thereof, the Executive shall not divulge to any other person, firm or corporation, or in any way use for the Executive's own benefit, except as required in the conduct of the business of the Company or any of its Subsidiaries or as authorized in writing on behalf of the Company, any trade secrets or confidential information of the Company or its Subsidiaries obtained during the course of the Executive's employment with the Company or its Subsidiaries. The Executive also agrees that the Executive will not, either subsequent to termination of employment or during employment, except as required in the conduct of the business of the Company or any of its Subsidiaries, or as authorized in writing on behalf of the Company, interfere with or disturb or attempt to interfere with or disturb any employment, contractual or business arrangements of the Company or any of its Subsidiaries with any of its employees, agents, suppliers, customers, reinsurers or other parties with which the Company or any of its Subsidiaries has a contractual relationship, as the case may be. (b) Non-Solicitation Covenant. While the Executive is actively employed with the Company and, in the event of a termination of employment with the Company for any reason, for a period of two years after the Termination Date, the Executive agrees that, except with the prior written permission of the Board of Directors of the Company, the Executive will not offer to hire, entice away, or in any manner attempt to persuade any officer, employee, or agent of the Company or any of the Subsidiaries to discontinue his or her relationship with the Company or any of the Subsidiaries nor will the Executive directly or indirectly solicit, divert, take away or attempt to solicit any business of the Company or any of its Subsidiaries as to which Executive has acquired any knowledge during the term of the Executive's employment with the Company. (c) Covenant Not to Compete. The Executive acknowledges and agrees with the Company that during the course of the Executive's employment with the Company, the Executive has had and will continue to have the opportunity to develop relationships with existing employees, customers and other business associates of the Company and the Subsidiaries, which relationships constitute goodwill of the Company, and the Executive acknowledges and agrees that the Company would be irreparably damaged if the Executive were to take actions that would damage or misappropriate such goodwill. The Executive acknowledges that the Company and its Subsidiaries currently engages, throughout the United States (the "Territory"), the business of the development, sale, marketing and administration of life insurance, annuities and extended care insurance products (the "Subject Business"). Accordingly, during the term of the Executive's employment with the Company and (i) prior to a Change of Control and in the case of a voluntary termination by the Executive under paragraph 4(d) or a termination by the Company for Cause under paragraph 4(b), the balance of the term of this Agreement under paragraph 2 as if no termination of employment occurred but notice of termination of the automatic extension was given either by the Executive at the time of his notice of voluntary resignation or given by the Company at the time of its notice of termination for Cause, or (ii) after a Change in Control, one year after the Termination Date (the "Noncompete Period"), the Executive shall not, directly or indirectly, enter into, engage in, assist, give or lend funds to or otherwise finance, be employed by or consult with, or have a financial or other interest in, any business which engages in the Subject Business, whether for or by himself or as an independent contractor, agent, stockholder, partner or joint venturer for any other person, provided that the aggregate ownership by the Executive of no more than two percent of the outstanding equity securities of any person, which securities are traded on a national or foreign securities exchange, quoted on the Nasdaq Stock Market or other automated quotation system or, in the case of the Company, of no more than ten percent of the Company's outstanding equity securities shall not be deemed to be giving or lending funds to, otherwise financing or having a financial interest in a competitor. In the event that any person in which the executive has any financial or other interest directly or indirectly enters into the Subject Business in the Territory during the Noncompete Period, the Executive shall divest all of his interest (other than any amount permitted under this paragraph) in such person within 30 days after such person enters into the Subject Business in the Territory. (d) Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of this paragraph 5, the Company shall have the following rights and remedies, in addition to any rights and remedies otherwise available at law or equity: (i) The right and remedy to have the provisions of this paragraph 5 specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by the Executive that any such breach or threatened breach will cause irreparable injury to the Company and the Subsidiaries and that money damages will not provide an adequate remedy to the Company and the Subsidiaries; and (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments, or other benefits, other than those payable under this Agreement, derived or received by the Executive or the enterprise in competition with the Company or any of the Subsidiaries as the result of any transactions constituting a breach of any part of this paragraph 5, and Executive agrees to account for and pay over to the Company such amounts promptly upon demand therefor. 6. Beneficiaries. In the event of the Executive's death after termination of employment, any amount or benefit payable or distributable to him pursuant to this Agreement shall be paid to the beneficiary designated by the Executive for such purpose in the last written instrument received by the Company prior to the Executive's death, if any, or, if no beneficiary has been designated, to the Executive's estate, but such designation shall not be deemed to supersede any beneficiary designation under any benefit plan of the Company. Whenever this Agreement provides for the written designation of a beneficiary or beneficiaries of the Executive, the Executive shall have the right to revoke such designation and to redesignate a beneficiary or beneficiaries by written notice to either the Company to such effect, except to the extent, if any, restricted by law. 7. Rights in the Event of Dispute. In the event of a dispute between the Company and the Executive regarding the Executive's employment or this Agreement, it is the intention of this Agreement that the dispute shall be resolved as expeditiously as possible, consistent with fairness to both sides, and that during pendency of the dispute the Executive and the Company shall be on equal footing, as follows: (a) Arbitration. Any claim or dispute relating to the Executive's employment or the terms and performance of this Agreement (other than enforcement of paragraph 5) shall be resolved by binding private arbitration before three arbitrators, and any award rendered by any arbitration panel, or a majority thereof, may be filed and a judgment obtained in any court having jurisdiction over the parties unless the relief granted in the award is delivered within ten (10) days of the award. Either party may request arbitration by written notice to the other party. Within thirty (30) days of receipt of such notice by the opposing party, each party shall appoint a disinterested arbitrator and the two arbitrators selected thereby shall appoint a third neutral arbitrator; in the event the two arbitrators cannot agree upon the third arbitrator within ten (10) days after their appointment, then the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding conducted hereunder shall be in the City of Minneapolis and shall follow the procedures set forth in the Rules of Commercial Arbitration of the American Arbitration Association, and both sides shall cooperate in as expeditious a resolution of the proceeding as is reasonable under the circumstances. The arbitration panel shall have the power to enter any relief it deems fair and just on any claim, including interim and final equitable relief, along with any procedural order that is reasonable under the circumstances. (b) Expenses of Prosecution/Defense of Claim. During the pendency of a dispute between the Company and the Executive relating to the Executive's employment or the terms or performance of this Agreement, the Company shall promptly pay the Executive's reasonable expenses of representation upon delivery of periodic billings for same, provided that (i) Executive (or a person claiming on the Executive's behalf) shall promptly repay all amounts paid hereunder at the conclusion of the dispute if the resolution thereof includes a finding that the Executive did not act in good faith in the matter in dispute or in the dispute proceeding itself, and (ii) no claim for expenses of representation shall be submitted by the Executive or any person acting on the Executive's behalf unless made in writing to the Board of Directors within one year of the performance of the services for which such claim is made. 8. No Obligation to Mitigate Damages. In the event the Executive becomes eligible to receive compensation or benefits subsequent to the termination of the Executive's employment under this Agreement, the Executive shall have no obligation to seek other employment in an effort to mitigate damages. To the extent the Executive shall accept other employment after the Executive's termination of employment, the compensation and benefits received from such employment shall not reduce the compensation and benefits otherwise due under this Agreement, except as provided in paragraph 4(f)(iii) above. 9. Other Benefits. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein, be in addition to, and not in derogation or diminution of, any benefits that Executive or the Executive's beneficiary may be entitled to receive under any other plan or program now or hereafter maintained by the Company, or its Subsidiaries. 10. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Executive, such obligations have been assumed by the successor as a matter of law. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (unless the foregoing opinion is rendered to the Executive) shall entitle the Executive to terminate the Executive's employment and to receive the payments provided for in paragraphs 4(f), 4(g) and 4(h), as the case may be, as if the Executive terminated this Agreement for Good Reason. The Executive's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Executive's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. The Company's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Company's successors and assigns, including any person which may acquire LifeUSA. 11. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 12. Survival. The rights and obligations of the parties pursuant to this Agreement shall survive the term of the employment to the extent that any performance is required hereunder after the expiration or termination of such term. 13. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Executive, to the Executive's last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. 14. Amendments and Construction. This Agreement may only be amended in a writing signed by the parties hereto. This Agreement shall be construed under the laws of the State of Minnesota. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By /s/Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/Donald J. Urban ----------------------------- Donald J. Urban AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED AGREEMENT is made and entered into as of January 1, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and MARK A. ZESBAUGH (the "Executive"). R E C I T A L S: WHEREAS, the Company and the Executive have entered into the employment agreement dated as of January 1, 1997 (the "1997 Agreement"); WHEREAS, in connection with the anticipated investment in the Company by Allianz Life Insurance Company of North America ("Allianz") pursuant to the stock purchase agreement dated as of January 13, 1998 (the "Allianz Agreement") between the Company and Allianz, Allianz has requested certain changes in the 1997 Agreement; WHEREAS, the Executive desires to facilitate the investment by Allianz in the Company by amending and restating the 1997 Agreement in its entirety as set forth in this Agreement; and WHEREAS, Allianz has agreed to purchase certain shares of the Company's common stock owned by Executive pursuant to the stock purchase agreement dated January 13, 1998 between Allianz and Executive, and, as a condition of Allianz's obligations thereunder, Executive has agreed to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Duties. The parties hereby agree that, during the term of this Agreement as set forth in paragraph 2 below, the Executive shall be employed as Executive Vice President and Chief Financial Officer of the Company with the duties and responsibilities attendant to such position. In discharging such duties and responsibilities, the Executive may also serve as an executive officer and/or director of any direct or indirect subsidiary of the Company (collectively the "Subsidiaries"). The salary, other compensation and benefits provided herein may be allocated among the Company and the Subsidiaries based upon the portion of the Executive's services provided to the Company and each of the Subsidiaries, respectively, and the Executive shall assist the Company in making such allocation as the Company may reasonably request. During the term of this Agreement, the Executive shall apply on a full-time basis (allowing for usual vacations and sick leave) all of the Executive's skill and experience to the performance of the Executive's duties hereunder with the Company and the Subsidiaries. It is understood that the Executive may have other business investments and participate in charitable organizations which may, from time to time, require minor portions of Executive's time, but which shall not interfere or be inconsistent with the Executive's duties under this Agreement. The Executive shall perform the Executive's duties at the Company's principal executive offices in Minneapolis, Minnesota or at such other location as may be mutually agreed upon by the Executive and the Company; provided that the Executive shall travel to other locations at such times as may be necessary for the performance of the Executive's duties under this Agreement. 2. Term of Employment. Unless sooner terminated as provided in paragraph 4 below, the term of this Agreement shall commence on the date hereof and shall continue through December 31, 2000; provided that the term shall be automatically extended for one year on each December 31st commencing December 31, 1998 unless either party gives written notice to the other prior to the date on which the automatic extension would be effective; provided that the term shall not be extended beyond Executive's sixty-fifth (65th) birthday. 3. Compensation and Benefits. During the term of this Agreement, the Executive shall be entitled to the following compensation and benefits for service to the Company and the Subsidiaries, including service as a director of the Company or its Subsidiaries: (a) Base Salary. The Executive shall be paid a base salary at a minimum annual rate of $268,750, payable in accordance with the Company's customary payroll policy, which salary shall be reviewed and may be increased from time to time at the discretion of the Board of Directors of the Company or the Compensation Committee of the Board of Directors (the "Base Salary"); provided that the amount of the Base Salary shall not be reduced after it has been increased by the Board of Directors or the Compensation Committee without the Executive's written consent. The performance of the Executive shall be reviewed at least once each calendar year which may be at the same time as any adjustment to the Base Salary of Executive. (b) Bonus. The Executive shall, in addition to the Base Salary, also be entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by the Company of performance goals established by the Board of Directors or the Compensation Committee of the Company's Board of Directors. (c) Stock Incentives. The Executive shall be eligible to receive stock options under any stock based plan from time to time adopted by the Company (the "Stock Plans"), as from time to time determined by the Board of Directors or Stock Option Committee of the Company's Board of Directors. (d) Reimbursement of Expenses. The Company shall reimburse the Executive for all business expenses properly documented in accordance with the Company's expense reimbursement policy. (e) Other Benefits. The Executive shall be entitled to participate and shall be included in any employee benefit plan, medical/dental coverage plan, life insurance plan, disability coverage plan, or similar benefit plan of the Company now existing or established hereafter which are generally applicable to executives of the Company. 4. Termination of Employment. (a) Death or Disability. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), the employment of the Executive hereunder shall terminate and the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate as of the end of the month in which such death or disability occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in paragraph 4(e), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event the Executive: (i) has repeatedly failed to perform the Executive's duties under this Agreement, which failure is willful and deliberate; (ii) has engaged in an act or acts of dishonesty which is or are intended to result in substantial personal enrichment for the Executive; (iii) has knowingly engaged in conduct which is materially injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A) any felony (other than any felony arising out of negligence), or (B) any crime or offense involving dishonesty with respect to the Company or any of the Subsidiaries; (v) has failed to comply with the covenants contained in paragraph 5 of this Agreement; or (vi) knowingly provides materially misleading information concerning the Company to the Board of Directors of the Company or any of its Subsidiaries, any governmental body or regulatory agency or to any lender or other financing source or proposed financing source of the Company or its Subsidiaries. If the employment of the Executive is terminated by the Company for Cause, the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate, except the Executive shall receive the Base Salary through the end of the month during which such a termination occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in paragraph 4(e), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected Executive Vice President and Chief Financial Officer of the Company; (ii) there is any material reduction in the scope of the Executive's authority and responsibility; (iii) there is a reduction in the Executive's Base Salary, a material reduction in the amount of Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan or employee retirement plan applicable to the Executive which is materially adverse to the Executive, or a material reduction in the other benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis/St. Paul, Minnesota metropolitan area; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason before a Change in Control (as defined below) or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Executive for Good Reason upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. In addition, in the event a Change in Control has occurred and the Executive elects upon ten (10) days prior notice to the Company to terminate employment with the Company within the sixty (60) day period following the first anniversary of the Change in Control, such termination shall be considered a termination by the Executive for Good Reason and the Executive shall be entitled to the severance benefits under paragraph 4(g) below. (d) Termination Without Cause. The Company may terminate the Executive's employment without Cause prior to the expiration of the term of this Agreement. If the employment of the Executive is terminated by the Company without Cause before a Change in Control or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Company without Cause upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. (e) Notice and Right to Cure. (i) Termination by Company for Cause. If the Company proposes to terminate the employment of the Executive for Cause under paragraph 4(b), the Company shall give written notice to the Executive specifying the reasons for such proposed determination with particularity and, in the case of a termination for Cause under paragraph 4(b)(i), the Executive shall have a reasonable opportunity to correct any curable situation to the reasonable satisfaction of the Board of Directors of the Company, which period shall be no less than thirty (30) days from the Executive's receipt of the notice of proposed termination. Notwithstanding the foregoing, the Executive's employment shall not be terminated for Cause unless and until there shall be delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than the majority of the members of the Board of Directors of the Company at a meeting called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's legal counsel, to be heard before the Board of Directors) finding that, in the opinion of the Company's Board of Directors, the Executive has engaged in conduct justifying a termination for Cause. (ii) Termination by Executive for Good Reason. If the Executive proposes to terminate the Executive's employment for Good Reason under paragraph 4(c) above (other than the last sentence of paragraph 4(c) above), the Executive shall give written notice to the Company, specifying the reason therefor with particularity. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination shall be effective on the date of such notice. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(v) above, the Company will have an opportunity to correct any curable situation to the reasonable satisfaction of the Executive within the period of time specified in the notice which shall not be less than thirty (30) days. If such correction is not so made or the circumstances or situation is such that it is not curable, the Executive may, within thirty (30) days after the expiration of the time so fixed within which to correct such situation, give written notice to the Company that the Executive's employment is terminated for Good Reason effective forthwith. (f) Severance Benefits. If the Executive is entitled to severance benefits under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a Change in Control or following twenty-four months after a Change in Control, the Executive shall be provided the following benefits (regardless of the death or disability of the Executive after the Termination Date): (i) Base Salary. The Company shall continue to pay to the Executive the Base Salary when and as such Base Salary would have been paid from the date of termination (the "Termination Date") through the end of the term of this Agreement under paragraph 2 as if such termination did not occur and there were no further automatic extensions of the term pursuant to paragraph 2 (the "Severance Period") as if the Executive continued to be employed by the Company during the Severance Period and regardless of the death or disability of the Executive subsequent to the Termination Date. (ii) Annual Bonus. If the effective date of such termination occurs before the Annual Bonus for any preceding calendar year has been paid, the Company shall, within thirty (30) days after the Termination Date, pay to the Executive the amount of the Executive's Annual Bonus for such preceding calendar year when and as it would have been paid if the Executive remained employed by the Company. In addition, for each calendar year within the Severance Period (including the calendar year in which the Termination Date occurs), the Company shall, within thirty (30) days after the end of each such calendar year, pay the Executive a bonus equal to the Deemed Bonus (as defined below). The "Deemed Bonus" shall be an amount equal to (A) prior to a Change in Control, the average of the Annual Bonus paid to the Executive for the two complete calendar years prior to the Termination Date, or (B) upon or after a Change in Control, the greater of (x) the average of the Annual Bonus paid to the Executive for the calendar year(s) after the Change in Control (including the calendar year in which a Change in Control occurs) or (y) the average of the Annual Bonus paid or payable to the Executive in respect of the two calendar years immediately preceding the calendar year in which the Change in Control occurs. (iii) Disability, Life Insurance and Medical/Dental Coverage. The Executive shall be entitled to the disability coverage, life insurance and medical/dental coverage which the Executive and the Executive's family received under paragraph 3(e) as if the Executive continued to be employed by the Company during the Severance Period; provided that if Executive obtains new employment with comparable benefits during the Severance Period, all entitlements under this paragraph 4(f)(iii) shall cease. Nothing in this paragraph shall be construed as providing Executive with coverage under any plan of the Company to which Executive would not otherwise be entitled and in the event any coverage is unavailable (e.g., if Executive is uninsurable), the Company's obligations under this paragraph may be satisfied by paying to Executive the cost of such coverage if it were available, as determined in good faith by the Company. (iv) Stock Options. Not later than thirty (30) days after the date on which the Executive's employment terminates, the Company shall pay the Executive a lump sum cash payment equal to the amount by which the fair market value (determined as of the Termination Date) of the number of shares of stock subject to any stock option granted under the Stock Plans which was not exercisable on the Termination Date and which would have become vested and exercisable during the Severance Period if the Executive had remained employed by the Company during the Severance Period. (g) Severance Benefits for Change in Control. In the event of a Change in Control and either upon or within (and including) twenty-four (24) months after such Change in Control, the Executive terminates employment for Good Reason or the Executive's employment is terminated by the Company for any reason other than Cause, then (regardless of the death or disability of the Executive after the Termination Date) the Company shall pay the Executive a lump sum cash payment within five (5) days after the Termination Date, in an amount equal to the amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of the Deemed Bonus (as defined below), and the Company shall also provide the Executive the severance benefits referred to in paragraph 4(f)(iii) as provided therein. (h) Excise Tax Gross-Up. If Executive is subject to any Excise Tax (as defined below) as a result of the severance payments and/or benefits to which Executive is entitled under paragraphs 4(f) or 4(g), the Company shall also pay the Executive the Gross-Up Payment in accordance with the following provisions: (i) Gross-Up Payment. Anything to the contrary notwithstanding, in the event it shall be determined that any payment, distribution or benefit made or provided by the Company to or for the benefit of the Executive (whether pursuant to this Agreement or otherwise) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Company shall pay the Executive in cash an amount (the "Gross-Up Payment") such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including but not limited to income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed on the Payments. (ii) Determination of Gross-Up Payment. Subject to paragraph 4(h)(iii) below, all determinations required to be made under paragraph 4(h)(i), including whether a Gross-Up Payment is required and the amount of the Gross-Up Payment, shall be made by the firm of independent public accountants selected by the Company to audit its financial statements for the year immediately preceding the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations to the Company and the Executive within thirty (30) days after the Termination Date. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required under this paragraph 4(h) (which accounting firm shall then be referred to as the "Accounting Firm"). All fees and expenses of the Accounting Firm in connection with the work it performs pursuant to this paragraph 4(h) shall be promptly paid by the Company. Any Gross-Up Payment (as determined pursuant to paragraph 4(h)(i) above) shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or a similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm, it is possible that Gross-up Payments which will not have been made by the Company should have been made ("Underpayment"). In the event that the Company exhausts its remedies pursuant to paragraph 4(h)(iii) below, and the Executive is thereafter required to make a payment of Excise Tax, the Accounting Firm shall promptly determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to the Executive within five (5) days after such determination. (iii) Contest. The Executive shall notify the Company in writing of any claim made by the Internal Revenue Service that, if successful, would require the Company to pay a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive; (C) cooperate with the Company in good faith in order effectively to contest such claim; (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 4(h)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph 4(h)(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid, and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (i) Benefits in Lieu of Severance Pay Policy. The severance benefits provided for in this paragraph 4 are in lieu of any benefits that would otherwise be provided to the Executive under the Company's severance pay policy and the Executive shall not be entitled to any benefits under the Company's severance pay policy. (j) No Funding of Severance. Nothing contained in this Agreement or otherwise shall require the Company to segregate, earmark or otherwise set aside any funds or other assets to provide for any payments required to be made under this paragraph 4 and the rights of the Executive to the severance benefits hereunder shall be solely those of a general, unsecured creditor of the Company. However, the Company may, in its discretion, deposit cash or property, or a combination of both, equal in value to all or a portion of the amounts anticipated to be payable hereunder into a trust, the assets of which are to be distributed by such times as determined by the trustee of such trust; provided that such assets shall be subject at all times to the rights of the Company's general creditors. (k) Definition of Change in Control. A "Change in Control" shall be deemed to have occurred if, prior to the expiration of the term of this Agreement: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than Allianz Life Insurance Company of North America and its affiliates or the Company or any of its Subsidiaries or any employee benefit plan of the Company or any of its Subsidiaries) becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the voting power of all of the Company's then outstanding securities, except for issuances of shares approved by a majority of the Incumbent Directors (as defined below) then in office; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (the "Incumbent Directors") together with any director (the "New Incumbent Director") whose nomination or election was approved by at least two-thirds of the Incumbent Directors and any New Incumbent Director who was previously elected, in each case who are directors at the time of the nomination or election of such director cease, for any reason to constitute at least a majority of the Board of Directors of the Company; or (iii) the shareholders of the Company approve the sale of all, or substantially all, of the business or assets of the Company or the liquidation or dissolution of the Company. 5. Confidentiality; Non-Solicitation Covenant; and Covenant Not to Compete. (a) Confidentiality. The Executive agrees that, at all times, both during the Executive's employment and after the termination thereof, the Executive shall not divulge to any other person, firm or corporation, or in any way use for the Executive's own benefit, except as required in the conduct of the business of the Company or any of its Subsidiaries or as authorized in writing on behalf of the Company, any trade secrets or confidential information of the Company or its Subsidiaries obtained during the course of the Executive's employment with the Company or its Subsidiaries. The Executive also agrees that the Executive will not, either subsequent to termination of employment or during employment, except as required in the conduct of the business of the Company or any of its Subsidiaries, or as authorized in writing on behalf of the Company, interfere with or disturb or attempt to interfere with or disturb any employment, contractual or business arrangements of the Company or any of its Subsidiaries with any of its employees, agents, suppliers, customers, reinsurers or other parties with which the Company or any of its Subsidiaries has a contractual relationship, as the case may be. (b) Non-Solicitation Covenant. While the Executive is actively employed with the Company and, in the event of a termination of employment with the Company for any reason, for a period of two years after the Termination Date, the Executive agrees that, except with the prior written permission of the Board of Directors of the Company, the Executive will not offer to hire, entice away, or in any manner attempt to persuade any officer, employee, or agent of the Company or any of the Subsidiaries to discontinue his or her relationship with the Company or any of the Subsidiaries nor will the Executive directly or indirectly solicit, divert, take away or attempt to solicit any business of the Company or any of its Subsidiaries as to which Executive has acquired any knowledge during the term of the Executive's employment with the Company. (c) Covenant Not to Compete. The Executive acknowledges and agrees with the Company that during the course of the Executive's employment with the Company, the Executive has had and will continue to have the opportunity to develop relationships with existing employees, customers and other business associates of the Company and the Subsidiaries, which relationships constitute goodwill of the Company, and the Executive acknowledges and agrees that the Company would be irreparably damaged if the Executive were to take actions that would damage or misappropriate such goodwill. The Executive acknowledges that the Company and its Subsidiaries currently engages throughout the United States (the "Territory"), the business of the development, sale, marketing and administration of life insurance, annuities and extended care insurance products (the "Subject Business"). Accordingly, during the term of the Executive's employment with the Company and (i) prior to a Change of Control, and in the case of a voluntary termination by the Executive under paragraph 4(d) or a termination by the Company for Cause under paragraph 4(b), the balance of the term of this Agreement under paragraph 2 as if no termination of employment occurred but notice of termination of the automatic extension was given either by the Executive at the time of his notice of voluntary resignation or given by the Company at the time of its notice of termination for Cause, or (ii) after a Change in Control, one year after the Termination Date (the "Noncompete Period"), the Executive shall not, directly or indirectly, enter into, engage in, assist, give or lend funds to or otherwise finance, be employed by or consult with, or have a financial or other interest in, any business which engages in the Subject Business, whether for or by himself or as an independent contractor, agent, stockholder, partner or joint venturer for any other person, provided that the aggregate ownership by the Executive of no more than two percent of the outstanding equity securities of any person, which securities are traded on a national or foreign securities exchange, quoted on the Nasdaq Stock Market or other automated quotation system or, in the case of the Company, of no more than ten percent of the Company's outstanding equity securities shall not be deemed to be giving or lending funds to, otherwise financing or having a financial interest in a competitor. In the event that any person in which the executive has any financial or other interest directly or indirectly enters into the Subject Business in the Territory during the Noncompete Period, the Executive shall divest all of his interest (other than any amount permitted under this paragraph) in such person within 30 days after such person enters into the Subject Business in the Territory. (d) Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of this paragraph 5, the Company shall have the following rights and remedies, in addition to any rights and remedies otherwise available at law or equity: (i) The right and remedy to have the provisions of this paragraph 5 specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by the Executive that any such breach or threatened breach will cause irreparable injury to the Company and the Subsidiaries and that money damages will not provide an adequate remedy to the Company and the Subsidiaries; and (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments, or other benefits, other than those payable under this Agreement, derived or received by the Executive or the enterprise in competition with the Company or any of the Subsidiaries as the result of any transactions constituting a breach of any part of this paragraph 5, and Executive agrees to account for and pay over to the Company such amounts promptly upon demand therefor. 6. Beneficiaries. In the event of the Executive's death after termination of employment, any amount or benefit payable or distributable to him pursuant to this Agreement shall be paid to the beneficiary designated by the Executive for such purpose in the last written instrument received by the Company prior to the Executive's death, if any, or, if no beneficiary has been designated, to the Executive's estate, but such designation shall not be deemed to supersede any beneficiary designation under any benefit plan of the Company. Whenever this Agreement provides for the written designation of a beneficiary or beneficiaries of the Executive, the Executive shall have the right to revoke such designation and to redesignate a beneficiary or beneficiaries by written notice to either the Company to such effect, except to the extent, if any, restricted by law. 7. Rights in the Event of Dispute. In the event of a dispute between the Company and the Executive regarding the Executive's employment or this Agreement, it is the intention of this Agreement that the dispute shall be resolved as expeditiously as possible, consistent with fairness to both sides, and that during pendency of the dispute the Executive and the Company shall be on equal footing, as follows: (a) Arbitration. Any claim or dispute relating to the Executive's employment or the terms and performance of this Agreement (other than enforcement of paragraph 5) shall be resolved by binding private arbitration before three arbitrators, and any award rendered by any arbitration panel, or a majority thereof, may be filed and a judgment obtained in any court having jurisdiction over the parties unless the relief granted in the award is delivered within ten (10) days of the award. Either party may request arbitration by written notice to the other party. Within thirty (30) days of receipt of such notice by the opposing party, each party shall appoint a disinterested arbitrator and the two arbitrators selected thereby shall appoint a third neutral arbitrator; in the event the two arbitrators cannot agree upon the third arbitrator within ten (10) days after their appointment, then the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding conducted hereunder shall be in the City of Minneapolis and shall follow the procedures set forth in the Rules of Commercial Arbitration of the American Arbitration Association, and both sides shall cooperate in as expeditious a resolution of the proceeding as is reasonable under the circumstances. The arbitration panel shall have the power to enter any relief it deems fair and just on any claim, including interim and final equitable relief, along with any procedural order that is reasonable under the circumstances. (b) Expenses of Prosecution/Defense of Claim. During the pendency of a dispute between the Company and the Executive relating to the Executive's employment or the terms or performance of this Agreement, the Company shall promptly pay the Executive's reasonable expenses of representation upon delivery of periodic billings for same, provided that (i) Executive (or a person claiming on the Executive's behalf) shall promptly repay all amounts paid hereunder at the conclusion of the dispute if the resolution thereof includes a finding that the Executive did not act in good faith in the matter in dispute or in the dispute proceeding itself, and (ii) no claim for expenses of representation shall be submitted by the Executive or any person acting on the Executive's behalf unless made in writing to the Board of Directors within one year of the performance of the services for which such claim is made. 8. No Obligation to Mitigate Damages. In the event the Executive becomes eligible to receive compensation or benefits subsequent to the termination of the Executive's employment under this Agreement, the Executive shall have no obligation to seek other employment in an effort to mitigate damages. To the extent the Executive shall accept other employment after the Executive's termination of employment, the compensation and benefits received from such employment shall not reduce the compensation and benefits otherwise due under this Agreement, except as provided in paragraph 4(f)(iii) above. 9. Other Benefits. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein, be in addition to, and not in derogation or diminution of, any benefits that Executive or the Executive's beneficiary may be entitled to receive under any other plan or program now or hereafter maintained by the Company, or its Subsidiaries. 10. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Executive, such obligations have been assumed by the successor as a matter of law. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (unless the foregoing opinion is rendered to the Executive) shall entitle the Executive to terminate the Executive's employment and to receive the payments provided for in paragraphs 4(f), 4(g) and 4(h), as the case may be, as if the Executive terminated this Agreement for Good Reason. The Executive's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Executive's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. The Company's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Company's successors and assigns, including any person which may acquire LifeUSA Insurance Company. 11. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 12. Survival. The rights and obligations of the parties pursuant to this Agreement shall survive the term of the employment to the extent that any performance is required hereunder after the expiration or termination of such term. 13. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Executive, to the Executive's last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. 14. Amendments and Construction. This Agreement may only be amended in a writing signed by the parties hereto. This Agreement shall be construed under the laws of the State of Minnesota. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. 15. Amended and Restated Agreement. This Agreement amends and restates in its entirety the 1997 Agreement and the 1997 Agreement shall have no further force or effect. IN WITNESS WHEREOF, the parties have duly executed this Amended and Restated Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By /s/Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/Mark A. Zesbaugh ----------------------------- Mark A. Zesbaugh EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of January 1, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and BRADLEY E. BARKS (the "Executive"). R E C I T A L S: WHEREAS, the Executive is now and has been the Senior Vice President - Finance of the Company; WHEREAS, the Executive and the Company wish to enter into this Agreement to provide for the continued employment of Executive; and WHEREAS, the Executive and the Company are willing to enter into this Agreement upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Duties. The parties hereby agree that, during the term of this Agreement as set forth in paragraph 2 below, the Executive shall be employed as the Senior Vice President - Finance of the Company with the duties and responsibilities attendant to such position. In discharging such duties and responsibilities, the Executive may also serve as an executive officer and/or director of any direct or indirect subsidiary of the Company (collectively the "Subsidiaries"). The salary, other compensation and benefits provided herein may be allocated among the Company and the Subsidiaries based upon the portion of the Executive's services provided to the Company and each of the Subsidiaries, respectively, and the Executive shall assist the Company in making such allocation as the Company may reasonably request. During the term of this Agreement, the Executive shall apply on a full-time basis (allowing for usual vacations and sick leave) all of the Executive's skill and experience to the performance of the Executive's duties hereunder with the Company and the Subsidiaries. It is understood that the Executive may have other business investments and participate in charitable organizations which may, from time to time, require minor portions of Executive's time, but which shall not interfere or be inconsistent with the Executive's duties under this Agreement. The Executive shall perform the Executive's duties at the Company's principal executive offices in Minneapolis, Minnesota or at such other location as may be mutually agreed upon by the Executive and the Company; provided that the Executive shall travel to other locations at such times as may be necessary for the performance of the Executive's duties under this Agreement. 2. Term of Employment. Unless sooner terminated as provided in paragraph 4 below, the term of this Agreement shall commence on the date hereof and shall continue through December 31, 2000; provided that the term shall be automatically extended for one year on each December 31st commencing December 31, 1998 unless either party gives written notice to the other prior to the date on which the automatic extension would be effective; provided that the term shall not be extended beyond Executive's sixty-fifth (65th) birthday. 3. Compensation and Benefits. During the term of this Agreement, the Executive shall be entitled to the following compensation and benefits for service to the Company and the Subsidiaries, including service as a director of the Company or its Subsidiaries: (a) Base Salary. The Executive shall be paid a base salary at a minimum annual rate of $200,000, payable in accordance with the Company's customary payroll policy, which salary shall be reviewed and may be increased from time to time at the discretion of the Board of Directors of the Company or the Compensation Committee of the Board of Directors (the "Base Salary"); provided that the amount of the Base Salary shall not be reduced after it has been increased by the Board of Directors or the Compensation Committee without the Executive's written consent. The performance of the Executive shall be reviewed at least once each calendar year which may be at the same time as any adjustment to the Base Salary of Executive. (b) Bonus. The Executive shall, in addition to the Base Salary, also be entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by the Company of performance goals established by the Board of Directors or the Compensation Committee of the Company's Board of Directors. (c) Stock Incentives. The Executive shall be eligible to receive stock options under any stock based plan from time to time adopted by the Company (the "Stock Plans"), as from time to time determined by the Board of Directors or Stock Option Committee of the Company's Board of Directors. (d) Reimbursement of Expenses. The Company shall reimburse the Executive for all business expenses properly documented in accordance with the Company's expense reimbursement policy. (e) Other Benefits. The Executive shall be entitled to participate and shall be included in any employee benefit plan, medical/dental coverage plan, life insurance plan, disability coverage plan, or similar benefit plan of the Company now existing or established hereafter which are generally applicable to executives of the Company. 4. Termination of Employment. (a) Death or Disability. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), the employment of the Executive hereunder shall terminate and the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate as of the end of the month in which such death or disability occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in paragraph 4(e), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event the Executive: (i) has repeatedly failed to perform the Executive's duties under this Agreement, which failure is willful and deliberate; (ii) has engaged in an act or acts of dishonesty which is or are intended to result in substantial personal enrichment for the Executive; (iii) has knowingly engaged in conduct which is materially injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A) any felony (other than any felony arising out of negligence), or (B) any crime or offense involving dishonesty with respect to the Company or any of the Subsidiaries; (v) has failed to comply with the covenants contained in paragraph 5 of this Agreement; or (vi) knowingly provides materially misleading information concerning the Company to the Board of Directors of the Company or any of its Subsidiaries, any governmental body or regulatory agency or to any lender or other financing source or proposed financing source of the Company or its Subsidiaries. If the employment of the Executive is terminated by the Company for Cause, the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate, except the Executive shall receive the Base Salary through the end of the month during which such a termination occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in paragraph 4(e), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected Senior Vice President - - Finance of the Company; (ii) there is any material reduction in the scope of the Executive's authority and responsibility; (iii) there is a reduction in the Executive's Base Salary, a material reduction in the amount of Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan or employee retirement plan applicable to the Executive which is materially adverse to the Executive, or a material reduction in the other benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis/St. Paul, Minnesota metropolitan area; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason before a Change in Control (as defined below) or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Executive for Good Reason upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. In addition, in the event a Change in Control has occurred and the Executive elects upon ten (10) days prior notice to the Company to terminate employment with the Company within the sixty (60) day period following the first anniversary of the Change in Control, such termination shall be considered a termination by the Executive for Good Reason and the Executive shall be entitled to the severance benefits under paragraph 4(g) below. (d) Termination Without Cause. The Company may terminate the Executive's employment without Cause prior to the expiration of the term of this Agreement. If the employment of the Executive is terminated by the Company without Cause before a Change in Control or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Company without Cause upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. (e) Notice and Right to Cure. (i) Termination by Company for Cause. If the Company proposes to terminate the employment of the Executive for Cause under paragraph 4(b), the Company shall give written notice to the Executive specifying the reasons for such proposed determination with particularity and, in the case of a termination for Cause under paragraph 4(b)(i), the Executive shall have a reasonable opportunity to correct any curable situation to the reasonable satisfaction of the Board of Directors of the Company, which period shall be no less than thirty (30) days from the Executive's receipt of the notice of proposed termination. Notwithstanding the foregoing, the Executive's employment shall not be terminated for Cause unless and until there shall be delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than the majority of the members of the Board of Directors of the Company at a meeting called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's legal counsel, to be heard before the Board of Directors) finding that, in the opinion of the Company's Board of Directors, the Executive has engaged in conduct justifying a termination for Cause. (ii) Termination by Executive for Good Reason. If the Executive proposes to terminate the Executive's employment for Good Reason under paragraph 4(c) above (other than the last sentence of paragraph 4(c) above), the Executive shall give written notice to the Company, specifying the reason therefor with particularity. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination shall be effective on the date of such notice. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(v) above, the Company will have an opportunity to correct any curable situation to the reasonable satisfaction of the Executive within the period of time specified in the notice which shall not be less than thirty (30) days. If such correction is not so made or the circumstances or situation is such that it is not curable, the Executive may, within thirty (30) days after the expiration of the time so fixed within which to correct such situation, give written notice to the Company that the Executive's employment is terminated for Good Reason effective forthwith. (f) Severance Benefits. If the Executive is entitled to severance benefits under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a Change in Control or following twenty-four months after a Change in Control, the Executive shall be provided the following benefits (regardless of the death or disability of the Executive after the Termination Date): (i) Base Salary. The Company shall continue to pay to the Executive the Base Salary when and as such Base Salary would have been paid from the date of termination (the "Termination Date") through the end of the term of this Agreement under paragraph 2 as if such termination did not occur and there were no further automatic extensions of the term pursuant to paragraph 2 (the "Severance Period") as if the Executive continued to be employed by the Company during the Severance Period and regardless of the death or disability of the Executive subsequent to the Termination Date. (ii) Annual Bonus. If the effective date of such termination occurs before the Annual Bonus for any preceding calendar year has been paid, the Company shall, within thirty (30) days after the Termination Date, pay to the Executive the amount of the Executive's Annual Bonus for such preceding calendar year when and as it would have been paid if the Executive remained employed by the Company. In addition, for each calendar year within the Severance Period (including the calendar year in which the Termination Date occurs), the Company shall, within thirty (30) days after the end of each such calendar year, pay the Executive a bonus equal to the Deemed Bonus (as defined below). The "Deemed Bonus" shall be an amount equal to (A) prior to a Change in Control, the average of the Annual Bonus paid to the Executive for the two complete calendar years prior to the Termination Date, or (B) upon or after a Change in Control, the greater of (x) the average of the Annual Bonus paid to the Executive for the calendar year(s) after the Change in Control (including the calendar year in which a Change in Control occurs) or (y) the average of the Annual Bonus paid or payable to the Executive in respect of the two calendar years immediately preceding the calendar year in which the Change in Control occurs. (iii) Disability, Life Insurance and Medical/Dental Coverage. The Executive shall be entitled to the disability coverage, life insurance and medical/dental coverage which the Executive and the Executive's family received under paragraph 3(e) as if the Executive continued to be employed by the Company during the Severance Period; provided that if Executive obtains new employment with comparable benefits during the Severance Period, all entitlements under this paragraph 4(f)(iii) shall cease. Nothing in this paragraph shall be construed as providing Executive with coverage under any plan of the Company to which Executive would not otherwise be entitled and in the event any coverage is unavailable (e.g., if Executive is uninsurable), the Company's obligations under this paragraph may be satisfied by paying to Executive the cost of such coverage if it were available, as determined in good faith by the Company. (iv) Stock Options. Not later than thirty (30) days after the date on which the Executive's employment terminates, the Company shall pay the Executive a lump sum cash payment equal to the amount by which the fair market value (determined as of the Termination Date) of the number of shares of stock subject to any stock option granted under the Stock Plans which was not exercisable on the Termination Date and which would have become vested and exercisable during the Severance Period if the Executive had remained employed by the Company during the Severance Period. (g) Severance Benefits for Change in Control. In the event of a Change in Control and either upon or within (and including) twenty-four (24) months after such Change in Control, the Executive terminates employment for Good Reason or the Executive's employment is terminated by the Company for any reason other than Cause, then (regardless of the death or disability of the Executive after the Termination Date) the Company shall pay the Executive a lump sum cash payment within five (5) days after the Termination Date, in an amount equal to the amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of the Deemed Bonus (as defined below), and the Company shall also provide the Executive the severance benefits referred to in paragraph 4(f)(iii) as provided therein. (h) Excise Tax Gross-Up. If Executive is subject to any Excise Tax (as defined below) as a result of the severance payments and/or benefits to which Executive is entitled under paragraphs 4(f) or 4(g), the Company shall also pay the Executive the Gross-Up Payment in accordance with the following provisions: (i) Gross-Up Payment. Anything to the contrary notwithstanding, in the event it shall be determined that any payment, distribution or benefit made or provided by the Company to or for the benefit of the Executive (whether pursuant to this Agreement or otherwise) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Company shall pay the Executive in cash an amount (the "Gross-Up Payment") such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including but not limited to income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed on the Payments. (ii) Determination of Gross-Up Payment. Subject to paragraph 4(h)(iii) below, all determinations required to be made under paragraph 4(h)(i), including whether a Gross-Up Payment is required and the amount of the Gross-Up Payment, shall be made by the firm of independent public accountants selected by the Company to audit its financial statements for the year immediately preceding the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations to the Company and the Executive within thirty (30) days after the Termination Date. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required under this paragraph 4(h) (which accounting firm shall then be referred to as the "Accounting Firm"). All fees and expenses of the Accounting Firm in connection with the work it performs pursuant to this paragraph 4(h) shall be promptly paid by the Company. Any Gross-Up Payment (as determined pursuant to paragraph 4(h)(i) above) shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or a similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm, it is possible that Gross-up Payments which will not have been made by the Company should have been made ("Underpayment"). In the event that the Company exhausts its remedies pursuant to paragraph 4(h)(iii) below, and the Executive is thereafter required to make a payment of Excise Tax, the Accounting Firm shall promptly determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to the Executive within five (5) days after such determination. (iii) Contest. The Executive shall notify the Company in writing of any claim made by the Internal Revenue Service that, if successful, would require the Company to pay a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive; (C) cooperate with the Company in good faith in order effectively to contest such claim; (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 4(h)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph 4(h)(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid, and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (i) Benefits in Lieu of Severance Pay Policy. The severance benefits provided for in this paragraph 4 are in lieu of any benefits that would otherwise be provided to the Executive under the Company's severance pay policy and the Executive shall not be entitled to any benefits under the Company's severance pay policy. (j) No Funding of Severance. Nothing contained in this Agreement or otherwise shall require the Company to segregate, earmark or otherwise set aside any funds or other assets to provide for any payments required to be made under this paragraph 4 and the rights of the Executive to the severance benefits hereunder shall be solely those of a general, unsecured creditor of the Company. However, the Company may, in its discretion, deposit cash or property, or a combination of both, equal in value to all or a portion of the amounts anticipated to be payable hereunder into a trust, the assets of which are to be distributed by such times as determined by the trustee of such trust; provided that such assets shall be subject at all times to the rights of the Company's general creditors. (k) Definition of Change in Control. A "Change in Control" shall be deemed to have occurred if, prior to the expiration of the term of this Agreement: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than Allianz Life Insurance Company of North America and its affiliates or the Company or any of its Subsidiaries or any employee benefit plan of the Company or any of its Subsidiaries) becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the voting power of all of the Company's then outstanding securities, except for issuances of shares approved by a majority of the Incumbent Directors (as defined below) then in office; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (the "Incumbent Directors") together with any director (the "New Incumbent Director") whose nomination or election was approved by at least two-thirds of the Incumbent Directors and any New Incumbent Director who was previously elected, in each case who are directors at the time of the nomination or election of such director cease, for any reason to constitute at least a majority of the Board of Directors of the Company; or (iii) the shareholders of the Company approve the sale of all, or substantially all, of the business or assets of the Company or the liquidation or dissolution of the Company. 5. Confidentiality; Non-Solicitation Covenant; and Covenant Not to Compete. (a) Confidentiality. The Executive agrees that, at all times, both during the Executive's employment and after the termination thereof, the Executive shall not divulge to any other person, firm or corporation, or in any way use for the Executive's own benefit, except as required in the conduct of the business of the Company or any of its Subsidiaries or as authorized in writing on behalf of the Company, any trade secrets or confidential information of the Company or its Subsidiaries obtained during the course of the Executive's employment with the Company or its Subsidiaries. The Executive also agrees that the Executive will not, either subsequent to termination of employment or during employment, except as required in the conduct of the business of the Company or any of its Subsidiaries, or as authorized in writing on behalf of the Company, interfere with or disturb or attempt to interfere with or disturb any employment, contractual or business arrangements of the Company or any of its Subsidiaries with any of its employees, agents, suppliers, customers, reinsurers or other parties with which the Company or any of its Subsidiaries has a contractual relationship, as the case may be. (b) Non-Solicitation Covenant. While the Executive is actively employed with the Company and, in the event of a termination of employment with the Company for any reason, for a period of two years after the Termination Date, the Executive agrees that, except with the prior written permission of the Board of Directors of the Company, the Executive will not offer to hire, entice away, or in any manner attempt to persuade any officer, employee, or agent of the Company or any of the Subsidiaries to discontinue his or her relationship with the Company or any of the Subsidiaries nor will the Executive directly or indirectly solicit, divert, take away or attempt to solicit any business of the Company or any of its Subsidiaries as to which Executive has acquired any knowledge during the term of the Executive's employment with the Company. (c) Covenant Not to Compete. The Executive acknowledges and agrees with the Company that during the course of the Executive's employment with the Company, the Executive has had and will continue to have the opportunity to develop relationships with existing employees, customers and other business associates of the Company and the Subsidiaries, which relationships constitute goodwill of the Company, and the Executive acknowledges and agrees that the Company would be irreparably damaged if the Executive were to take actions that would damage or misappropriate such goodwill. The Executive acknowledges that the Company and its Subsidiaries currently engages throughout the United States (the "Territory"), the business of the development, sale, marketing and administration of life insurance, annuities and extended care insurance products (the "Subject Business"). Accordingly, during the term of the Executive's employment with the Company and (i) prior to a Change of Control, and in the case of a voluntary termination by the Executive under paragraph 4(d) or a termination by the Company for Cause under paragraph 4(b), the balance of the term of this Agreement under paragraph 2 as if no termination of employment occurred but notice of termination of the automatic extension was given either by the Executive at the time of his notice of voluntary resignation or given by the Company at the time of its notice of termination for Cause, or (ii) after a Change in Control, one year after the Termination Date (the "Noncompete Period"), the Executive shall not, directly or indirectly, enter into, engage in, assist, give or lend funds to or otherwise finance, be employed by or consult with, or have a financial or other interest in, any business which engages in the Subject Business, whether for or by himself or as an independent contractor, agent, stockholder, partner or joint venturer for any other person, provided that the aggregate ownership by the Executive of no more than two percent of the outstanding equity securities of any person, which securities are traded on a national or foreign securities exchange, quoted on the Nasdaq Stock Market or other automated quotation system or, in the case of the Company, of no more than ten percent of the Company's outstanding equity securities shall not be deemed to be giving or lending funds to, otherwise financing or having a financial interest in a competitor. In the event that any person in which the executive has any financial or other interest directly or indirectly enters into the Subject Business in the Territory during the Noncompete Period, the Executive shall divest all of his interest (other than any amount permitted under this paragraph) in such person within 30 days after such person enters into the Subject Business in the Territory. (d) Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of this paragraph 5, the Company shall have the following rights and remedies, in addition to any rights and remedies otherwise available at law or equity: (i) The right and remedy to have the provisions of this paragraph 5 specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by the Executive that any such breach or threatened breach will cause irreparable injury to the Company and the Subsidiaries and that money damages will not provide an adequate remedy to the Company and the Subsidiaries; and (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments, or other benefits, other than those payable under this Agreement, derived or received by the Executive or the enterprise in competition with the Company or any of the Subsidiaries as the result of any transactions constituting a breach of any part of this paragraph 5, and Executive agrees to account for and pay over to the Company such amounts promptly upon demand therefor. 6. Beneficiaries. In the event of the Executive's death after termination of employment, any amount or benefit payable or distributable to him pursuant to this Agreement shall be paid to the beneficiary designated by the Executive for such purpose in the last written instrument received by the Company prior to the Executive's death, if any, or, if no beneficiary has been designated, to the Executive's estate, but such designation shall not be deemed to supersede any beneficiary designation under any benefit plan of the Company. Whenever this Agreement provides for the written designation of a beneficiary or beneficiaries of the Executive, the Executive shall have the right to revoke such designation and to redesignate a beneficiary or beneficiaries by written notice to either the Company to such effect, except to the extent, if any, restricted by law. 7. Rights in the Event of Dispute. In the event of a dispute between the Company and the Executive regarding the Executive's employment or this Agreement, it is the intention of this Agreement that the dispute shall be resolved as expeditiously as possible, consistent with fairness to both sides, and that during pendency of the dispute the Executive and the Company shall be on equal footing, as follows: (a) Arbitration. Any claim or dispute relating to the Executive's employment or the terms and performance of this Agreement (other than enforcement of paragraph 5) shall be resolved by binding private arbitration before three arbitrators, and any award rendered by any arbitration panel, or a majority thereof, may be filed and a judgment obtained in any court having jurisdiction over the parties unless the relief granted in the award is delivered within ten (10) days of the award. Either party may request arbitration by written notice to the other party. Within thirty (30) days of receipt of such notice by the opposing party, each party shall appoint a disinterested arbitrator and the two arbitrators selected thereby shall appoint a third neutral arbitrator; in the event the two arbitrators cannot agree upon the third arbitrator within ten (10) days after their appointment, then the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding conducted hereunder shall be in the City of Minneapolis and shall follow the procedures set forth in the Rules of Commercial Arbitration of the American Arbitration Association, and both sides shall cooperate in as expeditious a resolution of the proceeding as is reasonable under the circumstances. The arbitration panel shall have the power to enter any relief it deems fair and just on any claim, including interim and final equitable relief, along with any procedural order that is reasonable under the circumstances. (b) Expenses of Prosecution/Defense of Claim. During the pendency of a dispute between the Company and the Executive relating to the Executive's employment or the terms or performance of this Agreement, the Company shall promptly pay the Executive's reasonable expenses of representation upon delivery of periodic billings for same, provided that (i) Executive (or a person claiming on the Executive's behalf) shall promptly repay all amounts paid hereunder at the conclusion of the dispute if the resolution thereof includes a finding that the Executive did not act in good faith in the matter in dispute or in the dispute proceeding itself, and (ii) no claim for expenses of representation shall be submitted by the Executive or any person acting on the Executive's behalf unless made in writing to the Board of Directors within one year of the performance of the services for which such claim is made. 8. No Obligation to Mitigate Damages. In the event the Executive becomes eligible to receive compensation or benefits subsequent to the termination of the Executive's employment under this Agreement, the Executive shall have no obligation to seek other employment in an effort to mitigate damages. To the extent the Executive shall accept other employment after the Executive's termination of employment, the compensation and benefits received from such employment shall not reduce the compensation and benefits otherwise due under this Agreement, except as provided in paragraph 4(f)(iii) above. 9. Other Benefits. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein, be in addition to, and not in derogation or diminution of, any benefits that Executive or the Executive's beneficiary may be entitled to receive under any other plan or program now or hereafter maintained by the Company, or its Subsidiaries. 10. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Executive, such obligations have been assumed by the successor as a matter of law. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (unless the foregoing opinion is rendered to the Executive) shall entitle the Executive to terminate the Executive's employment and to receive the payments provided for in paragraphs 4(f), 4(g) and 4(h), as the case may be, as if the Executive terminated this Agreement for Good Reason. The Executive's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Executive's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. The Company's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Company's successors and assigns, including any person which may acquire LifeUSA Insurance Company. 11. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 12. Survival. The rights and obligations of the parties pursuant to this Agreement shall survive the term of the employment to the extent that any performance is required hereunder after the expiration or termination of such term. 13. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Executive, to the Executive's last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. 14. Amendments and Construction. This Agreement may only be amended in a writing signed by the parties hereto. This Agreement shall be construed under the laws of the State of Minnesota. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By /s/Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/Bradley E. Barks ----------------------------- Bradley E. Barks EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of January 1, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and CHARLES M. KAVITSKY (the "Executive"). R E C I T A L S: WHEREAS, the Executive is now and has been the Senior Vice President of LifeUSA Insurance Company, the Company's wholly-owned stock life insurance subsidiary ("LifeUSA"), and serves as an officer and/or director of certain other subsidiaries of the Company; WHEREAS, the Executive and the Company wish to enter into this Agreement to provide for the continued employment of Executive; and WHEREAS, the Executive and the Company are willing to enter into this Agreement upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Duties. The parties hereby agree that, during the term of this Agreement as set forth in paragraph 2 below, the Executive shall be employed as a Senior Vice President of LifeUSA with the duties and responsibilities attendant to such position. In discharging such duties and responsibilities, the Executive may also serve as an executive officer and/or director of any direct or indirect subsidiary of the Company (collectively the "Subsidiaries"). The salary, other compensation and benefits provided herein may be allocated among the Company and the Subsidiaries based upon the portion of the Executive's services provided to the Company and each of the Subsidiaries, respectively, and the Executive shall assist the Company in making such allocation as the Company may reasonably request. During the term of this Agreement, the Executive shall apply on a full-time basis (allowing for usual vacations and sick leave) all of the Executive's skill and experience to the performance of the Executive's duties hereunder with the Company and the Subsidiaries. It is understood that the Executive may have other business investments and participate in charitable organizations which may, from time to time, require minor portions of Executive's time, but which shall not interfere or be inconsistent with the Executive's duties under this Agreement. The Executive shall perform the Executive's duties at the Company's principal executive offices in Minneapolis, Minnesota or at such other location as may be mutually agreed upon by the Executive and the Company; provided that the Executive shall travel to other locations at such times as may be necessary for the performance of the Executive's duties under this Agreement. 2. Term of Employment. Unless sooner terminated as provided in paragraph 4 below, the term of this Agreement shall commence on the date hereof and shall continue through December 31, 2000; provided that the term shall be automatically extended for one year on each December 31st commencing December 31, 1998 unless either party gives written notice to the other prior to the date on which the automatic extension would be effective; provided that the term shall not be extended beyond Executive's sixty-fifth (65th) birthday. 3. Compensation and Benefits. During the term of this Agreement, the Executive shall be entitled to the following compensation and benefits for service to the Company and the Subsidiaries, including service as a director of the Company or its Subsidiaries: (a) Base Salary. The Executive shall be paid a base salary at a minimum annual rate of $[1998 BASE SALARY TO BE INSERTED WHEN DETERMINED], payable in accordance with the Company's customary payroll policy, which salary shall be reviewed and may be increased from time to time at the discretion of the Board of Directors of the Company or the Compensation Committee of the Board of Directors (the "Base Salary"); provided that the amount of the Base Salary shall not be reduced after it has been increased by the Board of Directors or the Compensation Committee without the Executive's written consent. The performance of the Executive shall be reviewed at least once each calendar year which may be at the same time as any adjustment to the Base Salary of Executive. (b) Bonus. The Executive shall, in addition to the Base Salary, also be entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by the Company of performance goals established by the Board of Directors or the Compensation Committee of the Company's Board of Directors. (c) Stock Incentives. The Executive shall be eligible to receive stock options under any stock based plan from time to time adopted by the Company (the "Stock Plans"), as from time to time determined by the Board of Directors or Stock Option Committee of the Company's Board of Directors. (d) Reimbursement of Expenses. The Company shall reimburse the Executive for all business expenses properly documented in accordance with the Company's expense reimbursement policy. (e) Other Benefits. The Executive shall be entitled to participate and shall be included in any employee benefit plan, medical/dental coverage plan, life insurance plan, disability coverage plan, or similar benefit plan of the Company now existing or established hereafter which are generally applicable to executives of the Company. 4. Termination of Employment. (a) Death or Disability. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), the employment of the Executive hereunder shall terminate and the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate as of the end of the month in which such death or disability occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in paragraph 4(e), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event the Executive: (i) has repeatedly failed to perform the Executive's duties under this Agreement, which failure is willful and deliberate; (ii) has engaged in an act or acts of dishonesty which is or are intended to result in substantial personal enrichment for the Executive; (iii) has knowingly engaged in conduct which is materially injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A) any felony (other than any felony arising out of negligence), or (B) any crime or offense involving dishonesty with respect to the Company or any of the Subsidiaries; (v) has failed to comply with the covenants contained in paragraph 5 of this Agreement; or (vi) knowingly provides materially misleading information concerning the Company to the Board of Directors of the Company or any of its Subsidiaries, any governmental body or regulatory agency or to any lender or other financing source or proposed financing source of the Company or its Subsidiaries. If the employment of the Executive is terminated by the Company for Cause, the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate, except the Executive shall receive the Base Salary through the end of the month during which such a termination occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in paragraph 4(e), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected Senior Vice President of LifeUSA; (ii) there is any material reduction in the scope of the Executive's authority and responsibility; (iii) there is a reduction in the Executive's Base Salary, a material reduction in the amount of Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan or employee retirement plan applicable to the Executive which is materially adverse to the Executive, or a material reduction in the other benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis/St. Paul, Minnesota metropolitan area; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason before a Change in Control (as defined below) or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Executive for Good Reason upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. In addition, in the event a Change in Control has occurred and the Executive elects upon ten (10) days prior notice to the Company to terminate employment with the Company within the sixty (60) day period following the first anniversary of the Change in Control, such termination shall be considered a termination by the Executive for Good Reason and the Executive shall be entitled to the severance benefits under paragraph 4(g) below. (d) Termination Without Cause. The Company may terminate the Executive's employment without Cause prior to the expiration of the term of this Agreement. If the employment of the Executive is terminated by the Company without Cause before a Change in Control or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Company without Cause upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. (e) Notice and Right to Cure. (i) Termination by Company for Cause. If the Company proposes to terminate the employment of the Executive for Cause under paragraph 4(b), the Company shall give written notice to the Executive specifying the reasons for such proposed determination with particularity and, in the case of a termination for Cause under paragraph 4(b)(i), the Executive shall have a reasonable opportunity to correct any curable situation to the reasonable satisfaction of the Board of Directors of the Company, which period shall be no less than thirty (30) days from the Executive's receipt of the notice of proposed termination. Notwithstanding the foregoing, the Executive's employment shall not be terminated for Cause unless and until there shall be delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than the majority of the members of the Board of Directors of the Company at a meeting called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's legal counsel, to be heard before the Board of Directors) finding that, in the opinion of the Company's Board of Directors, the Executive has engaged in conduct justifying a termination for Cause. (ii) Termination by Executive for Good Reason. If the Executive proposes to terminate the Executive's employment for Good Reason under paragraph 4(c) above (other than the last sentence of paragraph 4(c) above), the Executive shall give written notice to the Company, specifying the reason therefor with particularity. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(i), (ii), (iii) or (iv) above, the termination shall be effective on the date of such notice. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(v) above, the Company will have an opportunity to correct any curable situation to the reasonable satisfaction of the Executive within the period of time specified in the notice which shall not be less than thirty (30) days. If such correction is not so made or the circumstances or situation is such that it is not curable, the Executive may, within thirty (30) days after the expiration of the time so fixed within which to correct such situation, give written notice to the Company that the Executive's employment is terminated for Good Reason effective forthwith. (f) Severance Benefits. If the Executive is entitled to severance benefits under this paragraph 4(f) pursuant to paragraph 4(c) or (d) prior to a Change in Control or following twenty-four months after a Change in Control, the Executive shall be provided the following benefits (regardless of the death or disability of the Executive after the Termination Date): (i) Base Salary. The Company shall continue to pay to the Executive the Base Salary when and as such Base Salary would have been paid from the date of termination (the "Termination Date") through the end of the term of this Agreement under paragraph 2 as if such termination did not occur and there were no further automatic extensions of the term pursuant to paragraph 2 (the "Severance Period") as if the Executive continued to be employed by the Company during the Severance Period and regardless of the death or disability of the Executive subsequent to the Termination Date. (ii) Annual Bonus. If the effective date of such termination occurs before the Annual Bonus for any preceding calendar year has been paid, the Company shall, within thirty (30) days after the Termination Date, pay to the Executive the amount of the Executive's Annual Bonus for such preceding calendar year when and as it would have been paid if the Executive remained employed by the Company. In addition, for each calendar year within the Severance Period (including the calendar year in which the Termination Date occurs), the Company shall, within thirty (30) days after the end of each such calendar year, pay the Executive a bonus equal to the Deemed Bonus (as defined below). The "Deemed Bonus" shall be an amount equal to (A) prior to a Change in Control, the average of the Annual Bonus paid to the Executive for the two complete calendar years prior to the Termination Date, or (B) upon or after a Change in Control,the greater of (x) the average of the Annual Bonus paid to the Executive for the calendar year(s) after the Change in Control (including the calendar year during which a Change in Control occurs) or (y) the average of the Annual Bonus paid or payable to the Executive in respect of the two calendar years immediately preceding the calendar year in which the Change in Control occurs. (iii) Disability, Life Insurance and Medical/Dental Coverage. The Executive shall be entitled to the disability coverage, life insurance and medical/dental coverage which the Executive and the Executive's family received under paragraph 3(e) as if the Executive continued to be employed by the Company during the Severance Period; provided that if Executive obtains new employment with comparable benefits during the Severance Period, all entitlements under this paragraph 4(f)(iii) shall cease. Nothing in this paragraph shall be construed as providing Executive with coverage under any plan of the Company to which Executive would not otherwise be entitled and in the event any coverage is unavailable (e.g., if Executive is uninsurable), the Company's obligations under this paragraph may be satisfied by paying to Executive the cost of such coverage if it were available, as determined in good faith by the Company. (iv) Stock Options. Not later than thirty (30) days after the date on which the Executive's employment terminates, the Company shall pay the Executive a lump sum cash payment equal to the amount by which the fair market value (determined as of the Termination Date) of the number of shares of stock subject to any stock option granted under the Stock Plans which was not exercisable on the Termination Date and which would have become vested and exercisable during the Severance Period if the Executive had remained employed by the Company during the Severance Period. (g) Severance Benefits for Change in Control. In the event of a Change in Control and either upon or within (and including) twenty-four (24) months after such Change in Control, the Executive terminates employment for Good Reason or the Executive's employment is terminated by the Company for any reason other than Cause, then (regardless of the death or disability of the Executive after the Termination Date) the Company shall pay the Executive a lump sum cash payment within five (5) days after the Termination Date, in an amount equal to the amounts referred to in paragraph 4(f)(i), (ii) and (iv), plus the amount of the Deemed Bonus (as defined below), and the Company shall also provide the Executive the severance benefits referred to in paragraph 4(f)(iii) as provided therein. (h) Excise Tax Gross-Up. If Executive is subject to any Excise Tax (as defined below) as a result of the severance payments and/or benefits to which Executive is entitled under paragraphs 4(f) or 4(g), the Company shall also pay the Executive the Gross-Up Payment in accordance with the following provisions: (i) Gross-Up Payment. Anything to the contrary notwithstanding, in the event it shall be determined that any payment, distribution or benefit made or provided by the Company to or for the benefit of the Executive (whether pursuant to this Agreement or otherwise) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Company shall pay the Executive in cash an amount (the "Gross-Up Payment") such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including but not limited to income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed on the Payments. (ii) Determination of Gross-Up Payment. Subject to paragraph 4(h)(iii) below, all determinations required to be made under paragraph 4(h)(i), including whether a Gross-Up Payment is required and the amount of the Gross-Up Payment, shall be made by the firm of independent public accountants selected by the Company to audit its financial statements for the year immediately preceding the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations to the Company and the Executive within thirty (30) days after the Termination Date. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required under this paragraph 4(h) (which accounting firm shall then be referred to as the "Accounting Firm"). All fees and expenses of the Accounting Firm in connection with the work it performs pursuant to this paragraph 4(h) shall be promptly paid by the Company. Any Gross-Up Payment (as determined pursuant to paragraph 4(h)(i) above) shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or a similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm, it is possible that Gross-up Payments which will not have been made by the Company should have been made ("Underpayment"). In the event that the Company exhausts its remedies pursuant to paragraph 4(h)(iii) below, and the Executive is thereafter required to make a payment of Excise Tax, the Accounting Firm shall promptly determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to the Executive within five (5) days after such determination. (iii) Contest. The Executive shall notify the Company in writing of any claim made by the Internal Revenue Service that, if successful, would require the Company to pay a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive; (C) cooperate with the Company in good faith in order effectively to contest such claim; (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 4(h)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph 4(h)(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph 4(h)(iii), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid, and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (i) Benefits in Lieu of Severance Pay Policy. The severance benefits provided for in this paragraph 4 are in lieu of any benefits that would otherwise be provided to the Executive under the Company's severance pay policy and the Executive shall not be entitled to any benefits under the Company's severance pay policy. (j) No Funding of Severance. Nothing contained in this Agreement or otherwise shall require the Company to segregate, earmark or otherwise set aside any funds or other assets to provide for any payments required to be made under this paragraph 4 and the rights of the Executive to the severance benefits hereunder shall be solely those of a general, unsecured creditor of the Company. However, the Company may, in its discretion, deposit cash or property, or a combination of both, equal in value to all or a portion of the amounts anticipated to be payable hereunder into a trust, the assets of which are to be distributed by such times as determined by the trustee of such trust; provided that such assets shall be subject at all times to the rights of the Company's general creditors. (k) Definition of Change in Control. A "Change in Control" shall be deemed to have occurred if, prior to the expiration of the term of this Agreement: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than Allianz Life Insurance Company of North America and its affiliats or the Company or any of its Subsidiaries or any employee benefit plan of the Company or any of its Subsidiaries) becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the voting power of all of the Company's then outstanding securities, except for issuances of shares approved by a majority of the Incumbent Directors (as defined below) then in office; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (the "Incumbent Directors") together with any director (the "New Incumbent Director") whose nomination or election was approved by at least two-thirds of the Incumbent Directors and any New Incumbent Director who was previously elected, in each case who are directors at the time of the nomination or election of such director cease, for any reason to constitute at least a majority of the Board of Directors of the Company; or (iii) the shareholders of the Company approve the sale of all, or substantially all, of the business or assets of the Company or the liquidation or dissolution of the Company. 5. Confidentiality; Non-Solicitation Covenant; and Covenant Not to Compete. (a) Confidentiality. The Executive agrees that, at all times, both during the Executive's employment and after the termination thereof, the Executive shall not divulge to any other person, firm or corporation, or in any way use for the Executive's own benefit, except as required in the conduct of the business of the Company or any of its Subsidiaries or as authorized in writing on behalf of the Company, any trade secrets or confidential information of the Company or its Subsidiaries obtained during the course of the Executive's employment with the Company or its Subsidiaries. The Executive also agrees that the Executive will not, either subsequent to termination of employment or during employment, except as required in the conduct of the business of the Company or any of its Subsidiaries, or as authorized in writing on behalf of the Company, interfere with or disturb or attempt to interfere with or disturb any employment, contractual or business arrangements of the Company or any of its Subsidiaries with any of its employees, agents, suppliers, customers, reinsurers or other parties with which the Company or any of its Subsidiaries has a contractual relationship, as the case may be. (b) Non-Solicitation Covenant. While the Executive is actively employed with the Company and, in the event of a termination of employment with the Company for any reason, for a period of two years after the Termination Date, the Executive agrees that, except with the prior written permission of the Board of Directors of the Company, the Executive will not offer to hire, entice away, or in any manner attempt to persuade any officer, employee, or agent of the Company or any of the Subsidiaries to discontinue his or her relationship with the Company or any of the Subsidiaries nor will the Executive directly or indirectly solicit, divert, take away or attempt to solicit any business of the Company or any of its Subsidiaries as to which Executive has acquired any knowledge during the term of the Executive's employment with the Company. (c) Covenant Not to Compete. The Executive acknowledges and agrees with the Company that during the course of the Executive's employment with the Company, the Executive has had and will continue to have the opportunity to develop relationships with existing employees, customers and other business associates of the Company and the Subsidiaries, which relationships constitute goodwill of the Company, and the Executive acknowledges and agrees that the Company would be irreparably damaged if the Executive were to take actions that would damage or misappropriate such goodwill. The Executive acknowledges that the Company and its Subsidiaries currently engages throughout the United States (the "Territory"), the business of the development, sale, marketing and administration of life insurance, annuities and extended care insurance products (the "Subject Business"). Accordingly, during the term of the Executive's employment with the Company and (i) prior to a Change of Control and in the case of a voluntary termination by the Executive under paragraph 4(d) or a termination by the Company for Cause under paragraph 4(b), the balance of the term of this Agreement under paragraph 2 as if no termination of employment occurred but notice of termination of the automatic extension was given either by the Executive at the time of his notice of voluntary resignation or given by the Company at the time of its notice of termination for Cause, or (ii) after a Change in Control, one year after the Termination Date (the "Noncompete Period"), the Executive shall not, directly or indirectly, enter into, engage in, assist, give or lend funds to or otherwise finance, be employed by or consult with, or have a financial or other interest in, any business which engages in the Subject Business, whether for or by himself or as an independent contractor, agent, stockholder, partner or joint venturer for any other person, provided that the aggregate ownership by the Executive of no more than two percent of the outstanding equity securities of any person, which securities are traded on a national or foreign securities exchange, quoted on the Nasdaq Stock Market or other automated quotation system or, in the case of the Company, of no more than ten percent of the Company's outstanding equity securities shall not be deemed to be giving or lending funds to, otherwise financing or having a financial interest in a competitor. In the event that any person in which the executive has any financial or other interest directly or indirectly enters into the Subject Business in the Territory during the Noncompete Period, the Executive shall divest all of his interest (other than any amount permitted under this paragraph) in such person within 30 days after such person enters into the Subject Business in the Territory. (d) Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of this paragraph 5, the Company shall have the following rights and remedies, in addition to any rights and remedies otherwise available at law or equity: (i) The right and remedy to have the provisions of this paragraph 5 specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by the Executive that any such breach or threatened breach will cause irreparable injury to the Company and the Subsidiaries and that money damages will not provide an adequate remedy to the Company and the Subsidiaries; and (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments, or other benefits, other than those payable under this Agreement, derived or received by the Executive or the enterprise in competition with the Company or any of the Subsidiaries as the result of any transactions constituting a breach of any part of this paragraph 5, and Executive agrees to account for and pay over to the Company such amounts promptly upon demand therefor. 6. Beneficiaries. In the event of the Executive's death after termination of employment, any amount or benefit payable or distributable to him pursuant to this Agreement shall be paid to the beneficiary designated by the Executive for such purpose in the last written instrument received by the Company prior to the Executive's death, if any, or, if no beneficiary has been designated, to the Executive's estate, but such designation shall not be deemed to supersede any beneficiary designation under any benefit plan of the Company. Whenever this Agreement provides for the written designation of a beneficiary or beneficiaries of the Executive, the Executive shall have the right to revoke such designation and to redesignate a beneficiary or beneficiaries by written notice to either the Company to such effect, except to the extent, if any, restricted by law. 7. Rights in the Event of Dispute. In the event of a dispute between the Company and the Executive regarding the Executive's employment or this Agreement, it is the intention of this Agreement that the dispute shall be resolved as expeditiously as possible, consistent with fairness to both sides, and that during pendency of the dispute the Executive and the Company shall be on equal footing, as follows: (a) Arbitration. Any claim or dispute relating to the Executive's employment or the terms and performance of this Agreement (other than enforcement of paragraph 5) shall be resolved by binding private arbitration before three arbitrators, and any award rendered by any arbitration panel, or a majority thereof, may be filed and a judgment obtained in any court having jurisdiction over the parties unless the relief granted in the award is delivered within ten (10) days of the award. Either party may request arbitration by written notice to the other party. Within thirty (30) days of receipt of such notice by the opposing party, each party shall appoint a disinterested arbitrator and the two arbitrators selected thereby shall appoint a third neutral arbitrator; in the event the two arbitrators cannot agree upon the third arbitrator within ten (10) days after their appointment, then the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding conducted hereunder shall be in the City of Minneapolis and shall follow the procedures set forth in the Rules of Commercial Arbitration of the American Arbitration Association, and both sides shall cooperate in as expeditious a resolution of the proceeding as is reasonable under the circumstances. The arbitration panel shall have the power to enter any relief it deems fair and just on any claim, including interim and final equitable relief, along with any procedural order that is reasonable under the circumstances. (b) Expenses of Prosecution/Defense of Claim. During the pendency of a dispute between the Company and the Executive relating to the Executive's employment or the terms or performance of this Agreement, the Company shall promptly pay the Executive's reasonable expenses of representation upon delivery of periodic billings for same, provided that (i) Executive (or a person claiming on the Executive's behalf) shall promptly repay all amounts paid hereunder at the conclusion of the dispute if the resolution thereof includes a finding that the Executive did not act in good faith in the matter in dispute or in the dispute proceeding itself, and (ii) no claim for expenses of representation shall be submitted by the Executive or any person acting on the Executive's behalf unless made in writing to the Board of Directors within one year of the performance of the services for which such claim is made. 8. No Obligation to Mitigate Damages. In the event the Executive becomes eligible to receive compensation or benefits subsequent to the termination of the Executive's employment under this Agreement, the Executive shall have no obligation to seek other employment in an effort to mitigate damages. To the extent the Executive shall accept other employment after the Executive's termination of employment, the compensation and benefits received from such employment shall not reduce the compensation and benefits otherwise due under this Agreement, except as provided in paragraph 4(f)(iii) above. 9. Other Benefits. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein, be in addition to, and not in derogation or diminution of, any benefits that Executive or the Executive's beneficiary may be entitled to receive under any other plan or program now or hereafter maintained by the Company, or its Subsidiaries. 10. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Executive, such obligations have been assumed by the successor as a matter of law. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (unless the foregoing opinion is rendered to the Executive) shall entitle the Executive to terminate the Executive's employment and to receive the payments provided for in paragraph 4(f), 4(g) and 4(h), as the case may be, as if the Executive terminated this Agreement for Good Reason. The Executive's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Executive's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. The Company's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Company's successors and assigns, including any person which may acquire LifeUSA. 11. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 12. Survival. The rights and obligations of the parties pursuant to this Agreement shall survive the term of the employment to the extent that any performance is required hereunder after the expiration or termination of such term. 13. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Executive, to the Executive's last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. 14. Amendments and Construction. This Agreement may only be amended in a writing signed by the parties hereto. This Agreement shall be construed under the laws of the State of Minnesota. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By /s/Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/Charles M. Kavitsky ----------------------------- Charles M. Kavitsky EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT State or other jurisdiction of Name of subsidiary incorporation or organization LifeUSA Insurance Company Minnesota LifeUSA Securities, Inc. Minnesota LifeUSA Marketing, Inc. Minnesota EX-23 4 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-26841) pertaining to the Life USA Holding, Inc. 1990 Stock Option Plan and the Registration Statement (Form S-8 No. 33-38821) pertaining to the Life USA Holding, Inc. Employee Savings Plan of our report dated January 30, 1998, with respect to the consolidated financial statements included in this Annual Report and Form 10-K/A of Life USA Holding, Inc. for the year ended December 31, 1997. /s/ Ernst & Young LLP Minneapolis, Minnesota March 13, 1998 EX-24 5 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and each of the undersigned directors of the Company, hereby constitutes and appoints Robert W. MacDonald and Mark A. Zesbaugh and each of them (with full power to each of them to act alone) its/his true and lawful attorney-in-fact and agent, for it/him and on its/his behalf in its/his name, place and stead, in any and all capacities to sign, execute, affix its/his seal thereto and file the Annual Report on Form 10-K for the year ended December 31, 1997 under the Securities Exchange Act of 1934, as amended, including any amendment or amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority. There is hereby granted to said attorneys, and each of them, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in respect of the foregoing as fully as it/he or itself/himself might or could do if personally present, thereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same instrument and any of the undersigned directors may execute this Power of Attorney by signing any such counterpart. IN WITNESS WHEREOF, LIFE USA HOLDING, INC. has caused this Power of Attorney to be executed in its name by its President on the 6th day of March, 1998. LIFE USA HOLDING, INC. By /s/ Margery G. Hughes ---------------------------- Margery G. Hughes, President The undersigned directors of LIFE USA HOLDING, INC. have hereunto set their hands as of the 6th day of March, 1998. /s/ Hugh Alexander /s/ Daniel J. Rourke - ---------------------------- ---------------------------- Hugh Alexander Daniel J. Rourke /s/ Jack H. Blaine /s/ Donald J. Urban - ---------------------------- ---------------------------- Jack H. Blaine Donald J. Urban /s/ Ralph Strangis /s/ Mark A. Zesbaugh - ---------------------------- ---------------------------- Ralph Strangis Mark A. Zesbaugh /s/ Margery G. Hughes /s/ Barbara J. Lautzenheiser - ---------------------------- ---------------------------- Margery G. Hughes Barbara J. Lautzenheiser /s/ Robert W. MacDonald - ---------------------------- Robert W. MacDonald EX-27.1 6 FINANCIAL DATA SCHEDULE
7 1,000 YEAR 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 882,159 878,744 902,487 852,142 1,249,488 1,183,501 1,060,515 1,033,462 1,289,621 1,214,351 1,072,398 1,023,197 0 0 0 0 0 0 0 0 0 0 0 0 2,160,650 2,090,167 1,989,418 1,910,180 34,139 57,014 42,735 38,106 0 0 0 0 215,097 218,262 222,183 231,585 5,062,774 4,913,311 4,622,231 4,474,054 4,686,172 4,538,111 4,281,027 4,157,469 0 0 0 0 0 0 0 0 9,208 13,869 13,072 8,618 36,030 36,030 36,030 36,030 0 0 0 0 0 0 0 0 227 220 216 214 222,173 203,708 185,942 168,482 5,062,774 4,913,311 4,622,231 4,474,054 0 0 0 0 144,097 106,379 69,584 34,306 4,347 4,071 1,234 1,234 221,459 167,905 100,350 43,812 132,508 97,950 63,325 31,144 27,789 21,460 14,029 6,581 166,535 126,728 76,986 33,547 43,071 32,217 16,828 8,080 16,093 12,113 6,352 2,935 26,978 20,104 10,476 5,145 0 0 0 0 0 0 0 0 0 0 0 0 26,978 20,104 10,476 5,145 1.24 .93 .49 .24 1.11 .83 .45 .22 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.2 7 FINANCIAL DATA SCHEDULE
7 1,000 YEAR 9-MOS 6-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 878,279 839,393 807,095 796,446 1,003,197 986,142 946,734 925,127 1,013,761 981,284 938,531 931,699 0 0 0 0 0 0 0 0 0 0 0 0 1,905,304 1,848,783 1,776,136 1,741,920 20,989 31,049 32,542 33,531 0 0 0 0 212,138 219,122 215,456 204,166 4,386,723 4,301,205 4,120,547 3,977,021 4,078,621 3,994,015 3,834,694 3,692,591 0 0 0 0 0 0 0 0 5,381 7,643 5,410 3,483 36,030 36,030 36,030 36,030 0 0 0 0 0 0 0 0 210 209 208 203 172,405 159,741 151,474 151,209 4,386,723 4,301,205 4,120,547 3,977,021 0 0 0 0 129,412 95,519 62,571 30,926 1,791 1,671 1,671 1,679 185,695 137,825 86,741 40,949 116,931 87,524 57,833 28,899 24,495 18,571 12,911 6,168 138,407 101,970 63,966 31,165 37,065 26,950 16,273 7,322 13,611 9,900 5,986 2,701 23,454 17,050 10,287 4,621 0 0 0 0 0 0 0 0 0 0 0 0 23,454 17,050 10,287 4,621 1.13 .82 .50 .23 1.04 .76 .46 .21 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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