-----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, NxufblfVhxJOqRQCByWE4XQ396sWzw4OtrsHURT6enzIePijjh7b+HZ9eOr3SBJ0 Wua+tq+3ZJ372SftaAsJmw== 0000897101-99-000242.txt : 19990323 0000897101-99-000242.hdr.sgml : 19990323 ACCESSION NUMBER: 0000897101-99-000242 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 27 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 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 SEC ACT: SEC FILE NUMBER: 000-18485 FILM NUMBER: 99569378 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 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, l998. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to ___________________. Commission file number 0-18485. Life USA HOLDING, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1578384 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Suite 95, Interchange North Building 300 South Highway 169 Minneapolis, Minnesota 55426 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612)-546-7386 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report to Shareholders and Form 10-K or any amendment to this Annual Report to Shareholders and Form 10-K. [ ] The aggregate market value of the voting stock (17,603,796 shares) held by non-affiliates of the registrant as of February 12, 1999 was $201,387,426. The number of shares outstanding of the issuer's classes of common stock as of February 12, l999: Common stock, $.01 Par Value - 17,603,796 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual shareholders meeting to be held April 13, 1999 are incorporated by reference into Part III. CONTENTS PAGE ----- Financial Summary ................... 1 Letter to Shareholders .............. 2 Selected Consolidated Financial and Operating Data ..................... 6 General ............................. 8 Management's Discussion & Analysis -- Consolidated ....................... 16 Management's Discussion & Analysis -- Segment Reporting .................. 29 Consolidated Financial Statements and Notes .............................. 36 Form 10-K and other corporate information ........................ 65 Topical cross-reference ............. 65 ABOUT THE COMPANY Life USA Holding, Inc. is a national financial services holding and marketing company with $5.46 billion in consolidated assets and three wholly-owned subsidiaries. LifeUSA Insurance Company, its largest and most significant wholly-owned subsidiary, is licensed to write and sell life insurance and several forms of annuities, and is represented by over 140 marketing organizations and 70,000 independent agents nationwide. LifeUSA Marketing, Inc. conducts a variety of marketing activities, including acquiring equity interests in independent marketing organizations. LifeUSA Securities, Inc. is a retail broker-dealer that distributes a full range of securities products, including non-proprietary mutual funds, variable life insurance and annuity contracts, and processes general securities transactions. Life USA Holding, Inc. common stock trades on The Nasdaq Stock Market under the symbol LUSA. HIGHLIGHTS OF 1998 o Consolidated total revenues were $362.6 million. o Consolidated net income was $21.9 million. o Collected premiums and deposits (including business produced for Allianz Life) were $1.06 billion. o Consolidated assets increased to $5.46 billion at December 31, 1998. o LifeUSA Insurance Company's A.M. Best rating was upgraded to A- (Excellent). o LifeUSA Insurance Company's Moody's Investors Service rating was upgraded to A3 (Strong). o Agreement announced in January 1998 with Allianz Life to invest $100 million in LifeUSA over five years. o LTCAmerica Holding, Inc. was formed in July 1998. o LifeUSA Marketing, Inc. acquired minority interests in Life Sales LLC in March 1998 and Signature Financial Services, Inc. in April 1998. o Life USA Holding, Inc. acquired a minority interest in Windsor Financial Group, LLC in April 1998. o LifeUSA Marketing, Inc. recruited over 20,000 new agents. o Life USA Holding, Inc. paid dividends of 2.5 cents per share to shareholders in the second, third and fourth quarters of 1998. o In July 1998, the Company announced that its Board of Directors authorized a program to repurchase up to four million shares of its common stock through periodic purchases in the marketplace. o LifeUSA Insurance ranked fourth in sales of equity-indexed annuity products. FINANCIAL SUMMARY FINANCIAL SUMMARY
PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 CHANGE - ---------------------------------------------------- --------------- --------------- ------------ Consolidated Results of Operations Revenues .......................................... $ 362,648 $ 369,903 (2)% Net income ........................................ 21,907 26,978 (19) Net operating income .............................. 20,782 26,078 (20) Consolidated Financial Position Total assets ...................................... $ 5,458,719 $ 5,062,774 8% Invested assets ................................... 2,301,333 2,165,786 6 Debt .............................................. 20,898 41,030 (49) Shareholders' equity (excluding SFAS 115) ......... 266,551 214,251 24 Financial Ratios Return on invested assets ......................... .95% 1.25% -- Return on equity (excluding SFAS 115) ............. 8.22% 12.59% -- Debt to equity (excluding SFAS 115) ............... 7.84% 19.15% -- Per Share Data Diluted net income per share ...................... $ .83 $ 1.11 (25)% Diluted net operating income per share ............ .79 1.07 (26) Book value (excluding SFAS 115) ................... 10.76 9.41 14 Adjusted weighted-average shares .................. 26,426,291 25,160,437 5 Shares issued, outstanding and to be issued ....... 24,776,517 22,759,288 9 Share price High 1st Quarter ..................................... $ 17.56 $ 11.88 2nd Quarter ..................................... 17.00 14.25 3rd Quarter ..................................... 14.00 17.25 4th Quarter ..................................... 13.75 18.00 Low 1st Quarter ..................................... 12.50 9.00 2nd Quarter ..................................... 11.13 9.13 3rd Quarter ..................................... 10.75 13.75 4th Quarter ..................................... 9.50 16.00
[BAR CHARTS] TOTAL REVENUES NET INCOME INVESTED ASSETS PREMIUM & DEPOSITS $ MILLIONS $ MILLIONS $ BILLIONS $ BILLIONS 94 206 94 14 94 1.2 94 0.9 95 273 95 19 95 1.8 95 1.0 96 317 96 23 96 1.9 96 1.1 97 370 97 27 97 2.2 97 1.3 98 363 98 22 98 2.3 98 1.1 BOOK VALUE PER SHARE (EXCLUDING SFAS 115) DOLLARS 94 6.14 95 7.09 96 8.07 97 9.41 98 10.76 1 Life USA Holding, Inc. LETTER TO SHAREHOLDERS LETTER TO SHAREHOLDERS It may be a stretch to suggest that a year in which both sales and net income declined was a good year, but let me try. Of course, no one involved in the management of Life USA (the Company) is ever satisfied with disappointing financial results. And, despite our best efforts, the cold truth is that in 1998 consolidated net income declined 19% to $21.9 million or $.83 per share, compared to $27.0 million or $1.11 per share for 1997. The principal reason for the reduced earnings was an 18% decline in 1998 collected premiums to $1.06 billion in 1998 from $1.29 billion in 1997. Actually, net income would have been reduced even more had it not been for the extraordinary efforts of our president and chief operating officer, Maggie Hughes, the senior management of the company and the dedicated home office owners who worked diligently and successfully to control expenses. In 1998, consolidated operating expenses increased only 2% to $63.6 million, compared to $62.4 million for 1997. Total consolidated expenses increased minimally in 1998 to $327.5 million, from $326.8 million in 1997. What then, you may ask, occurred during 1998 to offset the weak financial results, and make the year a success? Well, there were a number of accomplishments that we believe will have a decided impact on future results. First of all, the collected premium results of 1998 should not be discounted. In the worst possible environment for the sale of traditional fixed annuities, the coordinated efforts of our field force, marketing company and the entire home office support staff resulted in over $1 billion of new premium. That is a remarkable accomplishment, especially in light of projections that total industry production for fixed annuities declined 30% in 1998. The year got off to a good start with the announcement in January 1998 of an enhanced relationship with Allianz Life Insurance Company of North America (Allianz Life). In exchange for the extension of the marketing, administration and reinsurance relationship with the Company, Allianz Life agreed to provide the Company with a sequentially timed equity placement (STEP) of $100 million. Every six months, over a five-year period, Allianz Life will provide the Company with $10 million of fresh capital. This will be accomplished either by the purchase of newly issued common stock or a convertible debenture. In either case, the terms of purchase are quite favorable to the Company. The transaction with Allianz Life is important in that it assures the Company of a reliable source of capital to support future growth. During 1998, the A.M. Best Company increased the rating of LifeUSA Insurance Company (LifeUSA Insurance) from B++ to A-, and Moody's Investment Services upgraded its rating of LifeUSA Insurance from Baa3 to A3. The enhanced ratings for the company offer concrete evidence of growing financial maturity and stability. During 1998, a record total of 20,752 new independent agents were contracted with LifeUSA Insurance. As these agents become familiar with LifeUSA Insurance's products and services, they form a basis for future premium growth. With over 70,000 agents under contract, LifeUSA Insurance has one of the most extensive agent distribution systems in the industry. In addition, during 1998, LifeUSA Marketing made equity investments in two major national marketing groups. The investments made in agent marketing companies are designed to increase current production and assure continued access to the production for years to come. On the financial side, 1998 was the year in which the Company declared the first shareholder dividend of 2.5 cents per quarter, and the board of directors authorized the company to repurchase up to four million shares of the Company's common stock. With the cost of capital at less than 5% and shares trading well below what the company believes to be the fair value of the stock, it was advantageous to existing shareholders to repurchase the Company's stock on the open market. At the end of 1998, a total of 1.8 million shares had been repurchased. Probably the most significant activities of 1998 revolved around product development. Over the past few years, as interest rates declined to historic lows and the stock market rose to historic highs, many financial analysts discounted the Company as a mono-line product (fixed annuities) company that would have a difficult time growing. For the most part, the criticism was valid and recognized by management. At the time, there Life USA Holding, Inc. 2 LETTER TO SHAREHOLDERS were two choices: change the product mix by developing variable annuity and life insurance products or maintain the current product mix and attempt to offset a shrinking fixed annuity market by expanding market share. Not willing to commit the capital and resources required to develop the manufacturing, administrative and distribution capabilities needed to enter the variable market (dominated by the largest companies) as a Johnny-come-lately, management opted for the second option. While hoping (praying) to see the environment for the sale of fixed annuities improve, management set out to expand the Company's share of a shrinking market. The strategy required aggressive recruiting of agents and investments in national marketing organizations. To a point, the strategy was successful. For the past four years, as other fixed annuity providers have either exited the market or experienced significant de-growth, the Company has "held its own," producing over $1 billion of premium each year. But, we seek to do more than "hold our own." With that in mind, LifeUSA Insurance has developed a series of products that we believe will be attractive, even in an environment of low interest rates and a robust stock market. Make no mistake, these products are fixed annuities, but they are structured in a way to allow the annuity holder to enhance the value of the annuity by participating in a portion of the growth in the S&P 500 Index. This is accomplished with the use of "options" in the S&P Index. Since these are still fixed annuities with principal and interest rates guaranteed, the policyholder is spared the normal downside risk associated with equity investments. While these products, under the generic name of "equity-indexed" annuities, have been on the market for a number of years, LifeUSA Insurance intends to introduce a new generation of products in 1999. The new products are designed to be aggressors in the marketplace, taking business away from the equity market. In 1998, the sale of equity-indexed products accounted for over 30% of total LifeUSA Insurance sales. In terms of premium production of equity-indexed products, LifeUSA Insurance ranks among the top five companies in the industry. Using the new products as the primary weapons, LifeUSA Insurance intends to take equity-indexed annuities to a new level in 1999, both in terms of benefits offered the consumer and total production. The goal is to become the industry leader in equity-indexed annuities. The new type of equity-indexed product developed by LifeUSA Insurance is the PowerHouse. The PowerHouse has the advantage of combining all the most popular features of various equity-indexed annuities into one product. In addition, LifeUSA Insurance will be the first company to take the concept of indexing and apply it to the payouts received by the annuitant. Now the annuitant will have the option to participate in the growth of the S&P 500 Index, even while receiving benefits from the annuity. To meet the growing needs of those retiring now, LifeUSA Insurance has developed an innovative single-premium, immediate annuity. The product, called WealthCare, offers three benefits not available from any other single-premium, immediate annuity. Those benefits are a death benefit, annual payouts indexed to the S&P 500 Index (with no downside risk) and an increase in benefits should the annuitant become sick or disabled prior to death. With the new equity-indexed products and the unique innovations applied to them, LifeUSA Insurance becomes an even more potent force in the annuity market and now will be able to compete heads-up against variable products. No longer can LifeUSA Insurance be considered a mono-line annuity product company. While equity-indexed products are certainly not investments per se, as are variable annuities, such products are designed to compete effectively in a low interest rate, rising stock market environment. Equity-indexed products also offer the advantage of being less costly to administer (they use the same system as traditional fixed annuities), and since agents are not required to have a securities license to sell the product, the company can use the existing distribution system. The broad distribution system of LifeUSA Insurance gives the company a tremendous advantage in marketing equity-indexed products. The Company is now well-positioned for any market. Should the market for traditional fixed annuities reverse itself and begin to grow, the Company is ready to be an industry leader. If the current interest rate and investment environment continues, the Company can compete effectively. The addition of the single-premium immediate annuity should also help capture the ever-growing flow of retirement funds. Our estimate is that the equity-indexed family of products could account for as much as 50% of total premium in 1999 and gives some reason to be optimistic that our efforts will result in increased total sales. 3 Life USA Holding, Inc. LETTER TO SHAREHOLDERS Annuities were not the only area of product development for LifeUSA Insurance. In order to put some life into life sales, an exciting new concept in life insurance was developed. The new product is called LifeFund and it truly is an innovation in life insurance. With traditional life insurance, there is always a "fund" of money available to the insured. The only problem is that the insured has to die for his beneficiaries to access the fund. That was great when people died young, but that was 100 years ago. We all know there are catastrophes other than death that can impact the financial stability of a family. Events such as heart attack, stroke, disabling accident and cancer can threaten the very life of the family, even if the event is not life threatening. LifeFund is a new type of life insurance that meets the needs of the consumer by making all or part of the fund available to the insured -- at the time of occurrence, not just at death. We believe LifeFund will be well received by regulators, consumers and agents. LifeFund can be the catalyst for increased life insurance sales. New products were not the only areas of development for the Company during 1998. After getting off to a rocky start, LifeUSA Securities has been stabilized by the addition of stronger marketing and administrative management, as well as a strengthening staff. We do not anticipate that LifeUSA Securities will be profitable in 1999, but we do expect to make important progress, especially in expanding the base of registered representatives. LifeUSA Securities seeks to position itself as the broker-dealer of choice for the independent insurance agent who is also registered to sell securities. This approach is in tune with, and provides support to, the total distribution system of LifeUSA Insurance. The other new development for the Company in 1998 was planning for the entrance into the long-term care market. But, the Company is not looking to just dabble in the long-term care market. Our objective is to be a dominant player in the long-term care market within five years. Most experts agree that providing financing for the long-term care of an aging population is the growth market for the insurance industry. As long as the government gets out of the way, the companies that provide a solution to the impending crisis in long-term care financing will be well rewarded. The Company is going to make an effort to be one of those companies. To accomplish our end, LTCAmerica Holding, Inc. (LTCAmerica) has been formed as a subsidiary of LifeUSA Insurance. Established as an independent company, LTCAmerica will be able to focus and concentrate on becoming a leader in the long-term care market. LTCAmerica has been structured in the "shadow" image of the Company, including the expectation that common stock ownership will be offered to the employees, agents and marketing organizations working to build the company. The concept of agent and employee ownership worked well with the Company, and we believe it will work even better with LTCAmerica. What is important to understand about the private market for long-term care is that it is still quite small and immature. There is no doubt that the need to finance long-term care offers tremendous potential; the risk is whether or not the potential emerges in a way for private insurance companies to participate. One thing is certain, the success of LTCAmerica will not be determined by how much of the current long-term care market can be captured. It is too small to be worth the effort. No, the key to success for LTCAmerica will be found in its ability to expand the market for the sale of long-term care insurance. This can only be accomplished by encouraging agents who have never sold the product to do so. To achieve this goal, two things are needed: favorable access to an extensive distribution system of agents and new products that are easier to understand and sell. With access to the 70,000 agents of the LifeUSA Insurance distribution system, LTCAmerica is in a unique position to leverage the first requirement for success. To meet the second need, LTCAmerica is currently in the process of developing a totally new approach to long-term care insurance. When these two elements are combined, we believe that LTCAmerica will be positioned to be a leading player in the long-term care market. Despite the decline in sales and income in 1998, the Company continued to build value. A review of the numbers following this letter will highlight increases in consolidated assets, shareholder equity and book value. Hopefully, as a Life USA shareholder, you will be encouraged by the actions we have taken to assure the steady, long-term growth and success of our company. Sometimes it's difficult to be a long-term company Life USA Holding, Inc. 4 LETTER TO SHAREHOLDERS in a short-term world, but we are confident that the course we have chosen will return equitable and competitive long-term benefits to our policyholders, as well as substantial long-term returns to our shareholders. We believe the efforts and accomplishments of 1998 moved our company closer to our goals. Please accept my thanks for your continued support of Life USA, and I offer a special thanks to all of those associated with Life USA and our affiliated companies, who have worked so diligently to assure the continued success of our company. /s/ Robert W. MacDonald Robert W. MacDonald CHAIRMAN AND CHIEF EXECUTIVE OFFICER Life USA Holding, Inc. CHIEF EXECUTIVE OFFICER LifeUSA Insurance Company 5 Life USA Holding, Inc. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA S SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF AND FOR THE YEAR ENDED DECEMBER 31 1998 - --------------------------------------------------------------------------------- -------------- Consolidated results of operations: Revenues ....................................................................... $ 362,648 Net income ..................................................................... 21,907 Adjustments to arrive at net operating income(1): Net realized gains on investments ............................................ (167) Charges (credits) for state guaranty fund assessments ........................ (1,068) Changes in tax liability for prior years' activity ........................... 110 ----------- Net operating income(1) ........................................................ 20,782 Per share data: Adjusted weighted-average shares ............................................... 26,426,291 Convertible subordinated debenture interest addback, net of tax ................ $ 85 Net income ..................................................................... 0.83 Net operating income(1) ........................................................ 0.79 Consolidated financial position: Assets ......................................................................... $ 5,458,719 Invested assets (fixed maturity investments and cash and cash equivalents) ..... 2,301,333 Debt (convertible subordinated debentures and line of credit) .................. 20,898 Shareholders' equity: As reported .................................................................. 279,985 Excluding SFAS No. 115 ....................................................... 266,551 Common stock data: Shares issued and outstanding and to be issued ................................. 24,776,517 Book value per share: As reported .................................................................. $ 11.30 Excluding SFAS No. 115 ....................................................... 10.76 Cash dividends declared per share .............................................. 0.08 Closing price .................................................................. 12.88 Financial ratios and other data: Return on invested assets--net income .......................................... 0.95% Return on invested assets--net operating income(1) ............................. 0.90% Return on equity--net income: As reported .................................................................. 7.82% Excluding SFAS No. 115 ....................................................... 8.22% Return on equity--net operating income(1): As reported .................................................................. 7.42% Excluding SFAS No. 115 ....................................................... 7.80% Debt to equity: As reported .................................................................. 7.46% Excluding SFAS No. 115 ....................................................... 7.84% Closing price to net income per share (P/E ratio) .............................. 15.5x Closing price to net operating income per share(1) ............................. 16.3x Closing price to book value per share: As reported .................................................................. 1.14x Excluding SFAS No. 115 ....................................................... 1.20x Total market capitalization .................................................... $ 318,998
- ------------------ 1) Net operating income equals net income, excluding, net of related income taxes: (i) net realized gains on investments and the corresponding increases in amortization of deferred policy acquisition costs and other benefits to policyholders, (ii) charges (credits) for state guaranty fund assessments and (iii) changes in tax liability for prior years' activity. In 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Beginning January 1, 1994, under the provisions of SFAS No. 115, held to maturity investments are carried at amortized cost and available for sale investments are carried at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity. Life USA Holding, Inc. 6
FIVE YEAR AVERAGE COMPOUND 1997 1996 1995 1994 1993 GROWTH RATE - -------------- -------------- -------------- -------------- -------------- ------------ $ 369,903 $ 316,898 $ 272,781 $ 206,313 $ 199,685 12.68% 26,978 23,454 19,097 14,469 15,115 7.70% (670) (408) (1,828) (641) (989) (930) 1,998 1,877 1,704 624 700 0 0 0 0 ----------- ----------- ----------- ----------- ----------- 26,078 25,044 19,146 15,532 14,750 7.10% 25,160,437 23,358,663 22,524,396 20,409,047 19,055,286 $ 870 $ 870 $ 757 N/A N/A 1.11 1.04 0.88 $ 0.71 $ 0.79 0.96% 1.07 1.11 0.88 0.76 0.77 0.40% $ 5,062,774 $ 4,386,723 $ 3,867,539 $ 3,065,271 $ 2,394,471 17.92% 2,165,786 1,902,465 1,754,087 1,249,321 899,998 20.66% 41,030 36,030 36,030 6,041 6,351 222,400 172,615 156,896 106,916 107,204 21.17% 214,251 169,280 144,189 123,836 107,204 19.98% 22,759,288 20,974,901 20,324,747 20,179,617 19,978,118 $ 9.77 $ 8.23 $ 7.72 $ 5.30 $ 5.37 16.06% 9.41 8.07 7.09 6.14 5.37 14.93% 0.00 0.00 0.00 0.00 0.00 16.88 12.00 8.00 7.25 18.88 1.25% 1.23% 1.09% 1.16% 1.68% 1.20% 1.32% 1.09% 1.24% 1.64% 12.13% 13.59% 12.17% 13.53% 14.10% 12.59% 13.86% 13.24% 11.68% 14.10% 11.73% 14.51% 12.20% 14.53% 13.76% 12.17% 14.79% 13.28% 12.54% 13.76% 18.45% 20.87% 22.96% 5.65% 5.92% 19.15% 21.28% 24.99% 4.88% 5.92% 15.2x 11.5x 9.1x 10.2x 23.8x 15.8x 10.8x 9.1x 9.5x 24.4x 1.73x 1.46x 1.04x 1.37x 3.52x 1.79x 1.49x 1.13x 1.18x 3.52x $ 384,063 $ 251,699 $ 162,598 $ 146,302 $ 377,087
- ------------------ In 1997, the Company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128 requires basic and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. It excludes the effects of options, warrants and convertible securities. Diluted earnings per share is computed based on the weighted average number of shares outstanding assuming that the proceeds from conversion of all stock options and warrants shall be used to purchase common stock at the average market price during the period. In accordance with SFAS No. 128, the Company has restated earnings per share for the years 1993 through 1996. 7 Life USA Holding, Inc. GENERAL GENERAL COMPANY STRUCTURE Life USA Holding, Inc. (the Company) is a national financial services holding and marketing company with $5.46 billion in consolidated assets. LifeUSA Insurance Company (LifeUSA Insurance), its largest wholly-owned subsidiary, is licensed to write and sell life insurance and annuities through independent field marketing organizations and agents in the District of Columbia and all states except New York. LifeUSA Marketing, Inc. (LifeUSA Marketing) and LifeUSA Securities, Inc. (LifeUSA Securities) are also wholly-owned subsidiaries of the Company. LifeUSA Insurance sells a variety of innovative life insurance and annuity products that offer long-term retirement benefits to consumers who seek protection against outliving their financial resources. The products are sold by a national marketing and distribution system comprised of Field Marketing Organizations (FMOs) with independent agents, and the products are serviced by home office staff. In July 1998, LTCAmerica Holding, Inc. (LTCAmerica) was formed for the purpose of acquiring, managing and funding the operations of an insurance company offering life insurance, annuity and health insurance products providing long-term care benefits to consumers. LTCAmerica will seek to purchase, as a subsidiary, either an existing long-term care insurance company or a shell insurance company that will underwrite and issue long-term care products. LTCAmerica is a majority-owned subsidiary of LifeUSA Insurance. LifeUSA Marketing conducts a variety of marketing activities for the Company, including the acquisition of and investment in national FMOs. In August 1996, LifeUSA Marketing acquired Tax Planning Seminars, a national marketing organization that had been contracted with LifeUSA Insurance for seven years. In addition, LifeUSA Marketing acquired minority equity interests in Creative Marketing International Corporation in November 1996, Personalized Brokerage Services, Inc. in May 1997, Ann Arbor Annuity Exchange in July 1997, Roster Financial, LLC in December 1997, Life Sales LLC in March 1998 and Signature Financial Services, Inc. in April 1998, all national FMOs. LifeUSA Securities is a retail broker-dealer that distributes a full range of securities products, including non-proprietary mutual funds, variable life insurance and annuity contracts, and processes general securities transactions. In April 1998, the Company purchased a minority interest in Windsor Financial Group, LLC (Windsor), a Minneapolis-based investment management firm. Windsor manages $3.7 billion of assets for financial institutions, foundations, retirement plans and high net worth individuals, including $1.9 billion of LifeUSA Insurance's portfolio. Management has organized the Company into three business segments in order to focus on the distinct functional revenue, expense and asset characteristics associated with the activities performed by each. The segments include: Insurance, Marketing and Corporate. Management's Discussion and Analysis on Business Segments which follows on page 29, focuses on these segments and the financial information used by management to make decisions and analyze the results of operations. MARKETING AND DISTRIBUTION As of December 31, 1998, 140 independent FMOs and over 70,000 agents were licensed to market LifeUSA Insurance policies and produce business for Allianz Life Insurance Company of North America (Allianz Life). All FMOs and agents are independent contractors and are responsible for their operating and marketing expenses. FMOs coordinate and pay for the marketing of LifeUSA Insurance products and provide recruiting, training and management of the agents contracted through them. Depending on the marketing techniques it uses and the market in which it operates, an FMO may have as many as several thousand agents. LifeUSA Marketing provides marketing support to FMOs through marketing training seminars, product and business system demonstrations, product literature and home office support. The FMO receives a gross cash commission from LifeUSA Insurance on business produced and, within specified LifeUSA Insurance guidelines, allocates such commissions among its agents. Life USA Holding, Inc. 8 GENERAL Cash commissions as a percentage of first year premiums are higher for life insurance sales than annuity sales. Commissions are based on a percentage of the targeted annual premiums and consist of both a higher first year commission and a lower renewal commission on premiums paid on a life insurance policy after the first year. FMOs and agents are subject to a chargeback of all or a portion of the commissions paid in the event a life insurance policy is canceled or surrendered, including cancellations for the non-payment of premiums, within the first 15 months of issuance. As is customary in the industry, LifeUSA Insurance advances agents up to 50% of first year commissions when life insurance policies are sold even though most of the premiums have not yet been received. LifeUSA Insurance contracts include a financial guaranty by the FMOs for chargebacks and advances to agents within the FMO's organization. The Company has developed a strategy to generate additional premium and deposit production from existing LifeUSA Insurance agents and from new production sources by investing in FMOs. The amount of any investment relates to the revenue currently generated by the FMO and the projected increase in business produced for LifeUSA Insurance by the FMO. During 1998, the FMOs in which LifeUSA Marketing has an equity interest produced 30% of the Company's life insurance and annuity production. In addition, LifeUSA Marketing recruits new FMOs to sell its products. During 1998, LifeUSA Insurance signed marketing agreements with 15 FMOs to market LifeUSA Insurance life insurance and annuity products for the first time. There can be no assurances that the Company's premium and deposit volume or income will be enhanced by the investments in FMOs or by the contracting of new FMOs. Although LifeUSA Insurance's larger and more successful FMOs and agents tend to produce a majority of their business with LifeUSA Insurance, there is no requirement that they do so. FMOs and agents may also be contracted with other life insurance companies. Each FMO essentially serves as a "wholesaler" for LifeUSA Insurance. A typical FMO consists of one or more highly experienced individuals who have demonstrated the ability to build, manage and supervise a marketing organization that is producing, or has the potential to produce, a minimum of $1.25 million in annual life insurance and annuity commissions. During 1998, one FMO, Life Sales LLC, accounted for 14% of LifeUSA Insurance's total production (which includes production for Allianz Life on policy forms similar to LifeUSA Insurance's). LifeUSA Marketing owns 50% of Life Sales LLC. Although no other single FMO accounted for more than 10% of LifeUSA Insurance's total production, the top FMOs (including their respective agents) produced the following portions of LifeUSA Insurance's total business during 1998: PERCENT OF CPCS(1) ------------------- Top 5 FMOs ................ 34% Top 10 FMOs ............... 49% Top 25 FMOs ............... 76% - ------------------ (1) CPCs (Combined Production Credits) are a measurement of the life insurance and annuity business produced. PRODUCTS LifeUSA Insurance's products compete against the products of other insurance companies on the basis of long-term benefits. Policyholder persistency is encouraged by LifeUSA Insurance through increased retirement income benefits for long-term policyholders and lower benefits in case of early surrender or lapse. LifeUSA Insurance's products are designed to permit long-term investment of assets by LifeUSA Insurance during the time premiums are being paid, benefits are accumulated and benefits are being paid out. This product design not only makes the products attractive to certain consumers, but also allows LifeUSA Insurance to purchase assets that have cash flows consistent with the liability. The target market for LifeUSA Insurance's products are consumers with average annual incomes of $25,000 to $60,000. Management believes that this market is not adequately serviced by the insurance industry and that the features of LifeUSA Insurance's products will be attractive to these consumers. LifeUSA Insurance has designed its products to emphasize long-term value and benefits. Management believes that this is a need of the "baby-boom" generation and that the insurance industry is best suited to provide long-term benefits in the form of income guaranteed for a lifetime. The economic concern today is 9 Life USA Holding, Inc. GENERAL not dying too soon, but living too long. By de-emphasizing short-term gain and lump sum cash benefits to those who surrender their policies, LifeUSA Insurance's products are less exposed to the disintermediation risk faced by companies selling commodity-type products. A disintermediation risk occurs when current interest rates are higher than the interest rates earned by a company's existing investment portfolio. The risk is that policyholders will move their funds away from the company to get higher, short-term rates. If the assets supporting the policies are invested long-term to support long-term rates of return and the liabilities offer short-term liquidity, those who surrender their policies for cash take more than their fair share from the company and from persisting policyholders. Management believes that consumer demand for individually-funded retirement products providing an adequate stream of retirement income is increasing and will continue to increase in the future. This is due primarily to the aging of the United States population, the reduction in employee-sponsored retirement plans and consumer concerns as to whether government-sponsored retirement programs, such as Social Security, will continue to provide meaningful retirement benefits. ANNUITY PRODUCTS LifeUSA Insurance's annuities are designed to offer flexible premium deposit payments and a variety of annuitization options to the annuitant. The product design also protects LifeUSA Insurance against the negative effects of disintermediation and other lump sum withdrawals by providing cash surrender values at amounts less than the annuitization values. To encourage persistency, LifeUSA Insurance's annuities pay enhanced benefits to policyholders that allow the annuity funds to accumulate over the long term and then elect some form of income payout option rather than a lump sum cash payment. At December 31, 1998, annuity account values in force (including business produced by LifeUSA Insurance agents for Allianz Life) totaled $5.7 billion ($3.9 billion of which was ceded to reinsurers). Over 88% of the in force annuities are single premium annuities. The following describes LifeUSA Insurance's most significant annuity products: ACCUMULATOR(TM) CLASSIC The Accumulator Classic has an 8% bonus and permits the policyholder to elect to receive the entire policy value over as few as five years. The Accumulator Classic accounted for approximately 16% of total annuity deposits in 1998. Approximately 5.5% of such policies annuitize on the first anniversary of the policy. The Accumulator Classic is marketed in all states except Oregon and Washington and was introduced in 1988. ACCUMULATOR(TM) CASH BONUS ANNUITY The Instant Cash Bonus Option is a feature of the Accumulator Cash Bonus annuity that allows the policyholder to receive the first-year annuity bonus in cash. The Accumulator Cash Bonus annuity, introduced in 1993, accounted for approximately 29% of total annuity deposits in 1998 and is marketed in all states except New Jersey, Oregon and Washington. ACCUMULATOR(TM) BONUS MAXXX(TM) ANNUITY The Accumulator Bonus MAXXX annuity has an immediate 10% bonus on all premium payments in the first policy year. It includes a nursing home benefit and the IDEA disability benefit that provides a policyholder 60% additional monthly retirement income in the event of total disability due to illness, accident or old age; the income increase is 30% in the event of partial disability. The Accumulator Bonus MAXXX annuity accounted for approximately 5% of total annuity deposits in 1998, the year it was introduced. It is marketed in all states except Washington, D.C., New Jersey, North Dakota, Oklahoma, Oregon, South Carolina, Texas, Vermont and Washington. IDEA(R) The IDEA -- Individual Disability Escalating Annuity -- is a unique concept in annuity product design providing a policyholder with 60% additional monthly retirement income in the event of total disability due to illness, accident or old age; the income increase is 30% in the event of partial disability. The increased income benefit is paid as long as the disability lasts, even for life. The IDEA is available on the Accumulator Bonus MAXXX annuity and Universal Annuity Life products. IDEAL(TM) ANNUITY The IDEAL annuity provides up to 10 years of protection against interest rate changes (increases and decreases). When issued, the IDEAL annuity offers a base credited rate, plus a 1.5% annual interest bonus, both guaranteed for five years. At the end of the first five-year term, the policyholder has the option to "re-enter" the policy at the interest rate credited on new issues. The new credited rate, plus another 1.5% annual interest bonus, is then guaranteed for a new five-year term, also protecting the policyholder against a rise in interest rates. The IDEAL annuity, introduced in 1997, Life USA Holding, Inc. 10 GENERAL accounted for approximately 7% of total annuity deposits in 1998 and is marketed in all states except New Jersey, North Dakota, Oklahoma, Oregon and Washington. IDEAL(TM) INDEX 50 ANNUITY The IDEAL Index 50 annuity combines the protection against interest rate changes of the IDEAL annuity with an additional benefit tied to the performance of the S&P 500(R) Index over the five-year term. The IDEAL Index 50 annuity is a competitive fixed annuity, with principal and interest guaranteed, which adds one half of the incremental growth of the S&P 500(R) Index to the value of the annuity if the S&P 500(R) Index outperforms the annuity over a five-year period. While not an investment product, the IDEAL Index 50 annuity is positioned as an alternative "safe haven" for investment funds. By shifting from equity investments to the IDEAL Index 50 annuity, an investor can "lock-in" current equity gains and still participate, should the stock market continue to rise. The IDEAL Index 50 annuity, introduced in 1997, accounted for approximately 11% of total annuity deposits in 1998. It is marketed in all states except New Jersey, North Dakota, Oklahoma, Oregon, South Carolina and Washington. IDEAL(TM) INDEX 75 ANNUITY The IDEAL Index 75 annuity is similar to the IDEAL Index 50 annuity except that three-fourths of the S&P 500(R) Index incremental growth is added to the annuitization value of the annuity. The IDEAL Index 75 annuity accounted for approximately 21% of total annuity deposits in 1998, the year it was introduced. It is marketed in the same states as the IDEAL Index 50 annuity. LIFE INSURANCE PRODUCTS At December 31, 1998, life insurance account values in force (including business produced by LifeUSA Insurance's agents for Allianz Life) aggregated $333.6 million ($222.0 million of which was ceded to reinsurers). The majority of in force life insurance business is paid in annual or more frequent installments. The following describes LifeUSA Insurance's most significant life insurance products: UNIVERSAL ANNUITY LIFE(R) I AND UNIVERSAL ANNUITY LIFE(R) III The Universal Annuity Life (UAL) products are specifically designed to pay the insured as much for living as for dying. At younger ages, when the protection against premature death is needed most, the UAL products provide tax-free benefits for the policyholder's family or business. At retirement, there are a variety of annuitization options available that provide significant additional monthly income if a life-time payout is selected. The IDEA option (described previously) is available as a rider. The UAL I and UAL III products are marketed in all states except that product approval by regulatory authorities is pending review in New Jersey for UAL I and New Jersey and Pennsylvania for UAL III. In 1998, the UAL I and UAL III products accounted for 88% of total life insurance premiums. The UAL I and UAL III were introduced in 1990 and 1991, respectively. LIFEUSA SECURITIES LifeUSA Securities is a full service registered broker-dealer in all 50 states. As a general securities dealer, LifeUSA Securities offers virtually all types of securities on the listed and over-the-counter markets. General securities purchases and trades are cleared through Bear Stearns Securities Corporation. Other products available include: mutual funds, unit investment trusts, variable life insurance and annuity contracts, limited partnerships and long-term care insurance. REINSURANCE RELATIONSHIP WITH ALLIANZ LIFE Since 1988, under the terms of agreements between the Company and Allianz Life, life insurance and annuity products have been produced for Allianz Life on policy forms similar to those of LifeUSA Insurance (the "Allianz/LUSA Business"). The Company has received commission and expense allowances, provided all administrative and other home office services, paid commissions due agents and paid applicable premium taxes on the Allianz/LUSA Business. LifeUSA Insurance assumes 25% of the Allianz/LUSA Business and pays commission and expense allowances on the assumed business to Allianz Life. During 1997 and 1998, the Company produced long-term care insurance business for Allianz Life and received marketing and service fees for that business. The terms of an agreement announced in January 1998 ("the agreement with Allianz Life") allow Allianz Life to acquire up to 35% of the outstanding common stock of the Company and to extend the marketing agreement between the two companies to December 31, 2000. Allianz Life will acquire its interest in the Company over a five-year period, ending in 2002, by purchasing from the Company $100 million of newly 11 Life USA Holding, Inc. GENERAL issued common stock in increments of $10 million semi-annually. The price at which Allianz Life will purchase the common stock will be at 250% of the Company's six-month average book value per share (excluding Statement of Financial Accounting Standards No. 115), at the time the common stock is issued. In August 1998, Allianz Life acquired 406,092 shares of the Company's common stock at $24.625 per share, and in February 1999, Allianz Life acquired 395,062 shares at the mutually agreed upon purchase price of $25.3125 per share. If the price at which Allianz Life would purchase the Company's common stock is more that 200% of the current market price at the time the common stock is tendered, Allianz Life can decline to purchase the stock, and the Company can require Allianz Life to purchase a convertible debenture for a like amount of capital. See Note 10 to the Consolidated Financial Statements. Effective April 1, 1998 and in accordance with the agreement with Allianz Life, Allianz Life, either as a direct writer or reinsurer, has the right to retain 37.5% of the new life insurance and annuity business produced by the Company's agents, up from 25% under the previous marketing agreement. REINSURANCE CEDED Since its inception in 1987, LifeUSA Insurance has entered into various agreements to reinsure a substantial portion of the new life insurance and annuity business written each year. Entering into these reinsurance agreements has allowed LifeUSA Insurance to write a larger volume of business than it would otherwise have been able to write due to statutory capital and surplus requirements. From April 1, 1991 through March 31, 1998, LifeUSA Insurance ceded a substantial portion of its new life insurance and annuity business to the following three reinsurers (the Reinsurers): o Employers Reassurance Corporation, a subsidiary of Employers Reinsurance Corporation, a member of the General Electric Company group (Employers); o Munich American Reassurance Company, a subsidiary of Munich Reinsurance Company, one of the largest German insurance companies (Munich); and o Republic-Vanguard Life Insurance Company, a member of PartnerRe Ltd., one of the largest reinsurance companies (Republic-Vanguard). Effective April 1, 1998, and in accordance with the agreement with Allianz Life, Allianz Life began assuming a portion of LifeUSA Insurance's business. Also effective April 1, 1998, Munich ceased assuming any new business from LifeUSA Insurance and LifeUSA Insurance increased the retention of its annuity business from 25% to 30% and its life insurance business from 25% to 50%. The following table shows the percentages of new life insurance and annuity business written by LifeUSA that have been ceded since inception: LIFE INSURANCE ANNUITY ---------------- -------- September 1987 - December 1988 ........ 100% 100% January 1989 - December 1989 .......... 95 100 January 1990 - December 1990 .......... 75 75 January 1991 - December 1992 .......... 70 75 January 1993 - June 1993 .............. 65 65 July 1993 - September 1995 ............ 50 50 October 1995 - March 1998 ............. 75 75 April 1998 - Present .................. 50 70 The Company receives commissions and expense allowances on the portions of LifeUSA Insurance's life insurance and annuity products reinsured and service fees on the Allianz/LUSA Business. The commissions and expense allowances and service fees (combined together and shown on the Consolidated Statement of Income as commission and expense allowances, net) received on life insurance policies are approximately 150% of the first-year planned target premium and range from 121/2% to 18% of renewal and first-year excess premiums. The Company also receives commissions and expense allowances and service fees ranging from 61/2% to 22% on annuity deposits. An additional allowance equal to .20% of the account value and renewal premium deposits of LifeUSA Insurance annuities issued from April 1, 1991 until December 31, 1996 is received as of the beginning of policy years two through ten. For LifeUSA Insurance annuities issued from January 1, 1997 through Life USA Holding, Inc. 12 GENERAL March 31, 1998, an additional allowance equal to .16% of the account value and renewal premium deposits is received as of the beginning of policy years two through the life of the policy. In April 1998, this additional allowance was changed to .21%. In April 1998, the Company began earning an additional allowance equal to .09% of the account value and renewal premium deposits of all annuities produced for Allianz Life, which is received as of the beginning of policy years two through the life of the policy. Under the reinsurance agreements, $428.7 million, $545.8 million and $437.9 million of premiums and deposits were ceded to the Reinsurers by LifeUSA Insurance for the years ended December 31, 1998, 1997 and 1996, respectively. When a life insurance policy ceded to the Reinsurers lapses before the end of 15 months, LifeUSA Insurance has agreed to pay a chargeback equal to the excess of the allowances received over the premiums received. As of December 31, 1998 and 1997, the reserve for lapsed policy chargebacks was $650,000. Assets and liabilities related to reinsurance ceded are required to be reported on a gross basis reflecting the possibility that reinsured risks could become a liability to the Company in the event the Reinsurers become unable to meet the obligations they have assumed. The reinsurance agreements require the Reinsurers' approval of policy forms and terms of LifeUSA Insurance products reinsured by the Reinsurers. Any restriction, limitation or condition imposed by the Reinsurers could have a material effect on LifeUSA Insurance's ability to write new business if LifeUSA Insurance was not able to replace the current reinsurers, or obtain the required capital to support the level of new business. REINSURANCE ASSUMED LifeUSA Insurance assumes a portion of new Allianz/LUSA Business directly from Allianz Life. Under this agreement, $116.1 million, $146.0 million and $122.7 million of premiums and deposits were assumed by LifeUSA Insurance from Allianz Life for the years ended December 31, 1998, 1997 and 1996, respectively. The following table shows the percentages of new Allianz/LUSA Business for Allianz Life that have been assumed by LifeUSA Insurance since inception: LIFE INSURANCE ANNUITY ---------------- -------- September 1987 - December 1989 ........ -- % -- % January 1990 - December 1990 .......... 25 25 January 1991 - December 1991 .......... 30 25 January 1992 - June 1993 .............. 50 30 July 1993 - September 1995 ............ 50 50 October 1995 - Present ................ 25 25 MAINTENANCE EXPENSES The Company is obligated to continue servicing the underlying life insurance and annuity policies written directly by LifeUSA Insurance and the Allianz/LUSA Business. It is possible that actual future renewal allowances and servicing costs will not conform to the assumptions inherent in the current estimation of allowances and costs. Management continuously monitors actual renewal allowance and servicing cost experience as it emerges and, should material changes in the assumptions occur, a liability would be established to the extent that the present value of future servicing costs is expected to exceed the present value of future renewal allowances. 13 Life USA Holding, Inc. GENERAL LIFE INSURANCE AND ANNUITIES IN FORCE The following table shows LifeUSA Insurance life insurance and annuities in force information at December 31, 1998 and December 31, 1997 (in millions):
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------- ------------------ Life insurance account values: All policies produced by LifeUSA Insurance agents(1) ....... $ 333.6 $ 299.1 Direct and assumed business(2) ............................. 286.2 257.0 Net of reinsurance(3) ...................................... 111.6 99.3 Life insurance face amounts: All policies produced by LifeUSA Insurance agents(1) ....... 7,679.7 7,997.5 Direct and assumed business(2) ............................. 6,646.2 6,931.7 Net of reinsurance(3) ...................................... 2,333.6 2,277.7 Annuity account values: All policies produced by LifeUSA Insurance agents(1) ....... 5,743.1 5,518.4 Direct and assumed business(2) ............................. 4,054.0 3,916.6 Net of reinsurance(3) ...................................... 1,825.0 1,781.1
- ------------------ (1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business. (2) Includes all LifeUSA Insurance products and the Allianz/LUSA Business assumed by LifeUSA Insurance. (3) Includes the portion of LifeUSA Insurance products retained by LifeUSA Insurance and the portion of Allianz/LUSA Business assumed by LifeUSA Insurance. UNDERWRITING All life insurance business is subject to standard underwriting procedures as agreed to by the Reinsurers, using an underwriting manual from the Reinsurers. Republic-Vanguard is the reinsurer currently charged with the responsibility of reviewing the underwriting practices of LifeUSA Insurance and performing periodic audits (every other year) of LifeUSA Insurance's compliance with underwriting procedures and results. There are minimal underwriting requirements with regard to annuity business. LifeUSA Insurance can underwrite all life policies with a face amount up to $500,000 without approval of Republic-Vanguard. Amounts above this level require individual evaluation by Republic-Vanguard. As appropriate, varying requirements, including tests, medical exams and personal financial statements, may be required at higher ages and/or larger face amounts of insurance. INVESTMENT POLICIES The Company's long-term investment portfolio is comprised of U.S. Treasury securities, U.S. Government agency securities, foreign government obligations denominated in U.S. dollars and issued and traded in the United States, mortgage-backed securities issued or guaranteed by U.S. government corporations or agencies and investment grade corporate obligations. The Company has never purchased real estate, private direct mortgages or below investment-grade securities. The Company engages Windsor and Allianz Investment Corporation (AIC), an affiliate of Allianz Life, to serve as the Company's investment advisers. At December 31, 1998, assets managed for customers by Windsor and AIC exceed $3.7 billion and $21.9 billion, respectively. Windsor and AIC purchase investment securities for the Company based on the Company's guidelines. The investment philosophy of LifeUSA Insurance is reflected in investment guidelines adopted by the Board of Directors of the Company annually, as follows: SIZE: no more than 5% of the Company's invested assets in any issuer other than direct or guaranteed United States obligations, no more than 25% of invested assets in any industry, and no more than 2% of any issue other than direct or guaranteed United States obligations; QUALITY: minimum quality of purchase must be "BBB-" or better, average quality "A" or better; DURATION: match to liabilities, allow for sufficient liquidity and cash flow matching; and INCOME: manage to maintain or increase income, excluding capital gains. Life USA Holding, Inc. 14 GENERAL AGENT AND EMPLOYEE OWNERSHIP Historically, the Company has issued a variety of equity-based financial instruments (common stock, convertible subordinated debentures and stock options) to LifeUSA Insurance agents and the Company's home office employees in order to provide these individuals with an ownership interest in the Company and create an important incentive to produce premiums and maintain profitable operations. From 1992 through March 31, 1997, the Company granted stock options as commission bonuses to LifeUSA Insurance agents based on net earned commissions on business written. The Company discontinued the granting of stock options as production bonuses in the calendar quarter ended March 31, 1997. The Company also has a stock option plan for employees under which employees on the anniversary date of their employment receive options on a number of shares of common stock equal to 1% of their annual salary at an exercise price per share of not less than 150% of the market value of a share of common stock on the date the option is issued. The Company expects to continue to grant stock options to employees. QUALITY OF SERVICE Management believes that quality service, responsiveness and support to agents and to policyholders have been and continue to be critical to agent retention, policyholder satisfaction and cost-effective operations. As a result of their ownership interests in the Company, home office employees have a special commitment to their jobs and are referred to as "home office owners." An example of home office responsiveness created by this commitment is the "48-hour challenge." If an insurance application conforming to normal standards is not completed within 48 hours, the agent receives $100. For 1998, 43,615 applications were submitted and only 47 challenges were paid. At December 31, 1998, the Company employed 426 full-time and 29 part-time persons, and the number of persons performing home office functions were as follows: NUMBER OF HOME OFFICE FUNCTION EMPLOYEES --------------------------------------- ---------- Executive ........................... 17 Operations .......................... 196 Support ............................. 84 Marketing ........................... 60 Information Services ................ 71 Owner Services ...................... 14 Securities .......................... 13 The Company's employees are not represented by a collective bargaining unit. The Company considers its general relations with its employees to be excellent. COMPETITION The industry in which the Company operates is highly competitive, with many competitors offering diverse products through various alternative marketing or distribution systems. The Company's products compete not only with life insurance and annuities, but they also compete with other retirement-oriented financial products, and stock and bond mutual funds. Competition for FMOs and agents with demonstrated ability is also intense. However, management believes that LifeUSA Insurance has been able to attract and will continue to be able to attract, motivate and retain productive, independent FMOs and agents by providing innovative products and quality service. 15 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS RESULTS OF OPERATIONS The following analysis of the results of operations and financial condition of Life USA Holding, Inc. (the Company) and its wholly-owned subsidiaries, LifeUSA Insurance Company (LifeUSA Insurance), LifeUSA Marketing, Inc. (LifeUSA Marketing) and LifeUSA Securities, Inc. (LifeUSA Securities), should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this Annual Report to Shareholders and Form 10-K. In 1998, the Company's production of total collected premiums and deposits decreased 18% compared to 1997. As a result, revenues from commission and expense allowances and expenses for commissions paid decreased. The Company generated increases in invested assets and annuities in force and as a result, revenues from policyholder charges and net investment income and expenses for interest credited to policyholder account values increased. Primarily as a result of these factors, net income for 1998 decreased 19% compared to 1997. PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including Allianz/LUSA Business, were $1.06 billion, $1.29 billion and $1.05 billion in 1998, 1997 and 1996, respectively, and represented a decrease of 18% in 1998 compared to 1997 and an increase of 23% in 1997 compared to 1996. The following table shows the amounts of premiums and deposits collected, ceded and retained for the three years (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Collected Premiums and Deposits(1): LifeUSA Insurance: Life: First year ...................................... $ 5,611 $ 7,883 $ 12,731 Single and renewal .............................. 52,116 52,323 49,242 ---------- ---------- ---------- Total Life .................................... 57,727 60,206 61,973 Annuities ....................................... 559,059 684,992 547,748 ---------- ---------- ---------- Total LifeUSA Insurance collected premiums and deposits ................................ 616,786 745,198 609,721 Allianz Life: Life: First year ...................................... 1,426 2,142 3,261 Single and renewal .............................. 15,164 14,961 14,817 ---------- ---------- ---------- Total Life .................................... 16,590 17,103 18,078 Annuities ....................................... 422,582 532,151 424,659 ---------- ---------- ---------- Total Allianz Life collected premiums and deposits ................................ 439,172 549,254 442,737 ---------- ---------- ---------- Total collected premiums and deposits ....... $1,055,958 $1,294,452 $1,052,458 ========== ========== ==========
- ------------------ (1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business. Life USA Holding, Inc. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Premiums and Deposits Not Retained or Assumed(2): LifeUSA Insurance: Life: First year .................................... $ 3,801 $ 5,913 $ 8,416 Single and renewal ............................ 34,512 34,021 31,925 -------- -------- -------- Total Life .................................. 38,313 39,934 40,341 Annuities ..................................... 390,348 505,829 397,566 -------- -------- -------- Total LifeUSA Insurance premiums and deposits not retained ..................... 428,661 545,763 437,907 Allianz Life: Life: First year .................................... 1,072 1,607 2,228 Single and renewal ............................ 9,177 8,833 8,596 -------- -------- -------- Total Life .................................. 10,249 10,440 10,824 Annuities ..................................... 312,832 392,807 309,198 -------- -------- -------- Total Allianz Life premiums and deposits not assumed ................................ 323,081 403,247 320,022 -------- -------- -------- Total premiums and deposits not retained or assumed ................................... $751,742 $949,010 $757,929 ======== ======== ======== Retained or Assumed Premiums and Deposits(3): LifeUSA Insurance: Life: First year .................................... $ 1,810 $ 1,970 $ 4,315 Single and renewal ............................ 17,604 18,302 17,317 -------- -------- -------- Total Life .................................. 19,414 20,272 21,632 Annuities ..................................... 168,711 179,163 150,182 -------- -------- -------- Total LifeUSA Insurance retained premiums and deposits .............................. 188,125 199,435 171,814 Allianz Life: Life: First year .................................... 354 535 1,033 Single and renewal ............................ 5,987 6,128 6,221 -------- -------- -------- Total Life .................................. 6,341 6,663 7,254 Annuities ..................................... 109,750 139,344 115,461 -------- -------- -------- Total Allianz Life assumed premiums and deposits .............................. 116,091 146,007 122,715 -------- -------- -------- Total retained or assumed premiums and deposits .............................. $304,216 $345,442 $294,529 ======== ======== ========
- ------------------ (2) Includes premiums and deposits related to LifeUSA Insurance ceded by LifeUSA Insurance to the Reinsurers and premiums and deposits related to Allianz/LUSA Business not assumed by LifeUSA Insurance. (3) Includes premiums and deposits related to LifeUSA Insurance retained by LifeUSA Insurance and premiums and deposits related to Allianz/LUSA Business assumed by LifeUSA Insurance. LifeUSA Insurance invests these premiums and deposits for the purpose of providing future benefits to its policyholders. Reference is made to the Reinsurance information under the caption "General-Reinsurance" on pages 11-13 in this Annual Report and Form 10-K for further details on the Company's reinsurance agreements. 17 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS REVENUES. Total revenues were $362.6 million, $369.9 million and $316.9 million in 1998, 1997 and 1996, respectively. The decrease in total revenues of 2% in 1998 compared to 1997 was primarily due to the decrease in net commissions and expense allowances associated with decreased production of business. This factor was partially offset by the increase in net investment income generated by the growth of invested assets and by an increase in policyholder charges. The increase in total revenues of 17% in 1997 compared to 1996 was primarily due to the increase in net commissions and expense allowances associated with increased production of business not retained or assumed. Also contributing to this increase in revenues was the increase in net investment income generated by the growth of invested assets and net realized gains on investments. The discussion which follows gives a line-by-line comparison of revenue for the years ended December 31, 1998, 1997 and 1996. See also the Business Segments section which follows for additional analysis of the results of operations. Policyholder charges, which represent the amounts assessed against policy account values for the cost of insurance, policy administration, annuitizations and surrenders, increased 7%, or $3.6 million, in 1998 compared to 1997, and 6%, or $2.6 million, in 1997 compared to 1996, reflecting the growth in and maturity of LifeUSA Insurance net retained account values in force. The following table shows the amounts of policyholder charges for 1998, 1997 and 1996 (in thousands): 1998 1997 1996 ----------- ------------ ------------ Direct .............. $ 105,390 $ 94,405 $ 82,904 Assumed ............. 19,026 18,187 16,540 Ceded ............... (71,355) (63,122) (52,602) --------- --------- --------- Net ................. $ 53,061 $ 49,470 $ 46,842 ========= ========= ========= Increases in net investment income of 10%, or $13.8 million, in 1998 compared to 1997, and 11%, or $14.7 million, in 1997 compared to 1996, are attributable to increases in invested assets (fixed maturity investments and cash and cash equivalents) to $2.30 billion at December 31, 1998 from $2.17 billion at December 31, 1997 and $1.90 billion at December 31, 1996, which was only partially offset by the reduction in yield on investments. The weighted average annual yield on invested assets (exclusive of realized and unrealized gains and losses) was 7.23%, 7.30% and 7.44% at December 31, 1998, 1997 and 1996, respectively. Net realized gains on investments had the following impact on the amortization of deferred policy acquisition costs, other benefits to policyholders, net income and earnings per share for 1998, 1997 and 1996 (dollars in millions, except per share amounts):
1998 1997 1996 -------- --------- --------- Net realized gains on investments ................ $ .8 $ 4.4 $ 1.8 Increase in: Amortization of deferred policy acquisition costs .3 1.9 .7 Other benefits to policyholders ................. .2 1.4 .5 ---- ----- ----- Income before income taxes ....................... .3 1.1 .6 Income taxes ..................................... .1 .4 .2 ---- ----- ----- Net income ....................................... $ .2 $ .7 $ .4 ==== ===== ===== Diluted earnings per share ....................... $ .01 $ .03 $ .02 ===== ====== ======
Net commissions and expense allowances on premiums and deposits collected on reinsured policies and service fees on business produced for Allianz Life decreased 15%, or $26.0 million, in 1998 compared to 1997. This decrease is consistent with the 18% decrease in total collected premiums and deposits and with the decline in collected first year life insurance premiums, both of which were partially offset by changes in the mix of deferred annuity products sold. The increase in net commissions and expense allowances of 24%, or $32.4 million, in 1997 compared to 1996, is consistent with the 23% increase in total collected premiums and deposits. Life USA Holding, Inc. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS The following table shows the amounts of net commissions and expense allowances for 1998, 1997 and 1996 (in thousands):
1998 1997 1996 ------------ ------------ ------------ LifeUSA Insurance: Life: First year .............................................. $ 4,718 $ 7,153 $ 10,263 Single and renewal ...................................... 5,520 5,515 5,246 -------- -------- -------- Total Life ............................................. 10,238 12,668 15,509 Annuities ............................................... 64,292 77,145 59,003 -------- -------- -------- Total LifeUSA Insurance .............................. 74,530 89,813 74,512 Allianz/LUSA Business: Life: First year .............................................. 1,570 2,148 3,336 Single and renewal ...................................... 2,082 2,110 2,227 -------- -------- -------- Total Life ........................................... 3,652 4,258 5,563 Annuities ............................................... 66,603 76,955 58,431 -------- -------- -------- Total Allianz/LUSA Business .......................... 70,255 81,213 63,994 Lapse policy chargebacks ................................... (656) (908) (772) -------- -------- -------- Total commissions and expense allowances, net ....... $144,129 $170,118 $137,734 ======== ======== ========
- ------------------ The above table includes commissions and expense allowances related to LifeUSA Insurance policies that have been ceded by LifeUSA Insurance to the Reinsurers and service fees related to Allianz/LUSA Business. The Company pays a lapse policy chargeback to the Reinsurers when a life insurance policy that has been ceded lapses before the end of 15 months. The chargeback paid for each policy is equal to the excess of the allowances received over the premiums received. Reference is made to the Reinsurance information under the caption "General-Reinsurance" on pages 11-13 in this Annual Report and Form 10-K for further details on the Company's reinsurance agreements. EXPENSES. Total expenses were $327.5 million, $326.8 million and $279.8 million in 1998, 1997 and 1996, respectively. Total expenses were relatively flat in 1998 compared to 1997 which reflects the growth in and maturity of annuities in force offset by the decline in premium production and the 1997 national advertising and sales promotion campaign. The increase in total expenses of 17% in 1997 compared to 1996 was primarily due to increased sales in 1997 and the national advertising and sales promotion campaign. The discussion that follows gives a line-by-line comparison of expenses for the years ended December 31, 1998, 1997 and 1996. See also the Business Segments section that follows for additional analysis of the results of operations. Increases in interest credited to policyholder account values of 8%, or $8.5 million, in 1998 compared to 1997 and 10%, or $10.0 million, in 1997 compared to 1996 reflect the growth in annuities in force. The following table shows the amounts of interest credited to policyholder account values for 1998, 1997 and 1996 (in thousands): 1998 1997 1996 ------------- ------------- ------------- Direct ......... $ 213,855 $ 191,538 $ 172,838 Assumed ........ 49,372 46,616 41,187 Ceded .......... (145,229) (128,647) (114,508) ---------- ---------- ---------- Net ............ $ 117,998 $ 109,507 $ 99,517 ========== ========== ========== Increases in other benefits to policyholders of 22%, or $5.1 million, in 1998 compared to 1997 reflect increased surrenders, additional reserves for index-related benefits, accrual of bonuses to be paid to policyholders and growth in and maturity of in force business. Increases in other benefits to policyholders of 19 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS 32%, or $5.6 million, in 1997 compared to 1996 reflect the accrual of bonuses to be paid to policyholders that is generated by the production of new business and the additional accrual of bonuses that is generated by the net realized gains on investments described above. Amortization of deferred policy acquisition costs increased 8%, or $2.3 million, in 1998 compared to 1997. This increase reflects an increase in gross profits due to a growing and more mature block of in force business with slightly increased surrenders. Amortization of deferred policy acquisition costs increased 13%, or $3.3 million, in 1997 compared to 1996. This reflects the combination of an increase in gross profits due to a growing, more mature block of in force business and an increase in the amortization of deferred policy acquisition costs as a result of the net realized gains on investments described above. LifeUSA Insurance uses models to estimate future gross profits and to allocate current gross margins in order to amortize deferred policy acquisition costs and accrue for bonuses to be paid to policyholders (the primary component of other benefits to policyholders). LifeUSA Insurance is required to make revisions to the estimates in these models and adjust amortization accordingly. In 1998 and 1997, minor revisions were made to the estimates used in these models, however, the impact on financial results was insignificant. During 1996, revisions were made to the estimates in the models used to amortize deferred policy acquisition costs and accrue for bonuses to be paid to policyholders. The cumulative effect of these revisions increased pretax income by $2.7 million in 1996. The following table shows comparative rates for lapses, surrenders and annuitizations for 1998, 1997 and 1996:
1998 1997 1996 ---------- ---------- ---------- Annualized first year lapse rate for life insurance policies (excluding single premium) ................................. 24.9% 22.7% 20.7% Annualized first year (13 months) surrender rate for annuities .................................................. 1.2 1.2 1.1 Annualized first year (13 months) annuitization rate for annuities .................................................. 5.5 6.1 5.9
The impact on estimated gross profits of actual policy experience, including the rates shown above, is consistent with the assumptions in the models used by LifeUSA Insurance to compute deferred policy acquisition cost amortization. Utilizing the actual policy experience and appropriate assumptions for future periods, these models indicate that deferred policy acquisition costs are fully recoverable. Commissions to agents decreased 15%, or $15.6 million, in 1998 compared to 1997. This decrease is consistent with the decrease in total collected premiums and deposits discussed previously and with the decline in collected first year life insurance premiums, both of which were partially offset by changes in the mix of deferred annuity products sold. Commissions to agents increased 27%, or $21.3 million, in 1997 compared to 1996. This increase was due to an increase in total collected premiums and deposits discussed previously and a change in the mix of deferred annuity products sold, both of which were partially offset by the decline in collected first year life insurance premiums. Taxes, licenses and fees (which consists primarily of premium taxes and state guaranty fund assessments) decreased 31%, or $851,000, in 1998 compared to 1997. The decrease was primarily due to a general decline in overall industry assessment liabilities and the decrease in premium production. Taxes, licenses and fees decreased 24%, or $853,000, in 1997 compared to 1996. This decrease was primarily due to a general decline in overall industry assessment liabilities and a reduction in the Company's estimates for future assessment liabilities, recoveries in the first quarter of 1997 of guaranty fund assessments and state income taxes paid in 1996 and offsetting increases in premium taxes related to increased production. Operating expenses increased 2%, or $1.2 million, in 1998 compared to 1997. The increase was due primarily to the growth of LifeUSA Insurance's in force annuity business, partially offset by the expenditures for a national advertising and sales promotion campaign during 1997. Operating expenses increased 14%, or $7.7 million, in 1997 compared to 1996. The increase was due primarily to the growth of LifeUSA Insurance in force annuity business and the expenditures for the national advertising and sales promotion campaign in 1997. Life USA Holding, Inc. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS Income taxes were $13.3 million in 1998, $16.1 million in 1997 and $13.6 million in 1996. The effective income tax rates for 1998, 1997 and 1996 were 37.7%, 37.4% and 36.7%, respectively. NET INCOME. Net income was $21.9 million in 1998, $27.0 million in 1997, and $23.5 million in 1996, which represents a decrease in net income of 19% in 1998 compared to 1997 and an increase of 15% in 1997 compared to 1996. Diluted earnings per share was $.83 in 1998, $1.11 in 1997 and $1.04 in 1996 which represents a decrease of 25% in 1998 compared to 1997 and an increase of 7% in 1997 compared to 1996. For 1998, the per share decrease is higher than the net income decrease due primarily to the shares issued as a result of the agreement with Allianz Life and option exercises partially offset by the repurchase of 1.8 million shares, which increased the number of shares used in the earnings per share calculation. For 1997, the per share increase is lower than the net income increase due to an increase of 1.8 million shares used in the earnings per share calculations. (See Note 8 to the Consolidated Financial Statements for details). The following table summarizes the operating highlights for 1998, 1997 and 1996 (dollars in millions, except per share amounts):
1998 1997 1996 -------------------- --------------------- --------------------- INCOME EPS INCOME EPS INCOME EPS ---------- --------- ---------- ---------- ---------- ---------- Consolidated net income and earnings per share $ 21.9 $ .83 $ 27.0 $ 1.11 $ 23.4 $ 1.04 Adjustments to arrive at consolidated net operating income(1): Net realized gains on investments ................... ( .2) (.01) ( .7) ( .03) ( .4) ( .02) Charges (credits) for state guaranty fund assessments ........................................ ( 1.0) (.04) ( .9) ( .04) 2.0 .09 Tax liability for prior years' activity ............. .1 .01 .7 .03 -- -- ------- ------ ------- ------- ------- ------- Consolidated net operating income and earnings per share ........................................... 20.8 .79 26.1 1.07 25.0 1.11 Impact of expenses associated with national advertising campaign ................................ -- -- 2.0 .08 -- -- ------- ------ ------- ------- ------- ------- Consolidated net operating income and earnings per share excluding impact of expenses associated with national advertising campaign ....... $ 20.8 $ .79 $ 28.1 $ 1.15 $ 25.0 $ 1.11 ======= ====== ======= ======= ======= =======
- ------------------ (1) Consolidated net operating income equals net income, excluding, net of related income taxes: (i) net realized gains on investments and the corresponding increases in amortization of deferred policy acquisition costs and other benefits to policyholders, (ii) charges (credits) for state guaranty fund assessments, and (iii) changes in tax liability for prior years' activity. LIQUIDITY AND CAPITAL RESOURCES During 1998, the Company's primary available sources of cash were: o service fees received by the Company for the Allianz/LUSA Business; o management fees from LifeUSA Insurance; o interest earned on invested assets; o $10 million received from Allianz Life's stock purchase in August 1998; o dividends totaling $2.5 million paid to the Company by LifeUSA Insurance; o issuance of shares upon exercise of common stock options; and o a $50 million long-term line of credit from its Reinsurers. In September 1998, the Company borrowed $10 million under its line of credit increasing the total outstanding balance to $15 million. A substantial portion of the Company's operating expenses is attributable to services provided to LifeUSA Insurance, such as employees, data processing, facilities and supplies, which are reimbursed by LifeUSA Insurance through management fees. LifeUSA Insurance is expected to have sufficient cash to provide 21 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS reimbursement through 1999, based on currently anticipated life insurance and annuity sales and on the continuation of acceptable reinsurance arrangements. The extended marketing relationship with Allianz Life and related infusion of $100 million in capital through 2002, along with the $50 million line of credit from the Reinsurers and dividends from LifeUSA Insurance, provides sufficient capital to fund the Company's needs. The Company's cash needs consist of: o operating expenses, including expenses in connection with efforts to increase the production of existing agents and expand the size of the field force; o capital contributions to LifeUSA Marketing for investments in marketing organizations expected to increase premium and deposit production volume for LifeUSA Insurance and Allianz Life; o repayments of borrowings under the line of credit to the Reinsurers; o operating expenses of and potential contributions to LifeUSA Securities to ensure compliance with NASD capital requirements; o quarterly dividends to shareholders of record; o authorized repurchases of its common stock; o potential contributions to LTCAmerica to purchase an existing long-term care insurance company or a "shell" insurance company and commence operations; and o contributions to LifeUSA Insurance to permit increases in sales volume and retention or assumption of new life insurance and annuity business produced by LifeUSA Insurance agents and to provide LifeUSA Insurance sufficient capital and surplus to maintain adequate capital ratios. In July 1998, the Company announced that its Board of Directors authorized a program to repurchase up to four million shares of its common stock through periodic purchases in the marketplace. The shares to be repurchased represented approximately 15% of the Company's 26.0 million shares outstanding. As of December 31, 1998, 1.8 million shares have been repurchased by the Company at an average price of $12.50 per share. Repurchased shares will be deemed to be outstanding shares for purposes of calculating the 35% of the outstanding common stock of the Company to be acquired over the next five years by Allianz Life. Management believes that the available sources of cash will provide sufficient capital resources to meet all the Company's cash needs in the ordinary course of business during the next twelve months, based on currently anticipated life insurance and annuity sales, expected levels of net retention and acceptable reinsurance agreements. For LifeUSA Insurance to retain or assume life insurance and annuity business, LifeUSA Insurance must maintain a sufficient level of statutory capital and surplus as established by the regulatory authorities in the jurisdictions where LifeUSA Insurance is licensed to do business. As LifeUSA Insurance retains and assumes business, it is required to expense commissions and other policy issuance costs for statutory accounting purposes and to establish statutory reserves for policy benefits, thereby creating a statutory loss and reducing statutory surplus in the first year of the policy. The anticipated profits from the retained or assumed business are realized over the remaining period that the policies are in force. The combination of these dynamics first produced statutory net income during 1995. LifeUSA Insurance produced statutory net income of $17.2 million in 1998 compared to $18.4 million in 1997. As of December 31, 1998, LifeUSA Insurance had statutory capital and surplus for regulatory purposes of $113.1 million compared to $103.7 million at December 31, 1997. LifeUSA Insurance expects to continue to satisfy statutory capital and surplus requirements through 1999 primarily through statutory profits on its maturing block of retained in force business. Effective April 1, 1998, LifeUSA Insurance increased the retention of its annuity business from 25 to 30% and its life insurance business from 25 to 50%. The changes in the retention levels did not produce a significant impact on statutory capital in 1998. In January 1999, the Company announced that its Board of Directors declared a cash dividend of 2.5 cents per share for the fourth quarter of 1998, payable on February 12, 1999, to shareholders of record as of January 28, 1999. The Company declared similar dividends for the first, second and third quarters of 1998. It is the intention of the Board of Directors to pay regular quarterly dividends in 1999 of 2.5 cents per share, or ten cents per share on an annual basis. Life USA Holding, Inc. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS Although the Board of Directors of the Company declares dividends on its common stock, there are statutory and regulatory limitations upon the extent to which dividends may be paid to a parent from an insurance subsidiary, including the restriction that an insurance company may only pay ordinary dividends out of unassigned funds (earned surplus). The Department of Commerce of the State of Minnesota must permit LifeUSA Insurance to pay dividends to the Company in any 12-month period in an amount exceeding the lesser of (i) 10 percent of the insurer's statutory earned surplus at the end of the preceding year or (ii) the insurer's statutory net gain from operations, not including realized capital gains, for the year preceding the distribution, both of which are determined in accordance with Minnesota insurance laws and regulations. The Department of Commerce of the State of Minnesota permitted LifeUSA Insurance to pay $2.5 million in extraordinary dividends to the Company during 1998 and 1997 and $5 million in January 1999. REGULATORY ENVIRONMENT. LifeUSA Insurance is subject to regulation in the 49 states in which it is authorized to do business. The laws of these states establish supervisory agencies with administrative powers related to granting and revoking licenses to transact business, approving the form and content of policies, reviewing the advertising and illustration of policies, licensing agents, establishing reserve requirements and regulating the type and amount of investments. Such regulations are primarily intended to protect policyholders. The Company is also regulated in several states as an insurance holding company and as a third party administrator. With the objective of reducing the risk of company insolvencies, the National Association of Insurance Commissioners (NAIC) established risk-based capital standards. The risks inherent in a life insurance company's operation determine its current capital requirements. These standards continue to be reviewed by the NAIC. LifeUSA Insurance's current percentage of actual total adjusted capital to authorized control level risk-based capital is well in excess of regulatory requirements. The NAIC continues to consider changes to model laws based on innovative product designs. Nonforfeiture law discussions have considered how to better support multiple benefit product designs, such as LifeUSA Insurance's two-tier annuities and universal life insurance contracts with enhanced retirement benefits. LifeUSA Insurance has been able to successfully demonstrate the financial stability of such designs, which provide higher retirement benefits to consumers while decreasing disintermediation and solvency risks to LifeUSA Insurance. As of December 31, 1998, the NAIC Life Insurance Illustration Model Regulation was effective in twenty-seven states. A requirement of the regulation is that prescribed tests be satisfied to demonstrate illustrated benefits are self-supporting and not lapse-supported. The requirements of this regulation have been successfully implemented by LifeUSA Insurance. In December 1998, the NAIC finalized a new annuity disclosure model regulation. Final NAIC adoption is anticipated in March 1999, and adoption in each state is required before it becomes law. The new model requires a product specific disclosure document and a copy of the NAIC Buyer's Guide to Fixed Deferred Annuities be provided to the consumer at the time of application. It does not regulate illustrations and does not require self-support or lapse-support testing of annuity illustrations. LifeUSA Insurance is monitoring these developments and no significant impact is anticipated at this time. NAIC committees are considering a new approach to statutory valuation of liabilities (reserves) and regulations for equity-indexed products. LifeUSA Insurance is monitoring these developments and no significant impact is anticipated at this time. Insurance laws also require LifeUSA Insurance to file detailed periodic reports with the regulatory agencies in each of the states in which it writes business, and these agencies may also examine LifeUSA Insurance's business operations and financial statements at any time. Under NAIC rules, one or more of the regulatory agencies will periodically examine LifeUSA Insurance, normally at three-year intervals, on behalf of the states in which LifeUSA Insurance is licensed. During 1996, the Minnesota Department of Commerce conducted a triennial examination of LifeUSA Insurance for the three years ended December 31, 1995 and a report of Association Financial Examination was released June 30, 1998. The recommendations contained in the report were not material individually or in the aggregate to LifeUSA Insurance's business operations or financial statements. 23 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS LifeUSA Securities, as a registered broker and dealer in securities, is subject to the Securities and Exchange Commission's Uniform Net Capital Rule. As of December 31, 1998, LifeUSA Securities' net capital exceeded the minimum required balance. In June 1998, the A.M. Best Company upgraded the rating assigned to LifeUSA Insurance to A- (Excellent) from B++ (Very Good). The A- rating is assigned to companies which, in A.M. Best's opinion, have excellent financial strength, operating performance and market profile, on balance, when compared to the standards established by the A.M. Best Company. A- companies have a strong ability to meet their ongoing obligations to policyholders. According to the A.M. Best Company, the upgrade reflects LifeUSA Insurance's innovative product portfolio and marketing ability, its extensive distribution system, its strong reinsurance relationships, and its ability to raise capital through its parent as demonstrated by the 1998 agreement with Allianz Life. In May 1998, Moody's Investors Service (Moody's) upgraded the rating assigned to LifeUSA Insurance to A3 from Baa3. This rating falls within Moody's "Strong Companies" category. According to Moody's, the upgrade reflects the significant minority interest to be held by Allianz Life, as well as the enhanced marketing, reinsurance and strategic ties between the Company and Allianz Life. In August 1998, Standard & Poor's (S&P) affirmed LifeUSA Insurance's initial claims-paying ability rating of BBB+ (Adequate). S&P assigns the BBB+ rating to insurers which, in its opinion, offer adequate financial security, but capacity to meet policyholder obligations is susceptible to adverse economic and underwriting conditions. INVESTMENTS As of December 31, 1998, the Company had cash, cash equivalents and fixed maturity investments on a consolidated basis totaling $2.30 billion, including $7.7 million in restricted deposits with state insurance authorities regulating LifeUSA Insurance. The following table summarizes the amortized cost, carrying and fair values of each investment category held at December 31, 1998 and 1997 (dollars in thousands):
AMORTIZED % OF CARRYING % OF FAIR % OF 1998 COST TOTAL VALUE TOTAL VALUE TOTAL - --------------------------------------------------- ------------- ----------- ------------- ----------- ------------- ----------- Cash and cash equivalents ......................... $ 21,570 .96% $ 21,570 .94% $ 21,570 .92% Government Treasury and Agency notes and bonds ............................................ 84,532 3.76 89,927 3.91 98,178 4.17 Taxable municipals ................................ 11,073 .49 11,226 .49 11,239 .48 Mortgage pass throughs ............................ 51,520 2.29 53,947 2.34 53,947 2.29 Agency Collateralized Mortgage Obligations: CMO -- Sequentials ............................... 2,491 .11 2,491 .11 2,540 .11 CMO -- PACs ...................................... 613,703 27.31 618,159 26.86 634,303 26.92 CMO -- ADs ....................................... 21,619 .96 21,619 .94 22,514 .96 CMO -- TACs ...................................... 7,106 .32 7,106 .31 7,733 .33 Investment grade corporate securities: AAA+ to AAA- ..................................... 73,975 3.29 74,668 3.24 77,237 3.28 AA+ to AA- ....................................... 190,650 8.49 197,282 8.57 203,387 8.63 A+ to A- ......................................... 687,305 30.59 708,241 30.78 723,494 30.71 BBB+ to BBB- ..................................... 456,726 20.34 472,717 20.54 477,820 20.25 Non investment grade corporate securities ......... 24,577 1.09 22,380 .97 22,308 .95 ---------- ------ ---------- ------ ---------- ------ Total cash and invested assets .................... $2,246,847 100.00% $2,301,333 100.00% $2,356,270 100.00% ========== ====== ========== ====== ========== ======
Life USA Holding, Inc. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
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% ========== ====== ========== ====== ========== ======
As part of its asset and liability management practices, LifeUSA Insurance manages investments and credited interest rates to produce a net investment spread consistent with priced-for expectations. As of December 31, 1998, the weighted average credited interest rate for deferred annuities and life insurance policies was 4.85% and the weighted average yield on the assets backing liabilities was 7.26%. As of December 31, 1997, the weighted average credited interest rate was 5.00% and the weighted average yield on the assets backing liabilities was 7.34%. Investment income from the assets backing liabilities exceeded interest credited to policyholders by $32.9 million during 1998. The investment portfolio is managed primarily by allocating new cash flows into investments that have yield, maturity and other characteristics suitable for LifeUSA Insurance's expected policyholder liabilities. Consistent with LifeUSA Insurance's asset and liability management practices, as of December 31, 1998, the effective duration of LifeUSA Insurance's fixed income securities was 4.66 years, compared to 5.03 years as of December 31, 1997. The percentage of the total fair value of the Company's portfolio that was comprised of investment grade corporate obligations was 63% at December 31, 1998. With each corporate security acquisition, LifeUSA Insurance's external managers perform a comprehensive analysis of the credit implications and outlook of the issuing corporation and industry. Ongoing procedures for monitoring and assessing any potential deterioration or downgrade in credit quality are also in place. The Company's guidelines for the acquisition of corporate securities do not allow the purchase of securities that are rated below investment grade by Moody's Investors Service and Standard & Poor's. Approximately 1% of the total fair value of the Company's portfolio was comprised of non-investment grade corporate obligations at December 31, 1998. The Company believes that there is no impairment to these investments, as they will continue to receive principal and interest payments through maturity. The remainder of the Company's portfolio is comprised of government and government agency obligations. Government and government agency obligations are primarily held in the form of Planned Amortization Class (PAC) Collateralized Mortgage Obligations (CMOs), the most conservative type of CMO issued. These CMOs are specifically structured to provide the highest degree of protection against swings in repayments caused primarily by changes in interest rates, have virtually no risk of default and are well-suited to fund the payment of the liabilities they support. Currently, the decision of the asset type in which to invest is dictated by market conditions and relative values within the respective markets at the time of purchase. Management believes that the types of assets in which it invests will allow the Company to maintain high quality, consistent yields and proper maturities for the overall portfolio. As of December 31, 1998, the Company held 44%, or $1.02 billion, of the total fair value of its fixed maturity investments as available for sale. The Company believes that this percentage is a prudent level that 25 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS will allow enough liquidity to meet any adverse cash flow experience. The Company continues to classify a significant portion of its investment securities as held to maturity based on its intent to hold such securities to maturity. A key feature of LifeUSA Insurance's products is the provision of bonuses to encourage terminating policyholders to withdraw their funds over settlement periods lasting at least five years. Policyholders taking cash settlements do not receive the bonuses. This feature allows the Company to hold a significant amount of assets to maturity. Insurance regulations require LifeUSA Insurance to perform an asset adequacy analysis each year to determine if the assets are sufficient to fund future obligations. LifeUSA Insurance's asset adequacy analysis indicates that the assets are sufficient to fund future obligations. The Company continually monitors and modifies the allocation of new assets between held to maturity and available for sale as deemed prudent based on the continuing analysis of cash flow projections and liquidity needs. At December 31, 1998, the Company's shareholders' equity and book value per share were $280.0 million and $11.30, respectively, compared to $222.4 million and $9.77, respectively, at December 31, 1997. Excluding the effect of the net unrealized gain on fixed maturity investments -- available for sale reported as a separate component of shareholders' equity in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company's shareholders' equity and book value per share were $266.6 million and $10.76, respectively, at December 31, 1998, compared to $214.3 million and $9.41, respectively, at December 31, 1997. MARKET RISK DISCLOSURE Market risk is the risk of loss that may occur when fluctuations in interest and currency exchange rates and equity and commodity prices change the value of a financial instrument. Both derivative and nonderivative financial instruments have market risk. The Company is primarily exposed to interest rate risk. INTEREST RATE RISK LifeUSA Insurance first manages interest rate risk through the design of its deferred annuity products and secondarily through asset and liability management. LifeUSA Insurance's core two-tier annuity product structure significantly reduces interest rate risk by encouraging long-term persistency and settlements by the policyholder. Historically, more than two-thirds of LifeUSA Insurance's annuity policyholders have elected to annuitize their benefits instead of surrender for cash. This increases the Company's ability to predict and manage cash flows relative to traditional annuity products. Changes in external interest rates have had little discernible effect on surrender and annuitization activity throughout the history of LifeUSA Insurance. Projected liability cash flows reflect LifeUSA Insurance's experience and actuarial projections of policyholder behavior based on product design. Assets purchased to back the liabilities have cash flows consistent with the liability structure. Asset cash flows are tightly structured through investment-grade non-callable corporate obligations or Planned Amortization Class Collateralized Mortgage Obligations. Currently 63% of the total fair value of the Company's investments are corporate investment-grade fixed income maturity obligations and 35% are direct government and government agency mortgage-backed securities. Liability duration measures are used as a guideline in establishing the initial laddered purchase of assets. In addition, cash flow analysis of the in force business using a combination of current and probable future interest rate scenarios is used to monitor and, if needed, adjust the asset portfolio accordingly. Investment guidelines are designed to maintain a stable portfolio yield using a buy-and-hold strategy with long-term, fixed income securities. As a result of the Company's approach to managing interest rate risk, if interest rates on December 31, 1998 abruptly increased 100 basis points, there would be no material effect on 1999 net income. This effect on net income does not consider the possible effects a change in economic activity could have in such an environment. The Company's customers and competitors would also respond to these fluctuations, and regulators or legislators might act in ways the Company cannot foresee. Because the Company cannot be certain what specific actions would be taken and their effects, the sensitivity analysis above assumes no significant changes in the Company's financial structure. Life USA Holding, Inc. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS DERIVATIVES LifeUSA purchases 5-year and 7-year "over-the-counter" European-Asian call option contracts based on the S&P 500 index. The option contracts are used specifically to hedge the potential policyholder benefit associated with the equity-indexed annuity policies sold by LifeUSA Insurance. LifeUSA Insurance only purchases option contracts from counterparties rated AA- or better and the option contracts are not used for trading purposes. As of December 31, 1998, LifeUSA Insurance's investment in option contracts is as follows (dollars in thousands): YEAR OF NOTIONAL NUMBER OF WEIGHTED AVG. MARKET EXPIRATION PAR UNITS STRIKE PRICE COST VALUE - ------------ ---------- ----------- --------------- -------- --------- 2002 $ 3,076 3,239 $1,278 $ 444 $ 821 2003 44,826 41,107 1,418 7,727 9,759 2004 2,200 2,593 1,239 347 643 2005 662 657 1,393 164 161 ------- ------ ------ ------- Totals $50,764 47,596 $8,682 $11,384 ======= ====== ====== ======= The option contracts are reported at fair value in other assets on the Consolidated Balance Sheet. Unrealized gains and losses on the option contracts are recorded in other revenues to offset increases in the future policy benefits liability for the index benefit that are shown in other benefits to policyholders on the Consolidated Statement of Income. The cost of the option contract is amortized over the life of the option contract and is reflected in the future policy benefits liability for the index benefit. Any realized gains at expiration are credited to policyholder reserves. YEAR 2000 UPDATE GENERAL A comprehensive analysis of the Year 2000 (Y2K) issue was completed in 1997. This analysis established a plan for compliance of all Company information systems and significant non-computer devices to ensure accurate processing of date data from the twentieth and into the twenty-first centuries. The project also included identification of key vendors and obtaining assurances that their key systems are Y2K compliant. Because the Company has only been operating since 1987, significant systems were already Y2K compliant. Total cost of the project was estimated at $500,000. At the end of fourth quarter of 1998, incurred costs totaled $616,000 with final costs expected to be approximately $650,000, including upgrading of operating systems, development tools and desktop applications. SYSTEMS The Company continues to execute its plan to ensure that all systems are Y2K compliant and expects to complete the plan by June 1999. All of the Company's mainframe, local area network and voicemail systems are all Y2K compliant with the exception of systems being upgraded in the normal course of business. Full scale production level system testing was completed in September 1998. These tests covered key functional components of the systems and tested conditions through the first quarter of 2001. The machine environment and application software executed as expected into 2001. Complete documentation of each test has been compiled and is being archived. Full scale production level system testing for each of the personal computer based applications was completed in January 1999. These tests covered key functional components of the applications and tested conditions through the first quarter of 2001. Complete documentation of each test has been compiled and is being archived. The personal computer based applications executed as expected into year 2001. Applications being upgraded in the normal course of business include the financial accounting application and the LifeUSA Insurance policy assembly application. The financial accounting application is being upgraded to provide more functionality. This application is Y2K compliant and installation by the end of first quarter 1999 is on schedule. LifeUSA Insurance is automating its policy assembly application during the first quarter of 1999, and that application will be Y2K compliant. In addition, all personal computer hardware and non-computer hardware is or will be Y2K compliant by June 1999. ONGOING ACTIVITY Follow-up on compliance assurances by key vendors and business partners was ongoing through the end of 1998 and will continue in 1999, as is appropriate. Testing of data exchange with 27 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS key external business partners continues for purposes of date compliance with testing being executed during the first quarter of 1999 as partners reach date compliance. Contingency planning continues as additional back-up protection with respect to key vendors who have provided assurances that their systems are Y2K compliant. SUMMARY At this time, the Company is aware of no Y2K compliance issues that will negatively impact the key business processes of the Company or its affiliated companies. All Y2K compliance plan activities are scheduled to be completed by June 1999. Life USA Holding, Inc. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS Management has organized the Company into three business segments in order to focus on the distinct functional activities performed by each. The Insurance Segment focuses on the administration, asset/liability management and reinsurance of fixed insurance products. The Marketing Segment focuses its efforts on the field force used to distribute fixed insurance products, product design and promotion, advertising and the management of investments in marketing subsidiaries. The Corporate Segment provides strategic direction for all segments and includes the operations of LifeUSA Securities and LTCAmerica because their results of operations are not yet material and do not warrant separate disclosure. The results of operations for the Company's Insurance, Marketing and Corporate Segments are presented in the discussion that follows. The table on pages 32 and 33 summarizes the results of operations for each of the three years in the period ended December 31, 1998 and total assets as of December 31, 1998, 1997 and 1996. The Company evaluates the performance of each business segment based on profit or loss from operations. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the Consolidated Financial Statements. The asset and income statement items are allocated based on the functionality and nature of the activities performed by each segment. INSURANCE SEGMENT. The Insurance Segment develops fixed insurance products for LifeUSA Insurance and Allianz Life, cedes a portion of the business written by LifeUSA Insurance to reinsurers and assumes a portion of the Allianz/LUSA Business. The Insurance Segment manages the assets and liabilities for business retained or assumed by LifeUSA Insurance and administers all of the LifeUSA Insurance and Allianz/LUSA Business. The Insurance Segment's primary revenue sources are net investment income, net commissions and expense allowances, service fees and policyholder charges. The Insurance Segment's primary expenses are interest credited to policyholder account values, other benefits to policyholders, amortization of deferred policy acquisition costs, intersegment marketing fees paid to the Marketing Segment for the production of LifeUSA Insurance and Allianz/LUSA Business and operating expenses. The Insurance Segment's primary assets are investments, reinsurance recoverables, deferred policy acquisition costs, accrued investment income and policy loans. These assets represent approximately 98% of the total consolidated assets. The Insurance Segment's profitability is derived from its ability to effectively manage the assets and liabilities retained or assumed by LifeUSA Insurance and to manage the operating expenses incurred in the administration of all business produced. REVENUES. Total revenues were $358.4 million, $368.3 million and $316.2 million in 1998, 1997 and 1996, respectively. Since the revenues reported by the Insurance Segment account for the majority of the revenues reported by the Company on a consolidated basis, the reasons for the changes are consistent with those previously discussed in the Company's Results of Operations section. EXPENSES. Total expenses were $330.5 million, $338.9 million and $293.6 million in 1998, 1997 and 1996, respectively. The decrease in total expenses of 2% in 1998 compared to 1997 is primarily attributable to the decrease in the marketing fee paid to the Marketing Segment, net of deferral, as a result of the decrease in premium and deposit production. This factor is partially offset by an increase in interest credited to policyholder account values due to growth of annuities in force. The marketing fee, which decreased 17% from 1997, is calculated as a percentage of premium and will vary generally with the change in premium and deposit production which decreased 18% from 1997. Differences in the mix of production between annuities and life insurance and differences in the mix of premium between single, first year and renewal will cause the marketing fee to change by greater or lesser amounts than the change in premium and deposit production. The increase in total expenses of 15% in 1997 compared to 1996 is primarily attributable to the 22% increase in the marketing fee as a result of the 23% increase in premium production. MARKETING SEGMENT. The Marketing Segment provides all services related to the recruitment and development of agents and FMOs, support of agents producing LifeUSA Insurance business and Allianz/LUSA 29 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS Business, and advertising, promotion and incentive programs to increase production. The Marketing Segment also manages all acquisitions of and investments in field marketing organizations. The Marketing Segment's primary revenue source is the intersegment marketing fee assessed to the Insurance Segment for the production of LifeUSA Insurance business and Allianz/LUSA Business. This fee is calculated as a percentage of the premiums and deposits produced with varying rates for life insurance and annuity production and for first year, single and renewal premium and deposits. The amount assessed is comparable to commissions earned by large national FMOs performing similar services. The Marketing Segment's assets, which account for less than 1% of total consolidated assets, consist primarily of investments in subsidiaries. The Marketing Segment's profitability is derived from its ability to manage commissions and operating costs. REVENUES. Total revenues were $133.8 million, $155.3 million and $129.2 million in 1998, 1997 and 1996, respectively. The decrease in total revenues of 14% in 1998 compared to 1997, and the increase in total revenues of 20% in 1997 compared to 1996, is primarily attributable to the marketing fee that is based on premium and deposit production discussed previously. The entire amount of the marketing fee is charged to the Insurance Segment and is eliminated in consolidation. EXPENSES. Total expenses were $126.8 million, $140.8 million and $114.8 million in 1998, 1997 and 1996, respectively. The decrease in total expenses of 10% in 1998 compared to 1997, and the increase in total expenses of 23% in 1997 compared to 1996, is primarily attributable to commissions incurred that are based on premium and deposit production discussed previously. Differences in the mix of production between annuities and life insurance and differences in the mix of premium between single, first year and renewal will also cause commissions to change. CORPORATE SEGMENT. The Corporate Segment provides strategic direction for the Company and its various business segments and includes the operations of LifeUSA Securities and LTCAmerica because their results are not yet material and do not warrant separate disclosure. The Corporate Segment charges a fee to all other segments based on the revenues of those individual segments. The Corporate Segment retains expenses of an enterprise-wide nature, such as the 1997 national advertising campaign. Assets consist primarily of surplus investments and investments in subsidiaries. REVENUES. Total revenues were $10.8 million, $10.4 million and $8.0 million for 1998, 1997 and 1996, respectively. The increase in total revenues of 4% in 1998 compared to 1997 is due to an increase in other revenues and equity income in subsidiaries partially offset by the decrease in the corporate fee. The increase in other revenues is due to an increase in LifeUSA Securities concession revenue on sales of security products. Equity income in subsidiaries is a result of the 40% minority interest in Windsor purchased in April 1998. The corporate fee decrease is due to a decrease in 1998 revenues for the Marketing and Insurance Segments. The increase in total revenues of 30% in 1997 compared to 1996 is primarily related to the increases in the corporate fee that is directly related to the increase in 1997 revenues for the Insurance Segment and Marketing Segment. In addition, net investment income on the fixed maturity investments held by the Company was first allocated to the Corporate Segment beginning in 1997. Prior to 1997, net investment income was fully allocated to the Insurance Segment. EXPENSES. Total expenses were $10.6 million, $11.2 million and $8.0 million for 1998, 1997 and 1996, respectively. The decrease of 6% in 1998 compared to 1997 is primarily attributable to the cost of a national advertising and sales campaign that was completed in 1997 partially offset by an increase in LifeUSA Securities commissions paid. The increase of 41% for 1997 compared to 1996 is primarily attributable to the cost of the national advertising campaign. Life USA Holding, Inc. 30 (This page has been left blank intentionally.) 31 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS BUSINESS SEGMENTS RESULTS OF OPERATIONS. The following table summarizes the results of operations and total assets reported by the three business segments and reconciles to the Company's consolidated results of operations and consolidated assets for the years ended 1998, 1997 and 1996 (in thousands):
INSURANCE SEGMENT MARKETING SEGMENT ----------------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 ------------- ------------- ------------- ---------- ---------- ---------- Revenues: Policyholder charges ................... $ 53,061 $ 49,470 $ 46,842 $ -- $ -- $ -- Net investment income .................. 156,895 143,263 129,410 22 -- -- Net realized gains (losses) on investments ........................... 795 4,371 1,791 -- -- -- Commissions and expense allowances, net ....................... 144,129 170,118 137,734 -- -- -- Marketing fee .......................... -- -- -- 131,753 154,500 128,481 Corporate fee .......................... -- -- -- -- -- -- Equity income in subsidiaries .......... -- -- -- 972 109 47 Other .................................. 3,565 1,090 429 1,074 658 643 ---------- ---------- ---------- -------- -------- -------- Total revenues ...................... 358,445 368,312 316,206 133,821 155,267 129,171 Expenses: Interest credited to policyholder account values ........................ 117,998 109,507 99,517 -- -- -- Other benefits to policyholders ........ 28,052 23,001 17,414 -- -- -- Amortization of deferred policy acquisition costs ..................... 30,120 27,789 24,495 -- -- -- Commissions and marketing fee .......... 111,092 134,348 109,879 103,930 119,896 97,157 Taxes, licenses and fees ............... 1,892 2,743 3,596 -- -- -- Operating expenses: Salaries and employee benefits ....... 15,243 16,226 14,597 7,741 6,167 4,575 Data processing ...................... 3,630 3,311 4,306 1,424 1,260 1,873 Printing and office supplies ......... 932 972 779 1,387 1,360 1,261 Depreciation and amortization ........ 2,545 2,454 2,084 2,738 1,571 794 Other ................................ 18,996 18,577 16,940 9,567 10,500 9,104 ---------- ---------- ---------- -------- -------- -------- Total expenses ...................... 330,500 338,928 293,607 126,787 140,754 114,764 ---------- ---------- ---------- -------- -------- -------- Income before income taxes .............. 27,945 29,384 22,599 7,034 14,513 14,407 Income taxes ............................ 10,011 10,826 8,294 3,118 5,624 5,293 ---------- ---------- ---------- -------- -------- -------- Net income .............................. $ 17,934 $ 18,558 $ 14,305 $ 3,916 $ 8,889 $ 9,114 ========== ========== ========== ======== ======== ======== Assets: Investment in equity method subsidiaries ........................... -- -- -- $ 35,122 $ 21,131 $ 12,342 ========== ========== ========== ======== ======== ======== Total assets ............................ $5,371,201 $5,004,303 $4,357,466 $ 37,456 $ 22,521 $ 12,569 ========== ========== ========== ======== ======== ========
- ------------------ (1) On a consolidated basis, the Company defers the costs of acquiring new business and amortizes these costs over the lives of the policies in proportion to the estimated gross profits expected to be realized on the policies. For business segment reporting purposes, the deferred policy acquisition costs and the corresponding amortization is recorded as an asset and expense of the Insurance Segment. In addition, expenses allocated to the Marketing Segment and Corporate Segment for business segment reporting purposes that are deferred by the Company on a consolidated basis are reported direct (gross of the amounts deferred) by each of these segments. The Insurance Segment reports the impact of these deferrals as a reduction in the marketing and corporate fees paid to the Marketing Segment and Corporate Segment, respectively. The differences between the total of the expenses reported by all of Life USA Holding, Inc. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
CORPORATE SEGMENT ELIMINATING ENTRIES(1) CONSOLIDATED - ---------------------------------- ------------------------------------------- ------------------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ---------- ---------- ---------- ------------- ------------- ------------- ------------- ------------- ------------- $ -- $ -- $ -- $ -- $ -- $ -- $ 53,061 $ 49,470 $ 46,842 1,029 834 2 -- -- -- 157,946 144,097 129,412 (26) (24) -- -- -- -- 769 4,347 1,791 -- -- -- -- -- -- 144,129 170,118 137,734 -- -- -- (131,753) (154,500) (128,481) -- -- -- 8,644 9,590 8,032 (8,644) (9,590) (8,032) -- -- -- 271 -- -- -- -- -- 1,243 109 47 861 14 -- -- -- -- 5,500 1,762 1,072 ------- ------- ------- ---------- ---------- ---------- ---------- ---------- ---------- 10,779 10,414 8,034 (140,397) (164,090) (136,513) 362,648 369,903 316,898 -- -- -- -- -- -- 117,998 109,507 99,517 -- -- -- -- -- -- 28,052 23,001 17,414 -- -- -- -- -- -- 30,120 27,789 24,495 728 11 -- (129,967) (152,863) (126,943) 85,783 101,392 80,093 -- -- -- -- -- -- 1,892 2,743 3,596 3,767 3,142 4,452 (778) (700) (600) 25,973 24,835 23,024 222 183 77 (73) (60) (78) 5,203 4,694 6,178 142 130 196 (251) (218) (203) 2,210 2,244 2,033 333 166 95 -- -- -- 5,616 4,191 2,973 5,409 7,608 3,155 (9,328) (10,249) (8,689) 24,644 26,436 20,510 ------- ------- ------- ---------- ---------- ---------- ---------- ---------- ---------- 10,601 11,240 7,975 (140,397) (164,090) (136,513) 327,491 326,832 279,833 ------- ------- ------- ---------- ---------- ---------- ---------- ---------- ---------- 178 (826) 59 -- -- -- 35,157 43,071 37,065 121 (357) 24 -- -- -- 13,250 16,093 13,611 ------- ------- ------- ---------- ---------- ---------- ---------- ---------- ---------- $ 57 $ (469) $ 35 $ -- $ -- $ -- $ 21,907 $ 26,978 $ 23,454 ======= ======= ======= ========== ========== ========== ========== ========== ========== $ 1,803 -- -- -- -- -- $ 36,925 $ 21,131 $ 12,342 ======= ======= ======= ========== ========== ========== ========== ========== ========== $36,710 $61,418 $58,889 $ 13,352 $ (25,468) $ (42,201) $5,458,719 $5,062,774 $4,386,723 ======= ======= ======= ========== ========== ========== ========== ========== ==========
- ------------------ the segments and the expenses (net of deferrals) reported by the Company on a consolidated basis appear as intersegment eliminations in the tables presented above. Eliminations for assets consist primarily of adjustments made to investments in wholly-owned subsidiaries, including dividends which are assumed to be made from the Marketing Segment to the Corporate Segment. 33 Life USA Holding, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS Statements other than historical information contained in this Annual Report and Form 10-K, including the statements involving hypothetical events included in the "Market Risk Disclosure," are forward-looking statements and, therefore, subject to risks and uncertainties, including those identified below, which could cause the actual results to differ materially from statements. In addition to statements which are forward-looking by reason of context, the words "believe," "expect," "anticipate," "intend," "designed," "goal," "objective," "optimistic," "will" and similar expressions identify forward-looking statements. Factors which could cause actual results to differ materially from the forward-looking statements, thereby resulting in a material adverse impact on the business, results of operations or financial condition of the Company, include but are not limited to (i) the Company's ability to develop or receive regulatory approval of new products intended to be marketed as uniquely suited to meet identified needs for life insurance, retirement income planning and long-term care; (ii) regulatory constraints on existing or future products rendering the products unmarketable or unprofitable; (iii) the Company's ability to favorably differentiate its products and service levels from those of competitors, including other insurance and financial services companies and various investment vehicles readily available to consumers; (iv) loss of key personnel; (v) the Company's ability to manage assets and produce returns providing sufficient spread on invested assets backing policyholder liabilities; (vi) the strength of the equity markets and the interest rate environment; (vii) field marketing organization investment in the education and support of agents selling the Company's products; (viii) the ability of owned and minority-owned marketing organizations to increase production and profitability; (ix) increase in the size and improvement in the productivity of the Company's distribution system; (x) continuation of mutually beneficial relationships with Allianz Life and the Reinsurers; (xi) continued access to capital at favorable rates; (xii) willingness of the private market to identify and allocate significant resources to long-term care coverage; (xiii) the Company's ability to attract and retain committed, competent and creative home office owners and management; (xiv) the Company's ability to ensure the continuous availability of technology at levels necessary to efficiently process and maintain the business produced for the entire enterprise and manage the assets of the enterprise; (xv) litigation, with or without merit, claiming significant resources of the enterprise; and (xvi) the ability of the Company to adequately remediate all operational systems and non-computer devices and internal computer software to avoid Year 2000 problems without significant additional expense, and the reliability of assurances obtained from and ongoing data exchange testing with key vendors and business partners to address Year 2000 problems. Forward-looking statements speak only as of the date on which they are made, and the Company does not undertake an obligation to update or revise any forward-looking statements. Life USA Holding, Inc. 34 (This page has been left blank intentionally.) 35 Life USA Holding, Inc. CONSOLIDATED BALANCE SHEET CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1998 1997 -------------- ------------- ASSETS Investments: Fixed maturity investments: Available for sale, at fair value (amortized cost: $966,205 at December 31, 1998 and $846,466 at December 31, 1997) .................... $1,020,691 $ 882,159 Held to maturity, at amortized cost (fair value: $1,314,009 at December 31, 1998 and $1,289,621 at December 31, 1997) .................. 1,259,072 1,249,488 Policy loans ............................................................... 34,939 29,003 ---------- ---------- Total investments ....................................................... 2,314,702 2,160,650 Cash and cash equivalents ................................................... 21,570 34,139 Accrued investment income ................................................... 33,729 30,976 Future policy benefits recoverable and amounts due from reinsurers .......... 2,801,109 2,577,598 Deferred policy acquisition costs ........................................... 216,725 215,097 Other assets ................................................................ 70,884 44,314 ---------- ---------- $5,458,719 $5,062,774 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Future policy benefits ..................................................... $5,030,833 $4,686,172 Other policyholders' funds ................................................. 9,839 9,208 Amounts due reinsurers ..................................................... 43,546 38,403 Accrued commissions to agents .............................................. 8,990 11,583 Taxes, licenses and fees payable ........................................... 6,023 8,415 Accounts payable ........................................................... 5,262 5,323 Long-term debt ............................................................. 15,000 5,000 Convertible subordinated debentures ........................................ 5,898 36,030 Deferred income taxes ...................................................... 19,172 16,513 Other liabilities .......................................................... 34,171 23,727 ---------- ---------- Total liabilities ....................................................... 5,178,734 4,840,374 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value; 15,000,000 shares authorized, none issued ............................................................... -- -- Common stock, $.01 par value; 60,000,000 shares authorized, 24,752,156 shares issued and outstanding (22,723,830 shares at December 31, 1997) ........................................................ 248 227 Common stock to be issued, 24,361 shares (35,458 shares at December 31, l997) ........................................................ 328 565 Additional paid-in capital ................................................. 150,096 108,372 Notes receivable from stock sales .......................................... (4,266) (7,477) Retained earnings .......................................................... 120,145 112,564 Accumulated other comprehensive income: Net unrealized gain on fixed maturity investments -- available for sale .... 13,434 8,149 ---------- ---------- Total shareholders' equity .............................................. 279,985 222,400 ---------- ---------- $5,458,719 $5,062,774 ========== ==========
SEE ACCOMPANYING NOTES. Life USA Holding, Inc. 36 CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED STATEMENT OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 -------------- -------------- -------------- Revenues: Policyholder charges .................................... $ 53,061 $ 49,470 $ 46,842 Net investment income ................................... 157,946 144,097 129,412 Net realized gains on investments ....................... 769 4,347 1,791 Commissions and expense allowances, net ................. 144,129 170,118 137,734 Other ................................................... 6,743 1,871 1,119 ----------- ----------- ----------- Total revenues ....................................... 362,648 369,903 316,898 Expenses: Interest credited to policyholder account values ........ 117,998 109,507 99,517 Other benefits to policyholders ......................... 28,052 23,001 17,414 Amortization of deferred policy acquisition costs ....... 30,120 27,789 24,495 Commissions ............................................. 85,783 101,392 80,093 Taxes, licenses and fees ................................ 1,892 2,743 3,596 Operating expenses ...................................... 63,646 62,400 54,718 ----------- ----------- ----------- Total expenses ....................................... 327,491 326,832 279,833 ----------- ----------- ----------- Income before income taxes ............................... 35,157 43,071 37,065 Income taxes ............................................. 13,250 16,093 13,611 ----------- ----------- ----------- Net income ............................................... $ 21,907 $ 26,978 $ 23,454 =========== =========== =========== Basic earnings per common share .......................... $ .85 $ 1.24 $ 1.13 =========== =========== =========== Diluted earnings per common share ........................ $ .83 $ 1.11 $ 1.04 =========== =========== =========== Number of shares used in per share calculation: Basic ................................................... 25,659,567 21,795,258 20,762,192 Diluted ................................................. 26,426,291 25,160,437 23,358,663
SEE ACCOMPANYING NOTES. 37 Life USA Holding, Inc. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
NUMBER TOTAL OF COMMON SHAREHOLDERS' STOCK SHARES EQUITY -------------- -------------- Balance at December 31, 1995 ........................................................... 20,324,747 $ 156,896 Comprehensive income Net income ............................................................................ 23,454 Change in net unrealized gain (loss) on fixed maturity investments, net of effect on deferred policy acquisition costs of $21,145 and net of tax of $4,855 ............. Reclassification adjustment for realized gains included in income net of effect on deferred policy acquisition costs of $(1,200) and net of tax of $191 .............. Other Comprehensive income ............................................................. (9,372) --------- Total Comprehensive income ............................................................. 14,082 Issuance of common shares to Employee .................................................. Savings Plan ........................................................................... 167,457 -- Issuance of shares through field marketing organization loan program, net .............. 478,262 -- Issuance of shares through exercise of options ......................................... 28,455 226 Common stock to be issued-shares, net of 674,174 shares issued ......................... (24,020) 1,411 ---------- --------- Balance at December 31, 1996 ........................................................... 20,974,901 172,615 Comprehensive income Net income ............................................................................ 26,978 Change in net unrealized gain (loss) on fixed maturity investments, net of effect on deferred policy acquisition costs of $(17,181) and net of tax of $3,466 ........... Reclassification adjustment for realized gains included in income net of effect on deferred policy acquisition costs of $(3,300) and net of tax of $347 .............. Other Comprehensive income ............................................................. 4,814 --------- Total Comprehensive income ............................................................. 31,792 Issuance of common shares to Employee Savings Plan ..................................... 101,251 -- Issuance of shares through field marketing organization loan program, net .............. 263,652 (257) Issuance of shares through exercise of options ......................................... 1,216,250 15,372 Issuance of shares through subsidiary acquisition ...................................... 132,188 1,450 Issuance of shares through warrants exercised .......................................... 57,615 -- Issuance of shares through conversion of convertible subordinated debentures ........... 110 -- Common stock to be issued-shares, net of 1,770,313 shares issued ....................... 13,321 1,428 ---------- --------- Balance at December 31, 1997 ........................................................... 22,759,288 222,400 Comprehensive income Net income ............................................................................ 21,907 Change in net unrealized gain (loss) on fixed maturity investments, net of effect on deferred policy acquisition costs of $(11,689) and net of tax of $2,388 ........... Reclassification adjustment for realized gains included in income net of effect on deferred policy acquisition costs of $(500) and net of tax of $69 ................. Other Comprehensive income ............................................................. 5,285 --------- Total Comprehensive income ............................................................. 27,192 Issuance of common shares to Employee Savings Plan ..................................... 118,482 (100) Issuance (cancellation) of shares through field marketing organization loan program, net ................................................................................... (83,094) (101) Issuance of shares through exercise of options ......................................... 621,857 7,428 Issuance of shares through subsidiary acquisition ...................................... 85,345 3,261 Issuance of shares through conversion of convertible subordinated debentures ........... 380 11 Issuance of shares associated with Allianz agreement ................................... 3,079,056 42,619 Repurchase of common stock ............................................................. (1,793,700) (22,408) Common stock to be issued-shares, net of 2,028,326 shares issued ....................... (11,097) 1,598 Dividends to shareholders .............................................................. (1,915) --------- Balance at December 31, 1998 ........................................................... 24,776,517 $ 279,985 ========== =========
SEE ACCOMPANYING NOTES. Life USA Holding, Inc. 38 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NOTES ACCUMULATED COMMON ADDITIONAL RECEIVABLE OTHER COMMON STOCK TO PAID-IN FROM COMPREHENSIVE RETAINED STOCK BE ISSUED CAPITAL STOCK SALES INCOME EARNINGS - ---------- ----------- ------------ ------------- --------------- ----------- $203 $ 382 $ 80,931 $ -- $ 12,707 $ 62,673 23,454 (8,972) (400) -------- (9,372) 2 (1,436) 1,434 5 3,883 (3,888) 0 226 1,411 ------------------------------------------------------------------------------------- 210 357 86,474 (3,888) 3,335 86,127 26,978 5,514 (700) -------- 4,814 1 (1,220) 1,219 3 3,586 (3,589) (257) 12 15,360 1 1,449 284 (284) 1,428 ------------------------------------------------------------------------------------- 227 565 108,372 (7,477) 8,149 112,564 21,907 5,485 (200) -------- 5,285 1 (1,835) 1,734 (1) (783) 1,248 (565) 7 7,421 1 1,297 1,963 11 31 42,588 (18) (10,544) (11,846) 1,598 (1,915) --------- $248 $ 328 $ 150,096 $ (4,266) $ 13,434 $ 120,145 ====== ======== ========= ======== ======== =========
SEE ACCOMPANYING NOTES. 39 Life USA Holding, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income ...................................................... $ 21,907 $ 26,978 $ 23,454 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion of discount on investments, net ..................... (5,425) (2,970) (2,441) Net realized gains on investments ............................. (769) (4,347) (1,791) Policy acquisition costs deferred ............................. (42,937) (44,628) (38,992) Amortization of deferred policy acquisition costs ............. 30,120 27,789 24,495 Deferred income tax (benefit) provision ....................... 340 470 (1,669) Changes in operating assets and liabilities ................... (15,821) 3,116 (13,347) Stock compensation ............................................ 1,741 1,220 1,436 ---------- ---------- ---------- Net cash provided by (used in) operating activities .............. (10,844) 7,628 (8,855) Cash flows from investing activities: Fixed maturity investments-available for sale: Purchases ..................................................... (169,869) (191,093) (152,389) Proceeds from sales ........................................... 26,288 196,818 42,542 Proceeds from maturities and principal payments on mortgage-backed securities ................................... 24,854 17,088 9,081 Fixed maturity investments-held to maturity: Purchases ..................................................... (92,937) (262,113) (102,603) Proceeds from sales ........................................... 10,785 -- -- Proceeds from maturities and principal payments on mortgage-backed securities ................................... 77,821 18,283 10,227 Investments in and loans to field marketing organizations ....... (12,756) (12,510) (10,469) ---------- ---------- ---------- Net cash used in investing activities ............................ (135,814) (233,527) (203,611) Cash flows from financing activities: Receipts from universal life and investment products ............ 304,216 345,442 294,529 Withdrawals on universal life and investment products ........... (318,371) (257,260) (208,529) Interest credited to policyholders .............................. 117,998 109,507 99,517 Change in deferred liability and reserves ....................... 24,868 19,587 14,511 Proceeds from exercise of stock options ......................... 7,423 15,372 226 Proceeds from line of credit .................................... 10,000 5,000 -- Proceeds from common stock issuance to Allianz Life ............. 10,000 -- -- Repurchase of common stock ...................................... (22,408) -- -- Dividends paid .................................................. (1,915) -- -- Other financing activities ...................................... 2,278 1,401 (21) ---------- ---------- ---------- Net cash provided by financing activities ........................ 134,089 239,049 200,233 ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents ............. (12,569) 13,150 (12,233) Cash and cash equivalents at beginning of the year ............... 34,139 20,989 33,222 ---------- ---------- ---------- Cash and cash equivalents at end of the year ..................... $ 21,570 $ 34,139 $ 20,989 ========== ========== ========== Cash paid during the year for interest ........................... $ 2,117 $ 2,148 $ 1,984 ========== ========== ========== Cash paid during the year for income taxes ....................... $ 12,941 $ 14,100 $ 16,263 ========== ========== ==========
SEE ACCOMPANYING NOTES. Life USA Holding, Inc. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Life USA Holding, Inc. (the Company) was incorporated on February 26, 1987 in the State of Minnesota for the purpose of acquiring, managing and funding the operations of a life insurance company. During 1987, the Company acquired Financial Assurance, Incorporated (FAI), a Colorado domiciled stock life insurance company, authorized to issue life insurance products in 40 states and the District of Columbia. After the acquisition, the Company changed the name of FAI to LifeUSA Insurance Company, which conducts its life insurance business under the registered trade name of "LifeUSA." During 1994, the Company acquired Fidelity Union Life Insurance Company (FULICO), a Minnesota domiciled shell life insurance company authorized to issue life insurance products in 49 states (excluding only New York) and the District of Columbia, and subsequently merged LifeUSA Insurance and FULICO into a single company. The surviving company retained the LifeUSA name and is domiciled in Minnesota, where the Company is headquartered. LifeUSA Insurance sells a variety of innovative life insurance and annuity products that offer long-term retirement benefits to consumers who seek protection against outliving their financial resources. The products of LifeUSA Insurance are sold by a national marketing and distribution system comprised of FMOs with independent agents and the products are serviced by home office staff. During 1996, the Company formed two wholly-owned subsidiaries: LifeUSA Securities and LifeUSA Marketing. LifeUSA Securities is a retail broker-dealer that distributes a full range of securities products, including non-proprietary mutual funds, variable life insurance and annuity contracts, and processes general securities transactions. LifeUSA Marketing conducts a variety of marketing activities for the Company, including the acquisition of and investments in national FMOs. In July 1998, LTCAmerica was formed for the purpose of acquiring, managing and funding the operations of an insurance company offering life insurance, annuity and health insurance products providing long-term care benefits to consumers. LTCAmerica will seek to purchase, as a subsidiary, either an existing long-term care insurance company or a shell insurance company that will underwrite and issue long-term care insurance products. LTCAmerica is a majority-owned subsidiary of LifeUSA Insurance. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. INVESTMENTS The Company classifies investments at the time of purchase as held to maturity or available for sale. Investments that the Company has the ability and positive intent to hold to maturity are so classified and carried at amortized cost. All other investments are classified as available for sale and carried at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity. The Company anticipates prepayments in the accounting for discounts and premiums related to its CMO investments. As differences arise between actual and anticipated prepayments, the effective yield of CMOs is recalculated to reflect actual prepayments to date and anticipated future prepayments. The net investment in the CMOs is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the CMOs. Realized gains and losses on sales of available for sale investments are recorded as revenue using the specific identification method. In addition, the amortization of deferred policy acquisition costs and other benefits to policyholders are adjusted for gains and losses realized on sales of available for sale investments that support policyholder liabilities. Changes in the fair value of available for sale investments are reflected directly in shareholders' equity, net of related adjustments for deferred policy acquisition costs and deferred taxes and related valuation allowances that would have been recorded if these investments would have been sold as of the balance sheet date. 41 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments that are determined to have a decline in value that is other than temporary are written down to estimated fair value. This value becomes the investment's new cost basis and the amount of the write down is recorded as a realized loss. The Company does not own any such investments. INVESTMENT IN EQUITY METHOD SUBSIDIARIES The Company uses the equity method of accounting for the various organizations in which it holds a minority interest. The excess of amounts invested over the proportionate equity in the investees' net assets has been accounted for as goodwill and is being amortized over a 15-year life. The Company's investment in various companies is classified as investment in equity method subsidiaries and is included in other assets on the Consolidated Balance Sheet. Any gains or losses are reflected in the investment balance and are also reflected in other income on the Consolidated Statement of Income. CASH AND CASH EQUIVALENTS The Company considers investments with maturity at the date of their acquisition of three months or less to be cash equivalents. The carrying amounts reported in the balance sheet for these financial instruments are based on cost and approximate fair value. ACCOUNTING FOR OPTION CONTRACTS Certain LifeUSA Insurance annuity products provide an additional benefit credited to the policy annuitization value based on the growth in the Standard & Poor's (S&P) 500 Index. LifeUSA Insurance has analyzed the characteristics of these benefits and has purchased option contracts tied to the S&P 500 Index with similar characteristics to hedge these risks. Management monitors correlation of in force amounts and option contract values to ensure proper matching. If persistency assumptions were to deviate significantly from anticipated rates, management would purchase or sell option contracts as deemed appropriate. As of December 31, 1998, management believes a proper hedge exists. The option contracts are reported at fair value in other assets on the Consolidated Balance Sheet. Unrealized gains and losses on the option contracts are recorded in other revenues on the Consolidated Statement of Income to offset increases in the future policy benefits liability for the index benefit that are shown in other benefits to policyholders on the Consolidated Statement of Income. The cost of the option contract is amortized over the life of the option contract and is reflected in the future policy benefits liability for the index benefit. Any realized gains at expiration are credited to policyholder reserves. LifeUSA Insurance purchases 5-year and 7-year "over-the-counter" European-Asian call option contracts based on the S&P 500 index. LifeUSA Insurance only purchases option contracts from counterparties rated AA- or better and the option contracts are not used for trading purposes. ACCOUNTING FOR CEDED COMMISSIONS AND EXPENSE ALLOWANCES Commissions and expense allowances, and the expenses associated with these revenues, are recognized in the period in which life insurance premiums and annuity deposits are ceded. The net cost of reinsurance for life insurance policies is realized ratably over the life of the affected business in relation to gross profits. ACCOUNTING FOR LIFE INSURANCE POLICIES AND ANNUITY CONTRACTS Revenues from universal life insurance and annuities represent amounts assessed against policyholders and are reported in the period that the amounts are assessed. The liability for future policy benefits for universal life insurance and annuities is equal to the sum of the balance that accrues to the benefit of policyholders, any amounts that have been assessed to compensate the insurer for services to be performed over future periods, an accrual for future retirement bonuses and any amounts previously assessed against policyholders that are refundable on termination of the contract. The liability for contracts in a payout status is based on the 1983 Individual Annuity Table at interest rates ranging from 5.25% to 10.25%. For business written directly, LifeUSA Insurance defers the cost of acquiring new business, principally sales compensation, policy issue costs, underwriting and other related sales expenses. LifeUSA Insurance defers the same proportion of costs of acquiring new business as the proportion of business retained. For the Allianz/LUSA Business assumed by LifeUSA Insurance, the amount of the allowance paid by LifeUSA Life USA Holding, Inc. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Insurance to Allianz Life as the cost of acquiring new business is deferred. These deferred costs are amortized over the lives of the policies in proportion to the estimated gross profits expected to be realized on the policies. STATE GUARANTY FUND ASSESSMENTS The Company uses the accrual basis of accounting to record its liability for state guaranty fund assessments. The liability recorded includes a provision for anticipated assessments that is calculated using data available from various industry sources that monitor the current status of open and closed insolvencies and report the premium base utilized by each state in calculating amounts assessed to individual insurers. Although additional provisions may be required, the Company is currently unaware of any significant pending assessments requiring accrual. The Company has also established an asset for assessments expected to be recovered through future premium tax offsets. Although changing legislative initiatives may affect the right to offset, the Company is currently unaware of any such initiatives affecting the recoverability of the asset recorded at December 31, 1998. In December 1997, the American Institute of Certified Public Accountants (AICPA) released Statement of Position (SOP) 97-3 titled "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." The SOP was adopted by the Company in the first quarter of 1998. As the accounting prescribed by the SOP is generally consistent with the Company's former method of accounting for assessments, adoption did not have a material impact on the Company's financial statements. EARNINGS PER COMMON SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. It excludes the effects of options, warrants and convertible securities. Diluted earnings per share is computed based on the weighted average number of shares outstanding assuming that the proceeds from conversion of all stock options and warrants shall be used to purchase common stock at the average market price during the period. See Note 8 to the Consolidated Financial Statements for the 1998, 1997, and 1996 calculation of basic and diluted earnings per common share. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company files a life-nonlife consolidated federal income tax return. Allocation of consolidated federal income tax is based upon separate company federal income tax provision calculations. In 1998, the Internal Revenue Service completed the audit of the Company's and LifeUSA Insurance's federal income tax returns for the years 1993 through 1996. There were no material adjustments as a result of the examination. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REINSURANCE The Company reports assets and liabilities related to ceded life insurance and annuity contracts on a gross basis. Specifically, account values ceded to reinsurers are reflected as a receivable and the liability for future policy benefits is recorded on a gross basis. 43 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW FINANCIAL ACCOUNTING STANDARDS In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 defines the accounting treatment and disclosure requirements for securities lending programs. During the third quarter of 1997, the Company entered a securities lending program with the custodial bank of its fixed maturity investment portfolio. The Company currently reports fees earned under this arrangement in net investment income. The effective date of the securities lending provisions of SFAS No. 125 was amended by SFAS No. 127 to apply to transactions occurring after December 31, 1997 and was adopted by the Company in the first quarter of 1998. The adoption of this statement had no impact on its financial statements. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 defines the financial statement presentation for all changes in a company's equity during a period, except those resulting from investments by owners and distributions to owners. SFAS No. 130 was adopted by the Company in the first quarter of 1998. The effect of the statement is merely a change in presentation on the balance sheet and statement of shareholders' equity. The adoption of this statement had no impact on the amount of net income, earnings per common share or total shareholders' equity reported. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise" and defines financial and descriptive information about a company's operating segments that is to be disclosed in financial statements. SFAS No. 131 was adopted by the Company for the year ended December 31, 1998. Management currently has organized the Company into three business segments in order to focus on the distinct functional characteristics associated with the activities performed by each. The results of operations for the Company's Insurance, Marketing and Corporate business segments are presented in Management's Discussion and Analysis of Financial Condition and Results of Operations on Business Segments. In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of Computer Software Developed For or Obtained For Internal use." The Company plans to adopt the SOP on January 1, 1999. The SOP will require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently expenses such costs as incurred. As a result of adopting the new SOP, the Company expects to capitalize approximately $1.3 million related to internal use software developed projects in 1999 that otherwise would have been expensed as incurred. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative and Similar Financial Instruments and for Hedging Activities," which addresses the accounting for derivative instruments, such as the option contracts owned by the Company, used as hedges against changes in cash flow or the fair value of specified assets or liabilities. This statement is required to be adopted in years beginning after September 15, 1999. The Company has not yet determined the impact of the new statement. RECLASSIFICATIONS Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. Life USA Holding, Inc. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 2. INVESTMENTS The amortized cost and fair value of fixed maturity investments as of December 31, 1998 and 1997 are as follows (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------- ------------ ------------ ------------- 1998: AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies ............ $ 12,485 $ 1,845 $ 3 $ 14,327 Foreign government obligations ................... 36,726 3,553 -- 40,279 Taxable municipals ............................... 6,062 154 -- 6,216 Investment grade corporate obligations ........... 707,388 45,151 900 751,639 Non investment grade corporate obligations ....... 21,581 -- 2,197 19,384 Mortgage-backed securities ....................... 181,963 6,883 -- 188,846 ---------- ------- ------ ---------- $ 966,205 $57,586 $3,100 $1,020,691 ========== ======= ====== ========== HELD TO MATURITY U.S. Treasury securities and obligations of U.S government corporations and agencies ............ $ 24,751 $ 7,005 $ -- $ 31,756 Foreign government obligations ................... 10,570 1,247 -- 11,817 Taxable municipals ............................... 5,011 57 45 5,023 Investment grade corporate obligations ........... 701,268 31,476 2,446 730,298 Non investment grade corporate obligations ....... 2,996 -- 72 2,924 Mortgage-backed securities ....................... 514,476 17,788 73 532,191 ---------- ------- ------ ---------- $1,259,072 $57,573 $2,636 $1,314,009 ========== ======= ====== ========== 1997: AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies ............ $ 13,940 $ 1,317 $ 1 $ 15,256 Foreign government obligations ................... 26,395 2,086 -- 28,481 Investment grade corporate obligations ........... 623,303 30,057 1,797 651,563 Non investment grade corporate obligations ....... 4,907 -- 1,225 3,682 Mortgage-backed securities ....................... 177,921 5,305 49 183,177 ---------- ------- ------ ---------- $ 846,466 $38,765 $3,072 $ 882,159 ========== ======= ====== ========== HELD TO MATURITY U.S. Treasury securities and obligations of U.S. government corporations and agencies ............ $ 23,398 $ 4,911 $ -- $ 28,309 Foreign government obligations ................... 10,605 789 -- 11,394 Investment grade corporate obligations ........... 696,542 18,480 1,904 713,118 Mortgage-backed securities ....................... 518,943 18,027 170 536,800 ---------- ------- ------ ---------- $1,249,488 $42,207 $2,074 $1,289,621 ========== ======= ====== ==========
Fair values for investments are based on quoted market prices. No holdings of any issuer are greater than 5% of the Company's total investments in fixed maturities, other than direct or guaranteed obligations of the United States government or United States government corporations and agencies. The foreign government obligations held are denominated in U.S. dollars and issued and traded in the United States. 45 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 2. INVESTMENTS (CONTINUED) The amortized cost and fair value of fixed maturity investments at December 31, 1998, by contractual maturity, are as follows (in thousands):
AVAILABLE FOR SALE HELD TO MATURITY --------------------------- ----------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ----------- ------------- ------------- ------------- Due in one year or less ...................... $ 7,051 $ 7,106 $ 66,353 $ 66,571 Due after one year through five years ........ 103,940 109,283 256,887 259,997 Due after five years through ten years ....... 328,135 349,377 307,710 332,642 Due after ten years .......................... 345,116 366,079 113,646 122,608 -------- ---------- ---------- ---------- 784,242 831,845 744,596 781,818 Mortgage-backed securities ................... 181,963 188,846 514,476 532,191 -------- ---------- ---------- ---------- Total ........................................ $966,205 $1,020,691 $1,259,072 $1,314,009 ======== ========== ========== ==========
Expected maturities in the foregoing table may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. During 1998, 1997 and 1996, the Company sold certain investments classified as available for sale. Proceeds from these sales were immediately reinvested in investments of a high grade similar to those investments sold. Gross gains of $1.3 million, $6.1 million and $1.9 million were realized on these sales in 1998, 1997 and 1996, respectively. Gross losses of $.5 million, $1.7 million and $.1 million were realized on these sales in 1998, 1997 and 1996, respectively. The recognition of these net realized gains resulted in an increase in the amortization of deferred policy acquisition costs and an increase in other benefits to policyholders of $.5 million, $3.3 million and $1.2 million in 1998, 1997 and 1996, respectively. In June 1998, a fixed maturity investment classified as held to maturity was sold with an amortized cost of $10 million. The realized gain on this sale was not significant. The sale of this fixed maturity investment was due to significant deterioration in the issuer's creditworthiness as indicated by downgrades by Standard & Poor's and Moody's Investor Services just prior to the sale. The components of net investment income are as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Fixed maturities ................ $156,430 $142,548 $128,629 Cash and cash equivalents ....... 2,409 2,222 1,403 Policy loans .................... 760 607 519 Other ........................... 109 68 94 -------- -------- -------- 159,708 145,445 130,645 Investment expenses ............. (1,762) (1,348) (1,233) -------- -------- -------- Net investment income ........... $157,946 $144,097 $129,412 ======== ======== ========
During 1998, the Company had investment management agreements with Windsor, Investment Advisors, Inc. (IAI) and AIC, an affiliate of Allianz Life. For their services in 1998, Windsor, IAI and AIC were paid a fee based on the market value of investments at the end of each quarter. For the years ended December 31, 1998, 1997 and 1996, the Company paid an aggregate of $1.0 million, $1.1 million and $1.0 million, respectively, for investment management services. Fixed maturity investments with a total carrying value of $7.7 million are on deposit with various states in support of statutory requirements as of December 31, 1998. Life USA Holding, Inc. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 2. INVESTMENTS (CONTINUED) The net unrealized gain on fixed maturity investments -- available for sale included in shareholders' equity consists of the following at December 31 (in thousands):
1998 1997 1996 ------------ ------------ ---------- Gross unrealized gain on fixed maturity investments -- available for sale ......... $ 54,486 $ 35,693 $ 13,879 Adjustments for: Deferred tax liability .................. (19,070) (12,835) (4,858) Deferred policy acquisition costs ....... (33,818) (22,629) (8,748) Deferred tax asset ...................... 11,836 7,920 3,062 --------- --------- -------- Net unrealized gain on fixed maturity investments -- available for sale ......... $ 13,434 $ 8,149 $ 3,335 ========= ========= ========
The gross unrealized gain on fixed maturity investments -- available for sale before adjustments for deferred taxes and deferred policy acquisition costs increased (decreased) $18.8 million, $21.8 million and $(36.8) million for the years ended December 31, 1998, 1997 and 1996, respectively. NOTE 3. EQUITY INTERESTS In 1996, LifeUSA Marketing acquired Tax Planning Seminars (TPS), a field marketing organization (FMO). In addition, LifeUSA Marketing holds minority equity interests of 50% of Life Sales LLC (LS), 40% of Creative Marketing International Corporation (CMIC), 45% of Personalized Brokerage Services, Inc. (PBS), 35% of Ann Arbor Annuity Exchange (Ann Arbor), 40% of Roster Financial, LLC (Roster) and 40% of Signature Financial Services, Inc (SF). In April 1998, the Company purchased a 40% minority interest in Windsor, a Minneapolis-based investment management firm. TPS is included in the consolidated financial statements of the Company with elimination of intercompany profits and balances. LifeUSA Marketing and the Company use the equity method of accounting for the companies in which it holds a minority interest. As of December 31, 1998 and 1997, LifeUSA Marketing and the Company had invested $36.9 million and $21.1 million, respectively, in its various companies. The excess of amounts invested over the proportionate equity in the investees' net assets has been accounted for as goodwill and is being amortized over a 15-year life. Total amortization for the years ended December 31, 1998, 1997 and 1996 was $2.1 million, $1.0 million and $200,000, respectively. The LS, PBS, Ann Arbor, Roster and SF acquisition agreements contain certain provisions which permit and could require LifeUSA Marketing to purchase part or all of the remaining equity interests. NOTE 4. LINE OF CREDIT During 1996, the Company entered into a line of credit agreement with two of the Reinsurers. The line of credit is available for use to fund certain investments and acquisitions the Company may make, capital contributions to LifeUSA Insurance, repurchase of common stock or capital expenditures. In 1997, the maximum borrowing allowed under this agreement was increased to $50 million. Borrowings under the line of credit, as amended, may be made through May 17, 2000, will mature on March 31, 2002 and will be subject to mandatory repayments from 25% of excess cash flow (as defined) for the prior calendar year on June 30, 2000 and March 31, 2001. The line of credit agreement contains various financial covenants, including maintenance of minimum levels of consolidated tangible net worth for the Company and statutory capital and surplus and risk-based capital for LifeUSA Insurance. The Company is required to pay a commitment fee of 1/4 of 1% per quarter on the average daily unused portion of the credit line. In September 1998, the Company borrowed $10 million under its line of credit increasing the total outstanding balance to $15 million. The Company has no other outstanding borrowings under this agreement. NOTE 5. CONVERTIBLE SUBORDINATED DEBENTURES During 1995, Allianz Life purchased a 15-year, $30 million convertible subordinated debenture from the Company. In February 1998, Allianz Life converted the $30 million debenture it purchased from the Company into shares of common stock as described in Note 10 to the Consolidated Financial Statements. 47 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 5. CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED) Prior to 1993, the Company's agents and employees earned convertible subordinated debentures as a portion of their compensation. At December 31, 1998, $5.9 million of these debentures were outstanding. The debentures bear an 8% fixed interest rate which is payable annually. The debentures mature on June 30, 2000 or sooner at the option of the Company or mandatorily upon the sale of the Company. Subject to certain conditions, the debentures may be converted into shares of the Company's common stock at a conversion price of $25.50 per share through June 30, 1999. This conversion price increases by $1.50 per year up to a maximum of $27.00 per share. The debentures are subordinate to all present and future indebtedness of the Company, including lease obligations. During 1998 and 1997, $8,816 and $2,562 of debentures were converted to 380 and 110 shares of common stock, respectively. No debentures were converted in 1996. NOTE 6. LEASES The Company leases office space, telephone equipment and furniture under operating leases expiring in various years through February 2001, with rights to lease additional office space at specified future dates and options to renew the leases for office space for an additional nine years and ten months from the expiration date. The office lease payments are subject to adjustment for real estate taxes and maintenance expenses. Rent expense on these operating leases charged to operations was $2.0 million, $1.9 million and $1.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. Minimum future rental payments under noncancelable operating leases having remaining terms in excess of one year as of December 31, 1998 are as follows (in thousands): 1999 .............. $2,334 2000 .............. 2,334 2001 .............. 389 ------ $5,057 ====== NOTE 7. CAPITAL STRUCTURE PREFERRED STOCK The Board of Directors has the authority to designate additional classes of preferred stock and the rights and preferences of any class of preferred stock from the 15 million authorized preferred shares. The issuance of preferred stock may adversely affect various rights, including voting rights, of the common shareholders and may be used as an anti-takeover device. COMMON STOCK TO BE ISSUED In connection with employee and Company contributions to the Life USA Holding, Inc. Employee Savings Plan (Savings Plan), 24,361 shares of common stock were to be issued at the price of $12.875 per share at December 31, 1998 and 35,458 shares of common stock were to be issued at prices ranging from $16.125 to $16.875 per share at December 31, 1997 to employee accounts under the Savings Plan. NOTES RECEIVABLE FROM STOCK SALES During 1998, 1997 and 1996, the Company issued common stock to several of its FMOs in exchange for promissory notes in order to provide additional incentives for the FMOs to increase the life insurance and annuity business produced for LifeUSA Insurance or through LifeUSA Insurance under its agreement with Allianz Life. The shares of common stock issued for the account of the FMO are held in the possession of the Company as security for the repayment of the promissory note. The promissory notes bear interest rates ranging from 8% to 10% per annum compounded monthly and are payable at maturity (the fifth anniversary of the date of the note). STOCK OPTION PLANS The Company has elected to follow Accounting Principles Board Opinion (APB) No. 25 "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 "Accounting for Life USA Holding, Inc. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 7. CAPITAL STRUCTURE (CONTINUED) Stock-Based Compensation," requires the use of highly subjective option valuation models that were developed for use in valuing publicly traded stock options. Currently, under APB No. 25, no compensation cost is recognized since the exercise price of the Company's stock options is equal to, or greater than, the market price of the underlying stock on the date of grant. In a recent proposed FASB Interpretation, the FASB limited the scope of APB No. 25 to individuals who meet the common law definition of an employee. As a result, options issued to directors and agents of the Company would have to be accounted for under SFAS No. 123. The final FASB Interpretation, which is expected to be issued in September 1999, is effective when issued. If adopted, the Interpretation would be applied prospectively but would be applied to plan modifications and grants that occur after December 15, 1998. The Company has not yet determined the impact of the proposed Interpretation. The binomial and Black and Scholes option valuation models were developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. To further facilitate the use of the information disclosed, a range of reasonable values also is presented with the Company's pro forma information to reflect the variability of the results of the valuation process that would arise from changes made to the assumptions. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined using binomial option valuation models as if the Company had accounted for its employee stock options under the fair value method of that Statement. The assumptions used for each stock option plan are included in the discussion of that specific plan. In 1990, the Company established the Life USA Holding, Inc. 1990 Stock Option Plan (the 1990 Stock Option Plan). The 1990 Stock Option Plan provides for the granting of stock options to employees and consultants of the Company. An aggregate of five million shares of common stock is reserved for issuance upon the exercise of the options granted. The purchase price of the shares of common stock subject to options granted under the 1990 Stock Option Plan is determined by a committee of the Board of Directors; the purchase price cannot be less than 100% of the fair market value on the date the option is granted for incentive stock options and cannot be less than 85% of the fair market value on the date the option is granted for non-qualified options. No options may be granted under the 1990 Stock Option Plan after September 2000. The option vesting period and exercise period are determined by the committee at the date of the grant. The vesting periods range from zero to four years. During 1996, the committee determined that the life of all outstanding employee stock options issued with a five year life would be extended to ten years and all future employee stock option grants would be issued with a life of ten years. The additional expense related to the grant extensions is disclosed separately in the 1996 pro forma disclosures. Based upon this information, the following assumptions were used in determining the SFAS 123 expense associated with the 1990 Stock Option Plan. The volatility used was 36.37%, 37.47% and 38.03% for 1998, 1997 and 1996, respectively; the risk free interest rates ranged from 4.39% to 4.86%, 5.07% to 5.70% and 5.04% to 6.38% for 1998, 1997 and 1996, respectively; and the expected option life was seven years for 1998, 1997 and 1996. The dividend yield for 1998 was .58% to 1.00%. 49 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 7. CAPITAL STRUCTURE (CONTINUED) Exercise prices for options outstanding as of December 31, 1998 ranged from $6.00 to $28.00. A summary of the Company's stock option activity for the 1990 Stock Option Plan, and related information for the years ended December 31 follows (in thousands, except exercise price amounts):
1998 1997 1996 ---------------------------- ---------------------------- --------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE --------- ------------------ --------- ------------------ --------- ----------------- Outstanding -- beginning of year 3,231 $ 11.72 2,720 $ 10.21 2,289 $ 10.26 Granted equal to market ........ 217 13.27 714 13.98 373 8.77 Granted above market ........... 203 21.39 178 19.84 151 12.96 Exercised ...................... (547) 9.22 (360) 8.82 (29) 7.00 Canceled ....................... (53) 17.83 (21) 11.48 (64) 11.50 ----- -------- ----- -------- ----- -------- Outstanding -- end of year ..... 3,051 $ 12.82 3,231 $ 11.72 2,720 $ 10.21 ===== ======== ===== ======== ===== ======== Exercisable -- end of year ..... 2,426 $ 12.73 2,154 $ 11.53 1,858 $ 10.39 ===== ======== ===== ======== ===== ======== Weighted-average fair value of options granted during the year (using SFAS 123 assumptions) .. $ 5.32 $ 6.55 $ 4.21 ======== ======== ========
The following table summarizes information concerning outstanding and exercisable options at December 31, 1998 (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 IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE - ------------------ ------------------ -------- ------------------ -------- ----------------- $ 6.00 - 9.00 5.1 474 $ 7.54 388 $ 7.21 $ 9.01 - 13.50 6.3 1,564 11.21 1,295 11.07 $13.51 - 20.25 8.3 794 16.14 524 16.35 $20.26 - 28.00 8.2 219 23.72 219 23.72
Beginning in 1992, the Company granted stock options as commission bonuses to LifeUSA Insurance agents (Agent Option Plan) based on net earned commissions on business written. The purchase price of shares of common stock subject to these options is the greater of $10.00 per share or 150% of the average closing bid price for the Company's common stock for the twenty days immediately preceding the end of the calendar quarter for which the stock option is granted. The options vest immediately upon issuance and expire on December 31 in the fifth year following the date of grant. As a result, 646,438 options granted in 1993 and 166,808 options granted in 1992 expired in 1998 and 1997, respectively. The Company discontinued the granting of stock options as production bonuses following the calendar quarter ended March 31, 1997. Based upon this information, the following assumptions were used in determining the SFAS 123 expense associated with the Agent Option Plan. The volatility used was 34.58% and 36.89% for 1997 and 1996 respectively; the risk free interest rates was 5.39% for 1997 and ranged from 6.10% to 6.15% for 1996; and the expected option life was four years for 1997 and 1996. Life USA Holding, Inc. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 7. CAPITAL STRUCTURE (CONTINUED) Exercise prices for options outstanding as of December 31, 1998 ranged from $11.02 to $18.90. A summary of the Company's stock option activity for the Agent Option Plan, and related information for the years ended December 31 follows (in thousands, except exercise price amounts):
1998 1997 1996 ---------------------------- ---------------------------- --------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE --------- ------------------ --------- ------------------ --------- ----------------- Outstanding -- beginning of year 3,256 $ 15.44 4,237 $ 14.58 3,482 $ 14.93 Granted equal to market ........ -- -- 101 15.71 862 13.38 Exercised ...................... (75) 12.19 (846) 11.83 -- -- Canceled ....................... (686) 21.49 (236) 13.11 (107) 16.37 ----- -------- ----- -------- ----- -------- Outstanding -- end of year ..... 2,495 $ 13.87 3,256 $ 15.44 4,237 $ 14.58 ===== ======== ===== ======== ===== ======== Exercisable -- end of year ..... 2,495 $ 13.87 3,256 $ 15.44 4,237 $ 14.58 ===== ======== ===== ======== ===== ======== Weighted-average fair value of options granted during the year (using SFAS 123 assumptions) .. $ -- $ 1.89 $ 2.37 ======== ======== ========
The following table summarizes information concerning outstanding and exercisable options at December 31, 1998 (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 IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE - ------------------ ------------------ -------- ------------------ -------- ----------------- $ 9.01 - 13.50 2.3 1,024 $ 12.24 1,024 $ 12.24 $13.51 - 20.25 1.9 1,471 15.00 1,471 15.00
During 1993, the Company established the LifeUSA Director Option Plan (Director Option Plan) which provides for the granting of stock options to members of the Company's Board of Directors who are not and have not been full-time employees of the Company or any of its subsidiaries. Each such director receives a non-qualified stock option to purchase 1,000 shares of common stock for each meeting of the Board of Directors attended. The exercise price of the option is equal to the fair market value of the stock on the date of the meeting. An aggregate of 200,000 shares of common stock is reserved for issuance upon the exercise of the options granted. These options vest immediately, are exercisable six months and one day after issuance, and expire on the earlier of five years from issuance or one year after the director ceases to be a member of the Board of Directors. Based upon this information, the following assumptions were used in determining the SFAS 123 expense associated with the Director Option Plan. The volatility used was 34.36%, 34.58% and 36.89% for 1998, 1997 and 1996 respectively; the risk free interest rates ranged from 4.58% to 4.62%, 4.97% to 5.21% and 6.03% to 6.10% for 1998, 1997 and 1996, respectively; and the expected option life was four years for 1998, 1997 and 1996. The dividend yield for 1998 was .61% to .81%. 51 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 7. CAPITAL STRUCTURE (CONTINUED) Exercise prices for options outstanding as of December 31, 1998 ranged from $8.25 to $18.13. A summary of the Company's stock option activity for the Director Option Plan, and related information for the years ended December 31 follows (in thousands, except exercise price amounts):
1998 1997 1996 ---------------------------- ---------------------------- --------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE --------- ------------------ --------- ------------------ --------- ----------------- Outstanding -- beginning of year 69 $ 11.61 65 $ 10.78 45 $ 11.67 Granted equal to market ........ 16 14.33 16 13.41 20 8.78 Canceled ....................... (6) 19.27 -- -- -- -- Exercised ...................... -- -- (12) 9.51 -- -- Outstanding -- end of year ..... 79 $ 11.58 69 $ 11.61 65 $ 10.78 ==== ======== === ======== == ======== Exercisable -- end of year ..... 71 $ 11.43 62 $ 11.08 55 $ 11.12 ==== ======== === ======== == ======== Weighted-average fair value of options granted during the year (using SFAS 123 assumptions) .. $ 4.81 $ 4.62 $ 3.28 ======== ======== ========
The following table summarizes information concerning outstanding and exercisable options at December 31, 1998 (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 IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE - ------------------- ------------------ -------- ------------------ -------- ----------------- $ 6.00 - 9.00 1.9 24 $ 8.57 24 $ 8.57 $ 9.01 - 13.50 2.1 32 10.70 28 10.47 $13.51 - 20.25 3.4 23 15.96 19 16.43
For purposes of pro forma disclosures, the estimated fair value of the options is charged to expense in the year of grant. During 1998, the expense has been reduced by dividend payments to shareholders and by amounts deferred from previous years' cost of acquiring new business. This amount has been calculated using a method consistent with that utilized by LifeUSA Insurance to defer commissions paid to agents. The Company's pro forma information follows (in thousands, except for earnings per share information):
1998 1997 ----------------------------------- -------------------------------- RANGE OF VALUES RANGE OF VALUES ------------------------ --------------------- SFAS 123 HIGH LOW SFAS 123 HIGH LOW ---------- ---------- ------------- ---------- ---------- ---------- Reported net income ............ $ 21,907 $ 21,907 $21,907 $ 26,978 $ 26,978 $ 26,978 Additional expense: ............ 1990 Stock Option Plan: Original grants .............. (1,217) (1,627) (443) (3,415) (4,275) (1,328) Grant extensions ............. -- -- -- -- -- -- Agent Option Plan ............ (21) (32) (7) (158) (259) (60) Director Option Plan ......... (41) (55) (27) (43) (56) (26) -------- -------- -------- -------- -------- -------- Pro forma net income ........... $ 20,628 $ 20,193 $21,430 $ 23,362 $ 22,388 $ 25,564 ======== ======== ======== ======== ======== ======== Pro forma earnings per share: Basic ........................ $ .80 $ .79 $ .84 $ 1.07 $ 1.03 $ 1.17 ======== ======== ======== ======== ======== ======== Diluted ...................... $ .78 $ .77 $ .81 $ .96 $ .92 $ 1.05 ======== ======== ======== ======== ======== ========
1996 -------------------------------- RANGE OF VALUES --------------------- SFAS 123 HIGH LOW ---------- ---------- ---------- Reported net income ............ $ 23,454 $ 23,454 $23,454 Additional expense: ............ 1990 Stock Option Plan: Original grants .............. (1,273) (1,626) (444) Grant extensions ............. (3,628) (5,091) (981) Agent Option Plan ............ (998) (1,512) (320) Director Option Plan ......... (38) (49) (21) -------- -------- ------- Pro forma net income ........... $ 17,517 $ 15,176 $21,688 ======== ======== ======= Pro forma earnings per share: Basic ........................ $ .84 $ .73 $ 1.05 ======== ======== ======= Diluted ...................... $ .79 $ .69 $ .97 ======== ======== ======= Life USA Holding, Inc. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 7. CAPITAL STRUCTURE (CONTINUED) SAVINGS PLAN In 1990, the Company adopted the Savings Plan. An aggregate of 1,000,000 shares of common stock is reserved for issuance by the Savings Plan. All permanent employees age 18 and over are eligible to participate in the Savings Plan. Participants may contribute from 1% to 15% of their annual salary to the Savings Plan, and the Company will match these contributions at a percentage to be determined annually at the discretion of the Company. The Company may also contribute a discretionary profit sharing amount, determined annually. Prior to January 1, 1998, contributions made to the Savings Plan by the Company were invested in common stock of the Company. Effective January 1, 1998, Company contributions may be in the form of common stock of the Company or cash contributions to the employee's elected mutual funds in the Savings Plan. During the years of 1998, 1997 and 1996, the Company matched the participants' contributions dollar-for-dollar up to 6% of their annual salaries. The Company's expense for the years ended December 31, 1998, 1997 and 1996, was $1.2 million, $1.1 million and $.9 million, respectively. STOCK REPURCHASE PROGRAM In July 1998, the Company announced that its Board of Directors authorized a program to repurchase up to four million shares of its common stock through periodic purchases in the marketplace. The shares to be repurchased represented approximately 15% of the Company's 26.0 million shares outstanding. As of December 31, 1998, 1.8 million shares have been repurchased by the Company at an average price of $12.50 per share. Repurchased shares will be deemed to be outstanding shares for purposes of calculating the 35% of the outstanding common stock of the Company to be acquired under the agreement with Allianz Life. See Note 10 to the Consolidated Financial Statements for more details. DIVIDENDS In January 1999, the Company announced that its Board of Directors declared a cash dividend of 2.5 cents per share for the fourth quarter of 1998, payable on February 12, 1999 to shareholders of record as of January 28, 1999. The Company declared similar dividends for the first, second and third quarters of 1998. It is the intention of the Board of Directors to pay regular quarterly dividends in 1999 of 2.5 cents per share, or ten cents per share on an annual basis. The ability of the Company to pay dividends is limited because a majority of the Company's revenues is produced by LifeUSA Insurance, and distributions by LifeUSA Insurance to the Company are subject to permission and other limitations imposed by the Department of Commerce of the State of Minnesota. LifeUSA Insurance paid $2.5 million in extraordinary dividends to the Company during 1998 and 1997 and $5 million in January 1999, as permitted by the Department of Commerce of the State of Minnesota. 53 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 8. EARNINGS PER SHARE Basic and diluted earnings per share for the years ended December 31, 1998, 1997 and 1996 were computed as follows (dollars in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- BASIC Weighted-average shares outstanding ................. 25,659,567 21,795,258 20,762,192 ========== ========== ========== Net income .......................................... $ 21,907 $ 26,978 $ 23,454 ============ ============ ============ Per common share amount ............................. $ .85 $ 1.24 $ 1.13 ============ ============ ============ DILUTED Average shares outstanding and to be issued ......... 25,665,658 21,808,351 20,767,538 Effect of dilutive securities: employee stock options, convertible debentures and warrants ....... 760,633 929,208 171,714 Shares assuming conversion of convertible subordinated debentures ............................ -- 2,422,878 2,419,411 ------------ ------------ ------------ Adjusted weighted-average shares .................... 26,426,291 25,160,437 23,358,663 ============ ============ ============ Net income .......................................... $ 21,907 $ 26,978 $ 23,454 Add convertible subordinated debenture interest, net of federal income tax effect ................... 85 870 870 ------------ ------------ ------------ Adjusted net income ................................. $ 21,992 $ 27,848 $ 24,324 ============ ============ ============ Per common share amount ............................. $ .83 $ 1.11 $ 1.04 ============ ============ ============
NOTE 9. INCOME TAXES Income taxes consist of the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Current income taxes: Federal ........................ $11,304 $15,346 $ 14,459 State .......................... 187 277 821 ------- ------- -------- Total current income taxes ....... 11,491 15,623 15,280 Deferred income taxes ............ 1,759 470 (1,669) ------- ------- -------- Total income taxes ............ $13,250 $16,093 $ 13,611 ======= ======= ========
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):
1998 1997 1996 ---------------------- ---------------------- ---------------------- PROVISION RATE PROVISION RATE PROVISION RATE ----------- ---------- ----------- ---------- ----------- ---------- Income taxes based on the statutory rate ....... $12,305 35.0% $15,075 35.0% $12,973 35.0% State income tax, net of federal benefit ....... 266 .8 366 .8 453 1.2 Other taxes .................................... 679 1.9 652 1.1 185 .5 ------- ---- ------- ---- ------- ---- Total income taxes ............................ $13,250 37.7% $16,093 37.4% $13,611 36.7% ======= ==== ======= ==== ======= ====
Life USA Holding, Inc. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 9. INCOME TAXES (CONTINUED) The components of the deferred tax provision (benefit) for the years ended December 31 are as follows (in thousands):
1998 1997 1996 ----------- ----------- ----------- Deferred policy acquisition costs ........ $ 3,784 $ 4,511 $ 3,548 Future policy benefits ................... (4,162) (5,279) (3,840) Deferred agent compensation .............. 187 260 49 State guaranty fund assessments .......... 300 749 (1,109) Other .................................... 1,650 229 (317) -------- -------- -------- $ 1,759 $ 470 $ (1,669) ======== ======== ========
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- Deferred tax assets: Future policy benefits ....................... $ 61,584 $57,422 Unrealized gains/losses on investments ....... 11,836 7,920 Deferred agent compensation .................. 2,217 2,404 State guaranty fund assessments .............. 1,109 1,109 Other ........................................ 10,637 7,978 -------- ------- Total gross deferred tax assets ................. 87,383 76,833 Deferred tax liabilities: Deferred policy acquisition costs ............ 75,831 72,047 Unrealized gains/losses on investments ....... 19,070 12,835 State guaranty fund assessments .............. 1,524 1,013 Other ........................................ 10,130 7,451 -------- ------- Total gross deferred tax liabilities ............ 106,555 93,346 -------- ------- Net deferred tax liability ...................... $ 19,172 $16,513 ======== =======
NOTE 10. AGREEMENT WITH ALLIANZ LIFE In an agreement announced in January 1998 ("the agreement with Allianz Life"), Allianz Life will acquire up to 35 percent of the outstanding common stock of the Company over the period ending 2002, and the marketing agreement between the two companies was extended to December 31, 2000. Allianz Life will acquire its interest in the Company as a result of several specific actions: First, over a five-year period ending 2002, Allianz Life will purchase from the Company $100 million of newly issued common stock in increments of $10 million semi-annually. The purchase of common stock will provide the Company with $100 million of equity capital through the use of a financing vehicle called a Sequentially Timed Equity Placement. The price at which Allianz Life will purchase the common stock will be at 250 percent of the Company's book value per share (excluding SFAS No. 115) at the time the common stock is issued. If the price at which Allianz Life would purchase the Company's common stock, calculated at 250 percent of the then current book value, is more than 200 percent of the current market price at the time the common stock is tendered, Allianz Life can decline to purchase the stock. However, in such an event, the Company may require Allianz Life to purchase a convertible debenture for a like amount of capital. The convertible debenture would include a 10 year term, interest only payments for the first five years, interest at a rate equal to the 10 year U.S. treasury bond, at the time of issue, conversion at 200 percent of the market price at issue, and a mandatory conversion provision at 80 percent of the conversion price. Second, in February 1998, Allianz Life converted the $30 million debenture it purchased from the Company in 1995. In order to complete the conversion, the Company issued Allianz Life 2.43 million shares of common stock at 55 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 10. AGREEMENT WITH ALLIANZ LIFE (CONTINUED) a conversion price of $12.34 per share. Allianz Life also exercised its preemptive rights and purchased 241,846 additional shares at $12.36 per share. Third, Allianz Life purchased 925,000 shares from certain members of the Company's management at $16.44 per share. In addition, Allianz Life may acquire an additional 1,604,104 shares of the Company's common stock in open market purchases through February 6, 2000. In August 1998, Allianz Life acquired 406,092 shares of the Company's common stock with the initial $10 million semi-annual installment. As of December 31, 1998 Allianz Life had purchased an aggregate of 5,304,056 shares. Allianz Life has nominated two individuals to the Company's Board of Directors, and additional directors may be nominated proportional to Allianz Life's percentage ownership. The agreement limits Allianz Life's ownership to 35% of the Company's common stock (excluding the effect of the Company's share repurchase program), precludes it from making management changes and provides certain other standstill protections. NOTE 11. RELATED PARTY TRANSACTIONS The Company currently has investment management agreements with Windsor and AIC. For their services in 1998, Windsor and AIC were paid a fee based on the market value of investments at the end of each quarter. For the years ended December 31, 1998, 1997 and 1996, the Company paid Windsor and AIC an aggregate of $.4 million, $.2 million and $.1 million, respectively, for investment management services. The Company incurred legal fees of $.7 million, $.4 million and $.4 million for the years ended December 31, 1998, 1997 and 1996, respectively, from the law firm of which one of its directors and two officers of the Company are members. Members of such firm beneficially owned 281,830 shares of the Company at December 31, 1998, or approximately 1.1% of the then outstanding shares. The Company incurred actuarial and other consulting fees of $.8 million, $1.2 million and $.7 million for the years ended December 31, 1998, 1997 and 1996, respectively, from the firm of which one of its directors is a member. The Company incurred legal and other consulting fees of $.1 million, $.2 million, and $.1 million for the years ended December 31, 1998, 1997 and 1996, respectively, from the firm of which one of its directors is a member. Life USA Holding, Inc. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 12. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES Changes in operating assets and liabilities consist of (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Increase in policy loans ................................... $ (1,649) $ (1,628) $ (1,553) Increase in accrued investment income ...................... (2,753) (3,142) (4,324) Increase in recoverable on paid losses and amounts due from reinsurers ........................................... (11,848) (10,791) (7,678) (Increase) decrease in other assets ........................ (10,743) 8,551 2,636 Increase in other policyholders' funds ..................... 631 3,827 928 Increase (decrease) in amounts due reinsurers .............. 5,143 14,798 (3,698) (Decrease) increase in accrued commissions to agents ....... (2,593) 1,340 (1,121) Decrease in taxes, licenses and fees payable ............... (2,392) (9,453) (1,045) (Decrease) increase in accounts payable .................... (61) (1,644) 2,196 Increase in other liabilities .............................. 10,444 1,258 312 --------- --------- --------- $ (15,821) $ 3,116 $ (13,347) ========= ========= ========= Supplemental schedule of noncash financing activities: Issuance of stock upon conversion of convertible subordinated debentures ................................. $ 11 $ 3 $ -- Issuance of stock to employees as compensation ........... 1,835 1,220 1,436 Issuance of stock upon conversion of convertible subordinated debenture and shares associated with agreement with Allianz Life ............................. 42,619 -- --
NOTE 13. STATUTORY CAPITAL AND SURPLUS LifeUSA Insurance, domiciled in Minnesota, prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Department of Commerce of the State of Minnesota. LifeUSA Insurance does not utilize any accounting practices in the preparation of its statutory financial statements that differ from those prescribed by the Department of Commerce of the State of Minnesota. At December 31, 1998 and 1997, LifeUSA Insurance had statutory capital and surplus of $113.1 million and $103.7 million, respectively, as reported to regulatory authorities. The Company made no capital contributions to LifeUSA Insurance in 1998 or 1997. LifeUSA Insurance paid $2.5 million in extraordinary dividends to the Company during 1998 and 1997 and $5 million in January 1999. The extraordinary dividends were permitted by the Department of Commerce of the State of Minnesota. LifeUSA Insurance's ability to pay dividends in the future is subject to compliance with Minnesota insurance laws and regulations. Statutory net income for the years ended December 31, 1998, 1997 and 1996 was $17.2 million, $18.4 million and $13.2 million, respectively. Differences between net income and statutory net income arise primarily from deferred policy acquisition costs, future policy benefits, deferred income taxes, amortization of licenses and noncash transactions relating to agent advances. 57 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- --------- -------------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998: Revenues ................. $92,078 $89,697 $ 88,767 $92,106 Net income ............... 6,009 5,574 5,168 5,156 Earnings per common share: Basic .................. .23 .22 .20 .20 Diluted ................ .23 .21 .20 .20 1997: Revenues ................. $79,352 $91,816 $107,187 $91,548 Net income ............... 5,145 5,331 9,628 6,874 Earnings per common share: Basic ................... .24 .25 .44 .31 Diluted ................. .22 .23 .38 .27
The results for the quarters ended December 31 were impacted by the following items (dollars in thousands, except per share amounts):
1998 1997 -------------------------- ------------------------- INCREASE (DECREASE) INCREASE (DECREASE) -------------------------- ------------------------- NET INCOME PER SHARE NET INCOME PER SHARE ------------ ----------- ------------ ---------- Net realized gains on investments ................. $ -- $ -- $ 76 $ .00 Credits for state guaranty fund assessments ....... 413 .01 977 .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 Consolidated Balance Sheet for these financial instruments approximate fair value. DERIVATIVE FINANCIAL INSTRUMENTS LifeUSA purchases 5-year and 7-year "over-the-counter" European-Asian call option contracts based on the S&P 500 index. The Company only purchases option contracts from counterparties rated AA- or better and the option contracts are not used for trading purposes. The notional par amounts of the option contracts were $51,000 and $5,000 at December 31, 1998 and 1997, respectively. Fair values are based on quoted market prices. INVESTMENT CONTRACTS The fair value of the Company's liabilities for deferred annuity contracts is estimated to be the cash surrender value of each contract. The cash surrender value represents the policyholder's account balance less applicable surrender charges. The fair value of liabilities for supplemental contracts without life contingencies and in-benefit annuity contracts is estimated by discounting estimated cash flows using appropriate market interest rates. The fair value of the Company's deferred policy acquisition costs is not required to be disclosed. However, in the event that the fair value of the liabilities for deferred annuity contracts, supplemental contracts without life contingencies and in-benefit annuity contracts were realized (i.e., the business is sold or completely ceded to a third party), the deferred policy acquisition cost asset with a carrying value of $195.8 million and $182.8 million at December 31, 1998 and 1997, respectively, would have a fair value of $0. Life USA Holding, Inc. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) CONVERTIBLE SUBORDINATED DEBENTURES AND LONG-TERM DEBT The fair value of convertible subordinated debentures and long-term debt is estimated using discounted cash flow analyses, based on interest rates for similar types of financial instruments with consistent maturities. The carrying amounts and fair values of the Company's financial instruments are as follows (in thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------------- -------------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE ---------------- ------------ ---------------- ------------- ASSETS Fixed maturity investments: Available for sale ...................... $1,020,691 $1,020,691 $ 882,159 $ 882,159 Held to maturity ........................ 1,259,072 1,314,009 1,249,488 1,289,621 Policy loans .............................. 34,939 34,939 29,003 29,003 Cash and cash equivalents ................. 21,570 21,570 34,139 34,139 Option contracts .......................... 11,384 11,384 848 848 Future policy benefits recoverable and amounts due from reinsurers .......... 2,658,485 2,423,527 2,449,309 2,211,385 LIABILITIES Investment contracts: Deferred annuities ...................... $3,439,658 $3,014,152 $3,333,160 $2,873,536 Supplementary contracts and in-benefit annuities ................... 1,275,773 1,296,468 1,076,337 1,118,775 Long-term debt ............................ 15,000 15,875 5,000 5,369 Convertible subordinated debentures ....... 5,898 6,314 36,030 46,955
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of estimated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. NOTE 16. REINSURANCE For details regarding life insurance and annuity reinsurance ceded and assumed refer to the information under the caption "General-Reinsurance" on pages 11 through 13 of this Annual Report and Form 10-K. Such information is incorporated by reference into these Notes to Consolidated Financial Statements. NOTE 17. CONTINGENCIES For details of current legal proceedings outstanding, refer to LEGAL PROCEEDINGS on page 66 of this Annual Report and Form 10-K. Such information is incorporated by reference into these Notes to Consolidated Financial Statements. 59 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION LIFE USA HOLDING, INC. (PARENT ONLY) BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1998 1997 -------------- ------------- ASSETS Fixed maturity investments -- available for sale, at fair value (amortized cost: $3,271 at December 31, 1998 and $8,139 at December 31, 1997) ............................................ $ 3,584 $ 7,161 Cash and cash equivalents ...................................... 8,817 9,009 Fixed assets and leasehold improvements, net ................... 5,459 5,828 Investments in subsidiaries, net ............................... 280,090 245,819 Deferred income taxes .......................................... 2,530 2,039 Other assets ................................................... 13,543 7,624 -------- -------- $314,023 $277,480 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Amounts due reinsurers ........................................ $ 211 $ 428 Accounts payable .............................................. 4,866 4,878 Accrued commissions to agents ................................. 3,534 4,575 Convertible subordinated debentures ........................... 5,898 36,030 Long-term debt ................................................ 15,000 5,000 Other policyholders' funds .................................... 13 15 Other liabilities ............................................. 4,516 4,154 -------- -------- Total liabilities ............................................ 34,038 55,080 Shareholders' equity: Preferred stock, $.01 par value; 15,000,000 shares authorized, none issued .................................................. -- -- Common stock, $.01 par value; 60,000,000 shares authorized, 24,752,156 shares issued and outstanding (22,723,830 shares at December 31, 1997) ........................................... 248 227 Common stock to be issued, 24,361 shares (35,458 shares at December 31, 1997) ........................................... 328 565 Additional paid-in capital .................................... 150,096 108,372 Notes receivable from stock sales ............................. (4,266) (7,477) Retained earnings ............................................. 120,145 112,564 Accumulated other comprehensive income: Net unrealized gain on fixed maturity investments -- available for sale .......... 13,434 8,149 -------- -------- Total shareholders' equity ................................... 279,985 222,400 -------- -------- $314,023 $277,480 ======== ========
Life USA Holding, Inc. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION (CONTINUED) LIFE USA HOLDING, INC. (PARENT ONLY) STATEMENT OF INCOME (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Revenues: Management fees ................................... $ 35,119 $ 34,976 $ 32,476 Net investment income ............................. 1,361 810 1,378 Commissions and expense allowances, net ........... 69,599 80,305 63,222 Equity in income of wholly-owned subsidiaries ..... 19,696 23,972 21,321 Other ............................................. 848 553 316 -------- -------- -------- Total revenues ................................... 126,623 140,616 118,713 Expenses: Commissions ....................................... 43,276 50,381 38,133 Salaries and employee benefits .................... 26,910 25,456 24,720 Depreciation and amortization ..................... 2,023 1,705 1,246 Interest expense .................................. 1,386 2,194 1,982 Other ............................................. 29,465 31,763 27,609 -------- -------- -------- Total expenses ................................... 103,060 111,499 93,690 -------- -------- -------- Income before income taxes ......................... 23,563 29,117 25,023 Income taxes ....................................... 1,656 2,139 1,569 -------- -------- -------- Net income ......................................... $ 21,907 $ 26,978 $ 23,454 ======== ======== ========
61 Life USA Holding, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION (CONTINUED) LIFE USA HOLDING, INC. (PARENT ONLY) STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income ......................................... $ 21,907 $ 26,978 $ 23,454 Adjustments to reconcile net income to net cash provided by operating activities ............. (13,486) (22,060) (10,147) --------- --------- --------- Net cash provided by operating activities ........... 8,421 4,918 13,307 Cash flows from investing activities: Fixed maturity investments -- available for sale: Purchases ........................................ -- (4,907) -- Proceeds from sales .............................. 4,916 -- -- Proceeds from maturities and principal payments on mortgage-backed securities .......... -- 2,000 -- Investment in LifeUSA Securities, Inc. ............. (1,605) (1,320) (285) Investment in LifeUSA Marketing, Inc. .............. (16,047) (10,382) (9,250) Loans to field marketing organizations ............. -- (1,605) (1,219) Capital expenditures ............................... (1,255) (1,650) (2,629) --------- --------- --------- Net cash used in investing activities ............... (13,991) (17,864) (13,383) Cash flows from financing activities: Proceeds from exercise of stock options ............ 7,423 15,372 226 Proceeds from line of credit ....................... 10,000 5,000 -- Proceeds from common stock issuance to Allianz Life ...................................... 10,000 -- -- Repurchase of common stock ......................... (22,408) -- -- Dividends paid ..................................... (1,915) -- -- Other financing activities ......................... 2,278 1,401 (25) --------- --------- --------- Net cash provided by financing activities ........... 5,378 21,773 201 --------- --------- --------- Net (decrease) increase in cash and cash equivalents ........................................ (192) 8,827 125 Cash and cash equivalents at beginning of the year ........................................ 9,009 182 57 --------- --------- --------- Cash and cash equivalents at end of the year ........ $ 8,817 $ 9,009 $ 182 ========= ========= ========= Cash paid during the year for interest .............. $ 2,117 $ 2,148 $ 1,984 ========= ========= ========= Cash paid during the year for income taxes .......... $ 12,604 $ 13,612 $ 15,782 ========= ========= ========= Supplemental schedule of noncash investing and financing activities: Issuance of stock upon conversion of convertible subordinated debentures ............... $ 11 $ 3 $ -- Issuance of stock to employees as compensation 1,835 1,220 1,436 Fixed assets contributed to LifeUSA Insurance Company ........................................... -- -- 1,362 Issuance of stock upon conversion of convertible subordinated debenture and shares associated with agreement with Allianz Life ....... 42,619 -- --
Life USA Holding, Inc. 62 REPORT OF INDEPENDENT AUDITORS REPORT OF INDEPENDENT AUDITORS The Board of Directors Life USA Holding, Inc. We have audited the accompanying consolidated balance sheets of Life USA Holding, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Life USA Holding, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Minneapolis, Minnesota January 29, 1999 63 Life USA Holding, Inc. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Life USA Holding, Inc. is responsible for the consolidated financial statements, accompanying notes and all other information presented in this Annual Report to Shareholders and Form 10-K. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts based on the best estimates and judgments of management. In order to safeguard assets and to maintain the integrity and objectivity of data in these financial statements, Life USA Holding, Inc. maintains a comprehensive system of internal accounting controls. These controls are supported by the careful selection and training of qualified personnel and an appropriate division of responsibilities. In addition, an integral part of the comprehensive system of internal control is an effective internal audit department. The Life USA Holding, Inc. internal audit department systematically evaluates the adequacy and effectiveness of internal accounting controls and measures adherence to established policies and procedures. The management of Life USA Holding, Inc. believes that, as of December 31, 1998, its system of internal control is adequate to accomplish the objectives discussed herein. The financial statements for the years ended December 31, 1998, 1997 and 1996 have been audited by Ernst & Young LLP, independent auditors. The audits were made in accordance with generally accepted auditing standards and included a review of the system of internal controls to the extent necessary to express an opinion on the financial statements. The audit committee of the Board of Directors, comprised solely of outside directors, meets regularly with the independent auditors, management and internal auditors to review the scope and results of the audit work performed. The independent auditors have unrestricted access to the audit committee, without the presence of management, to discuss the results of their audit, the adequacy of internal accounting controls and the quality of financial reporting. /s/ Robert W. MacDonald Robert W. MacDonald Chairman and Chief Executive Officer /s/ Mark A. Zesbaugh Mark A. Zesbaugh Executive Vice President and Chief Financial Officer Life USA Holding, Inc. 64 ANNUAL REPORT ON FORM 10-K ANNUAL REPORT ON FORM 10-K Securities and Exchange Commission Washington, D.C. 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998 Life USA Holding, Inc. Commission file number 0-18485 Incorporated in the State of Minnesota IRS Employer Identification No. 41-1578384 Suite 95 Interchange North Building 300 South Highway 169 Minneapolis, Minnesota 55426 Telephone: (612) 546-7386 Securities registered pursuant to Section 12(g) of the Act (and listed on the Nasdaq Stock Market): Common Stock, $.01 par value Life USA Holding, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Theaggregate market value of the voting and outstanding stock (17,603,796 shares) held by non-affiliates of the registrant as of February 12, 1999 was $201,387,426. This Annual Report to Shareholders and Form 10-K combines the disclosure requirements of the Securities and Exchange Commission and generally accepted accounting principles. Certain portions of the Annual Report to Shareholders and Form 10-K as referenced in the table at right are incorporated in the Form 10-K. Portions of the proxy statement for the annual shareholders meeting to be held April 13, 1999 are incorporated by reference into Part III. FORM 10-K CROSS-REFERENCE TABLE OF CONTENTS PAGE(S) - ----------------------------------------- ------------------------- PART I Item 1. Business General 8-15,41 Investments 14,18,24-27, 41,45-47 Reinsurance 11-13,17,19,59 Capital Resources 21-23 Marketing Organization Ownership 8,42,47 The Agreement with Allianz Life 2,11-13,22,55-56 Line of Credit 21,22,47 Regulatory Matters 23,24 Statutory Income and Capital of LifeUSA Insurance Company 22,27,57 Item 2. Properties 66 Item 3. Legal Proceedings 66 Item 4. Submission of Matters to a Vote of Security Holders none PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 1,22,23,74 Item 6. Selected Financial Data 6-7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-35 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 26,27 Item 8. Financial Statements and 32,33,36-40, Supplementary Data 57,69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III. Item 10. Directors and Executive Officers of the Registrants * Item 11. Executive Compensation * Item 12. Security Ownership of Certain Beneficial Owners and Management * Item 13. Certain Relationships and Related Transactions * PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 66-73 *Life USA Holding, Inc.'s Proxy Statement for the 1999 Annual Meeting of Shareholders is incorporated herein by reference. 65 Life USA Holding, Inc. ANNUAL REPORT ON FORM 10-K PROPERTIES Under leases expiring in February 2001, the Company leases approximately 141,000 square feet of office space at Interchange North Building, 300 South Highway 169, Minneapolis, Minnesota. See Note 6 to the Consolidated Financial Statements. Based on the Company's business plan, management believes the Company's current facilities will be adequate through 1999. LEGAL PROCEEDINGS In July 1997, two policyholders of FULICO whose policies were assumed by Allianz Life commenced an action against Allianz Life in state court in California. LifeUSA Insurance was also named as a defendant in the lawsuit because it is the successor of FULICO and a third plaintiff who is a policyholder of LifeUSA Insurance asserted certain claims against LifeUSA Insurance. This action is styled on behalf of the named plaintiffs and seeks certification on behalf of a class of policyholders who had purchased insurance products of Allianz/FULICO and LifeUSA Insurance. The plaintiffs allege that they and other policyholders have been damaged due to certain alleged improper life insurance sales practices relating to vanishing premiums, churning and retirement plans, among other things. In 1994, Allianz sold the stock of FULICO to the Company. The Company then merged its Colorado life insurance subsidiary with FULICO and changed FULICO's corporate name to LifeUSA Insurance in order to redomesticate its Colorado life insurance subsidiary to Minnesota and obtain licenses in all states except for New York. As part of the transaction, Allianz Life assumed all of the business written by FULICO prior to the sale of the stock of FULICO to the Company and agreed to indemnify the Company and LifeUSA Insurance against any liabilities of FULICO arising prior to the date on which FULICO was sold to the Company. The case has been transferred to the United States Federal Court for the District of Minnesota by agreement of the parties. Allianz Life and the plaintiffs' attorneys have reached a tentative settlement of the claims against Allianz Life. As part of the settlement, plaintiffs will dismiss the claims against the Company without prejudice, but will have the right to bring the claims again after further investigation. While it is not possible to predict the outcome of the litigation, the Company does not anticipate any material adverse financial result. In December 1997, six annuity policyholders commenced a lawsuit against the Company. The action is styled on behalf of the named plaintiffs and seeks certification on behalf of a class of policyholders who purchased annuity policies. The plaintiffs allege that they and other annuity policyholders have been damaged due to certain alleged misrepresentations and alleged inadequate disclosures at the times the annuities were purchased and from time to time thereafter. The case was commenced in the United States Court for the Eastern District of Pennsylvania. The litigation is in the discovery stage and is currently scheduled to be available for trial as early as May 21, 1999. While it is not possible to predict the outcome of the litigation, the Company does not anticipate any material adverse financial result. In June 1998, an action similar to the December 1997 lawsuit was commenced against the Company by one annuity policyholder on behalf of herself seeking certification on behalf of a class of all other New Jersey annuity policyholders in New Jersey State Court. The case has been removed to United States Federal Court for the District of New Jersey and the Company has moved to consolidate it with the January 1998 case in the United States Federal Court for the Eastern District of Pennsylvania. The plaintiff has moved to remand to state court and has objected to the consolidation. The litigation is in the early stages and, while it is not possible to predict the outcome of the litigation, the Company does not anticipate any material adverse financial result. Life USA Holding, Inc. 66 ANNUAL REPORT ON FORM 10-K EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of the Company, their ages and titles:
NAME AGE TITLE - ------------------------- ----- --------------------------------------------------- Robert W. MacDonald 56 Chairman and Chief Executive Officer Margery G. Hughes 48 President and Chief Operating Officer Mark A. Zesbaugh 34 Executive Vice President, Chief Financial Officer, Treasurer and Secretary Daniel J. Rourke 69 Senior Vice President and Chief Marketing Officer Donald J. Urban 57 Senior Vice President and Director of Sales Bradley E. Barks 39 Senior Vice President Finance Michael W. Farley 36 Senior Vice President and Chief Actuary Bruce D. Bengtson 49 Senior Vice President Neil H. McKay 37 Vice President Financial Analysis
67 Life USA Holding, Inc. ANNUAL REPORT ON FORM 10-K SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Life USA HOLDING, INC. By: /s/ MARK. A. ZESBAUGH -------------------------------- Mark A. Zesbaugh Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1934, this registration statement has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ ROBERT W. MACDONALD Chief Executive Officer March 8, 1999 - ------------------------- (Principal Executive Officer) and Director Robert W. MacDonald /S/ MARK A. ZESBAUGH Chief Financial Officer March 8, 1999 - ------------------------- (Principal Financial and Accounting Mark A. Zesbaugh Officer) and Director * Director * Director - ------------------------- ------------------------- Hugh Alexander Barbara J. Lautzenheiser * Director * Director - ------------------------- ------------------------- Edward J. Bonach Daniel J. Rourke * Director * Director - ------------------------- ------------------------- Jack H. Blaine Ralph Strangis * Director * Director - ------------------------- ------------------------- Margery G. Hughes Donald J. Urban * Director - ------------------------- Robert S. James *By: /s/ MARK A. ZESBAUGH March 8, 1999 Mark A. Zesbaugh Attorney-in-fact
* Mark A. Zesbaugh, on his own behalf and pursuant to Powers of Attorney, dated prior to the date hereof, attested by the officers and directors listed above and filed with the Securities and Exchange Commission, by signing his name hereto does hereby sign and execute this Report of Life USA Holding, Inc. on behalf of each of the officers and directors named above, in the capacities in which the name of each appears above. Life USA Holding, Inc. 68 EXHIBITS EXHIBITS FINANCIAL STATEMENTS FILED PAGES - -------------------------------------------------- -------- Life USA Holding, Inc. Consolidated Financial Statements ............... 36-40 Notes to Consolidated Financial Statements ....... 41-62 Report of Independent Auditors ................... 63 Life USA Holding, Inc. Condensed Financial Information (Parent Only) ............. 60-62 All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X include information that is disclosed elsewhere in the Annual Report and Form 10-K, or are inapplicable and therefore have been omitted. The following Exhibit Index lists the Exhibits to Annual Report and Form 10-K. 69 Life USA Holding, Inc. EXHIBITS
REGULATION S-K EXHIBIT TABLE ITEM REFERENCE - ---------------------------------------------------------------------------------------- --------------- Restated Articles of Incorporation of the Company ...................................... 3(7) Amended and Restated Bylaws of the Company ............................................. 3(17) Form of Stock Certificate .............................................................. 4(6) Form of Option Certificate ............................................................. 4(7) Service Agreement dated January 27, 1988 between the Company and North American Life and Casualty Company ............................................................. 10(2) Agreement dated April 6, 1987 with Transamerica Insurance Corporation of California .... 10(1) Life Coinsurance Agreement effective September 1, 1987 between Transamerica Occidental Life Insurance Company and Universal Security Assurance Life Insurance Company and Addendum thereto .......................................................... 10(3) Amendment to Life Coinsurance Agreement effective January 1, 1989 ...................... 10(20) Addenda No. 2 through 8 to Life Coinsurance Agreement between LifeUSA Insurance and Transamerica Occidental Life Insurance Company .................................... 10(20) Life and ADB YRT Retrocession Agreement between LifeUSA Insurance and Transamerica Occidental Life Insurance Company effective January 1, 1990 .............. 10(9) Addendum No. 1 to Life and ADB YRT Retrocession Agreement between LifeUSA Insurance and Transamerica Occidental Life Insurance Company .......................... 10(20) Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance Company and Transamerica Occidental Life Insurance Company effective January 1, 1995 .............. 10(15) Retrocessional Agreement between LifeUSA Insurance and Transamerica Occidental Life Insurance Company effective April 1, 1991 ............................................. 10(8) Addenda No. 1, 2 and 3 to Retrocessional Agreement between LifeUSA Insurance and Transamerica Occidental Life Insurance Company ........................................ 10(20) Trust Agreement between Transamerica Occidental Life Insurance Company, LifeUSA Insurance Company and State Street Bank and Trust Company effective October 28, 1996 .................................................................................. 10(20) Form of Indemnification Agreement dated as of December 31, 1989 ........................ 10(2) Life USA Holding, Inc. Employee Savings Plan effective January 1, 1990 ................. 10(4) First through Seventh Amendment to Employee Savings Plan ............................... 10(20) Restated Life USA Holding, Inc. Stock Option Plan ...................................... 10(7) Life USA Director Option Plan .......................................................... 10(10) Life and Annuity Coinsurance Agreement effective April 1, 1991 among LifeUSA Insurance Company, Employers Reassurance Corporation, Munich American Reassurance Company and Republic-Vanguard Life Insurance Company ...................... 10(5) Addenda Nos. 1 through 13 to the Life and Annuity Coinsurance Agreement ................ 10(20) Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance and the Reinsurers effective January 1, 1993 .................................................. 10(8) Addendum No. 1 through 2 to Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance and the Reinsurers .................................................. 10(20) Life and Annuity Coinsurance Agreement effective January 1, 1995 between Allianz Life Insurance Company of North America and LifeUSA Insurance Company ...................... 10(11) Amendment to Life and Annuity Coinsurance Agreement between Allianz Life Insurance Company of North America and LifeUSA Insurance Company ................................ 10(15)
Life USA Holding, Inc. 70 EXHIBITS
REGULATION S-K EXHIBIT TABLE ITEM REFERENCE - --------------------------------------------------------------------------------------- --------------- Joint Marketing Agreement entered into by and between Allianz Life Insurance Company of North America and Life USA Holding, Inc. .......................................... 10(11) Investment Management Agreement entered into by and between LifeUSA Insurance Company and Allianz Investment Corporation ........................................... 10(11) Investment Management Agreement entered into by and between Life USA Holding, Inc. and Allianz Investment Corporation .............................................. 10(11) Investment Management Agreement entered into by and between LifeUSA Insurance Company and Windsor Financial Group, LLC ............................................. 10(19) Investment Management Agreement entered into by and between Life USA Holding, Inc. and Windsor Financial Group, LLC ................................................ 10(19) Loan Agreement dated May 17, 1996 between Life USA Holding, Inc. and Employers Reassurance Corporation and Named Lenders ............................................ 10(12) Stock Pledge Agreement dated May 17, 1996 between Life USA Holding, Inc. and Employers Reassurance Corporation .................................................... 10(12) Amendment No. 1 to the Loan Agreement between Life USA Holding, Inc. and Employers Reassurance Corporation and Named Lenders .................................. 10(20) Amendment No. 2 to the Loan Agreement between Life USA Holding, Inc. and Employers Reassurance Corporation and Named Lenders .................................. 10(20) Amendment No. 3 to the Loan Agreement between Life USA Holding, Inc. and Employers Reassurance Corporation and Named Lenders .................................. 10(16) Amendment No. 4 to the Loan Agreement between Life USA Holding, Inc. and Employers Reassurance Corporation and Named Lenders .................................. 10(19) Amendment No. 5 to the Loan Agreement between Life USA Holding, Inc. and Employers Reassurance Corporation and Named Lenders .................................. 10(19) Claims Administration Agreement dated December 30, 1996 between Allianz Life Insurance Company of North America and LifeUSA Insurance Company ..................... 10(13) Amendment No. 1 to the Claims Administration Agreement between Allianz Life Insurance Company of North America and LifeUSA Insurance Company ..................... 10(15) Administration and Marketing Agreement dated December 30, 1996 between Allianz Life Insurance Company of North America and Life USA Holding, Inc. ........................ 10(13) Amendment No. 1 to the Administration and Marketing Agreement between Allianz Life Insurance Company of North America and Life USA Holding, Inc. ........................ 10(15) Stock Purchase Agreement dated January 13, 1998 between Life USA Holding, Inc. and Allianz Life Insurance Company of North America ...................................... 10(14) Amendment No. 1 to the Stock Purchase Agreement between Life USA Holding, Inc. and Allianz Life Insurance Company of North America .................................. 10(18) Amendment No. 2 to the Stock Purchase Agreement between Life USA Holding, Inc. and Allianz Life Insurance Company of North America .................................. 10(18) Amendment No. 3 to the Stock Purchase Agreement between Life USA Holding, Inc. and Allianz Life Insurance Company of North America .................................. 10(19) Reinsurance Agreement between Allianz Life Insurance Company of North America and LifeUSA Insurance Company ............................................................ 10(15)
71 Life USA Holding, Inc. EXHIBITS
REGULATION S-K EXHIBIT TABLE ITEM REFERENCE - ---------------------------------------------------------------------------------------- --------------- Employment Agreements dated January 1, 1998 between Life USA Holding, Inc. and each of Robert W. MacDonald, Margery G. Hughes, Donald J. Urban, Mark A. Zesbaugh, Bradley E. Barks and Charles M. Kavitsky .................................... 10(15) First Amendments to Employment Agreements dated December 17, 1998 between Life USA Holding, Inc. and each of Donald J. Urban and Bradley E. Barks .................... 10(19) Employment Agreements dated December 17, 1998 between Life USA Holding, Inc. and each of Hazel Reid and Robin Aeshliman ................................................ 10(19) Credit Agreement dated December 22, 1998 between LTCAmerica Holding, Inc. and Norwest Bank Minnesota, National Association .......................................... 10(19) Revolving Note dated December 22, 1998 between LTCAmerica Holding, Inc. and Norwest Bank Minnesota, National Association .......................................... 10(19) Guaranty dated December 22, 1998 by Allianz Life Insurance Company of North America, Inc. in favor of Norwest Bank Minnesota, National Association guaranteeing account of LTCAmerica Holding, Inc. ................................................... 10(19) Guaranty dated December 22, 1998 by LTCAmerica Holding, Inc. in favor of Allianz Life Insurance Company of North America .................................................... 10(19) Guaranty dated December 22, 1998 by Life USA Holding, Inc. in favor of Allianz Life Insurance Company of North America .................................................... 10(19) Pledge Agreement dated December 22, 1998 between LTCAmerica Holding, Inc. and Allianz Life Insurance Company of North America ....................................... 10(19) Security Agreement dated December 22, 1998 between Life USA Holding, Inc. and Allianz Life Insurance Company of North America ....................................... 10(19) Administration and Marketing Agreement dated January 1, 1999 between Allianz Life Insurance Company of North America and LTCAmerica Holding, Inc. ....................... 10(19) Administration and Marketing Agreement dated January 1, 1999 between LifeUSA Insurance Company and LTCAmerica Holding, Inc. ........................................ 10(19) Interests and Liabilities Agreement dated January 1, 1999 between LifeUSA Insurance Company and Allianz Life Insurance Company of North America ........................... 10(19) Retrocession Agreement effective January 1, 1999 issued to Allianz Life Insurance Company of North America by LifeUSA Insurance Company ................................. 10(19) Cash Management Agreement dated February 16, 1999 between LTCAmerica Holding, Inc. and Norwest Bank Minnesota, National Association ................................. 10(19) Service Agreement dated January 1, 1999 between LTCAmerica Holding, Inc. and Life USA Holding, Inc. ..................................................................... 10(19) Employee Leasing Agreement dated December 22, 1998 between LTCAmerica Holding, Inc. and Life USA Holding, Inc. ....................................................... 10(19) LTCAmerica Holding, Inc. 1998 Stock Option Plan ........................................ 10(19) Statement of Computation of Per Share Earnings (Years Ended December 31, 1998, 1997 and 1996 -- see Note 8 of the Annual Report to Shareholders) ..................... 11(19) 1998 Annual Report to Shareholders ..................................................... 13(19) Subsidiaries of the Registrant ......................................................... 21(19) Consent of Ernst & Young LLP (electronic filing only) .................................. 21(19) Powers of Attorney ..................................................................... 24(19) Financial Data Schedule (electronic filing only) ....................................... 27(19)
Life USA Holding, Inc. 72 EXHIBITS - ------------------ (1) Filed with the Company's Registration Statement No. 33-21989 and incorporated by reference herein. (2) Filed with the Company's 1989 Annual Report on Form 10-K, as amended, and incorporated by reference herein. (3) Filed with the Company's Registration Statement No. 33-30506, as amended by Post-Effective Amendment No. 1, and incorporated by reference herein. (4) Filed with the Company's Registration Statement No. 33-37981 and incorporated by reference herein. (5) Filed with the Company's 1990 Annual Report on Form 10-K and incorporated by reference herein. (6) Filed with the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1992 and incorporated by reference herein. (7) Filed with the Company's Registration Statement No. 33-52624 and incorporated by reference herein. (8) Filed with the Company's Registration Statement No. 33-68528 and incorporated by reference herein. (9) Filed with Amendment No. 1 to the Company's Registration Statement No. 33-68528 and incorporated by reference herein. (10) Filed with the Company's 1993 Annual Report on Form 10-K and incorporated by reference herein. (11) Filed with the Company's Current Report on Form 8-K filed March 3, 1995 and incorporated by reference herein. (12) Filed with the Company's Current Report on Form 8-K filed June 17, 1996 and incorporated by reference herein. (13) Filed with the Company's 1996 Annual Report on Form 10-K and incorporated by reference herein. (14) Filed with the Company's Current Report on Form 8-K filed January 13, 1998 and incorporated by reference herein. (15) Filed with the Company's 1997 Annual Report on Form 10-K and incorporated by reference herein. (16) Filed with the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998 and incorporated by reference herein. (17) Filed with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998 and incorporated by reference herein. (18) Filed with the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998 and incorporated by reference herein. (19) Filed with this Annual Report on Form 10-K. (20) Amendments and addenda made in the ordinary course of business available from the Company upon request. The exhibits filed with this Annual Report on Form 10-K may be obtained by writing to: Mark A. Zesbaugh Executive Vice President, Chief Financial Officer and Treasurer Life USA Holding, Inc. 300 South Highway 169 Suite 95 Minneapolis, MN 55426 During the three months ended December 31, 1998, the Company did not file any Current Reports on Form 8-K. 73 Life USA Holding, Inc. LIFE USA HOLDING, INC. BOARD OF DIRECTORS Robert W. MacDonald, CLU Chairman Chief Executive Officer Margery G. Hughes President Chief Operating Officer Mark A. Zesbaugh, CPA, CFA, FLMI Executive Vice President Chief Financial Officer Treasurer and Secretary Daniel J. Rourke, CLU Senior Vice President Chief Marketing Officer Donald J. Urban Senior Vice President Director of Sales Ralph Strangis Counsel to the Company Member of the Law Firm Kaplan, Strangis and Kaplan, P.A. Jack H. Blaine Former President National Organization of Life and Health Insurance Guaranty Associations Hugh Alexander Member of Alexander Law Firm, P.C. Barbara J. Lautzenheiser Lautzenheiser & Associates Edward J. Bonach Robert S. James Allianz Life Insurance Company of North America OFFICERS Robert W. MacDonald, CLU Chairman Chief Executive Officer Margery G. Hughes President Chief Operating Officer Mark A. Zesbaugh, CPA, CFA, FLMI Executive Vice President Chief Financial Officer Treasurer and Secretary Daniel J. Rourke, CLU Senior Vice President Chief Marketing Officer Donald J. Urban Senior Vice President Director of Sales Michael W. Farley, FSA, MAAA Senior Vice President Chief Actuary Bruce D. Bengtson, FSA, MAAA Senior Vice President Jo-Anne S. Halek Vice President Kimberly A. Lees Vice President Neil H. McKay, FSA, MAAA Vice President Troy D. Auth, CPA, FLMI Assistant Secretary Catherine A. Bartlett Bruce J. Parker Assistant Secretary Members of the Law Firm Kaplan, Strangis and Kaplan, P.A. CORPORATE INFORMATION Corporate Office 300 South Highway 169 Minneapolis, Minnesota 55426 612-546-7386 General Counsel Kaplan, Strangis and Kaplan, P.A. Minneapolis, Minnesota Independent Auditors Ernst & Young LLP Minneapolis, Minnesota Transfer Agent Harris Trust and Savings Bank Chicago, Illinois REINSURANCE PARTNERS Allianz Life Insurance Company of North America Minneapolis, Minnesota Employers Reassurance Corporation Overland Park, Kansas Munich American Reassurance Company Atlanta, Georgia Republic-Vanguard Life Insurance Company Dallas, Texas Transamerica Occidental Life Insurance Company Charlotte, North Carolina ANNUAL MEETING The annual meeting of the shareholders of Life USA Holding, Inc. will be held on April 13, 1999 at the Interchange Tower, 600 South Highway 169, Minneapolis, Minnesota 55426. All shareholders are invited to attend. SHAREHOLDER INFORMATION Life USA Holding, Inc. common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol LUSA. The Company paid a dividend of 2.5 cents per share in the second, third and fourth quarters of 1998. Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. As of February 12, 1999, there were 8,251 holders of record of the Company's common stock. On March 8, 1999, the closing sale price per share of the Company's common stock as reported by Nasdaq was $12.75. Life USA Holding, Inc. 74 LIFEUSA INSURANCE COMPANY BOARD OF DIRECTORS Robert W. MacDonald, CLU Chief Executive Officer Daniel J. Rourke, CLU Chairman Donald J. Urban President Margery G. Hughes Executive Vice President Mark A. Zesbaugh, CPA, CFA, FLMI Senior Vice President Treasurer Jacqueline K. Katrein, CPA Senior Vice President Support Division Chief Financial Officer Ralph Strangis Counsel to the Company Member of the Law Firm Kaplan, Strangis and Kaplan, P.A. Linda K. Burm Senior Vice President Chief Operating Officer OFFICERS Robert W. MacDonald, CLU Chief Executive Officer Daniel J. Rourke, CLU Chairman LifeUSA Insurance Company Chairman LifeUSA Marketing, Inc. Donald J. Urban President Margery G. Hughes Executive Vice President Mark A. Zesbaugh, CPA, CFA, FLMI Senior Vice President Treasurer Linda K. Burm Senior Vice President Chief Operating Officer Jacqueline K. Katrein, CPA Senior Vice President Chief Financial Officer Lane A. Kurle, FLMI Senior Vice President Secretary VICE PRESIDENTS Leo J. Anderson, FLMI Robert M. Anderson, FLMI, ALHC Kevin J. Boyce Carolyn K. Cosgrove, FLMI Brenda Z. Duenwald Michael A. Eitel, CPA Charles F. Field, FLMI, ALHC Susan L. Kumpula Lorraine M. Landram Blaine T. McGuire, CPA Robert L. Miller Kathaleen A. Morrow Janet M. Neary Philip B. Rosenbaum, CPA, FLMI David K. Sandberg, ASA, MAAA Susan K. Swanson Cathy H. Waldhauser, FSA, MAAA Kevin E. Walker, FLMI Deborah J. Wesenberg, FLMI, FALU, CLU Ann M. Yaggie ASSISTANT VICE PRESIDENTS Lisa M. Arneson, FLMI Jill J. Bradley, FLMI John R. Busse, FLMI Jeffrey R. Girod Christine M. Goebel, ACS John R. Kraft Amelia L. Lanier Richard P. Lapcinski Leslie J. LeQue Julie A. Letner Rodney D. Meyer, FLHC, FLMI Julie Minnich Denise A. Neumann Lisa M. Nicholson Kirsten A. Petsilis Roxanne M. Watercott 75 Life USA Holding, Inc. LIFEUSA MARKETING, INC. BOARD OF DIRECTORS Daniel J. Rourke, CLU Chairman Charles M. Kavitsky Chief Executive Officer President Denise M. Blizil Senior Vice President Chief Operating Officer Ronald L. Berger, CPA Senior Vice President Chief Financial Officer John A. Amann Vice President, Sales Linda K. Burm Chief Operating Officer LifeUSA Insurance Company David A. Schliesman Vice President, Sales Raj K. Sinha, MS, MBS, CLU, CFP Vice President, Marketing Donald J. Urban President and Chief Executive Officer LTCAmerica Holding, Inc. President LifeUSA Insurance Company Mark A. Zesbaugh, CPA, CFA, FLMI Chief Financial Officer Life USA Holding, Inc. Robert J. Burskey Ann Arbor Annuity Exchange, Inc. Richard E. Griffith CFC Insurance Marketing Corporation Thomas R. Kestler, CSP, CLU, ChFC Kestler Financial Group, Inc. Joseph R. Lehman, CFP, CLU Life Sales Walter F. Lineberger III, CLU, ChFC Annuity Masters at Personalized Brokerage Services, Inc. James A. Martin II, CLU, ChFC Tax Planning Seminars Edward A. Omert Roster Financial, LLC David A. Sunderland, CLU The Sunderland Group Thomas J. Wade American Financial Marketing, Inc. OFFICERS Daniel J. Rourke, CLU Chairman Charles M. Kavitsky Chief Executive Officer President Denise M. Blizil Senior Vice President Chief Operating Officer Ronald L. Berger, CPA Senior Vice President Chief Financial Officer Secretary VICE PRESIDENTS John A. Amann John T. Helgerson, CLU David A. Schliesman Raj K. Sinha, MS, MBS, CLU, CFP Mark A. Zesbaugh, CPA, CFA, FLMI ASSISTANT VICE PRESIDENTS Lisa B. Carlson Susan M. Gengler Sharyl L. Schultz, CLU Life USA Holding, Inc. 76 LIFEUSA SECURITIES, INC. BOARD OF DIRECTORS Robert W. MacDonald, CLU Chairman Life USA Holding, Inc. Mark A. Zesbaugh, CPA, CFA, FLMI President Margery G. Hughes President Life USA Holding, Inc. Bruce D. Bengtson, FSA, MAAA Senior Vice President Life USA Holding, Inc. OFFICERS Mark A. Zesbaugh, CPA, CFA, FLMI President, Chief Executive Officer, Secretary and Chief Financial Officer Tracy H. Gardner Vice President Chief Operating Officer Philip B. Rosenbaum, CPA, FLMI Treasurer VICE PRESIDENTS Kristi K. Bizer, CPA, FLMI Timothy J. Lyle Corey J. Walther 77 Life USA Holding, Inc. LTCAMERICA HOLDING, INC. BOARD OF DIRECTORS Donald J. Urban President Chief Executive Officer Bradley E. Barks, FSA, MAAA, CPA Chairman Chief Financial Officer Mark A. Zesbaugh, CPA, CFA, FLMI Executive Vice President Chief Financial Officer Treasurer and Secretary Life USA Holding, Inc. Robert W. MacDonald, CLU Chairman Chief Executive Officer Life USA Holding, Inc. Margery G. Hughes President Chief Operating Officer Life USA Holding, Inc. Daniel J. Rourke, CLU Senior Vice President Chief Marketing Officer Life USA Holding, Inc. Bruce D. Bengtson, FSA, MAAA Senior Vice President Life USA Holding, Inc. OFFICERS Donald J. Urban President Chief Executive Officer Robin L. Aeshliman Vice President and Secretary Chief Operating Officer Bradley E. Barks, FSA, MAAA, CPA Chairman Chief Financial Officer Hazel Reid Vice President Chief Marketing Officer VICE PRESIDENTS Darryl J. Chouinard, FLMI ASSISTANT VICE PRESIDENTS Sharon M. Friedrichsen Troy A. Hamlin Life USA Holding, Inc. 78 EX-10.1 2 INVESTMENT MANAGEMENT AGREEMENT EXHIBIT 10.1 INVESTMENT MANAGEMENT AGREEMENT AGREEMENT dated as of the 30th day of April, 1998 (the "Effective Date"), by and between LifeUSA Insurance Company, a Minnesota corporation (the "Client"), and Windsor Financial Group, LLC, a Minnesota limited liability company ("WFG"). 1. APPOINTMENT OF WFG AS ADVISOR. As of the Effective Date, the Client hereby appoints WFG as investment advisor and delegates to it the authority to manage, acquire and dispose of those assets of the Client which are described in attached Exhibit A (the "Account") under the terms and conditions set forth in this Agreement. The Client may direct additions to or withdrawals from the Account upon 30 days' prior written notice to WFG (which notice may be waived by WFG). 1.2 Custodial Functions. Unless otherwise agreed to in writing, the Client or Client's agent (and not WFG or its agent) shall have custody of all assets of the Account. The Custodian on the date hereof is State Street Bank and Trust; the Custodian may be changed from time to time by the Client, and Client shall thereafter give prompt notice of such change to WFG. 2. DISCRETIONARY AUTHORITY - INVESTMENTS AND BROKERAGE. 2.1 WFG's Authority. WFG shall have full and complete discretion to direct and manage the investment and reinvestment of assets in the Account and any additions thereto. This Agreement shall serve to appoint WFG as agent and attorney-in-fact with full power and authority to act on behalf of the Account with respect to (a) the purchase, sale, exchange, conversion or other transactions in any and all stocks, bonds and other securities as WFG may select; and (b) to establish accounts and execute transactions with one or more securities broker/dealer firms as WFG may select (or as Client may direct), including those which from time to time may furnish to WFG statistical information, investment research information and other services. 2.2 Investment Policy. Notwithstanding the foregoing, the Client shall furnish WFG a written statement of investment policy. Such statement shall have the effect of limiting the investments WFG is authorized to acquire and hold for the Account and shall be binding on WFG upon WFG's receipt of such statement. The written statement of investment policy may be modified by Client in writing at any time and shall be effective upon WFG's receipt of such modification. The original written statement of investment policy is attached hereto as Exhibit B. 2.3 Non-Liability. WFG shall not be responsible for any acts or omissions of any broker/dealer or Custodian acting for the Account pursuant to this Section 2. 3. APPRAISAL OF ACCOUNT. 3.1 Monthly Appraisal. WFG will provide the Client with a monthly appraisal of the Account dated as of the last day on which the New York Stock Exchange is open in any month (the "Appraisal Date"). Such appraisal shall be in the form of a written summary of assets of the Account on the Appraisal Date. 3.2 Valuation Methods. Securities traded on national stock exchanges will be valued at the composite price as published in the Wall Street Journal. Listed Securities which are not traded and over-the-counter securities will be valued at the closing bid price. Other securities and all other assets will be valued at fair value as determined in good faith by WFG. 4. FEES. 4.1 Calculation of Fees. As full compensation for services rendered under this Agreement, WFG will be paid a quarterly fee in accordance with the fee schedule set forth below based on the market value of the assets in the Account as of the Appraisal Date occurring in March, June, September and December in each year. For purposes of the calculation of the fee, the value of the securities and cash in the Account shall be determined as of the Appraisal Date at the end of each fiscal quarter pursuant to Section 3 above.
Available For Sale Assets Held to Maturity Assets ------------------------- ----------------------- 13 Basis Points on the first $200 Million 4 Basis Points on the first $800 Million 8 Basis Points on the next $300 Million 1 Basis Points thereafter 5 Basis Points on the next $500 Million 3 Basis Points thereafter
4.2 Proration of Fees. Fees will be prorated for assets deposited to or withdrawn from the Account during the quarter. If WFG shall serve for less than the whole of any quarterly period, its compensation (determined as provided above) shall be calculated and payable on a pro rata basis for the portion of the quarter for which it has served as an advisor hereunder. 4.3 Payment Method. The fees due hereunder shall be paid directly by the Client promptly upon receipt of an invoice therefor, but if not paid shall be a lien upon and payable out of the Account. 5. SERVICE TO OTHER CLIENTS. It is understood that WFG provides investment advisory services for other clients. It is further understood that WFG may take investment action on behalf of such other clients which differs from investment action taken on behalf of the Account. If the purchase or sale of securities for the Account and one or more such other clients is considered at or about the same time, transactions in such securities will be allocated among the several clients in a manner deemed equitable by WFG. 2 6. REPRESENTATIONS. 6.1 Representations by WFG. WFG represents that it is duly registered as an investment advisor with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940, as amended, and that WFG has completed, obtained or performed all other acts, registrations, filings, approvals, authorizations, consents or examinations necessary to comply with the requirements of any government or governmental authority for the performance of the acts contemplated by this Agreement. WFG will deliver such documentation of this compliance as the Client may from time to time reasonably request. 6.2 Form ADV. The Client represents that it has received a copy of WFG's Form ADV-Part II as required by the Security and Exchange Commission's "Brochure Rule". 7. ASSIGNMENT. No assignment (as defined in the Investment Advisers Act of 1940) of this Agreement shall be made by WFG without consent of the Client. 8. TERMINATION. This Agreement may be terminated by either party upon 30 days' prior written notice. 9. NOTICE. Any notice or report to be given pursuant to this Agreement shall be delivered or mailed: (a) to WFG at: Windsor Financial Group, LLC 222 South Ninth Street, Suite 2790 Minneapolis, MN 55402 Attn: Tyron K. Estlick, Chief Manager (b) to the Client at: LifeUSA Insurance Company 300 South Highway 169 Minneapolis, MN 55426 Attn: Mark A. Zesbaugh, Senior Vice President 10. CONSTRUCTION OF AGREEMENT. This Agreement shall be construed, and the rights and obligations of the parties hereunder enforced, in accordance with the laws of the State of Minnesota. 3 Agreed to and Accepted by: WINDSOR FINANCIAL GROUP, LLC LIFEUSA INSURANCE COMPANY By: /s/ Tyron K. Estlick By: /s/ Mark A. Zesbaugh ------------------------------ -------------------- Tyron K. Estlick, Chief Manager Mark A. Zesbaugh, Senior Vice President Date of Signature: April 30, 1998 Date of Signature: April 30, 1998 -------------- -------------- 4 EX-10.2 3 INVESTMENT MANAGEMENT AGREEMENT EXHIBIT 10.2 INVESTMENT MANAGEMENT AGREEMENT AGREEMENT dated as of the 30th day of April, 1998 (the "Effective Date"), by and between Life USA Holding, Inc., a Minnesota corporation (the "Client"), and Windsor Financial Group, LLC, a Minnesota limited liability company ("WFG"). 1. APPOINTMENT OF WFG AS ADVISOR. As of the Effective Date, the Client hereby appoints WFG as investment advisor and delegates to it the authority to manage, acquire and dispose of those assets of the Client which are described in attached Exhibit A (the "Account") under the terms and conditions set forth in this Agreement. The Client may direct additions to or withdrawals from the Account upon 30 days' prior written notice to WFG (which notice may be waived by WFG). 1.2 Custodial Functions. Unless otherwise agreed to in writing, the Client or Client's agent (and not WFG or its agent) shall have custody of all assets of the Account. The Custodian on the date hereof is State Street Bank and Trust; the Custodian may be changed from time to time by the Client, and Client shall thereafter give prompt notice of such change to WFG. 2. DISCRETIONARY AUTHORITY - INVESTMENTS AND BROKERAGE. 2.1 WFG's Authority. WFG shall have full and complete discretion to direct and manage the investment and reinvestment of assets in the Account and any additions thereto. This Agreement shall serve to appoint WFG as agent and attorney-in-fact with full power and authority to act on behalf of the Account with respect to (a) the purchase, sale, exchange, conversion or other transactions in any and all stocks, bonds and other securities as WFG may select; and (b) to establish accounts and execute transactions with one or more securities broker/dealer firms as WFG may select (or as Client may direct), including those which from time to time may furnish to WFG statistical information, investment research information and other services. 2.2 Investment Policy. Notwithstanding the foregoing, the Client shall furnish WFG a written statement of investment policy. Such statement shall have the effect of limiting the investments WFG is authorized to acquire and hold for the Account and shall be binding on WFG upon WFG's receipt of such statement. The written statement of investment policy may be modified by Client in writing at any time and shall be effective upon WFG's receipt of such modification. The original written statement of investment policy is attached hereto as Exhibit B. 2.3 Non-Liability. WFG shall not be responsible for any acts or omissions of any broker/dealer or Custodian acting for the Account pursuant to this Section 2. 3. APPRAISAL OF ACCOUNT. 3.1 Monthly Appraisal. WFG will provide the Client with a monthly appraisal of the Account dated as of the last day on which the New York Stock Exchange is open in any month (the "Appraisal Date"). Such appraisal shall be in the form of a written summary of assets of the Account on the Appraisal Date. 3.2 Valuation Methods. Securities traded on national stock exchanges will be valued at the composite price as published in the Wall Street Journal. Listed Securities which are not traded and over-the-counter securities will be valued at the closing bid price. Other securities and all other assets will be valued at fair value as determined in good faith by WFG. 4. FEES. 4.1 Calculation of Fees. As full compensation for services rendered under this Agreement, WFG will be paid a quarterly fee in accordance with the fee schedule set forth below based on the market value of the assets in the Account as of the Appraisal Date occurring in March, June, September and December in each year. For purposes of the calculation of the fee, the value of the securities and cash in the Account shall be determined as of the Appraisal Date at the end of each fiscal quarter pursuant to Section 3 above.
Available For Sale Assets Held to Maturity Assets ------------------------- ----------------------- 13 Basis Points on the first $200 Million 4 Basis Points on the first $800 Million 8 Basis Points on the next $300 Million 1 Basis Points thereafter 5 Basis Points on the next $500 Million 3 Basis Points thereafter
4.2 Proration of Fees. Fees will be prorated for assets deposited to or withdrawn from the Account during the quarter. If WFG shall serve for less than the whole of any quarterly period, its compensation (determined as provided above) shall be calculated and payable on a pro rata basis for the portion of the quarter for which it has served as an advisor hereunder. 4.3 Payment Method. The fees due hereunder shall be paid directly by the Client promptly upon receipt of an invoice therefor, but if not paid shall be a lien upon and payable out of the Account. 5. SERVICE TO OTHER CLIENTS. It is understood that WFG provides investment advisory services for other clients. It is further understood that WFG may take investment action on behalf of such other clients which differs from investment action taken on behalf of the Account. If the purchase or sale of securities for the Account and one or more such other clients is considered at or about the same time, transactions in such securities will be allocated among the several clients in a manner deemed equitable by WFG. 2 6. REPRESENTATIONS. 6.1 Representations by WFG. WFG represents that it is duly registered as an investment advisor with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940, as amended, and that WFG has completed, obtained or performed all other acts, registrations, filings, approvals, authorizations, consents or examinations necessary to comply with the requirements of any government or governmental authority for the performance of the acts contemplated by this Agreement. WFG will deliver such documentation of this compliance as the Client may from time to time reasonably request. 6.2 Form ADV. The Client represents that it has received a copy of WFG's Form ADV-Part II as required by the Security and Exchange Commission's "Brochure Rule". 7. ASSIGNMENT. No assignment (as defined in the Investment Advisers Act of 1940) of this Agreement shall be made by WFG without consent of the Client. 8. TERMINATION. This Agreement may be terminated by either party upon 30 days' prior written notice. 9. NOTICE. Any notice or report to be given pursuant to this Agreement shall be delivered or mailed: (a) to WFG at: Windsor Financial Group, LLC 222 South Ninth Street, Suite 2790 Minneapolis, MN 55402 Attn: Tyron K. Estlick, Chief Manager (b) to the Client at: Life USA Holding, Inc. 300 South Highway 169 Minneapolis, MN 55426 Attn: Mark A. Zesbaugh, Senior Vice President 10. CONSTRUCTION OF AGREEMENT. This Agreement shall be construed, and the rights and obligations of the parties hereunder enforced, in accordance with the laws of the State of Minnesota. 3 Agreed to and Accepted by: WINDSOR FINANCIAL GROUP, LLC LIFE USA HOLDING, INC. By: /s/ Tyron K. Estlick By: /s/ Mark A. Zesbaugh ----------------------------- -------------------- Tyron K. Estlick, Chief Manager Mark A. Zesbaugh, Senior Vice President Date of Signature: April 30, 1998 Date of Signature: April 30, 1998 -------------- -------------- 4 EX-10.3 4 AMENDMENT NO. 4 TO LOAN AGREEMENT EXHIBIT 10.3 AMENDMENT NO. 4 TO LOAN AGREEMENT THIS AMENDMENT, is made and entered into as of September, 1998, but effective as of July 15, 1998, among LIFE USA HOLDING, INC., as Borrower, EMPLOYERS REASSURANCE CORPORATION, as Agent and one of the Lenders, and REPUBLIC-VANGUARD LIFE INSURANCE COMPANY and WINTERTHUR LIFE RE INSURANCE COMPANY, as the other Lenders. W I T N E S S E T H: WHEREAS, the parties hereto have entered into the Loan Agreement dated as of May 17, 1996, as amended by Amendment No. 1 dated as of December 30, 1996, Amendment No. 2 dated as of May 30, 1997, and Amendment No. 3 dated as of January 30, 1998 (the "Agreement"), pursuant to which the Lenders have agreed to make advances to Borrower on the terms and conditions set forth therein; and WHEREAS, Borrower has advised the Agent and the Lenders that it has obtained approval of its Board of Directors effective July 15, 1998 to initiate a program to repurchase up to 4,000,000 shares of its outstanding Common Stock in open market transactions (the "Stock Repurchase Plan"); and WHEREAS, Borrower, the Agent and the Lenders wish to amend the Agreement as provided in this Amendment in connection with the Stock Repurchase Plan, NOW, THEREFORE, in consideration of these premises and of the covenants, conditions and promises hereinafter set forth and for One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Intention of Amendment. The purpose of this Amendment is to permit the use of the proceeds of any Term Loan Advance to purchase Borrower's Common Stock pursuant to the Stock Repurchase Plan and to make such other modifications to the Agreement as are necessary or appropriate to permit such application of proceeds. All terms defined in the Agreement are used herein as defined in the Agreement. 2. Amendment of Section 1 of the Agreement. Section 1 of the Agreement is hereby amended by adding a definition for "Stock Repurchase Plan" as follows: "Stock Repurchase Plan" shall mean the program to repurchase up to 4,000,000 shares of the Borrower's outstanding Stock in open market transactions, as approved by the Board of Directors of the Borrower effective July 15, 1998. 3. Amendment of Section 2.4 of Agreement. Subsection 2.4 of the Agreement is hereby amended in its entirety to read as follows: "2.4. Use of Proceeds. Borrower shall apply the proceeds of each Term Loan Advance (i) to fund, or reimburse Borrower for payments made after April 1, 1996 for, the cash portion of any FMO Investment, (ii) to fund, or reimburse Borrower for payments made after April 1, 1996 for, the Capital and Surplus of LifeUSA, (iii) to make, or reimburse Borrower for payments made after April 1, 1996 for, any Capital Expenditures permitted pursuant to Section 7.10 hereof or investment permitted pursuant to Section 7.2 hereof or (iv) to fund, or reimburse Borrower for payments made for, purchases of Borrower's Common Stock pursuant to the Stock Repurchase Plan." 4. Amendment of Section 7.2 of Agreement. Subsection (b) of Section 7.2 of the Agreement is hereby amended in its entirety to read as follows: "(b) Borrower shall not, and shall not permit any Subsidiary to make or commit to make, any advance, loan, extension of credit or capital contribution to, or purchase of any stock, bonds, notes, debentures or other securities of any Person (including, without limitation, any such Person which would constitute a Subsidiary), or make any other investment in any Person or otherwise engage in any investment activities, except for (i) FMO Investments by Borrower or any Subsidiary, provided that the aggregate amount of cash used by Borrower and its Subsidiaries to make such investments shall not exceed $25,000,000 outstanding at any one time, (ii) those investments and investment activities set forth on Schedule 7.2 hereto (the "Investment Guidelines"), as such Investment Guidelines are modified from time to time by the Board of Directors of LifeUSA Insurance Company, (iii) as permitted by subsection (a) hereof and (iv) purchases of Borrower's Common Stock pursuant to the Stock Repurchase Plan, but subject to compliance with Section 7.14 hereof." 5. Amendment of Section 7.5 of Agreement. Subsection (b) of Section 7.5 of the Agreement is hereby amended in its entirety to read as follows: "(b) Borrower shall not make or permit any Subsidiary of Borrower to make any changes in its capital structure, amend its certificate of incorporation or bylaws, or make or permit any Subsidiary or Borrower to make any changes in any of its business objectives, purposes or operations which might in any way adversely affect the repayment of the Obligations or have a Material Adverse Effect, provided that any amendment to the certificate of incorporation of Borrower to increase the number of 2 authorized shares of Common Stock shall not require the prior written consent of the Required Lenders." 6. Amendment to Section 7.14 of Agreement. Section 7.14 of the Agreement is hereby amended in its entirety to read as follows: "7.14 Restricted Payments. Borrower shall not and shall not permit any Subsidiary of Borrower to make any Restricted Payments, except that during any Fiscal Year commencing with the year beginning January 1, 1998, Borrower may pay dividends in an amount up to 25% of Excess Cash Flow for the prior Fiscal Year, and Borrower may repurchase its Common Stock pursuant to the Stock Repurchase Plan, provided, in each case, (i) no Default or Event of Default has occurred and is continuing or would result from the making of such Restricted Payment and (ii) Borrower's Consolidated Net Worth after giving effect to such Restricted Payment shall equal at least $207,000,000." 7. Representations and Warranties. Borrower represents and warrants to Agent and Lenders as follows: (a) All of the representations and warranties of Borrower contained in the Agreement or any of the Loan Documents are true and correct in all material respects on the date hereof as though made on such date, except to the extent that any such representation or warranty expressly relates to an earlier date and for changes permitted or contemplated by the Agreement, except as such representations and warranties were modified or supplemented since the date of the original Agreement. As of the date hereof, no Default or Event of Default under the Agreement as amended by this Amendment has occurred which is continuing. (b) The execution, delivery and performance by Borrower of this Amendment have been duly authorized by all necessary or proper corporate action and do not require the consent or approval of any Person which has not been obtained. (c) This Amendment has been duly executed and delivered by Borrower and constitutes a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms. 8. Fees and Expenses. Pursuant to Section 10.2 of the Agreement, Borrower shall pay all reasonable out-of-pocket costs and expenses of Agent in connection with the preparation of this Amendment, including the reasonable fees and expenses of its counsel. 3 9. Full Force and Effect. Except as expressly set forth herein, the Agreement, as amended hereby, shall continue in full force and effect in accordance with its terms. 10. Counterparts. This Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which, when so executed and delivered, shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 11. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without regard to the principles thereof regarding conflicts of laws. [The balance of this page is intentionally blank.] 4 IN WITNESS WHEREOF, the parties have executed this Agreement, each as of the date first above written. LIFE USA HOLDING, INC., as Borrower By: /s/ Mark A. Zesbaugh ------------------------------------------- Mark A. Zesbaugh Executive Vice President and Chief Financial Officer EMPLOYERS REASSURANCE CORPORATION, as Agent and Lender By: /s/ James D. Maughn ------------------------------------------- Its: Executive Vice President & Actuary REPUBLIC-VANGUARD LIFE INSURANCE COMPANY, as Lender By: /s/ John Brill ------------------------------------------- Its: Senior Vice President & Treasurer WINTERTHUR LIFE RE INSURANCE COMPANY, as Lender By: /s/ John Brill ------------------------------------------- Its: Senior Vice President & Treasurer SIGNATURE PAGE TO AMENDMENT NO. 4 TO LOAN AGREEMENT EX-10.4 5 AMENDMENT NO. 5 TO LOAN AGREEMENT EXHIBIT 10.4 AMENDMENT NO. 5 TO LOAN AGREEMENT THIS AMENDMENT, is made and entered into as of February ___, 1999, but effective as of April 30, 1998, among LIFE USA HOLDING, INC., as Borrower, EMPLOYERS REASSURANCE CORPORATION, as Agent and one of the Lenders, and REPUBLIC-VANGUARD LIFE INSURANCE COMPANY and WINTERTHUR LIFE RE INSURANCE COMPANY, as the other Lenders. W I T N E S S E T H: WHEREAS, the parties hereto have entered into the Loan Agreement dated as of May 17, 1996, as amended by Amendment No. 1 dated as of December 30, 1996, Amendment No. 2 dated as of May 30, 1997, Amendment No. 3 dated as of January 30, 1998 and Amendment No. 4 dated September, 1998 (the "Agreement"), pursuant to which the Lenders have agreed to make advances to Borrower on the terms and conditions set forth therein; and WHEREAS, Borrower has advised the Agent and the Lenders that it has acquired 40% of the equity of Windsor Financial Group, L.L.C., a Minnesota limited liability company and a registered investment advisor (the "Windsor Investment"); and WHEREAS, Borrower has advised the Agent and the Lenders that it has formed a subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"), for the purpose of acquiring a shell insurance company through which life insurance, annuities and health insurance offering long-term care benefits will be made available to consumers, that it subsequently transferred all of the capital stock of LTCA to LifeUSA Insurance Company ("LifeUSA"); that LTCA acquired all of the capital stock of Capitol Bankers Life Insurance Company ("Capitol Bankers"); that LTCA pledged the capital stock of Capitol Bankers to Allianz Life Insurance Company of North America ("Allianz") to secure LTCA's guaranty to Allianz to support the guaranty by Allianz of payment of a $15 million line of credit facility to LTCA by Norwest Bank Minnesota, National Association (the "LTCA Line of Credit"); that the Borrower granted a security interest in certain future payments to be made to the Borrower by Allianz to secure payment of the Borrower's guaranty to Allianz to support the Allianz guaranty of the LTCA Line of Credit; that Capitol Bankers, Allianz and LifeUSA have entered into reinsurance contracts, retrocession agreements and excess loss agreements with respect to the long term care business to be produced for each of them on Capitol Bankers' policy forms; and that LTCA has entered into a service agreement and employee leasing agreement with the Borrower, and LTCA and Capitol Bankers have entered into a management agreement (the "Affiliate Agreements;" all of the arrangements herein described being referred to as the "LTCA Transactions"); and WHEREAS, Borrower, the Agent and the Lenders wish to amend the Agreement as provided in this Amendment in connection with the Windsor Investment and the LTCA Transactions, NOW, THEREFORE, in consideration of these premises and of the covenants, conditions and promises hereinafter set forth and for One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Intention of Amendment. The purpose of this Amendment is to permit the use of the proceeds of any Term Loan Advance to make the Windsor Investment and to make such other modifications to the Agreement as are necessary or appropriate to permit the LTCA Transactions. All terms defined in the Agreement are used herein as defined in the Agreement. 2. Amendment of Section 1 of the Agreement. Section 1 of the Agreement is hereby amended by adding the following sentence to the definition of "Affiliate": "It is understood that Capitol Bankers (to be known as LTCAmerica Insurance Company) is an affiliate of the Borrower. Section 1 of the Agreement is further amended by adding a definition for "Windsor Investment" as follows: "Windsor Investment" shall mean the acquisition of an equity interest in Windsor Financial Group, L.L.C., a Minnesota limited liability company and a registered investment advisor, on the terms described in Schedule 2 hereto." 3. Amendment of Section 2.4 of the Agreement. Subsection 2.4 of the Agreement is hereby amended in its entirety to read as follows: "2.4. Use of Proceeds. Borrower shall apply the proceeds of each Term Loan Advance (i) to fund, or reimburse Borrower for payments made after April 1, 1996 for, the cash portion of any FMO Investment or the Windsor Investment, (ii) to fund, or reimburse Borrower for payments made after April 1, 1996 for, the Capital and Surplus of LifeUSA, (iii) to make, or reimburse Borrower for payments made after April 1, 1996 for, any Capital Expenditures permitted pursuant to Section 7.10 hereof or investment permitted pursuant to Section 7.2 hereof or (iv) to fund, or reimburse Borrower for payments made for, purchases of Borrower's Common Stock pursuant to the Stock Repurchase Plan." 4. Amendment of Section 6.3(b) of the Agreement. Clauses (ii) and (iii) of Section 6.3(b) of the Agreement are hereby amended in their entirety to read as follows: 2 "(ii) The Capital and Surplus plus AVR of LifeUSA as set forth in its respective Annual Statements shall be equal to or greater than $95,000,000, without regard to the Capital and Surplus plus AVR attributable to LTCA and its Subsidiaries. (iii) Borrower shall cause LifeUSA to maintain at all times, such maintenance to be evidenced as at the end of each fiscal quarter of LifeUSA, a Risk-Based Capital Ratio of at least 3.50 to 1.0, exclusive of capital attributable to LTCA and its Subsidiaries. Borrower shall cause Capitol Bankers to maintain at all times, such maintenance to be evidenced as at the end of each fiscal quarter of Capitol Bankers, a Risk-Based Capitol Ratio of least 3.50 to 1.0." 5. Amendment to Section 6.16 of the Agreement. Section 6.16 of the Agreement is hereby amended in its entirety to read as follows: "6.16 Pledge of FMO Investments and Windsor Investment. If requested by Agent at any time after the date hereof, the Borrower shall pledge to Agent for the ratable benefit of the Lenders any or all of the FMO Investments and the Windsor Investment pursuant to an amendment to the Pledge Agreement in form and substance satisfactory to Agent and its counsel." 6. Amendment to Section 7.1 of the Agreement. Section 7.1 of the Agreement is hereby amended in its entirety to read as follows: "7.1 Mergers, Etc. Neither Borrower nor any Subsidiary of Borrower shall directly or indirectly, by operation of law or otherwise, merge with, consolidate with, acquire all or substantially all of the assets or capital stock of, or otherwise combine with, any Person or a division of any Person nor form a subsidiary, except for the formation of LTCA and permitted FMO Investments and the Windsor Investment pursuant to Section 7.2 hereof." 7. Amendment of Subsection (b) of Section 7.2 of the Agreement. Subsection (b) of Section 7.2 of the Agreement is hereby amended in its entirety to read as follows: "(b) Borrower shall not, and shall not permit any Subsidiary to make or commit to make, any advance, loan, extension of credit or capital contribution to, or purchase of any stock, bonds, notes, debentures or other securities of any Person (including, without limitation, any such Person which would constitute a Subsidiary), or make any other investment in any Person or otherwise engage in any investment activities, except for (i) FMO Investments and the Windsor Investment by Borrower or any Subsidiary, provided that the aggregate amount of cash used by Borrower and its Subsidiaries to make such investments shall not exceed $25,000,000 outstanding at any one time, (ii) with respect to LifeUSA Insurance Company, those investments and investment activities set forth 3 on Schedule 7.2 hereto (the "LifeUSA Investment Guidelines"), as such LifeUSA Investment Guidelines are modified from time to time by the Board of Directors of LifeUSA Insurance Company, which Investment Guidelines will be modified to specifically permit the investment in LTCA, with respect to Capitol Bankers, those investments and investment activities set forth on Schedule 7.2A hereto (the "CB Investment Guidelines"), as such CB Investment Guidelines are modified from time to time by the Board of Directors of Capitol Bankers, (iii) as permitted by subsection (a) hereof and (iv) purchases of Borrower's Common Stock pursuant to the Stock Repurchase Plan, but subject to compliance with Section 7.14 hereof." 8. Amendment to Subsection (a) of Section 7.3 of the Agreement. Subsection (a) of Section 7.3 of the Agreement is hereby amended in its entirety to read as follows: "7.3. Indebtedness. (a) Except as otherwise expressly permitted by this Section 7.3 or by any other section of this Agreement, Borrower shall not, nor shall it permit any of its Subsidiaries to, create, incur, assume or permit to exist any Indebtedness, except (i) Indebtedness secured by Liens permitted under Section 7.9 hereof, (ii) the Term Loan, (iii) the Allianz Subordinated Debentures in an original principal amount not to exceed $30,000,000, (iv) the Convertible Subordinated Debentures in an original principal amount not to exceed $15,000,000, (v) indebtedness incurred by LTCA pursuant to a Credit Agreement dated as of December 22, 1998 between LTCA and Norwest Bank Minnesota, National Association, (vi) all deferred taxes, (vii) all unfunded pension fund and other employee benefit plan obligations and liabilities but only to the extent they are permitted to remain unfunded under applicable law and (viii) any other Indebtedness incurred by Borrower at any time after Fiscal Year 1996 in an outstanding principal amount at the time of each such incurrence not in excess of the lesser of (x) 2% of the Consolidated Net Worth of Borrower at such time and (y) $5,000,000." 9. Amendment to Subsection (a) of Section 7.5 of the Agreement. Subsection (a) of Section 7.5 of the Agreement is hereby amended in its entirety to read as follows: "7.5 Capital Structure. (a) Borrower shall not permit any Subsidiary of Borrower to issue or agree to issue any of their respective authorized but not outstanding shares of Stock (including treasury shares) to any Person other than Borrower or LifeUSA, except that LTCA is permitted to issue its shares for not less than fair value and in accordance with the provisions of applicable securities laws." 10. Amendment to Section 7.6 of the Agreement. The following sentence is hereby added to Section 7.6 of the Agreement: 4 "The life insurance, annuities and health insurance proposed to be produced by Capitol Bankers and by LifeUSA on Capitol Bankers policy forms are acceptable to the Lenders." 11. Amendment of Section 7.7 of the Agreement. Section 7.7 of the Agreement is hereby amended by adding thereto a new clause (d) reading as follows: "(d) The Affiliate Agreements between LTCA and the Borrower, LifeUSA or Capitol Bankers are acceptable to the Lenders." 12. Amendment of Section 7.9 of the Agreement. Section 7.9 of the Agreement is hereby amended to add the following clause (d): "(d) the security interest given to Allianz by the Borrower and the pledge given to Allianz by Capitol Bankers in connection with the LTCA Line of Credit." 13. Amendment of Section 7.10 of the Agreement. Section 7.10 of the Agreement is hereby amended in its entirety to read as follows: "Borrower shall not and shall not permit any of its Subsidiaries to make Capital Expenditures that, in the aggregate, exceed (i) for the Fiscal Year 1996, $3,000,000 plus the cost of remodeling the leasehold improvements incurred in such Fiscal Year, and (ii) for each Fiscal Year thereafter, $3,000,000, excluding the effect of SOP 98-1, "Accounting for Cost of Computer Software Developed or Obtained for Internal Use" for purposes of such calculation." 14. Representations and Warranties. Borrower represents and warrants to Agent and Lenders as follows: (a) All of the representations and warranties of Borrower contained in the Agreement or any of the Loan Documents are true and correct in all material respects on the date hereof as though made on such date, except to the extent that any such representation or warranty expressly relates to an earlier date and for changes permitted or contemplated by the Agreement, except as such representations and warranties were modified or supplemented since the date of the original Agreement. As of the date hereof, no Default or Event of Default under the Agreement as amended by this Amendment has occurred which is continuing. (b) The execution, delivery and performance by Borrower of this Amendment have been duly authorized by all necessary or proper corporate action and do not require the consent or approval of any Person which has not been obtained. 5 (c) This Amendment has been duly executed and delivered by Borrower and constitutes a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms. 15. Fees and Expenses. Pursuant to Section 10.2 of the Agreement, Borrower shall pay all reasonable out-of-pocket costs and expenses of Agent in connection with the preparation of this Amendment, including the reasonable fees and expenses of its counsel. 16. Full Force and Effect. Except as expressly set forth herein, the Agreement, as amended hereby, shall continue in full force and effect in accordance with its terms. 17. Counterparts. This Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which, when so executed and delivered, shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 18. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without regard to the principles thereof regarding conflicts of laws. [The balance of this page is intentionally blank.] 6 IN WITNESS WHEREOF, the parties have executed this Agreement, each as of the date first above written. LIFE USA HOLDING, INC., as Borrower By: /s/ Mark A. Zesbaugh -------------------------------------------- Mark A. Zesbaugh Executive Vice President and Chief Financial Officer EMPLOYERS REASSURANCE CORPORATION, as Agent and Lender By: /s/ James D. Maughn -------------------------------------------- Its: Executive Vice President & Actuary REPUBLIC-VANGUARD LIFE INSURANCE COMPANY, as Lender By: /s/ John Brill -------------------------------------------- Its: Senior Vice President & Treasurer WINTERTHUR LIFE RE INSURANCE COMPANY, as Lender By: /s/ John Brill -------------------------------------------- Its: Senior Vice President & Treasurer EX-10.5 6 AMENDMENT NO. 3 TO STOCK PURCHASE AGREEMENT EXHIBIT 10.5 AMENDMENT NO. 3 TO STOCK PURCHASE AGREEMENT THIS AMENDMENT is made and entered into as of February __, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation ("Allianz"). W I T N E S S E T H: WHEREAS, the parties hereto have entered into the Stock Purchase Agreement dated January 13, 1998, as amended by Amendment No. 1 dated as of January 30, 1998 and Amendment No. 2 dated as of July 15, 1998, (the "Agreement" and all terms defined in the Agreement are used herein as defined in the Agreement); and WHEREAS, the parties wish to amend Section 11.2(a)(iii) of the Agreement, NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Amendment to Section 11.2(a)(iii) of the Agreement. Section 11.2(a)(iii) of the Agreement is amended in its entirety to read as follows: "(iii) open market purchases of up to 1,604,104 shares of Common Stock within two (2) years after the date of the Initial Closing," 2. Full Force and Effect. Except as expressly set forth herein, the Agreement as amended hereby shall continue in full force and effect in accordance with its terms. 3. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which, when so executed and delivered, shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Minnesota, without regard to the principles thereof regarding conflict of laws. IN WITNESS WHEREOF, the parties have executed this Agreement, each as of the date first above written. LIFE USA HOLDING, INC. By: /s/ Mark A. Zesbaugh ------------------------------------------ Mark A. Zesbaugh, Executive Vice President and Chief Financial Officer ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA By: /s/ Michael T. Westermeyer ------------------------------------------ Michael T. Westermeyer, Vice President EX-10.6 7 FIRST AMENDMENTS TO EMPLOYMENT AGREEMENTS EXHIBIT 10.6 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is made and entered into as of December 17, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and DONALD J. URBAN (the "Executive"). RECITALS WHEREAS, the Executive entered into an Employment Agreement dated as of January 1, 1998 (the "Employment Agreement"), providing the terms and conditions for continued employment of the Executive by the Company, including without limitation the service of the Executive as the Senior Vice President and Director of Sales of the Company and the President of LifeUSA Insurance Company, the Company's subsidiary ("LifeUSA"); WHEREAS, the Company's subsidiary, LifeUSA Insurance Company, has formed a new subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"), for the purpose of offering life insurance, annuity products and health insurance; and WHEREAS, LifeUSA wishes to make the services of the Executive available to LTCA and its subsidiaries, permit assignment of the Employment Agreement to LTCA, provide for the repurchase by LTCA of the securities of LTCA purchased by the Executive in the event the Executive dies or is disabled, voluntarily terminates his employment or is terminated for Cause and confirm noncompete and nonsolicitation agreements, NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Performance of Duties for LTCA. The parties desire that the Executive provide services to LTCA as the President and Chief Executive Officer of LTCA, with the duties and responsibilities attendant to such position, and that the Executive provide services to subsidiaries of LTCA as agreed upon between the Executive and LTCA. So long as the Executive provides services to LTCA or its subsidiaries, the salary, other compensation and benefits provided in the Agreement shall be reimbursed by LTCA in accordance with the Employee Leasing Agreement between the Company and LTCA, until such time as the Employment Agreement is assigned to LTCA pursuant to paragraph 7 hereof. 2. Term of Employment. The term of the Employment Agreement is hereby extended to December 31, 2003, automatically extendable as provided in paragraph 2 of the Employment Agreement commencing December 31, 1999. 3. Modification of Paragraph 4(c) of the Employment Agreement. Paragraph 4(c), clause (i) of the Employment Agreement is hereby amended to read as follows: "...the Executive is not at all times a duly elected executive officer of the Company or a Subsidiary...." 4. Modification of Paragraph 4(d) of the Employment Agreement. Paragraph 4(d) of the Employment Agreement is hereby modified to add the following two sentences thereto: "The Executive may voluntarily terminate his employment without Good Reason prior to the expiration of the term of this Agreement by giving the Company at least sixty (60) days prior written notice or such shorter period of time as the Company's Board of Directors may determine. In the event the Executive voluntarily resigns, the Executive's rights to further Base Salary payments and the Annual Bonus (to the extent not yet earned) shall terminate on the effective date of such resignation, and the Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect." 5. LTCA Stock Buyback. In connection with the formation of LTCA and the execution of this First Amendment to Employment Agreement, the Executive is purchasing 400,000 shares of common stock of LTCA (the "Shares"). The Executive agrees that he will not transfer the Shares or any right or interest therein without the prior written consent of LTCA. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), in the event the Executive voluntarily terminates his employment, or in the event the Executive is terminated for Cause pursuant to Section 4(b) of the Employment Agreement, the Executive acknowledges that LTCA may, but is not obligated to, repurchase the Shares from the Executive at a price of ten cents ($.10) per share plus interest on the original purchase price of the Shares from the date of purchase at the rate of ten percent 10% per annum (the "purchase price"). In order to exercise its option to repurchase, LTCA must give notice of its intention to the Executive within sixty (60) days of the event giving rise to the repurchase option (or within one hundred twenty (120) days after the death or disability of the Executive) and purchase the Shares within thirty (30) days of giving such notice. The right of LTCA to repurchase the Shares pursuant to this paragraph 5 shall terminate on December 31, 2001. 6. Confidentiality, Nonsolicitation and Noncompete Covenants. Without limiting paragraph 5 of the Employment Agreement, the Executive acknowledges that the covenants of the Executive in paragraph 5 of the Employment Agreement extend in every respect to include LTCA and its subsidiaries and are enforceable by LTCA and its subsidiaries. 7. Assignability. In the event that it is determined between LTCA and the Company that the Executive should be a direct employee of LTCA, the Employment Agreement shall be amended to reflect that relationship (including without limitation the assumption by LTCA of the Company's obligations under paragraphs 3 and 4 of the Employment Agreement) Company's obligations under paragraphs 3 and 4 of , provided that the obligations of the Executive to the Company under paragraph 5 of the Employment Agreement and the rights of the parties in the event of a dispute with respect to such obligations shall continue to be binding on the parties for so long as such obligations and rights exist between LTCA and the Executive in accordance with the Employment Agreement. 8. Notices. Any notice required to be given to LTCA shall be given to its corporate headquarters, attention of the Secretary. 2 9. Successors. The Company's rights under the Employment Agreement shall inure to the benefit of, and be enforceable by, the Company and its Subsidiaries (including without limitation LTCA) and the successors and assigns of any of them. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By /s/ Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/ Donald J. Urban -------------------------------- Donald J. Urban FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is made and entered into as of December 17, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and BRADLEY E. BARKS (the "Executive"). RECITALS WHEREAS, the Executive entered into an Employment Agreement dated as of January 1, 1998 (the "Employment Agreement"), providing the terms and conditions for continued employment of the Executive by the Company, including without limitation the service of the Executive as the Senior Vice President-Finance of the Company; WHEREAS, the Company's subsidiary, LifeUSA Insurance Company, has formed a new subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"), for the purpose of offering life insurance, annuity products and health insurance; and WHEREAS, the Company wishes to make the services of the Executive available to LTCA and its subsidiaries, permit assignment of the Employment Agreement to LTCA, provide for the repurchase by LTCA of the securities of LTCA purchased by the Executive in the event the Executive dies or is disabled, voluntarily terminates his employment or is terminated for Cause and confirm noncompete and nonsolicitation agreements, NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Performance of Duties for LTCA. The parties desire that the Executive provide services to LTCA as the Chairman and Chief Financial Officer of LTCA, with the duties and responsibilities attendant to such position, and that the Executive provide services to subsidiaries of LTCA as agreed upon between the Executive and LTCA. So long as the Executive provides services to LTCA or its subsidiaries, the salary, other compensation and benefits provided in the Agreement shall be reimbursed by LTCA in accordance with the Employee Leasing Agreement between the Company and LTCA, until such time as the Employment Agreement is assigned to LTCA pursuant to paragraph 7 hereof. 2. Term of Employment. The term of the Employment Agreement is hereby extended to December 31, 2003, automatically extendable as provided in paragraph 2 of the Employment Agreement commencing December 31, 1999. 3. Modification of Paragraph 4(c) of the Employment Agreement. Paragraph 4(c), clause (i) of the Employment Agreement is hereby amended to read as follows: "...the Executive is not at all times a duly elected executive officer of the Company or a Subsidiary...." 4. Modification of Paragraph 4(d) of the Employment Agreement. Paragraph 4(d) of the Employment Agreement is hereby modified to add the following two sentences thereto: "The Executive may voluntarily terminate his employment without Good Reason prior to the expiration of the term of this Agreement by giving the Company at least sixty (60) days prior written notice or such shorter period of time as the Company's Board of Directors may determine. In the event the Executive voluntarily resigns, the Executive's rights to further Base Salary payments and the Annual Bonus (to the extent not yet earned) shall terminate on the effective date of such resignation, and the Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect." 5. LTCA Stock Buyback. In connection with the formation of LTCA and the execution of this First Amendment to Employment Agreement, the Executive is purchasing 400,000 shares of common stock of LTCA (the "Shares"). The Executive agrees that he will not transfer the Shares or any right or interest therein without the prior written consent of LTCA. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), in the event the Executive voluntarily terminates his employment, or in the event the Executive is terminated for Cause pursuant to Section 4(b) of the Employment Agreement, the Executive acknowledges that LTCA may, but is not obligated to, repurchase the Shares from the Executive at a price of ten cents ($.10) per share plus interest on the original purchase price of the Shares from the date of purchase at the rate of ten percent 10% per annum (the "purchase price"). In order to exercise its option to repurchase, LTCA must give notice of its intention to the Executive within sixty (60) days of the event giving rise to the repurchase option (or within one hundred twenty (120) days after the death of the Executive) and purchase the Shares within thirty (30) days of giving such notice. The right of LTCA to repurchase the Shares pursuant to this paragraph 5 shall terminate on December 31, 2001. 6. Confidentiality, Nonsolicitation and Noncompete Covenants. Without limiting paragraph 5 of the Employment Agreement, the Executive acknowledges that the covenants of the Executive in paragraph 5 of the Employment Agreement extend in every respect to include LTCA and its subsidiaries and are enforceable by LTCA and its subsidiaries. 7. Assignability. In the event that it is determined between LTCA and the Company that the Executive should be a direct employee of LTCA, the Employment Agreement shall be amended to reflect that relationship (including without limitation the assumption by LTCA of the Company's obligations under paragraphs 3 and 4 of the Employment Agreement), provided that the obligations of the Executive to the Company under paragraph 5 of the Employment Agreement and the rights of the parties in the event of a dispute with respect to such obligations shall continue to be binding on the parties for so long as such obligations and rights exist between LTCA and the Executive in accordance with the Employment Agreement. 8. Notices. Any notice required to be given to LTCA shall be given to its corporate headquarters, attention of the Secretary. 2 9. Successors. The Company's rights under the Employment Agreement shall inure to the benefit of, and be enforceable by, the Company and its Subsidiaries (including without limitation LTCA) and the successors and assigns of any of them. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By /s/ Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/ Bradley E. Barks -------------------------------- Bradley E. Barks EX-10.7 8 EMPLOYMENT AGREEMENTS EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of December 17, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and HAZEL REID (the "Executive"). R E C I T A L S WHEREAS, the Executive is now and has been an employee of the Company providing services to its marketing subsidiary; WHEREAS, the Company's subsidiary, LifeUSA Insurance Company, has formed a subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"), for the purpose of offering life insurance, annuity products and health insurance; and WHEREAS, the Company and the Executive wish to enter into this Agreement to provide for the continued employment of Executive and in connection with making the services of the Executive available to LTCA and its subsidiaries, all on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Duties. The parties hereby agree that, during the term of this Agreement as set forth in paragraph 2 below, the Executive shall be employed by the Company and will provide services to LTCA as the Senior Vice President and Chief Marketing Officer with the duties and responsibilities attendant to such position. In discharging such duties and responsibilities, the Executive may also serve as an executive officer and/or director of any direct or indirect subsidiary of the Company (collectively the "Subsidiaries"). The salary, other compensation and benefits provided herein may be allocated among the Company and the Subsidiaries based upon the portion of the Executive's services provided to the Company and each of the Subsidiaries, respectively, and the Executive shall assist the Company in making such allocation as the Company may reasonably request. During the term of this Agreement, the Executive shall apply on a full-time basis (allowing for usual vacations and sick leave) all of the Executive's skill and experience to the performance of the Executive's duties hereunder with the Company and the Subsidiaries. It is understood that the Executive may have other business investments and participate in charitable organizations which may, from time to time, require minor portions of Executive's time, but which shall not interfere or be inconsistent with the Executive's duties under this Agreement. The Executive shall perform the Executive's duties at the Company's principal executive offices in Minneapolis, Minnesota or at such other location as may be mutually agreed upon by the Executive and the Company, provided that the Executive shall travel to other locations at such times as may be necessary for the performance of the Executive's duties under this Agreement. 2. Term of Employment. Unless sooner terminated as provided in paragraph 4 below, the term of this Agreement shall commence on the date hereof and shall continue through December 31, 2001; provided that the term shall be automatically extended for one year on each December 31st commencing December 31, 1999 unless either party gives written notice to the other prior to the date on which the automatic extension would be effective, provided that the term shall not be extended beyond Executive's sixty-fifth (65th) birthday. 3. Compensation and Benefits. During the term of this Agreement, the Executive shall be entitled to the following compensation and benefits for service to the Company and the Subsidiaries, including any services as a director of the Company or its Subsidiaries: (a) Base Salary. The Executive shall be paid a base salary at a minimum annual rate of $110,000, payable in accordance with the Company's customary payroll policy, which salary shall be reviewed and may be increased from time to time at the discretion of the Board of Directors of the Company or the Compensation Committee of the Board of Directors (the "Base Salary"), provided that the amount of the Base Salary shall not be reduced after it has been increased by the Board of Directors or the Compensation Committee without the Executive's written consent. The performance of the Executive shall be reviewed at least once each calendar year which may be at the same time as any adjustment to the Base Salary of Executive. So long as the Executive performs services for LTCA or its subsidiaries, the Base Salary and other benefits received by the Executive hereunder shall be reimbursed by LTCA in accordance with the current leasing agreement between LTCA and the Company, unless this Agreement is assigned to LTCA pursuant to paragraph 5 hereof. (b) Bonus. The Executive shall, in addition to the Base Salary, also be entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by the Company of performance goals established by the Board of Directors or the Compensation Committee of the Company's Board of Directors. (c) Stock Incentives. The Executive shall be eligible to receive stock options under any stock based plan from time to time adopted by the Company (the "Stock Plans"), as from time to time determined by the Board of Directors or Stock Option Committee of the Company's Board of Directors. (d) Reimbursement of Expenses. The Company shall reimburse the Executive for all business expenses properly documented in accordance with the Company's expense reimbursement policy. (e) Other Benefits. The Executive shall be entitled to participate and shall be included in any employee benefit plan, medical/dental coverage plan, life insurance plan, disability coverage plan, or similar benefit plan of the Company now existing or established hereafter which are generally applicable to executives of the Company. 2 4. Termination of Employment. (a) Death or Disability. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), the employment of the Executive hereunder shall terminate and the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate as of the end of the month in which such death or disability occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in paragraph 4(e), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event the Executive: (i) has repeatedly failed to perform the Executive's duties under this Agreement, which failure is willful and deliberate; (ii) has engaged in an act or acts of dishonesty which is or are intended to result in substantial personal enrichment for the Executive; (iii) has knowingly engaged in conduct which is materially injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A) any felony (other than any felony arising out of negligence), or (B) any crime or offense involving dishonesty with respect to the Company or any of the Subsidiaries; (v) has failed to comply with the covenants contained in paragraph 5 of this Agreement; or (vi) knowingly provides materially misleading information concerning the Company to the Board of Directors of the Company or any of its Subsidiaries, any governmental body or regulatory agency or to any lender or other financing source or proposed financing source of the Company or its Subsidiaries. If the employment of the Executive is terminated by the Company for Cause, the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate, except the Executive shall receive the Base Salary through the end of the month during which such a termination occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in paragraph 4(e), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected executive officer of the Company or a Subsidiary; (ii) there is any material reduction in the scope of the Executive's authority and responsibility; (iii) there is a reduction in the Executive's Base Salary, a material reduction in the amount of Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan or employee retirement plan applicable to the Executive which is materially adverse to the Executive, or a material reduction in the other benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis/St. Paul, Minnesota metropolitan area; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason before a Change in Control (as defined below) or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Executive for Good Reason upon or within (and including) twenty-four (24) months after a Change in Control, the Executive 3 shall be entitled to the severance benefits set forth in paragraph 4(g) below. In addition, in the event a Change in Control has occurred and the Executive elects upon ten (10) days prior notice to the Company to terminate employment with the Company within the sixty (60) day period following the first anniversary of the Change in Control, such termination shall be considered a termination by the Executive for Good Reason and the Executive shall be entitled to the severance benefits under paragraph 4(g) below. (d) Termination Without Cause; Voluntary Termination. The Company may terminate the Executive's employment without Cause prior to the expiration of the term of this Agreement. If the employment of the Executive is terminated by the Company without Cause before a Change in Control or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Company without Cause upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. The Executive may voluntarily terminate his employment without Good Reason prior to the expiration of the term of this Agreement by giving the Company at least sixty (60) days prior written notice or such shorter period of time as the Company's Board of Directors may determine. In the event the Executive voluntarily resigns, the Executive's rights to further Base Salary payments and the Annual Bonus (to the extent not yet earned) shall terminate on the effective date of such resignation, and the Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (e) Notice and Right to Cure. (i) Termination by Company for Cause. If the Company proposes to terminate the employment of the Executive for Cause under paragraph 4(b), the Company shall give written notice to the Executive specifying the reasons for such proposed determination with particularity and, in the case of a termination for Cause under paragraph 4(b)(i), the Executive shall have a reasonable opportunity to correct any curable situation to the reasonable satisfaction of the Board of Directors of the Company, which period shall be no less than thirty (30) days from the Executive's receipt of the notice of proposed termination. Notwithstanding the foregoing, the Executive's employment shall not be terminated for Cause unless and until there shall be delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than the majority of the members of the Board of Directors of the Company at a meeting called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's legal counsel, to be heard before the Board of Directors) finding that, in the opinion of the Company's Board of Directors, the Executive has engaged in conduct justifying a termination for Cause. (ii) Termination by Executive for Good Reason. If the Executive proposes to terminate the Executive's employment for Good Reason under paragraph 4(c) above (other than the last sentence of paragraph 4(c) above), the Executive shall give written notice to the Company, specifying the reason therefor with particularity. In the event the Executive proposes to terminate employment for Good Reason under paragraph 4(c)(i), (ii), (iii) or (iv) 4 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 5 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 6 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; 7 (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. 8 (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, 9 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. 10 (d) Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of this paragraph 5, the Company shall have the following rights and remedies, in addition to any rights and remedies otherwise available at law or equity: (i) The right and remedy to have the provisions of this paragraph 5 specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by the Executive that any such breach or threatened breach will cause irreparable injury to the Company and the Subsidiaries and that money damages will not provide an adequate remedy to the Company and the Subsidiaries; and (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments, or other benefits, other than those payable under this Agreement, derived or received by the Executive or the enterprise in competition with the Company or any of the Subsidiaries as the result of any transactions constituting a breach of any part of this paragraph 5, and Executive agrees to account for and pay over to the Company such amounts promptly upon demand therefor. (e) Without limiting the provisions of this paragraph 5, the Executive acknowledges that the covenants of the Executive in this paragraph 5 extend in every respect to include LTCA and its subsidiaries and are enforceable by LTCA and its subsidiaries. 6. Beneficiaries. In the event of the Executive's death after termination of employment, any amount or benefit payable or distributable to him pursuant to this Agreement shall be paid to the beneficiary designated by the Executive for such purpose in the last written instrument received by the Company prior to the Executive's death, if any, or, if no beneficiary has been designated, to the Executive's estate, but such designation shall not be deemed to supersede any beneficiary designation under any benefit plan of the Company. Whenever this Agreement provides for the written designation of a beneficiary or beneficiaries of the Executive, the Executive shall have the right to revoke such designation and to redesignate a beneficiary or beneficiaries by written notice to either the Company to such effect, except to the extent, if any, restricted by law. 7. Rights in the Event of Dispute. In the event of a dispute between the Company and the Executive regarding the Executive's employment or this Agreement, it is the intention of this Agreement that the dispute shall be resolved as expeditiously as possible, consistent with fairness to both sides, and that during pendency of the dispute the Executive and the Company shall be on equal footing, as follows: (a) Arbitration. Any claim or dispute relating to the Executive's employment or the terms and performance of this Agreement (other than enforcement of paragraph 5) shall be resolved by binding private arbitration before three arbitrators, and any award rendered by any arbitration panel, or a majority thereof, may be filed and a judgment obtained in any court having jurisdiction over the parties unless the relief granted in the award is delivered within ten (10) days of the award. Either party may request arbitration by written notice to the other party. Within thirty (30) days of receipt of such notice by the opposing party, each party shall appoint a disinterested arbitrator and the two arbitrators selected thereby shall appoint a third neutral arbitrator; in the event the two arbitrators cannot agree upon the third arbitrator within ten (10) days after their appointment, then 11 the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding conducted hereunder shall be in the City of Minneapolis and shall follow the procedures set forth in the Rules of Commercial Arbitration of the American Arbitration Association, and both sides shall cooperate in as expeditious a resolution of the proceeding as is reasonable under the circumstances. The arbitration panel shall have the power to enter any relief it deems fair and just on any claim, including interim and final equitable relief, along with any procedural order that is reasonable under the circumstances. (b) Expenses of Prosecution/Defense of Claim. During the pendency of a dispute between the Company and the Executive relating to the Executive's employment or the terms or performance of this Agreement, the Company shall promptly pay the Executive's reasonable expenses of representation upon delivery of periodic billings for same, provided that (i) Executive (or a person claiming on the Executive's behalf) shall promptly repay all amounts paid hereunder at the conclusion of the dispute if the resolution thereof includes a finding that the Executive did not act in good faith in the matter in dispute or in the dispute proceeding itself, and (ii) no claim for expenses of representation shall be submitted by the Executive or any person acting on the Executive's behalf unless made in writing to the Board of Directors within one year of the performance of the services for which such claim is made. 8. No Obligation to Mitigate Damages. In the event the Executive becomes eligible to receive compensation or benefits subsequent to the termination of the Executive's employment under this Agreement, the Executive shall have no obligation to seek other employment in an effort to mitigate damages. To the extent the Executive shall accept other employment after the Executive's termination of employment, the compensation and benefits received from such employment shall not reduce the compensation and benefits otherwise due under this Agreement, except as provided in paragraph 4(f)(iii) above. 9. Other Benefits. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein, be in addition to, and not in derogation or diminution of, any benefits that Executive or the Executive's beneficiary may be entitled to receive under any other plan or program now or hereafter maintained by the Company, or its Subsidiaries. 10. LTCA Stock Buyback. In connection with the formation of LTCA and the execution of this Agreement, the Executive is purchasing 400,000 shares of common stock of LTCA (the "Shares"). The Executive agrees that she will not transfer the Shares or any right or interest therein without the prior written consent of LTCA. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), in the event the Executive voluntarily terminates his employment pursuant to paragraph 4(d), or in the event the Executive is terminated for Cause pursuant to Section 4(b) of this Agreement, the Executive acknowledges that LTCA may, but is not obligated to, repurchase the Shares from the Executive at a price of ten cents ($.10) per share plus interest on the original purchase price of the Shares from the date of purchase at the rate of 10% per annum (the "purchase price"). LTCA must give notice of its intention to the Executive within sixty (60) days of the event giving rise to the repurchase option (or within one hundred (120) days after the death of the Executive) and purchase the Shares within thirty (30) days of giving such notice. The right of LTCA to repurchase the Shares pursuant to this paragraph 10 shall terminate on December 30, 2001. 12 11. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Executive, such obligations have been assumed by the successor as a matter of law. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (unless the foregoing opinion is rendered to the Executive) shall entitle the Executive to terminate the Executive's employment and to receive the payments provided for in paragraphs 4(f), 4(g) and 4(h), as the case may be, as if the Executive terminated this Agreement for Good Reason. The Executive's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Executive's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. The Company's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Company and its Subsidiaries' (including without limitation LTCA) successors and assigns of any of them. 12. Assignability. In the event that it is determined between LTCA and the Company that the Executive should be a direct employee of LTCA, this Agreement shall be amended to reflect that relationship (including without limitation the assumption by LTCA of the Company's obligations under paragraphs 3 and 4 hereof), provided that the obligations of the Executive to the Company under paragraph 5 of the Agreement and the rights of the parties in the event of a dispute with respect to such obligations shall continue to be binding on the parties for so long as such obligations and rights exist between LTCA and the Executive in accordance with this Agreement. 13. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 14. Survival. The rights and obligations of the parties pursuant to this Agreement shall survive the term of the employment to the extent that any performance is required hereunder after the expiration or termination of such term. 15. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Executive, to the Executive's last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. Any notices required to be given to LTCA shall be given to its corporate headquarters, attention of the Secretary. 13 16. Amendments and Construction. This Agreement may only be amended in a writing signed by the parties hereto. This Agreement shall be construed under the laws of the State of Minnesota. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By: /s/ Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/ Hazel Reid --------------------------------- Hazel Reid EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of December 17, 1998 between LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and ROBIN AESHLIMAN (the "Executive"). R E C I T A L S WHEREAS, the Executive is now and has been an employee of the Company providing services to its marketing subsidiary; WHEREAS, the Company's subsidiary, LifeUSA Insurance Company, has formed a subsidiary, LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"), for the purpose of offering life insurance, annuity products and health insurance; and WHEREAS, the Company and the Executive wish to enter into this Agreement to provide for the continued employment of Executive and in connection with making the services of the Executive available to LTCA and its subsidiaries, all on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Duties. The parties hereby agree that, during the term of this Agreement as set forth in paragraph 2 below, the Executive shall be employed by the Company and will provide services to LTCA as the Senior Vice President and Chief Operating Officer with the duties and responsibilities attendant to such position. In discharging such duties and responsibilities, the Executive may also serve as an executive officer and/or director of any direct or indirect subsidiary of the Company (collectively the "Subsidiaries"). The salary, other compensation and benefits provided herein may be allocated among the Company and the Subsidiaries based upon the portion of the Executive's services provided to the Company and each of the Subsidiaries, respectively, and the Executive shall assist the Company in making such allocation as the Company may reasonably request. During the term of this Agreement, the Executive shall apply on a full-time basis (allowing for usual vacations and sick leave) all of the Executive's skill and experience to the performance of the Executive's duties hereunder with the Company and the Subsidiaries. It is understood that the Executive may have other business investments and participate in charitable organizations which may, from time to time, require minor portions of Executive's time, but which shall not interfere or be inconsistent with the Executive's duties under this Agreement. The Executive shall perform the Executive's duties at the Company's principal executive offices in Minneapolis, Minnesota or at such other location as may be mutually agreed upon by the Executive and the Company, provided that the Executive shall travel to other locations at such times as may be necessary for the performance of the Executive's duties under this Agreement. 2. Term of Employment. Unless sooner terminated as provided in paragraph 4 below, the term of this Agreement shall commence on the date hereof and shall continue through December 31, 2001; provided that the term shall be automatically extended for one year on each December 31st commencing December 31, 1999 unless either party gives written notice to the other prior to the date on which the automatic extension would be effective, provided that the term shall not be extended beyond Executive's sixty-fifth (65th) birthday. 3. Compensation and Benefits. During the term of this Agreement, the Executive shall be entitled to the following compensation and benefits for service to the Company and the Subsidiaries, including any services as a director of the Company or its Subsidiaries: (a) Base Salary. The Executive shall be paid a base salary at a minimum annual rate of $90,000, payable in accordance with the Company's customary payroll policy, which salary shall be reviewed and may be increased from time to time at the discretion of the Board of Directors of the Company or the Compensation Committee of the Board of Directors (the "Base Salary"), provided that the amount of the Base Salary shall not be reduced after it has been increased by the Board of Directors or the Compensation Committee without the Executive's written consent. The performance of the Executive shall be reviewed at least once each calendar year which may be at the same time as any adjustment to the Base Salary of Executive. So long as the Executive performs services for LTCA or its subsidiaries, the Base Salary and other benefits received by the Executive hereunder shall be reimbursed by LTCA in accordance with the current leasing agreement between LTCA and the Company, unless this Agreement is assigned to LTCA pursuant to paragraph 5 hereof. (b) Bonus. The Executive shall, in addition to the Base Salary, also be entitled to a cash annual bonus (the "Annual Bonus") based on the achievement by the Company of performance goals established by the Board of Directors or the Compensation Committee of the Company's Board of Directors. (c) Stock Incentives. The Executive shall be eligible to receive stock options under any stock based plan from time to time adopted by the Company (the "Stock Plans"), as from time to time determined by the Board of Directors or Stock Option Committee of the Company's Board of Directors. (d) Reimbursement of Expenses. The Company shall reimburse the Executive for all business expenses properly documented in accordance with the Company's expense reimbursement policy. (e) Other Benefits. The Executive shall be entitled to participate and shall be included in any employee benefit plan, medical/dental coverage plan, life insurance plan, disability coverage plan, or similar benefit plan of the Company now existing or established hereafter which are generally applicable to executives of the Company. 2 4. Termination of Employment. (a) Death or Disability. In the event of the Executive's death or disability (as defined in the Company's long term disability plan then in effect), the employment of the Executive hereunder shall terminate and the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate as of the end of the month in which such death or disability occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in paragraph 4(e), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event the Executive: (i) has repeatedly failed to perform the Executive's duties under this Agreement, which failure is willful and deliberate; (ii) has engaged in an act or acts of dishonesty which is or are intended to result in substantial personal enrichment for the Executive; (iii) has knowingly engaged in conduct which is materially injurious to the Company; (iv) is convicted of, or pleads nolo contendere to (A) any felony (other than any felony arising out of negligence), or (B) any crime or offense involving dishonesty with respect to the Company or any of the Subsidiaries; (v) has failed to comply with the covenants contained in paragraph 5 of this Agreement; or (vi) knowingly provides materially misleading information concerning the Company to the Board of Directors of the Company or any of its Subsidiaries, any governmental body or regulatory agency or to any lender or other financing source or proposed financing source of the Company or its Subsidiaries. If the employment of the Executive is terminated by the Company for Cause, the Company's obligation to make further Base Salary and Annual Bonus (to the extent not yet earned) payments hereunder shall thereupon terminate, except the Executive shall receive the Base Salary through the end of the month during which such a termination occurs. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in paragraph 4(e), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected executive officer of the Company or a Subsidiary; (ii) there is any material reduction in the scope of the Executive's authority and responsibility; (iii) there is a reduction in the Executive's Base Salary, a material reduction in the amount of Annual Bonus for which the Executive is eligible, an amendment to any Stock Plan or employee retirement plan applicable to the Executive which is materially adverse to the Executive, or a material reduction in the other benefits to which the Executive is entitled under paragraph 3(e) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis/St. Paul, Minnesota metropolitan area; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason before a Change in Control (as defined below) or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Executive for Good Reason 3 upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. In addition, in the event a Change in Control has occurred and the Executive elects upon ten (10) days prior notice to the Company to terminate employment with the Company within the sixty (60) day period following the first anniversary of the Change in Control, such termination shall be considered a termination by the Executive for Good Reason and the Executive shall be entitled to the severance benefits under paragraph 4(g) below. (d) Termination Without Cause; Voluntary Termination. The Company may terminate the Executive's employment without Cause prior to the expiration of the term of this Agreement. If the employment of the Executive is terminated by the Company without Cause before a Change in Control or following twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(f) below. If the employment of the Executive is terminated by the Company without Cause upon or within (and including) twenty-four (24) months after a Change in Control, the Executive shall be entitled to the severance benefits set forth in paragraph 4(g) below. The Executive may voluntarily terminate his employment without Good Reason prior to the expiration of the term of this Agreement by giving the Company at least sixty (60) days prior written notice or such shorter period of time as the Company's Board of Directors may determine. In the event the Executive voluntarily resigns, the Executive's rights to further Base Salary payments and the Annual Bonus (to the extent not yet earned) shall terminate on the effective date of such resignation, and the Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to executives of the Company then in effect. (e) Notice and Right to Cure. (i) Termination by Company for Cause. If the Company proposes to terminate the employment of the Executive for Cause under paragraph 4(b), the Company shall give written notice to the Executive specifying the reasons for such proposed determination with particularity and, in the case of a termination for Cause under paragraph 4(b)(i), the Executive shall have a reasonable opportunity to correct any curable situation to the reasonable satisfaction of the Board of Directors of the Company, which period shall be no less than thirty (30) days from the Executive's receipt of the notice of proposed termination. Notwithstanding the foregoing, the Executive's employment shall not be terminated for Cause unless and until there shall be delivered to the Executive a copy of the resolution duly adopted by the affirmative vote of not less than the majority of the members of the Board of Directors of the Company at a meeting called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's legal counsel, to be heard before the Board of Directors) finding that, in the opinion of the Company's Board of Directors, the Executive has engaged in conduct justifying a termination for Cause. (ii) Termination by Executive for Good Reason. If the Executive proposes to terminate the Executive's employment for Good Reason under paragraph 4(c) above (other than the last sentence of paragraph 4(c) above), the Executive shall give written notice to the 4 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 5 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. 6 (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, 7 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 8 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 9 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 10 securities shall not be deemed to be giving or lending funds to, otherwise financing or having a financial interest in a competitor. In the event that any person in which the executive has any financial or other interest directly or indirectly enters into the Subject Business in the Territory during the Noncompete Period, the Executive shall divest all of his interest (other than any amount permitted under this paragraph) in such person within 30 days after such person enters into the Subject Business in the Territory. (d) Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of this paragraph 5, the Company shall have the following rights and remedies, in addition to any rights and remedies otherwise available at law or equity: (i) The right and remedy to have the provisions of this paragraph 5 specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed by the Executive that any such breach or threatened breach will cause irreparable injury to the Company and the Subsidiaries and that money damages will not provide an adequate remedy to the Company and the Subsidiaries; and (ii) The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments, or other benefits, other than those payable under this Agreement, derived or received by the Executive or the enterprise in competition with the Company or any of the Subsidiaries as the result of any transactions constituting a breach of any part of this paragraph 5, and Executive agrees to account for and pay over to the Company such amounts promptly upon demand therefor. (e) Without limiting the provisions of this paragraph 5, the Executive acknowledges that the covenants of the Executive in this paragraph 5 extend in every respect to include LTCA and its subsidiaries and are enforceable by LTCA and its subsidiaries. 6. Beneficiaries. In the event of the Executive's death after termination of employment, any amount or benefit payable or distributable to him pursuant to this Agreement shall be paid to the beneficiary designated by the Executive for such purpose in the last written instrument received by the Company prior to the Executive's death, if any, or, if no beneficiary has been designated, to the Executive's estate, but such designation shall not be deemed to supersede any beneficiary designation under any benefit plan of the Company. Whenever this Agreement provides for the written designation of a beneficiary or beneficiaries of the Executive, the Executive shall have the right to revoke such designation and to redesignate a beneficiary or beneficiaries by written notice to either the Company to such effect, except to the extent, if any, restricted by law. 7. Rights in the Event of Dispute. In the event of a dispute between the Company and the Executive regarding the Executive's employment or this Agreement, it is the intention of this Agreement that the dispute shall be resolved as expeditiously as possible, consistent with fairness to both sides, and that during pendency of the dispute the Executive and the Company shall be on equal footing, as follows: 11 (a) Arbitration. Any claim or dispute relating to the Executive's employment or the terms and performance of this Agreement (other than enforcement of paragraph 5) shall be resolved by binding private arbitration before three arbitrators, and any award rendered by any arbitration panel, or a majority thereof, may be filed and a judgment obtained in any court having jurisdiction over the parties unless the relief granted in the award is delivered within ten (10) days of the award. Either party may request arbitration by written notice to the other party. Within thirty (30) days of receipt of such notice by the opposing party, each party shall appoint a disinterested arbitrator and the two arbitrators selected thereby shall appoint a third neutral arbitrator; in the event the two arbitrators cannot agree upon the third arbitrator within ten (10) days after their appointment, then the neutral arbitrator shall be appointed by the Chief Judge of Hennepin County (Minnesota) District Court. Any arbitration proceeding conducted hereunder shall be in the City of Minneapolis and shall follow the procedures set forth in the Rules of Commercial Arbitration of the American Arbitration Association, and both sides shall cooperate in as expeditious a resolution of the proceeding as is reasonable under the circumstances. The arbitration panel shall have the power to enter any relief it deems fair and just on any claim, including interim and final equitable relief, along with any procedural order that is reasonable under the circumstances. (b) Expenses of Prosecution/Defense of Claim. During the pendency of a dispute between the Company and the Executive relating to the Executive's employment or the terms or performance of this Agreement, the Company shall promptly pay the Executive's reasonable expenses of representation upon delivery of periodic billings for same, provided that (i) Executive (or a person claiming on the Executive's behalf) shall promptly repay all amounts paid hereunder at the conclusion of the dispute if the resolution thereof includes a finding that the Executive did not act in good faith in the matter in dispute or in the dispute proceeding itself, and (ii) no claim for expenses of representation shall be submitted by the Executive or any person acting on the Executive's behalf unless made in writing to the Board of Directors within one year of the performance of the services for which such claim is made. 8. No Obligation to Mitigate Damages. In the event the Executive becomes eligible to receive compensation or benefits subsequent to the termination of the Executive's employment under this Agreement, the Executive shall have no obligation to seek other employment in an effort to mitigate damages. To the extent the Executive shall accept other employment after the Executive's termination of employment, the compensation and benefits received from such employment shall not reduce the compensation and benefits otherwise due under this Agreement, except as provided in paragraph 4(f)(iii) above. 9. Other Benefits. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein, be in addition to, and not in derogation or diminution of, any benefits that Executive or the Executive's beneficiary may be entitled to receive under any other plan or program now or hereafter maintained by the Company, or its Subsidiaries. 10. LTCA Stock Buyback. In connection with the formation of LTCA and the execution of this Agreement, the Executive is purchasing 400,000 shares of common stock of LTCA (the "Shares"). The Executive agrees that she will not transfer the Shares or any right or interest therein without the prior written consent of LTCA. In the event of the Executive's death 12 or disability (as defined in the Company's long term disability plan then in effect), in the event the Executive voluntarily terminates his employment pursuant to paragraph 4(d), or in the event the Executive is terminated for Cause pursuant to Section 4(b) of this Agreement, the Executive acknowledges that LTCA may, but is not obligated to, repurchase the Shares from the Executive at a price of ten cents ($.10) per share plus interest on the original purchase price of the Shares from the date of purchase at the rate of 10% per annum (the "purchase price"). LTCA must give notice of its intention to the Executive within sixty (60) days of the event giving rise to the repurchase option (or within one hundred twenty (120) days after the death of the Executive) and purchase the Shares within thirty (30) days of giving such notice. The right of LTCA to repurchase the Shares pursuant to this paragraph 10 shall terminate on December 30, 2001. 11. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Executive, such obligations have been assumed by the successor as a matter of law. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (unless the foregoing opinion is rendered to the Executive) shall entitle the Executive to terminate the Executive's employment and to receive the payments provided for in paragraphs 4(f), 4(g) and 4(h), as the case may be, as if the Executive terminated this Agreement for Good Reason. The Executive's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Executive's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. The Company's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Company and its Subsidiaries' (including without limitation LTCA) successors and assigns of any of them. 12. Assignability. In the event that it is determined between LTCA and the Company that the Executive should be a direct employee of LTCA, this Agreement shall be amended to reflect that relationship (including without limitation the assumption by LTCA of the Company's obligations under paragraphs 3 and 4 hereof), provided that the obligations of the Executive to the Company under paragraph 5 of the Agreement and the rights of the parties in the event of a dispute with respect to such obligations shall continue to be binding on the parties for so long as such obligations and rights exist between LTCA and the Executive in accordance with this Agreement. 13. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 14. Survival. The rights and obligations of the parties pursuant to this Agreement shall survive the term of the employment to the extent that any performance is required hereunder after the expiration or termination of such term. 13 15. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Executive, to the Executive's last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. Any notices required to be given to LTCA shall be given to its corporate headquarters, attention of the Secretary. 16. Amendments and Construction. This Agreement may only be amended in a writing signed by the parties hereto. This Agreement shall be construed under the laws of the State of Minnesota. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. LIFE USA HOLDING, INC. By: /s/ Robert W. MacDonald ----------------------------- Robert W. MacDonald, Chairman and Chief Executive Officer /s/ Robin Aeshliman --------------------------------- Robin Aeshliman EX-10.8 9 CREDIT AGREEMENT EXHIBIT 10.8 CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of December 22, 1998, and is by and between LTCAMERICA HOLDING, INC., a Minnesota corporation (the 'Borrower") and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association with offices in Minneapolis, Minnesota (the "Bank"). RECITALS: WHEREAS, the Borrower has requested the Bank to lend it up to the sum of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00), on a committed, revolving basis (the "Revolving Line"); and WHEREAS, the Bank is willing to extend such credit to Borrower upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises herein contained, and each intending to be legally bound hereby, the parties agree as follows: SECTION 1 Definitions In addition to the terms used in the above Recitals, as used herein: "Advance" means a borrowing hereunder consisting of the aggregate amount outstanding under the Revolving Line of the same Interest Period. "Agreement" shall mean this Credit Agreement and all amendments and supplements hereto which may from time to time become effective hereafter in accordance with the terms of this Agreement. "Base Rate" shall mean the "base" or "prime" rate of interest as announced by the Bank from time to time. "Banking Day" shall mean any day other than a Saturday or Sunday on which banks in Minneapolis are generally open for the conduct of substantially all of their commercial lending activities and, with respect to LIBOR Advances, shall be a day on which dealings in U.S. dollars are carried on in the London interbank market. "Borrowed Money" shall mean funds obtained by incurring contractual indebtedness and shall not include trade accounts payable. "Borrowing Date" means a date on which an Advance is made hereunder. "Contingent Obligation" of a person means any agreement, undertaking or arrangement by which such person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other person. "Default" shall mean an Event of Default as referred to in Section 6 hereof, or an event which with notice or lapse of time or both would become an Event of Default, "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Generally Accepted Accounting Principles" or "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with those reflected in the financial statements referred to in Section 4 hereof. "Guarantor" shall mean Allianz Life Insurance Company of North America, Inc. "Guaranty" shall mean the guaranty of the Guarantor in the form of Exhibit B. "Indebtedness" of a person means such person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of property or services (other than accounts payable arising in the ordinary course of such person's business payable on terms customary in the trade), (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such person, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) capitalized lease obligations, (vi) net liabilities under interest rate swap, exchange or cap agreements, (vii) contingent obligations and (viii) obligations for which such person is obligated pursuant to a letter of credit. "Interest Period" means a LIBOR Interest Period. "LIBOR Advance" means an Advance which bears interest at a LIBOR Rate. "LIBOR Base Rate" means the rate determined by the Bank to be the rate at which dollar deposits are offered to major banks in the London interbank market two Banking Days prior to the first day of such LIBOR Interest Period, having a maturity approximately equal to such LIBOR Interest Period. "LIBOR Interest Period" means, with respect to a LIBOR Advance, a period of one, two, or three months commencing on a Banking Day selected by the Borrower pursuant to this Agreement. Such LIBOR Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two or three months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second or third succeeding month, such LIBOR Interest Period shall end on the last Banking, Day of such next, second or third succeeding month. If a LIBOR Interest Period would otherwise end on a day which is not a Banking Day, such LIBOR Interest Period shall end on the next succeeding Banking Day, provided, however, that if said next succeeding Banking Day falls in a new calendar month, such LIBOR Interest Period shall end on the immediately preceding Banking Day. "LIBOR Rate" means, with respect to a LIBOR Advance for the relevant LIBOR Interest Period, the sum of (i) the quotient of (a) the LIBOR Base Rate applicable to such LIBOR Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such LIBOR Interest Period, plus (ii) 0.75% per annum. "Material Adverse Effect" means a material adverse effect on (i) the business, Property, condition (financial or otherwise), results of operations, or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Bank thereunder. "NAIC" shall mean the National Association Of Insurance Commissioners or any successor thereto, or in lieu thereof, any other association, agency or other organization performing advisory, coordination or other like functions among insurance departments, insurance commissions and similar governmental authorities of the various states of the United States of America toward the promotion of uniformity in the practices of such governmental authorities. "Net Worth" shall mean, as of the date of any determination thereof, the sum of the stockholders equity of the Borrower (including paid-in-capital and any preferred stock to the extent included in stockholders equity in accordance with GAAP, but net of treasury shares) plus (or minus in the case of a deficit) the retained earnings of the Borrower determined in accordance with GAAP. "Note" shall mean the Revolving Note. "Reserve Requirement" means, with respect to a LIBOR Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on new non-personal time deposits of $100,000 or more with a maturity equal to that of such Eurocurrency liabilities (in the case of LIBOR Advances). "Revolving Line Commitment" shall mean $15,000,000.00, subject to reduction pursuant to Section 2.7 hereof. "Revolving Line Termination Date" shall mean five years from the date of this Agreement. "Revolving Note" shall mean the promissory note of the Borrower in the form of Exhibit A, evidencing borrowings under Section 2.1 hereof. "Subordinated Indebtedness" of a Person means any Indebtedness of such Person the payment of which is subordinated to payment of the indebtedness hereunder to the written satisfaction of the Bank. SECTION 2 Borrowings and Conditions of Lending 2.1 Revolving Line Commitment. The Bank agrees to lend to the Borrower from time to time from the effective date hereof until the Revolving Line Termination Date, sums not to exceed in the aggregate principal amount at any one time outstanding the amount of the Revolving Line Commitment. Within the limits of the Revolving Line Commitment and subject to the terms and conditions hereof, prior to the Revolving Line Termination Date the Borrower may borrow, prepay and reborrow pursuant to this Section 2. 1. 2.2 Advances and Selection of Interest Periods. Prior to each Advance, which shall be in minimum amounts of $100,000.00, the Borrower shall select the Interest Period applicable to such Advance, by giving irrevocable notice not later than 2:00 p.m., Minneapolis time, at least three Banking Days before the Borrowing Date. Such notice shall specify: (i) the Borrowing Date, which shall be a Banking Day, (ii) the amount of such Advance, and (iii) the applicable Interest Period. 2.3 Continuation of Outstanding Advances. Advances for a particular LIBOR Interest Period shall continue as such until the end of the then applicable Interest Period, at which time such LIBOR Advance shall automatically renew for the same length of Interest Period unless the Borrower has given the Bank notice otherwise. The Borrower may elect from time to time to convert all or any part of an Advance of any Interest Period to a different Interest Period, provided that such conversion shall be made only on the last day of the applicable Interest Period. The Borrower shall give the Bank irrevocable notice of such conversion not later than 2:00 p.m., Minneapolis time, at least three Banking Days before the end of the applicable Interest Period. Such notice shall specify: (i) the date of such conversion, which shall be a Banking Day, (ii) the amount to be converted, and (iii) the applicable Interest Period. 2.4 Termination of Interest Periods. No Interest Period with respect to amounts outstanding under the Revolving Line may end after the Revolving Line Termination Date. 2.5 Interest Rates. All advances shall bear interest at the LIBOR Rate, except that upon the occurrence of any Default, all Advances shall bear interest at a rate 2.0% in excess of the otherwise applicable LIBOR Rate until the end of the then current Interest Period and then at the Base Rate until such Default is cured. 2.6 Interest Payment Dates. Interest accrued on each Advance shall be payable on the last day of the applicable Interest Period, on any date on which the Advance is prepaid, and at maturity. All interest and fees under this Agreement shall be calculated on the basis of actual days elapsed in a year of 360 days. 2.7 Principal Reduction and Pavments. Notwithstanding any other provisions of this Agreement, if the Revolving Line Commitment is not fully funded as of December 31, 2000, the Revolving Line Commitment shall be reduced to such funded amount effective January 1, 2001. Thereafter, the Revolving Line Commitment shall reduce by $500,000 on the last day of each calendar quarter commencing March 31, 2001 through December 31, 2001 and by $1,625,000 on the last day of each calendar quarter commencing March 31, 2002. On each such reduction date the Borrower shall repay such principal amount as may be necessary to reduce the principal outstanding to the new maximum. 2.8 Optional Principal Payments. The Borrower may at any time, prepay the Note in whole or in part on the last day of the applicable Interest Period without premium or penalty. If any amount is prepaid on a date other than at the end of an Interest Period, then such prepayment shall be accompanied by a premium equal to the interest that would have been recoverable by the Bank by reinvesting the amount of principal prepaid from the prepayment date to the last day of the applicable Interest Period in U.S. Government Securities having a maturity date on or about that date. 2.9 Method of Payment. All sums payable to the Bank hereunder shall be paid directly to the Bank in immediately available funds. The Bank shall send the Borrower statements of all amounts due hereunder, which statements shall be considered correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within thirty days of its receipt of any statement which it deems to be incorrect. Alternatively, at its sole discretion, the Bank may charge against any deposit account of the Borrower all or any part of any amount due hereunder. 2.10 Fees. The Borrower shall pay to the Bank a one-time origination fee with respect to the Revolving Line equal to 0. 10 % per annum of the Revolving Line Commitment, payable on the date of this Agreement. In addition, the Borrower shall pay to the Bank an annual facility fee with respect to the Revolving Line equal to 0.10% per annum of the unused portion of the Revolving Line Commitment, payable in arrears on the last day of each quarter commencing March 31, 1999. 2.11 Unavailabilitv of LIBOR Rate. If prior to commencement of any LIBOR Interest Period the Bank shall determine that (i) deposits in the amount of the Advance scheduled to be outstanding are not available to the Bank in the London interbank market, or (ii) by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the LIBOR Rate, or (iii) the LIBOR Rate does not accurately reflect the cost to the Bank of making or continuing such loan, or (iv) that any applicable law or regulation makes it unlawful to make or maintain the loan if bearing interest based on the LIBOR Rate, then the Bank shall promptly give notice thereof to the Borrower, and the obligation of the Bank to make, or continue the Advance based on the LIBOR Rate shall terminate until deposits in such account shall again be readily available in the London interbank market, adequate and reasonable means shall exist for ascertaining the LIBOR Rate, the LIBOR Rate shall adequately reflect the cost to the Bank of making or continuing any such Loan and such illegality shall no longer exist. In such case all Advances shall bear interest at a rate based on the Base Rate plus or minus such margin as will result in an overall rate equivalent to the LIBOR Rate. 2.12 Yield Protection. If any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, or the compliance of any Lender therewith, (i) subjects the Bank to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding federal taxation of the overall net income of the Bank), or changes the basis of taxation of payments to the Bank in respect of its Loans or other amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Bank (other than reserves and assessments taken into account in determining the interest rate applicable to LIBOR Advances), or (iii) imposes any other condition the result of which is to increase the cost to the Bank of making, funding or maintaining loans or reduces any amount receivable by the Bank in connection with loans, or requires the Bank to make any payment calculated by reference to the amount of loans held or interest received by it, by an amount deemed material by the Bank, then, within 15 days of demand by the Bank, the Borrower shall pay the Bank that portion of such increased expense incurred or reduction in an amount received which the Bank determines is attributable to making, funding and maintaining its Loans and its Commitment. SECTION 3 Conditions Precedent The obligation of the Bank to make any advance hereunder is subject to the following conditions precedent: 3.1 The Borrower shall have delivered to the Bank, prior to the disbursement of the Loan (the "Closing") the following: A. The Revolving Note in the form of Exhibit A; B. A certified copy of resolutions of the Borrower's board of directors authorizing the execution, delivery and performance of this Agreement, the Note, and each other document to be delivered pursuant hereto and certifying as to the incumbency and signatures of the officers of the Borrower signing this Agreement, the Note, and each other document to be delivered pursuant hereto; C. A copy, certified as of the most recent date practicable, by the Secretary of State of Minnesota, of the Borrower's certificate of incorporation; D. The Guaranty of the Guarantor in the form of Exhibit B; E. A certified copy of resolutions of the Guarantor's board of directors authorizing the execution, delivery and performance of the Guaranty and certifying as to the incumbency and signatures of the officers of the Borrower signing the Guaranty; F. A copy, certified as of the most recent date practicable, by the Secretary of State of Minnesota, of the Guarantor's Articles of Incorporation; G. Payment of all fees required under Sections 2. 1 0 and 8.4 hereof. 3.2 At the time of the Closing and of any subsequent request for an advance: A. No Event of Default shall have occurred and be continuing, and no event shall have occurred and be continuing that, with the giving of notice or passage of time or both, would be an Event of Default; and B. No change shall have occurred which has a Material Adverse Effect since the date of this Agreement. 3.3 At the time of the Closing and each subsequent disbursement, all legal matters incidental thereto shall be satisfactory to the Bank's legal counsel. SECTION 4 Representations and Warranties To induce the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank as follows: 4.1 The Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Minnesota. 4.2 The Borrower is duly qualified to do business and is in good standing in any additional jurisdictions where, on advice of legal counsel, registration was deemed necessary. 4.3 The execution, delivery and performance of this Agreement, and the issuance of the Note by the Borrower are within its corporate powers, have been duly authorized, and are not in contravention of law, or the terms of Borrower's Articles of Incorporation or By-Laws or of any undertaking to which the Borrower is a party or by which it is bound. 4.4 This Agreement is, and the Note when issued will be, valid and binding in accordance with their terms. 4.5 No consent, approval or authorization of or declaration or filing with any governmental authority on the part of the Borrower is required in connection with the execution and delivery of this Agreement or the borrowings by the Borrower hereunder or on the part of the Borrower in connection with the consummation of any transaction contemplated herebv. 4.6 No litigation or governmental proceeding is pending, or, to the knowledge of the officers of the Borrower, threatened against the Borrower which could have a material adverse effect on the Borrower's financial condition or business. 4.7 The Borrower is in compliance in all material respects with ERISA and has received no notice to the contrary from any governmental body. 4.8 The Borrower is not in default with respect to any of its existing Indebtedness. SECTION 5 Covenants During the term of this Agreement, unless the Bank shall otherwise consent in writing: 5.1 Financial Reporting. The Borrower will maintain a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Bank: (i) Within 90 days after the close of each of its fiscal years, an unqualified (except for qualifications relating to changes in accounting principles or practices reflecting changes in generally accepted principles of accounting and required or approved by the Borrower's independent certified public accountants) audit report of the Borrower certified by independent certified public accountants, acceptable to the Bank, prepared in accordance with GAAP, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by any management letter prepared by said accountants. (ii) Within 90 days after the close of each of its fiscal years, an unqualified (except for qualifications relating to changes in accounting principles or practices reflecting changes in generally accepted principles of accounting and required or approved by the Borrower's independent certified public accountants) audit report of the Guarantor certified by independent certified public accountants, acceptable to the Bank, prepared in accordance with GAAP, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by any management letter prepared by said accountants. (iii) Within 45 days after the close of the first three quarterly periods of each of its fiscal years, unaudited balance sheets of the Borrower as at the close of each such period and profit and loss and reconciliation of surplus statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its chief financial officer. (iv) Within 45 days after the close of the first three quarterly periods of each of its fiscal years, unaudited balance sheets of the Guarantor as at the close of each such period and profit and loss and reconciliation of surplus statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its chief financial officer. (v) Together with the quarterly financial statements required hereunder, a compliance certificate in substantially the form of Exhibit "C" hereto signed by the chief financial officer of the Borrower showing the calculations necessary to determine compliance with this Agreement and stating that no Default exists, or if any Default exists, stating the nature and status thereof. (vi) Such other information (including non-financial information) as the Bank may from time to time reasonably request. 5.2 Use of Proceeds. Proceeds of the Revolving Line shall be used for working capital purposes and refinancing thereof, including acquisitions. 5.3 Notice of Default. The Borrower will give prompt notice in writing to the Bank of the occurrence of any Default and of any other development, financial or otherwise, which could have a Material Adverse Effect. 5.4 Conduct of Business. The Borrower will carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and to do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 5.5 Taxes. The Borrower will pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. 5.6 Insurance. The Borrower will maintain with financially sound and reputable insurance companies insurance on all of its property in such amounts and covering such risks as is consistent with sound business practice, and the Borrower will furnish to the Bank upon request full information as to the insurance carried. 5.7 CompIiance with Laws. The Borrower will comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject. 5.8 Inspection. The Borrower will permit the Bank, and its representatives and agents, to inspect any of the Property, corporate books and financial records of the Borrower and each Subsidiary, to examine and make, copies of the books of accounts and other financial records of the Borrower and each subsidiary, and to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Bank may designate. 5.9 Indebtedness. The Borrower will not create, incur, or suffer to exist any Indebtedness other than Indebtedness outstanding as of the date of this agreement and listed on Schedule 1 hereto. 5.10 Merger. The Borrower will not merge or consolidate with or into any other person, except that a subsidiary may merge with the Borrower or a wholly-owned subsidiary. 5.11 Invested Assets. The Borrower will maintain 100% of its invested assets in instruments having a rating from Moody's Investors Service or Standard & Poors Ratings Group of investment grade or higher. 5.12 Guaranties. The Borrower will not, nor will it permit any subsidiary to, make or suffer to exist any Contingent Obligations, except in favor of the Guarantor with respect to the Guarantor's payment of the Borrower's obligations under this Agreement and the Note. 5.13 Liens. The Borrower will not create, incur, or suffer to exist any Lien in, of or on the property of the Borrower, except: (i) Liens for taxes, assessments or governmental charges or levies on its property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings. (ii) Liens imposed by law and liens arising in the ordinary course of business which secure payment of obligations which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books. (iii) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. (iv) Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or its subsidiaries. (v) Liens in favor of the Guarantor to secure the Contingent Obligations to the Guarantor as described in Section 5.12. (vi) Liens existing on the date hereof and disclosed to the Bank in writing (vii) Liens evidenced by mortgages on real estate and improvements thereto given to secure Indebtedness representing the price of acquisition of real property and improvements thereto, and all Liens given upon the renewal, extension or refunding of such Indebtedness. 5.14 Affiliates. The Borrower will not, and will not permit any subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any property or service) with, or make any payment or transfer to, any affiliate except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such subsidiary than the Borrower or such subsidiary would obtain in a comparable arms-length transaction. 5.15 Reinsurance Agreement. The Borrower shall maintain a written commitment from the Guarantor to reinsure not less than 25% of Borrower's insurance subsidiary's annual written premiums each Year. 5.16 Marketing Agreement. The Borrower shall maintain a written agreement with Life USA Insurance Company granting the Borrower access to the national marketing organization and agent structure of Life USA Insurance Company for distribution of the Borrower's and its subsidiary's insurance products. 5.17 Minimum Net Worth. The Borrower will maintain at the end of each fiscal quarter a Net Worth of not less than $4,000,000 for each quarter through December 31, 1999 and not less than $5,000,000 for each quarter thereafter. 5.18 Risk Adjusted Capital. The Borrower will not permit its ratio of its insurance subsidiary's total adjusted capital to its authorized control level risk-based capital, as at the end of any fiscal quarter, to be less than 200%. The terms "total adjusted capital' and "authorized control level risk-based capital" shall have the same meanings as in the Annual Statement of the Borrower completed in accordance with the NAIC annual statement instructions and accounting practices and procedures manuals. SECTION 6 Events of Default 6.1 Upon the occurrence of any of the following events of default: A. Default in any payment of principal on the Note when due, or default in the payment of interest on the Note when due and continuance thereof for five days; or B. Default in the observance or performance of any other agreement of the Borrower or any Subsidiary or Guarantor herein set forth or in any other agreement between the Bank and the Borrower or such Subsidiary and continuance thereof for 30 days following written notice from the Bank; or C. Default by the Borrower or any Subsidiary in the payment of any other Indebtedness or in the observance or performance of any term, covenant or agreement of the Borrower or such Subsidiary in any agreement relating to any Indebtedness of the Borrower or such Subsidiary, the effect of which default is to permit the holder of such Indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof; or D. Final judgment or judgments for the payment of money aggregating in excess of $500,000 is or are outstanding against the Borrower or against any property or assets of it and any one of such judgments has remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of 60 days from the date of its entry; or E. Any representation or warranty made by the Borrower herein, or by the Guarantor under the Guaranty, or in any statement or certificate furnished by the Borrower hereunder, is untrue in any material respect; or F. The occurrence of a Material Adverse Change with respect to the Borrower; or G. Guarantor's debt obligations are rated at "AA" or worse by Standard & Poors Ratings Group or "A2" or worse by Moody's Investors Service, or Guarantor's rating by A.M. Best is worse than "A" and Guarantor fails, within 10 Banking Days after written notice from the Bank, to pledge investment grade marketable securities to the Bank to secure Guarantor's obligations to the Bank under its Guaranty, which pledge shall continue only until the earlier of (i) the date on which the obligations of the Borrower under this Agreement and the Revolving Note are paid in full, or (ii) the Guarantor's debt obligations rating by Moody's Investors Service is "Al" or better. then, or at any time thereafter, unless such event of default is remedied, the Bank or the holder of the Note may, by notice in writing to the Borrower, declare the Revolving Line to be terminated or the Note to be due and payable, or both, whereupon the Revolving Line shall immediately terminate or the Note shall immediately become due and payable, or both, as the case may be, subject to the provisions of Section 6.3. 6.2 Upon the occurrence of any of the following events of default: The Borrower or any subsidiary becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to the appointment of a custodian, trustee or receiver for itself or for the greater part of its properties; or a custodian, trustee or receiver is appointed for the Borrower or any subsidiary, or for the greater part of its properties without its consent and is not discharged within 60 days; or bankruptcy, reorganization or liquidation proceedings are instituted by or against the Borrower or any subsidiary and, if instituted against it, are consented to by it or remain undismissed for 60 days; then the Revolving Line shall immediately terminate and the Note shall automatically become immediately due and payable, without notice, subject to the provisions of Section 6.3 hereof. 6.3 Upon the occurrence and during the continuance of any Event of Default hereunder, the Bank shall provide written notice thereof to the Guarantor. Within 10 Banking Days after receipt of such notice, the Guarantor may, but shall not be required to, notify the Bank of its intent to purchase the obligations of the Borrower to the Bank under this Agreement and the Revolving Note from the Bank, without recourse. Prior to the expiration of such 10 Banking Days period, the Bank agrees that it will not exercise any other right or remedy under this Agreement, the Revolving Note, the Guaranty or any related document. The Guarantor's purchase of such obligations of the Borrower shall occur within 30 calendar days of the Guarantor's notice to the Bank of its intent to purchase such obligations, and during such period, the Bank shall not be entitled to exercise any other right or remedy under this Agreement, the Revolving Note, the Guaranty or any related document. Upon receipt by the Bank of payment of all amounts owed to it under this Agreement and the Revolving Note, the Bank shall assign this Agreement, the Revolving Note, and each related document to the Guarantor, pursuant to agreements and instruments reasonably requested by the Guarantor, whereupon the Guaranty shall be terminated and of no @er force or effect. SECTION 7 Change in Control. 7.1 Change of Control. In the event the Borrower has knowledge of a Change of Control or an impending Change of Control, the Borrower will give written notice (a "Control Change Notice") of such fact to the Bank at least 60 days prior to any proposed Change of Control Date; provided, however, that if the Borrower shall not then have knowledge of such fact, such Control Change Notice shall be delivered promptly upon receipt of such knowledge, but in no event later than three business days after the Change of Control Date. The Control Change Notice shall (i) describe the facts and circumstances of such Change of Control (including the Change of Control Date or proposed Change of Control Date) in reasonable detail and (ii) make reference to this Section 7.1 and the right of the Bank- to reduce or terminate the Commitment on the terms and conditions provided for herein. Upon the receipt of such Control Change Notice or, if no Control Change Notice is given, upon receipt of actual knowledge of a Change of Control, the Bank shall have the right, upon written notice (the "Declaration Notice") delivered to the Borrower by the Bank of reducing or terminating the Commitment, which reduction or termination shall be effective five Business Days following the delivery of such written notice. Such Declaration Notice shall be served, if at all, prior to 90 days after receipt of such Control Change Notice. In the event that no Control Change Notice shall be given, such Declaration Notice may be served at any time after the occurrence of the Change of Control in question. As used herein, the term "Change of Control" shall mean Life USA Holding, Inc. or Allianz Life Insurance Company of North America, Inc. ceasing to beneficially own, directly or indirectly, a majority of the outstanding capital stock of the Borrower. As used herein, the term "Change of Control Date' shall mean any date upon which a Change of Control shall occur. SECTION 8 Miscellaneous 8.1 The provisions of this Agreement shall be in addition to those of any note or other evidence of liability held by the Bank, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent the Bank from enforcing any or all other notes or other agreements in accordance with their respective terms. 8.2 From time to time, the Borrower will execute and deliver to the Bank such additional documents and will provide such additional information as the Bank may reasonably require to carry out the terms of this Agreement and be informed of the Borrower's status and affairs. 8.3 The Bank shall have the right at all times to enforce the provisions of this Agreement in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of the Bank in refraining from so doing at any time or times. The failure of the Bank at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same. All rights and remedies of the Bank are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. 8.4 The Borrower will pay all expenses, including the reasonable fees and expenses of legal counsel for the Bank, incurred in connection with the preparation, administration, amendment, modification or enforcement of this Agreement and the collection or attempted collection of the Note; provided that the obligation to reimburse fees and expenses of legal counsel for the Bank related to the preparation of this Agreement and related documents shall not exceed $2,500.00. 8.5 Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, or telegraph, as follows. unless such address is changed by written notice hereunder: A. If to the Borrower: LTCAmerica Holding, Inc. 300 South Highway 169 Minneapolis, Minnesota 55426 Attention: Brad Barks With a copy to: Allianz Life Insurance Company of North America, Inc. 1750 Hennepin Avenue South Minneapolis, Minnesota 55403-2195 Attention: Robert S. James B. If to the Bank: Norwest Bank Minnesota, N.A. Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479 Attention: Financial Institutions Division 8.6 The substantive laws of the State of Minnesota shall govern the construction of this Agreement and the rights and remedies of the parties hereto. 8.7 This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the Bank. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. 8.8 If any provision of this Agreement shall be held invalid under any applicable laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 8.9 All representations, warranties, covenants and agreements of the Borrower hereunder shall survive the making of the Loan. 8.10 Whenever any installment of the interest on the Note becomes due and payable on a day which is not a Banking Day, the maturity or due date thereof shall be extended to the next succeeding Banking Day and, in the case of principal of the Note, interest shall be payable thereon at the rate per annum specified in the Note during such extension. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. LTCAMERICA HOLDING, INC. By: /s/ Bradley E. Barks -------------------- Its CFO NORWEST BANK MINNESOTA. NATIONAL ASSOCIATION By: /s/ Larry M. Lange ------------------ Its Vice President EX-10.9 10 REVOLVING NOTE EXHIBIT 10.9 REVOLVING NOTE $15,000,000.00 December 22, 1998 FOR VALUE RECEIVED, LTCAMERICA HOLDING, INC. (the "Borrower") promises to pay on December 22, 2003 to the order of Norwest Bank Minnesota, National Association (the "Bank"), at its principal office in Minneapolis, Minnesota or such other address as the Bank or holder may designate from time to time, the principal sum of Fifteen Million and 00/100 Dollars ($15,000,000.00), or the amount shown on the Bank's records to be outstanding, plus interest as set forth below. PRINCIPAL. The outstanding principal balance of this Note shall be payable on December 22, 2003 and also according to the terms of the Credit Agreement of even date between the Bank and the Borrower (the "Agreement"). INTEREST. Interest on the unpaid principal balance of this Note shall accrue and be payable according to the terms of the Agreement. ADDITIONAL TERMS AND CONDITIONS. This Note is issued pursuant to the Agreement, and any amendments or substitutions thereof, which Agreement contains additional terms and conditions, including default and acceleration provisions, which are incorporated into this Note by reference. Capitalized terms not expressly defined herein shall have the meanings given them in the Agreement. The Borrower agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses incurred by the Bank if this Note is not paid as provided above. This Note shall be governed by the substantive laws of the State of Minnesota. WAIVER OF PRESENTMEENT AND NOTICE OF DISHONOR. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, hereby waives presentment, demand for payment, notice of dishonor, protest, and any notice relating to the acceleration of the maturity of this Note. LTCAMERICA HOLDING, INC. By: /s/ Bradley E. Barks -------------------- Its CFO EX-10.10 11 GUARANTY EXHIBIT 10.10 GUARANTY (By Organization) Date December 22, 1998 For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION (herein, with its participants, successors and assigns, called "Bank"), at its option, at any time or from time to time to make loans or extend other accommodations to or for the account of LTCAMERICA HOLDING, INC. (herein called "Borrower") or to engage in any other transactions with Borrower, the undersigned a Minnesota corporation hereby absolutely and unconditionally guarantees to the Bank the full and prompt payment when due, whether at maturity or earlier by reason of acceleration or otherwise, of the debts, liabilities and obligations described as follows: a. If this ___ is checked, the undersigned guarantees to Bank the payment and performance of each and every debt, liability and obligation of every type and description which Borrower may now or any time hereafter owe to Bank (whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, joint, several, or joint and several; all such debts, liabilities and obligations being hereinafter collectively referred to as "Indebtedness"). b. If this _X_ is checked, the undersigned guarantees to Bank the payment and performance of the debt, liability or obligation of Borrower to Bank evidenced by or arising out of the following: The Credit Agreement between Bank and Borrower dated December 22, 1998 and the Revolving Note, as described therein, in a principal amount not to exceed $15,000,000 plus accrued interest Thereon as provided in such Credit Agreement and Revolving Note and any extensions, renewals, replacements or modifications thereof (hereinafter referred to as "Indebtedness"). The undersigned further acknowledges and agrees with Bank that: 1. No act or thing need occur to establish the liability of the undersigned hereunder, and no act or thing, except full payment and discharge of all the Indebtedness, shall in any way exonerate the undersigned or modify, reduce, limit or release the liability of the undersigned hereunder. 2. If paragraph A is checked, this is an absolute, unconditional and continuing guaranty of payment of the Indebtedness and shall continue to be in force and be binding upon the undersigned, whether or not all Indebtedness is paid in full, until this Guaranty is revoked prospectively as to future transactions, by written notice actually received by the Bank, and such revocation shall not be effective as to Indebtedness existing or committed for at the time of actual receipt of such notice by the Bank, or as to any renewals, extensions and refinancings thereof. The undersigned represents and warrants to the Bank that the undersigned has a direct and substantial economic interest in Borrower and expects to derive substantial benefits therefrom and from any loans and financial accommodations resulting in the creation of Indebtedness guaranteed hereby, and that this Guaranty is given for a purpose that directly benefits the undersigned. The undersigned agrees to rely exclusively on the right to revoke this Guaranty prospectively as to future transactions, in accordance with this paragraph, if at any time, in the opinion of the authorized representative(s) of the undersigned, the benefits to the undersigned then being received by the undersigned in connection with this Guaranty are not sufficient to warrant the continuance of this Guaranty as to future Indebtedness. Accordingly, so long as this Guaranty is not revoked prospectively in accordance with this paragraph, the Bank may rely conclusively on a continuing warranty, hereby made, that the undersigned continues to be benefited by this Guaranty and the Bank shall have no duty to inquire into or confirm the receipt of any such benefits, and this Guaranty shall be effective and enforceable by the Bank without regard to the receipt, nature or value of any such benefits. 3. If the undersigned (i) shall be dissolved or liquidated; or (ii) shall be or become insolvent (however defined); or (iii) have a garnishment, levy or writ of attachment, or any local, state or federal notice of tax lien or levy served upon the Bank for attachment of property of the guarantor that is in the Bank's possession or for indebtedness owed to the guarantor by the Bank; or (iv) a custodian, trustee or receiver is appointed, with or without the guarantor's consent, for any of the guarantor's properties, or (v) the undersigned changes its legal form of organization, without the Bank's consent; then the Bank shall have the right to declare immediately due and payable, and the undersigned will forthwith pay to the Bank, the full amount of all Indebtedness, whether due and payable or unmatured. If the undersigned voluntarily commences or there is commenced involuntarily against the undersigned a case under the United States Bankruptcy Code, the fWl amount of all Indebtedness, whether due and payable or unmatured, shall be immediately due and payable without demand or notice thereof. 4. The liability of the undersigned hereunder shall be a principal amount of $15,000,000.00, plus accrued interest thereon plus all attorneys' fees, collection costs and enforcement expenses referable thereto. Indebtedness may be created and continued in any amount, whether or not in excess of such principal amount, without affecting or impairing the liability of the undersigned hereunder. The Bank may apply any sums received by or available to the Bank on account of the Indebtedness from Borrower or any other person (except the undersigned), from their properties, out of any collateral security or from any other source to payment of the excess. Such application of receipts shall not reduce, affect or impair the liability of the undersigned hereunder, If the liability of the undersigned is limited to a stated amount pursuant to this paragraph, any payment made by the undersigned under this Guaranty shall be effective to reduce or discharge such liability only if accompanied by a written transmittal document, received by the Bank, advising the Bank that such payment is made under this Guaranty for such purpose. 5. The undersigned will not exercise or enforce any right of contribution, reimbursement, recourse or subroation available to the undersigned against any person liable for payment of the Indebtedness, or as to any collateral security therefor, unless and until all of the Indebtedness shall have been fully paid and discharged. 6. The undersigned will pay or reimburse the Bank for all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Bank in connection with the protection, defense or enforcement of this Guaranty in any litigation or bankruptcy or insolvency proceedings. 7. Whether or not any existing relationship between the undersigned and Borrower has been changed or ended and whether or not this Guaranty has been revoked, the Bank may, but shall not be obligated to, enter into transactions resulting n the creation or continuance of Indebtedness, without any consent or approval by the undersigned and without any notice to the undersigned. The liability of the undersigned shall not be affected or impaired by any of the following acts or things (which the Bank is expressly authorized to do. omit or suffer from time to time, both before and after revocation of this Guaranty, without notice to or approval by the undersigned): (i) any acceptance of collateral security, guarantors, accommodation parties or sureties for any or all of the Indebtedness; (ii) any one or more extensions or renewals of Indebtedness (whether or not for Ion-er than the original period) or anv modification of the interest rates, maturities or other contractual terms applicable to any Indebtedness; (iii) any waiver or indulgence granted to Borrower, any delay or lack of diligence in the enforcement of Indebtedness, or any failure to institute proceedings, file a claim, -ive any required notices or otherwise protect any Indebtedness; (iv) any full or partial release of, settlement with, or agreement not to sue, Borrower or any other guarantor or other person liable in respect of any Indebtedness; (v) any discharge of any evidence of Indebtedness or the acceptance of any instrument in renewal thereof or substitution therefor; (vi) any failure to obtain collateral security (including rights of setoff) for the Indebtedness, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, insure, or enforce any collateral security; or any modification, substitution, discharge, impairment, or loss of any collateral security; (vii) any foreclosure or enforcement of any collateral security; (viii) any transfer of any Indebtedness or any evidence thereof, (ix) any order of application of any payments or credits upon Indebtedness; and (x) any election by the Bank underss.I I I I (b)(2) of the United States Bankruptcy Code. 8. The undersigned waives any and all defenses, claims and discharges of Borrower, or any other obligor, pertaining to Indebtedness, except the defense of discharge by payment in full. Without limiting the Generality of the foregoing, the undersigned will not assert, plead or enforce against the Bank any defense of waiver, release, discharge in bankruptcy, statute of limitations, res judicata, statute of frauds, anti-deficiency statute, fraud, incapacity, minority, usury, illegality or unenforceability which may be available to Borrower or any other person liable in respect of any Indebtedness, or any setoff available against the Bank to Borrower or anv such other person, whether or not on account of a related transaction. The undersigned expressly agrees that the undersigned shall be and remain liable for any deficiency remaining, after foreclosure of any mortgage or security interest securing the Indebtedness, whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. 9. The undersigned waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing, Indebtedness. The Bank shall not be required first to resort for payment of Indebtedness to Borrower or other persons or their properties, or first to enforce, realize upon or exhaust any collateral security for Indebtedness, before enforcing this Guaranty. 10. If any payment applied by the Bank to Indebtedness is thereafter set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of Borrower or any other obligor), the Indebtedness to which such payment was applied shall for the purposes of this Guaranty be deemed to have continued in existence, notwithstanding such application, and this Guaranty shall be enforceable as to such Indebtedness as fully as if such application had never been made. 11. The liability of the undersigned under this Guaranty is in addition to and shall be cumulative with all other liabilities of the undersigned to the Bank as guarantor or otherwise, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. While the undersigned has any liability to the Bank under this Guaranty, the undersigned agrees to provide to the Bank the undersigned's annual financial statements and such other financial information as the Bank may request. 12. The undersigned represents and warrants to the Bank that (i) the undersigned is duly organized and existing in good standing and has full power and authority to make and deliver this Guaranty; (ii) the execution, delivery and performance of this Guaranty by the undersigned have been duly authorized by all necessary action of its governing body and do not and will not violate the provisions of, or constitute a default under, any presently Applicable law or its organizational documents or any agreement presently binding on it; (iii) this Guaranty has been duly executed and delivered by the authorized representative(s) of the undersigned and constitutes its lawful, binding and legally enforceable obligation (subject to the United States Bankruptcy Code and other similar laws Generally affecting the enforcement of creditors' rights); and (iv) the authorization, execution, delivery and performance of this Guaranty do not require notification to, registration with, or consent or approval by, any federal, state or local regulatory body or administrative agency. 13. This Guaranty shall be effective upon delivery to the Bank, without further act, condition or acceptance by the Bank, shall be binding upon the undersigned and the successors and assigns of the undersigned and shall inure to the benefit of the Bank and its participants, successors and assigns. Any invalidity or unenforceability of any provision or application of this Guaranty shall not affect other lawful provisions and applications hereof, and to this end the provisions of this Guaranty are declared to be severable. This Guaranty may not be waived, modified, amended, terminated, released or otherwise changed except by a writing signed by the undersigned and the Bank. This Guaranty is issued in the state set forth above and shall be governed by its laws. The undersigned waives notice of the Bank's acceptance hereof and waives the right to a trial by jury in any action based on or pertaining to this Guaranty. 14. Notwithstanding- the terms of this Guaranty to the contrary, upon the occurrence and during the continuance of any Event of Default under the Credit Agreement, the Bank, by its acceptance of this Guaranty, agrees to provide written notice thereof to the undersigned. Within 10 Banking Days, as such ten-n is defined in the Credit Agreement, after receipt of such notice, the undersigned may, but shall not be required to, notify the Bank of its intent to purchase the obligations of the Borrower to the Bank under the Credit Agreement and the Revolving Note from the Bank, without recourse. Prior to the expiration of such 1O Banking- Days period, the Bank by its acceptance of this Guaranty, agrees that it will not exercise any other right or remedy under the Credit Agreement, the Revolving- Note, this Guaranty or any related document. The undersigned's purchase of such obligations of the Borrower shall occur within 30 calendar days of the undersigned's notice to the Bank of its intent to purchase such obligations, and during, such period, the Bank shall not be entitled to exercise any other right or remedy under the Credit Agreement, the Revolving Note, this Guaranty or any related document. Upon receipt by the Bank of payment of the Indebtedness, the Bank, by its acceptance of this Guaranty, agrees that it shall assign the Credit Agreement, the Revolving Note, and each related document to the undersigned, pursuant to agreements and instruments reasonably requested by the undersigned, whereupon this Guaranty shall be terminated and of no further force or effect. 15. The undersigned represent and warrants to the Bank that the financial statements of the undersigned for the fiscal year end in December 31, 1997, prepared by the undersigned and accompanied by an opinion of a certified public accountant, and for the period ending June 30, 1998 prepared by the undersigned, copies of which financial statements have been furnished to the Bank, and present fairly the financial condition of the undersigned as of such dates, and the results of their operations for the periods covered thereby in accordance with Generally Accepted Accounting Principles. There has been no change which constitutes a Material Adverse Effect, since June 30, 1998. "Material Adverse Effect" means a material adverse effect on (i) the business. Property, condition (financial or otherwise), results of operations, or prospects of the undersigned, (ii) the ability of the undersigned to perform its obligations under this Guaranty, or (iii) the validity or enforceability of this Guaranty or the rights or remedies of the Bank thereunder. 16. The undersigned acknowledges that it has reviewed the Credit Agreement described in the introductory section of this Guaranty and is aware of and has no objection to the terms and conditions thereof. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Guaranty is _X_ unsecured; __ secured by a(n) ______ dated ______. Signatures Guarantor's Name ALLIANZ LIFE INSURANCE COMPANY OF NQRTH AMERICA, INC. Signature: /s/ Robert S. James -------------------- Name and Title: Robert S. James, President Signature: /s/ Michael T. Westermeyer Name and Title: Michael T. Westermeyer, Secretary Street Address: 1750 Hennepin Avenue South City, State, Zip Code: Minneapolis, Minnesota 55403-2195 EX-10.11 12 GUARANTY EXHIBIT 10.11 GUARANTY THIS GUARANTY, dated as of December 22, 1998, is made and given by LTCAMERICA HOLDING, INC., a Minnesota corporation (the "Guarantor"), in favor of ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the "Creditor"). RECITALS A. Guarantor will or may become, or is now, indebted (the "Norwest Debt") to Norwest Bank Minnesota, National Association (the "Lender"). B. The Creditor has guarantied the Norwest Debt pursuant to a Guaranty (By Organization) of even date herewith executed by the Creditor in favor of the Lender (as the same may be amended, restated or otherwise modified, the "Creditor Guaranty"). C. As a condition to providing the Creditor Guaranty, the Creditor has required that this Guaranty be executed and delivered by the Guarantor and the Guarantor is willing to do so. NOW, THEREFORE, For good and valuable consideration, the Guarantor hereby covenants and agrees with the Creditor as follows: Section 1. Defined Terms. As used in this Guaranty, the following terms shall have the meaning indicated: "Creditor" shall have the meaning indicated in the opening paragraph hereof. "Creditor Default" shall mean the occurrence and continuance of an Event of Default under paragraph G. of Section 6.1 of the Norwest Agreement, if and only if no other Event of Default has occurred and is continuing under the Norwest Agreement. "Event of Default" shall have the meaning given to such term in the Norwest Agreement. "Guarantor" shall have the meaning indicated in the opening paragraph hereof. "Norwest Agreement" shall mean that certain Credit Agreement by and between Guarantor and Lender dated as of December 22, 1998, as amended as permitted under this Guaranty. "Norwest Loan Documents" shall mean the Norwest Agreement and all other instruments and agreements evidencing the Norwest Debt, as amended as permitted under this Guaranty. "Norwest Obligations" shall mean any indebtedness, liabilities and obligations of the Guarantor of every kind, nature or description under the Norwest Loan Documents, in all cases whether due or to become due, and whether now existing or hereafter arising or incurred. "Obligations" shall mean any indebtedness, liabilities and obligations of the Creditor of every kind, nature or description under the Creditor Guaranty, in all cases whether due or to become due, and whether now existing or hereafter arising or incurred. "Person" shall mean any individual, corporation, partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. Section 2. The Guaranty. The Guarantor hereby absolutely and unconditionally guarantees and agrees to pay to the Creditor the amount of any payment made by the Creditor with respect to the Obligations. Section 3. Continuing Guaranty. This Guaranty is an unconditional and continuing guaranty of payment and agreement to pay to the Creditor the amount of any payment made by the Creditor of the Obligations, and the obligations of the Guarantor hereunder shall not be released, in whole or in part, by any action or thing which might, but for this provision of this Guaranty, be deemed a legal or equitable discharge of a surety or guarantor, other than irrevocable payment to the Creditor by the Guarantor in full of the Obligations. No notice of any renewal or extension of the Obligations need be given to the Guarantor. The Guarantor hereby expressly waives (a) demand of payment, -2- presentment, protest, notice of dishonor, nonpayment or nonperformance on any and all forms of the Obligations or the Norwest Debt; (b) notice of acceptance of this Guaranty and notice of any liability to which it may apply; (c) all other notices and demands of any kind and description relating to the Obligations or the Norwest Debt now or hereafter provided for by any agreement, statute, law, rule or regulation; and (d) any and all defenses of the Creditor pertaining to the Obligations or of the Guarantor with respect to the Norwest Debt. The Guarantor shall be and remain liable for any deficiency remaining after foreclosure of any mortgage, deed of trust or security agreement securing all or any part of the Obligations. Notwithstanding the terms of this Guaranty to the contrary, the Guarantor shall not be liable under this Guaranty at any time when (A) either (I) a Creditor Default has occurred and is continuing or (II) the Norwest Obligations have been assigned to the Creditor, and (B) the Debtor is in compliance with the Norwest Obligations which have been assigned or otherwise transferred from the Lender to the Creditor by contract, subrogation or any other means, provided that, after such assignment or transfer has occurred, at any time any Event of Default other than a Creditor Default occurs and is continuing, the Guarantor shall thereafter be liable under this Guaranty. Section 4. Other Transactions. The Creditor is expressly authorized (a) to exchange or release with or without consideration any or all collateral for any of the Obligations and to deal with any such collateral in such manner as the Creditor may elect without notice to the Guarantor; and (b) to amend, modify, extend or supplement the Creditor Guaranty or other agreement or instrument evidencing the Obligations or any part thereof, waive compliance by the Lender or any other Person with the respective terms thereof and settle or compromise any of the Obligations without notice to the Guarantor and without in any manner affecting the absolute liabilities of the Guarantor hereunder. No invalidity or unenforceability of all or any part of the Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty. The liabilities of the Guarantor hereunder shall not be affected or impaired by any failure, delay, neglect or omission on the part of the Creditor to realize upon any collateral or security for any or all of the Obligations, nor by the taking by the Creditor of (or the failure to take) any other guaranty or guaranties to secure the -3- Obligations, nor by the taking by the Creditor of (or the failure to take or the failure to perfect its security interest in or other Lien on) collateral or security of any kind. The Guarantor acknowledges that this Guaranty is in effect and binding without reference to whether this Guaranty is signed by any other Person or Persons and that this Guaranty shall continue in full force and effect, both as to the Obligations then existing and/or thereafter created, notwithstanding the release of or extension of time to any other guarantor of the Obligations. Section 5. Actions Not Required. The Guarantor hereby waives any and all right to cause the Creditor to proceed against any security for the Obligations or any other recourse which the Creditor may have with respect thereto and further waives any and all requirements that the Creditor institute any action or proceeding at law or in equity, or obtain any judgment, against any other Person, or with respect to any collateral security for the Obligations, as a condition precedent to making demand on or bringing an action or obtaining and/or enforcing a judgment against, the Guarantor upon this Guaranty. Section 6. No Subrogation. Notwithstanding any payment or payments made by the Guarantor hereunder, the Guarantor waives all rights of subrogation to any of the rights of the Creditor against the Guarantor or any other Person liable for payment of any of the Obligations or any collateral security or guaranty held by the Creditor for the payment of the Obligations. Section 7. Application of Payments. Any and all payments upon the Obligations made by the Guarantor or by any other Person, and/or the proceeds of any or all collateral or security for any of the Obligations, may be applied by the Creditor on such items of the Obligations as the Creditor may elect. Section 8. Recovery of Payment. If any payment received by the Creditor and applied to the Obligations is subsequently set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of the Guarantor or any other obligor), the Obligations to which such payment was applied shall for the purposes of this Guaranty be deemed to have -4- continued in existence, notwithstanding such application, and this Guaranty shall be enforceable as to such Obligations as fully as if such application had never been made. References in this Guaranty to amounts "irrevocably paid" or to "irrevocable payment" refer to payments that cannot be set aside, recovered, rescinded or required to be returned for any reason. Section 9. Financial Conditions. The Guarantor has executed and delivered this Guaranty based on the Guarantor's own judgment and not in reliance upon any statement or representation of the Creditor. The Creditor shall have no obligation to provide the Guarantor with any advice whatsoever or to inform the Guarantor at any time of the Creditor's actions, evaluations or conclusions on the financial condition or any other matter concerning the Lender. Section 10. Remedies. All remedies afforded to the Creditor by reason of this Guaranty are separate and cumulative remedies. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Creditor. Section 11. Bankruptcy of the Guarantor. The Guarantor expressly agrees that the obligations of the Guarantor under this Guaranty shall not in any way be impaired or otherwise affected by the institution by or against the Guarantor or any other Person of any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or any other similar proceedings for relief under any bankruptcy law or similar law for the relief of debtors and that any discharge of any of the Obligations pursuant to any such bankruptcy or similar law or other law shall not diminish, discharge or otherwise affect in any way the obligations of the Guarantor under this Guaranty, and that upon the institution of any of the above actions, such obligations shall be enforceable against the Guarantor. Section 12. Costs and Expenses. The Guarantor will pay or reimburse the Creditor on demand for all out-of-pocket expenses (including in each case all reasonable fees and expenses of counsel) incurred by the Creditor in connection with the enforcement of this Guaranty against the Guarantor. -5- Section 13. Waivers and Amendments. This Guaranty can be waived, modified, amended, terminated or discharged only explicitly in a writing signed by the Creditor. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Section 14. Notices. Any notice or other communication to any party in connection with this Guaranty shall be in writing and shall be sent by manual delivery, telefacsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telefacsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. Section 15. Representations and Warranties. The Guarantor hereby represents and warrants to the Creditor that: (a) It is a Minnesota corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the power and authority and the legal right to own and operate its properties and to conduct the business in which it is currently engaged. (b) It has the power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guaranty and has taken all necessary corporate action to authorize such execution, delivery and performance. (c) This Guaranty constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). -6- (d) The execution, delivery and performance of this Guaranty will not (i) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to it, (ii) violate or contravene any provision of its organizational documents, or (iii) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which it is a party or by which it or any of its properties may be bound or result in the creation of any lien thereunder. It is not in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could have a material adverse effect on its business, operations, properties, assets or condition (financial or otherwise). (e) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on its part to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, this Guaranty. (f) There are no actions, suits or proceedings pending or, to its knowledge, threatened against or affecting it or any of its properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to it, would have a material adverse effect on its business, operations, property or condition (financial or otherwise) or on its ability to perform its obligations hereunder. (g) It expects to derive benefits from the transactions resulting in the creation of the Obligations and the Norwest Debt. The Creditor may rely conclusively on the continuing warranty, hereby made, that the Guarantor continues to be benefitted by the Creditor Guaranty and the Norwest Debt, and the Creditor shall have no duty to inquire -7- into or confirm the receipt of any such benefits, and this Guaranty shall be effective and enforceable by the Creditor without regard to the receipt, nature or value of any such benefits. Section 16. Continuing Guaranty. This Guaranty shall (a) remain in full force and effect until irrevocable payment in full by the Guarantor of the Obligations or the irrevocable payment in full of the Norwest Debt other than by payment by the Creditor under the Creditor Guaranty, (b) be binding upon the Guarantor, its successors and assigns and (c) inure to the benefit of, and be enforceable by, the Creditor and its respective successors, transferees, and assigns. Section 17. Amendment to Norwest Loan Documents. The Guarantor will not amend or otherwise modify, or waive any terms under the Norwest Loan Documents without the prior written consent of the Creditor. Section 18. Revocation. Notwithstanding any other provision hereof, the Guarantor may revoke this Guaranty prospectively as to future transactions by written notice to that effect actually received by the Creditor. No such revocation shall release, impair or affect in any manner any liability hereunder with respect to Obligations created, contracted, assumed or incurred prior to receipt by the Creditor of written notice of revocation, or any renewals or extensions thereof, theretofore or thereafter made, or all other costs, expenses and attorneys' fees arising from such Obligations. Section 19. Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS GUARANTY SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. Section 20. Consent to Jurisdiction. AT THE OPTION OF THE CREDITOR, THIS GUARANTY MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE GUARANTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GUARANTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP -8- CREATED BY THIS GUARANTY, THE CREDITOR AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE- DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. Section 21. Waiver of Jury Trial. EACH OF THE GUARANTOR AND THE CREDITOR, BY ITS ACCEPTANCE OF THIS GUARANTY, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 22. General. All representations and warranties contained in this Guaranty or in any other agreement between the Guarantor and the Creditor shall survive the execution, delivery and performance of this Guaranty and the creation and payment of the Obligations. Captions in this Guaranty are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Guaranty. -9- IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the date first above written. GUARANTOR: LTCAMERICA HOLDING, INC. By /s/ Bradley E. Barks ----------------------------- Title CFO -------------------------- Address: Attention: Bradley E. Barks 300 South Highway 169, Suite 95 Minneapolis, Minnesota 55426 Telefacsimile No. 612-525-6553 Address for the Creditor: Allianz Life Insurance Company of North America Attention: Robert S. James 1750 Hennepin Avenue Minneapolis, Minnesota 55403-2195 Telecopier Number: 612-337-6355 -10- EX-10.12 13 GUARANTY EXHIBIT 10.12 GUARANTY THIS GUARANTY, dated as of December 22, 1998, is made and given by LIFE USA HOLDING, INC., a Minnesota corporation (the "Guarantor"), in favor of ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the "Creditor"). RECITALS A. LTCAmerica Holding, Inc., a Minnesota corporation (the "Debtor"), will or may become, or is now, indebted (the "Norwest Debt") to Norwest Bank Minnesota, National Association (the "Lender"). B. The Creditor has guarantied the Norwest Debt pursuant to a Guaranty (By Organization) of even date herewith executed by the Creditor in favor of the Lender (as the same may be amended, restated or otherwise modified, the "Creditor Guaranty"). C. As a condition to providing the Creditor Guaranty, the Creditor has required that this Guaranty be executed and delivered by the Guarantor and the Guarantor is willing to do so. D. Guarantor currently owns 100% of the issued and outstanding capital stock of LifeUSA Insurance Company, a Minnesota corporation, which owns 100% of the issued and outstanding capital stock of the Debtor, and finds it is in its best interest to provide this Guaranty. NOW, THEREFORE, For good and valuable consideration, the Guarantor hereby covenants and agrees with the Creditor as follows: Section 1. Defined Terms. As used in this Guaranty, the following terms shall have the meaning indicated: "Creditor" shall have the meaning indicated in the opening paragraph hereof. "Creditor Default" shall mean the occurrence and continuance of an Event of Default under paragraph G. of Section 6.1 of the Norwest Agreement, if and only if no other Event of Default has occurred and is continuing under the Norwest Agreement. "Debtor" shall have the meaning indicated in Recital A. "Event of Default" shall have the meaning given to such term in the Norwest Agreement. "Guarantor" shall have the meaning indicated in the opening paragraph hereof. "Norwest Agreement" shall mean that certain Credit Agreement by and between the Debtor and Lender dated as of December 22, 1998, as amended as permitted under this Guaranty. "Norwest Loan Documents" shall mean the Norwest Agreement and all other instruments and agreements evidencing the Norwest Debt, as amended as permitted under this Guaranty. "Norwest Obligations" shall mean any indebtedness, liabilities and obligations of the Debtor of every kind, nature or description under the Norwest Loan Documents, in all cases whether due or to become due, and whether now existing or hereafter arising or incurred. "Obligations" shall mean any indebtedness, liabilities and obligations of the Creditor of every kind, nature or description under the Creditor Guaranty, in all cases whether due or to become due, and whether now existing or hereafter arising or incurred. "Person" shall mean any individual, corporation, partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. Section 2. The Guaranty. The Guarantor hereby absolutely and unconditionally guarantees and agrees to pay to the Creditor the amount of any payment made by the Creditor with respect to the Obligations. Section 3. Continuing Guaranty. This Guaranty is an unconditional and continuing guaranty of payment and agreement to pay to the Creditor the amount of any payment made by the -2- Creditor of the Obligations, and the obligations of the Guarantor hereunder shall not be released, in whole or in part, by any action or thing which might, but for this provision of this Guaranty, be deemed a legal or equitable discharge of a surety or guarantor, other than irrevocable payment to the Creditor by the Guarantor in full of the Obligations. No notice of any renewal or extension of the Obligations need be given to the Guarantor. The Guarantor hereby expressly waives (a) demand of payment, presentment, protest, notice of dishonor, nonpayment or nonperformance on any and all forms of the Obligations or the Norwest Debt; (b) notice of acceptance of this Guaranty and notice of any liability to which it may apply; (c) all other notices and demands of any kind and description relating to the Obligations or the Norwest Debt now or hereafter provided for by any agreement, statute, law, rule or regulation; and (d) any and all defenses of the Creditor pertaining to the Obligations or of the Debtor with respect to the Norwest Debt. The Guarantor shall be and remain liable for any deficiency remaining after foreclosure of any mortgage, deed of trust or security agreement securing all or any part of the Obligations. Notwithstanding the terms of this Guaranty to the contrary, the Guarantor shall not be liable under this Guaranty at any time when (A) either (I) a Creditor Default has occurred and is continuing or (II) the Norwest Obligations have been assigned to the Creditor, and (B) the Debtor is in compliance with the Norwest Obligations which have been assigned or otherwise transferred from the Lender to the Creditor by contract, subrogation or any other means, provided that, after such assignment or transfer has occurred, at any time any Event of Default other than a Creditor Default occurs and is continuing, the Guarantor shall thereafter be liable under this Guaranty. Section 4. Other Transactions. The Creditor is expressly authorized (a) to exchange or release with or without consideration any or all collateral for any of the Obligations and to deal with any such collateral in such manner as the Creditor may elect without notice to the Guarantor; and (b) to amend, modify, extend or supplement the Creditor Guaranty or other agreement or instrument evidencing the Obligations or any part thereof, waive compliance by the Lender or any other Person with the respective terms thereof and settle or compromise any of the Obligations without notice to the Guarantor and without in any manner affecting the absolute liabilities of the Guarantor -3- hereunder. No invalidity or unenforceability of all or any part of the Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty. The liabilities of the Guarantor hereunder shall not be affected or impaired by any failure, delay, neglect or omission on the part of the Creditor to realize upon any collateral or security for any or all of the Obligations, nor by the taking by the Creditor of (or the failure to take) any other guaranty or guaranties to secure the Obligations, nor by the taking by the Creditor of (or the failure to take or the failure to perfect its security interest in or other Lien on) collateral or security of any kind. The Guarantor acknowledges that this Guaranty is in effect and binding without reference to whether this Guaranty is signed by any other Person or Persons and that this Guaranty shall continue in full force and effect, both as to the Obligations then existing and/or thereafter created, notwithstanding the release of or extension of time to any other guarantor of the Obligations. Section 5. Actions Not Required. The Guarantor hereby waives any and all right to cause the Creditor to proceed against any security for the Obligations or any other recourse which the Creditor may have with respect thereto and further waives any and all requirements that the Creditor institute any action or proceeding at law or in equity, or obtain any judgment, against the Debtor or any other Person, or with respect to any collateral security for the Obligations, as a condition precedent to making demand on or bringing an action or obtaining and/or enforcing a judgment against, the Guarantor upon this Guaranty. Section 6. No Subrogation. Notwithstanding any payment or payments made by the Guarantor hereunder, the Guarantor waives all rights of subrogation to any of the rights of the Creditor against the Debtor or any other Person liable for payment of any of the Obligations or any collateral security or guaranty held by the Creditor for the payment of the Obligations, and the Guarantor waives all rights to seek any recourse to or contribution or reimbursement from the Debtor or any other Person liable for payment of any of the Obligations in respect of payments made by the Guarantor hereunder unless and until all of the Obligations have been irrevocably paid in full. Section 7. Application of Payments. Any and all payments upon the Obligations made by the Guarantor or by any -4- other Person, and/or the proceeds of any or all collateral or security for any of the Obligations, may be applied by the Creditor on such items of the Obligations as the Creditor may elect. Section 8. Recovery of Payment. If any payment received by the Creditor and applied to the Obligations is subsequently set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of the Debtor or any other obligor), the Obligations to which such payment was applied shall for the purposes of this Guaranty be deemed to have continued in existence, notwithstanding such application, and this Guaranty shall be enforceable as to such Obligations as fully as if such application had never been made. References in this Guaranty to amounts "irrevocably paid" or to "irrevocable payment" refer to payments that cannot be set aside, recovered, rescinded or required to be returned for any reason. Section 9. Debtor's Financial Condition. The Guarantor is familiar with the financial condition of the Debtor, and the Guarantor has executed and delivered this Guaranty based on the Guarantor's own judgment and not in reliance upon any statement or representation of the Creditor. The Creditor shall have no obligation to provide the Guarantor with any advice whatsoever or to inform the Guarantor at any time of the Creditor's actions, evaluations or conclusions on the financial condition or any other matter concerning the Debtor or the Lender. Section 10. Remedies. All remedies afforded to the Creditor by reason of this Guaranty are separate and cumulative remedies. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Creditor. Section 11. Bankruptcy of the Debtor. The Guarantor expressly agrees that the obligations of the Guarantor under this Guaranty shall not in any way be impaired or otherwise affected by the institution by or against the Debtor or any other Person of any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or any other similar proceedings for relief under any bankruptcy law or similar law for the relief of -5- debtors and that any discharge of any of the Obligations pursuant to any such bankruptcy or similar law or other law shall not diminish, discharge or otherwise affect in any way the obligations of the Guarantor under this Guaranty, and that upon the institution of any of the above actions, such obligations shall be enforceable against the Guarantor. Section 12. Costs and Expenses. The Guarantor will pay or reimburse the Creditor on demand for all out-of-pocket expenses (including in each case all reasonable fees and expenses of counsel) incurred by the Creditor in connection with the enforcement of this Guaranty against the Guarantor. Section 13. Waivers and Amendments. This Guaranty can be waived, modified, amended, terminated or discharged only explicitly in a writing signed by the Creditor. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Section 14. Notices. Any notice or other communication to any party in connection with this Guaranty shall be in writing and shall be sent by manual delivery, telefacsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telefacsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. Section 15. Representations and Warranties. The Guarantor hereby represents and warrants to the Creditor that: (a) It is a Minnesota corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the power and authority and the legal right to own and operate its properties and to conduct the business in which it is currently engaged. -6- (b) It has the power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guaranty and has taken all necessary corporate action to authorize such execution, delivery and performance. (c) This Guaranty constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (d) The execution, delivery and performance of this Guaranty will not (i) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to it, (ii) violate or contravene any provision of its organizational documents, or (iii) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which it is a party or by which it or any of its properties may be bound or result in the creation of any lien thereunder. It is not in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could have a material adverse effect on its business, operations, properties, assets or condition (financial or otherwise). (e) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on its part to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, this Guaranty. -7- (f) There are no actions, suits or proceedings pending or, to its knowledge, threatened against or affecting it or any of its properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to it, would have a material adverse effect on its business, operations, property or condition (financial or otherwise) or on its ability to perform its obligations hereunder. (g) It expects to derive benefits from the transactions resulting in the creation of the Obligations and the Norwest Debt. The Creditor may rely conclusively on the continuing warranty, hereby made, that the Guarantor continues to be benefitted by the Creditor Guaranty and the Norwest Debt, and the Creditor shall have no duty to inquire into or confirm the receipt of any such benefits, and this Guaranty shall be effective and enforceable by the Creditor without regard to the receipt, nature or value of any such benefits. Section 16. Continuing Guaranty. This Guaranty shall (a) remain in full force and effect until irrevocable payment in full by the Guarantor of the Obligations or the irrevocable payment in full of the Norwest Debt other than by payment by the Creditor under the Creditor Guaranty, (b) be binding upon the Guarantor, its successors and assigns and (c) inure to the benefit of, and be enforceable by, the Creditor and its respective successors, transferees, and assigns. Section 17. Amendment to Norwest Loan Documents. The Guarantor will not permit the Debtor to amend or otherwise modify, or waive any terms under the Norwest Loan Documents without the prior written consent of the Creditor. Section 18. Revocation. Notwithstanding any other provision hereof, the Guarantor may revoke this Guaranty prospectively as to future transactions by written notice to that effect actually received by the Creditor. No such revocation shall release, impair or affect in any manner any liability hereunder with respect to Obligations created, contracted, assumed or incurred prior to receipt by the Creditor of written notice of revocation, or any renewals or extensions thereof, -8- theretofore or thereafter made, or all other costs, expenses and attorneys' fees arising from such Obligations. Section 19. Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS GUARANTY SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. Section 20. Consent to Jurisdiction. AT THE OPTION OF THE CREDITOR, THIS GUARANTY MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE GUARANTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GUARANTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS GUARANTY, THE CREDITOR AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE- DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. Section 21. Waiver of Jury Trial. EACH OF THE GUARANTOR AND THE CREDITOR, BY ITS ACCEPTANCE OF THIS GUARANTY, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 22. General. All representations and warranties contained in this Guaranty or in any other agreement between the Guarantor and the Creditor shall survive the execution, delivery and performance of this Guaranty and the creation and payment of the Obligations. Captions in this Guaranty are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Guaranty. IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the date first above written. GUARANTOR: -9- GUARANTOR: LIFE USA HOLDING, INC. By /s/ Mark A. Zesbaugh ------------------------------------- Title CFO ---------------------------------- Attention: Mark A. Zesbaugh 300 South Highway 169, Suite 95 Minneapolis, Minnesota 55426 Telefacsimile No. 612-525-6102 Address for the Creditor: Allianz Life Insurance Company of North America Attention: Robert S. James 1750 Hennepin Avenue Minneapolis, Minnesota 55403-2195 Telefacsimile Number: 612-337-6355 -10- EX-10.13 14 PLEDGE AGREEMENT EXHIBIT 10.13 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT, dated as of December 22, 1998, is made and given by LTCAMERICA HOLDING, INC., a Minnesota corporation (the "Pledgor"), to ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation (the "Creditor"). RECITALS A. The Pledgor will or may become, or is now, indebted to the Creditor under a Guaranty of even date made by Pledgor in favor of the Creditor (the"Guaranty"). B. Upon the acquisition by Pledgor of the capitol stock of Capitol Bankers Life Insurance Company, the Pledgor will be the owner of the personal property described on Schedule I attached hereto and made a part hereof. C. The Creditor has requested and the Pledgor agrees that such property shall be pledged to the Creditor to secure the obligations of the Pledgor to the Creditor as hereinafter provided. D. The Pledgor finds it advantageous, desirable and in the best interests of the Pledgor to comply with the requirement that this Agreement be executed and delivered to the Creditor. NOW, THEREFORE, for good and valuable consideration, the Pledgor hereby agrees with the Creditor for the Creditor's benefit as follows: Section 1. Defined Terms. 1(a) As used in this Agreement, the following terms shall have the meanings indicated: "Collateral" shall have the meaning given to such term in Section 2. "Creditor" shall have the meaning indicated in the opening paragraph hereof. "Event of Default" shall have the meaning given to such term in Section 11. "Initial Collateral" shall have the meaning given to such term in Section 2. "Lien" shall mean any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of the lessors under capitalized leases), in, of or on any assets or properties of the Person referred to. "Obligations" shall mean (a) all indebtedness, liabilities and obligations of the Pledgor to the Creditor of every kind, nature or description under the Guaranty, including the Pledgor's obligation on any instrument evidencing indebtedness pursuant thereto and any other instrument hereafter issued in substitution or replacement thereof, (b) all liabilities of the Pledgor under this Agreement, and (c) in all of the foregoing cases whether due or to become due, and whether now existing or hereafter arising or incurred. "Person" shall mean any individual, corporation, partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "Related Collateral" shall have the meaning given to such term in Section 2. "Security Interest" shall have the meaning given to such term in Section 2. 1(b) Terms Defined in Uniform Commercial Code. All other terms used in this Agreement that are not specifically defined herein or the definitions of which are not incorporated herein by reference shall have the meaning assigned to such terms in the Uniform Commercial Code in effect in the State of MINNESOTA as of the date first above written to the extent such other terms are defined therein. -2- 1(c) Singular/Plural, Etc. Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular, the plural and "or" has the inclusive meaning represented by the phrase "and/or." The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation." The words "hereof," "herein," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections are references to Sections in this Pledge Agreement unless otherwise provided. Section 2. Pledge. As security for the payment and performance of all of the Obligations, the Pledgor hereby pledges to the Creditor and grants to the Creditor a security interest (the "Security Interest") in the following, whether now owned or hereafter acquired (the "Collateral"): 2(a) The property described on Schedule I hereto (the "Initial Collateral"). 2(b) All shares, dividends, interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Initial Collateral. 2(c) Any and all collateral security (the "Related Collateral") now or hereafter securing all or any items of the Initial Collateral or securing any proceeds thereof and all rights, remedies, powers and privileges of the Pledgor under all of the foregoing. 2(d) All proceeds of any and all of the foregoing (including proceeds that constitute property of types described above). Pledgor's grant of a security interest in the Initial Collateral and all covenants and representations under this Agreement with respect to the Initial Collateral are deemed to speak as of and from the date of the acquisition thereof as set forth in Recital B, above, as appropriate. Section 3. Delivery of Collateral. Any certificates and instruments representing or evidencing the Initial Collateral -3- owned by the Pledgor as of the date of this Agreement shall be delivered to the Creditor contemporaneously with the execution of this Agreement. All certificates and instruments representing or evidencing Collateral received by the Pledgor after the execution of this Agreement shall be delivered to the Creditor promptly upon the Pledgor's receipt thereof. All such certificates and instruments shall be held by or on behalf of the Creditor pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Creditor. The Creditor shall have the right at any time, whether before or after an Event of Default, to cause any or all of the Collateral to be transferred of record into the name of the Creditor or its nominee (but subject to the rights of the Pledgor under Section 6) and to exchange certificates representing or evidencing Collateral for certificates of smaller or larger denominations. The Pledgor shall execute and deliver to the Creditor such items of assignment and transfer (including, without limitation, assignments of financing statements and recordable assignments of mortgages and deeds of trust) of any Related Collateral as the Creditor may from time to time reasonably request. Notwithstanding any of the foregoing, as to any Collateral consisting of book-entry or uncertificated securities or securities which are held by a third Person, the Pledgor shall deliver to the Creditor evidence satisfactory to the Creditor that such Collateral has been registered in the name of, or as pledged to, the Creditor. Such evidence shall include the acknowledgment of the issuer or Person holding such Collateral that such issuer or Person holds such Collateral as agent for the Creditor and that such Collateral is identified on the books of such issuer or third Person as belonging to or pledged to the Creditor. Section 4. Certain Warranties and Covenants. The Pledgor makes the following warranties and covenants: 4(a) The Pledgor has title to the Initial Collateral and will have title to each other item of Collateral hereafter acquired, free of all Liens except the Security Interest. -4- 4(b) The Pledgor has full power and authority to execute this Pledge Agreement, to perform the Pledgor's obligations hereunder and to subject the Collateral to the Security Interest created hereby. 4(c) No financing statement covering all or any part of the Collateral is on file in any public office (except for any financing statements filed by the Creditor, and any financing statements or other documents filed or recorded by the Pledgor with respect to its Lien on any Related Collateral). 4(d) Any shares of stock included in the Initial Collateral have been duly authorized and validly issued by the issuer thereof and are fully paid and non-assessable. Any debt instrument included in the Initial Collateral has been duly authorized, issued and delivered and is the legal, valid and binding obligation of the issuer thereof, and is not in default. No debt instrument included in the Initial Collateral is subject to any offset or similar right or claim of the issuer thereof. 4(e) The Pledgor shall not forgive, cancel, subordinate, compromise, modify, amend or extend the time for payment of, or waive any default under, any debt instrument included in the Collateral, or modify or amend, or waive any default under any agreement with respect to the Related Collateral, or consent to or acquiesce in any of the foregoing, without in each case the prior written consent of the Creditor. 4(f) The Initial Collateral represents all of the issued and outstanding shares of all classes of capital stock of the issuer identified on Schedule I as of the Closing Date. Section 5. Further Assurances. The Pledgor agrees that at any time and from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or that the Creditor may reasonably request, in order to perfect and protect the Security Interest or to enable the Creditor to exercise and enforce its rights and remedies hereunder with respect to any Collateral (but any failure to request or assure that the Pledgor execute and deliver such instruments or documents or to take such action shall not affect or impair the validity, sufficiency or enforceability of this -5- Agreement and the Security Interest, regardless of whether any such item was or was not executed and delivered or action taken in a similar context or on a prior occasion). Section 6. Voting Rights; Dividends; Etc. 6(a) Subject to paragraph (d) of this Section 6, the Pledgor shall be entitled to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement; provided, however, that the Pledgor shall not exercise or shall refrain from exercising any such right if such action could reasonably be expected to have a material adverse effect on the value of the Collateral or any material part thereof and actions which shall be deemed to have a material adverse effect shall include, without limitation, voting to issue any shares of capital stock of the issuer identified on Schedule I in addition to the Initial Collateral. 6(b) Subject to paragraph (e) of this Section 6, the Pledgor shall be entitled to receive, retain, and use in any manner any and all interest and dividends paid in respect of the Collateral; provided, however, that any and all (i) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, (ii) dividends and other distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (iii) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Collateral, shall be, and shall be forthwith delivered to the Creditor to hold as, Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Creditor, be segregated from the other property or funds of the Pledgor, and be forthwith -6- delivered to the Creditor as Collateral in the same form as so received (with any necessary indorsement or assignment). The Pledgor shall, upon request by the Creditor, promptly execute all such documents and do all such acts as may be necessary or desirable to give effect to the provisions of this Section 6 (b). 6(c) The Creditor shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the voting and other rights that it is entitled to exercise pursuant to Section 6 (a) hereof and to receive the dividends and interest that it is authorized to receive and retain pursuant to Section 6 (b) hereof. 6(d) Upon the occurrence and during the continuance of any Event of Default, the Creditor shall have the right in its sole discretion, and the Pledgor shall execute and deliver all such proxies and other instruments as may be necessary or appropriate to give effect to such right, to terminate all rights of the Pledgor to exercise or refrain from exercising the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 6 (a) hereof, and all such rights shall thereupon become vested in the Creditor who shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights; provided, however, that the Creditor shall not be deemed to possess or have control over any voting rights with respect to any Collateral unless and until the Creditor has given written notice to the Pledgor that any further exercise of such voting rights by the Pledgor is prohibited and that the Creditor and/or its assigns will henceforth exercise such voting rights; and provided, further, that neither the registration of any item of Collateral in the Creditor's name nor the exercise of any voting rights with respect thereto shall be deemed to constitute a retention by the Creditor of any such Collateral in satisfaction of the Obligations or any part thereof. 6(e) Upon the occurrence and during the continuance of any Event of Default: (i) all rights of the Pledgor to receive the dividends and interest that it would otherwise be authorized to receive and -7- retain pursuant to Section 6(b) hereof shall cease, and all such rights shall thereupon become vested in the Creditor who shall thereupon have the sole right to receive and hold such dividends as Collateral, and (ii) all payments of interest and dividends that are received by the Pledgor contrary to the provisions of paragraph (i) of this Section 6 (e) shall be received in trust for the benefit of the Creditor, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Creditor as Collateral in the same form as so received (with any necessary indorsement). Section 7. Transfers and Other Liens. The Pledgor agrees that it will not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or permit to exist any Lien, upon or with respect to any of the Collateral. Section 8. Creditor Appointed Attorney-in-Fact. The Pledgor hereby appoints the Creditor the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Creditor's good-faith discretion, to take any action and to execute any instrument that the Creditor may reasonably believe necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of the Pledgor under Section 6 hereof), in a manner consistent with the terms hereof, including, without limitation, to receive, indorse and collect all instruments made payable to the Pledgor representing any dividend or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 9. Creditor May Perform. If the Pledgor fails to perform any agreement contained herein, the Creditor may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Creditor incurred in connection therewith shall be payable by the Pledgor under Section 13 hereof. Section 10. The Creditor's Duties. The powers conferred on the Creditor hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it -8- to exercise any such powers. The Creditor shall be deemed to have exercised reasonable care in the safekeeping of any Collateral in its possession if such Collateral is accorded treatment substantially equal to the safekeeping which the Creditor accords its own property of like kind. Except for the safekeeping of any Collateral in its possession and the accounting for monies and for other properties actually received by it hereunder, the Creditor shall have no duty, as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Creditor has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any Persons or any other rights pertaining to any Collateral. The Creditor will take action in the nature of exchanges, conversions, redemption, tenders and the like requested in writing by the Pledgor with respect to any of the Collateral in the Creditor's possession if the Creditor in its reasonable judgment determines that such action will not impair the Security Interest or the value of the Collateral, but a failure of the Creditor to comply with any such request shall not of itself be deemed a failure to exercise reasonable care. Section 11. Default. Each of the following occurrences shall constitute an Event of Default under this Agreement: (a) the failure of the Pledgor to pay when due any of the Obligations; (b) the failure of the Pledgor to perform any agreement of the Pledgor contained herein or in any other agreement with the Creditor; (c) any statement, representation or warranty of the Pledgor made herein or at any time furnished to the Creditor is untrue in any respect as of the date made; (d) the entry of any judgment against the Pledgor for an amount equal to or greater than $1,000,000 in monetary damages or which prohibits the Pledgor from conducting its business substantially as conducted on the date of this Agreement; (e) the Pledgor becomes insolvent or is generally not paying its debts as they become due; (f) the appointment of or assignment to a custodian, as that term is defined in the United States Bankruptcy Code, for any property of the Pledgor, or encumbrance, levy, seizure or attachment of any portion of the Collateral; (g) the commencement of any proceeding or the filing of a petition by or against the Pledgor under the provisions of the United States Bankruptcy Code for liquidation, reorganization or adjustment of debts or under -9- any insolvency law or other statute or law providing for the modification or adjustment of the rights of creditors; or (h) dissolution, consolidation, or merger, or transfer of a substantial part of the property of the Pledgor. Section 12. Remedies upon Default. If any Event of Default shall have occurred and be continuing, and the Obligations remain due and owing for more than 30 days after such occurrence: 12(a) The Creditor may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code of the State of MINNESOTA (the "Code") in effect at that time (whether or not the Code then applies to the affected Collateral), and may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Creditor's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Creditor may reasonably believe are commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Creditor may arrange a sale of Collateral which would qualify as exempt from registration under the Securities Act of 1933, as amended, including the sale of Collateral privately to purchasers who will agree to take the Collateral for investment and not with a view to distribution and who will agree to the imposition of restrictive legends on the certificates representing the Collateral. The Pledgor agrees that the Creditor shall not incur any liability, and any liability of the Pledgor for any deficiency shall not be impaired, as a result of the sale of the Collateral or any portion thereof at any such private sale. 12(b) The Creditor may notify any Person obligated on any of the Collateral that the same has been assigned or transferred to the Creditor and that the same should be performed as requested by, or paid directly to, the Creditor, as the case may be. The Pledgor shall join in giving such notice, if the Creditor so requests. The Creditor may, in the -10- Creditor's name or in the Pledgor's name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such Collateral or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligation of any such Person. 12(c) Any cash held by the Creditor as Collateral and all cash proceeds received by the Creditor in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Creditor, be held by the Creditor as collateral for, or then or at any time thereafter be applied in whole or in part by the Creditor against, all or any part of the Obligations (including any expenses of the Creditor payable pursuant to Section 13 hereof). Section 13. Costs and Expenses; Indemnity. The Pledgor will pay or reimburse the Creditor on demand for all out-of-pocket expenses (including in each case all filing and recording fees and taxes and all reasonable fees and expenses of counsel and of any experts and agents) incurred by the Creditor in connection with the protection, satisfaction, foreclosure or enforcement of the Security Interest and the enforcement of this Agreement, and all such costs and expenses shall be part of the Obligations secured by the Security Interest. Section 14. Waivers and Amendments; Remedies. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Creditor. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Creditor. All rights and remedies of the Creditor shall be cumulative and may be exercised singly in any order or sequence, or concurrently, at the Creditor's option, and the exercise or enforcement of any such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. Section 15. Notices. Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, -11- telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. Section 16. Representations and Warranties. The Pledgor hereby represents and warrants to the Creditor that: 16(a) The Pledgor is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority and the legal right to own and operate its properties and to conduct the business in which it is currently engaged. 16(b) The Pledgor has the corporate power and authority and the legal right to execute and deliver, and to perform its obligations under, this Agreement and has taken all necessary corporate action to authorize such execution, delivery and performance. 16(c) This Agreement constitutes a legal, valid and binding obligation of the Pledgor enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 16(d) The Pledgor's correct tax identification number is set forth on the signature page of this Agreement. Section 17. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Obligations and the expiration of the obligation, if any, of the Creditor to extend credit -12- accommodations to the Pledgor, (b) be binding upon the Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of the Creditor hereunder, to the benefit of, and be enforceable by, the Creditor and its successors, transferees and assigns. Section 18. Termination of Security Interest. Upon payment in full of the Obligations or the irrevocable payment in full of the Norwest Debt, as such term is defined in the Guaranty, other than by payment by the Creditor under the Creditor Guaranty, as such term is defined in the Guaranty, and the expiration of any obligation of the Lender, as such term is defined in the Guaranty, to extend credit accommodations to the Debtor, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Pledgor. Upon any such termination, the Creditor will return to the Pledgor such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination. Any reversion or return of the Collateral upon termination of this Agreement and any instruments of transfer or termination shall be at the expense of the Pledgor and shall be without warranty by, or recourse on, the Creditor. As used in this Section, "Pledgor" includes any assigns of Pledgor, any Person holding a subordinate security interest in any part of the Collateral or whoever else may be lawfully entitled to any part of the Collateral. SECTION 19. GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA; PROVIDED, HOWEVER, THAT NO EFFECT SHALL BE GIVEN TO CONFLICT OF LAWS PRINCIPLES OF THE STATE OF MINNESOTA, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA. Whenever possible, each provision of this Agreement and any other statement, instrument or transaction contemplated hereby or relating hereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto shall be held to be prohibited or invalid under -13- such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto. SECTION 20. CONSENT TO JURISDICTION. AT THE OPTION OF THE CREDITOR, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE PLEDGOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE PLEDGOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE CREDITOR AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. Section 21. Waiver of Jury Trial. EACH OF THE PLEDGOR AND THE CREDITOR, BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 22. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Section 23. General. All representations and warranties contained in this Agreement or in any other agreement between the Pledgor and the Creditor shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. The Pledgor waives notice of the acceptance of this Agreement by the Creditor. Captions in this Agreement are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Agreement. -14- IN WITNESS WHEREOF, the Pledgor has caused this Pledge Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. PLEDGOR: LTCAMERICA HOLDING, INC. By /s/ Bradley E. Barks ----------------------------------- Title CFO -------------------------------- Address for Pledgor: Attention: Bradley E. Barks 300 South Highway 169, Suite 95 Minneapolis, Minnesota 55426 Telefacsimile No. 612-525-6553 Pledgor's Tax ID #: 41-1920187 Address for Creditor: Allianz Life Insurance Company of North America Attention: Robert S. James 1750 Hennepin Avenue Minneapolis, Minnesota 55403-2195 Telecopier Number: 612-337-6355 -15- SCHEDULE I TO PLEDGE AGREEMENT Class of Number Certificate Par Issuer Stock of Shares Number Value - ------ ----- --------- ------ ----- Capitol Common 1,405,000 170 $1.34 Bankers Life Insurance Company -16- EX-10.14 15 SECURITY AGREEMENT EXHIBIT 10.14 SECURITY AGREEMENT DEBTOR: LIFEUSA HOLDING, INC. SECURED PARTY: ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Security Interest And Collateral. To secure the debt, liability or obligation of the Debtor to Secured Party evidenced by that certain Guaranty of even date herewith made by the Debtor in favor of the Secured Party (the "Guaranty"), and any extensions, renewals or replacements thereof (herein referred to as the "Obligations"), Debtor hereby grants Secured Party a security interest (herein called the "Security Interest") in the following property (herein called "Collateral"): the last $10,000,000 purchase of obligations of Secured Party pursuant to Section 2 of that certain Stock Purchase Agreement dated as of January 13, 1998, as amended (the "Purchase Agreement"), by and between Debtor and Secured Party, and Debtor hereby authorized Secured Party to retain such purchase price as of the date it is to be made for the purpose of perfecting Secured Party's security interest therein. The Collateral shall include (i) all substitutions and replacements for and proceeds and products of any and all of the foregoing property, and (ii) all books, records, manuals, programs, software, systems and storage media relating to any of the foregoing property. DEBTOR WARRANTS, REPRESENTS AND AGREES THAT: 1. Title, Etc. Debtor has (or will have at the time it acquires rights in Collateral hereafter acquired or arising) and will maintain so long as the Security Interest remains outstanding, title to each item of Collateral (including the proceeds and products thereof), free and clear of all security interests, mortgages, liens or encumbrances ("Liens") except the Security Interest. Debtor will defend the Collateral against all claims or demands of all individuals, corporations or other entities ("Persons") (other than the Secured Party) claiming the Collateral or any interest therein. All costs of keeping the Collateral free of Liens prohibited by this Agreement will be borne and paid by Debtor. Debtor will not sell, lease or otherwise dispose of any Collateral. 2. Location. Debtor's chief place of business and chief executive office are located at its address indicated on the signature page hereof. Debtor will not permit any item of Collateral or any records pertaining thereto to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. 3. Further Assurance. Debtor will at any time or times hereafter execute such financing statements and other documents and instruments and perform such acts as the Secured Party may from time to time request to establish, maintain, perfect and enforce a valid security interest in the Collateral, and will pay all costs of filing and recording. Debtor will furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request. 4. Books, Records, Inspection. Debtor will keep accurate books, records and accounts with respect to the Collateral, and with respect to the general business of Debtor, and will make the same available to the Secured Party at its request for examination and inspection; and will permit any authorized representative of the Secured Party to examine and inspect, during normal business hours, any and all premises where the Collateral is or may be kept or located. 5. Action by Secured Party. If Debtor at any time fails to perform or observe any of its obligations and agreements hereunder, the Secured Party shall have the authority, but shall not be obligated to perform or observe such agreement and to take any and all other actions which the Secured Party may deem necessary to cure or correct such failure (including without limitation, the payment of taxes, the satisfaction of Liens, the execution of financing statements and the indorsement of instruments). All sums so advanced or paid by the Secured Party shall be payable by Debtor on demand with interest at the highest lawful rate permitted under applicable law which shall not, in any event, exceed a per annum rate equal to 3% in excess of the rate then applicable to the Norwest Obligations, as such term is defined in the Guaranty. -2- 6. Events of Default. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"): (i) Debtor shall fail to pay any or all of the Obligations when due or (if payable on demand) on demand, shall fail to observe or perform any covenant or agreement herein binding on it or shall be in default under the Guaranty; (ii) any representation or warranty by Debtor set forth in this Agreement or made to Secured Party in any financial statements or reports submitted to Secured Party by or on behalf of Debtor shall prove materially false or misleading; or (iii) Debtor or any other guarantor of any Obligation shall (A) be or become insolvent (however defined); or (B) voluntarily file, or have filed against it involuntarily, a petition under the United States Bankruptcy Code; or (C) if a corporation, partnership, or organization, be dissolved or liquidated or, if a partnership, suffer the death of a partner or, if an individual, die; or (D) go out of business. 7. Remedies. If any Event of Default shall have occurred and be continuing, and the Obligations remain due and owing for more than 30 days after such occurrence, Secured Party may exercise any one or more of the following rights and remedies: (i) declare all unmatured Obligations to be immediately due and payable, and the same shall thereupon be immediately due and payable, without presentment or other notice or demand; (ii) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including but not limited to the right to take possession of any Collateral, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which Debtor hereby expressly waives), and the right to dispose of any or all of the Collateral, and in connection therewith Secured Party may require Debtor to make the Collateral available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties, and if notice to Debtor of any intended disposition of collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonably if given (in the manner specified in Section 9) at least 10 calendar days prior to the date of intended disposition or other action; (iii) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Debtor or against any other person or property. If any payments -3- on any Collateral are received by Debtor after an Event of Default has occurred, such payments shall be held in trust by Debtor as the property of the Secured Party and shall not be commingled with any funds or property of Debtor and shall be forthwith remitted to the Secured Party for application on the Obligations. 8. Costs and Expenses. Debtor will pay or reimburse the Secured Party on demand for all out-of-pocket expenses (including in each case all filing and recording fees and taxes and all reasonable fees and expenses of counsel and of any experts and agents) incurred by the Secured Party in connection with the protection, satisfaction, foreclosure or enforcement of the Security Interest and the enforcement of this Agreement, and all such costs and expenses shall be part of the Obligations secured by the Security Interest. 9. Notices. Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telefacsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telefacsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. 10. Termination of Security Interest. Upon payment in full of the Obligations or the irrevocable payment in full of the Norwest Debt, as such term is defined in the Guaranty, other than by payment by the Creditor under the Creditor Guaranty, as such term is defined in the Guaranty, and the expiration of any obligation of the Lender, as such term is defined in the Guaranty, to extend credit accommodations to the, the security granted hereunder shall terminate, all rights to the Collateral shall revert to the Debtor, and the Secured Party shall be obligated to complete its purchase obligation under Section 2 of the Purchase Agreement to the extent that the Collateral has not been applied to the satisfaction of the Obligations pursuant to the terms of this Agreement. The Secured Party shall execute and -4- deliver to the Debtor such documents as the Debtor shall reasonably request to evidence such termination. 11. Governing Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA. 12. Consent to Jurisdiction. AT THE OPTION OF THE SECURED PARTY, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE DEBTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE DEBTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SECURED PARTY AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. 13. Waiver of Jury Trial. EACH OF THE DEBTOR AND THE SECURED PARTY, BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 14. Miscellaneous. This Agreement can be waived, modified, amended, terminated or discharged only explicitly in a writing signed by the Secured Party. A waiver so signed shall be effective only in the specific instance and for the specific purpose given and shall not impair or effect the rights of the Secured Party or the provisions of this Agreement in any other respect at any other time. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective heirs, representatives, successors and assigns. This Agreement shall take effect when signed by Debtor and delivered to Secured Party. Debtor waives notice of the Secured Party's -5- acceptance hereof. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not effect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. Executed as of December 22, 1998. DEBTOR LIFEUSA HOLDING, INC. By /s/ Mark A. Zesbaugh ------------------------------------ Title CFO --------------------------------- Address for Debtor: Attention: Mark A. Zesbaugh 300 South Highway 169, Suite 95 Minneapolis, Minnesota 55426 Telefacsimile No. 612-525-6102 Debtor Tax ID #41-1578384 Address for the Secured Party: Allianz Life Insurance Company of North America Attention: Robert S. James 1750 Hennepin Avenue Minneapolis, Minnesota 55403-2195 Telefacsimile Number: 612-337-6355 -6- EX-10.15 16 ADMINISTRATION AND MARKETING AGREEMENT EXHIBIT 10.15 ADMINISTRATION AND MARKETING AGREEMENT ENTERED INTO BY AND BETWEEN ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA OF MINNEAPOLIS, MINNESOTA (THE "COMPANY") AND LTCAMERICA HOLDING, INC. OF MINNEAPOLIS, MINNESOTA ("HOLDING") DATED AS OF JANUARY 1, 1999 WHEREAS, Holding, through its subsidiary, Capitol Bankers Life Insurance Company ("Insurance"), proposes to offer a line of life insurance, annuity and health insurance products, and the Company desires to provide similar products utilizing Holding's skills in product design and underwriting; and NOW, THEREFORE, in consideration for the mutual promises and undertakings set forth herein and for other good and valuable consideration, the parties hereby agree as follows: SECTION 1 - DEFINITIONS 1.1 "Covered Products" shall mean ordinary life insurance policies, annuities and health insurance issued on the forms listed on Exhibit 1 hereto. It is expressly understood and agreed that Exhibit 1 may be amended from time to time to add New Insurance Products. 1.2 "Marketing Services" shall mean identifying prospective agents ("Prospective Agents") of the Company for purposes of marketing the Covered Products and New Insurance Products, notifying the Company of Prospective Agents, and processing agent appointments and cancellations on behalf of the Company, and training and supervising all agents appointed with respect to the Covered Products and New Insurance Products. "Marketing Services" shall also include, subject to such limitations as the Company may from time to time deem appropriate, seeking approval on behalf of the Company by appropriate insurance departments, wherever required, of appointments of Prospective Agents. 1.3 "New Insurance Products" shall be life insurance, annuity products and health insurance developed by Holding or its subsidiary, Insurance, which are, with the approval of the Company added to those listed on Exhibit 1. New Insurance Products shall be products similar to those of Insurance written on the Company's paper. 1.4 "Operating Manuals" shall mean all written rules, regulations, instructions and directives of the Company regarding its operations, as are in effect from time to time. 1.5 "Policy Administration Services" shall mean, with respect to the Covered Products and New Insurance Products, (a) preparation and filing with state insurance departments, as appropriate all policy form filings, including premium rates, subject to such limitations as the Company may from time to time deem appropriate, (b) provision of full administration services, including billing and collecting premium, monthly processing, loan processing, valuation, policyholder statements, maintenance of policy records, processing policy cancellations, policy changes, contractual changes, reinstatements and customer inquiries, (c) designing, printing and distribution of administrative forms as they become necessary, and (d) all other administrative activities in connection with the Covered Products and New Insurance Products, including, but not limited to, maintaining necessary records and the producing of required reports such that the cash payments made between Holding and the Company, and between the Company and its reinsurers, can be accurately computed and recorded. "Policy Administrative Services" shall not include any activities related to (i) adjusting or paying claims or (ii) negotiating reinsurance on behalf of the Company. 1.6 "Services" shall mean Underwriting Services, Policy Administration Services and Marketing Services. 1.7 "Underwriting Guidelines" shall mean the Company's underwriting guidelines as in effect from time to time. Holding may recommend changes to the Underwriting Guidelines, which changes shall be subject to the Company's approval, which approval shall not be unreasonably withheld. 1.8 "Underwriting Services" shall mean, with respect to the Covered Products and New Insurance Products, processing and accepting applications and proposals for insurance, underwriting (including determination of appropriate rates), policy issuance, policy printing, processing of unscheduled policy changes, policy cancellations, routing of applications and other papers required in the underwriting process, routing of issued policies for delivery to policyholders, and all other related services. SECTION 2 - SERVICES 2.1 Holding shall provide the Services in the name of and on behalf of the Company with respect to the Covered Products and New Insurance Products in the territory described in Schedule A hereto. Holding shall provide the Services in the name of and on behalf of the Company only as provided in this Agreement or as directed by the Company in writing. Except as specifically set forth in this Agreement or as authorized by the Company in writing, Holding shall not have authority to enter into any agreements on the Company's behalf or to alter or amend any of the policies relating to the Covered Products and New Insurance Products or to modify, waive or extend any of their provisions. 2 2.2 In connection with the Policy Administration Services provided by Holding under this Agreement, Holding shall: a. be responsible for all Company policies entrusted to it whether issued or not, and shall only issue policies in series; b. be responsible for making, or causing to be made, any modifications to administrative systems required for the ongoing administration of all policies in force or new policies being issued; c. maintain all records, including but not limited to statistical and accounting records, that a life and health insurance company would maintain with respect to the Covered Products and New Insurance Products so as to allow the Company to make only general ledger entries in its books and records; and d. maintain all other data which are necessary to enable the Company to prepare its annual convention statement and any other reports required by any governmental agency or reporting bureau or which are reasonably required by the Company in order that the Company may properly analyze and manage the business included under this Agreement, provided that such data will be provided by Holding to the Company upon request by the Company. 2.3 In connection with the Marketing Services provided by Holding under this Agreement, and subject to such limitations as the Company may from time to time determine, Holding shall have the authority, on behalf of the Company, to appoint agents of the Company for the purpose of soliciting and producing the Covered Products and New Insurance Products and to remove any of such agents. Holding shall pay all costs of licensing and appointing such agents on behalf of the Company. 2.4 The Covered Products and the New Insurance Products shall be differentiated from Insurance products through terms as the Company and Holding mutually agree. The Company will commit to annual first year and single premium goals for the Covered Products and the New Insurance Products prior to the beginning of each calendar year during the term of this Agreement. The goal for 1999 is $10,000,000 in first year and single premium. Six months prior to the beginning of each calendar year commencing with respect to the calendar year 2000, the Company and Holding will mutually agree to the amount of first year and single premium which can be written on the Covered Products and the New Insurance Products for the next calendar year. 3 2.5 Holding shall not: a. accept applications for, bind or issue any insurance covering any risk prohibited in writing by the Company or excluded (whether by exclusion or warranty) from Exhibit 1, as amended or replaced from time to time; b. have any authority, right or responsibility with respect to any of the following activities related to the business produced under this Agreement: (i) adjusting or paying any claims, or (ii) negotiating reinsurance on behalf of the Company; c. mass cancel policies in force that are Covered Products or New Insurance Products except upon written instructions from the Company to do so; d. bind the Company in contravention of its Operating Manuals or Underwriting Guidelines; or e. issue any advertising or promotional material bearing the Company's name without first obtaining the written approval of the Company, except where such material is consistent with agreed upon written criteria. 2.6 Holding shall provide the Services (a) in accordance with all applicable laws, regulations, bulletins and insurance department requirements, (b) in accordance with applicable Operating Manuals, or such other service standards as the parties shall mutually agree in writing from time to time, and (c) in accordance with Sections 2.1 through 2.5 of this Agreement. 2.7 Holding shall be liable to the Company for any losses to the Company caused by negligent or intentional acts of Holding, its officers, employees or agents. 2.8 Holding agrees to indemnify and hold the Company harmless from and against any and all losses, costs, damages and expenses (including attorney's fees) which the Company may incur by reason of any demand or action by any person arising out of the negligence or intentional acts of Holding, and the Company agrees to indemnify and hold Holding harmless from and against any and all losses, costs, damages and expenses (including attorney's fees) which Holding may incur by reason of any demand or action by any person arising out of the negligence or intentional acts of the Company. 2.9 If Holding does not perform all of its duties and responsibilities under this Agreement after written notice and a reasonable opportunity to perform, the Company may adjust the compensation paid under Section 5 of this Agreement, or other remittances to Holding, in order to restore the Company to the position it would have occupied had Holding performed all of its duties and responsibilities. 2.10 This Agreement is not exclusive. The Company reserves the right to appoint agents in the territory covered by this Agreement for the purpose of producing business other than the Covered Products and New Insurance Products. Holding reserves, on behalf of its 4 subsidiaries, the right of such subsidiaries to appoint agents, including agents appointed with respect to the Covered Products and New Insurance Products pursuant to this Agreement, for the purpose of producing business for such subsidiaries. SECTION 3 - PREMIUMS 3.1 All premiums received by Holding with respect to the Covered Products and New Insurance Products, either before or after termination of this Agreement, shall be held by Holding as trustee for the Company. Holding shall have the authority to draw against said funds held for and on behalf of the Company, but only for one or more of the following purposes: a. Payment of return premiums; b. Payment of policy claims and benefits; or c. Payment of reinsurance premiums for any related reinsurance the Company has obtained with respect to any of the Company's policies issued under this Agreement. 3.2 Premiums temporarily held by Holding as trustee for the Company may be invested by Holding in demand or time bank accounts as may be authorized by the Minnesota Insurance Codes as legal bank investments for Life Insurance Companies, until drawn on for one or more of the purposes set forth in Section 3.1. Holding shall promptly remit all premiums to the Company's reinsurer in accordance with the terms of the Reinsurance Contract dated as of ______________, 199___, by and between Holding and the Company (the "Reinsurance Contract"). 3.3 The Company hereby assigns to Holding all income derived from premiums invested on behalf of the Company by Holding pursuant to the authority granted herein. 3.4 The keeping of an account with Holding on the Company's books in the form of a debtor-creditor account is to be deemed merely a record of business transacted. Neither the keeping of an account in such form, nor the rendering of same, nor failure to enforce prompt remittance, nor alteration in compensation rate, nor compromise or settlement, shall be held to waive assertion of the trust relationship as to premiums collected by Holding. It is further understood and agreed that Holding is responsible for, and guarantees to the Company, payment of all premiums on policies due and received on behalf of the Company with respect to the Covered Products and the New Insurance Products. Should Holding fail to pay the Company any such premiums received when due, Holding agrees to bear any collection or other expense, including reasonable attorney's fees and costs, expended by the Company to enforce collection from Holding. 5 SECTION 4 - OPERATION AND ACQUISITION EXPENSES Holding shall be responsible for all operation and acquisition expenses incurred in connection with the Covered Products and New Insurance Products subject to this Agreement, including, by way of illustration and not of limitation, such items as rentals, salaries, supplies not furnished by the Company, postage, advertising, local license fees, attorney's fees, utilities, cost of equipment, agents' fees or commissions and assessments or assignments, if any, lawfully made by governmental authority, the sole liability of the Company being payment of premium taxes and payment to Holding of the compensation stipulated in Section 5 hereof SECTION 5 -- COMPENSATION 5.1 The Company agrees to allow Holding a service fee equal to (a) the reinsurance allowance or ceding commission (expressed as a percentage) allowed the Company under the Reinsurance Contract, less 0.1%, multiplied by (b) the amount of business to which such allowance or commission is applicable. Holding shall be responsible for paying all commissions due agents appointed by the Company with respect to business written by the Company and reinsured under the Reinsurance Contract. 5.2 Holding agrees to reimburse the Company for premium taxes on all business subject hereto. 5.3 If a policy reinsured under the Reinsurance Contract lapses at any point in time during the first 13 months, Holding agrees to reimburse the Company an amount equal to the excess, if any, of the total first year service fee paid by the Company under Section 5.1 on that policy over the total first year "initial" premium paid on that policy, as defined in the Reinsurance Contract. 5.4 The Company will pay all payments assessed by the various state guaranty associations based on the Covered Products business. The Company and Holding agree that assessments will be sought to be recovered either through future premium tax offsets or additional margins or inforce business. SECTION 6 - REPORTS AND REMITTANCES 6.1 Within 10 days after the end of each month, Holding shall provide the Company with a copy of the report Insurance sends the reinsurer under the Reinsurance Agreement. 6.2 Within 10 days after the end of each month, Holding shall report the net written premium hereunder for the month of account and remit the provision for premium taxes as stipulated in Section 5. 6 SECTION 7 - STATUS OF HOLDING, ITS EMPLOYEES AND AGENTS While performing its authorities granted herein, Holding shall be deemed an independent contractor, as the Company reserves no authority or right to control Holding's method of performance of its duties and responsibilities hereunder. No employees of Holding shall be regarded as employees of the Company, except as may be required by governing statutes. SECTION 8 - EXAMINATION OF BOOKS AND RECORDS Holding shall, as often as reasonably requested by the Company, submit all books and records maintained by Holding pursuant hereto for examination and review by any authorized representative of the Company and/or its quota share reinsurers; and Holding shall in all things cooperate and render assistance in such examination. Holding shall make copies of any such books and records and furnish them to the Company as may be requested by the Company's representatives. SECTION 9 - OWNER OF POLICY FORMS, SUPPLIES AND LICENSES All policy forms, records and supplies furnished by the Company to Holding, as well as any policy forms or other supplies on which the Company's name appears, whether supplied by the Company or not, shall be and remain the property of the Company and shall be turned over to the Company promptly upon demand. All licenses and other material relating to governmental licensing or authorization of the Company with respect to this Agreement shall be and remain the property of the Company and shall be turned over to the Company by Holding promptly upon demand. SECTION 10 - COMMENCEMENT AND TERMINATION 10.1 The effective date of commencement of this Agreement shall be January 1, 1999, and this Agreement shall continue for a minimum of one year and will be subject to termination upon either party giving one year advance notice of cancellation, provided that this Agreement may not be terminated by Holding so long as the Company remains a guarantor with respect to Holding's revolving credit facility. In the event of the termination of this Agreement, the Company shall not directly or indirectly (through reinsurance or otherwise) sell any life or annuity products similar to the Covered Products or the New Insurance Products during the one year following such termination. In the event of a termination of this Agreement, Holding may not directly or indirectly (through reinsurance or otherwise) sell any products similar to products of the Company other than Covered Products during one year following such termination. 10.2 If either party fails to perform substantially and materially the duties and responsibilities set forth in this Agreement or fails to make required payments hereunder and such failure continues for more than 30 days after written notice delivered by the other party, the other party may terminate this Agreement notwithstanding any other provisions to the contrary. 7 SECTION 11 - MISCELLANEOUS 11.1 This Agreement, and all rights and interests arising herefrom, shall be binding upon, and shall inure to the benefit of, the parties hereto, their representatives, successors and assigns, provided that the authorities, duties and responsibilities of either Holding or the Company may not be assigned by either of such parties without the written consent of the other. 11.2 This Agreement may not be modified verbally, nor may it be modified by any subsequent practice or course of dealing by the parties, or in any manner other than in writing signed by the parties hereto. No forbearance or neglect on the part of the Company to enforce any of the provisions of this Agreement shall be construed as a waiver of any of its rights or privileges hereunder, unless in each instance a written memorandum specifically expressing such waiver be made and subscribed by the President or a Vice President of the Company. No such waiver shall modify this Agreement or affect the rights of the Company with respect to any subsequent default or failure or performance by Holding. 11.3 This Agreement shall be deemed to be a Minnesota contract and construed in accordance with the laws of the State of Minnesota. 11.4 This Agreement supersedes all previous agreements with respect to the subject matter herein, either oral or written, between the parties hereto. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have caused this Agreement to be executed as of January 1, 1999. ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA By: Robert S. James --------------- Its: President of Individual Marketing LTCAMERICA HOLDING, INC. By: Bradley E. Barks ---------------- Its: CFO 8 EXHIBIT 1 POLICY FORMS The format of EXHIBIT 1 includes only Policy Forms and Plan Codes. However, this Agreement shall cover all state variations and qualified and non-qualified versions of the Policy Forms and Plan Codes in EXHIBIT 1. PLAN CODE DESCRIPTION 1C-P-Y-A 2101X Ideal Care - Comprehensive 1F-P-Y-A 2102X Ideal Care - Facility Care 1H-P-Y-A 2103X Ideal Care - Home and Community Based Care Y = "N" for non-qualified and "Q" for qualified versions X = State variation code 9 SCHEDULE A TO THE ADMINISTRATION AND MARKETING AGREEMENT BETWEEN ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA AND LTCAMERICA HOLDING, INC. DATED AS OF JANUARY 1, 1999 ALL POLICIES IN 1999: The territory covered by this Agreement includes the following jurisdictions: All states* except: New York No other jurisdiction shall be included in the territory covered without the express written agreement of both parties. *LTCAmerica Holding, Inc. (and its affiliates) will not act as Allianz Life Insurance Company of North America's general agent for insurance sales in the State of Connecticut and will not perform duties nor have responsibilities related thereto under this Agreement. ALL POLICIES AFTER 1999: The territory covered by the appointment under this Agreement includes the following jurisdictions: All states*except New York and States where Insurance has a license to sell long term care insurance. No other jurisdiction shall be included in the territory covered by the appointment under this Service Agreement without the express written agreement of both parties. EX-10.16 17 ADMINISTRATION AND MARKETING AGREEMENT EXHIBIT 10.16 ADMINISTRATION AND MARKETING AGREEMENT ENTERED INTO BY AND BETWEEN LIFEUSA INSURANCE COMPANY OF MINNEAPOLIS, MINNESOTA (THE "COMPANY") AND LTCAMERICA HOLDING, INC. OF MINNEAPOLIS, MINNESOTA ( "HOLDING") DATED AS OF JANUARY 1, 1999 WHEREAS, Holding, through its subsidiary, Capitol Bankers Life Insurance Company ("Insurance"), proposes to offer a line of life insurance, annuity and health insurance products, and the Company desires to provide similar products utilizing Holding's skills in product design and underwriting; NOW, THEREFORE, in consideration for the mutual promises and undertakings set forth herein and for other good and valuable consideration, the parties hereby agree as follows: SECTION 1 - DEFINITIONS 1.1 "Covered Products" shall mean ordinary life insurance policies, annuities and health insurance issued on Exhibit 1 hereto. It is expressly understood and agreed that Exhibit 1 may be amended from time to time to add New Insurance Products. 1.2 "Marketing Services" shall mean identifying prospective agents ("Prospective Agents") of the Company for purposes of marketing the Covered Products and New Insurance Products, notifying the Company of Prospective Agents, and processing agent appointments and cancellations on behalf of the Company, and training and supervising all agents appointed with respect to the Covered Products and New Insurance Products. "Marketing Services" shall also include, subject to such limitations as the Company may from time to time deem appropriate, seeking approval on behalf of the Company by appropriate insurance departments, wherever required, of appointments of Prospective Agents. 1.3 "New Insurance Products" shall be life insurance, annuity products and health insurance developed by Holding or its subsidiary, Insurance, which are, with the approval of the Company added to those listed on Exhibit 1. New Insurance Products shall be products similar to those of Insurance written on the Company's paper. 1.4 "Operating Manuals" shall mean all written rules, regulations, instructions and directives of the Company regarding its operations, as are in effect from time to time. 1.5 "Policy Administration Services" shall mean, with respect to the Covered Products and New Insurance Products, (a) preparation and filing with state insurance departments, as appropriate all policy form filings, including premium rates, subject to such limitations as the Company may from time to time deem appropriate, (b) provision of full administration services, including billing and collecting premium, monthly processing, loan processing, valuation, policyholder statements, maintenance of policy records, processing policy cancellations, policy changes, contractual changes, reinstatements and customer inquiries, (c) designing, printing and distribution of administrative forms as they become necessary, and (d) all other administrative activities in connection with the Covered Products and New Insurance Products, including, but not limited to, maintaining necessary records and the producing of required reports such that the cash payments made between Holding and the Company, and between the Company and its reinsurers, can be accurately computed and recorded. "Policy Administrative Services" shall not include any activities related to (i) adjusting or paying claims or (ii) negotiating reinsurance on behalf of the Company. 1.6 "Services" shall mean Underwriting Services, Policy Administration Services and Marketing Services. 1.7 "Underwriting Guidelines" shall mean the Company's underwriting guidelines as in effect from time to time. Holding may recommend changes to the Underwriting Guidelines, which changes shall be subject to the Company's approval, which approval shall not be unreasonably withheld. 1.8 "Underwriting Services" shall mean, with respect to the Covered Products and New Insurance Products, processing and accepting applications and proposals for insurance, underwriting (including determination of appropriate rates), policy issuance, policy printing, processing of unscheduled policy changes, policy cancellations, routing of applications and other papers required in the underwriting process, routing of issued policies for delivery to policyholders, and all other related services. SECTION 2 - SERVICES 2.1 Holding shall provide the Services in the name of and on behalf of the Company with respect to the Covered Products and New Insurance Products in the states listed in Schedule A hereto. Holding shall provide the Services in the name of and on behalf of the Company only as provided in this Agreement or as directed by the Company in writing. Except as specifically set forth in this Agreement or as authorized by the Company in writing, Holding shall not have authority to enter into any agreements on the Company's behalf or to alter or amend any of the policies relating to the Covered Products and New Insurance Products or to modify, waive or extend any of their provisions. 2 2.2 In connection with the Policy Administration Services provided by Holding under this Agreement, Holding shall: a. be responsible for all Company policies entrusted to it whether issued or not, and shall only issue policies in series; b. be responsible for making, or causing to be made, any modifications to administrative systems required for the ongoing administration of all policies in force or new policies being issued; c. maintain all records, including but not limited to statistical and accounting records, that a life and health insurance company would maintain with respect to the Covered Products and New Insurance Products so as to allow the Company to make only general ledger entries in its books and records; and d. maintain all other data which are necessary to enable the Company to prepare its annual convention statement and any other reports required by any governmental agency or reporting bureau or which are reasonably required by the Company in order that the Company may properly analyze and manage the business included under this Agreement, provided that such data will be provided by Holding to the Company upon request by the Company. 2.3 In connection with the Marketing Services provided by Holding under this Agreement, and subject to such limitations as the Company may from time to time determine, Holding shall have the authority, on behalf of the Company, to appoint agents of the Company for the purpose of soliciting and producing the Covered Products and New Insurance Products and to remove any of such agents. The purpose of such agent appointment is to enable the agents to sell the Covered Products and New Insurance Products in those states in which they are licensed and authorized to sell products for Insurance in all jurisdictions listed in Schedule B hereto. Holding will also use its best efforts to cause such agents to sell the Covered Products and the New Insurance Products. Holding shall pay all costs of licensing and appointing such agents on behalf of the Company. 2.4 The Covered Products and the New Insurance Products shall be differentiated from the Company products through terms as the Company and Holding mutually agree. The Company will commit to annual first year and single premium goals for the calendar year during the term of this Agreement. The goal for 1999 is $10,000,000 in first year and single premium. Six months prior to the beginning of each calendar year commencing with respect to the calendar year 2000, the Company and Holding will mutually agree to the amount of first year and single premium which can be written on the Covered Products and the New Insurance Products for the next calendar year. 3 2.5 Holding shall not: a. accept applications for, bind or issue any insurance covering any risk prohibited in writing by the Company or excluded (whether by exclusion or warranty) from Exhibit 1, covering business produced under this Agreement; b. have any authority, right or responsibility with respect to any of the following activities related to the business produced under this Agreement: (i) adjusting or paying any claims; or (ii) negotiating reinsurance on behalf of the Company; c. mass cancel policies in force that are Covered Products or New Insurance Products except upon written instructions from the Company to do so; d. bind the Company in contravention of its Operating Manuals or Underwriting Guidelines; or e. issue any advertising or promotional material bearing the Company's name without first obtaining the written approval of the Company, except where such material is consistent with agreed upon written criteria. 2.6 Holding shall provide the Services (a) in accordance with all applicable laws, regulations, bulletins and insurance department requirements, (b) in accordance with applicable Operating Manuals, or such other service standards as the parties shall mutually agree in writing from time to time, and (c) in accordance with Sections 2.1 through 2.5 of this Agreement. 2.7 Holding shall be liable to the Company for any losses to the Company caused by negligent or intentional acts of Holding, its officers, employees or agents. 2.8 Holding agrees to indemnify and hold the Company harmless from and against any and all losses, costs, damages and expenses (including attorney's fees) which the Company may incur by reason of any demand or action by any person arising out of the negligence or intentional acts of Holding, and the Company agrees to indemnify and hold Holding harmless from and against any and all losses, costs, damages and expenses (including attorney's fees) which Holding may incur by reason of any demand or action by any person arising out of the negligence or intentional acts of the Company. 2.9 If Holding does not perform all of its duties and responsibilities under this Agreement after written notice and a reasonable opportunity to perform, the Company may adjust the compensation paid under Section 5 of this Agreement, or other remittances to Holding, in order to restore the Company to the position it would have occupied had Holding performed all of its duties and responsibilities. 2.10 This Agreement is not exclusive. The Company reserves the right to appoint agents in the territory covered by this Agreement for the purpose of producing business other than the Covered Products and New Insurance Products. Holding reserves, on behalf of its 4 subsidiaries, the right of such subsidiaries to appoint agents, including agents appointed with respect to the Covered Products and New Insurance Products pursuant to this Agreement, for the purpose of producing business for such subsidiaries. SECTION 3 - PREMIUMS 3.1 All premiums received by Holding with respect to the Covered Products and New Insurance Products, either before or after termination of this Agreement, shall be held by Holding as trustee for the Company. Holding shall have the authority to draw against said funds held for and on behalf of the Company, but only for one or more of the following purposes: a. Payment of return premiums; b. Payment of policy claims and benefits; or c. Payment of reinsurance premiums for any related reinsurance the Company has obtained with respect to any of the Company's policies issued under this Agreement. 3.2 Premiums temporarily held by Holding as trustee for the Company may be invested by Holding in demand or time bank accounts as may be authorized by the Minnesota Insurance Codes as legal bank investments for Life Insurance Companies, until drawn on for one or more of the purposes set forth in Section 3.1. Holding shall promptly remit all premiums to the Company's reinsurer in accordance with the terms of the Reinsurance Contract dated as of ____________, 199___, by and between the Company and Allianz Life Insurance Company of North America, as amended or replaced from time to time (the "Reinsurance Contract"). 3.3 The Company hereby assigns to Holding all income derived from premiums invested on behalf of the Company by Holding pursuant to the authority granted herein. 3.4 The keeping of an account with Holding on the Company's books in the form of a debtor-creditor account is to be deemed merely a record of business transacted. Neither the keeping of an account in such form, nor the rendering of same, nor failure to enforce prompt remittance, nor alteration in compensation rate, nor compromise or settlement, shall be held to waive assertion of the trust relationship as to premiums collected by Holding. It is further understood and agreed that Holding is responsible for, and guarantees to the Company, payment of all premiums on policies due and received on behalf of the Company with respect to the Covered Products and the New Insurance Products. Should Holding fail to pay the Company any such premiums received when due, Holding agrees to bear any collection or other expense, including reasonable attorney's fees and costs, expended by the Company to enforce collection from Holding. SECTION 4 - OPERATION AND ACQUISITION EXPENSES Holding shall be responsible for all operation and acquisition expenses incurred in connection with the Covered Products and New Insurance Products subject to this Agreement, 5 including, by way of illustration and not of limitation, such items as rentals, salaries, supplies not furnished by the Company, postage, advertising, local license fees, attorney's fees, utilities, cost of equipment, agents' fees or commissions and assessments or assignments, if any, lawfully made by governmental authority, the sole liability of the Company being payment of premium taxes and payment to Holding of the compensation stipulated in Section 6 hereof SECTION 5 - COMPENSATION 5.1 The Company agrees to allow Holding a service fee equal to (a) the reinsurance allowance or ceding commission (expressed as a percentage) allowed the Company under the Reinsurance Contract, less 0.1%, multiplied by (b) the amount of business to which such allowance or commission is applicable. Holding shall be responsible for paying all commissions due agents appointed by the Company with respect to business written by the Company and reinsured under the Reinsurance Contract. 5.2 Holding agrees to reimburse the Company for premium taxes on all business subject hereto. 5.3 If a policy reinsured under the Reinsurance Contract lapses at any point in time during the first 13 months, Holding agrees to reimburse the Company an amount equal to the excess, if any, of the total first year service fee paid by the Company under Section 5.1 on that policy over the total first year "initial" premium paid on that policy, as defined in the Reinsurance Contract. 5.4 The Company will pay all payments assessed by the various state guaranty associations based on the Covered Products business. The Company and Holding agree that assessments will be sought to be recovered either through future premium tax offsets or additional margins or inforce business. SECTION 6 - REPORTS AND REMITTANCES 6.1 Within 10 days after the end of each month, Holding shall provide the Company with a copy of the report the Company the reinsurer under the Reinsurance Agreement. 6.2 Within 10 days after the end of each month, Holding shall report the net written premium hereunder for the month of account and remit the provision for premium taxes as stipulated in Section 5. SECTION 7 - STATUS OF HOLDING, ITS EMPLOYEES AND AGENTS While performing its authorities granted herein, Holding shall be deemed an independent contractor, as the Company reserves no authority or right to control Holding's method of performance of its duties and responsibilities hereunder. No employees of Holding shall be regarded as employees of the Company, except as may be required by governing statutes. 6 SECTION 8 - EXAMINATION OF BOOKS AND RECORDS Holding shall, as often as reasonably requested by the Company, submit all books and records maintained by Holding pursuant hereto for examination and review by any authorized representative of the Company and/or its quota share reinsurers; and Holding shall in all things cooperate and render assistance in such examination. Holding shall make copies of any such books and records and furnish them to the Company as may be requested by the Company's representatives. SECTION 9 - OWNER OF POLICY FORMS, SUPPLIES AND LICENSES All policy forms, records and supplies furnished by the Company to Holding, as well as any policy forms or other supplies on which the Company's name appears, whether supplied by the Company or not, shall be and remain the property of the Company and shall be turned over to the Company promptly upon demand. All licenses and other material relating to governmental licensing or authorization of the Company with respect to this Agreement shall be and remain the property of the Company and shall be turned over to the Company by Holding promptly upon demand. SECTION 10 - COMMENCEMENT AND TERMINATION 10.1 The effective date of commencement of this Agreement shall be January 1, 1999, and this Agreement shall continue for a minimum of one year and will be subject to termination upon either party giving one year advance notice of cancellation. In the event of the termination of this Agreement, the Company shall not directly or indirectly (through reinsurance or otherwise) sell any life or annuity products similar to the Covered Products or the New Insurance Products during the one year following such termination. In the event of a termination of this Agreement, Holding may not directly or indirectly (through reinsurance or otherwise) sell any products similar to products of the Company other than Covered Products during one year following such termination. 10.2 If either party fails to perform substantially and materially the duties and responsibilities set forth in this Agreement or fails to make required payments hereunder and such failure continues for more than 30 days after written notice delivered by the other party, the other party may terminate this Agreement notwithstanding any other provisions to the contrary. SECTION 11 - ACCESS TO AGENTS The Company hereby grants to Holding and Insurance the right and privilege of recruiting the agents of the Company for the purpose of contracting those agents to sell the products of Insurance in all states in which Insurance is licensed to sell such products, whether or not the Company is licensed to sell similar products in those states. 7 SECTION 12 - MISCELLANEOUS 12.1 This Agreement, and all rights and interests arising herefrom, shall be binding upon, and shall inure to the benefit of, the parties hereto, their representatives, successors and assigns, provided that the authorities, duties and responsibilities of either Holding or the Company may not be assigned by either of such parties without the written consent of the other. 12.2 This Agreement may not be modified verbally, nor may it be modified by any subsequent practice or course of dealing by the parties, or in any manner other than in writing signed by the parties hereto. No forbearance or neglect on the part of the Company to enforce any of the provisions of this Agreement shall be construed as a waiver of any of its rights or privileges hereunder, unless in each instance a written memorandum specifically expressing such waiver be made and subscribed by the President or a Vice President of the Company. No such waiver shall modify this Agreement or affect the rights of the Company with respect to any subsequent default or failure or performance by Holding. 12.3 This Agreement shall be deemed to be a Minnesota contract and construed in accordance with the laws of the State of Minnesota. 12.4 This Agreement supersedes all previous agreements with respect to the subject matter herein, either oral or written, between the parties hereto. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have caused this Agreement to be executed as of January 1, 1999. LIFEUSA INSURANCE COMPANY By: /s/ Mark A. Zesbaugh ---------------- Its Senior Vice President LTCAMERICA HOLDING, INC. By: Bradley E. Barks ---------------- Its CFO 8 EXHIBIT 1 POLICY FORMS The format of EXHIBIT 1 includes only Policy Forms and Plan Codes. However, this Agreement shall cover all state variations and qualified and non-qualified versions of the Policy Forms and Plan Codes in EXHIBIT 1. PLAN CODE DESCRIPTION 1C-P-Y 1101X Ideal Care - Comprehensive 1F-P-Y 1102X Ideal Care - Facility Care 1H-P-Y 1103X Ideal Care - Home and Community Based Care Y = "N" for non-qualified and "Q" for qualified versions X = State variation code SCHEDULE A TO THE ADMINISTRATION AND MARKETING AGREEMENT BETWEEN LIFEUSA INSURANCE COMPANY AND LTCAMERICA HOLDING, INC. The territory covered by this Agreement includes the following jurisdictions: All states* except: New York No other jurisdictions shall be included in the territory covered without the express written agreement of both parties. *LTCAmerica Holding, Inc. (and its affiliates) will not act as LifeUSA Insurance Company's general agent for insurance sales in the State of Connecticut and will not perform duties nor have responsibilities related thereto under this Agreement. EX-10.17 18 INTERESTS AND LIABILITIES AGREEMENT EXHIBIT 10.17 INTERESTS AND LIABILITIES AGREEMENT entered into by and between LIFEUSA INSURANCE COMPANY and ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA Minneapolis, Minnesota (hereinafter referred to as the "SUBSCRIBING REINSURER") IT IS HEREBY AGREED that the SUBSCRIBING REINSURER shall have a 100% share as respects policies in the interests and liabilities of the "Reinsurer" as set forth in the attached Coinsurance Agreement entitled: COINSURANCE AGREEMENT Effective: January 1, 1999 IT IS FURTHER AGREED that this Interests and Liabilities Agreement shall become effective on January 1, 1999, with respect to policies issued on or after that date, and shall continue in force until terminated in accordance with the provisions of the attached Coinsurance Agreement. IT IS ALSO AGREED that the SUBSCRIBING REINSURER'S share in the attached Coinsurance Agreement shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the SUBSCRIBING REINSURER shall in no event participate in the interests and liabilities of the other reinsurers. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Interest and Liabilities Agreement as of the dates undermentioned at: Minneapolis, Minnesota, this 22nd day of December 1998. /s/ Linda K. Burm, Senior Vice President and COO ------------------------------------------------------ LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota, this 22nd day of December 1998. /s/ Robert S. James, President of Individual Marketing ------------------------------------------------------ ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA COINSURANCE AGREEMENT Effective: January 1, 1999 between LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota And The subscribing reinsurers whose respective INTERESTS AND LIABILITIES AGREEMENTS ARE ATTACHED HERETO TABLE OF CONTENTS ARTICLE PAGE - ------- ---- I REINSURANCE COVERAGE.............................................1 II REINSURANCE PREMIUMS.............................................3 III CLAIMS...........................................................3 IV REPORTS AND REMITTANCES..........................................4 V EXPENSES.........................................................6 VI INTEREST ON STATEMENTS AND CLAIMS................................6 VII DAC TAX..........................................................6 VIII OVERSIGHTS.......................................................6 IX REDUCTIONS, TERMINATIONS AND CHANGES.............................6 X ACCESS TO RECORDS................................................7 XI UNAUTHORIZED REINSURERS..........................................8 XII INSOLVENCY.......................................................8 XIII ARBITRATION......................................................8 XIV RECAPTURE........................................................9 XV REINSTATEMENTS...................................................9 XVI PARTIES TO THE AGREEMENT.........................................9 XVII SCOPE AND DURATION OF AGREEMENT..................................9 XVIII OFFSET..........................................................10 XIX WRITTEN AGREEMENT...............................................10 XX INTERMEDIARY....................................................10 EXHIBIT I.......................................................11 EXHIBIT II......................................................12 EXHIBIT III.....................................................13 EXHIBIT IV......................................................14 EXHIBIT V.......................................................16 COINSURANCE AGREEMENT Effective: January 1, 1999 between LIFEUSA INSURANCE cOMPANY Minneapolis, Minnesota (hereinafter referred to as the "Company") and THE SUBSCRIBING REINSURERS WHOSE RESPECTIVE INTERESTS AND LIABILITIES AGREEMENTS ARE ATTACHED HERETO (hereinafter referred to as the "Reinsurer") This Agreement, effective January 1, 1999, is made between the Company and the Reinsurer as follows: ARTICLE I - REINSURANCE COVERAGE A. The Company's individual life insurance, annuities and health insurance, with a focus towards long term care, issued on the policy forms specified in Exhibit I shall be reinsured automatically with the Reinsurer, provided it meets the following requirements: 1. Policy issued according to the Company's then existing regular new risk underwriting rules. 2. Mortality ratings from Standard to Table 16 (P), inclusive. 3. Issue age 80 or below for life insurance, issue age 85 or below for annuities, and issue age between 18 and 84 for long term care insurance. 4. Resident of the United States or Canada. 5. Risk has not been submitted to the Reinsurer for facultative reinsurance. 6. Company retains the coinsurance percentage specified in Exhibit II. 7. The face amount of life insurance then applied for in all companies, including the Company on the life, when added to the face amount then in force in all companies including the Company on that life, shall not exceed $2,500,000. For accidental death benefits, the amount shall not exceed $300,000. 8. The maximum amount to be reinsured automatically on any one life shall not exceed $500,000 for life insurance and $1,000,000 for annuities. B. If the insurance does not meet the automatic requirements specified in paragraph A, the Company may submit an application for facultative reinsurance. An application for facultative reinsurance shall be made by submitting to the Reinsurer a "Preliminary Application for Reinsurance," Exhibit III, together with copies of all papers pertaining to the insurability of the risk. The Reinsurer shall have the option of accepting or rejecting or rating any application for facultative reinsurance. The Reinsurer shall promptly notify the Company of its underwriting action after the Reinsurer has examined the evidence of insurability submitted. If the amounts of life insurance issued and applied for in all companies is less than $1,500,000, the Company shall submit the information required in the preceding paragraph to Allianz Life Insurance Company of North America as the designated lead underwriter for the Reinsurer, and Allianz Life's underwriting decision shall be binding on the Reinsurer. If the amount of life insurance issued and applied for in all companies is $1,500,000 or more, the Company shall submit the information required in the second preceding paragraph to each reinsurer with an Interests and Liabilities Agreement to this Agreement, and each reinsurer shall promptly notify the Company of its underwriting action. C. The liability of the Reinsurer shall begin on the effective date of the Company's liability on each policy reinsured hereunder. A policy reinsured hereunder shall be any policy for which the Company assigned its policy number after the effective date of this Agreement. However, the Reinsurer's liability for facultative reinsurance on a risk shall not commence before the Reinsurer has accepted the application for reinsurance. In no event shall the reinsurance be in force and binding unless the issuance and delivery of such insurance constituted the doing of business in the United States of America in a jurisdiction in which the Company was properly licensed. D. Reinsurance shall be coinsurance and shall follow the policy forms and rates of the Company. The Company has furnished the Reinsurer with copies of its policy forms, applications, rates and values and shall submit to the Reinsurer policy modifications or new policy forms before reinsurance shall become effective hereunder. E. The Reinsurer's share of a policy reinsured hereunder shall remain unchanged so long as the policy issued by the Company remains in force, except as provided in ARTICLE VIII - REDUCTIONS, TERMINATIONS AND CHANGES. F. Receipt by the Reinsurer of the initial reinsurance premium and of each subsequent reinsurance premium, in accordance with the provisions of ARTICLE IV - REPORTS AND REMITTANCES of this Agreement shall be a condition to the Reinsurer's continuing liability for reinsurance of each policy reinsured. G. The Company shall inform the Reinsurer of any reinsurance by means of the monthly accounting report as described in ARTICLE IV - REPORTS AND REMITTANCES. H. If a policy reinsured is changed to a plan of insurance not included in Exhibit I, reinsurance under this Agreement shall continue only with the written agree- - 2 - 02/23/99 ment of the Reinsurer, except as provided in paragraph A of ARTICLE VIII - REDUCTIONS, TERMINATIONS AND CHANGES. I. The Reinsurer shall establish and assume liability for all statutory reserves, as required under law by the State of Minnesota, in proportion to the Reinsurer's liability for reinsurance on each policy reinsured. ARTICLE II - REINSURANCE PREMIUMS A. The Company shall pay the Reinsurer as reinsurance premiums, the reinsured portion of the premiums and deposits received by the Company from its insureds, including the policy fee. B. The Reinsurer shall pay the Company the allowances described in Exhibit IV. C. The Reinsurer shall not reimburse the Company for the amount of any premium taxes. D. The Company will pay all payments assessed by the various state guaranty associations based on the Covered Products business. The Reinsurer will reimburse the Company for the Reinsurer's share of such assessments and participate in any premium tax offsets based on the coinsurance percentages in Exhibit II. The Company and Reinsurer agree that assessments will be sought to be recovered either through future premium tax offsets or additional margins on inforce business. ARTICLE III - CLAIMS The Reinsurer shall reimburse the Company for the reinsured portion of all claims. Reinsured claims shall be reported by the Company and paid by the Reinsurer on the following basis: A. The Reinsurer shall be liable to the Company for the insurance benefits reinsured under this Agreement as the Company shall be liable for such benefits. All reinsurance claim settlements shall be subject to the terms and conditions of the particular form of contract under which the Company is liable. B. When the Company is advised of a claim, it shall promptly notify the Reinsurer. C. The Company shall submit to the Reinsurer a copy of each paper connected with the claim to the extent that such papers are requested by the Reinsurer in accordance with criteria established from time to time by the Reinsurer. After reviewing such claim papers, the Reinsurer shall give its opinion as to how it would have handled the claim had it been a claim of the Reinsurer. The Reinsurer shall give its opinion within ten working days after the Reinsurer shall have received a copy of each paper connected with the claim. If no response is received within this ten-day period, it will be presumed the Reinsurer is agreeable to payment of the claim. D. Payment of reinsurance proceeds shall be on the same basis as settlement is made by the Company under the policy reinsured hereunder. - 3 - 02/23/99 E. The Company shall promptly notify the Reinsurer of its intention to contest insurance reinsured under this Agreement or to assert defenses to a claim for such insurance. If the Company's contest of such insurance results in the reduction of its liability, the Reinsurer's share of such reduction shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. If the Reinsurer should decline to participate in the contest or assertion of defenses, the Reinsurer then shall discharge all of its liability by the payment of the full amount of reinsurance to the Company, and the Reinsurer shall not share in any subsequent reduction in liability. F. If the amount of insurance provided by a policy reinsured under this Agreement is increased or reduced because of a misstatement of age or sex established at claim of the insured, the Reinsurer's share of such increase or reduction shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. G. The Company alone shall pay the routine expenses incurred in connection with settling claims. These expenses may include compensation of agents and employees and the cost of routine investigations. H. The Reinsurer shall share with the Company all expenses which are not routine. Expenses which are not routine shall be those directly incurred in connection either with the contest of insurance or the assertion of defenses to insurance or with the possibility of a contest or assertion of defenses. The Reinsurer's share of these expenses shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. However, if the Reinsurer has discharged its liability under paragraph E of this Article, the Reinsurer shall not share in any expenses incurred after the date it has discharged its liability. The term "claim expenses" shall mean statutory interest payable on insurance proceeds, court costs, interest upon judgments, and allocated investigation, adjustment and legal expenses, but the term "claim expenses" shall not include salaries paid to employees of the Company. I. Any particular reinsurer shall be obligated to reimburse the Company for the percentage set forth in that reinsurer's Interests and Liabilities Agreement of any amount paid by the Company for punitive, exemplary or compensatory damages arising out of the conduct of the Company in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefit under a policy reinsured by this Agreement, but only if that particular reinsurer shall have, in advance of any such conduct by the Company, counseled with the Company and concurred in the Company's course of conduct. ARTICLE IV - REPORTS AND REMITTANCES The following rules for Monthly Reinsurance Accounting are required: A. The reinsurance premiums required under this Agreement shall be payable to the Reinsurer on the same basis as the insurance premiums and deposits are payable to the Company. - 4 - 02/23/99 B. Within ten days following the close of each month, the Company shall provide the Reinsurer with a statement listing the total and the reinsured portions of all premiums, deposits, refunds, allowances, claims, surrender benefits, policy loans, reserves and other mutually agreed upon items applicable to the month just ended. The format and methods of calculation of such items shall be in a form mutually acceptable to all parties. C. For administrative purposes only, if a statement shows that a net balance is payable to the Reinsurer, the Company shall include with the statement its payment for the amount of the net balance due the Reinsurer. If payment for the full amount of the net balance due the Reinsurer is not included with the statement, the reinsurance premiums for all of the risks listed on the statement shall be in default. If a statement shall not be received by the Reinsurer within thirty days after the close of the month, the reinsurance premiums for all of the risks that would have been listed on such a statement shall be in default. Also for administrative purposes only, if a statement shows that a net balance is payable to the Company, the Reinsurer shall pay to the Company the amount of the net balance within thirty days after the day on which the Reinsurer receives the monthly statement from the Company. D. It is the understanding of both parties that both parties desire the payment of net balances due no less frequently than weekly. Either party may, at its option and with the cooperation and consent of the other party, implement appropriate procedures designed to accomplish such transfers along with the appropriate statements. Such procedures may involve the establishment of special bank accounts and the use of wires, express mail or equivalent means. The establishment of such procedures, however, does not remove from either party any of the rights or obligations set forth in the other paragraphs of this Article. E. The Reinsurer shall have the right to terminate the reinsurance on risks for which reinsurance premiums are in default by giving ninety days written notice of termination to the Company. As of the close of the last day of this ninety-day notice period, all of the Reinsurer's liability for reinsurance on risks which are the subject of the termination notice shall terminate unless the Reinsurer shall have been paid the amount in default prior to that time. Notwithstanding termination of reinsurance as provided by this paragraph, the Company shall continue to be liable to the Reinsurer for all unpaid reinsurance premiums earned by the Reinsurer under this Agreement. F. There shall be no reinstatement of reinsurance terminated under paragraph E of this Article. G. The first day of the ninety-day notice of termination under paragraph E of this Article shall be the day the notice shall be deposited in the mail addressed to the Company's Home Office, or, if the mail is not used, the day it is delivered to the Company's Home Office or to an Officer of the Company. H. Within thirty days following the close of each calendar quarter, the Company shall prepare and submit to the Reinsurer an in force listing of all risks reinsured under this Agreement setting forth pertinent data mutually agreed upon by all parties. - 5 - 02/23/99 I. All amounts payable under this Agreement shall be payable in the lawful money of the United States; except, however, that they shall be payable in the lawful money of Canada if the Company's insurance is based on Canadian currency. ARTICLE V - EXPENSES The Company shall bear the expense of all medical examinations, inspection fees and other charges incurred in connection with the issuance of the Company's insurance policies reinsured. ARTICLE VI - INTEREST ON STATEMENTS AND CLAIMS A. Interest accrual on all amounts owed from one party to the other begins on the tenth day following the end of the month. All interest credited shall be simple interest. B. This arrangement shall take effect beginning with the January 1999 statement. Interest accrual for the January 1999 statement shall begin on February 10, 1999. C. On the twentieth day of the month preceding the end of each calendar quarter (on the following business day if the twentieth day falls on a weekend or holiday), the interest rate shall be established which shall apply to any statements or claims due during the following calendar quarter. D. The interest rate shall be the three-month Treasury Bill rate as stated in the Wall Street Journal. ARTICLE VII - DAC TAX The Company and the Reinsurer hereby agree that any DAC tax paid and credits received pursuant to Section 848 of the Internal Revenue Code of 1986 as a result of the Reinsured Policies will be shared proportionally according to the coinsurance percentages in Exhibit II. ARTICLE VIII - OVERSIGHTS It is understood and agreed that if failure to comply with the terms of this Agreement is shown to be unintentional and the result of a misunderstanding or oversight on the part of either the Company or the Reinsurer, both the Company and the Reinsurer shall be restored to the positions they would have occupied had no such misunderstanding or oversight occurred, provided the failure is rectified within a reasonable time after discovery. ARTICLE IX - REDUCTIONS, TERMINATIONS AND CHANGES A. If there is a contractual or non-contractual replacement or change in the insurance reinsured under this Agreement, the insurance shall continue to be reinsured with the Reinsurer. B. If the insurance reinsured under this Agreement increases and: - 6 - 02/23/99 1. The increase is subject to new underwriting evidence, the provisions of ARTICLE I - REINSURANCE COVERAGE shall apply to the increase in reinsurance. 2. The increase is not subject to new underwriting evidence, the Reinsurer shall accept automatically the increase in reinsurance, provided that the total amount ceded does not exceed the Reinsurer's automatic binding limit. C. If the amount of insurance provided by a policy reinsured under this Agreement is increased or reduced, the Reinsurer's share of such increase or reduction shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. D. If insurance reinsured under this Agreement is increased or reduced, the Reinsurer's share of any adjustments to cash values, reserves, policy loans, or other shared values shall be the percentage set forth in Exhibit II, based on the date the policy was first reinsured under this Agreement. E. If insurance reinsured under this Agreement is terminated, the reinsurance for the individual risk involved shall be terminated on the effective date of termination. F. On facultative reinsurance, if the Company wishes to reduce the mortality rating, this reduction shall be reunderwritten on a facultative basis under the facultative provisions of this Agreement. G. The Reinsurer shall refund to the Company all unearned reinsurance premiums not including policy fees, less applicable allowances, arising from reductions, terminations and changes as described in this Article. H. If there is a contractual or non-contractual replacement or change in the insurance reinsured under this Agreement, the reinsurance allowances set forth in Exhibit IV shall be calculated, based on policy duration from the original date of issue, unless full new underwriting evidence according to the Company's regular underwriting rules is required. If such evidence is required, then the reinsurance allowance shall be based on the effective date of the replacement or change, but only in the proportion and to the extent that full first year compensation is payable, and subject to approval of the Reinsurer. ARTICLE X - ACCESS TO RECORDS A. The Reinsurer, by its duly authorized and appointed representatives, shall have the right at any reasonable time to examine at the office of the Company or the offices of any of the agencies which produce business for the Company, all papers and documents relating to reinsurance under this Agreement. B. At least once each year, the independent auditors of the Company shall perform certain confirmation procedures, agreed upon by the Company and the Reinsurer, in connection with the reinsurance. A copy of the report of the independent auditor shall be furnished to the Reinsurer. - 7 - 02/23/99 ARTICLE XI - UNAUTHORIZED REINSURERS The Reinsurer agrees to fund its share of the Company's ceded statutory reserves by: 1. Escrow or trust accounts for the benefit of the Company; and/or 2. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. ARTICLE XII - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. ARTICLE XIII - ARBITRATION A. It is the intention of the parties that customs and usages of the business of reinsurance shall be given full effect in the interpretation of this Agreement. The parties shall act in all things with the highest good faith. A dispute or difference between the parties with respect to the operation or interpretation of this Agreement on which an amicable understanding cannot be reached shall be decided by arbitration. The arbitrators are empowered to decide all questions or issues and shall be free to reach their decisions from the standpoint of equity and customary practices of the insurance and reinsurance industry rather than from that of strict law. B. There shall be three arbitrators who shall be active or retired officers of life insurance companies other than the contracting companies or their affiliates. - 8 - 02/23/99 Each of the contracting companies shall appoint one of the arbitrators and these two arbitrators shall select the third. In the event that either contracting company should fail to choose an arbitrator within thirty days after the other contracting company has given notice of its arbitrator appointment, that contracting company may choose two arbitrators, who shall in turn choose a third arbitrator before entering arbitration. If the two arbitrators are unable to agree upon the selection of a third arbitrator within thirty days following their appointment, each arbitrator shall nominate three candidates within ten days thereafter, two of whom the other shall decline and the decision shall be made by drawing lots. C. The arbitrators shall decide by a majority of votes and from their written decision there can be no appeal. Within 45 days after the closing of the arbitration hearings, the decisions of the arbitrators will be presented to the parties to the arbitration. The cost of arbitration, including the fees of the arbitrators, shall be borne by the losing party unless the arbitrators decide otherwise. ARTICLE XIV - RECAPTURE Unless otherwise mutually agreed by the parties to this Agreement, insurance reinsured under this Agreement shall not be eligible for recapture. ARTICLE XV - REINSTATEMENTS If insurance shall lapse for nonpayment of premium and if it is reinstated in accordance with its terms and the rules of the Company, the applicable reinsurance shall be reinstated by the Reinsurer, subject to the condition that the Company shall pay to the Reinsurer all reinsurance premiums in the same manner as the Company shall receive its premiums under its policy. ARTICLE XVI - PARTIES TO THE AGREEMENT This Agreement is for indemnity reinsurance solely between the Company and the Reinsurer. The acceptance of reinsurance shall not create any right or legal relation whatever between the Reinsurer and the insured or any other person having an interest in any kind of insurance issued by the Company. ARTICLE XVII - SCOPE AND DURATION OF AGREEMENT A. This Agreement shall be effective on January 1, 1999. This Agreement will remain in place at least as long as the Credit Agreement, dated December 22, 1998, between CAPITAL BANKERS LIFE INSURANCE COMPANY and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION remains in place. During this period, ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA will reinsure at least 25% of the business written by CAPITAL BANKERS LIFE INSURANCE COMPANY. This Agreement may be terminated with respect to new business to be reinsured thereafter at any time, subject to paragraph B of this Article, by either party giving ninety days written notice of termination to the other party. Reinsurance of policies in force on the date of termination shall remain in force until the extinction of the Company's liability under the policies reinsured. - 9 - 02/23/99 B. Notwithstanding the provisions of paragraph A of this Article, if the Reinsurer terminates this Agreement with respect to new reinsurance and the Company has not arranged for a replacement reinsurer for new reinsurance prior to the date of termination under paragraph A of this Article, the Company may, by written notice to the Reinsurer prior to expiration of the ninety day period referred to in paragraph A of this Article, require that this Agreement shall continue in effect for up to an additional ninety days. ARTICLE XVIII - OFFSET Any debts or credits, liquidated or unliquidated, in favor of or against either the Reinsurer or the Company with respect to this Agreement only shall be set-off and only the balance shall be allowed or paid. ARTICLE XIX - WRITTEN AGREEMENT A. This Agreement shall constitute the entire Agreement between the parties with respect to the business being reinsured hereunder, and there are no other understandings between the parties other than as expressed in this Agreement. B. Any change or modification to this Agreement shall be null and void unless made by amendment to this Agreement and signed by both parties. ARTICLE XX - INTERMEDIARY Reinsurance Alternatives - Reinsurance Intermediaries, 7900 Xerxes Avenue South, Minneapolis, Minnesota 55431, is hereby recognized as the intermediary with regard to this Agreement. - 10 - 02/23/99 EXHIBIT I COINSURANCE AGREEMENT Effective: January 1, 1999 between LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota And The Reinsurers The format of EXHIBIT I includes only Policy Forms and Plan Codes. However, this Agreement shall coinsure all state variations and qualified and non-qualified versions of the Policy Forms and Plan Codes in EXHIBIT I. PLAN CODE DESCRIPTION 1C - P - Y 1101X Ideal Care - Comprehensive 1F - P - Y 1102X Ideal Care - Facility Care 1H - P - Y 1103X Ideal Care - Home and Community Based Care Y = "N" for non-qualified and "Q" for qualified versions X = State variation code - 11 - 02/23/99 EXHIBIT II COINSURANCE AGREEMENT Effective: January 1, 1999 between LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota And The Reinsurers COINSURANCE PERCENTAGES For all policies reinsured under this Agreement, the Company and the Reinsurer shall share the risks in accordance with the following schedule of coinsurance percentages: Policies First Company's Reinsurer's Reinsured Between: Share Share ----------------------- --------- ----------- 01/01/99 and Thereafter 0.00% 100.0% - 12 - 02/23/99 EXHIBIT III COINSURANCE AGREEMENT Effective: January 1, 1999 between LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota And The Reinsurers Exhibit III will consist of the Preliminary Application for Reinsurance to be agreed by the Reinsurers. Copy of the Preliminary Application for Reinsurance used by LifeUSA Insurance Company will be Exhibit III. - 13 - 02/23/99 EXHIBIT IV COINSURANCE AGREEMENT Effective: January 1, 1999 between LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota And The Reinsurers ALLOWANCES The REINSURER shall pay to the COMPANY an allowance equal to the coinsurance percentage reinsured multiplied by the following allowances: I. Ideal Care - Comprehensive, Facility Care, Home and Community Based Care 1. Per policy allowances A. ISSUE ALLOWANCE ----------------------- ----------------------------- ISSUE AGE ALLOWANCE AT ISSUE ----------------------- ----------------------------- < 65 $35 ----------------------- ----------------------------- 65 - 74 $105 ----------------------- ----------------------------- 75+ $245 ----------------------- ----------------------------- B. MAINTENANCE ALLOWANCE: $30 All Years - 14 - 02/23/99 2. Percent of premium allowances A. PLANS OTHER THAN COMPOUND INFLATION PLAN: - ------------------- ------------------ ------------------ ------------------ ISSUE AGE YR 1 YRS 2-10 YRS 11+ --------- ---- -------- ------- - ------------------- ------------------ ------------------ ------------------ 40-44 119.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ 45-49 114.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ 50-54 109.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ 55-59 104.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ 60-64 99.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ 65-69 94.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ 70-74 89.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ 75-79 84.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ 80+ 79.7% 23.0% 13.0% - ------------------- ------------------ ------------------ ------------------ B. COMPOUND INFLATION PLANS: - ------------------- ------------------ ------------------ ------------------ ISSUE AGE YR 1 YRS 2-10 YRS 11+ --------- ---- -------- ------- - ------------------- ------------------ ------------------ ------------------ 40-44 116.8% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 45-49 111.8% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 50-54 106.8% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 55-59 101.8% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 60-64 96.8% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 65-69 92.2% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 70-74 87.5% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 75-79 82.9% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 80+ 78.2% 22.3% 12.3% - ------------------- ------------------ ------------------ ------------------ 3. Claim Allowance: 5% of incurred claims - 15 - 02/23/99 EXHIBIT V COINSURANCE AGREEMENT Effective: January 1, 1999 between LIFEUSA INSURANCE COMPANY Minneapolis, Minnesota And The Reinsurers LINESLIP As of January 1, 1999, LifeUSA Insurance Company of Minneapolis, Minnesota, entered into a Coinsurance Agreement (the "Agreement") with Allianz Life Insurance Company of North America of Minneapolis, Minnesota. For the purposes of this Letter of Understanding, the reinsurer will be referred to as the LifeUSA Lineslip ("Lineslip"). The Agreement provides, among other things, for reinsurance commissions and reinsurance allowances to be paid by the Lineslip to LifeUSA, as provided in Exhibit IV to the Agreement. This Letter of Understanding acknowledges that those allowances were developed in such a way as to provide the Lineslip with an agreed rate of return, based on assumptions provided by LifeUSA and based on a methodology agreed to by the Lineslip. The Lineslip reinsurers will participate in certain aspects of managing the profitability of the policies reinsured under the Agreement as members of a Product Management Committee which will, among other things, advise LifeUSA as to investment strategy, agree to an algorithm for determining the rate of interest to be credited to policyholders by LifeUSA, agree to underwriting guidelines by LifeUSA, and agree to the cost of insurance and premium rates charged to new and existing policyholders by LifeUSA. This Letter of Understanding acknowledges that if LifeUSA unilaterally decides to take an action, or to not take an action, which is outside the agreed parameters, without agreement by the Product Management Committee, and if such action or inaction continues for three months after the Product Management Committee has notified LifeUSA of its recommendation, the reinsurance shall be repriced. LifeUSA shall have an obligation to adjust ongoing reinsurance terms to reestablish the rates of return to the Lineslip as originally agreed. If the terms of this Letter of Understanding are in conflict with any state insurance regulations which would preclude LifeUSA from taking reserve credits in its Statutory Annual Statement for the reinsurance under the Agreement, the terms of this Letter of Understanding will be deemed to conform with those statutes in such a way that (1) LifeUSA may take full credit for the reinsured statutory reserves and (2) the spirit of this Letter of Understanding is maintained consistent with (1). - 16 - 02/23/99 EX-10.18 19 RETROCESSION AGREEMENT EXHIBIT 10.18 RETROCESSION AGREEMENT EFFECTIVE: JANUARY 1, 1999 ISSUED TO ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA MINNEAPOLIS, MINNESOTA (HEREINAFTER REFERRED TO AS THE "REINSURER") BY LIFEUSA INSURANCE COMPANY MINNEAPOLIS, MINNESOTA (HEREINAFTER REFERRED TO AS THE "RETROCESSIONAIRE") BY THIS AGREEMENT, the Reinsurer obligates itself to retrocede to the Retrocessionaire and the Retrocessionaire obligates itself to accept a quota share part of the Reinsurer's interests and liabilities, as respects Life Insurance, Annuity and Health Insurance business under the Coinsurance Agreement, effective January 1, 1999, issued to LifeUSA Insurance Company and the Coinsurance Agreement effective January 1, 1999 issued to Capitol Bankers Life Insurance Company (hereinafter referred to as the "Original Contracts"). The quota share part shall be 25% with respect to all business. Copies of the Original Contracts are attached to and forms part of this Agreement. ARTICLE I - COMMENCEMENT AND TERMINATION A. This Agreement shall become effective on January 1, 1999, with respect to policies reinsured under the Original Contracts on or after that date, and it shall continue in force thereafter until terminated. B. This Agreement shall terminate with respect to new business written under the Original Contracts on the dates that the Original Contracts terminate with respect to new business. Business covered under the Original Contracts and retroceded hereunder on or prior to the effective date of termination shall remain in full force and effect until expiration or cancellation of such business, whichever first occurs. However, it is understood and agreed that if the Original Contracts are terminated for any reason, coverage under this Agreement, as respects the terminated Contract, shall expire automatically at the same time and in the same manner. ARTICLE II - CONCURRENCY OF CONDITIONS This Agreement shall follow in all respects the terms and conditions of the Original Contracts (including addenda thereto when accepted by the Retrocessionaire), provided the terms and conditions of the Original Contracts are not inconsistent with the terms and conditions of this Agreement. The Reinsurer agrees to transmit all notices and information pertaining to the subject matter of this Agreement as promptly as possible after receipt thereof on forms mutually agreed as requested by the Retrocessionaire. ARTICLE III - PREMIUM AND COMMISSIONS A. As premium for the reinsurance provided hereunder, the Reinsurer shall retrocede the Retrocessionaire's pro rata share of the premiums ceded to the Reinsurer under the Original Contracts. B. The Retrocessionaire shall allow the Reinsurer retrocession allowances equal to those granted under the Original Contracts. C. The premium due the Retrocessionaire (less retrocession allowances thereon) shall be remitted by the Reinsurer as promptly as possible after the Reinsurer receives its premiums under the Original Contracts. ARTICLE IV - CLAIMS AND BENEFITS A. The Retrocessionaire shall be liable for its pro rata share of all policy claims and benefits the Reinsurer pays or allows under the Original Contracts, and the Retrocessionaire shall pay its pro rata share of any such policy claims and benefits promptly following receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Reinsurer as requested by the Retrocessionaire. B. The Retrocessionaire shall receive its pro rata share of all recoveries made by the Reinsurer in respect of policy claims and benefits subject to this Agreement. C. The Retrocessionaire will be liable for or shall receive its pro rata share of DAC Tax, Guaranty Fund Assessments and corresponding offsets and credits as described under the Original Contracts. ARTICLE V - ACCESS TO RECORDS The Retrocessionaire, by its duly appointed representatives, shall have the right at any reasonable time to examine all papers in the possession of the Reinsurer referring to business effected hereunder. ARTICLE VI - UNAUTHORIZED RETROCESSIONAIRES The Retrocessionaire agrees to fund its share of the Reinsurer's retroceded statutory reserves by: 1. Escrow or trust accounts for the benefit of the Reinsurer; and/or 2. Cash advances; 2 if, without such funding, a penalty would accrue to the Reinsurer on any financial statement it is required to file with the insurance regulatory authorities involved. ARTICLE VII - INSOLVENCY A. In the event of the insolvency of the Reinsurer, all reinsurance shall be payable on the basis of the policies reinsured directly to its liquidator, receiver, conservator or statutory successor, without diminution because of the insolvency of the Reinsurer or because such liquidator, receiver, conservator or statutory successor has failed to pay all or a portion of any claim. B. In the event of the insolvency of the Reinsurer, the liquidator, receiver, conservator or statutory successor shall give the Retrocessionaire written notice of the pendency of a claim on a policy reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of a claim, the Retrocessionaire may investigate such claim and interpose in the name of the Reinsurer, its liqudator, receiver, conservator or statutory successor, but at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which the Retrocessionaire may deem available to the Reinsurer or its liquidator, receiver, conservator or statutory successor. C. The expense thus incurred by the Retrocessionaire shall be chargeable, subject to court approval, against the Reinsurer as part of the expenses of conservation, liquidation or insolvency to the extent of a proportionate share of the benefit which may accrue to the Reinsurer solely as a result of the defense undertaken by the Retrocessionaire. Where two or more retrocessionaires are involved in the same claim and a majority in interest elect to interpose a defense or defenses to such claim, the expense shall be apportioned as though such expense had been incurred by the Reinsurer. ARTICLE VIII - ARBITRATION A. It is the intention of the parties that customs and usages of the business of reinsurance shall be given full effect in the interpretation of this Agreement. The parties shall act in all things with the highest good faith. A dispute or difference between the parties with respect to the operation or interpretation of this Agreement on which an amicable understanding cannot be reached shall be decided by arbitration. The arbitrators are empowered to decide all questions or issues and shall be free to reach their decisions from the standpoint of equity and customary practices of the insurance and reinsurance industry rather than from that of strict law. B. There shall be three arbitrators who shall be active or retired officers of life insurance companies other than the contracting companies or their affiliates. Each of the contracting companies shall appoint one of the arbitrators and these two arbitrators shall select the third. In the event that either contracting company should fail to choose an arbitrator within thirty days after the other contracting company has given notice of its arbitrator appointment, that contracting company may choose two arbitrators, who shall in turn choose a third arbitrator 3 before entering arbitration. If the two arbitrators are unable to agree upon the selection of a third arbitrator within thirty days following their appointment, each arbitrator shall nominate three candidates within ten days thereafter, two of whom the other shall decline and the decision shall be made by drawing lots. C. The arbitrators shall decide by a majority of votes and from their written decision there can be no appeal. The cost of arbitration, including the fees of the arbitrators, shall be borne by the losing party unless the arbitrators decide otherwise. ARTICLE IX - INTERMEDIARY Reinsurance Alternatives - Reinsurance Intermediaries, 7900 Xerxes Avenue South, Minneapolis, Minnesota 55431, is hereby recognized as the intermediary with regard to this Agreement. IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement as of the date undermentioned at: Minneapolis, Minnesota, this 22nd day of December, 1998. ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA By: Robert S. James ----------------------------------- Its: President of Individual Marketing ----------------------------------- LifeUSA INSURANCE COMPANY By: Mark A. Zesbaugh ----------------------------------- Its: Senior Vice President ----------------------------------- 4 EX-10.19 20 MASTER AGREEMENT FOR CASH MANAGEMENT SERVICES EXHIBIT 10.19 MASTER AGREEMENT for CASH MANAGEMENT SERVICES This Master Agreement for Cash Management Services ("Agreement") is entered into this 17th day of February, 1999 between NORWEST BANK SOTA, NATIONAL ASSOCIATION (the "Bank") and the undersigned customer LTCAmerica Holding, Inc. ("the Company"). The Bank offers and provides certain cash management services to its commercial customers, and the Company anticipates that it will from time to time engage the Bank to perform all or some cash management services under this Agreement (the "Services"). The Bank and the Company agree: 1. SCOPE OF THE SERVICES. The Bank shall provide the Company with the cash management services set forth below and those additional Services subsequently agreed to by the Bank. The Services are described in general terms in separate writings which are specifically incorporated into this Agreement (the "Product Descriptions"). The Company agrees to the terms and conditions contained in the applicable Product Description(s); the Bank's user guide (the "Guide"), if any, for each Service it requests; and the Bank's terms and conditions applicable to each account affected by the Services (the "Account Terms"). Delivery and use of a Service shall be conclusively deemed to be agreement to the provisions contained in the applicable Product Description and Guide. The Bank may amend a Product Description, a Guide, or the Account Terms from time to time upon fourteen (14) days prior written notice. The Company acknowledges receiving a copy of the Account Terms and of the Product Description and Guide, if any, for the Services it has initially requested. 2. PERFORMANCE OF THE SERVICES. The Bank shall perform the Services in accordance with reasonable commercial standards applicable to the Bank's business, in conformity with rules, regulations or laws governing the activities of the Bank, and in accordance with this Agreement. 3. TERM. This agreement shall continue in effect unless terminated by either party upon sixty (60) days prior written notice. The Bank may immediately terminate this Agreement without notice to the Company if the Company files, or has filed against it, a petition under the U.S. Bankruptcy Code or a similar state or federal law. Each additional Service shall commerce within a reasonable time after the Bank agrees to provide it and shall continue in effect until terminated by written notice or termination of this Agreement. 4. SERVICE FEES; TAXES; INVOICE; PAYMENT. The Company agrees to pay the Bank for the Services in accordance with the Bank's fee schedule(s). The Bank may modify its fee schedule(s) at any time upon prior notice. The Company also agrees to pay an amount equal to any taxes applicable to the Services, however designated, exclusive of taxes based on the net income of the Bank. Except as otherwise agreed in writing, all fees and taxes shall be charged monthly against the Company's accrued earnings allowance. The Bank may debit the Company's account(s) with the Bank for, or may bill the Company and the Company agrees promptly to pay, any amount by which the fees or taxes exceed such earnings allowance. 5. LIABILITY; INDEMNIFICATION. The Bank shall be responsible only for performing the Services as expressly provided for in this Agreement, and shall be liable only for claims, demands, judgements, expenses and losses incurred by the Company, its directors, officers, employees and agents directly resulting from the Bank's failure to perform in accordance with the Product Description and Guide or the negligence or intentional misconduct of the Bank or its affiliates and agents, in performing those Services (including reasonable attorneys' fees and legal expenses). The Bank shall have no liability for failure to perform or delay in performing the Services if such failure or delay-is due to circumstances beyond the Bank's reasonable control. Each party agrees to make reasonable efforts to prevent such occurrences. In no event shall the Bank have any liability for any consequential, special, punitive or indirect loss or damage. The Company shall promptly furnish proof of loss in written form to the Bank, and shall provide the Bank all reasonable assistance in recovering a loss. If the Company is reimbursed by or on behalf of the Bank, the Bank or its designee shall be subrogated to all rights of the Company. Except to the extent that the Bank is liable under the terms of this Agreement, the Company agrees to indemnify and hold the Bank, its directors, officers, employees and agents harmless form all claims, demands, judgements, and expenses (including their reasonable attorneys' fees and legal expenses) arising out of or in any way connected with the performance of the Services. The Bank and the Company agree that the provisions of this paragraph 5 shall survive termination of this Agreement 6. AFFILIATES. Present and future Bank affiliates may from time to time provide one or more Services under the terms of this Agreement. In that event, the Bank shall notify the Company that the affiliate has agreed to provide the Service(s), the term "Bank" shall include the affiliate with respect to the Service, and the Bank and the affiliate may share any information helpful in providing the Service. The Company acknowledges that its consent to the release of information is not a condition of doing business with the Bank or its affiliates. 7. GENERAL. The laws of the state in which the principal office of the particular Bank providing the Service is located shall govern for all purposes. This Agreement shall constitute the entire agreement between the Bank and the Company and supersede prior oral or written representations, conditions, warranties, understandings, proposals or agreements regarding the Services. Headings do not constitute a part of this Agreement. Any notice or other communication may be sent to the Company at its then current address on file with the Bank. The Bank and the Company will have reasonable time after receipt of any notice or other communication to act on it. No provision may be modified except in writing signed by the party against whom the modification is to be enforced. No waiver of any right on one occasion will be a waiver of the same or any other right on a subsequent occasion. The Bank or the Company may assign this Agreement to any successor by merger, consolidation or corporate reorganization. Any invalidity, in whole or in part of any provision shall not affect the validity of any other provision. The Bank may grant credit to the Company in connection with the Services, but is not required to do so. Delivery and use of any informational Service occurs when the information is provided. The Bank may, without notice, refuse to honor any payment transfer or withdrawal order which would result in an overdraft, even if it has previously allowed overdrafts. The Bank may establish cut-off times, and may change those cut-off times upon reasonable notice to the Company. Unless specifically defined in the applicable Product Description or Guide, the term "banking day" means that part of a business day occurring prior to the cut off time stated in the Bank's funds availability policy, and the term "business day" means that part of every calendar day except Saturdays, Sundays and federal holidays, during which the Bank is open to the public for carrying on substantially all of its banking function. The Bank may disclose any information which in its opinion facilitates the performance of a Service. The Bank may at any time use agents and/or independent contractors to provide all or any portion of a Service upon reasonable notice to the Company. The parties have caused this Agreement to be executed and warrant that their respective signatory, whose signature(s) appears below, has been and is on the date of the Agreement duly authorized by all necessary action in accordance with its governing instruments to execute this Agreement. AGREED TO AND ACCEPTED BY. AGREED TO AND ACCEPTED BY: NORWEST BANK MINNESOTA, LTCAMERICA HOLDING, INC. NATIONAL ASSOCIATION ("COMPANY") ("BANK") By: /s/ Larry M. Lange By: /s/ Bradley E. Barks ------------------ -------------------- Name: Larry M. Lange Name: Bradley E. Barks Title: Vice President Title: Chairman and CFO Date: February 18, 1999 Date: February 17, 1999 PRODUCT DESCRIPTION CONTROLLED DISBURSEMENT AND OPTIONAL DEFERRED FUNDING SERVICES This Product Description contains provisions which, in addition to the provisions contained in the Master Agreement for Cash Management Services entered into between the Bank and the Company (the "Agreement"), shall govern the controlled disbursement and optional deferred funding services to be provided by the Bank (the "Services"). 1. Optional Deferred Funding Service. The Company may chose to use the deferred funding Service by separately notifying the Bank in writing. 2. Accounts. The Company will execute all documents necessary to establish and will maintain a checking account (the "Checking Account") with the Bank's affiliate separately identified in writing (the "Disbursing Bank"). The Company will obtain balance reporting services from the Bank or an affiliate and authorizes the Bank to access those services. The Company will also execute all documents necessary to establish and will maintain a transaction account with the Bank (the "Funding Account"). 3. Determination of Amount of Presentment. Each banking day of the Disbursing Bank, ih-e Bank and the Company will determine, by means of the balance reporting service, the total dollar amount of checks drawn on the Checking Account that have been presented that day. If the Company has chosen to use the deferred funding Service and if a second Federal Reserve Bank presentment is made on any banking day, the Company will be notified of the total Dollar amount of checks that have been presented with each Federal Reserve Bank presentment. 4. Contingent Funding. If the daily, information is not available by the applicable deadline, the Company will use an estimate based on historical in-formation to determine tge amount that will be required to fund the Checking Account. If the Company over funds the Funding Account, earnings credit will be provided on the excess balances at the adjusted earnings credit rate. If the Funding Account is under funded and an overdraft is allowed, the Company will be charged for the amount of the overdraft at the borrowing rate separately agreed to by the Company and the Bank. 5. Transfer Funds to the Checking Account. Neither the Bank nor the Disbursing Bank intends to make a loan to the Company. Upon receipt of (a) notice of the total dollar amount of checks presented as described in Section 3, or (b) determination of an amount that will be required to fund as described in Section 4, the Bank is authorized to charge the Funding Account for the amount(s) and to transfer that amount to the Disbursing Bank in good and collected funds for credit to the Checking Account. If this occurs after a cut-off time established by the Bank, the Bank will make a good faith attempt to transfer sufficient funds to the Disbursing Bank prior to the close of that business day. However, the Bank shall not incur any liability as a result of the Disbursing Bank's nonpayment of a check, unless nonpayment results directly and proximately from the Bank's willful misconduct. 6. Deposit Funds to the Funding Account. Each banking day the Company will deposit good and collected funds to the Funding Account sufficient to cover the amount to be transferred in accordance with Section 5. The Bank may require that the funds be deposited to the Funding Account before the transfer is made. The Bank will determine the amount of good and collected funds in accordance with its applicable published funds availability policy. The Bank may require that any funds to be deposited under this Section 6 be deposited before funds are transferred to the Disbursing Bank. If (i) the Bank has transferred funds for credit to the Checking Account and the Company does not comply with this Section 6 or the Bank has reason to believe that the Company may not comply, or (ii) the Company has chosen to use the deferred funding Service, and the Bank has reason to believe that a deposit made by the Bank on behalf of the Company will be returned unpaid, the Bank is authorized to instruct the Disbursing Bank to return the funds. If the Company has chosen to use the deferred funding Service: 6.1. For checks presented after the first Federal Reserve Bank presentment and prior to the Bank's cutoff time for presentment, the Bank will on behalf of the Company deposit sufficient funds to the Funding Account. 6.2. Deposits made by the Bank on behalf of the Company, may be made at the Bank's discretion, by either depository transfer check or by an entry initiated through an automated clearinghouse (the "ACH"). 6.3. If a deposit is made by ACH, the Bank agrees to give the Company ledger credit on the day the entry is initiated; however, under the ACH rules, ledger credit is provisional and subject to revocation if settlement never becomes final. 7. Protection Against Counterfeit Checks. The Company and the Bank acknowledge that there is a growing risk of loss resulting from the increasing use of counterfeit checks. The Company recognizes that controlled disbursement customers are susceptible to losses from counterfeit checks. The Company is aware that the Bank offers, without charge, a service known as "Positive Pay" which is an effective means of controlling this risk. The Bank has advised the Company that if it does not use the Positive ray service, the Bank will be unable to prevent losses from counterfeit checks and the Company will be treated as having assumed the risk of those losses. EX-10.20 21 SERVICE AGREEMENT EXHIBIT 10.20 SERVICE AGREEMENT THIS SERVICE AGREEMENT is entered into as of January 1, 1999 between LTCAMERICA HOLDING, INC., a Minnesota corporation ("LTCA"), and LIFE USA HOLDING, INC., a Minnesota corporation ("LUSA"). RECITALS WHEREAS, LUSA is experienced in the provision of a variety of services to its insurance company subsidiary; and WHEREAS, LTCA desires to obtain certain of those services for itself and its insurance company subsidiary, LTCAmerica Insurance Company ("LTCA Insurance"); NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Description of Services. LUSA agrees to perform the following services for LTCA: (a) Accounting Services. LUSA shall provide LTCA with any accounting services requested by LTCA, including without limitation services relating to taxes, keeping the general books of account and preparation of any other accounting or statistical records or financial reports. (b) Owners' Services. LUSA shall provide the following services as requested by LTCA: training and education, facilities management and administration of human resources and risk management. (c) Treasury and Investment Services. LUSA shall provide all treasury and investment services requested by LTCA, including without limitation bank and cash management services (including cash receipts), disbursements and policy suspense maintenance and investment operations management and reporting (including asset liability analysis). (d) Data Processing and Information Systems Services. LUSA shall provide all data processing and information systems services requested by LTCA, including without limitation the provision of hardware and software required to develop and administer products and compensate agents. (e) Actuarial Services. LUSA shall provide all services in connection with financial actuarial information necessary for statutory and GAAP financial statements, product development services and services in connection with year end certification of an appointed actuary. 1 (f) Compliance Services. LUSA shall provide services in connection with filing corporate documents necessary to do business in all states in which LTCA Insurance is licensed to do business, filing LTCA products and products similar to LTCA products on the paper of other insurance companies, advertising review and other regulatory activities. (g) Internal Audit Services. LUSA shall provide services required to document the controls in all critical systems and to audit cash. (h) Marketing Services. LUSA shall provide services in connection with the preparation of marketing materials as needed, handling of agent telephone inquiries as needed, and promotion of LTCA in meetings and seminars. (i) Mail and Supply Services. LUSA shall provide LTCA with services in connection with the receiving and sending of mail and the distribution of supplies. 2. Term; Termination. The term of this Agreement shall commence on the date hereof and shall expire on the third anniversary hereof unless sooner terminated or extended. The term of this Agreement shall be automatically extended for successive periods of three years each unless either party gives written notice of cancellation at least 120 days prior to expiration of this Agreement, as extended. In the event that LUSA does not provide the services required hereunder in accordance with this Agreement, LTCA shall so notify LUSA in writing and LUSA shall have ten business days in which to remedy the deficiency. If LUSA has not remedied the deficiency within the cure period, LTCA may terminate this Agreement in whole or with respect to the specific service, and such termination shall be effective as of the date on which written notice is given to LUSA. 3. Relationship. The services provided by LUSA pursuant to this Agreement shall be rendered as an independent contractor, and nothing herein shall be deemed to create a joint venture, partnership or employment relationship between LUSA and LTCA. 4. Compensation. LTCA shall compensate LUSA for the services provided pursuant to this Agreement in accordance with Schedule A hereto, as such schedule is modified from time to time by an amendment thereto executed by the parties. LUSA shall pay all costs incurred by LUSA to provide LTCA with the services provided pursuant to this Agreement. 5. Service Standards; Access. During the term of this Agreement, LUSA will accord LTCA a "most favored customer" status to ensure that the services provided to LTCA by LUSA are of at least the same level (quality, quantity, reliability and response time) of similar services provided by LUSA to its insurance subsidiary. LUSA will permit LTCA and its auditors access to the premises, books and records of LUSA from time to time during normal business hours to review or audit the services provided hereunder, including without limitation adherence to generally accepted accounting principles where applicable. 6. Confidentiality and Security. LUSA acknowledges the confidential nature of all information it may obtain or acquire concerning LTCA, its business and the business of its affiliates during the provision of the services under this Agreement, including without limitation financial information, including but not limited to information concerning products, revenues, 2 profits, markets, sales, trade secrets, agents, key personnel, pricing policies, operational methods, policyholder lists, supplier lists, marketing, distribution, studies, analyses, plans for future development and all other business affairs and methods of the LTCA or any affiliate and any supplier to or customer of LTCA or any affiliate, which is not readily available to the public, whether or not obtained with the permission of the Company. LUSA agrees to maintain in the strictest of confidence all such information, and LUSA will not permit access to such information to any person other than LTCA or its employees or agents, except employees of LUSA who require access to such information to perform the services under this Agreement. LUSA will instruct its employees that such information of LTCA be maintained in the strictest of confidence. 7. Insurance. LUSA, at its expense, will maintain insurance for all risks on the computer equipment and other property used to provide the services provided hereunder for risks customarily covered. 8. Proprietary Rights. LUSA recognizes that LTCA owns the proprietary rights to any reports, plans, products, programs and other property designed by LUSA at LTCA's request, including computer source and object code) established for LTCA during the term of this Agreement, and such property shall remain the exclusive property of LTCA. 9. Indemnification. LUSA agrees to indemnify, defend and hold LTCA and its affiliates harmless from any and all claims, demands, suits, liabilities, costs and expenses (including attorneys' fees) arising from or in any way connected with the performance of the services contemplated hereunder by LUSA, except to the extent such nonperformance is the result of the gross negligence or willful misconduct of LTCA. 10. Arbitration. The parties hereto agree that all disputes arising under or relating to this Agreement or the transactions contemplated hereunder shall be subject solely to binding and nonappealable arbitration to be held in Minneapolis, Minnesota, in accordance with the rules of the American Arbitration Association under the commercial rules then in effect. The AAA shall recommend three arbitrators who are knowledgeable in the field of life insurance. The parties shall agree upon one of the three arbitrators or, if no arbitrator is mutually agreed upon within 15 days of submission, the AAA shall appoint one of the three arbitrators within 30 days after such selection period. The award rendered by the arbitrator shall include costs of arbitration and reasonable attorneys' fees and fees of experts and other witnesses, but shall not include punitive damages against either party. Notwithstanding this provision, appropriate injunctive relief may be sought by LTCA with respect to the obligations of LUSA under Section 6 hereof. 11. Survival. Notwithstanding any termination of this Agreement, the confidentiality obligations of LUSA under Section 6 and the indemnification obligations of LUSA under Section 9 shall survive any such termination. 12. Assignment. Neither LTCA nor LUSA, directly or indirectly, may sell, assign or transfer any of its rights or obligations contemplated under this Agreement without first obtaining the written consent of the other party. This Agreement shall inure to the benefit of and be binding upon the parties, their successors, trustees, permitted assigns, receivers and legal representatives but shall not inure to the benefit of any other person or entity. 3 13. Entire Agreement. This Agreement contains the entire and only agreement between the parties with respect to the subject matter hereof, and no oral statements or representations or prior written matter not contained herein or therein shall have any force or effect. This Agreement shall not be modified in any way except by a writing subscribed by the parties by their duly authorized representatives. No amendment of this Agreement or its exhibits or schedules shall be of any force or effect unless reduced to writing and executed by a writing of the parties in the same manner as the present Agreement. 14. Notices. All notices under this Agreement must be in writing and shall be addressed as follows: To LTCA: LTCAmerica Holding, Inc 300 South County Highway 169, Suite 95 Minneapolis, MN 55426 Attention: Chief Financial Officer Telephone: 612-525-6009 Facsimile: 612-525-6553 To LUSA: Life USA Holding, Inc. 300 South County Highway 169, Suite 95 Minneapolis, MN 55426 Attention: Chief Financial Officer Telephone: 612-525-6013 Facsimile: 612-525-6102 All notices, consents, waivers, and other communications under this Agreement shall be deemed to have been duly given when (i) delivered by hand (with written confirmation of receipt), (ii) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (iii) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth above (or to such other addresses and facsimile numbers as a party may designate by notice to the other party). 15. Governing Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in all respects according to the internal laws of the State of Minnesota, determined without reference to conflict of law principles. 16. Severability. In the event that any of the provisions of this Agreement are held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision thereof and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein and the parties hereto shall to the fullest extent possible modify any such provision to the 4 extent required to carry out the general intention of this Agreement and to impart validity thereto. 17 No Waiver. No forbearance, indulgence, or relaxation or inaction by any party at any time to require performance of any provisions of this Agreement shall in any way affect, diminish or prejudice the right of a party hereto to require performance of that provision, and any waiver or acquiescence by any party hereto in any breach of any provision of this Agreement shall not be construed as a waiver or acquiescence in any continuing or succeeding breach of such provision, a waiver or an amendment of the provision itself or a waiver of any right under or arising out of this Agreement or acquiescence in or recognition of rights and/or positions other than as expressly stipulated in this Agreement. 18. Counterparts; Headings This Agreement may be executed in any number of counterparts each of which shall be deemed to be an original and all of which shall constitute one and the same Agreement. No heading or caption contained in this Agreement shall be considered in interpreting any of its terms or provisions. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first written above. LIFEUSA HOLDING, INC. By: /s/ Mark A. Zesbaugh -------------------- Name: Title: CFO LTCAMERICA HOLDING, INC. By: /s/ Bradley E. Barks -------------------- Name: Title: CFO 6 SCHEDULE A SERVICES AND COMPENSATION
Service Area Service Provided Method of Charge Rate Actuarial (33) Product Development Hourly by project 95 Product Filing Hourly by project 95 Monthly Reporting Monthly Retainer 3,563 Year-end Reporting Monthly Retainer 100 Compliance (34) Product Filing and Approval Hourly by project 61 Advertising Approval Monthly Retainer 1,220 Regulatory Monthly Retainer 610 Corp. Filings Monthly Retainer 1,845 Overhead Monthly Retainer 1,288 Corp. Accounting (22) Sr. Mgmt - Ins. Co. Monthly Retainer 5,000 Internal Audit (12) Documentation Monthly Retainer 3,206 Audit - Internal Monthly Retainer Security Monthly Retainer 529 Other Monthly Retainer 266 Investment (27) Accounting and Reporting Monthly Retainer 3,355 Analysis Monthly Retainer 600 ALM Annual year end 4,550 Policies and Design Once in January 5,800 Treasury (23) 401(k) & Stock Options Monthly Retainer 303 Financial Reporting - Shares Monthly Retainer 69 Cash Management Monthly Retainer 1,210 Suspense Processing Monthly Retainer 4,400 Info. Services (92,75,94) Development Hourly by project 75 Telecommunication - Not LD Actual Cost per month 6,700 Telecommunication - LD Actual Cost per month 10,000 Technical Services Monthly Retainer 23,920 Info. Management (93) Development Hourly by project 75
7
Service Area Service Provided Method of Charge Rate Mail/Supply (87) Workshops By Piece 44.000 Supply Orders By Piece 6.250 Starter Kits Per Kit 0.900 Mailings (1 per Qtr) By Piece 0.030 Out-going Mail By Piece 0.115 In-coming Mail By Piece 0.070 Marketing (86) Prepare marketing material By Piece 4,000 FASTeam - overflow Phone per Call - Commercials on the road per Workshop 60 Software Monthly Retainer 10,000 Owners Services (73,74) Training (73) Monthly Retainer 1,000 Facilities (74) per Sq. Ft. 24.00 Owners Council/CBO Monthly Retainer 2,282 Holding Co. Svc Fee % of Ceded Revenue 2.5% % of Retained Revenue 1.0%
8 EX-10.21 22 EMPLOYEE LEASING AGREEMENT EXHIBIT 10.21 EMPLOYEE LEASING AGREEMENT THIS EMPLOYEE LEASING AGREEMENT is entered into as of December 22, 1998, between LTCAmerica Holding, Inc., a Minnesota corporation ("LTCA"), and Life USA Holding, Inc., a Minnesota corporation ("LUSA"), RECITALS WHEREAS, LUSA employs persons with knowledge and experience in the administration of insurance products, including without limitation underwriting, marketing, agent compensation, policy administration, claims processing, compliance, actuarial services and benefits and claims and information services; and WHEREAS, LTCA is a newly formed insurance holding company which desires to lease certain employees from LUSA to provide administrative services to LTCA and an insurance subsidiary to be acquired by LTCA and known as Capitol Bankers Life Insurance Company ("Insurance"), NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I LEASED EMPLOYEES SECTION 1.1. GENERAL PARAMETERS. It is the intention of the parties to this Agreement that LUSA shall make available for lease by LTCA those employees required by LTCA to provide certain services to market and administer the business of LTCA and Insurance, subject at all times to the business requirements of LUSA (the "Leased Employees"). Nothing herein shall require LTCA to accept any employee identified by LUSA, and LTCA shall at all times be free to hire its own employees or enter into separate arrangements with LUSA or third parties for the outsourcing of services. SECTION 1.2. SPECIFICATION OF LEASED EMPLOYEES. LTCA shall specify to LUSA the positions for which it requires Leased Employees, including the skill sets and experience for each position. Promptly following receipt of such information, LUSA shall prepare and submit to LTCA a list of employees of LUSA satisfying LTCA's requirements and information with respect to the skill set and experience of each such employee. If LUSA does not currently have employees with the appropriate skill sets and experience, it shall secure such employees as expeditiously as practicable. SECTION 1.3. SELECTION OF LEASED EMPLOYEES. Upon receipt of information identifying those persons available for lease by LTCA, LTCA shall determine the employees of LUSA that it wishes to lease under this Agreement, which determination shall be made by LTCA in its sole discretion. SECTION 1.4. CONTROL AND DIRECTION OF LEASED EMPLOYEES. Nothing herein shall be construed as altering the employer/employee relationship of LUSA and the Leased Employees and the ultimate right of LUSA to control and direct the services provided by the Leased Employees pursuant to this Agreement, provided that LTCA shall be solely responsible for the means and details by which those services are provided, including without limitation the authority to set work rules and hours, establish job descriptions, allocate and reallocate job responsibilities, review performance and change job assignments. If at any time LTCA determines that it no longer needs the services of a particular Leased Employee, whether by reason of a change in LTCA's requirements, dissatisfaction of the services of a Leased Employee or any other reason, LTCA may notify LUSA that the particular Leased Employee is no longer subject to the provisions of this Agreement and is therefore solely the responsibility of LUSA. SECTION 1.5. COMPENSATION OF LEASED EMPLOYEES. LUSA shall be solely responsible for compensating all Leased Employees, including salary and benefits, required premiums for unemployment and workers' compensation insurance and employer FICA contributions, and shall be solely responsible for all lawful payroll deductions including federal and state income taxes and employee's FICA contributions. All Leased Employees shall be entitled to all incidents of employment by LUSA, including without limitation LUSA stock options, bonuses, personal days, health and medical benefits and 401(k) contributions. Salaries of Leased Employees shall be established by LUSA, subject to such modifications as are mutually acceptable to LUSA and LTCA. SECTION 1.6. PAYMENT FOR LEASED EMPLOYEES. LTCA shall provide LUSA with all information reasonably requested by it in order to provide compensation to Leased Employees, including identification of work and personal leave days. LTCA shall reimburse LUSA for all costs attributable to compensation and the administration of employees and employee records of the Leased Employees on or before the 15th and the last day of each calendar month based on a statement provided to LTCA by LUSA containing such information as is reasonably required by LTCA. SECTION 1.7. NONDISCRIMINATION. LTCA agrees that no Leased Employee will be denied work or subject to different treatment under this Agreement on the grounds of race, color, national origin or sex. LTCA further agrees that it will comply with the provisions of the Civil Rights Act of 1964 and other applicable local, state and federal employment laws and the regulations which implement such laws. SECTION 1.8. MUTUAL COOPERATION. Notwithstanding anything herein to the contrary, LTCA and LUSA will cooperate with each other in the defense of any claim brought by a Leased Employee against either party. 2 ARTICLE II INSURANCE SECTION 2.1. GENERAL LIABILITY INSURANCE. During the term of this Agreement, the Leased Employees shall be covered by LTCA's general liability insurance with limits reasonably acceptable to LUSA. LUSA shall be named as an additional insured on such insurance. At the request of LUSA, LTCA shall provide LUSA with a certificate or other proof that such insurance is in effect. The requirements of this Section 2.1 may be satisfied by inclusion of LTCA under LUSA's insurance policies with the appropriate reimbursement by LTCA to LUSA. SECTION 2.2. PROFESSIONAL LIABILITY INSURANCE. During the term of this Agreement, LUSA shall carry and pay the premiums on professional liability insurance providing coverage and protection for LTCA and LUSA with respect to acts or omissions in connection with services performed by the Leased Employees. LUSA shall have control over the settlement of any claims or litigation brought against it or LTCA as a result of the acts or omissions of the Leased Employees while providing services to LTCA. Settlement of any such claim or litigation against LUSA or LTCA will not be made without the prior written consent of LTCA. LUSA agrees to indemnify and hold LTCA harmless from and against any liability, claim, loss, attorneys' fees, interest or other costs or expenses of whatever kind or nature incurred by LTCA as a result of either of the deductible under any policy of professional liability insurance or the coverage or limits of coverage under any such policy. At the request of LTCA, LUSA shall provide LTCA with a certificate or other proof that the insurance required by this Section 2.2 is in effect. The insurance required by this Section shall be deemed to be primary as against any insurance carried by LTCA, including self-insurance by LTCA. The requirements of this Section 2.2 with respect to professional liability insurance may be satisfied by inclusion of LTCA under LUSA's insurance policies with appropriate reimbursement by LTCA to LUSA. ARTICLE III INDEMNIFICATION SECTION 3.1. INDEMNIFICATION BY LUSA. LUSA agrees to indemnify and hold LTCA harmless from any and all liability, loss, expense (including reasonable attorneys' fees and costs), or other claims for injury or damages arising out of the performance of duties by the Leased Employees for LTCA, including without limitation, those related to legally required employment taxes, alleged violations of the Fair Labor Standards Act or alleged violations of any other law, regulation or ordinance applicable to the employment of employees, except for those claims which arise out of the gross negligence or intentional misconduct of LTCA, its officers, agents or employees. SECTION 3.2. INDEMNIFICATION BY LTCA. LTCA agrees to indemnify and hold LUSA harmless from any and all liability, loss, expense (including reasonable attorneys' fees and costs), or other claims for injury or damages arising out of the performance of this Agreement by LTCA, including without limitation those related to the supervision and work conditions of the 3 Leased Employees, except for those claims which arise out of the gross negligence or intentional misconduct of LUSA, its officers, agents or employees. ARTICLE IV TERM AND TERMINATION OF AGREEMENT SECTION 3.1. TERM. This Agreement shall commence on the date hereof and shall continue for a term ending on December 31, 1999, unless terminated earlier pursuant to Section 3.2 hereof. SECTION 3.2. TERMINATION OF AGREEMENT. This Agreement is subject to termination upon the occurrence of any one of the following events: (a) At any time by the mutual written agreement of LTCA and LUSA, or (b) At the end of the initial term or any extension thereof if either party gives notice of termination not later than December 1 of any year. (c) By the nondefaulting party upon a material default by the other party of any condition of this Agreement and failure to cure such default within 5 days after written notice to the defaulting party specifying the default, provided that the nondefaulting party shall inform the defaulting party of such termination by written notice. ARTICLE 5 MISCELLANEOUS PROVISIONS SECTION 5.1. NONCREATION OF THIRD PARTY RIGHTS. Nothing in this Agreement confers upon or creates any rights or claims for any person or entity not a party to this Agreement, including, but not limited to, any Leased Employee, and this Agreement may not be the basis for any claim of any nature whatsoever by any such person or entity against LTCA and/or LUSA. Further, nothing in this Agreement is intended in any way to create any contractual or other rights for any Leased Employee against either LTCA or LUSA. This Agreement shall not constitute an express or implied contract, promise, commitment or guarantee of employment, for any period or duration, by either LTCA and/or LUSA with any Leased Employee. SECTION 5.2. RELATIONSHIP OF PARTIES. In making and performing this Agreement, the parties hereto act and shall act at all times as independent contractors, and nothing contained in this Agreement shall be construed or implied to create a partnership or joint venture between the parties. LUSA and LTCA each expressly reserve the right to enter into the same or similar arrangements with other individuals or organizations. SECTION 5.3. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns and may not be assigned to any other person without the prior written consent of the other party. 4 SECTION 5.4. ENTIRE AGREEMENT. This Agreement represents the entire understanding between the parties and cannot be amended, altered, supplemented, modified or waived, in whole or in part, except by a writing duly signed by both parties. SECTION 5.5. NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person or received by confirmed facsimile or by registered or certified mail (postage prepaid, return receipt requested) addressed to the respective parties, as follows: If to LUSA: Life USA Holding, Inc. 300 South Highway 169, Suite 95 Minneapolis, Minnesota 55426-1191 Attn: Margery Hughes, Chief Operating Officer If to LTCA: LTCAmerica Holding, Inc. 300 South Highway 169, Suite 95 Minneapolis, Minnesota 55426-1191 Attn: Robin Aeshliman, Chief Operating Officer SECTION 5.6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed effective as of the date set forth above. LIFE USA HOLDING, INC. By: /s/ Mark A. Zesbaugh ----------------------------------- Name: --------------------------------- Title: CFO -------------------------------- LTCAMERICA, INC. By: /s/ Bradley E. Barks ----------------------------------- Name: --------------------------------- Title: CFO -------------------------------- EX-10.22 23 1998 STOCK OPTION PLAN EXHIBIT 10.22 LTCAMERICA HOLDING, INC. 1998 STOCK OPTION PLAN ------------------------------ PART I PURPOSES; DEFINITIONS; SHAREHOLDER APPROVAL; RESERVATION OF SHARES; AND PARTICIPATION IN PLAN ARTICLE I Purposes 1.1 Purposes of Plan. The purpose of this LTCAmerica Holding, Inc. 1998 Stock Option Plan (the "Plan") is to provide incentives to employees of and consultants to of the Company and/or its Subsidiaries who contribute, and are expected to contribute, to the success of the Company and its Subsidiaries, to provide a means of rewarding outstanding performance, and to enhance the interest of such employees and consultants in the Company's continued success and progress by providing them with a proprietary interest in the Company. Further, this Plan is designed to enhance the Company's ability to maintain a competitive position in attracting and retaining qualified personnel and consultants necessary for the continued success and progress of the Company. ARTICLE II Definitions 2.1 Certain terms used herein shall have the meaning below stated, subject to the provisions of Section 7.1. "Board" or "Board of Directors" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the committee appointed by the Board to administer this Plan pursuant to Article VII or, if no Committee is appointed by the Board, means the Board. "Common Stock" means, subject to the provisions of Section 9.3, the presently authorized common stock of the Company, par value $.01 per share. "Company" means LTCAmerica Holding, Inc., a Minnesota corporation. "Consultant" means any person providing services to the Company or any Subsidiary who is not an Employee of the Company. "Disability" means (subject to Section 6.2) a physical or mental impairment of sufficient severity such that an Employee is permanently unable to continue his employment with the Company as determined by the Committee. "Employee" means an employee (including an officer) of the Company or of any Subsidiary of the Company. "Fair Market Value" means the fair market value of the Company's Common Stock as determined by the Committee on the basis of available prices for such Common Stock or in such manner as may be authorized by applicable regulations under the Code. "Incentive Stock Option" means an option to purchase Common Stock, granted by the Company to an Employee pursuant to Section 5.1, which is intended to meet the requirements of Section 422A of the Code and which is designated at the time of the award of an Incentive Stock Option. "Non-Statutory Option" means an option to purchase Common Stock, granted by the Company to an Optionee or a Consultant pursuant to Section 5.1, which is not an Incentive Stock Option. "Option" means an Incentive Stock Option or a Non-Statutory Option. "Optionee" means the holder of an Option granted under the Plan. "Plan" means the LTCAmerica Holding, Inc. 1998 Stock Option Plan, as set forth herein and as from time to time amended. "Subsidiary" means a subsidiary or parent corporation, as defined in Section 425(e) and (f) of the Code, with respect to the Company. ARTICLE III Shareholder Approval; Reservations of Shares 3.1 Shareholder Approval. This Plan shall be subject to approval by the affirmative vote of the holders of a majority of the Company's Common Stock present or represented and entitled to vote thereon at a meeting of shareholders, which approval must be obtained no later than December 7, 1999. 3.2 Shares Reserved Under Plan. Subject to adjustment under the provisions of Section 9.3 hereof, the maximum number of shares of Common Stock which may be issued and sold under this Plan is 2,000,000 shares. Such shares may be either authorized and unissued shares or shares issued and thereafter acquired by the Company. Shares issued pursuant to this Plan shall be subject 2 to all applicable provisions of the Articles of Incorporation and Bylaws of the Company in existence at the time of issuance of such shares and at all times thereafter. If Options granted under this Plan shall terminate or cease to be exercisable by reason of expiration, surrender for cancellation or otherwise without having been wholly exercised, new Options may be granted under this Plan covering the number of shares to which such termination or cessation relates. At no time may the sum of the maximum number of shares issuable under outstanding Options granted under this Plan and the number of shares previously issued under Options granted under this Plan exceed the maximum number of shares that may be issued and sold under this Plan, as above stated. ARTICLE IV Participation in Plan 4.1 Eligibility to Receive Options. Options under this Plan may be granted only to (a) Employees who are employed by the Company or a Subsidiary on the date the Option is granted and who the Committee believes are in a position to make an important contribution to the success of the Company, and (b) Consultants of the Company or a Subsidiary who the Committee believes are in a position to make important contributions to the success of the Company, all as determined by the Committee. 4.2 Participation Not Guarantee of Employment. Nothing in this Plan or in the instrument evidencing the grant of an Option shall in any manner be construed to limit in any way the right of the Company or a Subsidiary to terminate an Employee's employment at any time without regard to the effect of such termination on any rights such Employee would otherwise have under this Plan, or give any right to such an Employee to remain employed by the Company or a Subsidiary thereof in any particular position or at any particular rate of compensation. PART II OPTIONS; TERMINATION OF EMPLOYMENT AND DEATH ARTICLE V Options 5.1 Grants of Options. (a) Grant. The Committee may grant Incentive Stock Options and/or Non-Statutory Options to Employees and Non-Statutory Options to Consultants, subject to the limitations provided in Section 7.1. All Options under this Plan shall be granted within ten years of December 7, 1998, the date on which this Plan was adopted by the Board of Directors subject to approval of the Plan by shareholders. 3 (b) Option Price. The purchase price per share of Common Stock under each Incentive Stock Option and Non-Statutory Option shall be determined by the Committee but shall be not less than 100% of the Fair Market Value per share of such Common Stock on the date the Option is granted for Incentive Stock Options and 85% of the Fair Market Value per share of such Common Stock on the date the Option is granted for Non-Statutory Options; provided that no more than ten percent (10%) of the Non-Statutory Options granted under the Plan (determined at the time of grant) shall be granted at an exercise price below Fair Market Value per share. The purchase price per share may be subject to adjustment in accordance with the provisions of Section 9.3 hereof. (c) Options Agreements. Options shall be evidenced by option agreements in such form and containing such terms and conditions as the Committee shall approve, which terms and conditions need not be the same for all Options. (d) Options Nontransferable. An Option granted under this Plan shall by its terms be nontransferable by the Optionee otherwise than by will or the laws of descent and distribution, and, during the lifetime of the Optionee, shall be exercisable only by such Optionee. No transfer of an Option by an Optionee by will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will and/or such other evidence as the Committee may determine necessary to establish the validity of the transfer. (e) Substitution and Cancellation. The Committee, in its sole discretion, may grant to an Optionee who has been granted an Option under this Plan, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price lower (or higher) than the purchase price provided in the Option so surrendered and cancelled and containing such other terms as the Committee may deem appropriate, subject to Section 5.1(b) and such other limitations or restrictions with respect to an Incentive Stock Option as may be imposed by the Code; provided that the number of outstanding Options under the Plan which have been issued in the exchange referred to in this sentence shall not exceed ten percent (10%) of the outstanding Options under the Plan (determined at the time of such exchange). 5.2 Exercise. (a) Term of Options; Vesting; and Exercise. The term of each Option granted under this Plan shall not exceed ten (10) years from the date of grant. An Option granted under this Plan shall become vested at such rate and on such conditions as the Committee shall determine at the time such Option is granted. (b) Exercise; Payment on Exercise. Options shall be exercised by delivering to the Company an exercise notice in the form prescribed by the Committee. No shares of Common Stock shall be issued on the exercise of an Option unless paid for in full at the time of purchase as provided in the next sentence and until the provisions of 9.4 shall have been satisfied. Payment for shares of Common Stock purchased upon the exercise of an Option shall be made (i) in cash, or (ii) in whole or in part in shares of Common Stock held by the Optionee for at least six months and valued at the then Fair Market Value thereof, or (iii) by delivery to the Company of irrevocable 4 instructions to the Optionee's broker, which instructions and broker shall be satisfactory to the Company, to promptly deliver to the Company the total purchase price for the shares of the Option being exercised from the sale proceeds for such shares or the loan proceeds for such shares or any other securities which the Optionee may have in his account with such broker, and the Company will deliver such shares directly to such broker in accordance with such procedures as the Committee may establish, which alternative forms of payment may be permitted by the Committee at the time the Option is granted or at any time thereafter during the term of the Option. Stock certificates for the shares of Common Stock so paid for will be issued and delivered to the person entitled thereto only at the Company's office in Minneapolis, Minnesota. No Optionee shall have any rights as a shareholder with respect to any share of Common Stock covered by an Option unless and until such Optionee shall have become the holder of record of such share and, except as otherwise permitted in Section 9.3 hereof, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property or distributions or other rights) in respect of such share for which the record date is prior to the date on which such Optionee shall have become the holder of record thereof. (c) Dissolution, Liquidation, Etc. If at any time after an Option has become exercisable and prior to its exercise and expiration, a voluntary dissolution, liquidation (other than a liquidation into another corporation which agrees to continue this Plan) or winding up of the affairs of the Company shall be proposed, the Company shall cause notice in writing to be mailed to each person holding an Option under this Plan, which notice shall be mailed not less than twenty days prior to the closing of the transfer books of the Company or the record date for determination of the holders of Common Stock of the Company entitled to participate in such dissolution, liquidation or winding up, as the case may be, to the end that during such notice period the holder of any Option, to the extent that the same is then exercisable by such holder, subject to the terms of Article V hereof, may purchase Common Stock in accordance with the terms of the Option and be entitled, in respect of the number of shares so purchased, to all the rights of the other holders of Common Stock of the Company with respect to such proposed dissolution, liquidation or winding up of the affairs of the Company. Each Option at the time outstanding and all rights thereunder shall terminate at the close of business on the twentieth day after mailing of such notice to the holder of such Option or on the record date for determination of holders of Common Stock entitled to participate in such dissolution, liquidation or winding up, whichever date is later. (d) Exercise of Options. In the event that an Optionee exercises Options, such Optionee shall comply with all requirements set forth in the option agreement for such Options in connection with the purchase of shares of Common Stock under this Plan. 5.3 Incentive Stock Options. (a) Annual Limitation. In no event shall any Optionee be granted an Incentive Stock Option under this Plan or any other plan of the Company or any Subsidiary if such option would, during the calendar year in which the option first becomes exercisable when combined with other Incentive Stock Options which first become exercisable in such calendar year, entitle such Optionee, to purchase shares of Common Stock or shares of any Subsidiary having an aggregate fair market value (determined as of the time such option or options were granted) in excess of $100,000. In the event an option granted hereunder is designated an Incentive Stock Option and exceeds the limitations set forth in this Section 5.4(a), whether at the time of grant or thereafter, such option shall be an Incentive Stock Option only to the extent permitted hereby and the balance thereof shall be a Non-Statutory Option for the purposes of this Plan. (b) Incentive Stock Options Granted to Ten Percent Shareholders. No Incentive Stock Option shall be granted to any Employee who owns, directly or indirectly pursuant to Section 425(d) of the Code, stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Subsidiary, unless at the time such Incentive Stock Option is granted, the price of the Incentive Stock Option is at least 110% of the Fair Market Value of the Common Stock subject to the Incentive Stock Option and such Incentive Stock Option, by its terms, is not exercisable after the expiration of five (5) years from the date such Incentive Stock Option is granted. (c) Notice. Each Optionee shall give prompt notice to the Company of any disposition of shares acquired upon exercise of an Incentive Stock Option if such disposition occurs within either two years after the date of grant or one year after the date of transfer of such shares to the Optionee upon the exercise of such Incentive Stock Option. (d) Consent. To the extent appropriate to avoid a "modification" or other event described in Section 425(h) of the Code, a Optionee's rights under an Incentive Stock Option (including the rights to pay the exercise price in Common Stock) shall be set forth in the option agreement for such Option entered into at the date of grant, so as to preclude any requirement that further Committee consent be given after the date of grant. ARTICLE VI Termination of Employment 6.1 Termination of Employment. Unless earlier terminated in accordance with its terms, an Option shall terminate 30 days after any termination of the Optionee's employment with the Company or any Subsidiary if the Optionee is an Employee or, in the case of death or disability of any Optionee, 90 days after the death or disability of such Optionee. Notwithstanding the previous sentence, the Committee shall be authorized to extend the period of time within which an Option may be exercised, provided that such date is no later than ten years from the date of the grant of such Option. 6.2 Employment. For all purposes of this Plan, and any Option granted hereunder, "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). 6 PART III ADMINISTRATION, AMENDMENT AND TERMINATION OF PLAN; MISCELLANEOUS ARTICLE VII Administration of Plan 7.1 The Committee. This Plan shall be administered by a Committee (which shall be the Board unless the Board appoints a committee pursuant hereto) of three or more persons, all of whom shall be members of the Board and shall be appointed by, and serve at the pleasure of, the Board. No person shall serve as a member of the Committee if such person is eligible, or at any time within one year prior to appointment as a member was granted any Options under this Plan or granted or awarded equity securities under any other plan of the Company or any of its affiliates. A majority of the Committee shall constitute a quorum thereof and the actions of a majority of the Committee at a meeting at which a quorum is present, or actions unanimously approved in writing by all members of the Committee, shall be the actions of the Committee. Vacancies occurring on the Committee shall be filled by the Board. The Committee shall have full and final authority to interpret this Plan and the agreements evidencing Options granted hereunder (which agreements need not be identical), to prescribe, amend and rescind rules and regulations, if any, relating to this Plan and to make all determinations necessary or advisable for the administration of this Plan. The Committee's determination in all matters referred to herein shall be conclusive and binding for all purposes and upon all persons including, but without limitation, the Company, the shareholders of the Company, the Committee and each of the members thereof, and the Employees and Consultants of the Company or a Subsidiary, and their respective successors in interest. 7.2 Liability of Committee. No member of the Committee shall be liable for anything done or omitted to be done by such member or by any other member of the Committee in connection with this Plan, except for the willful misconduct or gross negligence of such member. The Committee shall have power to engage outside consultants, auditors or other professional help to assist in the fulfillment of the Committee's duties under this Plan at the Company's expense. 7.3 Determinations of the Committee. In making its determinations concerning the Employees and Consultants, who shall receive Options as well as the number of shares to be covered thereby and time or times at which they shall be granted, the Committee shall take into account the nature of the services rendered by the respective Employees and Consultants, their past, present, and potential contribution to the Company's success and such other factors as the Committee may deem relevant. The Committee shall also determine the form of option agreements to be issued under this Plan and the terms and conditions to be included therein, provided such terms and conditions are not inconsistent with the terms of this Plan. In its discretion or in accordance with a direction from the Board, the Committee may waive any provisions of any option agreement, provided such waiver is not inconsistent with the terms of this Plan as then in effect. 7 ARTICLE VIII Amendment and Termination of Plan 8.1 Amendment of Plan. (a) Generally. The Plan may be amended at any time and from time to time by the Board of Directors of the Company but no amendment which (i) increases the aggregate number of shares of Common Stock which may be issued and sold under this Plan other than adjustments pursuant to Section 9.3, (ii) decreases the minimum option price provided in this Plan, (iii) extends the period during which Options may be granted under this Plan, or (vi) changes the class of Employees eligible to receive Options, shall be effective unless and until the same is approved by the affirmative vote, in person or by proxy, of the holders of a majority of the shares of Common Stock of the Company present and entitled to vote at a meeting held to take such action at which a quorum is present. No termination or amendment of this Plan, without the consent of the holder of any Option then existing, may terminate such holder's Option or materially and adversely affect such holder's rights thereunder. (b) Amendments Relating to Incentive Stock Options. To the extent applicable, this Plan is intended to permit the issuance of Incentive Stock Options in accordance with the provisions of Section 422A of the Code. The Plan may be modified or amended at any time, both prospectively and retroactively, and in such manner as to affect Incentive Stock Options previously granted (after taking into account Section 425(h) of the Code, relating to "modifications," etc.), if such amendment or modification is necessary for this Plan and the Incentive Stock Options granted hereunder to qualify under said provisions of the Code. 8.2 Termination. The Board of Directors of the Company may at any time terminate this Plan as of any date specified in a resolution adopted by the Board. If not earlier terminated, this Plan shall terminate on the tenth anniversary of the effective date of the Plan. No Options may be granted after this Plan has terminated. After this Plan shall terminate, the function of the Committee will be limited to supervising the administration of Options previously granted. ARTICLE IX Miscellaneous Provisions 9.1 Restrictions Upon Grant of Options. The registration or qualification under any Federal or state law of any shares of Common Stock to be granted pursuant to this Plan (whether to permit the grant of Options or the resale or other disposition of any such shares of Common Stock by or on behalf of the Optionees receiving such shares) may be necessary or desirable and, in any such event, delivery of the certificates for such shares of Common Stock shall, if the Board of Directors, in its sole discretion, shall determine, not be made until such listing, registration or qualification shall have been completed. 9.2 Restrictions upon Resale of Unregistered Stock. If the shares of Common Stock that have been transferred to a Optionee pursuant to the terms of this Plan are not registered under the 8 1933 Act, pursuant to an effective registration statement, such Optionee, if the Committee shall deem it advisable, may be required to represent and agree in writing (i) that any shares of Common Stock acquired by such Optionee pursuant to this Plan will not be sold except pursuant to an effective registration statement under the 1933 Act, or pursuant to an exemption from registration under the 1933 Act and (ii) that such Optionee is acquiring such shares of Common Stock for such Optionee's own account and not with a view to the distribution thereof. 9.3 Adjustments. In the event of any change (through recapitalization, merger, consolidation, stock dividend, split-up, or amount of the Company's capital stock (or any other transaction described in Section 425(a) of the Code) after any Option is granted hereunder and prior to the exercise thereof, the Option, to the extent that it has not been exercised, shall entitle the holder to such number and kind of securities as such holder would have been entitled to had such holder actually owned the stock subject to the Option at the time of the occurrence of such change. If any such event should occur, the number of shares subject to Options which are authorized to be issued hereunder, but which have not been issued, shall be similarly adjusted. If any other event shall occur, prior to the exercise of an Option granted to an Optionee hereunder, which shall increase or decrease the amount of capital stock outstanding and which the Committee, in its sole discretion, shall determine equitably requires an adjustment in the number of shares which the holder should be permitted to acquire, such adjustment as the Committee shall determine may be made, and when so made shall be effective and binding for all purposes of this Plan. 9.4 Withholding of Taxes. Each Optionee who exercises an Option to purchase Common Stock shall, prior to the issuance of any shares or payment of any amounts to the Optionee, pay to the Company, or make arrangements (including withholding of shares of Common Stock purchased upon exercise of the Option at the Fair Market Value thereof) satisfactory to the Committee regarding payment of, any taxes of any kind required by law to be withheld with respect to the transfer to such Optionee of such shares of Common Stock and/or amounts upon exercise of such Option. 9.5 Use of Proceeds. The proceeds from the sale of Common Stock pursuant to Options granted under this Plan shall constitute general funds of the Company and may be used for such corporate purposes as the Company may determine. 9.6 Other Grants. Options may be granted under this Plan from time to time in substitution for stock options held by employees of other corporations who are or are about to become employees of the Company or a Subsidiary as the result of a merger or consolidation of the employing corporation with the Company or a Subsidiary, or the acquisition by the Company or a Subsidiary of the assets of the employing corporation, or the acquisition by the Company or a Subsidiary of stock of the employing corporation as the result of which it becomes a Subsidiary of the Company. The terms and conditions of the substituted Options so granted may vary from the terms and conditions set forth in Part II to such extent as the Committee may deem appropriate to conform, in whole or in part, to the provisions of the substituted stock incentives. 9.7 Other Benefits. Nothing contained herein shall prevent the Company from establishing other incentive plans in which Employees and Consultants under the Plan may also participate. No award under this Plan shall be considered as compensation in calculating any 9 insurance, pension or other benefit for which the recipient is eligible unless any such insurance, pension or other benefit is granted under a plan which expressly provides that compensation under this Plan (and specifying the type of such compensation) shall be considered as compensation under such plan. 10 OPTION EXERCISE FORM LTCAmerica Holding, Inc. Suite 99, Interchange North Building 300 South Highway 169 Minneapolis, Minnesota 55426 Attention: Corporate Secretary Dear Sir: I hereby exercise the following Stock Options granted under LTCAmerica Holding, Inc.'s (the "Company") 1998 Stock Option Plan (the "Plan"): Date of Options Exercise Number of Grant Awarded Price Shares Exercised ----- ------- ----- ---------------- As payment for the exercise of the above listed stock options and for the amount of federal, state and local tax which the Company is required by law or believes appropriate to withhold and the cost of any applicable state or federal documentary tax stamps, I am enclosing and elect the following method of payment (check appropriate box): [ ] Cashier's or certified check in the amount of $_________ [ ] Shares of the Company's Common Stock which have been held by me for at least six months and which are valued at Fair Market Value (as defined in the Plan) listed below. Certificate Acquisition Fair Market Number Date Number of Shares Value ------ ---- ---------------- ----- NOTE: All shares of Common Stock must be transferred to LTCAmerica Holding, Inc. on the reverse side of each certificate. 11 [ ] Irrevocable instructions, a copy of which is attached hereto and is subject to the Company's approval, to my broker who must be acceptable to you to promptly deliver to the Company an amount sufficient to pay such amounts from either (i) the proceeds of sale through the broker of a sufficient number of shares purchased by me upon exercise of the Option as set forth above or (ii) the loan proceeds from borrowings by me from the broker, and the Company is hereby instructed to issue and deliver the shares purchased by me upon exercise of the option as set forth above directly to and in the name of the broker. Unless the third payment option above is selected, in which case the shares will be issued and delivered as described therein, please have ________ certificates issued in blocks of ________ shares per certificate and the certificates should be registered as follows: Name ------------------------------------------- Mailing Address -------------------------------- Social Security Number ------------------------- I agree to give prompt notice to the Company of any disposition of the shares acquired hereby if such disposition occurs within either two years after the date of grant or one year after the date of acquisition of the shares. Very truly yours, ----------------------------------- Signature EX-21 24 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 LTCAmerica Holding, Inc. Minnesota Tax Planning Seminars New Jersey EX-23 25 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. 333-67997) pertaining to the Life USA Holding, Inc. Employee Stock Option Plan, the Registration Statement (Form S-8 No. 333-67999) pertaining to the Life USA Holding, Inc. Employee Savings Plan, and the Registration Statement (Form S-8 No. 333-67831) pertaining to the Life USA Holding, Inc. Director Stock Option Plan of our report dated January 29, 1999 with respect to the consolidated financial statements of Life USA Holding, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ Ernst & Young LLP Minneapolis, Minnesota March 19, 1999 EX-24 26 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, 1998 under the Securities Exchange Act of 1934, as amended, including any amendment or amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority. There is hereby granted to said attorneys, and each of them, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in respect of the foregoing as fully as it/he or itself/himself might or could do if personally present, thereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same instrument and any of the undersigned directors may execute this Power of Attorney by signing any such counterpart. IN WITNESS WHEREOF, LIFE USA HOLDING, INC. has caused this Power of Attorney to be executed in its name by its President on the 23rd day of February, 1999. LIFE USA HOLDING, INC. By /s/ Margery G. Hughes --------------------- Margery G. Hughes, President The undersigned directors of LIFE USA HOLDING, INC. have hereunto set their hands as of the 23rd day of February, 1999. /s/ Hugh Alexander /s/ Jack H. Blaine - ------------------------------------- ------------------------------------- Hugh Alexander Jack H. Blaine /s/ Margery G. Hughes /s/ Barbara J. Lautzenheiser - ------------------------------------- ------------------------------------- Margery G. Hughes Barbara J. Lautzenheiser /s/ Robert W. MacDonald /s/ Daniel J. Rourke - ------------------------------------- ------------------------------------- Robert W. MacDonald Daniel J. Rourke /s/ Ralph Strangis /s/ Donald J. Urban - ------------------------------------- ------------------------------------- Ralph Strangis Donald J. Urban /s/ Mark A. Zesbaugh /s/ Edward J. Bonach - ------------------------------------- ------------------------------------- Mark A. Zesbaugh Edward J. Bonach /s/ Robert S. James - ------------------------------------- Robert S. James 2 EX-27 27 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1998 DEC-31-1998 1,020,691 1,259,072 1,314,009 0 0 0 2,314,702 21,570 0 216,725 5,458,719 5,030,833 0 0 9,839 20,898 0 0 248 279,737 5,458,719 0 157,946 769 203,933 146,050 30,120 151,321 35,157 13,250 21,907 0 0 0 21,907 .85 .83 0 0 0 0 0 0 0
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