SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995 [Fee Required]
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to_____________ [No Fee Required]
Commission File No. 0-16880
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BNL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
IOWA 42-1239454
(State of incorporation) (IRS Employer Identification No.)
301 Camp Craft Road, Suite 200
Austin, TX 78746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 327-3065
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, No 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 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. _____
BNL Financial Corporation revenues for fiscal year 1995 were $4,262,677.
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 31, 1995, was approximately $4,340,200 based
upon the market value of such stock sold as of such date (see also Item 5 of
Form 10-KSB regarding the limited trading market for the Company's shares).
As of December 31, 1995, the Registrant had outstanding 23,173,149 shares
(excluding treasury shares) of Common Stock, no par value (which includes
10,911,373 shares owned by affiliates of the Registrant).
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-KSB Incorporated Document
Transitional Small Business Disclosure Format Yes ___ No _X__
Total # of pages including cover page ___
<PAGE>
================================================================================
PART 1
ITEM 1. BUSINESS
General
BNL Financial Corporation (the "Company" or "Registrant" formerly United Iowa
Corporation) is an insurance holding company incorporated in Iowa in January,
1984. The Company's principal executive offices are located at 301 Camp Craft
Road, Suite 200, Austin, Texas 78746; its telephone number is (512) 327-3065
The Company has two wholly-owned subsidiaries, BNL Equity Corporation ("BNLE" -
formerly United Arkansas Corporation) and Brokers National Life Assurance
Company ("BNLAC" - formerly Iowa Life Assurance Company). Effective August 1,
1994, United Arkansas Corporation ("UAC") was merged with USSA Acquisition Inc.,
("USSA") a wholly owned subsidiary of the Company and UAC was the survivor of
the merger. As a part of the merger, all of the outstanding shares of common
stock of UAC were converted into newly issued shares of common stock of the
Company at a rate of ten shares of UAC for nine shares of the Company. In
connection with the merger, the Company redomesticated its subsidiary Iowa Life
Assurance Company, ("ILAC") an Iowa-domiciled life insurance company, into
Arkansas. Immediately following the redomestication, the insurance subsidiary of
UAC, United Arkansas Life Assurance Company, was merged into ILAC and the name
of the surviving company was changed to Brokers National Life Assurance Company.
At the same time, United Arkansas Corporation became BNL Equity Corporation.
Industry Segments
The operations of the Company are conducted through BNLAC, which in 1995 sold
life and accident and health insurance policies in 20 states. BNLAC began direct
marketing of its insurance products in Iowa in October, 1987. Prior to 1992,
BNLAC 's insurance products were sold only in Iowa. The Company has no foreign
operations.
BNLAC has Certificates of Authority in 27 states to offer life and accident and
health insurance on an individual and group basis. BNLAC currently concentrates
its marketing on group dental insurance sold primarily on a payroll deduction
basis.
The Company conducts business in only one industry segment. The financial
information relating thereto is contained in Item 6 and the Exhibits attached to
this Report.
Sales and Marketing
The Company markets specialized products through professional independent agents
and brokers. BNLAC's primary marketing emphasis is the development of
specialized or "niche" life and health insurance products that can be sold on a
group or payroll deduction basis through independent insurance agents. BNLAC
currently offers an accidental death life insurance policy, a family level term
insurance policy, a tax deferred annuity policy and a line of dental insurance
policies.
Statistics by line of business are as follows (gross before reinsurance):
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
<S> <C> <C>
I. Annual Premiums and Annuity Deposits In Force:
Ordinary Life Insurance $407,000 $452,000
Individual Annuities(1) 337,000 384,000
Group Dental Insurance 5,264,000 3,250,000
Accidental Death Insurance 94,000 110,000
--------------- --------------
Total $6,102,000 $4,196,000
=============== ==============
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II. Collected Premiums and Annuity Deposits:
Ordinary Life Insurance $406,000 $447,000
Individual Annuities(1) 371,000 377,000
Group Dental Insurance 4,159,000 2,640,000
Accidental Death Insurance 86,000 101,000
---------------- -----------------
Total $5,022,000 $3,565,000
================ =================
III. Amount of Insurance:
Ordinary Life Insurance $35,000,000 $36,000,000
Accidental Death Insurance 180,000,000 208,000,000
---------------- -----------------
Total $215,000,000 $244,000,000
================ =================
<FN>
(1) Classified as a deposit liability on the financial statements.
</FN>
</TABLE>
Premiums collected by state are reflected in the following table:
<TABLE>
<CAPTION>
Group Dental and
State Life Premiums Annuity Accidental Death Total
- ------------------- -------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Alabama $ - $ - $ 268,586 $ 268,586
Arkansas 13,925 - 1,507,852 1,521,777
Colorado - - 136,619 136,619
Delaware - - 1,068 1,068
Florida 781 - 98,444 99,225
Georgia - - 421,078 421,078
Illinois 589 - 169,853 170,442
Indiana 8,148 - 74,819 82,967
Iowa 367,650 370,633 629,233 1,367,516
Louisiana - - 6,589 6,589
Michigan 954 - 453,968 454,922
Minnesota 9,364 - 82,059 91,423
Mississippi 540 - 58,976 59,516
Missouri 165 - 195,403 195,568
Nebraska 96 - 6,249 6,345
Ohio - - 26,309 26,309
Oklahoma 3,881 - 99,863 103,744
South Dakota - - 6,976 6,976
Miscellaneous - - 1,603 1,603
==================== ==================== ===================== ====================
Total $406,093 $370,633 $4,245,547 $5,022,273
==================== ==================== ===================== ====================
</TABLE>
As of January 1, 1996, BNLAC had appointed 784 general agents and brokers in 21
states to market its policies compared to 612 agents and brokers on January 1,
1995.
On all of its products except the dental policies, BNLAC follows the industry
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practice of paying a large portion of the first year's premiums and a relatively
small portion of subsequent premiums as commissions to agents. For the dental
policies, commissions are level in all years which is typical for this type of
business. There is considerable competition for insurance agents and BNLAC
competes with larger, well-established life insurance companies for the services
of agents. BNLAC believes it can attract competent agents by offering
competitive compensation, efficient service to agents and customers and by
developing products to fill special needs within the marketplace.
Reinsurance
As is customary among insurance companies, BNLAC reinsures with other insurance
companies portions of the life and accident and health insurance risks it
underwrites. The primary purpose of reinsurance agreements is to enable an
insurance company to reduce the amount of its risk on any particular policy and,
by reinsuring the amount exceeding the maximum amount which it is willing to
retain, to write policies in amounts larger than it could without such
agreements.
An effect of reinsurance is to transfer a portion of the profit, if any, on the
insurance ceded to the reinsurer. Even though a portion of the risk may be
reinsured, BNLAC will remain liable to perform all obligations imposed by the
policies issued by it and is liable if its reinsurer should be unable to meet
its obligation under the reinsurance agreements. BNLAC will determine the
insurability of the applicant prior to submitting the application to the
reinsurer. However, if reinsurers reject any such application as an
unsatisfactory risk, BNLAC will also reject the application.
The two principal types of life insurance reinsurance treaties commonly in use
in the industry and by BNLAC are "automatic" and "facultative" agreements. Under
an "automatic" treaty, the reinsurer agrees that it will assume liability
automatically for the excess over the ceding company's retention limits on any
application acceptable to the ceding company. Under a "facultative" treaty, the
reinsurer retains the right to accept or reject any reinsurance submitted after
a survey of each individual application.
A. Life and Accident Insurance.
BNLAC reinsures the accidental death life insurance policies with Business Mens
Assurance Company (BMA), Kansas City, Mo., under an automatic treaty where BMA
assumes liability for all risks over $25,000. The rating by A.M. Best Company of
Business Mens Assurance Company was "A+" (Superior) for 1994.
All other BNLAC life insurance products in excess of $35,000 are reinsured with
BMA under an automatic treaty up to $175,000 and under a facultative treaty for
amounts over $175,000.
The following chart shows life insurance in force net of reinsurance for each of
the five years ended December 31.
<TABLE>
<CAPTION>
Gross Net
Insurance Reinsurance Reinsurance Insurance
In Force Ceded Assumed In Force
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Life Insurance
1995 $35,310,000 $11,486,000 $6,631,000 $30,455,000
1994 36,280,000 11,188,000 5,624,000 30,716,000
1993 38,485,000 14,142,000 5,524,000 29,867,000
1992 44,472,000 16,321,000 5,308,000 33,459,000
1991 42,872,000 14,615,000 5,112,000 33,369,000
Accidental Death Insurance
1995 $180,000,000 $164,426,000 $0 $15,574,000
1994 208,000,000 190,350,000 0 17,650,000
1993 239,345,000 219,583,000 0 19,762,000
1992 320,048,000 293,823,000 0 26,225,000
1991 32,195,000 29,295,000 0 2,900,000
</TABLE>
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<PAGE>
B. Group Dental Insurance.
Prior to January 1, 1995, group dental insurance was reinsured with UniLife
Insurance Company ("UniLife") of San Antonio, TX. under a quota share
reinsurance agreement whereby UniLife assumed 90% of the risk on each of these
policies. BNLAC received a fee for the portion of risks reinsured by UniLife.
Effective January 1, 1995, BNLAC renegotiated its quota share reinsurance
agreement with UniLife. Under the terms of the new agreement, BNLAC reinsured
50% of the dental business and no longer received a fee for the portion of the
risks reinsured by UniLife. In addition, BNLAC paid UniLife claim administration
fees equal to 4% of net collected premiums on the portion of the risk retained
(50%).
In March 1995, BNLAC was notified that UniLife was discontinuing active
marketing and underwriting of insured dental policies and consequently was
terminating the quota share reinsurance agreement and administrative agreement
with BNLAC, effective January 1, 1996 and March 31, 1996, respectively.
Effective June 1, 1995, BNLAC amended its reinsurance agreement so that all new
dental business written was 100% insured by BNLAC. On November 1, 1995, BNLAC
terminated its reinsurance agreements with UniLife and began administrating and
retaining 100% of the group dental business.
The following chart shows group dental insurance premiums collected net of
reinsurance for each of the five years ended December 31.
<TABLE>
<CAPTION>
Gross Net
Premiums Premiums Premiums Ceding
Group Dental Insurance Collected Ceded Collected Fees
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1995 $4,159,000 $1,655,000 $2,504,000 $0
1994 2,640,000 2,376,000 264,000 180,000
1993 1,241,000 1,117,000 124,000 109,000
1992 321,000 289,000 32,000 27,000
1991 1,000 900 100 0
</TABLE>
The following chart shows group dental insurance claims paid net of reinsurance
and incurred loss ratios for each of the five years ended December 31. The
incurred loss ratio represents the ratio of incurred claims to premiums earned.
<TABLE>
<CAPTION>
Gross Ceded Net Incurred
Group Dental Insurance Claims Paid Claims Claims Paid Loss %
---------------------- ---------------- ------------- ---------------- -------------------
<S> <C> <C> <C> <C>
1995 $2,719,000 $1,211,000 $1,508,000 72.5%
1994 1,822,000 1,639,000 183,000 74.8
1993 858,000 772,000 86,000 73.2
1992 197,000 177,000 20,000 76.7
1991 0 0 0 0
</TABLE>
Investments
Consistent with insurance company regulatory laws, BNLAC invests its available
funds in certificates of deposit, US Government and Agency bonds, corporate
bonds and other investment securities. The earnings from such investments
represent a substantial part of BNLAC's income. For each of the five years ended
December 31, BNLAC's net investment income (rounded to the nearest thousand) and
ratio of net return on mean invested assets were as follows:
<TABLE>
<CAPTION>
Net Net Return on
Investment Mean Invested
Year Income Assets
- ------------ --------------- -------------------
<S> <C> <C>
1995 $734,000 6.6%
1994 674,000 6.5
1993 599,000 6.1
1992 637,000 6.9
1991 467,000 7.7
</TABLE>
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<PAGE>
Reference is made to Note 5 of the Notes to Consolidated Financial Statements,
page E-9, regarding realized and unrealized gains and losses on investments in
securities and the change in difference between cost (amortized cost for fixed
maturities) and market value.
As of December 31, 1995, BNLAC and the Company owned taxable municipal bonds
(the "bonds") representing investment in three issuers by whom the proceeds of
the securities were invested in guaranteed investment contracts with Executive
Life Insurance Company ("Executive Life"). Executive Life was placed under
rehabilitation by the California regulators in 1991. At that time all interest
payments on the bonds were discontinued.
On March 31, 1991 the Company elected to reduce the book value of the bonds to
25% of their $700,000 face value (approximate market value at that time) and
recorded a loss of $522,282 as a result.
In 1993, a rehabilitation plan was approved for Executive Life. In 1994, the
Company and BNLAC received partial payments on the bonds that included $175,000
return of principal remaining on the books, $133,318 realized gain from recovery
of previous write-down and $106,015 interest. In 1995, the Company and BNLAC
received $188,456 realized gain from recovery of previous write-down and $43,174
interest on the bonds.
As of December 31, 1995, the Company and BNLAC had received $645,963 of
principal and interest on the bonds since 1991 when they went into default. The
bonds have a total market value of $580; which indicates the rehabilitation
program has paid out substantially all of the principal available now and in the
future on the bonds.
Special Factors Relating to Accounting and Regulatory Reporting of Insurance
Companies
State insurance laws and regulations generally govern the accounting practices
and prescribe the procedures and form for financial reports of insurance
companies filed with state insurance regulatory agencies. Although there are
some differences among the various states, there is a substantial degree of
uniformity by reason of the policies adopted by the National Association of
Insurance Commissioners. Reports prepared in accordance with the prescribed or
permitted accounting practices are primarily intended to reflect the ability of
an insurance company to meet its obligations to policyholders and do not
necessarily reflect going-concern value. Balance sheets prepared under this
approach are designed primarily to reflect the financial position of insurance
companies from the standpoint of solvency. Certain of the prescribed or
permitted accounting practices for statutory purposes differ in some respects
from generally accepted accounting principles followed by other business
enterprises in determining financial position and results of operations.
Life insurance company gross income is generated from two primary sources,
premiums and investment income. The cost of placing new policies in force may
exceed the premiums received from those policies for the first year. In
subsequent policy years, some of these costs, such as commissions, medical
examinations and investigative expenses, may be reduced substantially. Also,
policy lapses and surrenders are generally greater in the first years that
policies are in force. Although the costs of acquiring new insurance business
are large and generally not duplicated thereafter, statutory accounting
procedures for insurance companies and state laws and regulations designed to
protect policyholders provide that the entire amount of acquisition costs must
be expensed currently instead of being spread over the life of the policies. As
a result of this and other factors, new insurance companies normally show
little, if any, profit on a statutory basis in their early years of operations.
The interests of policyholders and of the public in the financial integrity of
the life insurance industry make it important that the solvency of life
insurance companies be demonstrated to regulatory authorities. Consideration of
these interests and the uncertainties inherent in the future have resulted in
the accounting practices prescribed or permitted by insurance regulatory
authorities. Solvency must be continuously demonstrated for a life insurance
company to be permitted to offer its services to the public.
A large portion of the first year and renewal premiums are required to be placed
in reserve for the protection of policyholders. The amount of such reserves is
based upon actuarial calculations and its annual increase is treated as an
expense for insurance accounting purposes. Premiums create income only to the
extent that they exceed reserve requirements and commissions. Regulatory
authorities require that actuarial calculations of reserves use conservative
assumptions as to mortality and future interest earnings on the reserves.
Accordingly, the amounts of premiums available to create income will be
decreased. BNLAC calculates reserves using the Commissioner's Reserve Valuation
Method. This method provides a lower reserve in the early years of a policy to
partially offset the higher first-year costs of the policy. Although such
reserves are treated as liabilities and are not available for the general use of
an insurance company, a company is free to invest such reserves in accordance
with applicable state laws. Interest earned on invested reserves becomes
operating income to the life insurance company to the extent that it exceeds the
interest required to be added to the reserves.
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<PAGE>
The consolidated financial statements of the Company and BNLAC to be presented
to shareholders and the public are required to be prepared in conformity with
generally accepted accounting principles. The objective of these financial
statements is to provide reliable financial information about economic resources
and obligations of a business enterprise and changes in net resources resulting
from its business activities, measured as a going concern. To the extent that
the accounting practices prescribed or permitted by state regulatory authorities
differ from generally accepted accounting principles, appropriate adjustments
will be made, including (but not limited to) the following:
a) Premiums are reported as earned over the premium paying period..
Benefits and expenses are associated with earned premiums so as to
result in the matching of expenses with the related premiums over the
life of the contracts. This is accomplished through the provision for
liabilities for future policy benefits and the deferral and amortization
of acquisition costs.
b) Certain assets designated as "non-admitted assets" for statutory
purposes are reinstated to the accounts.
c) The asset valuation reserve is reclassified as retained earnings rather
than as a liability. The interest maintenance reserve is reclassified
from a liability to investment income.
d) Deferred federal income taxes are provided for income and deductions
which are recognized in the financial statements at a different time
than for federal income tax purposes. These items (temporary
differences) relate primarily to different methods of calculating policy
reserves, treatment of acquisition costs, and recognition of deferred
and uncollected premiums.
e) Premium payments received on annuities are not reported as revenue but
are recorded as increases to a deposit liability account. The profits
are then deferred over the life of the policy instead of being realized
when the payments are received.
f) Realized gains and losses from the sale of investments are reclassified
to a separate component of summary of operations. Taxes thereon
are included in the tax provision.
g) Investments in fixed maturity securities that are available for sale are
carried at fair value with the unrealized appreciation (depreciation)
recorded to shareholders' equity.
There is no assurance that BNLAC will be profitable when reporting in conformity
with generally accepted accounting principles, and in any event, no dividends
may be paid to the Company by BNLAC unless such dividends would be permissible
under the statutory accounting requirements.
Competition
The life insurance business is highly competitive, and BNLAC competes in many
instances with individual companies and groups of affiliated companies that have
substantially greater financial resources, larger sales forces and more
widespread agency and brokerage relationships than BNLAC. Certain of these
companies operate on a mutual basis which may give them an advantage over BNLAC
on policies due to the fact that the profits thereon accrue to the policyholders
rather than the shareholders. In 1994 BNLAC was assigned an A. M. Best's
financial performance rating of "B-" (adequate).
BNLAC focuses its marketing efforts on sales of life, health and dental
insurance products to small and medium size groups of insureds such as employee
groups and members of associations. Group sizes sold by BNLAC range in size from
2 to approximately 1,200 persons. BNLAC also sells life, health and dental
insurance products to individuals. BNLAC is a relatively small insurance company
which has no identifiable market share. BNLAC is not ranked according to its
size or volume of sales.
BNLAC competes for the services of agents and brokers in several ways. First,
the line of dental insurance products offered by BNLAC are attractive to brokers
and general agents because such products can be sold as an "add-on" to group
insurance products. Second, BNLAC strives to provide high service to agents by
offering insurance products that meet their clients needs and individualized
service in the administration of such products. Finally, BNLAC attempts to
structure the levels of premiums, benefits and commissions on dental insurance
products to compare favorably with competitors.
Insurance Regulations
BNLAC is subject to regulation and supervision by the states in which it is
admitted to transact business. The laws of these jurisdictions generally
establish supervisory agencies with broad administrative and supervisory powers
relative to granting and revoking licenses to transact business, regulating
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<PAGE>
trade practices, establishing guaranty associations, licensing agents, approving
policy forms, regulating premium rates for some lines of business, establishing
reserve requirements, regulating competitive matters, prescribing the form and
content of required financial statements and reports, determining the
reasonableness and adequacy of statutory capital and surplus and regulating the
type and amount of investments permitted.
Most states have also enacted legislation which regulates insurance holding
company systems, including acquisitions, extraordinary dividends, the terms of
surplus notes, the terms of affiliate transactions and other related matters.
BNLAC is registered as a holding company system pursuant to such legislation in
Arkansas and BNLAC routinely reports to other jurisdictions.
Recently, increased scrutiny has been placed upon the insurance regulatory
framework. A number of state legislatures have considered or enacted legislative
proposals that alter, and in many cases increase, the authority of state
agencies to regulate insurance companies and this could result in the federal
government assuming some role in the regulation of the insurance industry. The
Subcommittee on Oversight and Investigations of the Committee on Energy and
Commerce of the US House of Representatives has made inquiries and conducted
hearings as part of a broad study of the regulation of US insurance companies.
The National Association of Insurance Commissioners (NAIC), an association of
state regulators and their staffs, attempts to coordinate the state regulatory
process and continually re-examines existing laws and regulations and their
application to insurance companies. Recently, this re-examination has focused on
insurance interpretations of existing law, the development of new laws and the
implementation of non-statutory guidelines. The NAIC has formed committees and
appointed advisory groups to study and formulate regulatory proposals on such
diverse issues as the use of surplus debentures, accounting for reinsurance
transactions and the adoption of risk-based capital ("RBC") rules. In addition,
in connection with its accreditation of states to conduct periodic company
examinations, the NAIC has encouraged states to adopt model NAIC laws on
specific topics, such as holding company regulations and the definition of
extraordinary dividends. It is not possible to predict the future impact of
changing state and federal regulation on operations of BNLAC.
The NAIC has adopted model RBC requirements, effective December 31, 1993, to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance risks associated with: (i) asset quality; (ii) mortality and
morbidity; (iii) asset and liability matching; and (iv) other business factors.
The RBC formula is designed to be used by the states as an early warning tool to
identify possible weakly capitalized companies for the purpose of initiating
regulatory action. In addition, the formula defines a new minimum capital
standard which will supplement the prevailing system of low fixed minimum
capital and surplus requirements on a state-by -state basis.
The new RBC requirements provide for four different levels of regulatory
attention depending on the ratio of a company's total adjusted capital (defined
as the total of its statutory capital, surplus, asset valuation reserve and 50%
of apportioned dividends) to its RBC. The "Company Action Level" is triggered if
a company's total adjusted capital is less than 100% but greater than or equal
to 75% of its RBC, or if total adjusted capital is less than 125% of RBC and a
negative trend has occurred. The trend test calculates the greater of any
decreases in the margin (i.e., the amount in dollars by which a company's total
adjusted capital exceeds its RBC) between the current year and the prior year
and between the current year and the average of the past three years, and
assumes that the decrease could occur again in the coming year. If a similar
decrease in the margin in the coming year would result in an RBC of less than
95%, then Company Action Level would be triggered. At the Company Action Level,
a company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. The
"Regulatory Action Level" is triggered if a company's total adjusted capital is
less than 75% but greater than or equal to 50% of its RBC. At the Regulatory
Action Level the regulatory authority will perform a special examination of the
company and issue an order specifying corrective actions that must be followed.
The "Authorized Control Level" is triggered if a company's total adjusted
capital is less than 50% but greater than or equal to 35% of its RBC, and the
regulatory authority may take any action it deems necessary, including placing
the company under regulatory control. The "Mandatory Control Level" is triggered
if a company's total adjusted capital is less than 35% of its RBC, and the
regulatory authority is mandated to place the company under its control.
Calculations using the NAIC formula at December 31, 1995, indicated that the
ratios of total adjusted capital to RBC for BNLAC would have been significantly
above the Company Action Level.
As part of their routine regulatory process, approximately once every three
years, insurance departments conduct detailed examinations ("triennial
examinations") of the books, record and accounts of insurance companies
domiciled in their states. Such triennial examinations are generally conducted
in cooperation with the departments of other states under guidelines promulgated
by the NAIC.
The Iowa Insurance Division conducted BNLAC's regular triennial examination as
of December 31, 1990. An interim examination was completed September 30, 1992
after the Company's acquisition of Statesman Life Insurance Company. At the
conclusion of the regular examination, the Iowa Insurance Division proposed
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various changes in the amounts recorded of certain assets and liabilities. BNLAC
accepted these adjustments which reduced its surplus by $31,733. The interim
examination resulted in a decrease in BNLAC's surplus of $8,099. In addition, a
question concerning a loan was raised by the Iowa Insurance Division and has
been resolved.
BNLAC's management is not aware of any failure to comply with any significant
insurance regulatory requirement to which BNLAC is subject at this time.
Personnel
As of February 28, 1996, BNLAC had four executive officers, 29 full-time
administrative personnel and 1 part-time employee. BNLAC's administrative staff
supervises services for the agency force, policy underwriting, policy issuance
and service, billing and collections, life claims, accounting and bookkeeping,
preparation of reports to regulatory authorities and other matters. The Company
has not experienced any work stoppages or strikes and considers its relations
with its employees and agents to be excellent. None of the Company's employees
is presently represented by a union. BNLAC uses a third party administrater to
process their dental claims.
Administrative Agreement - Dental Insurance
In August, 1991 in conjunction with its reinsurance treaty with UniLife, BNLAC
entered into an administrative agreement whereby UniLife agreed to perform, at
no cost to BNLAC, all administrative and claim services with respect to the
dental insurance policies written by BNLAC. The agreement was amended effective
January 1, 1995, whereby BNLAC increased the amount it retains on this business
from 10% to 50% and BNLAC agree to pay UniLife a claims administrative fee equal
to 4% of net collected premiums on the portion of the risk (50%) not ceded to
UniLife. In March 1995, BNLAC was notified that UniLife was discontinuing active
marketing and underwriting of insured dental policies and consequently was
terminating the quota share reinsurance agreement and administrative agreement
with BNLAC, effective January 1, 1996 and March 31, 1996, respectively.
Effective June 1, 1995, BNLAC amended its reinsurance agreement so that all new
dental business written was 100% insured by BNLAC. On November 1, 1995, BNLAC
terminated its reinsurance agreements with UniLife and began administrating and
retaining 100% of the group dental business.
ITEM 2. PROPERTIES
Neither the Company, BNLE or BNLAC own any real estate.
BNLAC leases 288 square feet of office space in Des Moines, IA at a
rentalof $567 per month ($6,804 per year). The rent includes the services of a
secretary that is shared with other tenants of the building.
On June 1, 1994, BNLAC entered into a 5 year lease for 5,588 square feet of
office space in Austin, Texas at a monthly rent of $5,588 ($67,056 per year)
during 1994 and 1995 plus pro rata operating expenses in 1995. The rent
increases to $6,053 per month, plus pro rata operating expenses, beginning in
the third year of the lease. The Company has its administrative and marketing
offices at this location.
BNLE leases office space in North Little Rock at a monthly rate of $1,800
($21,600 per year). The lease expires June 1, 1996. BNLAC shares 50% of the
rental cost.
The Company owns the furniture and equipment used in the operation of its
business.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company, BNLE or
BNLAC are parties or to which any of their property is the subject.
I-8
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 22, 1995 in Des
Moines, Iowa. At the annual meeting, the following individuals were elected to
the Company's Board of Directors.
Wayne E. Ahart Hayden Fry James A. Mullins
C. Donald Byrd John Greig C. James McCormick
Kenneth Tobey Roy Keppy Knox Nelson
Barry N. Shamas Thomas Landry Robert R. Rigler
Cecil Alexander Roy Ledbetter Chris Schenkel
Richard Barclay Mahlon A. Martin L. Stanley Schoelerman
Eugene A. Cernan John E. Miller Orville Sweet
Charles Thone
13,296,243 shares had been voted in favor of Messrs. Barclay, Shamas, Sweet, and
Schenkel (275,627 shares having been withheld); 13,281,819 shares had been voted
in favor Mr. Ahart (290,051 shares having been withheld); 13,285,341 shares had
been voted in favor of Mr. Byrd (286,529 shares having been withheld);
13,289,163 shares had been voted in favor of Mr. Fry (282,707 shares having been
withheld); 13,294,239 shares had been voted in favor of Mr. Tobey (277,631
shares having been withheld); 13,293,243 shares had been voted in favor of
Messrs. Thone, Keppy, Alexander, Miller and Nelson (278,627 shares having been
withheld); 134,296,441 shares had been voted in favor of Messrs. Landry and
McCormick (275,429 shares having been withheld) 13,294,443 shares had been voted
in favor of Messrs. Martin, Mullins, and Schoelerman (277,427 shares having been
withheld) and 13,297,443 shares voted in favor of Messrs. Cernan, Greig, Rigler
and Ledbetter (274,427 shares having been withheld.) In August, 1995, Mahlon
Martin died and his position on the board has not been filled at this time.
The shareholders ratified the selection of Amend, Smith & Co., p.c., as the
Company's independent auditors for the year ending December 31, 1995 with
13,409,874 shares voted in favor, 39,666 shares voted against and 122,330
abstained.
I-9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market for Stock
The stock of the Company was traded by Starmont Capital Ltd. Des Moines, Iowa on
a workout basis. There has been a limited trading market for the Company's
securities during 1995. During the year there were a total of nine stock sales
with a price ranging from $.40 to $.35 a share. The final stock sold during 1995
was at $.35 a share.
From 1989 until 1992, BNL Equity Corporation (formerly United Arkansas
Corporation) offered Arkansas residents 1,000,000 shares of common stock and
500,000 shares of preferred stock in units of two common shares and one
preferred share at $10 per unit. As a condition of the public offering, the
13,500,000 shares issued to organizers in February 1989 were placed in escrow.
On May 1, 1992 the organizers' shares were reduced to 5,563,212 in accordance
with an agreement whereby the organizers could not collectively own more than 60
percent of the number of shares of common stock outstanding.
In 1994, in order to consummate a merger of United Arkansas Corporation and USSA
Acquisition Inc., the stock subject to the February 1, 1989 escrow agreement was
released from the terms and conditions of the February 1, 1989 escrow agreement
so that the stock could be exchanged for common stock of United Iowa Corporation
pursuant to the terms of the merger (see Note 2). A new escrow agreement with an
effective date of February 28, 1994, prohibits sale or transfer of the
organizers' shares until any one of the following conditions is satisfied:
a. The Company has net earnings per share per year, after tax and before
extraordinary items, of $1.86 for any three years following the public
offering.
b. A tender offer or an offer to merge or otherwise acquire the Company's
common stock at a per share price of at least $3.34 per share of common
stock and having a market value at the effective date of the tender offer,
merger, or other acquisition of at least $3.71 per share of common stock.
c. At any time after February 28, 1995, the public market price exceeds $3.25
for a term of 90 trading days and for 30 consecutive trading days prior to
a request for termination of the escrow.
d. If insurance business in force reaches the following levels:
$100,000,000 - 50% of escrowed shares will be released.
$125,000,000 - 25% of escrowed shares will be released.
$150,000,000 - remaining 25% of escrowed shares will be released.
e. All escrowed shares will be released August 1, 1999, if they have not been
released prior to that time.
Holders
As of December 31, 1995, there were 4,926 shareholders of record of the
Company's common stock.
Dividends
The Company has not declared any dividends on its common stock to date and has
no present plans to pay any dividends in the foreseeable future. The Company's
ability to declare and pay dividends in the future will be dependent upon its
earnings and the cash needs for expansion. In addition, payment of dividends by
BNLAC is regulated under Arkansas insurance laws.
Transfer Agent and Registrar
First Commercial Trust, Little Rock, Arkansas, is the Registrar and Transfer
Agent for the Company's common stock.
II-1
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1995, the Company had liquid assets of $1,910,596 in cash, money
market savings accounts, treasury bills and short-term certificates of deposit;
all of which can readily be converted to cash.
The major components of operating cash flows are premiums, annuity deposits and
investment income. In 1995, BNLAC collected $5.0 million of premiums and annuity
deposits (gross before reinsurance) and $880,000 of investment income. Another
source of cash flow is from the sale of investments which, in 1995, produced
gains totaling $308,000.
The Company's investments are primarily in U.S. Government and Government
Agencies ($10,280,559) and other investment grade bonds ($1,224,243) which have
been marked to market and classified as available for sale. The Company does not
hedge its investment income through the use of derivatives.
Management believes that liquid assets along with investment and premium income
exceed the necessary long and short-term liquidity requirements and the Company
will not require an external source of funds for its liquidity requirements.
The Company's insurance operations are conducted through its wholly-owned
subsidiary, BNLAC. At December 31, 1995 BNLAC had statutory capital and surplus
of approximately $5,800,000 which is sufficient to meet BNLAC's capital
requirements in the states in which it is licensed and which management believes
is sufficient to support anticipated future growth.
Results of Operations
Premium income for 1995 was $3,073,819 compared to $971,600 in 1994, an increase
of $2,102,219. The increase was due to the increased sales of group dental
insurance and the termination of the group dental reinsurance agreement (see
note 9), effective November 1, 1995, whereby BNLAC changed its retention of
dental premiums from 50% to 100%.
Net investment income was $880,368 in 1995 and $893,757 in 1994. The decrease
was due to the receipt of interest of $106,000 in 1994, compared to $43,174 in
1995, on certain taxable municipal bonds that had been in default since 1991
(see note 5).
Realized gains were $308,490 in 1995 compared to $154,646 in 1994. Realized
gains included $188,456 and $133,318 for 1995 and 1994 respectively, of partial
payments of principal on certain taxable municipal bonds that had been marked
down to 25% of par value in 1991. The balance of the increase in realized gains
in 1995 was primarily due to gains on bonds sold.
Increases in liability for future policy benefits were $47,670 in 1995 compared
to $133,336 for the same period in 1994. The decrease of $85,666 is directly
related to lapses in life and annuity policies and reflects the marketing shift
to group dental insurance.
Policy benefits and other insurance costs were $2,618,023 in 1995 compared to
$553,016 in 1994. The increase in 1995 was due to claims and commissions on the
increased dental insurance premiums written and the termination of the group
dental reinsurance contract. The incurred loss ratio on the group dental
insurance was 72.5% in 1995 compared to 74.8% in 1994.
Amortization of deferred policy acquisition costs was $48,191 in 1995 and
$44,339 in 1994. The increase was due to a decline in life and accidental death
business in force which accelerated the amortization of the deferred policy
acquisition costs on these blocks of business.
Operating expenses were $1,767,550 in 1995 and $1,805,306 in 1994. The decrease
was primarily due to a decrease in accounting fees and recapture of agents
balances previously written off.
Taxes, other than on income were $137,170 for 1995 and $102,757 for 1994. The
1995 increase was primarily due to an increase in premium taxes on the increased
dental insurance premiums collected.
The consolidated net loss for 1995 was $355,927 compared to $619,285 in 1994.
The decrease in the loss was due to the increase in premiums and realized gains
and the decrease in liability for future policy benefits and operating expenses.
II-2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages E-1 through E-14 attached to this Report is hereby
incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
II-3
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
First Became
Director or
Executive Officer
Name Age Position
- --------------------------- -------- --------------------- -----------------------------------------------
<S> <C> <C> <C>
Wayne E. Ahart 55 1984 Chairman of the Board and Director
C. Donald Byrd 54 1984 Vice Chairman of the Board and Director
Kenneth Tobey 37 1994 President
Barry N. Shamas 48 1984 Executive Vice President,
Treasurer and Director
Cecil Alexander 59 1994 Director
Richard Barclay 58 1994 Director
Eugene A. Cernan 61 1994 Director
Hayden Fry 66 1984 Director
John Greig 60 1984 Director
Roy B. Keppy 72 1984 Director
Tom Landry 70 1984 Director
Roy Ledbetter 65 1994 Director
John E. Miller 66 1994 Director
James A. Mullins 61 1984 Director
C. James McCormick 70 1984 Director
Knox Nelson 69 1994 Director
Robert R. Rigler 72 1989 Director
Chris Schenkel 71 1994 Director
L. Stan Schoelerman 70 1984 Director
Orville Sweet 71 1984 Director
Charles Thone 71 1984 Director
- --------------------------- - -------- -- --------------------- --
</TABLE>
The term of office of each director expires at the annual meeting of
shareholders upon election and qualification of such director's successor. The
Company's executive officers serve at the pleasure of the Board of Directors.
The above officers and directors serve in the same capacity for BNLAC.
Identification of Certain Significant Employees
Not applicable.
Family Relationships
No family relationship exists between any director or executive officer
of the Company.
III-1
<PAGE>
Business Experience
The following is a brief description of the business experience during the past
five years of the directors and executive officers of the Company.
Wayne E. Ahart has served as Chairman of the Board of BNL since 1984 and BNLAC
since 1986. He has served as Chairman of the Board of BNLE since 1988 and served
as Chairman of the Board of United Arkansas Life from 1990 to 1994. Prior to
that time, Mr. Ahart served as Board Chairman of: Investors Trust, Inc. ("ITI")
and its subsidiary, Investors Trust Assurance Company ("ITAC"), both of
Indianapolis, Indiana (1973-1987); Liberty American Corporation
("LAC")(President since 1981) and its subsidiary Liberty American Assurance
Company ("LAAC"), both of Lincoln, Nebraska (1975-1987); (President) American
Investors Corporation ("AIC") and its subsidiary, Future Security Life Insurance
Company ("FSL"), both of Austin, Texas (1980-1987). Mr. Ahart has been owner and
Chairman of the Board of Lone Star Pizza Garden Inc. from 1986 to the present.
C. Don Byrd has been Vice Chairman of the Board of BNL, BNLE and BNLAC
since August 1, 1994. Mr. Byrd was President and a Director of BNL and BNLAC
since 1984 and 1986, respectively. Mr. Byrd was Agency Director of FSL from 1983
to 1984 and Regional Director of AIC 1981 to 1983. He was an agent and Regional
Director of ITI and ITAC from 1974 to 1981.
Kenneth Tobey has been President and director of BNLAC and BNL since August 1,
1994. Mr. Tobey has served as President of BNLE since 1988 and served as
president of United Arkansas Life from 1990 to 1994. He served as Assistant to
the President and Training Director of BNLAC from 1986 to 1988. From 1981 to
1986, Mr. Tobey served in various capacities for AIC and FSL, including Agent,
Regional Manager, Executive Sales Director and Assistant to the President.
Barry N. Shamas has served as Executive vice-president, Secretary and Treasurer
of BNLE since 1988 and United Arkansas Life from 1990 to 1994. From 1984 and
1986, respectively, he has served as Executive Vice President and Director of
BNL and BNLAC, which positions he presently holds. He served in various
capacities for ITI and ITAC, including Executive Vice President, Senior Vice
President, Treasurer and Financial Vice President beginning in 1976 through
1987. Mr. Shamas served as Executive Vice President, Secretary/Treasurer and as
Director of AIC and FSL from 1980 and 1983, respectively, until 1987. From 1978
through 1987, Mr. Shamas served as a Director and a member of the Executive
Committee of LAC and LAAC.
Jeffrey J. Drees has served as Controller of BNLE since 1988 and United Arkansas
Life from 1990 to 1994. He has served as the Controller of BNL since 1988 and
BNLAC since April 1987. He previously served as: Vice President and Controller
of FSL (1983-1986); Chief Accountant and Vice President of Providence Washington
Insurance Company, Austin, Texas (April 1982 - May 1983); Controller of
Montgomery Ward Corporation, Cedar Rapids, Iowa (October 1979 - March 1982); and
Assistant Controller of State Automobile & Casualty Underwriters, Des Moines,
Iowa (June 1978 - October 1979).
Cecil L. Alexander is currently Vice President of Public Affairs for Arkansas
Power & Light Company, where he has been employed since 1980. Prior to joining
the AP&L Executive Staff, Mr. Alexander served for 16 years in the Arkansas
General Assembly, and during 1975-76, was Speaker of the House of
Representatives. Since 1971 Mr. Alexander has been involved in the real estate
business as a partner in Heber Springs Realty. He is a past president of the
Cleburne County Board of Realtors and has served on the governmental affairs
committee of the Arkansas Association of Realtors. Alexander is currently on the
Board of Directors of Mercantile Bank of Heber Springs, the Board of Directors
of the Arkansas Tourism Development Foundation, and the Board of Directors of
Baptist Foundation.
Richard L. Barclay, a Certified Public Accountant, has been engaged in public
accounting since 1961. He is a Partner in the firm of Barclay, Yarborough &
Evans, Certified Public Accountants in Rogers, Arkansas. He is a member of the
Arkansas Society of Certified Public Accountants and of the American Institute
of Certified Public Accountants. He was a member of the Arkansas House of
Representatives from 1977 until 1991. He presently serves as a Director of
Federal Savings Bank, Rogers, Arkansas; and Vice President, Arkansas State
Chamber of Commerce.
Eugene A. Cernan has been President and Chairman of the Board of The Cernan
Corporation, since 1981. In addition, he recently became Chairman of the Board
of Johnson Engineering Corporation which provides the National Aeronautics and
Space Administration (NASA) with Flight Crew Systems Development. Captain Cernan
retired from the U. S. Navy in 1976 after serving 20 years as a naval aviator,
13 of which were dedicated to direct involvement with the U. S. Space Program as
a NASA astronaut. Captain Cernan was the pilot on the Gemini 9 mission and the
second American to walk in space; lunar module pilot of Apollo 10; and
Spacecraft Commander of Apollo 17, which resulted in the distinction of being
the last man to have left his footprints on the surface of the moon. In 1973, he
served as a Senior United States Negotiator in discussions with USSR on the
Apollo-Soyuz Mission. Mr. Cernan served as Executive Consultant- Aerospace and
Government of Digital Equipment Corporation from 1986 to 1992, and he was a
Director and Vice President-International of Coral Petroleum, Inc., Houston,
Texas from 1976 to 1981. Captain Cernan is presently a Director of Up With
People, an international educational foundation for young men and women; United
States Space Foundation; the Young Astronaut Council; Alaska Aerospace
Development Corporation, International MicroSpace; and Johnson Engineering
Corporation. Captain Cernan is also on the President's Engineering Committee,
Purdue University and is a member of the Board of Trustees of the U. S. Naval
Aviation Museum, NFL Alumni and Major League Baseball Players Alumni. In
III-2
<PAGE>
addition, Captain Cernan has served as a consultant commentator to ABC News. He
served on the Board of AIC and FSL from 1980 and 1983, respectively, to 1987.
Hayden Fry has been Head Football Coach at the University of Iowa since 1979. He
was Head Football Coach at North Texas State University from 1973 to 1978 and at
Southern Methodist University from 1962 to 1972. He was named Football Coach of
the Year in the Big Ten (1981, 1990, 1991), the Missouri Valley Conference
(1973), and the Southwest Conference (1962, 1966 and 1968). He is on the Board
of Advisors of Wilson Sporting Goods (1962 to date); the Board of Trustees of
Pop Warner Football (1962 to date); and the American Football Coaches
Association (1983 to date) and is the 1993 President. He was President of
Hawkeye Marketing Group from 1979 - 1984. He is a member of the Board of
Directors of the PPI Group.
John Greig has been President of Greig and Co. since 1967. He is a Director of
Boatmen's Bank of Iowa, NW., Estherville, Iowa. He has been President of the
Iowa Cattlemen's Association (1975-1976) and a member of the Executive Committee
of the National Cattlemen's Association (1975-1976). He was a member of the Iowa
Board of Regents from 1985 to 1991. He was elected as an Iowa State
Representative in 1993.
Roy Keppy has operated his grain and livestock farming operation in Davenport,
Iowa since 1946. In 1982, he and his son founded Town and Country Meats in
Davenport and he currently serves as its Vice President. He was a Director of
Eldridge Cooperative Elevator Company for 33 years, retiring in 1982, serving as
President for 6 years. He is now a Director of First State Bank N.A., Davenport,
Iowa. He is a past Chairman of the National Livestock and Meat Board, and was on
its Board of Directors from 1970 to 1986. He was on the Board of Directors of
the National Pork Producers from 1965 to 1972, serving as its President in
1970-1971.
Thomas W. Landry was Head Coach of the Dallas Cowboys, 1960 to 1989. He is a
member of the National Board of Trustees of the Fellowship of Christian
Athletes. He serves as a Director of Dallas Theological Seminary. He was on the
Board of Directors of Continental Life Insurance Company for four years. He has
served as Texas State Chairman of the American Cancer Society. Mr. Landry is an
Advisory Member of the Board of Directors of Southwest Baptist Theological
Seminary, Chairman of the Dallas International Sports Commission, and a member
of the Board of Advisors of Alexander Proudfoot Company.
Roy E. Ledbetter presently serves as President and Chief Executive Officer of
Highland Industrial Park, a division of Highland Resources, Inc. in East Camden,
Arkansas. He holds a Bachelor of Science Degree in Education from Southern
Arkansas University at Magnolia, a Masters Degree in Education from Henderson
State University at Arkadelphia and an AMP from Harvard Business School at
Boston. In 1966, Mr. Ledbetter joined Highland Resources, Inc. and coordinated
organization of Southern Arkansas University Technical Branch; was promoted to
division Manager (1972), Vice President and Division Manager (1975), Senior Vice
President (1980), and President in 1984. He is past President of the Camden
Chamber of Commerce; was 1977 Camden Jaycee's Man of the Year; was awarded first
annual Camden Area Chamber of Commerce Community Service Award in 1983; served
on Education Standards Committee of the State of Arkansas; and presently serves
on the Boards of East Camden and Highland Railroad, Shumaker Public Service
Corporation, Merchants and Planters Bank of Camden, and First United Bancshares
of El Dorado.
C. James McCormick is Chairman of the Board of McCormick, Inc., Best Way
Express, Inc., and President of JAMAC Corporation, all of Vincennes, Indiana. He
is also Vice Chairman of Golf Hosts, Inc. He is the owner of CJ Leasing. Mr.
McCormick is Chairman of the Board of Directors and CEO of First Bancorp,
Vincennes, Indiana; First Vice Chairman of Vincennes University and a Life
Director of the Indiana Chamber of Commerce; and a member of the Indiana
President's Organization and the Indiana Automobile Dealers Association. He is a
former Chairman of the Board of the American Trucking Associations. Mr.
McCormick is a Past Chairman of the National Board of Trustees of The Fellowship
of Christian Athletes.
John E. Miller has been a member of the State of Arkansas House of
Representatives since 1959. He has been self-employed in the insurance,
abstract, real estate, heavy construction and farming business for more than 20
years. He presently serves on the Board of Directors of Calico Rock Medical
Center, Easy K Foundation, National Conference of Christians and Jews, Council
of State Governments, Southern Legislative Conference, State Advocacy Services,
Lions World Services for the Blind, State Board of Easter Seals, Williams
Baptist College Board of Trustees, Chairman of the Governor's Developmental
Disabilities Planning Council and Izard County Chapter of the American Red
Cross.
James A. Mullins has owned and operated Prairie Flat Farms, Corwith, Iowa since
1969. He was a director of the Omaha Farm Credit Bank from 1985 to 1994, a
director of the Federal Farm Credit Banks Funding Corporation from 1986 to 1994,
and director of the US Meat Export Federation from 1988 to 1995. He served as
Chairman of the Foreign Trade Committee, National Cattlemen's Association (1988
- - 1993). He was Chairman of the US Meat Export Federation until 1994. He was
Chairman of the National Livestock & Meat Board in 1983; Chairman of the Beef
Industry Council in 1979 and 1980; and Chairman of the Omaha Farm Credit Bank in
1988 and 1989.
Knox Nelson served in the Arkansas House of Representatives from 1957 to 1959.
In 1961, he was elected a member of the Arkansas State Senate and served in that
capacity until December 19, 1991. For 40 years Mr. Nelson has been associated
with and currently owns Knox Nelson Oil Company.
Robert R. Rigler has been Chairman of the Board of Security State Bank, New
Hampton, Iowa since 1989; he served as its President and CEO from 1968 to 1989.
Mr. Rigler was Iowa Superintendent of Banking from 1989 to 1991. He was a member
III-3
<PAGE>
of the Iowa Transportation Commission from 1971 to 1986 and served as its
Chairman from 1973 to 1986. He was a member of the Iowa State Senate from 1955
to 1971 and served as a Majority and Minority Floor Leader.
Chris Schenkel has been a full-time television sportscaster of ABC Sports, New
York, New York, from 1965 to present. He also served as Spokesperson for
Owens-Illinois, Toledo, Ohio, from 1976 to present, for whom he speaks as voice
on commercials, personal appearances, conventions and shows. Mr. Schenkel served
as Chairman of the Board of Directors of Counting House Bank, North Webster,
Indiana from 1974-1982. He also served as a director of ITI and ITAC from 1978
to 1986 and on the Board of Haskell Indian Junior College, Lawrence, Kansas.
L. Stanley Schoelerman has been President and a partner of Petersen Sheep &
Cattle Co., Spencer, Iowa since 1964. He was a Director of Home Federal Savings
& Loan, Spencer, Iowa, from 1969 to 1988; and Honeybee Manufacturing, Everly,
Iowa, from 1974 to 1986. He was President of Topsoil-Schoenewe, Everly, Iowa,
from 1974 to 1986. Mr. Schoelerman was Commissioner of the Iowa Department of
Transportation from 1974 to 1978 and was a member of the National Motor Carrier
Advisory Board of the Federal Highway Administration from 1981 to 1985.
Orville Sweet served as a Visiting Industry Professor at Iowa State University
from 1989 to 1990 and is President of Sweet and Associates, a consulting firm
for agricultural organizations. He was Executive Vice President of the 100,000
member National Pork Producers Council, Des Moines, Iowa, from 1979 to 1989. He
was President of the American Polled Hereford Association, Kansas City, Missouri
in 1963-79. He is past President of the US Beef Breeds Council and the National
Society of Livestock Records Association and was a Director of the Agricultural
Hall of Fame and the US Meat Export Federation. He is a member of the American
Society of Animal Science. He has served as a member of the USDA Advisory
Council Trade Policy, the State Department Citizens Network and the Executive
Committee of the Agricultural Council of America.
Charles Thone has been a Senior Principal of the law firm of Erickson &
Sederstrom, P.C., Lincoln, Nebraska, since 1983. He was Governor of the State of
Nebraska from 1979 to 1983 and a Representative in the US Congress (First
District of Nebraska) from 1971 to 1979. He was Managing Partner of the law firm
of Davis, Thone, Bailey, Polsky & Hansen, Lincoln, Nebraska from 1959 to 1971.
He has been an Assistant U.S. Attorney in Nebraska and Nebraska Assistant
Attorney General and Nebraska Deputy Secretary of State. He has been a member of
the Board of Trustees of the University of Nebraska Foundation since 1979; and a
member of the Board of Directors of the Nebraska State Bar Foundation since
Involvement in Certain Legal Proceedings
Not applicable.
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth certain information regarding remuneration of
executive officers in excess of $100,000 during the three years ended December
31.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(A) (B) (C) (D) (E) (F) (G) (H) (I)
Other
Annual Restricted All Other
Name and Principal Compensation Stock Options/SARs LTIP Compensation
Position Year Salary Bonus $ $ Award(s) $ (#) Payouts $ $
--------------------------- -------- ------------ ---------- ------------ --------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wayne E. Ahart, CEO 1995 $125,000 $0 $8,744 $0 - $0 $0
" 1994 $125,000 $0 $8,013 $0 - $0 $0
" 1993 $125,000 $0 $3,486 $0 - $0 $0
</TABLE>
The total number of executive officers of the Company is four and the total
remuneration paid to all executive officers as a group is $380,396. The Company
does not have employment agreements with any of its officers.
Compensation of Directors
Each director receives a fee of $100 plus reasonable travel expenses for each
meeting of the Board of Directors attended. No director receives any other
remuneration in the capacity of director.
III-4
<PAGE>
Stock Option and Appreciation Rights
In 1994, the Board of Directors and stockholders approved the 1994 Brokers and
Agents' Nonqualified Stock Option Plan. This plan, subject to approval of the
registration, was established as incentive to sales persons of BNLAC. A maximum
of 250,000 shares will be available under the plan and the option period may not
exceed a term of 5 years. The duration of the plan is ten years and it will be
administrated by a four member committee of Directors. During 1995 the Company
granted 26,400 stock options with an exercise price of $.50 per share. No
options were granted through this plan in 1994. No options were exercised in
1995.
The Company does not have any contingent forms of remuneration for its employees
or directors, such as options, warrants or other rights to purchase the
Company's securities, or any pension, retirement, stock appreciation or other
similar plans.
Indebtedness of Management
No officer, director or nominee for director of the Company or associate of such
person was indebted to the Company at any time during the year ended December
31, 1995, other than for ordinary travel and expense advances and for other
transactions in the ordinary course of business, if any.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table reflects the persons known to the Company to be the
beneficial owners of more than 5% of the Company's voting securities as of
December 31, 1995:
<TABLE>
<CAPTION>
Amount and Nature of
Title of Class Name and Address of Beneficial Owner Beneficial Ownership Percent of Class as of
(1) December 31, 1995
- ------------------ -------------------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
Common Stock Wayne E. Ahart 4,845,505(2)(3) 20.91%
#14 Club Estates Parkway
Austin, Texas 78738
Common Stock Barry N. Shamas 2,801,816(5) 12.09%
1095 Hidden Hills Dr.
Dripping Springs, Texas 78620
Common Stock Universal Guaranty Life Insurance 2,216,776(2) 9.57%
Company
5250 S. Sixth St. Rd.
Springfield, Illinois 62705
Common Stock C. Donald Byrd 1,452,719(4) 6.27%
631 47th Street
W. Des Moines, IA 37076
<FN>
(1)To the Company's knowledge, all shares are beneficially owned by, and
the sole voting and investment power is held by the persons named,
except as otherwise indicated.
(2)Wayne E. Ahart and Commonwealth Industries, Inc.("CIC"), a parent of
Universal Guaranty Life Insurance Company ("UGL"), have agreed: (a) that
if Mr. Ahart sells his shares of the Company to a third party, Mr. Ahart
or the third party must also purchase UGL's shares of the Company at the
same price and on the same terms; and (b) in the event UGL receives a
bona fide offer to purchase its shares of the Company, Mr. Ahart has a
first right of refusal to purchase such shares on the same terms and
conditions.
(3) Includes 2,400,000 shares held in the name of National Iowa
Corporation and 2,178,926 shares held in the name of Arkansas National
Corporation, both of which are controlled by Mr. Ahart.
(4) All of Mr. Byrd's shares are subject to a right of first refusal of the
Company to acquire said shares on the same terms and conditions
as any proposed sale or other transfer by Mr. Byrd.
(5) Includes 1,400,000 shares held in the name of Life Industries
of Iowa, Inc., and 1,335,171 shares held in the name of Arkansas
Industries Corporation, both of which are controlled by Mr. Shamas.
</FN>
</TABLE>
III-5
<PAGE>
Security Ownership of Management
The following table sets forth, as of December 31, 1995, certain information
concerning the beneficial ownership of the Company's Common Stock by each
director of the Company and by all directors and officers as a group:
<TABLE>
<CAPTION>
Amount and Nature of
Title Beneficial Ownership(1) Percent of Class as of
of Class Name of Beneficial Owner December 31, 1995
- ---------------------- ---------------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Common Stock Wayne E. Ahart 4,845,505(2) 20.91%
" Barry N. Shamas 2,801,816(4) 12.09%
" C. Donald Byrd 1,452,719(3) 6.27%
" Kenneth Tobey 761,762 3.29%
" Cecil Alexander 37,088 .16%
" Richard Barclay 37,088 .16%
" Eugene A. Cernan 37,088 .16%
" Hayden Fry 69,047 .30%
" John Greig 50,102 .22%
" Roy Keppy 51,001 .22%
" Tom Landry 87,088 .38%
" Roy Ledbetter 37,088 .16%
" John E. Miller 37,088 .16%
" C. James McCormick 137,084(5) .59%
" James A. Mullins 50,000 .22%
" Knox Nelson 37,088 .16%
" Robert R. Rigler 3,295 .01%
" Chris Schenkel 37,088 .16%
" L. Stanley Schoelerman 50,000 .22%
" Orville Sweet 50,000 .22%
" Charles Thone 50,000 .22%
" All officers and directors as a
group (22 persons)
10,737,578(6) 46.33%
- ---------------------- -- ----------------------------------
<FN>
(1)To the Company's knowledge, all shares are beneficially owned by, and the
sole voting and investment power is held by the persons named, except as
otherwise indicated.
(2) Includes 2,400,000 shares held in the name of National Iowa Corporation and
2,178,926 shares held in the name of Arkansas National Corporation, both of
which are controlled by Mr. Ahart.
(3) All of Mr. Byrd's shares are subject to a right of first refusal of the
Company to acquire said shares on the same terms and conditions as any proposed
sale or other transfer by Mr. Byrd.
(4) Includes 1,400,000 shares held in the name of Life Industries of Iowa, Inc.,
and 1,335,171 shares held in the name of Arkansas Industries Corporation, both
of which are controlled by Mr. Shamas.
(5)Includes 10,000 shares held in the name of C. James McCormick and 90,000
shares divided equally among and held in the names of Mr. McCormick's four
children.
(6) Includes the shares of Jeffrey J. Drees, Vice President - Controller of the
Company.
</FN>
</TABLE>
III-6
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships
During the years ended December 31, 1995 and 1994, as part of the Company's
routine investment program, the Company and BNLAC effected certain of its
purchases and sales of various US Treasury and corporate securities through the
brokerage firm of Ahart & Bryan, Inc. ("A & B, Inc."), of North Little Rock,
Arkansas. A & B, Inc. is registered with the National Association of Securities
Dealers, Inc. Mr. Tom Ahart (a brother of the Company's Chairman, Wayne E.
Ahart) is President and a Director of A & B, Inc. The above-described
transactions were executed pursuant to a clearing agreement between A & B, Inc.
and Rauscher, Pierce, Refsnes, Inc., ("RPR") an unaffiliated brokerage firm and
a member of the New York Stock Exchange. Under the clearing agreement, RPR acted
as "clearing agent" for A & B, Inc. (the introducing broker). In that capacity,
RPR executed purchases and sales with a market value totaling approximately
$9,800,000 and $6,600,000 during 1995 and 1994 respectively, as directed by the
Company through A & B, Inc. RPR received, held and disbursed all of the proceeds
and securities relating to these transactions until such transactions were
consummated (at which time such proceeds and/or securities were disbursed at the
direction of the Company and BNLAC). A & B received fees totaling $7,197 and
$7,327 for 1995 and 1994 respectively, for completing these transactions.
Management believes that the amounts charged by A & B, Inc. in these
transactions were less than those which would have been charged by other
brokerage firms. The Company and BNLAC used A & B, Inc. as one of its broker
dealers during 1994 and 1995 and anticipates continuing this arrangement.
Affiliates
Effective August 1, 1994, the Company merged its wholly-owned subsidiary, USSA
Acquisition, Inc. ("USSA"), an Arkansas corporation, with and into UAC, an
Arkansas insurance holding company, and UAC became a wholly-owned subsidiary of
the Company. In March, 1994, the name of the Company was changed from United
Iowa Corporation to BNL Financial Corporation as one of the first steps in the
merger. The merger involved an exchange of newly-issued common stock of the
Company for all of the issued and outstanding shares of common stock of UAC. The
merger was approved by the shareholders of UAC. The shareholders of the Company
authorized additional shares of its common stock, some of which was used in
connection with the merger. The merger was approved August 1, 1994 by the
Arkansas Insurance Department. The merger is more fully described in the
Registration Statement on Form S-4 (including a preliminary Prospectus/Proxy
Statement), No. 33-70318, filed with the Securities and Exchange Commission on
October 13, 1993. The Registration Statement includes as an exhibit thereto the
proposed Plan of Merger (also referred to as the "Merger Agreement"). The Plan
of Merger contains all terms and conditions of the transaction and is
incorporated in its entirety herein by reference thereto.
In connection with the merger of USSA and UAC, the Company redomesticated its
subsidiary, BNLAC, an Iowa-domiciled life insurer, into Arkansas. The
redomestication was a step preliminary to merging with United Arkansas Life
Assurance Company, an Arkansas-domiciled life insurer, with BNLAC as the
survivor of the merger. The merger enhanced the capital of the Company and its
subsidiaries and increased BNLAC's capacity for premium growth. The merger of
the insurance companies was approved by the Iowa Insurance Division and the
Arkansas Insurance Department
As part of the Company's continuing efforts of expansion and diversification, on
November 30, 1995 BNL Brokerage Corporation was formed as an Arkansas domiciled
entity. There was no activity in this corporation in 1995.
III-7
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The information required by this section is set forth on page E-2 of this Report
and is incorporated herein by reference.
2. Financial Statement Schedules Included in item 14(a)
<TABLE>
<CAPTION>
Page Number
Form 10-KSB
----------------
<S> <C>
Report of Independent Accountants on Financial Statement Schedule
E-14
</TABLE>
<TABLE>
3. Exhibits
<CAPTION>
No. Description Page or Method of Filing
- ------------ -------------------------------------------------------- --------------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of BNL Financial Incorporated by reference to Exhibits 3.1 of the
Corporation, dated January 27, 1984 and Amendment to Company's Registration Statement No. 33-70318.
Articles of Incorporation of BNL Financial
Corporation, dated November 13, 1987.
3.2 Bylaws of BNL Financial Corporation Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement No. 33-70318
4.1 Instruments defining the rights of security holders, Incorporated by reference to Exhibit 4 of the
including indentures Company's Registration Statement No. 2-94538 and
Exhibits 3.5 and 4 of Post-Effective Amendment No. 3
thereto.
4.2 Articles of Incorporation of BNL Financial Included herewith as Exhibit 3.1 which is incorporated
Corporation, dated January 27, 1984 and Amendment to herein by reference thereto.
Articles of Incorporation on BNL Financial
Corporation, dated November 13, 1987.
10.1 Office Lease dated January 1, 1985 between Registrant Incorporated by reference to Exhibit 10.4 of
and William L. Kopatick. Pre-Effective Amendment No. 1 of the Company's
Registration Statement No. 2-94538.
10.2 Form of Agreement between Commonwealth Industries Filed with 10-QSB for the period ended September 30,
Investors Corporation and American Investors 1994.
Corporation and Wayne E. Ahart regarding rights
to purchase shares of the Company.
10.3 Agreement dated December 21, 1990 between Incorporated by reference to Exhibit 10.9 of the
Registrant and C. Byrd granting Registrant right of first Company's Annual Report on Form 10-K for the year
refusal as to future transfer of Mr. Byrd's shares of ended December 31, 1990.
the Company's common stock.
10.4 Quota Share Reinsurance Agreement dated 8/10/91 Incorporated by reference to Exhibit 10.10 of the
between Registrant and UniLife Insurance Co. of San Company's Annual Report on Form 10-K for the year
Antonio, Texas ended December 31, 1991.
IV-1
<PAGE>
10.5 Subscription Agreement dated March 2, 1994. Incorporated by reference to S-4 Registration
Statement No. 33-70318.
10.6 Stock Escrow Agreement dated February 28, 1994. Incorporated by reference to S-4 Registration
Statement No. 33-70318.
10.7 Merger Agreement between United Arkansas Corporation Incorporated by reference to S-4 Registration
and USSA Acquisition Inc. dated February 11, 1994. Statement No. 33-70318.
10.8 Merger Agreement between Iowa Life Assurance Company Filed with 10-QSB for the period ended March 31, 1994.
and United Arkansas Life Assurance dated March 2, 1994.
10.9 Office lease dated March 24, 1994, between Iowa Life Filed with 10-QSB for the period ended September 30,
Assurance Company andEnclave KOW, Ltd., for premises 1994.
in Austin, Texas.
10.10 Amendment Number Two to the Quota Share Reinsurance Filed with Form 8-K dated January 18, 1995.
Agreement dated 8/10/91 between Registrant and UniLife
Insurance Co. of San Antonio, Texas
11 Statement re computation of per share earnings. Reference is made to the explanation of the
computation of per share earnings as shown in Note 1
to the Notes to Consolidated Financial Statements
filed herewith under item 14(a)(1) above which clearly
describes the same.
12 Statements re computation of ratios. Not applicable.
16 Letter Re Change in Certifying Accountant Filed with Form 8-K dated September 14, 1995.
22 Subsidiaries of Registrant Filed herewith.
</TABLE>
(b) Reports on Form 8-K
On January 18, 1995, the Company filed a Form 8-K regarding the change in the
quota share reinsurance agreement with UniLife Insurance Company effective
January 1, 1995.
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 12th day of March
1996.
BNL FINANCIAL CORPORATION
/S/ Wayne E. Ahart
- ------------------
By: Wayne E. Ahart, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------- ------------------------------ --------------
<S> <C> <C>
/S/ Wayne E. Ahart
- -------------------------------------------- 3/12/96
Wayne E. Ahart Chairman of the Board, Director --------------------------
(Principal Executive Officer)
/S/ C. Donald Byrd 3/12/96
- ------------------------------------------- -------------------------
C. Donald Byrd Vice Chairman of the Board and Director
/S/ Kenneth Tobey 3/12/96
- -------------------------------------------- -------------------------
Kenneth Tobey President and Director
/S/ Barry N. Shamas 3/12/96
- -------------------------------------------- -------------------------
Barry N. Shamas Executive Vice President, Treasurer and
Director (Principal Financial and
Accounting Officer)
- ------------------------------------------- -------------------------
Hayden Fry Director
/S/ John Greig 3/12/96
- -------------------------------------------- -------------------------
John Greig Director
/S/ Roy Keppy 3/12/96
- -------------------------------------------- -------------------------
Roy Keppy Director
/S/ Tom Landry 3/12/96
- -------------------------------------------- -------------------------
Tom Landry Director
/S/ C. James McCormick 3/12/96
- -------------------------------------------- -------------------------
C. James McCormick Director
/S/ James A. Mullins 3/12/96
- -------------------------------------------- -------------------------
James A. Mullins Director
/S/ Robert R. Rigler 3/12/96
- -------------------------------------------- -------------------------
Robert R. Rigler Director
/S/ Stanley Schoelerman 3/12/96
- -------------------------------------------- -------------------------
Stanley Schoelerman Director
/S/ Orville Sweet 3/12/96
- -------------------------------------------- -------------------------
Orville Sweet Director
/S/ Charles Thone 3/12/96
- -------------------------------------------- -------------------------
Charles Thone Director
/S/ Cecil Alexander 3/12/96
- -------------------------------------------- -------------------------
Cecil Alexander Director
IV-3
<PAGE>
/S/ Richard Barclay 3/12/96
- -------------------------------------------- -------------------------
Richard Barclay Director
/S/ Eugene A. Cernan 3/12/96
- -------------------------------------------- -------------------------
Eugene A. Cernan Director
/S/ Roy Ledbetter 3/12/96
- -------------------------------------------- -------------------------
Roy Ledbetter Director
/S/ John E. Miller 3/12/96
- -------------------------------------------- -------------------------
John E. Miller Director
/S/ Knox Nelson 3/12/96
- -------------------------------------------- -------------------------
Knox Nelson Director
- -------------------------------------------- -------------------------
Chris Schenkel Director
</TABLE>
IV-4
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
ITEM 14 (a) AND 14 (d)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
BNL FINANCIAL CORPORATION and SUBSIDIARIES
DES MOINES, IOWA
Financial Statements Required by Item 8
<TABLE>
<CAPTION>
Page Number of 1995
Form 10-KSB
-------------------------
<S> <C>
Consolidated Balance Sheet, December 31, 1995 and 1994 E-2
Consolidated Statement of Operations for the years ended December 31, 1995 and 1994 E-3
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1995 E-4
and 1994
Consolidated Statement of Cash Flows for the years ended December 31, 1995 and 1994 E-5
Notes to Consolidated Financial Statements E-6
Report of Independent Accountants on Consolidated Financial Statements E-14
</TABLE>
E-1
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1995 and 1994
===========================================================================================================
<CAPTION>
December 31, December 31,
1995 1994
------------------- -------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $1,910,596 $2,207,537
Investments available for sale, at fair value (amortized
cost $10,959,766; 10,716,387; respectively ) 11,504,802 10,448,215
Investment in equity securities, common stock
at market (cost $108,123; $131,208; respectively) 41,870 110,792
------------------- -------------------
Total investments, including cash and
cash equivalents 13,457,268 12,766,544
Accrued investment income 252,617 201,120
Furniture and equipment, net 303,262 151,935
Deferred policy acquisition costs 514,561 562,750
Receivable from reinsurer 142,677 315,527
Other assets 433,827 227,958
------------------- -------------------
Total assets $15,104,212 $14,225,834
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for future policy benefits $1,325,514 $1,275,699
Policy claims payable 552,235 296,200
Annuity deposits 3,435,834 3,319,236
Deferred annuity profits 602,719 591,637
Premium deposit funds 195,542 220,885
Supplementary contracts without life contingencies 84,213 173,593
Other liabilities 315,358 167,191
------------------- -------------------
Total liabilities 6,511,415 6,044,441
------------------- -------------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, $.02 stated value, 45,000,000 shares
authorized, 23,311,944 shares issued and outstanding 466,239 466,239
Additional paid-in capital 14,308,230 14,308,272
Unrealized appreciation (depreciation) of securities 478,783 (288,590)
Accumulated deficit (6,596,350) (6,240,423)
Treasury stock, at cost, 138,795 shares (64,105) (64,105)
------------------- -------------------
Total shareholders' equity 8,592,797 8,181,393
------------------- -------------------
Total liabilities and shareholders' equity $15,104,212 $14,225,834
=================== ===================
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
E-2
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1995 and 1994
===============================================================================================================
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1994
------------------- ------------------
<S> <C> <C>
Income:
Premium income $3,073,819 $971,066
Net investment income 880,368 893,757
Realized gains 308,490 154,646
------------------- ------------------
Total income 4,262,677 2,019,469
------------------- ------------------
Expenses:
Increase in liability for future policy benefits 47,670 133,336
Policy benefits and other insurance costs 2,618,023 553,016
Amortization of deferred policy acquisition costs 48,191 44,339
Operating expenses 1,767,550 1,805,306
Taxes, other than on income 137,170 102,757
------------------- ------------------
Total expenses 4,618,604 2,638,754
------------------- ------------------
Loss from operations before
income taxes (355,927) (619,285)
Provision for income taxes - -
------------------- ------------------
Net loss $(355,927) $(619,285)
=================== ==================
Net loss per common share $(0.02) $(0.03)
=================== ==================
Weighted average number of fully
paid common shares 23,311,944 23,311,944
=================== ==================
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
E-3
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1995, and 1994
====================================================================================================================================
<CAPTION>
Unrealized
Additional (Depreciation)
Common Stock Paid-In Accumulated Appreciation of Treasury
Shares Amount Capital Deficit Securities Stock
-------------- ------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 24,243,186 $484,864 $14,299,646 $(5,621,138) $1,049,154 $(74,105)
Common stock reduction
during merger (931,242) (18,625) 8,626 - - -
Treasury shares canceled - - - - - 10,000
Unrealized depreciation
of securities - - - - (1,337,744) -
Net loss - - - (619,285) - -
-------------- ------------- --------------- --------------- -------------- -------------
Balance, December 31, 1994 23,311,944 466,239 14,308,272 (6,240,423) (288,590) (64,105)
Fractional shares
repurchased - - (42) - - -
Unrealized appreciation
of securities - - - - 767,373 -
Net loss - - - (355,927) - -
============== ============= =============== =============== ============== ============
Balance, December 31, 1995 23,311,944 $466,239 $14,308,230 $(6,596,350) $478,783 $(64,105)
============== ============= =============== =============== ============== ============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
E-4
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, and 1994
=========================================================================================================================
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(355,927) $(619,285)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Realized gains on investments (306,851) (154,624)
Realized gains on sale of furniture and equipment (1,639) (22)
Depreciation 65,294 53,662
Amortization of deferred acquisition costs,
organization costs and state licenses acquired 51,299 58,639
Accretion of bond discount (7,460) (6,190)
Deferred policy acquisition costs (48,189) (7,939)
Change in assets and liabilities:
Decrease (increase) in receivable from reinsurer 172,850 (140,338)
Increase in accrued investment income (51,497) (26,680)
Increase in liability for future policy benefits 49,815 132,944
Increase in policy claims payable 256,035 156,700
Increase in annuity deposits and deferred profits 127,680 287,944
Increase (decrease) in premium deposit funds (25,343) 10,905
Other, (increase) (13,977) (33,664)
--------------- ---------------
Net cash used in operating activities (87,910) (287,948)
--------------- ---------------
Cash flows from investing activities
Proceeds from sales of investments 1,599,954 1,583,813
Proceeds from maturity or redemption of investments 1,666,657 450,661
Sales of equity securities 22,562 1,024
Proceeds from sale of furniture and equipment 7,340 250
Purchase of furniture and equipment (221,009) (42,413)
Purchase of fixed maturity securities (3,195,155) (3,784,772)
Purchase of equity securities - (105,705)
--------------- ---------------
Net cash used in investing activities (119,651) (1,897,142)
--------------- ---------------
Cash flows from financing activities:
Net payments on supplementary contracts (89,380) (19,857)
--------------- ---------------
Net cash used in financing activities (89,380) (19,857)
--------------- ---------------
Net decrease in cash and cash equivalents (296,941) (2,204,947)
Cash and cash equivalents, beginning of period 2,207,537 4,412,484
--------------- ---------------
Cash and cash equivalents, end of period $1,910,596 $2,207,537
=============== ===============
Supplemental Information:
Noncash activities:
Cancellation of treasury stock - $(10,000)
=============== ===============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
E-5
<PAGE>
- --------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies:
The consolidated financial statements include the accounts of BNL Financial
Corporation and its wholly owned subsidiaries, BNL Equity Corporation and
Brokers National Life Assurance Company (BNLAC). As part of the Company's
continuing efforts of expansion and diversification, on November 30, 1995, BNL
Brokerage Corporation was formed as an Arkansas domiciled entity. There was no
activity in this corporation in 1995. It will be a wholly owned subsidiary of
BNLAC. All significant intercompany balances have been eliminated.
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
The Company's principal activity is the sale of individual and group life and
accident and health insurance within the United States. The Company is licensed
to sell in 27 states. Substantially all of the Company's life insurance in force
is nonparticipating business.
Premiums are reported as earned when due.
Benefits and expenses are associated with earned premiums so as to result in
recognition over the life of the policy. Such recognition is accomplished by
means of the provision for future policy benefits and amortization of deferred
policy acquisition costs.
Costs of acquiring new business and certain expenses of policy issuance and
underwriting have been deferred; these deferred policy acquisition costs are
being amortized over the premium-paying period of the policies (maximum of 30
years) in proportion to the ratio of annual premium revenue to total premium
revenue anticipated.
Liability for future policy benefits for traditional and limited-payment
contracts has been determined primarily by the net level premium method using
the 1975 through 1980 Select and Ultimate Mortality Table, interest assumptions
starting at 7% graded to 5% at the end of the sixteenth year and estimated
future withdrawals based upon Linton tables B or C.
For annuity contracts without mortality risk, net premium deposits and benefit
payments are recorded as increases or decreases in a liability account rather
than as revenue and expense. Expenses incurred and fees charged upon issuance
are deferred and recognized in relationship to the amount of funds held.
Increases in the liability account for interest credited to contracts are
charged to expense. The interest rate assumptions ranged from 6.50% to 5.25%
during 1995 and 1994.
The Company classifies its fixed maturity investments as investments available
for sale. Such securities may be sold prior to maturity due to changes that
might occur in market interest rates, changes in the security's prepayment risk,
the Company's liquidity needs, and similar factors, including the Company's
asset/liability management strategy. Investments available for sale are carried
at fair value. Unrealized gains and losses resulting from changes in the
valuation of fixed maturity securities are recorded directly to shareholders'
equity. Realized gains or losses on sale of investments are determined on a
specific identification basis. Investments in equity securities are carried at
fair value.
Cash equivalents are carried at amortized cost, which approximates fair value.
Cash equivalents represent US Treasury Bills and other short-term securities.
For purposes of the statement of cash flows, the Company considers all highly
liquid short-term investments to be cash equivalents. For purpose of cash flows
disclosures, there have been no federal income taxes or interest paid for 1995
and 1994.
Furniture and equipment are recorded at cost. Maintenance and repairs are
charged to expense as incurred. Provision for depreciation is made on the basis
of estimated useful lives of 3 to 10 years utilizing the straight-line method.
Accumulated depreciation totaled $309,498 and $271,515 at December 31, 1995 and
1994, respectively. Depreciation expense was $65,294 and $53,662 for the years
ended December 31, 1995, and 1994, respectively.
Other assets include agents' balances reduced by allowance for doubtful accounts
of $155,665 and $232,377 at December 31, 1995 and 1994, respectively. Reductions
in the allowance account were a credit to bad debt expense recorded in
operations of $(48,000) and $(32,535) for the years ended December 31, 1995, and
1994, respectively.
Other assets also include the cost of 26 state licenses acquired in 1991 as part
of the Statesmen Life Insurance Company acquisition. Such licenses are amortized
over the related estimated life of the license (40 years) using the
straight-line method. Amortization expense of approximately $3,109, was recorded
for each of the years ended December 31, 1995, and 1994.
E-6
<PAGE>
1. Summary of Significant Accounting Policies (continued):
Certain items in 1994 financial statements have been reclassified to conform to
the 1995 financial statements.
Net loss per share is based on net loss divided by the weighted average number
of fully paid shares.
2. Business Combination:
Effective August 1, 1994, United Arkansas Corporation (UAC) was merged with USSA
Acquisition Inc., a wholly owned subsidiary of the Company. As a part of the
merger, all of the outstanding shares of common stock of UAC were converted into
newly issued shares of common stock of the Company at a rate of ten shares of
UAC for nine shares of the Company. In connection with the merger, the Company
redomesticated its subsidiary Iowa Life Assurance Company (ILAC), an
Iowa-domiciled life insurance company, into Arkansas, making it an
Arkansas-domiciled company. Immediately following the redomestication, the
insurance subsidiary of UAC, United Arkansas Life Assurance Company, was merged
into ILAC and the name of the surviving company was changed to Brokers National
Life Assurance Company. At that same time, United Iowa Corporation was renamed
BNL Financial Corporation and United Arkansas Corporation became BNL Equity
Corporation. Upon completion of the merger, USSA Acquisition Inc., was
dissolved. This transaction was accounted for as a pooling of interests in 1994.
3. Shareholders' Equity:
At December 31, 1995 and 1994 shareholders' equity includes approximately
$6,372,000 and $5,915,000 respectively, of BNLAC net assets, substantially all
of which are restricted from distribution to the parent company without the
prior approval of the Arkansas Insurance Department. During 1994, the Company
contributed $1,000,000 of additional capital to BNLAC.
BNLAC reports to state regulatory authorities on a statutory accounting basis
that differs from the basis used herein. Under Arkansas insurance regulations,
BNLAC must maintain a minimum of $1,000,000 in capital and surplus. Capital and
surplus and net loss of BNLAC as reported on a statutory basis are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1994
---- ----
<S> <C> <C>
Capital and surplus $5,792,668 $6,243,076
========== ==========
Net loss $(436,054) $(453,689)
========== ==========
</TABLE>
The following is a reconciliation of consolidated net loss and shareholders'
equity per the financial statements included herein to BNLAC unconsolidated net
loss and capital and surplus on a statutory basis:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------------------------------- ------------------------------------------
Income/Loss Capital and Surplus Income/Loss Capital and Surplus
----------------- ---------------------- ---------------- ----------------------
<S> <C> <C> <C> <C>
Consolidated Reporting Under
Generally Accepted Accounting Principles $(355,927) $8,592,797 $(619,285) $8,181,393
Less Parent Company and BNL Equity 20,224 2,220,523 75,010 2,266,547
----------------- ---------------------- ----------------- ----------------------
Brokers National Life Assurance Company (335,703) 6,372,274 (544,275) 5,914,846
Deferred Acquisition Costs 48,188 (514,561) 44,337 (562,750)
Reserve and Premium Adjustments (15,317) 4,227 (14,015) 7,912
Interest Maintenance Reserve/AVR (77,919) (342,604) 22,433 (269,335)
Unrealized appreciation (depreciation)
of securities - (480,385) - 386,347
Annuity Deposits and Related Adjustments (73,389) 828,571 21,174 829,118
Other 18,086 (74,854) 16,657 (63,062)
----------------- ---------------------- ----------------- ----------------------
BNLAC Statutory Basis $(436,054) $5,792,668 $(453,689) $6,243,076
================= ====================== ================= ======================
</TABLE>
E-7
<PAGE>
4. Income Taxes:
During 1993, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. The Statement adopts the liability
method of accounting for deferred income taxes. Under the liability method,
companies establish a deferred tax liability or asset for the future tax effects
of temporary differences between book and tax basis of assets and liabilities.
Changes in future tax rates will result in immediate adjustments to deferred
taxes. The effect of adopting (SFAS) No. 109 was immaterial.
The total net operating loss carry forwards at December 31, 1995 were
approximately $5,884,000 for income tax reporting. The net operating loss carry
forwards expire in years 2000 - 2010. The Company and its subsidiaries will file
separate income tax returns for 1995.
A deferred tax asset of $2,600,000 resulted from net operating loss carryovers
and temporary differences primarily related to the life insurance subsidiary.
The Company has recognized a corresponding valuation allowance of $2,600,000
against the deferred tax asset. This represents a net increase of $200,000 in
the deferred tax asset for 1995 and corresponding valuation allowance over the
previous year. The Company recognized no current or deferred tax expense or
benefit.
5. Investments:
The amortized cost and estimated market value of investments in fixed maturity
securities are as follows:
<TABLE>
<CAPTION>
December 31, 1995 Gross Gross Estimated
----------------- Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations of
US government corporations and agencies $4,927,660 $496,718 $ - $5,424,378
Obligations of states and political subdivisions 5,390,856 45,616 (16,067) 5,420,405
Corporate Securities 410,365 7,701 (4,672) 413,394
Mortgage-backed securities
GNMA 30,769 5,796 - 36,565
Public utility bonds 200,116 9,944 - 210,060
--------------- ------------- ------------- ---------------
Totals $10,959,766 $565,775 $(20,739) $11,504,802
=============== ============= ============= ===============
December 31, 1994 Gross Gross Estimated
- ----------------- Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------- ------------- ---------------
US Treasury securities and obligations of
US government corporations and agencies $5,766,379 $22,435 $(206,548) $5,582,266
Obligations of states and political subdivisions 3,841,349 83,000 (216,876) 3,807,473
Corporate securities 727,668 1,500 (39,582) 689,586
Mortgage-backed securities
GNMA 36,944 - (1,444) 35,500
Public utility bonds 344,047 - (10,657) 333,390
--------------- ------------- ------------- ---------------
Totals $10,716,387 $206,935 $(475,107) $10,448,215
=============== ============= ============= ===============
</TABLE>
The amortized cost and estimated fair value of investments in fixed maturity
securities at December 31, 1995 by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties and because most mortgage-backed securities provide for periodic
payments throughout their life.
E-8
<PAGE>
5. Investments (continued):
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------
Estimated
Amortized Cost Market Value
--------------- --------------
<S> <C> <C>
Due in one year or less $ 551,368 $ 552,724
Due after one year through five years 3,781,842 3,855,470
Due after five years through ten years 3,168,581 3,219,918
Due after ten years 3,427,206 3,840,125
--------------- --------------
10,928,997 11,468,237
Mortgage-backed securities 30,769 36,565
--------------- --------------
$10,959,766 $11,504,802
=============== ==============
</TABLE>
Proceeds from sales and maturities of investments in fixed maturity securities
for the years ended December 31, 1995 and 1994 were $1,599,954 and $1,583,813,
respectively. Gross gains of $307,416 and $156,497 and gross losses of $565 and
$1,851 were realized on those December 31, 1995, and 1994 sales, respectively.
Investment in equity securities at December 31, 1995 and 1994 represents common
stock investments as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Market Market Value
Cost Value Cost
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Banks, trusts and
insurance companies $ 2,423 $ 625 $ 2,423 $ 1,250
Industrial, savings
and loans and other 105,700 41,245 128,785 109,542
------------- ------------ ------------- -------------
$108,123 $41,870 $131,208 $110,792
============= ============ ============= =============
</TABLE>
Net investment income for the years ended December 31, 1995 and 1994 is as
follows:
December 31,
------------------------------
1995 1994
------------- -------------
Interest on debt securities and
cash investments $897,175 $907,292
Dividends on equity securities 169 177
------------- -------------
897,344 907,469
Investment expenses (16,976) (13,712)
------------- -------------
Net investment income $880,368 $893,757
============= =============
E-9
<PAGE>
5. Investments (continued):
Net realized gains and losses are summarized below:
December 31,
------------------------------
1995 1994
------------- -------------
Debt securities $307,374 $153,622
Equity securities (523) 1,024
------------- -------------
$306,851 $154,646
============= =============
Included in 1995 and 1994 realized gains on debt securities is $188,456 and
$133,318, respectively of gains on taxable municipal bonds that were written
down in 1991 to 25% of par value for a total realized loss of $522,282. The
taxable municipal bonds were of three issuers whereby the proceeds of the
securities were invested in guaranteed investment contracts (GICs) of Executive
Life Insurance Company (Executive Life). Executive Life was placed under
rehabilitation by the California regulators in 1991. In 1993, a rehabilitation
plan was approved and in 1995 and 1994 the Company received a portion of the
principal in excess of the book value and back interest on the bonds.
6. Fair Value of Financial Instruments
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents
(Note 1) $ 1,910,596 $ 1,910,596 (a) $ 2,207,537 $ 2,207,537 (a)
Investments-fixed maturity, available for sale
(Note 5 & 1) 11,504,802 11,504,802 (b) 10,448,215 10,448,215 (b)
Investments -equity securities
(Note 5 & 1) 41,870 41,870 (b) 110,792 110,792 (b)
Other financial instruments-Assets 316,428 316,428 (a) 226,797 226,797 (a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Assets $13,773,696 $13,773,696 $12,993,341 $12,993,341
================ ================ ================ ================
Liabilities
Premium deposit funds $195,542 $195,542 (a) $220,885 $220,885 (a)
Supplementary contracts without life contingencies
(Note 1) 84,213 84,213 (a) 173,593 173,593 (a)
Annuity deposits
(Note 1) 3,435,834 3,435,834 (a) 3,319,236 3,319,236 (a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Liabilities $3,715,589 $3,715,589 $3,713,714 $3,713,714
================ ================ ================ ================
<FN>
(a) The indicated assets and liabilities are carried at book value which
approximates fair value.
(b) Fair value of investments are based on quoted market price or dealer quotes,
when available. If quotes are not available, fair values are based on quoted
prices of comparable instruments.
</FN>
</TABLE>
E-10
<PAGE>
7. Commitments and Contingencies:
The Company has entered into noncancelable operating leases for office space and
equipment. Future minimum payments under the leases are as follows:
1996 $94,997
1997 $77,868
1998 $77,868
1999 $41,544
Thereafter $0
----------------------
Total $292,277
======================
Related lease cost incurred for the years ended December 31, 1995 and 1994 was
$101,480 and $103,089, respectively.
The Company's wholly owned insurance subsidiary may be subject to losses related
to guarantee fund assessments. Such assessments result from liquidation of
troubled insurers by state regulators. The assessment to BNLAC, if any, is not
reasonably estimable, nor expected to have a material effect on the financial
statements.
Cash deposits in excess of federally insured limits are approximately $274,000
at December 31, 1995.
8. Liability for Unpaid Claims
Activity in the liability for unpaid claims is summarized as follows.
<TABLE>
<CAPTION>
1995 1994
------------------ -------------------
<S> <C> <C>
Balance at January 1 $296,200 $139,500
Less Reinsurance Recoverable 260,730 117,800
------------------ -------------------
Net Balance at January 1 35,470 21,700
------------------ -------------------
Incurred related to:
Current year 1,902,000 149,627
Prior years 1,688 (1,143)
------------------ -------------------
Total Incurred 1,903,688 148,484
------------------ -------------------
Paid related to:
Current year 1,475,000 118,657
Prior years 32,658 16,057
------------------ -------------------
Total paid 1,507,658 134,714
------------------ -------------------
Net Balance at December 31 431,500 35,470
Plus reinsurance recoverable 120,735 260,730
================== ===================
Balance at December 31 $552,235 $296,200
================== ===================
</TABLE>
9. Reinsurance:
Liability for future policy benefits is reported before the effects of
reinsurance. Reinsurance receivable (including amounts related to insurance
liabilities) are reported as assets. Estimated reinsurance receivable are
recognized in a manner consistent with the liabilities related to the underlying
reinsurance contracts. Such amounts have been presented in accordance with
Statement of Financial Standards No. 113 "Accounting and Reporting for
Reinsurance of Short Duration and Long Duration Contracts." The Company is
liable if the reinsuring companies are unable to meet their obligations under
the reinsurance agreements.
E-11
<PAGE>
9. Reinsurance (continued):
The Company retains a maximum of $35,000 on any one risk and reinsures the
remainder with Business Mens Assurance Company. The rating by A.M. Best Company
of Business Mens Assurance Company, the primary life reinsurer, was "A+"
(Superior) for 1994.
Following is a summary of life reinsurance for December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross other from other Net Assumed to
Amount Companies Companies Amounts Net
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1995
Life Insurance in force
(in thousands) $35,310 $11,486 $6,631 $30,455 21.7%
============= ============= ============= ============= =============
Premiums-life insurance $406,093 $40,915 $16,758 $381,936 4.3%
============= ============= ============= ============= =============
Percentage
Ceded to Assumed of Amount
Gross other from other Net Assumed to
Amount Companies Companies Amounts Net
------------- ------------- ------------- ------------- -------------
December 31, 1994
Life Insurance in force
(in thousands) $36,280 $11,188 $5,624 $30,716 18.3%
============= ============= ============= ============= =============
Premiums-life insurance $448,231 $31,043 $16,583 $433,771 3.8%
============= ============= ============= ============= =============
</TABLE>
10. Related Party Transactions
During the years ended December 31, 1995 and 1994, as part of the Company's
routine investment program, certain purchases and sales of securities were
effected through a broker firm owned by the brother of the Chairman of the Board
of the Company. The above described transactions were executed pursuant to a
clearing agreement with an unaffiliated brokerage firm and member of the New
York Stock Exchange. Total purchases and sales executed under the agreement were
approximately $9,800,000 and $6,600,000 for 1995 and 1994, respectively. Fees
paid to the related broker were $7,197 and $7,327 for 1995 and 1994,
respectively.
11. Stock Option Plan
In 1994, the Board of Directors and stockholders approved the 1994 Brokers and
Agents' Nonqualified Stock Option Plan. This plan, subject to approval of the
registration, was established as incentive to sales persons of BNLAC. A maximum
of 250,000 shares will be available under the plan and the option period may not
exceed a term of 5 years. The duration of the plan is ten years and it will be
administrated by a four member committee of Directors. During 1995 the Company
granted 26,400 stock options with an exercise price of $.50 per share. No
options were granted through this plan in 1994. No options were exercised in
1995.
E-12
<PAGE>
12. The Offering
From 1989 until 1992, United Arkansas Corporation offered Arkansas residents
1,000,000 shares of common stock and 500,000 shares of preferred stock in units
of two common shares and one preferred share at $10 per unit. As a condition of
the public offering, the 13,500,000 shares issued to organizers in February 1989
were placed in escrow. On May 1, 1992 the organizers' shares were reduced to
5,563,212 in accordance with an agreement whereby the organizers could not
collectively own more than 60 percent of the number of shares of common stock
outstanding.
In 1994, in order to consummate a merger of United Arkansas Corporation and USSA
Acquisition Inc., the stock subject to the February 1, 1989 escrow agreement was
released from the terms and conditions of the February 1, 1989 escrow agreement
so that the stock could be exchanged for common stock of United Iowa Corporation
pursuant to the terms of the merger (see Note 2). A new escrow agreement with an
effective date of February 28, 1994, prohibits sale or transfer of the
organizers' shares until any one of the following conditions is satisfied:
a. The Company has net earnings per share per year, after tax and before
extraordinary items, of $1.86 for any three years following the public
offering.
b. A tender offer or an offer to merge or otherwise acquire the Company's
common stock at a per share price of at least $3.34 per share of common
stock and having a market value at the effective date of the tender offer,
merger, or other acquisition of at least $3.71 per share of common stock.
c. At any time after February 28, 1995, the public market price
exceeds $3.25 for a term of 90 trading days and for 30 consecutive trading
days prior to a request for termination of the escrow.
d. If insurance business in force reaches the following levels:
$100,000,000 - 50% of escrowed shares will be released.
$125,000,000 - 25% of escrowed shares will be released.
$150,000,000 - remaining 25% of escrowed shares will be released.
e. All escrowed shares will be released August 1, 1999, if they have not been
released prior to that time.
E-13
<PAGE>
- --------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
================================================================================
To the Board of Directors and Shareholders
BNL Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of BNL Financial
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, change in shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of BNL
Financial Corporation and Subsidiaries as of December 31, 1995 and 1994 and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/S/ Amend, Smith & Co.
-----------------------
Oklahoma City, Oklahoma AMEND, SMITH & CO., p.c
February 15, 1996
E-14
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 0
<DEBT-HELD-FOR-SALE> 11504802
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 41870
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 11546672
<CASH> 1910596
<RECOVER-REINSURE> 142677
<DEFERRED-ACQUISITION> 514561
<TOTAL-ASSETS> 15104212
<POLICY-LOSSES> 1827912
<UNEARNED-PREMIUMS> 49837
<POLICY-OTHER> 4038553
<POLICY-HOLDER-FUNDS> 279755
<NOTES-PAYABLE> 0
0
0
<COMMON> 466239
<OTHER-SE> 8126558
<TOTAL-LIABILITY-AND-EQUITY> 15104212
3073819
<INVESTMENT-INCOME> 880368
<INVESTMENT-GAINS> 308490
<OTHER-INCOME> 0
<BENEFITS> 2015220
<UNDERWRITING-AMORTIZATION> 48191
<UNDERWRITING-OTHER> 650473
<INCOME-PRETAX> (355927)
<INCOME-TAX> 0
<INCOME-CONTINUING> (355927)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (355927)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
<RESERVE-OPEN> 35470
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 1475000
<PAYMENTS-PRIOR> 32658
<RESERVE-CLOSE> 431500
<CUMULATIVE-DEFICIENCY> 1688
</TABLE>
