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, 1996 [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
- --------------------------------------------------------------------------------
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 1996 were $8,206,463.
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 31, 1996, was approximately $3,968,183 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, 1996, 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 three wholly-owned subsidiaries, BNL Equity Corporation ("BNLE"
- - formerly United Arkansas Corporation), Brokers National Life Assurance Company
("BNLAC" - formerly Iowa Life Assurance Company) and BNL Brokerage Corporation.
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. BNL Brokerage Corporation, was formed on November 30, 1995.
The corporation was formed in order to offer another company's products to
agents and brokers appointed to BNLAC. The products do not compete with BNLAC's
policies and BNL Brokerage will receive commissions on the sales.
Industry Segments
The operations of the Company are conducted through BNLAC, which in 1996 sold
life and accident and health insurance policies in 23 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 payroll deductible
10 year level tem policy, a family level term insurance policy and a line of
dental insurance policies.
Statistics by line of business are as follows (gross before reinsurance):
<TABLE>
<CAPTION>
1996 1995
--------------- --------------
<S> <C> <C>
I. Annual Premiums and Annuity Deposits In Force:
Ordinary Life Insurance $387,000 $407,000
Individual Annuities(1) 298,000 337,000
Group Dental Insurance 7,804,000 5,264,000
Accidental Death Insurance 70,000 94,000
--------------- --------------
Total $8,559,000 $6,102,000
=============== ==============
<PAGE>
II. Collected Premiums and Annuity Deposits:
Ordinary Life Insurance $393,000 $406,000
Individual Annuities(1) 322,000 371,000
Group Dental Insurance 6,926,000 4,159,000
Accidental Death Insurance 72,000 86,000
---------------- -----------------
Total $7,713,000 $5,022,000
================ =================
III. Amount of Insurance:
Ordinary Life Insurance $34,000,000 $35,000,000
Accidental Death Insurance 148,000,000 180,000,000
---------------- -----------------
Total $182,000,000 $215,000,000
================ =================
<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 $ - $ - $ 423,095 $ 423,095
Arkansas 14,060 - 1,727,544 1,741,604
Colorado - - 267,114 267,114
Delaware - - 8,391 8,391
Florida 770 - 116,373 117,143
Georgia - - 677,700 677,700
Idaho - - 10,746 10,746
Illinois 508 - 285,161 285,669
Indiana 11,038 - 216,427 227,465
Iowa 344,890 321,799 926,044 1,592,733
Kentucky - - 5,717 5,717
Louisiana 947 - 62,473 63,420
Michigan 956 - 807,595 808,551
Minnesota 14,526 - 261,510 276,036
Mississippi 1,074 - 661,484 662,558
Missouri 165 - 278,175 278,340
Nebraska 60 - 11,006 11,066
Ohio - - 46,005 46,005
Oklahoma 3,589 - 171,888 175,477
Pennsylvania - - 22,274 22,274
South Dakota - - 9,373 9,373
Miscellaneous - - 2,476 2,476
==================== ==================== ===================== ====================
Total $392,583 $321,799 $6,998,571 $7,712,953
==================== ==================== ===================== ====================
</TABLE>
<PAGE>
As of January 1, 1997, BNLAC had appointed 1,193 general agents and brokers in
24 states to market its policies compared to 784 agents and brokers on January
1, 1996.
On all of its products except the dental policies, BNLAC follows the industry
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 1995.
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
1996 $33,796,000 $11,091,000 $7,252,000 $29,957,000
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
Accidental Death Insurance
1996 $148,000,000 $139,725,000 $0 $8,275,000
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
</TABLE>
<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 reinsured 50% of the dental business to UniLife
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.
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>
1996 $6,926,000 $0 $6,926,000 $0
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
</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>
1996 $4,653,000 $0 $4,653,000 73.6%
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
</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>
1996 $757,000 6.8%
1995 734,000 6.6
1994 674,000 6.5
1993 599,000 6.1
1992 637,000 6.9
</TABLE>
<PAGE>
Reference is made to Note 4 of the Notes to Consolidated Financial Statements,
page E-8, 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, 1996, 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. As of December
31, 1996, the Company and BNLAC had received $687,217 of principal and interest
on the bonds since 1991 when they went into default. The bonds have a total
market value of $230; 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.
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
<PAGE>
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 and health 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 1995 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
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.
<PAGE>
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 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, 1996, 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, records 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 regular triennial statutory examination for the three year period ending
December 31, 1995 was conducted by the Arkansas Insurance Department. During the
course of the examination, the Department notified the Company that Arkansas law
required that all bonds and other investments held by custodial agreement be
registered with the Depository Trust Corporation (DTC) through a custody
agreement with an Arkansas bank. As a result of the 1994 merger of Iowa Life
Assurance Company and United Arkansas Life Assurance Company, BNLAC had
$4,130,392 of securities registered with DTC through a custodial agreement with
a fully-insured investment banking firm. This resulted in a proposal by the
Arkansas Insurance Department to nonadmit these assets. Subsequent to year end,
BNLAC satisfied the Department rule by moving the custodial agreement to First
Commercial Bank, Little Rock, Arkansas. The department also proposed that a 1996
expense of $77,998 be reclassified to 1995. This amount represents an under
estimate of the incurred but not reported dental claims for 1995. The Arkansas
Insurance Department examination report is expected to be released in final form
in mid 1997.
<PAGE>
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, 1997, BNLAC had four executive officers, 27 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 administrator to
process 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 agreed 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 rental of
$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 1995 and $6,053 ($72,636 per year) during 1996, plus pro rata operating
expenses. The Company has its administrative and marketing offices at this
location.
During 1995 and the first half of 1996 BNLE leased office space in North Little
Rock, Arkansas at a monthly rate of $1,800 ($21,600 per year). At June 1, 1996,
BNLE entered into a three year lease at a monthly rate of $1,200 ($14,400 per
year) and moved its office to Sherwood, Arkansas. 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
On April 30, 1996, Myra Jo Pearson and Paul Pearson filed a class action
complaint in the Circuit Court of Pulaski County, Arkansas (3rd Division) naming
the Company, BNL Equity Corporation and several officers of the Company, as
defendants. On July 19, 1996, the plaintiffs filed their first amended complaint
and on and after July 24, 1996, the defendants were first served and notified of
the complaint and first amended complaint. The plaintiffs have alleged that the
defendants violated the Arkansas Securities Act in several respects in
connection with the public offerings of securities made by United Arkansas
Corporation ("UAC") (now known as BNL Equity Corporation) during the period from
January 1989 until May, 1992. The plaintiffs have filed on behalf of themselves,
as well as all other similarly situated persons who acquired UAC stock in these
offerings. The crux of the plaintiffs' allegations is that the defendants made
alleged misrepresentations and omissions concerning the business plan and
insurance marketing strategy of UAC in connection with the public offerings.
<PAGE>
The Company has retained the firm of Friday, Eldredge & Clark, Little Rock,
Arkansas, to handle the defense of the action on behalf of all defendants. The
company believes the action is frivolous and that substantial evidence exists
which directly refutes the allegations. The Company intends to vigorously defend
the matter and on August 13, 1996, filed an answer denying all alleged
violations. The Company is pursuing sanctions against appropriate parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 21, 1996 in Des
Moines, Iowa. At the annual meeting, the following individuals were elected to
the Company's Board of Directors.
<TABLE>
<S> <C> <C>
Wayne E. Ahart Hayden Fry C. James McCormick
C. Donald Byrd John Greig Robert R. Rigler
Kenneth Tobey Roy Keppy Chris Schenkel
Barry N. Shamas Thomas Landry L. Stanley Schoelerman
Cecil Alexander Roy Ledbetter Orville Sweet
Richard Barclay John E. Miller Charles Thone
Eugene A. Cernan James A. Mullins
</TABLE>
12,858,770 shares had been voted in favor of Messrs. Barclay, Cernan, Greig,
McCormick, Mullins, Schenkel, Shamas, Thone, Alexander, Keppy, Ledbetter,
Miller, Rigler and Schoelerman; 12,855,764 shares had been voted in favor
Messrs. Ahart and Byrd; 12,856,766 shares had been voted in favor of Mr. Tobey;
12,854,270 shares had been voted in favor of Mr. Landry; 12,854,768 shares had
been voted in favor of Mr. Fry; 12,857,570 shares had been voted in favor of Mr.
Sweet. 228,004 shares were withheld from all directors.
The shareholders ratified the selection of Smith, Carney & Co., p.c. (formerly
Amend, Smith & Co.,) as the Company's independent auditors for the year ending
December 31, 1996 with 12,955,604 shares voted in favor, 11,184 shares voted
against and 119,986 abstained.
<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 1996. During the year there were a total of seven stock sales
with a price ranging from $.32 to $.35 a share. The final stock sold during 1996
was at $.32 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.
An 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, 1996, there were 4,845 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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1996, the Company had liquid assets of $702,769 in cash, money
market savings accounts, 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 1996, BNLAC collected $7.7 million of premiums and annuity
deposits (gross before reinsurance) and $864,000 of investment income. Another
source of cash flow is from the sale of investments which, in 1996, produced
gains totaling $93,000.
The Company's investments are primarily in U.S. Government and Government
Agencies ($11,029,332) and other investment grade bonds ($856,577) 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, 1996 BNLAC had statutory capital and surplus
of approximately $5,035,886. The Company and BNL Equity Corporation contributed
$500,000 to the gross paid in and contributed surplus of BNLAC in February 1997.
Results of Operations
Premium income for 1996 was $7,245,660 compared to $3,073,819 in 1995, an
increase of $4,171,841. The increase was due to the increased sales of group
dental insurance and an increase in dental premiums retained by BNLAC from 50%
in 1995 to 100% in 1996 (see note 8). Effective November 1, 1995, BNLAC
increased its retention of dental insurance premiums to 100%.
Net investment income was $863,940 in 1996 and $880,368 in 1995. The decrease
was due to the receipt of interest of $43,174 in 1995, compared to $30,204 in
1996, on certain taxable municipal bonds that had been in default since 1991
(see note 4). Interest and principal payments will continue on the GIC bonds
through 1998, though the majority of the funds have been distributed at this
time.
Realized gains were $96,863 in 1996 compared to $308,490 in 1995. Realized gains
included $30,204 and $188,456 for 1996 and 1995 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 realized gains in 1996 and
1995 were due to gains on bonds sold in the normal course of the Company's
investment activity.
Increases in liability for future policy benefits were $55,407 in 1996 compared
to $47,670 for the same period in 1995. The increase of $7,737 is due to the
increase in life GAAP reserves as the block of life insurance ages. The increase
in liability for future policy benefits will fluctuate annually based on the
persistency of the life insurance in force.
Policy benefits and other insurance costs were $6,353,988 in 1996 compared to
$2,618,023 in 1995. The increase in 1996 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 73.6% in 1996 compared to 72.5% in 1995.
Amortization of deferred policy acquisition costs was $39,894 in 1996 and
$48,191 in 1995. Amortization of deferred policy acquisition costs should
continue to decrease as the asset is reduced over the upcoming years.
Operating expenses were $2,443,908 in 1996 and $1,767,550 in 1995. The increase
was primarily due to an increase in home office staff, office supplies, printing
expense and claims administrative expense - all of which are attributable to
taking over the administration of the dental business. Management expects
overhead to decrease as a percentage of premium as premium income increases.
Taxes, other than on income were $253,238 for 1996 and $137,170 for 1995. The
1996 increase was due to an increase in premium taxes on the increased dental
insurance premiums collected.
The consolidated net loss for 1996 was $939,927 compared to $355,927 in 1995.
The increase in the loss was due to the increase in operating expenses, policy
benefits, and other insurance costs discussed above.
<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
<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 56 1984 Chairman of the Board and Director
C. Donald Byrd 55 1984 Vice Chairman of the Board and Director
Kenneth Tobey 38 1994 President
Barry N. Shamas 49 1984 Executive Vice President,
Treasurer and Director
Cecil Alexander 60 1994 Director
Richard Barclay 59 1994 Director
Eugene A. Cernan 62 1994 Director
Hayden Fry 67 1984 Director
John Greig 61 1984 Director
Roy B. Keppy 73 1984 Director
Tom Landry 71 1984 Director
Roy Ledbetter 66 1994 Director
John E. Miller 67 1994 Director
James A. Mullins 62 1984 Director
C. James McCormick 71 1984 Director
Robert R. Rigler 73 1989 Director
Chris Schenkel 72 1994 Director
L. Stan Schoelerman 71 1984 Director
Orville Sweet 72 1984 Director
Charles Thone 72 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.
<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.
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
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.
<PAGE>
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.
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
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.
<PAGE>
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
1985. He was a Director of LAC and LAAC from 1983 to 1987. Mr.
Thone is active in many civic organizations.
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>
Wayne E. Ahart, CEO 1996 $125,000 $0 $9,375 $0 - $0 $0
" 1995 $125,000 $0 $8,744 $0 - $0 $0
" 1994 $125,000 $0 $8,013 $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 $379,370. 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.
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 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 1996 and 1995 the Company granted 101,725 and 26,400 stock
options respectively, with an exercise price of $.50 per share. No options were
exercised in 1996 or 1995. Under the fair value method, total compensation
recognized for grant of stock options was $0. The fair value of options granted
is estimated at $800 and $200 in 1996 and 1995 respectively. These values were
computed using a binomial method as prescribed in SFAS 123 and certain
assumptions including risk free interest rate of 6.5%, expected life of 3 years,
expected volatility of 11% and no expected dividends due to statutory
limitations. The estimated weighted average remaining life of the options is 2.6
years.
<PAGE>
In November 1996, the Board of Directors authorized a stock bonus plan for the
benefit of certain officers of the corporation subject to specific guidelines.
No stock bonus will be granted until the Company has consolidated after tax
profits. The plan has not been formally established.
On January 1, 1997 the Brokers National Life Employee Pension Plan was adopted.
The plan is a qualified retirement plan under the Internal Revenue Code. All
employees are eligible who have attained age 21 and have completed one year of
service. Employer contributions are discretionary, however the Company is not
contributing at this time.
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, 1996, 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, 1996:
<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, 1996
- ------------------ -------------------------------------- ------------------------- --------------------------
<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>
<PAGE>
Security Ownership of Management
The following table sets forth, as of December 31, 1996, 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
Beneficial Ownership(1) Percent of Class as of
Title of Name of Beneficial Owner December 31, 1996
Class
- ---------------------- ---------------------------------- -------------------------- ---------------------------
<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%
" Robert R. Rigler 3,295 .01%
" Chris Schenkel 37,088 .16%
" L. Stanley 50,000 .22%
Schoelerman
" Orville Sweet 50,000 .22%
" Charles Thone 50,000 .22%
" All executive officers and
directors as a group (20 persons)
10,651,947 46.00%
- ---------------------- -- ----------------------------------
<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.
</FN>
</TABLE>
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships
During the years ended December 31, 1995 and up to July 26, 1996, 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
$4,300,000 and $9,800,000 during 1996 and 1995 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 $5,855 and
$7,197 for 1996 and 1995 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. Effective July 26, 1996, A & B, Inc. was merged into First
Commercial Investments, Inc. Throughout the remainder of 1996, the Company
continued to use Mr. Ahart at First Commercial Investments, Inc. for sales and
purchases of approximately $1,700,000, from which Mr. Ahart received $4,207 of
commissions. The Company anticipates continuing this arrangement. Mr. Ahart is
not on the board nor is he a principal owner of First Commercial Investments,
Inc.
Affiliates
BNL Brokerage Corporation, was formed on November 30, 1995. The corporation was
formed in order to offer another company's products to agents and brokers
appointed to BNLAC. The products do not compete with BNLAC's policies and BNL
Brokerage will receive commissions on the sales.
<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-13
</TABLE>
3. Exhibits
<TABLE>
<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 Annual Report on Form 10-K for the period
Articles of Incorporation of BNL Financial ending December 31, 1993.
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 Incorporated by reference to Exhibit 3.1 of the
Corporation, dated January 27, 1984 and Amendment to Company's Annual Report on Form 10-K for the period
Articles of Incorporation on BNL Financial ending December 31, 1993.
Corporation, dated November 13, 1987.
10.1 Form of Agreement between Commonwealth Industries Filed with 10-QSB for the period ended September 30,
Corporation, American Investors Corporation and Wayne 1994.
E. Ahart regarding rights to purchase shares of the
Company.
10.2 Agreement dated December 21, 1990 between Registrant Filed with 10-QSB for the period ended March 31, 1996.
and C. Donald Byrd granting Registrant right of first
refusal as to future transfers of Mr. Byrd's shares of
the Company's common stock.
10.3 Subscription Agreement dated March 2, 1994. Incorporated by reference to S-4 Registration
Statement No. 33-70318.
10.4 Stock Escrow Agreement dated February 28, 1994. Incorporated by reference to S-4 Registration
Statement No. 33-70318.
10.5 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.
<PAGE>
10.6 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.
10.7 Office lease dated March 24, 1994, between Iowa Life Filed with 10-QSB for the period ended September 30,
Assurance Company and Enclave KOW, Ltd., for premises 1994.
in Austin, Texas.
10.8 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
The Company filed no reports on Form 8-K for the period covered by this report.
<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 4th day of March
1997.
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
3/12/97
- -------------------------------------------- -------------------------
Wayne E. Ahart Chairman of the Board, Director
(Principal Executive Officer)
/S/ C. Donald Byrd
3/14/97
- -------------------------------------------- -------------------------
C. Donald Byrd Vice Chairman of the Board and Director
/S/ Kenneth Tobey
3/6/97
- -------------------------------------------- -------------------------
Kenneth Tobey President and Director
/S/ Barry N. Shamas
3/12/97
- -------------------------------------------- -------------------------
Barry N. Shamas Executive Vice President, Treasurer and
Director (Principal Financial and
Accounting Officer)
- -------------------------------------------- -------------------------
Hayden Fry Director
<PAGE>
/S/ John Greig
3/7/97
- -------------------------------------------- -------------------------
John Greig Director
/S/ Roy Keppy
3/7/97
- -------------------------------------------- -------------------------
Roy Keppy Director
/S/ Tom Landry
3/4/97
- -------------------------------------------- -------------------------
Tom Landry Director
/S/ C. James McCormick
3/7/97
- -------------------------------------------- -------------------------
C. James McCormick Director
/S/ James A. Mullins
3/8/97
- -------------------------------------------- -------------------------
James A. Mullins Director
/S/ Robert R. Rigler
3/12/97
- -------------------------------------------- -------------------------
Robert R. Rigler Director
/S/ Stanley Schoelerman
3/20/97
- -------------------------------------------- -------------------------
Stanley Schoelerman Director
/S/ Orville Sweet
3/6/97
- -------------------------------------------- -------------------------
Orville Sweet Director
/S/ Charles Thone
3/7/97
- -------------------------------------------- -------------------------
Charles Thone Director
/S/ Cecil Alexander
3/5/97
- -------------------------------------------- -------------------------
Cecil Alexander Director
<PAGE>
/S/ Richard Barclay
3/8/97
- -------------------------------------------- -------------------------
Richard Barclay Director
/S/ Eugene A. Cernan
3/7/97
- -------------------------------------------- -------------------------
Eugene A. Cernan Director
/S/ Roy Ledbetter
3/5/97
- -------------------------------------------- -------------------------
Roy Ledbetter Director
/S/ John E. Miller
3/8/97
- -------------------------------------------- -------------------------
John E. Miller Director
- -------------------------------------------- -------------------------
Chris Schenkel Director
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
ITEM 14 (a) AND 14 (d)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
DES MOINES, IOWA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Financial Statements Required by Item 8
<TABLE>
<CAPTION>
Page Number of 1996
Form 10-KSB
-------------------------
<S> <C>
Consolidated Balance Sheet, December 31, 1996 and 1995 E-2
Consolidated Statement of Operations for the years ended December 31, 1996 and 1995 E-3
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1996 E-4
and 1995
Consolidated Statement of Cash Flows for the years ended December 31, 1996 and 1995 E-5
Notes to Consolidated Financial Statements E-6
Report of Independent Accountants on Financial Statements E-14
</TABLE>
================================================================================
E-1
- ------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
===============================================================================
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------------- -------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $702,769 $1,910,596
Investments available for sale, at fair value (amortized
cost $11,854,901; 10,959,766; respectively ) 11,885,909 11,504,802
Investment in equity securities, common stock
at market (cost $108,123; $108,123; respectively) 35,438 41,870
------------------- -------------------
Total investments, including cash and
cash equivalents 12,624,116 13,457,268
Accrued investment income 222,101 252,617
Furniture and equipment, net 266,234 303,262
Deferred policy acquisition costs 474,667 514,561
Receivable from reinsurer 28,462 142,677
Other assets 485,995 433,827
------------------- -------------------
Total assets $14,101,575 $15,104,212
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for future policy benefits $1,382,280 $1,325,514
Policy claims payable 816,500 552,235
Annuity deposits 3,495,571 3,435,834
Deferred annuity profits 610,536 602,719
Premium deposit funds 177,909 195,542
Supplementary contracts without life contingencies 70,515 84,213
Other liabilities 415,901 315,358
------------------- -------------------
Total liabilities 6,969,212 6,511,415
------------------- -------------------
Commitments and contingencies (Note 6)
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 14,308,230
Unrealized appreciation (depreciation) of securities (41,679) 478,783
Accumulated deficit (7,536,322) (6,596,350)
Treasury stock, at cost, 138,795 shares (64,105) (64,105)
------------------- -------------------
Total shareholders' equity 7,132,363 8,592,797
------------------- -------------------
Total liabilities and shareholders' equity $14,101,575 $15,104,212
=================== ===================
<FN>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
- -------------------------------------------------------------------------------
E-2
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996 and 1995
===============================================================================
===============================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995
------------------- ------------------
<S> <C> <C>
Income:
Premium income $7,245,660 $3,073,819
Net investment income 863,940 880,368
Realized gains 96,863 308,490
------------------- ------------------
Total income 8,206,463 4,262,677
------------------- ------------------
Expenses:
Increase in liability for future policy benefits 55,407 47,670
Policy benefits and other insurance costs 6,353,988 2,618,023
Amortization of deferred policy acquisition costs 39,894 48,191
Operating expenses 2,443,908 1,767,550
Taxes, other than on income 253,238 137,170
------------------- ------------------
Total expenses 9,146,435 4,618,604
------------------- ------------------
Loss from operations before
income taxes (939,972) (355,927)
Provision for income taxes - -
------------------- ------------------
Net loss $(939,972) $(355,927)
=================== ==================
Net loss per common share $(0.04) $(0.02)
=================== ==================
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>
- --------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1996, and 1995
================================================================================
<TABLE>
<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, 1995 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)
Unrealized depreciation
of securities - - - - (520,462) -
Net loss - - - (939,972) - -
============== ============= =============== =============== ============== =============
Balance, December 31, 1996 23,311,944 $466,239 $14,308,230 $(7,536,322) $(41,679) $(64,105)
============== ============= =============== =============== ============== =============
<FN>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------
</FN>
E-4
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, and 1995
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(939,972) $(355,927)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Realized gains on investments (93,094) (306,851)
Realized gains on sale of furniture and equipment (3,769) (1,639)
Depreciation 90,821 65,294
Amortization of deferred acquisition costs,
organization costs and state licenses acquired 43,003 51,299
Accretion of bond discount (4,734) (7,460)
Deferred policy acquisition costs (39,894) (48,189)
Change in assets and liabilities:
Decrease in receivable from reinsurer 114,215 172,850
Decrease (increase) in accrued investment income 30,516 (51,497)
Increase in liability for future policy benefits 56,766 49,815
Increase in policy claims payable 264,265 256,035
Increase in annuity deposits and deferred profits 67,554 127,680
Decrease in premium deposit funds (17,633) (25,343)
Other, decrease (increase) 86,350 (13,977)
--------------- ---------------
Net cash used in operating activities (345,606) (87,910)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of investments 1,484,269 1,599,954
Proceeds from maturity or redemption of investments 1,463,351 1,666,657
Sales of equity securities 0 22,562
Proceeds from sale of furniture and equipment 9,000 7,340
Purchase of furniture and equipment (60,216) (221,009)
Purchase of fixed maturity securities (3,744,927) (3,195,155)
--------------- ---------------
Net cash used in investing activities (848,523) (119,651)
--------------- ---------------
Cash flows from financing activities:
Net payments on supplementary contracts (13,698) (89,380)
--------------- ---------------
Net cash used in financing activities (13,698) (89,380)
--------------- ---------------
Net decrease in cash and cash equivalents (1,207,827) (296,941)
Cash and cash equivalents, beginning of period 1,910,596 2,207,537
--------------- ---------------
Cash and cash equivalents, end of period $702,769 $1,910,596
=============== ===============
<FN>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
E-5
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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, Brokers
National Life Assurance Company (BNLAC) and BNL Brokerage Corporation. 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 with current marketing
emphasis on dental insurance. 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 6.75% to 5.25%
during 1996 and 1995.
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 1996
and 1995.
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 $297,409 and $309,498 at December 31, 1996 and
1995, respectively. Depreciation expense was $90,821 and $65,294 for the years
ended December 31, 1996, and 1995, respectively.
Other assets include agents' balances reduced by allowance for doubtful accounts
of $142,191 and $155,665 at December 31, 1996 and 1995, respectively. Reductions
in the allowance account were a credit to bad debt expense recorded in
operations of $(13,474) and $(48,000) for the years ended December 31, 1996, and
1995, 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, 1996, and 1995.
E-6
<PAGE>
1. Summary of Significant Accounting Policies (continued):
The Company accounts for the 1994 brokers and agents stock option plan using the
fair value method as required by SFAS # 123. Under this method the fair value of
the options granted is recorded as expense at the date of grant. See note 10.
Certain amounts for the year ended December 31, 1995 have been reclassified to
conform with the presentation of December 31, 1996 amounts. The
reclassifications have no effect on net income for the year ended December 31,
1995.
Net loss per share is based on net loss divided by the weighted average number
of fully paid shares.
2. Shareholders' Equity:
At December 31, 1996 and 1995 shareholders' equity includes approximately
$5,187,000 and $6,372,000 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.
BNLAC reports to state regulatory authorities on a statutory accounting basis
that differs from the basis used herein. Due to a regulatory requirement
associated with the redomestication in 1994, BNLAC must maintain a minimum of
$2,300,000 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,
----------------------------------------
1996 1995
---- ----
<S> <C> <C>
Capital and surplus $5,035,886 $5,792,668
========== ==========
Net loss $(756,906) $(436,054)
========== ==========
</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, 1996 December 31, 1995
----------------------------------------- ------------------------------------------
Income/Loss Capital and Surplus Income/Loss Capital and Surplus
----------------- ---------------------- ----------------- -----------------------
<S> <C> <C> <C> <C>
Consolidated Reporting Under
Generally Accepted Accounting Principles $(939,972) $7,132,363 $(355,927) $8,592,797
Less Parent Company and BNL Equity 215,886 1,944,975 20,224 2,220,523
----------------- ---------------------- ----------------- ----------------------
Brokers National Life Assurance Company (724,086) 5,187,388 (335,703) 6,372,274
Deferred Acquisition Costs 39,894 (474,667) 48,188 (514,561)
Reserve and Premium Adjustments (30,424) 222,505 (15,317) 4,227
Interest Maintenance Reserve/AVR (38,920) (387,489) (77,919) (342,604)
Unrealized appreciation (depreciation)
of securities - (22,387) - (480,385)
Annuity Deposits and Related Adjustments 8,707 610,536 (73,389) 828,571
Other (12,077) (100,000) 18,086 (74,854)
----------------- ---------------------- ----------------- ----------------------
BNLAC Statutory Basis $(756,906) $5,035,886 $(436,054) $5,792,668
================= ====================== ================= ======================
</TABLE>
The regular triennial statutory examination for the three year period ending
December 31, 1995 was conducted by the Arkansas Insurance Department. During the
course of the examination, the Department notified the Company that Arkansas law
required that all bonds and other investments held by custodial agreement be
registered with the Depository Trust Corporation (DTC) through a custody
agreement with an Arkansas bank. As a result of the 1994 merger of Iowa Life
Assurance Company and United Arkansas Life Assurance Company, BNLAC had
$4,130,392 of securities registered with DTC through a custodial agreement with
a fully-insured investment banking firm. This resulted in a proposal by the
Arkansas Insurance Department to nonadmit these assets.
E-7
<PAGE>
2. Shareholders' Equity (continued):
Subsequent to year end, BNLAC satisfied the Department rule by moving the
custodial agreement to First Commercial Bank, Little Rock, Arkansas. The
department also proposed that a 1996 expense of $77,998 be reclassified to 1995.
This amount represents an under estimate of the incurred but not reported dental
claims for 1995. The above tables do not include the proposed adjustments. The
Arkansas Insurance Department examination report is expected to be released in
final form in mid 1997.
3. Income Taxes:
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, which prescribes 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 total net operating loss carry forwards at December 31, 1996 were
approximately $7,050,000 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 1996.
A deferred tax asset of $2,870,000 resulted from net operating losses carryovers
and temporary differences primarily related to the life insurance subsidiary.
The Company has recognized a corresponding valuation allowance of $2,870,000
against the deferred tax asset. This represents a net increase of $270,000 in
the deferred tax asset for 1996 and corresponding valuation allowance over the
previous year. The Company recognized no current or deferred tax expense or
benefit.
4. Investments:
The amortized cost and estimated market value of investments in fixed maturity
securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Cost Unrealized Unrealized Market Value
Gains Losses
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
December 31, 1996
US Treasury securities and obligations of
US government corporation and agencies $10,972,990 $176,748 $(120,406) $11,029,332
Obligation of states and political subdivisions 297,461 230 (18,551) 279,140
Corporate Securities 310,577 1,203 (10,839) 300,941
Mortgage-backed securities
GNMA 27,308 - (245) 27,063
Public utility bonds 246,565 3,727 (859) 249,433
--------------- ------------- ------------- ---------------
Totals $11,854,901 $181,908 $(150,900) $11,885,909
=============== ============= ============= ===============
Gross Gross Estimated
Amortized Cost Unrealized Unrealized Market Value
Gains Losses
--------------- ------------- ------------- ---------------
December 31, 1995
US Treasury securities and obligations of
US government corporation and agencies $9,721,174 $538,886 $(16,067) $10,243,993
Obligations of states and political subdivisions 597,342 3,448 - 600,790
Corporate securities 362,597 7,701 (4,664) 365,634
Mortgage-backed securities
GNMA 30,769 5,796 - 36,565
Public utility bonds 247,884 9,944 (8) 257,820
--------------- ------------- ------------- ---------------
Totals $10,959,766 $565,775 $(20,739) $11,504,802
=============== ============= ============= ===============
</TABLE>
E-8
<PAGE>
4. Investments (continued):
The amortized cost and estimated fair value of investments in fixed maturity
securities at December 31, 1996 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.
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------
Estimated
Amortized Cost Market Value
--------------- --------------
<S> <C> <C>
Due in one year of less $ 346,892 $347,333
Due after one year through five years 2,290,724 2,297,015
Due after five years through ten years 4,071,718 4,036,833
Due after ten years 5,118,259 5,177,665
--------------- --------------
11,827,593 11,858,846
Mortgage-backed securities 27,308 27,063
--------------- --------------
$11,854,901 $11,885,909
=============== ==============
</TABLE>
Proceeds from sales and maturities of investments in fixed maturity securities
for the years ended December 31, 1996 and 1995 were $2,947,620 and $3,266,611,
respectively. Gross gains of $97,757 and $307,416 and gross losses of $4,663 and
$565 were realized on those December 31, 1996, and 1995 sales, respectively.
Investment in equity securities at December 31, 1996 and 1995 represents common
stock investments as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
Market Market
Cost Value Cost Value
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Banks, trusts and
insurance companies $ 2,423 $ 438 $ 2,423 $ 625
Industrial, savings
and loans and other 105,700 35,000 105,700 41,245
------------- ------------ ------------- -------------
$108,123 $35,438 $108,123 $41,870
============= ============ ============= =============
</TABLE>
Net investment income for the years ended December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Interest on debt securities and
cash investments $878,573 $897,175
Dividends on equity securities - 169
------------- -------------
878,573 897,344
Investment expenses (14,633) (16,976)
------------- -------------
Net investment income $863,940 $880,368
============= =============
</TABLE>
E-9
<PAGE>
4. Investments (continued):
Net realized gains and losses are summarized below:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Debt securities $93,094 $307,374
Equity securities - (523)
------------- -------------
$93,094 $306,851
============= =============
</TABLE>
Included in 1996 and 1995 realized gains on debt securities is $30,205 and
$188,456, 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 1996, 1995 and 1994 the Company received a portion of
the principal in excess of the book value and back interest on the bonds.
5. Fair Value of Financial Instruments
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents
(Note 1) $ 702,769 $ 702,769 (a) $ 1,910,596 $ 1,910,596 (a)
Investments-fixed maturity, available for sale
(Note 4 & Note 1) 11,885,909 11,885,909 (b) 11,504,802 11,504,802 (b)
Investments-equity securities
(Note 4 & Note 1) 35,438 35,438 (b) 41,870 41,870 (b)
Other financial instruments-Assets 315,057 315,057 (a) 316,428 316,428 (a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Assets $12,939,173 $12,939,173 $13,773,696 $13,773,696
================ ================ ================ ================
Liabilities
Premium deposit funds $177,909 $177,909 (a) $195,542 $195,542 (a)
Supplementary contracts without life contingencies
(Note 1) 70,515 70,515 (a) 84,213 84,213 (a)
Annuity deposits
(Note 1) 3,495,571 3,495,571 (a) 3,435,834 3,435,834 (a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Liabilities $3,743,995 $3,743,995 $3,715,589 $3,715,589
================ ================ ================ ================
<FN>
(a) The indicated assets and liabilities are carried at book value which
approximate 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>
6. Commitments and Contingencies:
The Company, BNL Equity Corporation and several officers in the Company are
defendants in a pending lawsuit alleging violation of the Arkansas Securities
Act. The Company expects to obtain a favorable judgment in the case and believes
the action is frivolous and that substantial evidence exists which directly
refutes the allegations. However, the ultimate outcome of this litigation is
unknown at the present time. Accordingly, no provisions for any liability that
might result has been made in the financial statements. In the opinion of
management, the existing litigation is not considered to be material in relation
to the Company's financial position.
The Company has entered into noncancelable operating leases for office space and
equipment. Future minimum payments under the leases are as follows:
<TABLE>
<S> <C> <C>
1997 $99,072
1998 $92,268
1999 $55,944
2000 $0
Thereafter $0
----------------------
Total $247,284
======================
</TABLE>
Related lease cost incurred for the years ended December 31, 1996 and 1995 was
$110,486 and $101,480, 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 $168,000
at December 31, 1996.
7. Liability for Unpaid Claims
Activity in the liability for unpaid claims is summarized as follows.
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
<S> <C> <C>
Balance at January 1 $552,235 $296,200
Less Reinsurance Recoverable 120,735 260,730
------------------ -------------------
Net Balance at January 1 431,500 35,470
------------------ -------------------
Incurred related to:
Current year 5,016,402 1,902,000
Prior years 72,837 1,688
------------------ -------------------
Total Incurred 5,089,239 1,903,688
------------------ -------------------
Paid related to:
Current year 4,090,828 1,475,000
Prior years 618,572 32,658
------------------ -------------------
Total paid 4,709,400 1,507,658
------------------ -------------------
Net Balance at December 31 811,339 431,500
Plus reinsurance recoverable 5,161 120,735
================== ===================
Balance at December 31 $816,500 $552,235
================== ===================
</TABLE>
8. Reinsurance:
Liability for future policy benefits is reported before the effects of
reinsurance. Reinsurance receivable (including amounts related to insurance
liabilities) is reported as assets. Estimated reinsurance receivable is
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>
8. Reinsurance (continued):
In 1994 the Company wrote dental business of which 90% was ceded, under a quota
share reinsurance agreement, to UniLife Insurance Company (UniLife). Effective
January 1, 1995, the agreement was modified to a 50% quota share reinsurance
agreement. In March 1995, BNLAC received notice from UniLife of termination of
the quota share reinsurance agreement. Effective November 1, 1995, BNLAC started
administrating and retaining 100% of the group dental business. Dental premiums
collected for the years ended December 31, 1996 and 1995 were approximately
$6,926,000 and $4,159,000 respectively, of which approximately $6,851,000 and
$2,504,000 were included in premium income.
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 1995.
Following is a summary of reinsurance for December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross other from other Net Amounts Assumed to
Amount Companies Companies Net
------------- ------------- ------------- ------------- -------------
December 31, 1996
<S> <C> <C> <C> <C> <C>
Life Insurance in force
(in thousands) $33,796 $11,091 $7,252 $29,957 24.2%
============= ============= ============= ============= =============
Premiums-life insurance $389,543 $43,475 $20,961 $367,029 5.7%
Premiums-accident and health 6,878,631 - - 6,878,631 -
------------- ------------- ------------- ------------- -------------
Total insurance premiums $7,268,174 $43,475 $20,961 $7,245,660 0.3%
============= ============= ============= ============= =============
Percentage
Ceded to Assumed of Amount
Gross other from other Net Amounts Assumed to
Amount Companies Companies Net
------------- ------------- ------------- ------------- -------------
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%
Premiums-accident and health 2,691,883 - - 2,691,883 -
------------- ------------- ------------- ------------- -------------
$3,097,976 $40,915 $16,758 $3,073,819 0.5%
============= ============= ============= ============= =============
</TABLE>
9. Related Party Transactions/Certain Relationships
During the year ended December 31, 1995 and up to July 26, 1996, 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 between an unaffiliated brokerage firm and a member of the
New York Stock Exchange. Total purchases and sales executed under the agreement
were approximately $4,300,000 and $9,800,000 during 1996 and 1995 respectively.
Fees paid to the related broker were $5,855 and $7,197 for 1996 and 1995
respectively. Effective July 26, 1996, the broker firm was merged into First
Commercial Investments, Inc. Throughout the remainder of 1996, the Company
purchased and sold approximately $1700,000 worth of securities from First
Commercial Investments Inc., from which the brother of the Chairman of the Board
received $4,207 commissions. The Company anticipates continuing this arrangement
in the future.
10. Stock Option and Stock Bonus Plan
In 1994, the Board of Directors and stockholders approved the 1994 Brokers and
Agents' Nonqualified Stock Option Plan. This plan 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 1996 and 1995 the Company granted 101,725 and 26,400 stock
options respectively, with
E-12
<PAGE>
10. Stock Option and Stock Bonus Plan Continued
an exercise price of $.50 per share. No options were exercised in 1996 or 1995.
Under the fair value method, total compensation recognized for grant of stock
options was $0. The fair value of options granted is estimated at $800 and $200
in 1996 and 1995 respectively. These values were computed using a binomial
method as prescribed in SFAS 123 and certain assumptions including risk free
interest rate of 6.5%, expected life of 3 years, expected volatility of 11% and
no expected dividends due to statutory limitations. The estimated weighted
average remaining life of the options is 2.6 years. See note 1.
In November 1996, the Board of Directors authorized a stock bonus plan for the
benefit of certain officers of the corporation subject to specific guidelines.
No stock bonus will be granted unless the company has consolidated after-tax
profits. The plan has not been formally established.
11. The Offering
As a condition of the public offering, an 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.
12. Subsequent Events
The Brokers National Life Employee Pension Plan was adopted January 1, 1997. The
plan is a qualified retirement plan under the Internal Revenue Code. All
employees are eligible who have attained age 21 and have completed one year of
service. Employer contributions are discretionary, however the Company is not
contributing at this time.
On February 28, 1997, BNL Financial Corporation and BNL Equity Corporation
contributed $500,000 to the gross paid-in and contributed surplus of Brokers
National Life Assurance Company.
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 sheets of BNL Financial
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes 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, 1996 and 1995 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/ Smith Carney & Co.
------------------------
Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c
February 13, 1997
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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 0
<DEBT-HELD-FOR-SALE> 11885909
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 35438
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 11921347
<CASH> 702769
<RECOVER-REINSURE> 28462
<DEFERRED-ACQUISITION> 474667
<TOTAL-ASSETS> 14101575
<POLICY-LOSSES> 2166347
<UNEARNED-PREMIUMS> 32433
<POLICY-OTHER> 4106107
<POLICY-HOLDER-FUNDS> 248424
<NOTES-PAYABLE> 0
0
0
<COMMON> 466239
<OTHER-SE> 6666124
<TOTAL-LIABILITY-AND-EQUITY> 14101575
7245660
<INVESTMENT-INCOME> 863940
<INVESTMENT-GAINS> 96863
<OTHER-INCOME> 0
<BENEFITS> 5211737
<UNDERWRITING-AMORTIZATION> 39894
<UNDERWRITING-OTHER> 1197658
<INCOME-PRETAX> (939972)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (939972)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<RESERVE-OPEN> 552235
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 4206402
<PAYMENTS-PRIOR> 618572
<RESERVE-CLOSE> 816500
<CUMULATIVE-DEFICIENCY> 66337
</TABLE>
