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, 1997 [Fee Required]
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to_____________ [No Fee Required]
Commission File No. 0-16880
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BNL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
IOWA 42-1239454
(State of incorporation) (IRS Employer Identification No.)
301 Camp Craft Road, Suite 200
Austin, TX 78746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 327-3065
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. _____
BNL Financial Corporation revenues for fiscal year 1997 were $12,468,221.
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 31, 1997, was approximately $3,678,533 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, 1997, 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") is an insurance
holding company incorporated in Iowa in January, 1984. The Company's
administrative 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"), Brokers National Life Assurance Company ("BNLAC") and BNL Brokerage
Corporation. BNL Brokerage Corporation was formed on November 30, 1995 for the
purpose of making available insurance products from other companies to agents
and brokers appointed to BNLAC. Such products do not compete with BNLAC's
policies and BNL Brokerage receives commissions on such sales.
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| BNL Financial Corporation |
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| BNL Equity Corporation |
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| Brokers National Life Assurance Company |
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| BNL Brokerage Corporation |
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Industry Segments
The operations of the Company are conducted through BNLAC, which in 1997 sold
life and accident and health insurance policies in 25 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. Currently the product that is
producing the most premium is group dental insurance sold primarily on a payroll
deduction basis.
The Company conducts business in the industry segment "life, accident and health
insurers". Financial information relating thereto is contained below, in Item 6
and the Exhibits attached to this Report.
Sales and Marketing
The Company markets its products through independent agents and brokers. BNLAC's
current marketing emphasis is the development of specialized or "niche" life and
health insurance products that can be sold as an add-on or companion product to
BNLAC's line of dental insurance products. BNLAC currently offers an accidental
death life insurance policy, a payroll deductible 10-year level term policy, a
family level term insurance policy with its line of dental insurance policies.
These products are all designed to be sold as group or payroll deduction
policies.
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<TABLE>
<CAPTION>
Statistics by line of business are as follows (gross before reinsurance):
1997 1996
----------------- --------------
I. Annual Premiums and Annuity Deposits In Force:
<S> <C> <C>
Ordinary Life Insurance $371,000 $387,000
Individual Annuities(1) 249,000 298,000
Group Dental Insurance 14,912,000 7,804,000
Accidental Death Insurance 59,000 70,000
----------------- --------------
Total $15,591,000 $8,559,000
================= ==============
II. Collected Premiums and Annuity Deposits:
Ordinary Life Insurance $362,000 $393,000
Individual Annuities(1) 276,000 322,000
Group Dental Insurance 10,877,000 6,926,000
Accidental Death Insurance 58,000 72,000
---------------- -----------------
Total $11,573,000 $7,713,000
================ =================
III. Amount of Insurance:
Ordinary Life Insurance $37,000,000 $34,000,000
Accidental Death Insurance 119,000,000 148,000,000
---------------- -----------------
Total $156,000,000 $182,000,000
================ =================
<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 &
State Life Premiums Annuity Accidental Death Total
- ------------------- -------------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Alabama $ 3,212 $ - $ 554,308 $ 557,520
Arkansas 26,218 - 1,678,121 1,704,339
Colorado 83 - 489,958 490,041
Delaware 349 - 59,875 60,224
Florida 2,791 - 146,307 149,098
Georgia 1,513 - 938,890 940,403
Idaho - - 98,504 98,504
Illinois 772 - 431,299 432,071
Indiana 11,922 - 830,576 842,498
Iowa 282,008 275,872 1,188,252 1,746,132
Kentucky - - 33,241 33,241
Louisiana 3,032 - 321,426 324,458
Michigan 1,883 - 1,197,002 1,198,885
Minnesota 14,214 - 621,110 635,324
Mississippi 3,387 - 1,067,293 1,070,680
Missouri 1,006 - 398,005 399,011
Montana - - 8,791 8,791
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Nebraska 60 - 32,034 32,094
Ohio 1,928 - 211,219 213,147
Oklahoma 1,834 - 166,072 167,906
Oregon - - 2,859 2,859
Pennsylvania 4,160 - 209,077 213,237
South Dakota - - 9,147 9,147
Tennessee - - 23,352 23,352
Utah 1,721 - 218,203 219,924
==================== ==================== ====================== ====================
Total $362,093 $275,872 $10,934,921 $11,572,886
==================== ==================== ====================== ====================
</TABLE>
As of December 31, 1997, BNLAC had appointed 1,964 general agents and brokers in
26 states to market its policies compared to 1,193 agents and brokers on
December 31, 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 is able to 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 "Family Shield" 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" (Excellent) for
1996.
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.
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<TABLE>
<CAPTION>
Gross Net
Insurance Reinsurance Reinsurance Insurance
In Force Ceded Assumed In Force
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Life Insurance
1997 $36,828,000 $11,971,000 $8,226,000 $33,083,000
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
Accidental Death Insurance
1997 $119,000,000 $112,250,000 $0 $6,750,000
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
</TABLE>
B. Group Dental Insurance.
Prior to January 1, 1995, group dental insurance was reinsured with UniLife
Insurance Company ("UniLife") of San Antonio, Texas 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 and
UniLife performed all the administrative functions related to these policies at
no cost to BNLAC. 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 administering 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>
1997 $10,877,000 $0 $10,877,000 $0
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
</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>
1997 $7,842,000 $0 $7,842,000 75.7%
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
</TABLE>
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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 grade 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:
Net Net Return on
Investment Mean Invested
Year Income Assets
- ------------ --------------- -------------------
1997 $790,000 7.1%
1996 757,000 6.8
1995 734,000 6.6
1994 674,000 6.5
1993 599,000 6.1
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, 1997, 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, 1997, the Company and BNLAC had received $746,798 of principal and interest
on the bonds since 1991 when they went into default. The bonds have a total
market value of $0; which indicates the rehabilitation program has paid out
substantially the entire 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
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<PAGE>
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
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 1996 BNLAC was assigned an A. M. Best's
financial performance rating of "B-" (fair).
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
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<PAGE>
three to approximately 1,200 persons. BNLAC also sells life and health 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 a high level of 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.
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
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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, 1997, 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 Arkansas Insurance Department in February, 1997 conducted the triennial
statutory examination for the three year period ending December 31, 1995. 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.
As noted in the final examination order of the Insurance Commissioner of the
State of Arkansas dated June 5, 1997, 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 $99,000 be reclassified to
1995. This amount represents an under estimate of the incurred but not reported
dental claims for 1995.
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, 1998, BNLAC had four executive officers, 32 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.
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
$584 per month ($7,008 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 $6,053 ($72,636 per year)
during 1996 and 1997, plus pro rata operating expenses. The Company has its
administrative offices at this location.
During 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. 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
I-8
<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 is vigorously defending the
matter and is in the process of seeking 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 20, 1997 in Des
Moines, Iowa. At the annual meeting, the following individuals were elected to
the Company's Board of Directors.
<TABLE>
<CAPTION>
<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
Eugene A. Cernan James A. Mullins
</TABLE>
12,457,328 shares voted in favor of Messrs. Barclay, and Greig; 12,454,328 voted
in favor of Mr. Miller; 12,453,326 shares voted in favor of Messrs. Tobey and
Shamas; 12,453,128 shares were voted in favor of Schoelerman and Sweet;
12,452,126 shares voted in favor of Messrs. Ahart and Byrd; 12,451,226 shares
voted in favor of Alexander, Cernan, Ledbetter; 12,449,726 shares in favor Mr.
Rigler; 12,448,226 shares voted in favor of Mr. Mullins; 12,448,142 shares voted
in favor of Mr. McCormick; 12,447,026 shares voted in favor of Mr. Schenkel;
12,446,642 shares voted in favor of Mr. Landry; 12,445,142 shares voted in favor
of Mr. Keppy; 12,440,060 shares voted in favor of Mr. Fry. 94,516 shares were
withheld from all directors.
The shareholders ratified the selection of Smith, Carney & Co., p.c. as the
Company's independent auditors for the year ending December 31, 1997 with
12,147,860 shares voted in favor, 47,430 shares voted against and 96,052
abstained.
I-9
<PAGE>
================================================================================
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market for Stock
The stock of the Company is 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 1997. During the year there were a total of four stock sales
all at a price of $.30 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, 1997, there were 4,778 shareholders of record of the
Company's common stock.
Dividends
The Company has not declared any dividends on its common stock to date and has
no present plans to pay any dividends in the foreseeable future. The Company's
ability to declare and pay dividends in the future will be dependent upon its
earnings and the cash needs for expansion. In addition, payment of dividends by
BNLAC is regulated under Arkansas insurance laws.
Transfer Agent and Registrar
First Commercial Trust, Little Rock, Arkansas, is the Registrar and Transfer
Agent for the Company's common stock.
II-1
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1997, the Company had liquid assets of $714,539 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 1997, BNLAC collected $11.6 million of premiums and
annuity deposits (gross before reinsurance) and $859,749 of investment income.
Another source of cash flow is from the sale of investments which, in 1997,
produced gains totaling $75,754.
The Company's investments are primarily in U.S. Government and Government
Agencies ($11,057,471) and other investment grade bonds ($708,476) 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, 1997 BNLAC had statutory capital and surplus
of $5,136,292. The Company and BNL Equity Corporation contributed $500,000 and
$250,000 to the gross paid in and contributed surplus of BNLAC in February 1997
and November 1997, respectively. BNLAC is required to maintain minimum levels of
statutory capital and surplus as a condition to conducting business in the
states in which it is licensed. Each of these states had different rules
regarding the minimum level of capital and surplus required in that state. The
State of Arkansas, which is the legal domicile of BNLAC, requires a minimum of
$2,300,000 in capital and surplus. Management believes it will continue to
satisfy the requirements of all states.
Results of Operations
Premium income for 1997 was $11,532,718 compared to $7,245,660 in 1996, an
increase of $4,287,058. The increase in premium income is due to an increase in
group dental insurance premiums written during 1997.
Net investment income was $859,749 in 1997 and $863,940 in 1996. The decrease
was due to the receipt of interest of $30,204 in 1996, compared to $14,253 in
1997, on certain taxable municipal bonds that had been in default since 1991
(see note 4). The bonds have a total market value of $0; which indicates the
rehabilitation program has paid out substantially the entire principal available
now and in the future on the bonds.
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 $75,754 in 1997 compared to $96,863 in 1996. Realized gains
included $42,328 and $30,204 for 1997 and 1996 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 1997 and 1996 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 $(39,601) in 1997
compared to $55,407 for the same period in 1996. The decrease of $95,008 is due
to an increase in the number of surrendered policies in 1997 compared to 1996.
The increase in liability for future policy benefits will fluctuate annually
based on the persistency of the life insurance in force and the sale of new life
insurance policies.
Policy benefits and other insurance costs were $10,221,754 in 1997 compared to
$6,353,988 in 1996. The increase in 1997 was due to claims and commissions on
the increased dental insurance premiums written. In addition, group dental and
health benefits increased due to an increase in the incurred loss ratio from
73.6% in 1996 to 75.7% in 1997.
Amortization of deferred policy acquisition costs was $40,972 in 1997 and
$39,894 in 1996. Amortization of deferred policy acquisition costs should remain
fairly constant as the asset is reduced over the upcoming years but could vary
in relation to new life insurance sales.
II-2
<PAGE>
Operating expenses were $2,780,237 in 1997 and $2,443,908 in 1996. The increase
was primarily due to an increase in claims administrative expense, data
processing expense, salaries and office supplies expense. The increase in all
four expense items is attributable to the increase in volume of group dental
business processed in 1997. An increase in legal expenses of approximately
$30,000 was another primary factor in the increase in operating expenses.
Taxes, other than on income were $396,471 for 1997 and $253,238 for 1996. The
1997 increase was due to an increase in premium taxes on the increased dental
insurance premiums collected.
The consolidated net loss for 1997 was $931,612 compared to $939,972 in 1996.
The Company's net loss for 1997 decreased even though the company absorbed
significant costs associated with the increase in first year business that
resulted in the 50% increase in collected premiums. To facilitate improvement in
1998 net income results, BNLAC is focusing on reducing its dental claims loss
ratio. In early 1998, BNLAC filed for increases in new business premium rates on
three of its four group dental plans, modified benefits on two of its four
dental plans, increased renewal rates on groups with high loss ratios, increased
rates in certain geographic areas. Further, BNLAC began negotiations to enter
into preferred provider arrangements to reduce claims. If BNLAC's strategic plan
to reduce the loss ratio is successful, the Company's net loss should decline in
1998.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages E-1 through E-14 attached to this Report is hereby
incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
II-3
<PAGE>
================================================================================
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
First Became
Director or
Executive Officer
Name Age Position
- --------------------------- -------- --------------------- -----------------------------------------------
<S> <C> <C> <C>
Wayne E. Ahart 57 1984 Chairman of the Board and Director
C. Donald Byrd 56 1984 Vice Chairman of the Board and Director
Kenneth Tobey 39 1994 President
Barry N. Shamas 50 1984 Executive Vice President,
Treasurer and Director
Cecil Alexander 61 1994 Director
Richard Barclay 60 1994 Director
Eugene A. Cernan 63 1994 Director
Hayden Fry 68 1984 Director
John Greig 62 1984 Director
Roy B. Keppy 74 1984 Director
Tom Landry 72 1984 Director
Roy Ledbetter 67 1994 Director
John E. Miller 68 1994 Director
James A. Mullins 63 1984 Director
C. James McCormick 72 1984 Director
Robert R. Rigler 74 1989 Director
Chris Schenkel 73 1994 Director
L. Stan Schoelerman 72 1984 Director
Orville Sweet 73 1984 Director
- --------------------------- -------- ---------------------
</TABLE>
The term of office of each director expires at the annual meeting of
shareholders upon election and qualification of such director's successor. The
Company's executive officers serve at the pleasure of the Board of Directors.
The above officers and directors serve in the same capacity for BNLAC.
Identification of Certain Significant Employees
Not applicable.
Family Relationships
No family relationship exists between any director or executive officer
of the Company.
III-1
<PAGE>
Business Experience
The following is a brief description of the business experience during the past
five years of the directors and executive officers of the Company.
Wayne E. Ahart has served as Chairman of the Board of BNL since 1984 and BNLAC
since 1986. He has served as Chairman of the Board of BNLE since 1988 and served
as Chairman of the Board of United Arkansas Life from 1990 to 1994. Prior to
that time, Mr. Ahart served as Board Chairman of: Investors Trust, Inc. ("ITI")
and its subsidiary, Investors Trust Assurance Company ("ITAC"), both of
Indianapolis, Indiana (1973-1987); Liberty American Corporation
("LAC")(President since 1981) and its subsidiary Liberty American Assurance
Company ("LAAC"), both of Lincoln, Nebraska (1975-1987); (President) American
Investors Corporation ("AIC") and its subsidiary, Future Security Life Insurance
Company ("FSL"), both of Austin, Texas (1980-1987). Mr. Ahart has been owner and
Chairman of the Board of Lone Star Pizza Garden Inc. from 1986 to the present.
C. Don Byrd has been Vice Chairman of the Board of BNL, BNLE and BNLAC since
August 1, 1994. Mr. Byrd was President and a Director of BNL and BNLAC since
1984 and 1986, respectively. Mr. Byrd was Agency Director of FSL from 1983 to
1984 and Regional Director of AIC 1981 to 1983. He was an agent and Regional
Director of ITI and ITAC from 1974 to 1981.
Kenneth Tobey has been President and director of BNLAC and BNL since August 1,
1994. Mr. Tobey has served as President of BNLE since 1988 and served as
president of United Arkansas Life from 1990 to 1994. He served as Assistant to
the President and Training Director of BNLAC from 1986 to 1988. From 1981 to
1986, Mr. Tobey served in various capacities for AIC and FSL, including Agent,
Regional Manager, Executive Sales Director and Assistant to the President.
Barry N. Shamas has served as Executive vice-president, Secretary and Treasurer
of BNLE since 1988 and United Arkansas Life from 1990 to 1994. From 1984 and
1986, respectively, he has served as Executive Vice President and Director of
BNL and BNLAC, which positions he presently holds. He served in various
capacities for ITI and ITAC, including Executive Vice President, Senior Vice
President, Treasurer and Financial Vice President beginning in 1976 through
1987. Mr. Shamas served as Executive Vice President, Secretary/Treasurer and as
Director of AIC and FSL from 1980 and 1983, respectively, until 1987. From 1978
through 1987, Mr.
Shamas served as a Director and a member of the Executive Committee of LAC and
LAAC.
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.
III-2
<PAGE>
Hayden Fry has been Head Football Coach at the University of Iowa since 1979. He
was Head Football Coach at North Texas State University from 1973 to 1978 and at
Southern Methodist University from 1962 to 1972. He was named Football Coach of
the Year in the Big Ten (1981, 1990, 1991), the Missouri Valley Conference
(1973), and the Southwest Conference (1962, 1966 and 1968). He is on the Board
of Advisors of Wilson Sporting Goods (1962 to date); the Board of Trustees of
Pop Warner Football (1962 to date); and the American Football Coaches
Association (1983 to date) and is the 1993 President. He was President of
Hawkeye Marketing Group from 1979 - 1984. He is a member of the Board of
Directors of the PPI Group.
John Greig has been President of Greig and Co. since 1967. He is a Director of
Boatmen's Bank of Iowa, NW., Estherville, Iowa. He has been President of the
Iowa Cattlemen's Association (1975-1976) and a member of the Executive Committee
of the National Cattlemen's Association (1975-1976). He was a member of the Iowa
Board of Regents from 1985 to 1991. He was elected as an Iowa State
Representative in 1993.
Roy Keppy has operated his grain and livestock farming operation in Davenport,
Iowa since 1946. In 1982, he and his son founded Town and Country Meats in
Davenport and he currently serves as its Vice President. He was a Director of
Eldridge Cooperative Elevator Company for 33 years, retiring in 1982, serving as
President for 6 years. He is now a Director of First State Bank N.A., Davenport,
Iowa. He is a past Chairman of the National Livestock and Meat Board, and was on
its Board of Directors from 1970 to 1986. He was on the Board of Directors of
the National Pork Producers from 1965 to 1972, serving as its President in
1970-1971.
Thomas W. Landry was Head Coach of the Dallas Cowboys, 1960 to 1989. He is a
member of the National Board of Trustees of the Fellowship of Christian
Athletes. He serves as a Director of Dallas Theological Seminary. He was on the
Board of Directors of Continental Life Insurance Company for four years. He has
served as Texas State Chairman of the American Cancer Society. Mr. Landry is an
Advisory Member of the Board of Directors of Southwest Baptist Theological
Seminary, Chairman of the Dallas International Sports Commission, and a member
of the Board of Advisors of Alexander Proudfoot Company.
Roy E. Ledbetter presently serves as President and Chief Executive Officer of
Highland Industrial Park, a division of Highland Resources, Inc. in East Camden,
Arkansas. He holds a Bachelor of Science Degree in Education from Southern
Arkansas University at Magnolia, a Masters Degree in Education from Henderson
State University at Arkadelphia and an AMP from Harvard Business School at
Boston. In 1966, Mr. Ledbetter joined Highland Resources, Inc. and coordinated
organization of Southern Arkansas University Technical Branch; was promoted to
division Manager (1972), Vice President and Division Manager (1975), Senior Vice
President (1980), and President in 1984. He is past President of the Camden
Chamber of Commerce; was 1977 Camden Jaycee's Man of the Year; was awarded first
annual Camden Area Chamber of Commerce Community Service Award in 1983; served
on Education Standards Committee of the State of Arkansas; and presently serves
on the Boards of East Camden and Highland Railroad, Shumaker Public Service
Corporation, Merchants and Planters Bank of Camden, and First United Bancshares
of El Dorado.
C. James McCormick is Chairman of the Board of McCormick, Inc., Best Way
Express, Inc., and President of JAMAC Corporation, all of Vincennes, Indiana. He
is also Vice Chairman of Golf Hosts, Inc. He is the owner of CJ Leasing. Mr.
McCormick is Chairman of the Board of Directors and CEO of First Bancorp,
Vincennes, Indiana; First Vice Chairman of Vincennes University and a Life
Director of the Indiana Chamber of Commerce; and a member of the Indiana
President's Organization and the Indiana Automobile Dealers Association. He is a
former Chairman of the Board of the American Trucking Associations. Mr.
McCormick is a Past Chairman of the National Board of Trustees of The Fellowship
of Christian Athletes.
John E. Miller has been a member of the State of Arkansas House of
Representatives since 1959. He has been self-employed in the insurance,
abstract, real estate, heavy construction and farming business for more than 20
years. He presently serves on the Board of Directors of Calico Rock Medical
Center, Easy K Foundation, National Conference of Christians and Jews, Council
of State Governments, Southern Legislative Conference, State Advocacy Services,
Lions World Services for the Blind, State Board of Easter Seals, Williams
Baptist College Board of Trustees, 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.
III-3
<PAGE>
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.
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.
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>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(A) (B) (C) (D) (E) (F) (G) (H) (I)
Other
Annual Restricted All Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus $ sation $ Award(s) $ SARS(#) Payouts $ sation $
--------------------------- -------- ------------ ---------- ------------ --------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wayne E. Ahart, CEO 1997 $125,000 $0 $8,927 $0 - $0 $0
" 1996 $125,000 $0 $9,375 $0 - $0 $0
" 1995 $125,000 $0 $8,744 $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 $376,218. 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.
Benefit Plans
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. Initially 250,000 shares were available under the
plan. On November 17, 1997 the Board of Directors authorized an additional
500,000 shares. The option period may not exceed a term of 5 years and the
duration of the plan is ten years. The plan is administered by a four member
committee of Directors. During 1997 and 1996 the Company granted 208,050 and
101,725 stock options respectively, with an exercise price of $.50 per share. No
options were exercised in 1997 or 1996. Under the fair value method, total
compensation recognized for grant of stock options was $0. The fair value of
options granted is estimated at $1,500 and $800 in 1997 and 1996 respectively.
III-4
<PAGE>
These values were computed using a binomial method as prescribed in SFAS 123 and
certain assumptions include 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 2.5
years.
In May 1997, the Board of Directors approved a stock bonus plan for the benefit
of certain officers of the corporation. The plan provides for a bonus based on
consolidated after-tax profits subject to specified limits. The bonus amount,
net of taxes, will be used to purchase stock in the Company on the open market.
No stock bonus will be granted until the Company has consolidated after-tax
profits.
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, 1997, 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, 1997:
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership Percent of Class as of
Title of Class Name and Address of Beneficial Owner (1) December 31, 1997
- ------------------ -------------------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
Common Stock Wayne E. Ahart 4,845,505(2)(3) 20.91%
#14 Club Estates Parkway
Austin, Texas 78738
Common Stock Barry N. Shamas 2,801,816(5) 12.09%
1095 Hidden Hills Dr.
Dripping Springs, Texas 78620
Common Stock Universal Guaranty Life Insurance 2,216,776(2) 9.57%
Company
5250 S. Sixth St. Rd.
Springfield, Illinois 62705
Common Stock C. Donald Byrd 1,452,719(4) 6.27%
631 47th Street
W. Des Moines, IA 37076
<FN>
(1)To the Company's knowledge, all shares are beneficially owned by, and
the sole voting and investment power is held by the persons named,
except as otherwise indicated.
(2)Wayne E. Ahart and Commonwealth Industries, Inc. ("CIC"), a parent of
Universal Guaranty Life Insurance Company ("UGL"), have agreed: (a) that
if Mr. Ahart sells his shares of the Company to a third party, Mr. Ahart
or the third party must also purchase UGL's shares of the Company at the
same price and on the same terms; and (b) in the event UGL receives a
bona fide offer to purchase its shares of the Company, Mr. Ahart has a
first right of refusal to purchase such shares on the same terms and
conditions.
(3)Includes 2,400,000 shares held in the name of National Iowa Corporation
and 2,178,926 shares held in the name of Arkansas National Corporation,
both of which are controlled by Mr. Ahart.
(4)All of Mr. Byrd's shares are subject to a right of first refusal of the
Company to acquire said shares on the same terms and conditions as any
proposed sale or other transfer by Mr. Byrd.
(5)Includes 1,400,000 shares held in the name of Life Industries of Iowa,
Inc., and 1,335,171 shares held in the name of Arkansas Industries
Corporation, both of which are controlled by Mr. Shamas.
</FN>
</TABLE>
III-5
<PAGE>
Security Ownership of Management
The following table sets forth, as of December 31, 1997, 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 Percent of Class as of
Title of Class Name of Beneficial Owner Beneficial Ownership(1) December 31, 1997
- ---------------------- ---------------------------------- -------------------------- ---------------------------
<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%
" All executive officers and
directors as a group (20 persons)
10,601,947 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>
III-6
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships
Historically, the Company utilized the firm of Ahart & Bryan, Inc. ("A & B,
Inc."), of North Little Rock, Arkansas, to facilitate purchases and sales of
corporate securities as a part of its routine investment program. Because Mr.
Tom Ahart, President and a Director of A & B, Inc. is a brother of the Company's
Chairman, Wayne E. Ahart, transactions between A & B, Inc. and the Company have
been disclosed in prior financial statements.
Effective July 26, 1996, A & B, Inc. was merged into First Commercial
Investments, Inc. which is now the brokerage firm utilized by the Company for
its investment transactions. Tom Ahart is employed by First Commercial
Investments, Inc. as a Vice President, but he is neither a board member nor
principal owner of First Commercial Investments, Inc. For the period from
January 1, 1996 to July 26, 1996 (during which period A & B Inc. was considered
a related party by virtue of Tom Ahart's position of ownership and control), the
amount of purchases and sales executed through A & B, Inc. (as the introducing
broker) had a market value of approximately $4,300,000, and A & B, Inc. received
fees totaling $5,855 for such period.
Affiliates
BNL Brokerage Corporation, was formed on November 30, 1995. The corporation was
formed in order to make available insurance products from other companies to
agents and brokers appointed to BNLAC. Such products do not compete with BNLAC's
policies and BNL Brokerage will receive commissions on such sales.
III-7
<PAGE>
================================================================================
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The information required by this section is set forth on page E-2 of this Report
and is incorporated herein by reference.
2. Financial Statement Schedules Included in item 14(a)
Page Number Form
10-KSB
--------------------
Report of Independent Accountants on Financial Statement Schedule E-14
<TABLE>
<CAPTION>
3. Exhibits
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.
4.3 Stock Bonus Plan approved May 1997, for the benefit of Attached as Exhibit 4.3
Don Byrd and Kenny Tobey
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.
IV-1
<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 1994
premises 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.
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 4th day of March
1998.
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 3/12/98
- -------------------------------------------- -------------------------
Wayne E. Ahart Chairman of the Board, Director
(Principal Executive Officer)
/S/ C. Donald Byrd 3/14/98
- -------------------------------------------- -------------------------
C. Donald Byrd Vice Chairman of the Board and Director
/S/ Kenneth Tobey 3/6/98
- -------------------------------------------- -------------------------
Kenneth Tobey President and Director
/S/ Barry N. Shamas 3/12/98
- -------------------------------------------- -------------------------
Barry N. Shamas Executive Vice President, Treasurer and
Director (Principal Financial and
Accounting Officer)
/S/ Hayden Fry 03/15/98
- -------------------------------------------- -------------------------
Hayden Fry Director
IV-3
<PAGE>
- -------------------------------------------- -------------------------
John Greig Director
/S/ Roy Keppy 3/7/98
- -------------------------------------------- -------------------------
Roy Keppy Director
/S/ Tom Landry 3/4/98
- -------------------------------------------- -------------------------
Tom Landry Director
/S/ C. James McCormick 3/7/98
- -------------------------------------------- -------------------------
C. James McCormick Director
/S/ James A. Mullins 3/8/98
- -------------------------------------------- -------------------------
James A. Mullins Director
/S/ Robert R. Rigler 3/12/98
- ------------------------------------------ -------------------------
Robert R. Rigler Director
/S/ Stanley Schoelerman 3/20/98
- -------------------------------------------- -------------------------
Stanley Schoelerman Director
/S/ Orville Sweet 3/6/98
- ------------------------------------------- -------------------------
Orville Sweet Director
/S/ Cecil Alexander 3/5/98
- -------------------------------------------- -------------------------
Cecil Alexander Director
/S/ Richard Barclay 3/8/98
- -------------------------------------------- -------------------------
Richard Barclay Director
IV-4
<PAGE>
/S/ Eugene A. Cernan 3/7/98
- -------------------------------------------- -------------------------
Eugene A. Cernan Director
/S/ Roy Ledbetter 3/5/98
- -------------------------------------------- -------------------------
Roy Ledbetter Director
/S/ John E. Miller 3/8/98
- -------------------------------------------- -------------------------
John E. Miller Director
/S/ Chris Schenkel 3/8/98
- -------------------------------------------- -------------------------
Chris Schenkel Director
</TABLE>
IV-5
<PAGE>
BNL Financial Corporation - 1996 Form 10-K
================================================================================
================================================================================
ANNUAL REPORT ON FORM 10-KSB
ITEM 14 (a) AND 14 (d)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
DES MOINES, IOWA
- --------------------------------------------------------------------------------
Financial Statements Required by Item 8
<TABLE>
<CAPTION>
Page Number of 1997
Form 10-KSB
-------------------------
<S> <C>
Consolidated Balance Sheet, December 31, 1997 and 1996 E-2
Consolidated Statement of Operations for the years ended December 31, 1997 and 1996 E-3
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1997 E-4
and 1996
Consolidated Statement of Cash Flows for the years ended December 31, 1997 and 1996 E-5
Notes to Consolidated Financial Statements E-6
Report of Independent Accountants on Financial Statements E-14
</TABLE>
E-1
<PAGE>
<TABLE>
=========================================================================================================
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, December 31,
ASSETS 1997 1996
------------------- -------------------
<S> <C> <C>
Cash and cash equivalents $714,539 $702,769
Investments available for sale, at fair value (amortized
cost $11,507,730; 11,854,901; respectively ) 11,765,947 11,885,909
Investment in equity securities, common stock
at market (cost $108,123; $108,123; respectively) 20,438 35,438
------------------- -------------------
Total investments, including cash and
Cash equivalents 12,500,924 12,624,116
Accrued investment income 225,042 222,101
Furniture and equipment, net 261,312 266,234
Deferred policy acquisition costs 433,695 474,667
Receivable from reinsurer 26,677 28,462
Premiums due and unpaid 355,793 139,041
Other assets 344,410 346,954
------------------- -------------------
Total assets $14,147,853 $14,101,575
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for future policy benefits $1,352,555 $1,382,280
Policy claims payable 1,368,630 816,500
Annuity deposits 3,336,323 3,495,571
Deferred annuity profits 615,737 610,536
Premium deposit funds 127,697 177,909
Supplementary contracts without life contingencies 56,031 70,515
Advanced and unallocated premium 328,814 102,923
Commissions payable 184,677 124,184
Other liabilities 364,429 188,794
------------------- -------------------
Total liabilities 7,734,893 6,969,212
------------------- -------------------
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 170,530 (41,679)
Accumulated deficit (8,467,934) (7,536,322)
Treasury stock, at cost, 138,795 shares (64,105) (64,105)
------------------- -------------------
Total shareholders' equity 6,412,960 7,132,363
------------------- -------------------
Total liabilities and shareholders' equity $14,147,853 $14,101,575
=================== ===================
<FN>
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
E-2
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996
------------------- ------------------
<S> <C> <C>
Income:
Premium income $11,532,718 $7,245,660
Net investment income 859,749 863,940
Realized gains 75,754 96,863
------------------- ------------------
Total income 12,468,221 8,206,463
------------------- ------------------
Expenses:
Increase (decrease) in liability for future policy benefits (39,601) 55,407
Policy benefits and other insurance costs 10,221,754 6,353,988
Amortization of deferred policy acquisition costs 40,972 39,894
Operating expenses 2,780,237 2,443,908
Taxes, other than on income 396,471 253,238
------------------- ------------------
Total expenses 13,399,833 9,146,435
------------------- ------------------
Loss from operations before
income taxes (931,612) (939,972)
Provision for income taxes - -
------------------- ------------------
Net loss $(931,612) $(939,972)
=================== ==================
Net loss per common share (basic and diluted) $(0.04) $(0.04)
=================== ==================
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.
E-3
</FN>
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized
Common Stock Additional (Depreciation)
------------------------------ Paid-In Accumulated Appreciation of Treasury
Shares Amount Capital Deficit Securities Stock
-------------- ------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 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)
Unrealized appreciation
of securities - - - - 212,209 -
Net loss - - - (931,612) - -
============== ============= =============== =============== ============== =============
Balance, December 31, 1997 23,311,944 $466,239 $14,308,230 $(8,467,934) $170,530 $(64,105)
============== ============= =============== =============== ============== =============
<FN>
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
E-4
</FN>
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 1997, and 1996
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(931,612) $(939,972)
Adjustments to reconcile net loss to net cash
used in operating activities:
Realized gains on investments (79,833) (93,094)
Realized (gains) losses on sale of furniture and equipment 4,079 (3,769)
Depreciation 95,159 90,821
Amortization of deferred acquisition costs,
organization costs and state licenses acquired 44,082 43,003
Accretion of bond discount (4,145) (4,734)
Deferred policy acquisition costs (40,972) (39,894)
Change in assets and liabilities:
Decrease in receivable from reinsurer 1,785 114,215
Decrease (increase) in accrued investment income (2,941) 30,516
Increase (decrease) in liability for future policy benefits (29,725) 56,766
Increase in policy claims payable 552,130 264,265
Increase (decrease) in annuity deposits and deferred profits (154,047) 67,554
Decrease in premium deposit funds (50,212) (17,633)
Other, decrease 286,860 86,350
--------------- ---------------
Net cash used in operating activities (309,392) (345,606)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of investments 1,322,816 1,484,269
Proceeds from maturity or redemption of investments 3,274,836 1,463,351
Proceeds from sale of furniture and equipment 201 9,000
Purchase of furniture and equipment (95,706) (60,216)
Purchase of fixed maturity securities (4,166,500) (3,744,927)
--------------- ---------------
Net cash provided by (used in) investing activities 335,647 (848,523)
--------------- ---------------
Cash flows from financing activities:
Net payments on supplementary contracts (14,485) (13,698)
--------------- ---------------
Net cash used in financing activities (14,485) (13,698)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 11,770 (1,207,827)
Cash and cash equivalents, beginning of period 702,769 1,910,596
--------------- ---------------
Cash and cash equivalents, end of period $714,539 $702,769
=============== ===============
<FN>
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
E-5
</TABLE>
<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. The Company's plan to
utilize dental insurance to attract agents who will market other BNLAC products
along with dental is working. Therefore, the significant premium growth is
primarily due to an increase in sales of dental insurance for which the maximum
annual risk per policy is $2,000. 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 1997 and 1996.
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 1997
or 1996.
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 $377,098 and $297,409 at December 31, 1997 and
1996, respectively. Depreciation expense was $95,159 and $90,821 for the years
ended December 31, 1997 and 1996, respectively.
Other assets include agents' balances reduced by allowance for doubtful accounts
of $130,513 and $142,191 at December 31, 1997 and 1996, respectively. Reductions
in the allowance account were a credit to bad debt expense recorded in
operations of $(11,678) and $(13,474) for the years ended December 31, 1997 and
1996, respectively.
E-6
<PAGE>
1. Summary of Significant Accounting Policies (continued):
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, 1997 and 1996.
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, 1996 have been reclassified to
conform with the presentation of December 31, 1997 amounts. The
reclassifications have no effect on net income for the year ended December 31,
1996.
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, 1997 and 1996, shareholders' equity includes approximately
$5,481,000 and $5,187,000 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 an Arkansas regulatory
requirement associated with the redomestication in 1994, BNLAC must maintain a
minimum of $2,300,000 in capital and surplus. Additionally, each state in which
BNLAC is licensed has statutory minimum capital requirements required for
maintaining its license to sell. Capital and surplus and net loss of BNLAC as
reported on a statutory basis are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996
<S> <C> <C>
Capital and surplus $5,136,292 $5,035,886
Net loss $(645,603) $(756,906)
</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, 1997 December 31, 1996
----------------------------------------- ------------------------------------------
Income/Loss Capital and Surplus Income/Loss Capital and Surplus
----------------- ---------------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Consolidated Reporting Under
Generally Accepted Accounting Principles $(931,612) $6,412,960 $(939,972) $7,132,363
Less Parent Company and BNL Equity 246,986 931,904 215,886 1,944,975
----------------- ---------------------- ----------------- ----------------------
Brokers National Life Assurance Company (684,626) 5,481,056 (724,086) 5,187,388
Deferred Acquisition Costs 40,972 (433,695) 39,894 (474,667)
Reserve and Premium Adjustments (8,305) 192,191 (30,424) 222,505
Interest Maintenance Reserve/AVR 16,691 (344,286) (38,920) (387,489)
Unrealized appreciation of securities - (258,502) - (22,387)
Annuity Deposits and Related Adjustments (27,600) 615,736 8,707 610,536
Other 17,265 (116,208) (12,077) (100,000)
----------------- ---------------------- ----------------- ----------------------
BNLAC Statutory Basis $(645,603) $5,136,292 $(756,906) $5,035,886
================= ====================== ================= ======================
</TABLE>
The Arkansas Insurance Department in February, 1997 conducted the triennial
statutory examination for the three year period ending December 31, 1995. 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):
As noted in the final examination order of the Insurance Commissioner of the
State of Arkansas dated June 5, 1997, 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 $99,000 be reclassified to
1995. This amount represents an underestimate of the incurred but not reported
dental claims for 1995. The above tables do not include the proposed
adjustments.
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 carryovers at December 31, 1997 were approximately
$8,100,000 for income tax reporting. The net operating loss carryovers expire in
years 2000 - 2010. The Company and its Subsidiaries will file separate income
tax returns for 1997.
A deferred tax asset of $3,140,000 resulted from net operating loss carryovers
and temporary differences primarily related to the life insurance subsidiary.
The Company has recognized a corresponding valuation allowance of $3,140,000
against the deferred tax asset. This represents a net increase of $270,000 in
the deferred tax asset for 1997 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
December 31, 1997 Unrealized Unrealized Estimated
Amortized Cost Gains Losses Market Value
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations of
US government corporations and agencies $10,779,985 $292,058 $( 33,380) $11,038,663
Obligations of states and political subdivisions 297,588 162 (4,500) 293,250
Corporate securities 310,607 3,282 (2,813) 311,076
Mortgage-backed securities
GNMA 20,205 - (1,397) 18,808
Public utility bonds 99,345 4,805 - 104,150
--------------- ------------- ------------- ---------------
Totals $11,507,730 $300,307 $(42,090) $11,765,947
=============== ============= ============= ===============
Gross Gross
December 31, 1996 Unrealized Unrealized Estimated
Amortized Cost Gains Losses Market Value
--------------- ------------- ------------- ---------------
US Treasury securities and obligations of
US government corporations and agencies $10,972,990 $176,748 $(120,406) $11,029,332
Obligations 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
=============== ============= ============= ===============
</TABLE>
E-8
<PAGE>
4. Investments (continued):
The amortized cost and estimated fair value of investments in fixed maturity
securities at December 31, 1997 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, 1997
---------------------------------
Estimated
Amortized Cost Market Value
--------------- --------------
<S> <C> <C>
Due in one year or less $ 500,000 $ 495,000
Due after one year through five years 1,769,437 1,802,596
Due after five years through ten years 3,595,468 3,581,509
Due after ten years 5,622,620 5,868,034
--------------- --------------
11,487,525 11,747,139
Mortgage-backed securities 20,205 18,808
--------------- --------------
$11,507,730 $11,765,947
=============== ==============
</TABLE>
Proceeds from sales and maturities of investments in fixed maturity securities
for the years ended December 31, 1997 and 1996 were $4,597,652 and $2,947,620,
respectively. Gross gains of $80,143 and $97,757 and gross losses of $310 and
$4,663 were realized on those December 31, 1997 and 1996 sales, respectively.
Investment in equity securities at December 31, 1997 and 1996 represents common
stock investments as follows:
<TABLE>
<CAPTION>
1997 1996
Market Market
Cost Value Cost Value
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Banks, trusts and
insurance companies $ 2,423 $ 438 $ 2,423 $ 438
Industrial, savings
and loans and other 105,700 20,000 105,700 35,000
------------- ------------ ------------- -------------
$108,123 $20,438 $108,123 $35,438
============= ============ ============= =============
</TABLE>
Net investment income for the years ended December 31, 1997 and 1996 is as
follows:
December 31,
------------------------------
1997 1996
------------- -------------
Interest on debt securities and
cash investments $878,594 $878,573
Dividends on equity securities - -
------------- -------------
878,594 878,573
Investment expenses (18,845) (14,633)
------------- -------------
Net investment income $859,749 $863,940
============= =============
E-9
<PAGE>
4. Investments (continued):
Net realized gains and losses are summarized below:
December 31,
------------------------------
1997 1996
------------- -------------
Debt securities $79,833 $93,094
Equity securities - -
------------- -------------
$79,833 $93,094
============= =============
Included in 1997 and 1996 realized gains on debt securities is $42,328 and
$30,205, respectively of gains on taxable municipal bonds that were written down
in 1991 to 25% of par value ($700,000) 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 each year thereafter the Company has received a portion of
the principal in excess of the book value and back interest on the bonds. As of
December 31, 1997 the Company has received a total of $746,798 from the
rehabilitation plan.
5. Fair Value of Financial Instruments
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------- ---------------- ----------------
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents
(Note 1) $ 714,539 $ 714,539 (a) $ 702,769 $ 702,769 (a)
Investments-fixed maturity, available for sale
(Note 4 & Note 1) 11,765,947 11,765,947 (b) 11,885,909 11,885,909 (b)
Investments -equity securities
(Note 4 & Note 1) 20,438 20,438 (b) 35,438 35,438 (b)
Other financial instruments-Assets 313,363 313,363 (a) 315,057 315,057 (a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Assets $12,814,287 $12,814,287 $12,939,173 $12,939,173
================ ================ ================ ================
Liabilities
Premium deposit funds $127,697 $127,697 (a) $177,909 $177,909 (a)
Supplementary contracts without life contingencies
(Note 1) 56,031 56,031 (a) 70,515 70,515 (a)
Annuity deposits
(Note 1) 3,336,323 3,336,323 (a) 3,495,571 3,495,571 (a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Liabilities $3,520,051 $3,520,051 $3,743,995 $3,743,995
================ ================ ================ ================
<FN>
(a) The indicated assets and liabilities are carried at book value, which
approximate fair value.
(b) Fair value of investments is 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 have been made in the financial statements. In the opinion of
management, the existing litigation is without merit and the Company is in the
process of seeking sanctions against appropriate parties.
The Company has entered into noncancelable operating leases for office space and
equipment. Future minimum payments under the leases are as follows:
1998 $120,664
1999 $68,819
2000 $20,843
2001 $6,336
Thereafter $2,358
----------------------
Total $219,020
======================
Related lease cost incurred for the years ended December 31, 1997 and 1996 was
$113,455 and $110,486, respectively.
The Company's wholly owned insurance subsidiary might 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 $33,000 at
December 31, 1997.
For information regarding minimum capital requirements to maintain a license to
sell in various states, see Note 2.
7. Liability for Unpaid Claims
Activity in the liability for unpaid claims is summarized as follows.
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
<S> <C> <C>
Balance at January 1 $816,500 $552,235
Less Reinsurance Recoverable 5,161 120,735
------------------ -------------------
Net Balance at January 1 811,339 431,500
------------------ -------------------
Incurred related to:
Current year 8,387,011 5,016,402
Prior years 11,846 72,837
------------------ -------------------
Total Incurred 8,398,857 5,089,239
------------------ -------------------
Paid related to:
Current year 7,017,720 4,090,828
Prior years 823,846 618,572
------------------ -------------------
Total Paid 7,841,566 4,709,400
------------------ -------------------
Net Balance at December 31 1,368,630 811,339
Plus reinsurance recoverable - 5,161
================== ===================
Balance at December 31 $1,368,630 $816,500
================== ===================
</TABLE>
E-11
<PAGE>
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.
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"
(Excellent) for 1996.
Following is a summary of reinsurance for December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross other from other Assumed to
Amount Companies Companies Net Amounts Net
--------------- ------------- ------------- --------------- -------------
December 31, 1997
<S> <C> <C> <C> <C> <C>
Life Insurance in force
(in thousands) $36,828 $11,971 $8,226 $33,083 24.9%
=============== ============= ============= =============== =============
Premiums-life insurance $383,798 $57,362 $22,938 $349,374 6.6%
Premiums-accident and health 11,087,724 28,748 - 11,058,976 -
--------------- ------------- ------------- --------------- -------------
Total insurance premiums $11,471,522 $86,110 $22,938 $11,408,350 0.2%
=============== ============= ============= =============== =============
December 31, 1996
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%
============= ============= ============= ============= =============
</TABLE>
9. Related Party Transactions\Certain Relationships
Historically, the Company utilized the firm of Ahart & Bryan, Inc. ("A & B,
Inc."), of North Little Rock, Arkansas, to facilitate purchases and sales of
corporate securities as a part of its routine investment program. Because Mr.
Tom Ahart, President and a Director of A & B, Inc. is a brother of the Company's
Chairman, Wayne E. Ahart, transactions between A & B, Inc. and the Company have
been disclosed in prior financial statements.
Effective July 26, 1996, A & B, Inc. was merged into First Commercial
Investments, Inc. which is now the brokerage firm utilized by the Company for
its investment transactions. Tom Ahart is employed by First Commercial
Investments, Inc. as a Vice President, but he is neither a board member nor
principal owner of First Commercial Investments, Inc. For the period from
January 1, 1996 to July 26, 1996 (during which period A & B Inc. was considered
a related party by virtue of Tom Ahart's position of ownership and control), the
amount of purchases and sales executed through A & B, Inc. (as the introducing
broker) had a market value of approximately $4,300,000, and A & B, Inc. received
fees totaling $5,855 for such period.
E-12
<PAGE>
10. Benefit Plans for Certain Brokers/Agents and Employees
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. Initially 250,000 shares were available under the
plan. On November 17, 1997 the Board of Directors authorized an additional
500,000 shares. The option period may not exceed a term of 5 years and the
duration of the plan is ten years. A four-member committee of Directors
administers the plan. During 1997 and 1996 the Company granted 208,050 and
101,725 stock options respectively, with an exercise price of $.50 per share.
There were 309,775 stock options outstanding at December 31, 1997. No options
have been exercised since inception of the plan. Under the fair value method,
total compensation recognized for grant of stock options was $0. The fair value
of options granted is estimated at $1,500 and $800 in 1997 and 1996,
respectively. These values were computed using a binomial method as prescribed
in SFAS 123 and certain assumptions include 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 2.5 years. The options do not have a dilutive effect on earnings
per share at this time, but may have such an effect in the future. See Note 1.
In May 1997, the Board of Directors approved a stock bonus plan for the benefit
of certain officers of the corporation. The plan provides for a bonus based on
consolidated after-tax profits subject to specified limits. The bonus amount,
net of taxes, will be used to purchase stock in the Company on the open market.
No stock bonus will be granted unless the Company has consolidated after-tax
profits.
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.
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
No events have occurred subsequent to the close of the books on December 31,
1997, which have a material effect on the financial condition of the 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, 1997 and 1996 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Oklahoma City, Oklahoma \s\ SMITH, CARNEY & CO., p.c
February 11, 1998
E-14
<PAGE>
Exhibit 4.3
STOCK BONUS AGREEMENT
This Stock Bonus Agreement (the "Agreement") is made effective as of the 1st day
of January, 1997, between BNL Financial Corporation (the "Company") and C.
Donald Byrd ("Employee").
Whereas, The Employee serves as an executive officer of the Company; and
Whereas, the Company desires to encourage the Employee to remain as an employee
of the Company and for the Employee to have a growing personal interest in the
continued success and progress of the Company; and
Whereas, the Company desires to offer certain compensation to the Employee for
the performance of his duties through the purchase of stock as herein provided;
and
Whereas, the Company and Employee desire to enter into an agreement setting
forth the rights and obligations of the respective parties under said
compensation agreement;
Now, therefore, in consideration of the foregoing and the covenants contained
herein, the Company and Employee agree as follows:
1. Establishment of Committee. A committee (the "Committee") of the board of
directors of the Company shall be established to implement the terms of this
Agreement. If the board shall not establish a separate committee for that
purpose, the Compensation Committee of the board shall act as the Committee.
2. Allocation of Profits. Subject to the terms and conditions set forth in the
Agreement, the Company agrees that it will allocate and set aside an amount
equal to two and one-half percent (2 1/2%) of the after taxes net profits in
excess of two hundred fifty thousand dollars ($250,000), of the Company each
year (the "Allocated Amount"). For purposes of the Agreement, "after taxes net
profits" shall be calculated in accordance with generally accepted accounting
principles, with the amount to be determined from the year-end financial
statements of the Company.
3. Use of Allocated Amount. The Allocated Amount shall be used by the Company in
the following manner:
(i) the Company shall withhold any amounts necessary to pay all
required taxes and similar charges required to be withheld on account of the
payment of compensation to the Employee; and
(ii) after deduction for the withholding of taxes and other charges as
provided in the aforesaid subsection, the funds remaining of the Allocated
Amount shall be used to purchase shares of the Company's common stock (the
"Shares") for and on behalf of the Employee.
4. Timing of the Allocation. When the annual financial statements of the Company
have been received by the Company, a copy thereof shall be promptly given to the
Committee, together with a statement from the chief financial officer, or other
person designated by the Committee to make such calculation, of the
determination of the Allocated Amount hereunder. Upon receipt of the financial
information and the calculation as herein provided, the Committee shall direct
the appropriate officers or employees of the Company to set aside the Allocated
Amount for purposes of making the purchases herein contemplated and shall make
such arrangements as it deems appropriate to complete such purchases. It is the
intention of the parties hereto that all such purchases shall take place as soon
as reasonably practicable after the setting aside of the Allocated Amount.
5. Purchase of Shares. If possible, the Shares shall be purchased on the open
market at the then current market price. In the event that an insufficient
number of shares shall be available for purchase on the open market so as to be
able to fully utilize the Allocated Amount for the purchase of Shares, the
Allocated Amount may be used to purchase shares directly from the Company. If
the Shares are purchased from the Company, the price shall be established at the
then-current market price or, if no such market exists, at a price to be
established by the board of directors of the Company. The Committee shall be
responsible for determining the timing and source of the purchases and shall use
reasonable efforts to comply with the intent of this agreement as herein
expressed.
6. Issuance of Shares. The Shares shall be purchased in the name of the Employee
and shall be issued in his name or, upon the request of the Employee, be issued
in joint tenancy with the Employee and any person designated by the Employee.
Neither the Company nor the Committee shall acquire any interest in or title to
any of the Shares.
7. Interpretation and Implementation of the Agreement. The Committee shall have
the full authority to interpret and implement this Agreement. The Company and
the Employee agree that any determination, if reasonable and made in good faith,
of the Committee shall be binding upon the parties.
8. Limitation on Annual Amount. The Allocated Amount for any one year shall not
exceed fifty thousand dollars ($50,000).
9. Limitation on shares to be Purchased. This Agreement shall cease and the
Employee shall not be entitled to receive any additional Shares hereunder when
the total number of Shares purchased for the Employee shall be four hundred
thousand (400,000).
10. Termination of the Agreement by the Company. The Company may terminate the
Agreement at any time; provided, however, that the Employee shall be entitled to
receive any and all Shares to which he is entitled prior to the date of the
termination. If the Agreement is terminated after the end of the Company's
fiscal year but before the purchase of any Shares under the Agreement on account
of the results of the Company for the prior year, the Employee shall be entitled
to receive the entire amount which would be due for the prior fiscal year. If
the Agreement is terminated prior to the end of the Company's fiscal year, the
Committee shall make such adjustments to the Allocated Amount due, if any, to
the Employee for that fiscal year as it deems appropriate. In making such
determination the Committee shall act in a reasonable manner and shall take into
account such factors as the length of time during the year the Agreement was in
effect and the Employee's contribution during the year to the success of the
Company.
11. Automatic Termination upon Termination of Employee. The termination of
Employee's employment with the Company shall act as a termination of the
Agreement at the date of Employee's termination, subject to the following:
(a) If Employee voluntarily terminates after the end of the Company's
fiscal year but before the Employee has received the Allocated amount, Employee
shall be entitled to receive the entire Allocated Amount for that previous
fiscal year.
(b) If Employee voluntarily terminates his employment with the Company
before the end of the fiscal year, Employee shall not be entitled to receive any
of the Allocated Amount for that fiscal year unless the Committee shall, in its
sole discretion, determine that such payment, or a portion thereof, would be
appropriate.
(c) If Employee's employment with the Company is terminated by the
Company for any reason other than for cause, as hereinafter defined, during the
fiscal year, the Employee shall be entitled to receive that portion of the
Allocated Amount which the amount of time during which he was employed bears to
the entire fiscal year.
(d) If Employee's employment with the Company is terminated by the
Company for cause, Employee shall not be entitled to receive any amount
hereunder for that fiscal year.
For purposes of this section, "for cause" shall mean dishonesty, theft,
conviction of a serious misdemeanor or felony, drunkenness or drug use,
unethical business conduct, breach of trust or a material breach of this
Agreement. "For Cause" shall also include the failure of the Employee for any
reason, within ten (10) days after receipt of Employee of written notice from
the Company, to correct, cease, or otherwise alter any insubordination, failure
to comply with instructions or other action or omission to act that in the
opinion of the Company does or may materially and adversely affect its business
or operation.
12. Possible Restriction on Shares. Employee recognizes and agrees that the
Shares may be "restricted securities" as that term is defined under the federal
securities laws if the Shares have been purchased directly from the Company or
in a manner that would require the Shares to be restricted securities. The
Company agrees that it will use reasonable efforts to purchase the Shares in
such a fashion that they will not be considered "restricted securities" but
makes no guaranty or other assurance that the Shares will be so acquired.
13. Assignability. The Employee may not assign his rights hereunder; provided,
however, that, in the event of the disability of the Employee, his interests may
be exercised by this representative, guardian or similar agent and that, in the
event of the death of the Employee, his estate and heirs may acquire and
exercise any and all of his rights hereunder which exist at the date of his
death.
14. Entire Agreement. This Agreement constitutes the entire agreement of the
parties with respect to the matters contained herein.
15. Right to Employment. Nothing contained herein shall be construed as
providing Employee with any rights to continued employment with the Company.
The parties agree that this agreement shall become effective as of the day first
written above.
By: /S/ Donald Byrd
---------------
C. Donald Byrd
"Employee"
BNL Financial Corporation
"Company"
By: /S/ Wayne E. Ahart
------------------
Chairman of the Board
STOCK BONUS AGREEMENT
This Stock Bonus Agreement (the "Agreement") is made effective as of the 1st day
of January, 1997, between BNL Financial Corporation (the "Company") and Kenneth
D. Tobey ("Employee").
Whereas, The Employee serves as an executive officer of the Company; and
Whereas, the Company desires to encourage the Employee to remain as an employee
of the Company and for the Employee to have a growing personal interest in the
continued success and progress of the Company; and
Whereas, the Company desires to offer certain compensation to the Employee for
the performance of his duties through the purchase of stock as herein provided;
and
Whereas, the Company and Employee desire to enter into an agreement setting
forth the rights and obligations of the respective parties under said
compensation agreement;
Now, therefore, in consideration of the foregoing and the covenants contained
herein, the Company and Employee agree as follows:
1. Establishment of Committee. A committee (the "Committee") of the board of
directors of the Company shall be established to implement the terms of this
Agreement. If the board shall not establish a separate committee for that
purpose, the Compensation Committee of the board shall act as the Committee.
2. Allocation of Profits. Subject to the terms and conditions set forth in the
Agreement, the Company agrees that it will allocate and set aside an amount
equal to two and one-half percent (2 1/2%) of the after taxes net profits in
excess of two hundred fifty thousand dollars ($250,000), of the Company each
year (the "Allocated Amount"). For purposes of the Agreement, "after taxes net
profits" shall be calculated in accordance with generally accepted accounting
principles, with the amount to be determined from the year-end financial
statements of the Company.
3. Use of Allocated Amount. The Allocated Amount shall be used by the Company in
the following manner:
(i) the Company shall withhold any amounts necessary to pay all
required taxes and similar charges required to be withheld on account of the
payment of compensation to the Employee; and
(ii) after deduction for the withholding of taxes and other charges as
provided in the aforesaid subsection, the funds remaining of the Allocated
Amount shall be used to purchase shares of the Company's common stock (the
"Shares") for and on behalf of the Employee.
4. Timing of the Allocation. When the annual financial statements of the Company
have been received by the Company, a copy thereof shall be promptly given to the
Committee, together with a statement from the chief financial officer, or other
person designated by the Committee to make such calculation, of the
determination of the Allocated Amount hereunder. Upon receipt of the financial
information and the calculation as herein provided, the Committee shall direct
the appropriate officers or employees of the Company to set aside the Allocated
Amount for purposes of making the purchases herein contemplated and shall make
such arrangements as it deems appropriate to complete such purchases. It is the
intention of the parties hereto that all such purchases shall take place as soon
as reasonably practicable after the setting aside of the Allocated Amount.
5. Purchase of Shares. If possible, the Shares shall be purchased on the open
market at the then current market price. In the event that an insufficient
number of shares shall be available for purchase on the open market so as to be
able to fully utilize the Allocated Amount for the purchase of Shares, the
Allocated Amount may be used to purchase shares directly from the Company. If
the Shares are purchased from the Company, the price shall be established at the
then-current market price or, if no such market exists, at a price to be
established by the board of directors of the Company. The Committee shall be
responsible for determining the timing and source of the purchases and shall use
reasonable efforts to comply with the intent of this agreement as herein
expressed.
6. Issuance of Shares. The Shares shall be purchased in the name of the Employee
and shall be issued in his name or, upon the request of the Employee, be issued
in joint tenancy with the Employee and any person designated by the Employee.
Neither the Company nor the Committee shall acquire any interest in or title to
any of the Shares.
7. Interpretation and Implementation of the Agreement. The Committee shall have
the full authority to interpret and implement this Agreement. The Company and
the Employee agree that any determination, if reasonable and made in good faith,
of the Committee shall be binding upon the parties.
8. Limitation on Annual Amount. The Allocated Amount for any one year shall not
exceed fifty thousand dollars ($50,000).
9. Limitation on shares to be Purchased. This Agreement shall cease and the
Employee shall not be entitled to receive any additional Shares hereunder when
the total number of Shares purchased for the Employee shall be four hundred
thousand (400,000).
10. Termination of the Agreement by the Company. The Company may terminate the
Agreement at any time; provided, however, that the Employee shall be entitled to
receive any and all Shares to which he is entitled prior to the date of the
termination. If the Agreement is terminated after the end of the Company's
fiscal year but before the purchase of any Shares under the Agreement on account
of the results of the Company for the prior year, the Employee shall be entitled
to receive the entire amount which would be due for the prior fiscal year. If
the Agreement is terminated prior to the end of the Company's fiscal year, the
Committee shall make such adjustments to the Allocated Amount due, if any, to
the Employee for that fiscal year as it deems appropriate. In making such
determination the Committee shall act in a reasonable manner and shall take into
account such factors as the length of time during the year the Agreement was in
effect and the Employee's contribution during the year to the success of the
Company.
11. Automatic Termination upon Termination of Employee. The termination of
Employee's employment with the Company shall act as a termination of the
Agreement at the date of Employee's termination, subject to the following:
(a) If Employee voluntarily terminates after the end of the Company's
fiscal year but before the Employee has received the Allocated amount, Employee
shall be entitled to receive the entire Allocated Amount for that previous
fiscal year.
(b) If Employee voluntarily terminates his employment with the Company
before the end of the fiscal year, Employee shall not be entitled to receive any
of the Allocated Amount for that fiscal year unless the Committee shall, in its
sole discretion, determine that such payment, or a portion thereof, would be
appropriate.
(c) If Employee's employment with the Company is terminated by the
Company for any reason other than for cause, as hereinafter defined, during the
fiscal year, the Employee shall be entitled to receive that portion of the
Allocated Amount which the amount of time during which he was employed bears to
the entire fiscal year.
(d) If Employee's employment with the Company is terminated by the
Company for cause, Employee shall not be entitled to receive any amount
hereunder for that fiscal year.
For purposes of this section, "for cause" shall mean dishonesty, theft,
conviction of a serious misdemeanor or felony, drunkenness or drug use,
unethical business conduct, breach of trust or a material breach of this
Agreement. "For Cause" shall also include the failure of the Employee for any
reason, within ten (10) days after receipt of Employee of written notice from
the Company, to correct, cease, or otherwise alter any insubordination, failure
to comply with instructions or other action or omission to act that in the
opinion of the Company does or may materially and adversely affect its business
or operation.
12. Possible Restriction on Shares. Employee recognizes and agrees that the
Shares may be "restricted securities" as that term is defined under the federal
securities laws if the Shares have been purchased directly from the Company or
in a manner that would require the Shares to be restricted securities. The
Company agrees that it will use reasonable efforts to purchase the Shares in
such a fashion that they will not be considered "restricted securities" but
makes no guaranty or other assurance that the Shares will be so acquired.
13. Assignability. The Employee may not assign his rights hereunder; provided,
however, that, in the event of the disability of the Employee, his interests may
be exercised by this representative, guardian or similar agent and that, in the
event of the death of the Employee, his estate and heirs may acquire and
exercise any and all of his rights hereunder which exist at the date of his
death.
14. Entire Agreement. This Agreement constitutes the entire agreement of the
parties with respect to the matters contained herein.
15. Right to Employment. Nothing contained herein shall be construed as
providing Employee with any rights to continued employment with the Company.
The parties agree that this agreement shall become effective as of the day first
written above.
/S/ Kenneth D. Tobey
- --------------------
Kenneth D. Tobey
"Employee"
BNL Financial Corporation
"Company"
By: /S/ Wayne E. Ahart
------------------
Chairman of the Board
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