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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
from______to_____ .
Commission File No. 0-16880
- --------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
IOWA 42-1239454
(State of incorporation) (I.R.S. Employer Identification No.)
301 Camp Craft Road, Suite 200
Austin, Texas 78746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 327-3065
- --------------------------------------------------------------------------------
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____
As of March 31, 1999, the Registrant had 23,311,944 shares of Common Stock, no
par value, outstanding.
Transitional Small Business Disclosure Format (check one) Yes___ No__X__
<PAGE>
Item 1. Financial Statements
BNL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30
ASSETS 1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
Investments:
Investments available for sale, at
fair value ....................... $10,772,709 $10,006,208
Equity securities, common stock ....... 2,313 2,573
Cash and cash investments ............. 199,112 2,426,963
----------- -----------
Total Investments 10,974,133 12,435,744
Accrued investment income ................ 267,734 195,652
Furniture and equipment .................. 453,439 325,717
Deferred policy acquisition costs ........ 358,733 379,917
Receivable from reinsurer ................ 33,531 33,531
Premiums due and unpaid................... 755,948 611,786
Other assets ............................. 363,266 345,428
----------- ----------
TOTAL ASSETS $13,206,783 $14,327,775
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liability for future policy benefits . $1,356,853 $1,398,633
Policy claims payable................. 2,438,175 2,508,175
Premium deposit fund ................. 128,813 114,841
Annuity deposits ..................... 3,014,133 3,259,195
Deferred annuity profits ............. 500,000 521,212
Supplementary contracts without
life contingencies ............... 111,119 129,944
Advanced and unallocated premium...... 605,342 352,999
Commissions payable................... 364,686 310,303
Other liabilities .................... 436,313 528,507
---------- ----------
Total liabilities 8,952,432 9,123,809
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock ......................... 466,239 466,239
Additional paid-in capital ........... 14,308,230 14,308,230
Unrealized appreciation (depreciation)
of securities ................... (770,308) 208,289
Treasury stock ....................... (64,105) (64,105)
Accumulated deficit .................. (9,685,705) (9,714,687)
---------- -----------
Total shareholders' equity 4,254,351 5,203,966
---------- ----------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $13,206,784 $14,327,775
========== ==========
<FN>
(See Notes to Consolidated Financial Statements)
</FN>
</TABLE>
2
<PAGE>
BNL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1999 1998 1999 1998
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Premium income .................................. $7,410,959 $5,649,343 $ 21,527,171 $ 15,041,756
Investment income ............................... 204,311 204,120 584,117 621,118
Realized gains on investments ................... 17,073 7,411 22,556 61,929
------------- ------------ ----------- -----------
Total income ................................... 7,632,343 5,860,874 22,133,844 15,724,803
------------- ------------ ----------- -----------
EXPENSES:
Policy benefits and other insurance costs ....... 6,350,215 5,276,681 18,341,293 13,501,308
Increase in liability for future policy benefits. (19,514) 11,670 (41,781) 52,053
Amortization of deferred policy acquisition costs 5,868 6,012 21,185 20,614
Operating expenses .............................. 1,103,912 878,366 3,137,072 2,570,398
Taxes, other than on income ..................... 203,323 172,835 647,092 494,925
------------- ------------ ----------- -----------
Total expenses ................................. 7,643,804 6,345,564 22,104,861 16,639,298
------------- ------------ ----------- -----------
OPERATING INCOME (LOSS)......................... (11,462) (484,690) 28,982 (914,495)
Provision for income taxes ......................... 0 0 0 0
------------- ------------ ----------- -----------
NET GAIN (LOSS)................................. ($11,462) ($484,690) $ 28,982 ($914,495)
============= ============ =========== ===========
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during
period..................................... ($293,759) $149,416 ($956,041) $159,957
Reclassification adjustment for gains
included in net income..................... (17,073) (7,411) (22,556) (61,929)
------------- ------------ ----------- -----------
Other comprehensive income (loss)................... (310,832) 142,005 (978,597) 98,028
------------- ------------ ----------- -----------
COMPREHENSIVE INCOME (LOSS).................... ($322,293) ($342,685) ($949,614) ($816,467)
============= ============ =========== ===========
Net gain (loss) per share ....................... ($0.00) ($0.02) $0.00 ($0.04)
============= ============ =========== ===========
Weighted average number
of shares ...................................... 23,311,944 23,311,944 23,311,944 23,311,944
============= ============ =========== ===========
<FN>
(See Notes to Consolidated Financial Statements)
</FN>
</TABLE>
3
<PAGE>
<TABLE>
BNL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months
Ended Ended
09/30/99 09/30/98
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net gain (loss) ............................................ $ 28,982 ($ 914,495)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Realized (gain) on investments ............................ (23,210) (61,929)
Realized loss on sale of furniture and equipment........... 654 -
Depreciation .............................................. 106,409 77,227
Amortization of deferred acquisition
costs and state licenses acquired ...................... 23,517 22,945
Accretion of bond discount ................................ 357 (2,631)
Change in assets and liabilities:
Decrease in accrued investment income ..................... (72,082) 42,493
Increase in premiums due and unpaid........................ (144,162) (133,065)
Decrease (increase) in premium deposit fund ................ 13,972 (5,476)
Decrease in annuity deposits and deferred profits.......... (266,274) (73,669)
Decrease (increase) in liability for future policy
benefits ............................................... (41,781) 52,053
Decrease (increase) in policy claims payable............... (73,000) 571,370
Increase in advanced and unallocated premium............... 252,343 50,462
Increase in commissions payable............................ 54,383 54,984
Other net ................................................. (112,378) 96,006
---------- ---------
Total Adjustments ..................................... (281,252) 690,770
---------- ---------
Total cash provided by (used in)
operating activities .............................. (252,750) (223,725)
Cash flows from investing activities:
Sales of debt securities ................................. 2,673,446 8,735,728
Sales of equity securities ............................... 0 0
Sales of furniture and equipment ......................... 4,000 0
Purchase of equity securities ............................ 0 0
Purchase of furniture and equipment ...................... (238,786) (45,270)
Purchase of fixed maturity securities .................... (4,395,415) (6,811,410)
--------- ---------
Net cash provided by (used in) investing activities (1,956,755) 1,879,048
--------- ---------
Cash flows from financing activities:
Payments on supplementary contracts ...................... (18,826) 79,579
--------- ----------
Net cash provided by (used in) financing activities (18,826) 79,579
--------- ----------
Net increase (decrease) in cash and cash equivalents ....... (2,227,851) 1,734,902
Cash and cash equivalents, beginning of year ............ 2,426,963 714,539
--------- ---------
Cash and cash equivalents, end of period ................ $ 199,112 $ 2,449,441
========= =========
<FN>
(See notes to Consolidated Financial Statements)
</FN>
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The financial statements included herein reflect all adjustments which are, in
the opinion of management, necessary to present a fair statement of the interim
results on a basis consistent with the prior period. The statements have been
prepared to conform to the requirements of Form 10-QSB and do not necessarily
include all disclosures required by generally accepted accounting principles
(GAAP). The reader should refer to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998, previously filed with the Commission, for
financial statements for the year ended December 31, 1998, prepared in
accordance with GAAP. Net income (loss) per share of common stock is based on
the weighted average number of outstanding common shares.
-5-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
At September 30, 1999, the Company had liquid assets of $199,112 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 premium, annuity deposits and
investment income. In the first nine months of 1999, BNLAC collected $21,594,896
of premiums and annuity deposits (gross before reinsurance) and the Company had
consolidated investment income of $584,117.
The Company's investments are primarily in U.S. Government and Government
Agencies and other investment grade bonds 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.
The Company's insurance operations are conducted through its wholly owned
subsidiary, Brokers National Life Assurance Company (BNLAC). At September 30,
1999, BNLAC had statutory capital and surplus of $3,909,925. In 1997, BNL
Financial Corporation contributed $500,000 to the paid in surplus of BNLAC and
BNL Equity Corporation contributed $250,000. BNLAC is required to maintain
minimum levels of statutory capital and surplus, which differ from state to
state, as a condition to conducting business in those states in which it is
licensed. The State of Arkansas, which is the legal domicile of BNLAC, requires
a minimum of $2,300,000 in capital and surplus. The highest requirement in any
state in which BNLAC is licensed is $3,000,000. Some states in which BNLAC is
licensed have increased these requirements to as much as $5,000,000, but, in
general, BNLAC may continue to operate under the lower minimum requirements in
effect when it first became licensed in the applicable state. BNLAC voluntarily
withdrew its license in the state of Washington due to an increased minimum
capital stock requirement in that state of $2,400,000. Management monitors these
developments to maintain compliance with the requirements of each state.
Results of Operations
Premium income for the first nine months of 1999 was $21,527,171 compared to
$15,041,756 for the same period in 1998. The increase of $6,485,415, or 43%, was
due to an increase in insurance premiums written.
Net investment income was $584,117 for the period ended September 30, 1999
compared to $621,118 for the same period in 1998. The decrease was primarily due
to lower interest rates and the reinvestment of bonds called for redemption in
lower yielding short-term investments.
Realized gains on investments were $22,556 in the first nine months of 1999
compared to $61,929 for the same period in 1998. The decrease in realized gains
was due to a decrease in bonds sold in the normal course of the Company's
investment activity.
In the first nine months of 1999, policy benefits and other insurance costs were
$18,341,293 compared to $13,501,308 for the same period in 1998. The increase
was due to an increase in claims and commissions resulting from the increase in
insurance business in force. The dental claims loss ratio was 72.8% during the
first nine months of 1999 compared to 77.8% for the same period in 1998.
Management believes the decrease in the dental claims ratio indicates a reversal
of the upward trend of the loss ratio over the past two years.
For the period ended September 30, 1999, the increase in liability for future
policy benefits was ($41,781) compared to $52,053 in 1998. The decrease in 1999
was due to a decrease in life reserves from surrendered policies.
Amortization of deferred policy acquisition costs were $21,185 and $20,614 for
the first nine months of 1999 and 1998 respectively. Amortization of deferred
policy acquisition costs may vary in the future in relation to new life
insurance sales and lapses or surrenders of existing policies.
Operating expenses increased to $3,137,072 in the first nine months of 1999
compared to $2,570,398 for the same period in 1998. The increase in operating
expenses was primarily due to an increase in payroll and claims administrative
expense - which are all attributable to the increased volume of insurance in
force.
Taxes, other than on income, fees and assessments were $647,092 for the first
nine months of 1999 compared to $494,925 for the same period in 1998. The
increase was primarily due to an increase in premium taxes on the increased
premiums collected.
The net gain from operations for the first nine months of 1999 was $28,982
compared to ($914,495) for the same period in 1998. The profit in 1999 compared
to the 1998 loss, was primarily due to an increase in premium income, a lower
dental insurance claims ratio and a lower cost per unit to administer the
business.
The "Year 2000" Issue
The "Year 2000" (or "Y2K") Issue is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem arose
because many software programs were written using two digits for the year (e.g.
98) rather than four digits (e.g. 1998). These systems automatically assume that
the first two digits are "1" and "9", which will cause these programs to
misinterpret dates occurring after December 31, 1999.
The Company has 3 primary sources of computer data. They are:
1. VIP Systems, Inc. (VIP) - Independent provider of mainframe computer
support for all of the Company's data except dental insurance claims
payments.
2. Employer Plan Services, Inc. (EPSI) - Third Party Administrator (TPA) for
the Company's dental insurance claims payments and claims records.
3. In-house programs which provide a majority of the Company's management
reports.
The Y2K compliance status of each of these three systems is as follows:
VIP
All VIP application software programs were originally written with an
8-digit date field, including 4 digits for the year designation. As a
result, VIP has represented to the Company that its application software
is Y2K compliant.
VIP is in the process of converting its existing application
software to PC based hardware using Windows NT operating system (which
is Y2K compliant). The conversion process includes testing for Y2K
compliance and is scheduled for completion by November 1, 1999. BNL
will perform final Y2K compliance verification tests at that time.
VIP's mainframe computer used an operating system that was not Y2K
compliant. VIP recently acquired and implemented all necessary program
"patches" required to make its mainframe operating system Y2K compliant.
On January 12, 1999, VIP informed the Company that tests have been
performed without problems and that the mainframe and operating system are
Y2K compliant.
EPSI
In April 1999, the company changed its TPA to EPSI. EPSI is currently in
the process of replacing equipment or making corrections to the
programming of existing equipment where it is feasible, so that
date-related activities and the functions they provide do not adversely
interfere with the processing of data. Equipment which has been purchased
has been guaranteed as Year 2000 compliant. They have purchased new
software that is Year 2000 compliant for the processing of claims.
Contingency plans are also being developed to reduce the likelihood that
year 2000 events outside of their control will not adversely impact
customer service. BNL will perform Y2K compliance verification after EPSI
has completed their software and hardware updates. In the event the
verification tests fail, the Company's backup alternative would be to
retain a new TPA that is Y2K compliant.
-7-
<PAGE>
In-House Programs
The Company's Internal Systems Management (ISM) department implemented a
year 2000 strategy in January 1998 to evaluate all hardware and in-house
program software to determine their Y2K readiness. The ISM department
identified the following hardware and software problems:
1. Computer system board BIOS's would not understand year 2000 date.
2. Some computers were still using operating systems that were not Y2K
compliant.
3. Internal network software was not Y2K compliant.
4. Internal databases had some Y2K issues.
The ISM department evaluated these problems and by January 1999 had taken the
following actions to correct the problems identified:
1. Replaced all computer system boards with boards Y2K approved by National
Software Testing Laboratories.
2. Upgraded all computers to a Y2K compliant operating system.
3. Converted the internal network to new network software with all appropriate
upgrades.
4. Upgraded the internal database with millennium edition software.
Full scale testing has been performed in a year 2000 environment with no
problems being found. As of February 1,1999 the Company's ISM department
believes that in-house programs are Y2K compliant.
The cost incurred to date by the Company to correct the Y2K problem has not been
material. The Company does not expect to incur any additional material costs to
become compliant nor does it foresee a need for any substantial amount of
in-house staff training.
-8-
<PAGE>
PART II -- OTHER INFORMATION
Item 1. 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. On August 27, 1998, the Court entered a ruling certifying the lawsuit as a
class action, with the class of plaintiffs including all Arkansas purchasers who
participated in the public offerings of securities by UAC during the stated time
frame. The Company believes that serious errors were made in certifying the
class, and the Company is in the process of filing an appeal of the
certification order.
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 2. Changes in Securities.
None of the rights of the holders of any of the Company's securities were
materially modified during the period covered by this report. In addition, no
class of securities of the Company was issued or modified which materially
limited or qualified any class of its registered securities.
Item 3. Defaults Upon Senior Securities.
During the period covered by this report there was no material default in the
payment of any principal, interest, sinking or purchase fund installment, or any
other material default not cured within 30 days with respect to any indebtedness
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No items were submitted to a vote of security holders during the current period.
Item 5. Other Information.
None
-9-
<PAGE>
Item 6. Exhibits and Reports on Form 10-QSB
No exhibits or reports are being filed with this 10-QSB.
(b) Reports on Form 8-K
No reports were filed for the period covered by this report.
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.
BNL FINANCIAL CORPORATION
(Registrant)
Date: October 11, 1999 /s/ Wayne E. Ahart
____________________________
By: Wayne E. Ahart, Chairman of the Board
(Chief Executive Officer)
Date: October 11, 1999 /s/ Barry N. Shamas
____________________________
By: Barry N. Shamas, Executive V.P.
(Chief Financial Officer)
-11-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 10772709
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2313
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10974133
<CASH> 199112
<RECOVER-REINSURE> 33531
<DEFERRED-ACQUISITION> 358733
<TOTAL-ASSETS> 13206783
<POLICY-LOSSES> 3662392
<UNEARNED-PREMIUMS> 129636
<POLICY-OTHER> 3514133
<POLICY-HOLDER-FUNDS> 239932
<NOTES-PAYABLE> 0
0
0
<COMMON> 466239
<OTHER-SE> 3788112
<TOTAL-LIABILITY-AND-EQUITY> 13206784
21527171
<INVESTMENT-INCOME> 584117
<INVESTMENT-GAINS> 22556
<OTHER-INCOME> 0
<BENEFITS> 15529373
<UNDERWRITING-AMORTIZATION> 21185
<UNDERWRITING-OTHER> 2770139
<INCOME-PRETAX> 28982
<INCOME-TAX> 0
<INCOME-CONTINUING> 28982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28982
<EPS-BASIC> .00
<EPS-DILUTED> .00
<RESERVE-OPEN> 2650000
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 12552822
<PAYMENTS-PRIOR> 2778498
<RESERVE-CLOSE> 2432000
<CUMULATIVE-DEFICIENCY> (128498)
</TABLE>
