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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 March 31, 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
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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
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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>
June 30
ASSETS 1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
Investments:
Investments available for sale, at
fair value ....................... $11,387,249 $10,006,208
Equity securities, common stock ....... 2,912 2,573
Cash and cash investments ............. 465,898 2,426,963
----------- -----------
Total Investments 11,856,058 12,435,744
Accrued investment income ................ 212,326 195,652
Furniture and equipment .................. 446,618 325,717
Deferred policy acquisition costs ........ 364,600 379,917
Receivable from reinsurer ................ 33,531 33,531
Premiums due and unpaid................... 584,837 611,786
Other assets ............................. 387,368 345,428
----------- ----------
TOTAL ASSETS $13,885,338 $14,327,775
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liability for future policy benefits . $1,376,367 $1,398,633
Policy claims payable................. 2,438,175 2,508,175
Premium deposit fund ................. 123,866 114,841
Annuity deposits ..................... 3,154,872 3,259,195
Deferred annuity profits ............. 500,000 521,212
Supplementary contracts without
life contingencies ............... 117,025 129,944
Advanced and unallocated premium...... 698,457 352,999
Commissions payable................... 415,335 310,303
Other liabilities .................... 484,599 528,507
---------- ----------
Total liabilities 9,308,694 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 ................... (459,476) 208,289
Treasury stock ....................... (64,105) (64,105)
Accumulated deficit .................. (9,674,244) (9,714,687)
---------- -----------
Total shareholders' equity 4,576,645 5,203,966
---------- ----------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $13,885,338 $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 Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
1999 1998 1999 1998
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Premium income .................................. $7,378,050 $5,042,166 $ 14,116,212 $ 9,392,413
Investment income ............................... 204,753 198,094 379,806 416,988
Realized gains on investments ................... 5,404 2,343 5,483 54,518
------------- ------------ ----------- -----------
Total income ................................... 7,588,206 5,242,603 14,501,500 9,863,929
------------- ------------ ----------- -----------
EXPENSES:
Policy benefits and other insurance costs ....... 6,173,121 4,486,719 11,991,078 8,224,627
Increase in liability for future policy benefits. (5,433) (1,610) (22,267) 40,383
Amortization of deferred policy acquisition costs 6,340 8,116 15,317 14,602
Operating expenses .............................. 1,107,237 848,705 2,033,160 1,692,032
Taxes, other than on income ..................... 229,748 169,056 443,769 322,090
------------- ------------ ----------- -----------
Total expenses ................................. 7,511,013 5,510,986 14,461,057 10,293,734
------------- ------------ ----------- -----------
OPERATING INCOME (LOSS)......................... $ 77,193 ($268,383) 40,443 (429,805)
Provision for income taxes ......................... 0 0 0 0
------------- ------------ ----------- -----------
NET GAIN (LOSS)................................. $ 77,193 ($268,383) $ 40,443 ($429,805)
============= ============ =========== ===========
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during
period..................................... ($569,290) $35,374 ($562,282) $ 10,541
Reclassification adjustment for gains
included in net income..................... (5,404) (2,343) (5,483) (54,518)
------------- ------------ ----------- -----------
Other comprehensive income (loss)................... (574,694) 33,031 (667,765) (43,977)
------------- ------------ ----------- -----------
COMPREHENSIVE INCOME (LOSS).................... ($342,685) ($112,874) ($816,467) ($542,524)
============= ============ =========== ===========
Net gain (loss) per share ....................... ($0.00) ($0.02) ($0.00) ($0.02)
============= ============ =========== ===========
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>
Six Months
Ended Ended
06/30/99 06/30/98
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net gain (loss) ............................................ $ 40,443 ($ 429,805)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Realized (gain) on investments ............................ (6,137) (54,518)
Realized loss on sale of furniture and equipment........... 654 -
Depreciation .............................................. 70,527 50,432
Amortization of deferred acquisition
costs and state licenses acquired ...................... 16,871 16,156
Accretion of bond discount ................................ (180) (1,830)
Change in assets and liabilities:
Decrease in accrued investment income ..................... (16,674) (9,204)
(Increase) decrease in premiums due and unpaid............. 26,949 (123,410)
Decrease (increase) in premium deposit fund ................ 9,025 (7,523)
Decrease in annuity deposits and deferred profits.......... (125,535) (59,947)
Decrease (increase) in liability for future policy
benefits ............................................... (22,267) 40,383
Decrease (increase) in policy claims payable............... (70,000) 259,370
Increase in advanced and unallocated premium............... 345,458 9,546
Increase in commissions payable............................ 105,032 78,854
Other net ................................................. (87,408) (34,005)
---------- ---------
Total Adjustments ..................................... 205,378 164,304
---------- ---------
Total cash provided by (used in)
operating activities .............................. 286,759 (265,501)
Cash flows from investing activities:
Sales of debt securities ................................. 2,207,179 4,705,813
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 ...................... (196,083) (34,736)
Purchase of fixed maturity securities .................... (4,250,000) (4,853,811)
--------- ---------
Net cash provided by (used in) investing activities (2,234,904) (182,734)
--------- ---------
Cash flows from financing activities:
Payments on supplementary contracts ...................... (12,920) (7,550)
--------- ----------
Net cash provided by (used in) financing activities (12,920) (7,550)
--------- ----------
Net increase (decrease) in cash and cash equivalents ....... (1,961,065) (455,785)
Cash and cash equivalents, beginning of year ............ 2,426,963 714,539
--------- ---------
Cash and cash equivalents, end of period ................ $ 465,898 $ 258,754
========= =========
<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 March 31, 1999, the Company had liquid assets of $1,451,881 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 quarter of 1999, BNLAC collected $6,636,038 of
premiums and annuity deposits (gross before reinsurance) and the Company had
consolidated investment income of $175,053.
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 March 31, 1999,
BNLAC had statutory capital and surplus of $3,838,243. 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
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 quarter of 1999 was $6,738,162 compared to
$4,350,247 for the same period in 1998. The increase of $2,387,915, or 55%, was
due to an increase in insurance premiums written during 1998.
Net investment income was $175,053 for the period ended March 31, 1999 compared
to $218,904 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 $79 in the first three months of 1999
compared to $52,175 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 quarter of 1999, policy benefits and other insurance costs were
$5,817,957 compared to $3,737,908 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 74.4% for the
first quarter of 1999 compared to 74.2% for the same period in 1998.
For the period ended March 31, 1999, the increase in liability for future policy
benefits was ($16,834) compared to $41,993 in 1998. The decrease in 1999 was due
to a decrease in life reserves from surrendered policies.
Amortization of deferred policy acquisition costs were $8,977 and $6,486 for the
first quarter 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 $925,923 in the first quarter of 1999 compared
to $843,327 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.
-6-
<PAGE>
Taxes, other than on income, fees and assessments were $214,021 for the first
quarter of 1999 compared to $153,034 for the same period in 1998. The increase
was primarily due to an increase in premium taxes on the increased premiums
collected.
The net loss from operations for the first quarter of 1999 was $36,750 compared
to $161,422 for the same period in 1998. The reduction in the 1999 first quarter
loss compared to 1998 was primarily due to an increase in premium income 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 mid-1999. On August 1, 1999, VIP will
decide which system (the current mainframe system or the new PC system)
will be in use at year end 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.
Effective April 15, 1999, the Company terminated its TPA agreement with ASO
North America and entered into a three-year agreement with Employer Plan
Services, Inc. (EPSI) to administer the Company's group dental claims. The
agreement will increase the Company's claims administration expense by 50% at
the current level of claims processing. Management feels the terms of the new
agreement are competitive and necessary to get the quality of service required
to administer the Company's claims.
-9-
<PAGE>
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 10-QSB
No. Description Page or Method of Filing
- ---------- ---------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of BNL Financial Incorporated by reference to Exhibit 3.1 of the
Corporation (formerly United Iowa Corporation), Company's Annual Report on Form 10-K for the
dated January 27, 1984 and Amendment to Articles period ending December 31, 1993.
of Incorporation of BNL Financial Corporation,
dated November 13, 1987.
3.2 Bylaws of BNL Financial Corporation Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement No. 33-70318
4.1 Instruments defining the rights of security Incorporated by reference to Exhibit 4 of the
holders, 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 4.2 of the
Corporation (formerly United Iowa Corporation), Company's Annual Report on Form 10-K for the
dated January 27, 1984 and Amendment to Articles period ending December 31, 1998.
of Incorporation on BNL Financial Corporation,
dated November 13, 1987.
10.1 Form of Agreement between Commonwealth Industries Filed with 10-QSB for the period ended September
Corporation, American Investors Corporation and 30, 1994.
Wayne E. Ahart regarding rights to purchase shares
of the Company.
10.2 Agreement dated December 21, 1990 between Filed with 10-QSB for the period ended March 31,
Registrant and C. Donald Byrd granting 1996.
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 Incorporated by reference to S-4 Registration
Corporation and USSA Acquisition Inc. dated Statement No. 33-70318
February 11, 1994
10.6 Merger Agreement between Iowa Life Assurance Filed with 10-QSB for the period ended March 31,
Company and United Arkansas Life Assurance Company 1994
dated March 2, 1994
10.7 Office lease dated March 24, 1994, between Brokers Filed with 10-QSB for the period ended September
National Life Assurance Company (formerly Iowa 30, 1994
Life Assurance Company) and Enclave KOW, Ltd., for
premises in Austin, Texas.
-10-
<PAGE>
10.8 Amendment Number Two to the Quota Share Filed with Form 8-K dated January 18, 1995
Reinsurance Agreement dated 8/10/91 between
Registrant and UniLife Insurance Co. of San
Antonio, Texas
10.9 Stock Bonus Agreement between BNL Financial Filed with 10-QSB for the period ended June 30,
Corporation and C. Donald Bryd and Kenneth Tobey 1997
10.10 Office lease assumption and assignment agreement Filed with 10KSB for the period ended December 31,
dated September 1, 1998, between Brokers National 1998
Life Assurance Company and Walgreen Co. and
Charles H. Morrison for premises in Austin, TX
10.11 Sublease dated January 20, 1999 between Brokers 31, Filed with 10-KSB for the period ended December1998
National Life Assurance Company and PRG, Inc. 1998
10.12 Agreement between Employer Plan Services Inc. and Filed herewith as Exhibit I
Brokers National Life Assurance Company to
administer dental claims processing for the Company
11 Statement re computation of per share earnings Not applicable
12 Statements re computation of ratios Not applicable
22 BNL Brokerage Corporation, Brokers National Life
Assurance Company and BNL Equity Corporation, all
wholly owned by Registrant
</TABLE>
(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: May 11, 1999 /s/ Wayne E. Ahart
____________________________
By: Wayne E. Ahart, Chairman of the Board
(Chief Executive Officer)
Date: May 11, 1999 /s/ Barry N. Shamas
____________________________
By: Barry N. Shamas, Executive V.P.
(Chief Financial Officer)
-11-
<PAGE>
EXHIBIT I
CLAIM SERVICES AGREEMENT
THIS AGREEMENT is made as of the First day of
June 1, 1999 between:
Brokers National Life Assurance Company
(an Arkansas Corporation)
(hereinafter referred to as "Brokers") and
Employer Plan Services, Inc.
(a Texas corporation)
(hereinafter referred to as "EPSI")
This Agreement, together with any Schedules and Exhibits attached or referenced
within this Agreement and any amendments to the Agreement, constitute the entire
Agreement between Brokers and EPSI.
<PAGE>
TABLE OF CONTENTS
I. Purpose
II. Consideration
III. Duties of EPSI
A. Payment of Claims
B. Claim Determination
C. Customer Service
D. Watts Service
E. Eligibility Maintenance
F. Reports
G. Disputed Claims
H. Overpayment and Underpayment
I. Fidelity Bond and Errors and Omissions Coverage
J. Maintenance of Records
K. Notices and Complaints
IV. Restrictions on Performance
A. Trademarks and Tradenames
B. Subcontracting
V. Rights of Brokers
A. Periodic Audits
B. Ownership of and Access to Records
VI. Duties of Brokers
VII. Compensation
VIII. Printing Costs
IX. Liability of EPSI and Brokers
A. Liability of EPSI
B. Liability of Brokers
X. Termination
A. Duration
B. Termination by EPSI
C. Termination by Brokers
XI. General Provisions
A. Performance of Service
B. Amendments
C. Notice
<PAGE>
Purpose
This Agreement provides for the terms under which EPSI will provide
dental claim services for the current or future contracted Brokers
dental insurance Policyholders. EPSI will provide such services
regarding claims for the Policyholders' covered persons ("Covered
Persons"), in accordance with the terms of the Policyholders' policies
("Policy(ies)").
Consideration
The consideration for this Agreement will be the mutual promises of the
parties contained herein.
Duties of EPSI
EPSI will perform the following services with respect to Brokers' Policyholders:
A. Payment of Claims - EPSI will receive, review, evaluate, refer, adjust and
promptly pay or deny all claims that are submitted to EPSI according to
EPSI then current claims administration practices and procedures and as
directed by Brokers. All claims will be paid in strict conformance with the
Policy language, unless directed otherwise by Brokers. Specific services
will include:
1. Preparation of checks for the payment of the amount of benefits determined
to be payable under the Policy to the Beneficiary or to the assignee of
benefits as the interests appear to EPSI.
2. Release benefit checks to the payee by regular mail. The frequency of such
check releases shall be in accordance with the written instructions of
Brokers. EPSI shall be entitled to rely upon such approval as a guarantee
of funding.
3. In the event that a Claim is denied, in whole or in part, written notice to
the Beneficiary of the reason(s) for the denial.
4. Preparation and release of Explanation of Benefit forms to the Beneficiary
in conjunction with the payment or denial of each Claim.
EPSI will reduce claim turnaround time, within a reasonable period of time after
the effective date of this agreement, in order to comply with the requirements
of any applicable State Unfair Claims Practices Act or the requirements of any
State Insurance Department law or regulation. Brokers will have sole
responsibility to notify EPSI of any such State Insurance Department requirement
or law.
B. Claim Determination - With respect to any specific claim, if EPSI deems
appropriate, EPSI may:
1. Correspond directly with the Covered Person, Policyholder and/or providers
of health-care services in the event that additional information appears to
be necessary to properly process the Claim;
2. Consult with professional medical or dental consultants (at the expense of
Brokers);
3. Use its standard procedures to determine whether there is other coverage
against which benefits provided under Brokers' Policy may be coordinated;
4. Determine whether the procedure, treatment or supplies appears to be
medically necessary in the opinion of EPSI;
5. Determine the amount of benefits which appear to be payable under the
Policy with respect to the indicated procedure, based upon the lesser of
the amount due under any applicable PPO Fee Schedule, the amount actually
charged or the 75th percentile of the amount considered reasonable and
customary in accordance with the data base then loaded into the EPSI
system. It is understood and agreed that such percentile shall be as
determined by Brokers. The reasonable and customary data base loaded into
the EPSI system will, unless otherwise disclosed to Brokers, be as provided
to EPSI by Medical Data Research; updated not less frequently than every 6
months.
C. Customer Service - EPSI will maintain a Customer Service Unit
trained to respond to telephone and written inquiries from Covered
Persons and providers relating to the Policy and Claim matters.
D. Watts Service - EPSI will provide a toll-free telephone number so
that Covered Persons or providers may contact EPSI regarding
Claims matters during the regular business hours of EPSI.
E. Eligibility Maintenance - EPSI will maintain an eligibility file
of Covered Persons entitled to receive benefits under the Policies
based upon information provided to EPSI by Brokers as provided for
in Section VI.D of this Agreement.
F. Reports - EPSI will:
1. maintain a system for the tracking of payments, refunds, stop payments, and
voids, and report the transactions in the Monthly Claim Report; and
2. maintain a system for and assume all reporting responsibilities for the
preparation and distribution of IRS Form 1099 for providers of dental
service.
3. provide reports as needed by Brokers for the timely completion of Brokers
financial statement and as requested by Brokers for analysis of Brokers
claim experience.
G. Disputed Claims - EPSI will refer all disputed claims to Brokers
for determination. A claim which is pending further information
is not a disputed claim.
"Disputed Claim" is a claim:
1. which has been denied in whole or in part by EPSI; and
2. for which EPSI's determination has been disputed or appealed in writing.
In referring a Disputed Claim to Brokers, EPSI will provide Brokers with the
following information:
1. a copy of all documents in the claimant's file, including the claim,
correspondence between EPSI and the claimant, and any other pertinent
documents relating to the Disputed Claim; and
2. an analysis of the Disputed Claim and the basis for the claim denial with
appropriate references to the applicable provisions of the Policy(ies).
Brokers will notify EPSI in writing of its determination with respect to
the Disputed Claim. Brokers retains final decision making authority as to
how the Disputed Claim will be handled.
H. Rescissions - EPSI will refer all claims which contain
information which would be grounds for rescinding a Covered
Person's coverage to Brokers along with the appropriate
documentation. Brokers will have the sole authority to decide
whether or not coverage should be rescinded. Brokers has the
sole authority to issue all notices of rescission to Covered
Persons. EPSI will be notified of all rescissions.
I. Overpayment and Underpayment - If EPSI pays any person less than
the amount to which he or she is entitled under the Policy(ies),
EPSI will promptly, upon learning of the underpayment, adjust
the underpayment to the correct amount.
If EPSI or Brokers discovers that an overpayment has been made on
behalf of any person's claim, EPSI is hereby authorized to seek
recovery from the dentist or insured and or to offset the amount
of any excess payment form any unpaid claim of such person or of
any other person who is a member of such person's family unit.
J. Fidelity Bond and Errors and Omissions Coverage
1. EPSI is required to purchase a Blanket Fidelity Bond in its own name in an
amount of at least $1,000,000
The Bond will state that:
a. loss, if any, involving money or other property belonging to Brokers will
be payable to Brokers as its interest may appear; and
b. if the Bond is canceled, Brokers will be notified 30 days prior to such
cancellation.
EPSI, upon request, will provide a copy of the Bond to Brokers.
2. EPSI is required to purchase and to maintain Liability Insurance in any
amount not less than $1,000,000 per individual claim and $1,000,000 in the
aggregate to provide insurance coverage for liability related to or arising
out of EPSI's errors or omissions in the performance of its duties under
this Agreement. EPSI will provide Brokers with evidence of such coverage,
upon request, and will notify brokers of any material change or
cancellation of such coverage 30 days prior to such change or cancellation.
K. Maintenance of Records - All records will be maintained at EPSI's principal
administrative offices:
1. the duration of this Agreement; or
2. a longer period of time as may be required under the Employee Retirement
Income Security Act of 1974, or any applicable state or commonwealth
statute.
EPSI may copy all claim forms and accompanying documentation on a record-keeping
system. All records will be maintained in accordance with prudent standards of
record keeping. Notwithstanding the above, it is hereby agreed that all records
pertaining to the business administered hereunder are the sole property of
Brokers, and EPSI shall provide Brokers any and all such documents on request by
Brokers. Brokers agrees to pay the cost of retrieval of such records.
L. Notices and Complaints - If EPSI receives:
1. notice of the commencement of any legal proceeding involving any Covered
Persons; or
2. communication from:
a. any Insurance Department or other administrative agency; or
b. any other person identifying a complaint by any Covered Person or calling a
hearing involving any Brokers practice,
EPSI will immediately notify Brokers. EPSI will immediately send copies of any
necessary documentation to Brokers, for exclusive handling by Brokers. EPSI will
maintain a file containing any written letters of complaint received from
Covered Persons, Policyholders or service providers for a period of six (6)
years from receipt of the complaint letter, or a longer period of time as may be
required under the employee retirement Income Security Act of 1974 or any
applicable state statute.
Restrictions on Performance
A. Trademarks and Tradenames - EPSI will not use the claim
files or Brokers' name, trademarks, logo or the name of any
other affiliated Brokers' company in any way or manner not
specifically authorized in writing by Brokers. EPSI may use
only advertising which:
1. pertains to the business underwritten by Brokers; and
2. has been approved in writing by Brokers in advance of its use.
B. Subcontracting - EPSI will not subcontract any of its
administrative functions, duties, or responsibilities without
the prior approval of Brokers. Brokers has the right to refuse
approval for any reason whatsoever at its sole discretion.
Rights of Brokers
A. Periodic Audits - Brokers may audit the records of EPSI which pertain to
the performance of the duties of EPSI with respect to the Policies. EPSI
will fully cooperate with Brokers, or its designee, during any such audit.
Brokers will provide 15 calendar days prior written notice to EPSI of its
intent to perform an audit and to include in such notice the name of the
persons authorized to perform the audit. All such audits shall take place
at the office of EPSI during its normal business hours.
B. Ownership of and Access of Records - All source documentation relating to
the Policies which comes into the possession of EPSI is the property of
Brokers. Accordingly, EPSI will retain all records pertaining to the
Policies for the period required by law and will furnish information
relating to claims for benefits under the policies which is in the
possession of EPSI as requested by Brokers. EPSI reserves the right to
charge its then current fee for the production of such information. Records
will not be used for any purpose not authorized in writing by Brokers.
<PAGE>
Duties of Brokers
Brokers will provide EPSI with the following items:
A. Brokers' general administrative instructions as applicable to
Policyholders;
B. A copy of the master Policy(ies), booklet(s), rider(s), and Certificate
forms;
C. Any additional standard Brokers forms necessary for the administration of
the Policy(ies);
D. A monthly, or more frequently if desired, eligibility file of persons
entitled to receive benefits from Policies based upon information provided
to Brokers by Policyholders on EPSI's standard electronic or other media
acceptable to EPSI. Brokers, and not EPSI, shall be responsible for the
accuracy of such eligibility information; and EPSI shall be entitled to
accept such information as accurate without inspection or investigation;
E. A claims clearing Account which shall be established, maintained and
adequately funded solely by Brokers ("Account"). Such Account shall be used
exclusively for the payment of claims as provided in Section III.A.1. of
this Agreement. Brokers shall at all times be responsible for funding this
account for the payment of benefits under the Policies by and through this
Account. Brokers shall also be responsible for reconciling the Account.
EPSI shall not be required to use any of its funds for the payment of any
such benefits, and it is expressly understood and agreed that Brokers, and
not EPSI, shall be liable in the event any such check or checks are not
honored when presented for payment.
Compensation
EPSI shall be reimbursed by Brokers according to the attached Schedule A for all
services enumerated in this Agreement. Brokers understands and agrees that
additional services that it may request EPSI to perform or an increase in the
complexity if the services will generate additional fees that are not included
on Schedule A. EPSI will outline such additional fees and secure Brokers written
agreement to such fees prior to undertaking any action with respect to any such
requested service.
Printing Costs
If EPSI requests any forms in addition to or in replacement of forms available
and in stock at Brokers, Brokers will review and prepare the form language,
prepare the form language, prepare a mechanical proof(s) and cause such forms to
be printed. Brokers will bear the cost of printing such forms.
Liability of EPSI and Brokers
A. Liability of EPSI - EPSI agrees to indemnify and hold Brokers
harmless from any and all liability, loss, damage, fines,
penalties and costs, including expenses and reasonable
attorneys' fees, which Brokers may sustain by reason of EPSI's
actions or failure to act in carrying out its responsibilities
as set forth in this Agreement. EPSI also agrees to indemnify
and hold Brokers harmless from any liability or loss resulting
from the dishonest acts of EPSI employees or officers.
B. Liability of Brokers - Brokers agrees to indemnify and hold
EPSI harmless from any and all liability, loss, damage, fines,
penalties and costs, including expenses and reasonable
attorneys' fees, which EPSI may sustain by reason of Brokers'
actions or failure to act in carrying out its responsibilities
as set forth in this Agreement. Brokers agrees to indemnity
and hold EPSI harmless from any liability or loss resulting
from the dishonest acts of Brokers employees or officers.
Termination
A. Duration - Unless terminated as provided in paragraph X.B
below, the term of this Agreement shall be three (3) years,
commencing on the Effective Date ("Initial Term") and shall be
automatically renewed for successive one (1) year terms
("renewal Terms"). As used in this Agreement, "Term" means the
period during which the Agreement is in force, commencing on
the Effective Date and ending on the effective date of
termination.
B. Termination by EPSI - EPSI may terminate this Agreement upon 15 days prior
written notice in the event that:
- ----------------------------
1. any check issued for payment of benefits under the Policies is dishonored
for any reason and Brokers fails to deposit funds to cover such check
within 10 days of being notified of the dishonored check, or
2. any fee due and owing to EPSI remains unpaid for a period of 15 days after
payment is due, or
3. Brokers refuses or neglects to provide information reasonably requested by
EPSI for the performance of its duties under the Agreement, or
4. a petition in voluntary or involuntary Bankruptcy is filed by, or with
respect to, Brokers.
EPSI shall specify the "effective date of termination" in any such notice.
C. Termination by Brokers - This Agreement may be terminated immediately by
Brokers when and if:
1. EPSI commits fraud or gross negligence in the performance of any of its
duties under this Agreement, or
2. wrongfully withholds or misappropriates, for EPSI's own use, funds of
Brokers or any of its Policyholders, or
3. EPSI refuses or neglects to provide information reasonably requested by
Brokers for the performance of its duties under the Agreement, or
4. a petition in voluntary or involuntary Bankruptcy is filed by, or with
respect to EPSI, or
5. More than 50% of EPSI outstanding stock is transferred to individuals
other than the current shareholders.
D. Either Brokers or EPSI may terminate this Agreement at any time during
any Renewal Term, without cause, upon 90 days prior written notice to
the other party.
E. Effect of Termination - EPSI shall not be obligated to perform any
services whatever under this Agreement to or on behalf of Brokers on
or after the effective date of termination of this Agreement, unless a
written agreement providing otherwise has been executed by EPSI and
Brokers prior to such effective date.
General Provisions
A. Performance of Service - In the event that EPSI fails to
perform services under this Agreement, Brokers may assume
those services and will be entitled to the fees or allowances
otherwise payable to EPSI.
B. Amendments - This Agreement, any Schedules and Exhibits
attached hereto can be changed at any time by an amendment
signed by both parties.
Brokers may change the Policyholders, Policy(ies),
Administrative policies or guidelines at any time by providing
EPSI at least sixty (60) days advance written notice of such
change. All such changes will become prospectively binding on
EPSI. IF any such change shall affect the scope of services
performed by EPSI or require extraordinary measures, the fees
payable shall be adjusted as mutually agreed to by the parties
in writing.
EPSI will not change any Policy language or any of Brokers practices unless
authorized in writing by Brokers.
C. EPSI shall perform only ministerial duties to Brokers and
shall be neither the fiduciary nor co-fiduciary as defined by
the Employee Retirement Income Security Act of 1974 (ERISA).
All reports or disclosures required by law or governmental
authorities shall be the responsibility of Brokers. EPSI may
provide information, assistance and advice to Brokers to meet
these requirements.
D. EPSI shall make no representation to Brokers concerning any
federal, state or local tax status of the Plan. All such
questions should be referred to Brokers' counsel or tax
consultant. If, during the operation of the Plan, the federal
government, the government of any state of any political
subdivision or instrumentality of either shall assess any tax
against the Plan and EPSI is required to pay such tax, EPSI
shall report payment to Brokers and make a charge against the
Plan for such tax.
Notice - Any notification referenced under this Agreement will be effective:
1. only if it is in writing, unless otherwise indicated; and
2. when hand-delivered or two (2) days after it is mailed by registered
mail, return receipt requested and addressed as follows:
If addressed to Brokers, to:
Brokers National Life Assurance Company
2100 W. William Cannon, Ste. L
Austin, Texas 78745
If addressed to EPSI, to:
EPSI Benefits, Inc.
Employer Plan Services
2180 North Loop West, Suite 400
Houston, Texas 770189
<PAGE>
This Agreement is made binding by the signatures of Brokers' and EPSI's
representatives who are duly authorized to enter into such agreements.
FOR EPSI: Lyndon A. Smith President
(Name) (Title)
of EMPLOYER PLAN SERVICES, INC. agrees on its behalf to the terms of this
Agreement. I am authorized to enter into such agreements.
__/s/ Lyndon A. Smith_________________ __4/15/99_____
(Signature) (Date)
FOR Brokers: Barry Shamas Executive Vice President
(Name) (Title)
of Brokers, agree on its behalf to the terms of this Agreement. I am authorized
to enter into such agreements.
___/s/ Barry N. Shamas________________ __4/15/99______
(Signature) (Date)
<PAGE>
SCHEDULE A
SCHEDULE OF FEES
(waived) ANNUAL MAINTENANCE FEE: This fee shall be collected in the twelfth
month of each contract year for: revisions to -------- the Plans, Plan review
meetings, computer updates, claims reporting and preparation of the IRS form
1099 for the Plan Providers.
ADMINISTRATION FEE: The fees in this section are charged to administer the
services as indicated. The fee listed below shall be multiplied by the number of
eligible employees in the corresponding plan of benefits on the 15th of each
month.
DENTAL BENEFIT
$ 1.68 1st 60,000 EE Lives
----------
$ 1.55 60,001 - 75,000 EE Lives
----------
$ 1.45 75,001 - 125,000 EE Lives
----------
$ 1.30 *125,000+ EE Lives
----------
The Company designates Barry Shamas as its administrative contact with the
Claims Administrator.
The effective date of this schedule is June 1, 1999, and it shall remain in
effect until this Agreement is terminated or this schedule is amended by
agreement of both parties. After 12 months and at the 125,000 EE Life level we
will review the fee between Brokers and EPSI to discuss possible increases.
By their signatures below, the undersigned:
a. certify that they have authority granted to them respectively by
Company and by Claims Administrator, Inc., to execute this agreement
on its behalf and
b. hereby execute this agreement in their respective names.
BROKERS NATIONAL EMPLOYER PLAN SERVICES, INC.
LIFE ASSURANCE COMPANY
BY: /s/ Barry N Shamas BY: /s/ Lyndon A Smith________
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 10914452
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1844
<MORTGAGE> 0
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<TOTAL-INVEST> 10916296
<CASH> 1451881
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<TOTAL-ASSETS> 14583930
<POLICY-LOSSES> 3923000
<UNEARNED-PREMIUMS> 111975
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0
0
<COMMON> 466239
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<INVESTMENT-INCOME> 175053
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<UNDERWRITING-AMORTIZATION> 8977
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<INCOME-CONTINUING> (36750)
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