<PAGE>
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, 1998 [Fee Required]
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to_____________ [No Fee Required]
Commission File No. 0-16880
- - --------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
IOWA 42-1239454
(State of incorporation) (IRS Employer Identification No.)
2100 West William Cannon, Suite L
Austin, TX 78745
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 383-0220
- - --------------------------------------------------------------------------------
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 1998 were $21,919,618.
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 31, 1998, was approximately $3,743,508 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, 1998, the Registrant had outstanding 23,173,149 shares
(excluding treasury shares) of Common Stock, no par value (which includes
10,694,790 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 ___
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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 2100 West William Cannon, Suite L, Austin,
Texas 78745; its telephone number is (512) 383-0220
The Company has four wholly owned subsidiaries, BNL Equity Corporation ("BNLE"),
Brokers National Life Assurance Company ("BNLAC"), BNL Brokerage Corporation and
Consumers Protective Association (formerly National Dental Benefit Association,
Inc.) Consumers Protective Association is an inactive association that was
purchased for the purpose of marketing services to members, including insurance
products.
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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 1998 sold
life and accident and health insurance policies in 27 states. In 1987 BNLAC
began selling insurance in Iowa, and in 1992, BNLAC expanded its sales to other
states. The Company has no foreign operations.
BNLAC is licensed in 26 states to offer life and accident and health insurance
on an individual and group basis. Most of BNLAC's premium revenues are from
sales of group dental insurance sold primarily on a payroll deduction basis. In
February 1999, the Company was notified that the State of Washington had
increased its paid-in capital stock from $1,200,000 to $2,400,000. Insurance
sales in Washington are less than 1% of total premium and management believes
that it was not in the Company's best interest to invest additional surplus
funds at this time. Therefore, the Company voluntarily withdrew its Certificate
of Authority from the State of Washington.
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
emphasizes the development of specialized or "niche" life and health insurance
products. BNLAC offers an accidental death life insurance policy, a payroll
deductible 10-year level term policy, level term family insurance policy and a
hospital indemnity policy with its line of dental insurance policies. These
products are all designed to be sold as group or payroll deduction policies.
I-1
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<TABLE>
Statistics by line of business are as follows (gross before reinsurance):
<CAPTION>
1998 1997
----------------- ---------------
<S> <C> <C>
I. Annual Premiums and Annuity Deposits In Force:
Ordinary Life Insurance $340,000 $371,000
Individual Annuities(1) 216,000 249,000
Group Dental Insurance 24,778,000 14,912,000
Miscellaneous A&H insurance 84,000 59,000
----------------- ---------------
Total $25,418,000 $15,591,000
================= ===============
II. Collected Premiums and Annuity Deposits:
Ordinary Life Insurance $368,000 $362,000
Individual Annuities(1) 258,000 276,000
Group Dental Insurance 20,294,000 10,877,000
Miscellaneous A&H insurance 61,000 58,000
----------------- ------------------
Total $20,981,000 $11,573,000
================= ==================
III. Amount of Insurance:
Ordinary Life Insurance $35,000,000 $37,000,000
Accidental Death Insurance 111,000,000 119,000,000
----------------- ------------------
Total $146,000,000 $156,000,000
================= ==================
(1) Classified as a deposit liability on the financial statements.
</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>
Arkansas 30,300 - 1,922,296 1,952,596
Indiana 12,060 - 1,884,699 1,896,759
Michigan 4,457 - 1,876,844 1,881,301
Iowa 259,439 258,012 1,353,654 1,871,105
Georgia 6,992 - 1,538,361 1,545,353
Minnesota 13,514 - 1,503,293 1,516,807
Mississippi 4,580 - 1,365,689 1,370,269
Utah 3,197 - 1,259,324 1,262,521
All Other States 33,218 - 7,650,678 7,683,896
==================== ==================== ====================== ====================
Total $367,757 $258,012 $20,354,838 $20,980,607
==================== ==================== ====================== ====================
</TABLE>
On December 31, 1998, BNLAC had 2,847 general agents and brokers in 26 states to
market its policies compared to 1,964 agents and brokers on December 31, 1997.
On all of its products except the dental policies, BNLAC pays as commissions to
agents a relatively large portion of the first year's premiums and smaller
portions of subsequent premiums. For the dental policies, commissions are level
in all years. These practices are common in the industry. There is considerable
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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
BNLAC reinsures with other insurance companies portions of the risks it
underwrites on sales of life and accident and health insurance. Reinsurance
enables BNLAC, as the "ceding company," to reduce the amount of its risk on any
particular policy and to write policies in amounts larger than it could without
such agreements.
The reinsurer receives a portion of the profit on the reinsured policies. BNLAC
remains directly liable to policyholders to perform all policy obligations, and
bears the contingent risk of the reinsurer's insolvency.
Before submitting an application for a policy to the reinsurer, BNLAC determines
whether the applicant is insurable, but BNLAC rejects any application which is
not accepted by the reinsurer.
BNLAC reinsurers its life insurance under agreements which are classified as
either "automatic" or "facultative." 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 reviewing each application.
A. Life and Accident Insurance.
BNLAC reinsures its "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
1997.
All other BNLAC life insurance products in excess of $35,000 are reinsured with
BMA under an automatic treaty up to $175,000 and under a facultative treaty for
amounts over $175,000.
The following chart shows life insurance in force net of reinsurance for each of
the five years ended December 31.
<TABLE>
<CAPTION>
Gross Net
Insurance Reinsurance Reinsurance Insurance
In Force Ceded Assumed In Force
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Life Insurance
1998 $34,877,000 $13,684,000 $9,229,000 $30,422,000
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
Accidental Death Insurance
1998 $114,000,000 $107,250,000 $0 $6,750,000
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
</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 and profits on
each of these policies. BNLAC received a fee for ceding 90% of the premiums and
UniLife performed all the administrative functions related to these policies at
no cost to BNLAC. The agreement amount was modified in 1995 to reduce the amount
of risk ceded and to impose certain claim administration fees on BNLAC.
On November 1, 1995, the agreement was terminated and BNLAC began administering
and retaining 100% on the group dental business.
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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>
1998 $20,294,000 $0 $20,294,000 $0
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
</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>
1998 $14,859,000 $0 $14,859,000 78.4%
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
</TABLE>
In 1998 BNLAC began marketing a hospital indemnity policy that is reinsured on a
50% quota share basis with European Specialty (North America) Limited ("ESG").
ESG is not licensed in Arkansas. The reinsurance agreement requires ESG to
maintain a deposit or letters of credit in a qualified institution for the
benefit of BNLAC in an amount equal to BNLAC's reserve credit on the reinsured
portion of the business.
Investments
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
- - -------------- --------------- ------------------
1998 $777,937 6.6%
1997 790,000 7.1
1996 757,000 6.8
1995 734,000 6.6
1994 674,000 6.5
For information concerning realized and unrealized gains and losses on
securities see Note 4 of the Notes to Consolidated Financial Statements, page
E-8.
As of December 31, 1998, BNLAC and the Company owned taxable municipal bonds
(the "bonds") of three issuers who used the proceeds to invest in guaranteed
investment contracts of 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 reduced 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.
In 1993, a rehabilitation plan was approved for Executive Life. As of December
31, 1998, the Company and BNLAC had received $569,305 of the original $700,000
principal and $177,775 interest on the bonds since 1991. No further recovery of
principal and interest on these bonds is expected.
Special Factors Relating to Accounting and Regulatory Reporting of Insurance
Companies
State insurance laws and regulations govern the accounting practices and the
form of financial reports of insurance companies filed with state insurance
regulatory agencies. Most states have adopted the uniform rules established by
the National Association of Insurance Commissioners. Reports prepared in
accordance with statutory accounting practices reflect primarily the ability of
an insurance company to meet its obligations to policyholders and do not
necessarily reflect its going-concern value. Certain statutory accounting
practices differ from generally accepted accounting principles as applied to the
Company's audited financial statements.
Life insurance company revenues are generated primarily from premiums and
investment income. Commissions and other sales cost may exceed the amount of
first year premiums but are generally lesser in later policy years. Policy
lapses and surrenders tend to occur more frequently in the earlier years after a
policy is sold. Statutory Accounting rules for insurance companies require all
acquisition costs to be expensed immediately and not spread over the expected
duration of the policies. This makes it difficult for a new or growing insurance
company to show net profits.
Statutory accounting practices also require that a relatively large portion of
premiums be held as reserves for the protection of policyholders. The amount of
such reserves is based upon actuarial calculations and the annual increase in
reserves is treated as an expense. Such calculations must be based upon
conservative assumptions as to mortality costs and earnings. Premiums are
earnings only to the extent that they exceed reserve requirements and
commissions. 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 use in
operations, a company is free to invest such reserves in accordance with
applicable state laws. Interest earned on invested reserves is operating income
to the life insurance company to the extent that it exceeds the interest
required to be added to the reserves.
The Company's consolidated financial statements 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.
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<PAGE>
The ability of BNLAC to pay dividends to the Company is restricted under
Arkansas insurance laws.
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
since their profits accrue to the policyholders rather than the shareholders. In
1997 BNLAC was assigned an A. M. Best's financial performance rating of "B-"
(fair).
BNLAC focuses its marketing efforts on sales of its products to small and medium
size groups of employees, association members and others. These groups range in
size from three to approximately 1,350 persons. BNLAC also sells its products to
individuals. BNLAC is a 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 Company's dental insurance products are attractive to brokers and general
agents because they can be sold as an "add-on" to other group insurance
products. Second, BNLAC strives to provide a high level of service to agents by
offering products that meet their clients' needs and by providing individualized
service in the administration of such products. Finally, BNLAC attempts to
structure the levels of premiums, benefits and commissions on 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. Each state has an insurance department which has
broad administrative and supervisory powers to grant and revoke licenses to
transact business, regulate trade practices, establish guaranty associations,
license agents, approve policy forms, regulate premium rates for some lines of
business, establish reserve requirements, regulate competitive matters,
prescribe the form and content of required financial statements and reports,
determine the reasonableness and adequacy of statutory capital and surplus and
regulate 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, 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.
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RBC requirements provide for four different levels of regulatory attention
depending on the ratio of a company's total adjusted capital (defined as the
total of its statutory capital, surplus, asset valuation reserve and 50% of
apportioned dividends) to its RBC. The "Company Action Level" is triggered if a
company's total adjusted capital is less than 100% but greater than or equal to
75% of its RBC, or if total adjusted capital is less than 125% of RBC and a
negative trend has occurred. The trend test calculates the greater of any
decreases in the margin (i.e., the amount in dollars by which a company's total
adjusted capital exceeds its RBC) between the current year and the prior year
and between the current year and the average of the past three years, and
assumes that the decrease could occur again in the coming year. If a similar
decrease in the margin in the coming year would result in an RBC of less than
95%, then Company Action Level would be triggered. At the Company Action Level,
a company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. The
"Regulatory Action Level" is triggered if a company's total adjusted capital is
less than 75% but greater than or equal to 50% of its RBC. At the Regulatory
Action Level the regulatory authority will perform a special examination of the
company and issue an order specifying corrective actions that must be followed.
The "Authorized Control Level" is triggered if a company's total adjusted
capital is less than 50% but greater than or equal to 35% of its RBC, and the
regulatory authority may take any action it deems necessary, including placing
the company under regulatory control. The "Mandatory Control Level" is triggered
if a company's total adjusted capital is less than 35% of its RBC, and the
regulatory authority is mandated to place the company under its control.
Calculations using the NAIC formula at December 31, 1998 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. As a
result of the examination, the Company was required to establish a custodial
arrangement with an Arkansas bank for certain securities, and to reclassify from
1996 to 1995 an estimated expense of $99,000 for dental claims incurred but not
reported.
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, 1999, BNLAC had four executive officers, 36 full-time
administrative personnel and 2 part-time employees. 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.
The Company leases 12,150 square feet of office space in Austin, Texas, under a
seven year, triple net lease. The annual base rentals are $121,944 and will
increase to $127,944 in 2000. The initial term of the lease will expire in 2005.
The Company may renew the lease for another ten years at the rate of $126,000
for the first five years and $129,000 for the second five years. The Company
also has a lease for office space in Austin which it no longer occupies. The
Company has a sublease on this space until May 1, 1999 when the lease and
sublease expire.
BNLE leases office space in Sherwood, Arkansas at a rental of $1,200 per month
($14,400 per year). BNLAC shares 50% of the rental cost.
The Company owns the furniture and equipment used in the operation of its
business.
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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
The Company retained the firm of Friday, Eldredge & Clark, Little Rock,
Arkansas, to handle the defense of the action on behalf of all defendants. On
March 3, 1998, the plaintiffs filed a Second Amended Class Action Complaint in
which they dropped certain claims, including allegations of common law fraud,
fraudulent concealment, tolling of the statute of limitations, and the request
for punitive damages.
The first issue determined in the case concerned the procedural issue of whether
the lawsuit would be certified 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. A hearing was held on the issue
of whether the class would be certified on June 8, 1998, and on August 27, 1998
the Court entered a ruling certifying the class. 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 certification of the class does not have any impact on the substantive
issues to be litigated, including whether or not any material misrepresentations
or omissions were made in the offerings in question, whether the claims are
barred by the applicable statute of limitations, and other issues. If the effort
to certify the action as a class action had failed, the Company's potential
liability, if any, would have been limited to the named plaintiffs, Myra Jo
Pearson, Paul Pearson and James Stillwell. Since the class has been certified,
the potential liability, if any, extends to all members of the class.
The Company continues to believe strongly that the case is without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 20, 1998 in Des
Moines, Iowa. At the annual meeting, the following individuals were elected to
the Company's Board of Directors. The number of shares voted for each director
is set forth next to his name.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Wayne E. Ahart (13,954,247) Hayden Fry (13,949,321) C. James McCormick (13,952,825)
C. Donald Byrd (13,959,449) John Greig (13,960,651) Robert R. Rigler (13,953,365)
Kenneth Tobey (13,960,451) Roy Keppy (13,951,823) Chris Schenkel (13,951,865)
Barry N. Shamas (13,955,909) Thomas Landry (13,951,325) L.Stanley Schoelerman (13,958,651)
Cecil Alexander (13,952,825) Roy Ledbetter (13,952,627) Orville Sweet (13,960,451)
Richard Barclay (13,952,825) John E. Miller (13,960,651)
Eugene A. Cernan (13,951,325) James A. Mullins (13,960,651)
A total of 111,594 shares were voted against all directors.
</TABLE>
The shareholders ratified the selection of Smith, Carney & Co., as the
Corporation's independent auditors for the fiscal year 1998. 13,913,496 shares
were voted in favor; 54,261 were voted against; and 105,488 shares abstained.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market for Stock
During 1998 the stock of the Company was traded by Starmont Capital Ltd. Des
Moines, Iowa on a workout basis. There has been a limited trading market for the
Company's securities during 1998. During the year there were a total of eight
stock sales all at a price of $.30 a share. Starmont Capital has discontinued
trading stock on a workout basis.
In connection with an offering of common stock and preferred stock by BNL Equity
Corporation (formerly United Arkansas Corporation) organizers of the Company
received 5,563,212 shares which are held in escrow. These shares will be
released from escrow on August 1, 1999.
Holders
As of December 31, 1998, there were 4,716 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
Regions Bank, Little Rock, Arkansas, is the Registrar and Transfer Agent for the
Company's common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1998, the Company had liquid assets of $2,426,963 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 1998, BNLAC collected $21 million of premiums and annuity
deposits (gross before reinsurance) and $807,342 of investment income. Another
source of cash flow is from the sale of investments which produced gains of
$57,563 in 1998.
The Company's investments are primarily in U.S. Government and Government
Agencies ($9,171,893) and other investment grade bonds ($834,315) 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 Company's long and short-term liquidity needs. The Company does not
plan to borrow money for operations.
The Company conducts its insurance operations through its wholly owned
subsidiary, BNLAC. At December 31, 1998 BNLAC had statutory capital and surplus
of $3,995,706. 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. For additional information, see Note 2 to the financial statements.
II-1
<PAGE>
Results of Operations
Premium income for 1998 was $21,054,713 compared to $11,532,718 in 1997, an
increase of $9,521,995. This increase is due to the increase in group dental
insurance premiums written during 1998.
Net investment income was $807,342 in 1998 and $859,749 in 1997. The decrease
was due to the receipt of interest of $17,253 in 1997, compared to $282 in 1998,
on certain taxable municipal bonds that had been in default since 1991 (see Note
4). Management believes no additional interest or principal will be received on
these. The remainder of the decrease was primarily due to lower interest rates
and the reinvestment of bonds called for redemption in short-term lower yeilding
investments.
Realized gains were $57,563 in 1998 compared to $75,754 in 1997. Realized gains
included $1,815 and $42,328 for 1998 and 1997, 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 1998 and 1997 were
due to gains on bonds sold in the normal course of the Company's investment
activity.
Increases (decrease) in liability for future policy benefits were $39,224 in
1998 compared to ($39,601) for the same period in 1997. The increase of $78,825
is primarily due to an increase in unearned premium on the group dental
insurance.
Policy benefits and other insurance costs were $18,971,791 in 1998 compared to
$10,221,754 in 1997. The increase was due to an increase in claims and
commissions resulting from the increase in insurance business in force. In
addition, the claims ratio on dental insurance, which represents the ratio of
claims incurred to premium received, was 78.4% for 1998 compared 75.7% in 1997.
Amortization of deferred policy acquisition costs was $53,778 in 1998 and
$40,972 in 1997. The increase resulted from an adjustment to the amortization
schedule to reflect the increase in lapsed life policies during 1998.
Operating expenses were $3,431,929 in 1998 and $2,780,237 in 1997. This increase
was primarily due to increases in data processing expense, payroll and claims
administrative expense - all of which relate to the increased volume of
insurance in force. Despite this increase, the amount of such expenses expressed
as a percentage of premiums (on a statutory basis) declined from 20.5% in 1997
to 14.5% in 1998.
Taxes, other than on income were $669,648 for 1998 and $396,471 for 1997. The
increase was due to the premium taxes on the increased insurance premiums
collected.
The consolidated net operating loss for 1998 was $1,246,752 compared to $931,612
in 1997. The increase was due to the increase in the claims ratio on the group
dental business and reflects a trend in this industry. The Company has addressed
the issue by modifying new business rates and benefits and further increasing
renewal rates.
Accounting Developments
The Company was required to adopt SFAS # 130 "Reporting Comprehensive Income" on
January 1, 1998. This rule requires the Company to report the year to date
change in unrealized gains or losses on its investments as comprehensive income
on the Statement of Income. Unrealized gains or losses reported in the equity
section of the balance sheet have been renamed "accumulated other comprehensive
income." For the year ended December 31, 1998 other comprehensive income was
$37,760 compared to $212,209 for the same period in 1997. The decrease in
comprehensive income in 1998 was due to a smaller increase in market value of
the bond portfolio in 1998 versus 1997.
Market Risk
The Company's conservative investment philosophies minimize market risk and risk
of default by investing in high quality debt instruments, with staggered
maturity dates. The Company does not hedge investment risk through the use of
derivative financial instruments. The market value of the Company's investments
in debt instruments varies with changes in interest rates. A significant
increase in interest rates could cause decreases in the market values of
investments and have a negative effect on comprehensive income and decrease
surplus.
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.
II-2
<PAGE>
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. ASO North America, Inc. (ASO) - 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.
ASO
In December 1998, ASO completed the first of a two step conversion to a Y2K
compliant computer system. The second step will be a system upgrade and is
scheduled for completion by July 1, 1999. ASO has represented to BNL that the
upgrade is fully Y2K compliant. BNL will perform final Y2K compliance
verification tests when the upgrade has been installed. In the event the
verification tests fail, the Company's backup alternative is to retain a new TPA
that is Y2K compliant.
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.
II-3
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages E-1 through E-15 attached to this Report is hereby
incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
II-4
<PAGE>
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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
Name Age Executive Officer Position
- - ---------------------------- -------- --------------------- -----------------------------------------------
<S> <C> <C> <C>
Wayne E. Ahart 58 1984 Chairman of the Board and Director
C. Donald Byrd 57 1984 Vice Chairman of the Board and Director
Kenneth Tobey 40 1994 President and Director
Barry N. Shamas 51 1984 Executive Vice President, Treasurer and
Director
Cecil Alexander 62 1994 Director
Richard Barclay 61 1994 Director
Eugene A. Cernan 64 1994 Director
Hayden Fry 69 1984 Director
John Greig 63 1984 Director
Roy B. Keppy 75 1984 Director
Tom Landry 73 1984 Director
Roy Ledbetter 68 1994 Director
John E. Miller 69 1994 Director
James A. Mullins 64 1984 Director
C. James McCormick 73 1984 Director
Robert R. Rigler 75 1989 Director
Chris Schenkel 74 1994 Director
L. Stan Schoelerman 73 1984 Director
Orville Sweet 74 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 Beall, Barclay & Co.,
Certified Public Accountants in Rogers, Arkansas and an Executive Director of
the Policy and Budget committee for the Arkansas office of the governor. From
1961 to 1997, he was 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 was Head Football Coach at the University of Iowa from 1979 to 1998.
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.
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 is presently a semi retired television sportscaster with ABC
Sports. From 1965 to 1997 he was a full-time television sportscaster of ABC
Sports, New York, New York. 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.
III-3
<PAGE>
L. Stanley Schoelerman has been President and a partner of Petersen Sheep &
Cattle Co., Spencer, Iowa since 1964. He was a Director of Home Federal Savings
& Loan, Spencer, Iowa, from 1969 to 1988; and Honeybee Manufacturing, Everly,
Iowa, from 1974 to 1986. He was President of Topsoil-Schoenewe, Everly, Iowa,
from 1974 to 1986. Mr. Schoelerman was Commissioner of the Iowa Department of
Transportation from 1974 to 1978 and was a member of the National Motor Carrier
Advisory Board of the Federal Highway Administration from 1981 to 1985.
Orville Sweet served as a Visiting Industry Professor at Iowa State University
from 1989 to 1990 and is President of Sweet and Associates, a consulting firm
for agricultural organizations. He was Executive Vice President of the 100,000
member National Pork Producers Council, Des Moines, Iowa, from 1979 to 1989. He
was President of the American Polled Hereford Association, Kansas City, Missouri
in 1963-79. He is past President of the US Beef Breeds Council and the National
Society of Livestock Records Association and was a Director of the Agricultural
Hall of Fame and the US Meat Export Federation. He is a member of the American
Society of Animal Science. He has served as a member of the USDA Advisory
Council Trade Policy, the State Department Citizens Network and the Executive
Committee of the Agricultural Council of America.
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 Compensation Stock Options/SARs LTIP Compensation
Position Year Salary Bonus $ $ Award(s) $ (#) Payouts $ $
- - ----------------------------- ------- ------------- ---------- ------------ --------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Wayne E. Ahart, CEO 1998 $125,000 $0 $8,605 $0 - $0 $0
" 1997 $125,000 $0 $8,927 $0 - $0 $0
" 1996 $125,000 $0 $9,375 $0 - $0 $0
</TABLE>
The total number of executive officers of the Company is four and the total
remuneration paid to all executive officers as a group is $379,252. 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. A four-member committee of Directors
administers the plan. During 1998 and 1997 the Company granted 255,575 and
208,050 stock options respectively, with an exercise price of $.50 per share. At
December 31, 1998, there were 565,350 options outstanding. No options were
exercised in 1998 or 1997. Under the fair value method, total compensation
recognized for grant of stock options was $0. The fair value of options granted
is estimated at $1,650 and $1,500 in 1998 and 1997 respectively. These values
were computed using a binomial method as prescribed in SFAS 123 and certain
assumptions include risk free interest rate of 6.0%, 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 2.2
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.
III-4
<PAGE>
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, 1998, other than for ordinary travel and expense advances and other
reimbursable expenses, 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, 1998:
<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, 1998
- - ------------------- -------------------------------------- -------------------------- -------------------------
<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
(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.
</TABLE>
Security Ownership of Management
The following table sets forth, as of December 31, 1998, 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>
III-5
<PAGE>
Amount and Nature of Percent of Class as of
Title of Class Name of Beneficial Owner Beneficial Ownership (1) December 31, 1998
- - ----------------------- ----------------------------------- ------------------------- ---------------------------
<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 46,088 .20%
" 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 (19 persons) 10,640,947 45.92%
- - ----------------------- -- -----------------------------------
(1)To the Company's knowledge, all shares are beneficially owned by, and
the persons named, except as otherwise indicated hold the sole voting
and investment power.
(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.
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
III-6
<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-15
<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 Filed herewith as Exhibit I.
Corporation, dated January 27, 1984 and Amendment to
Articles 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 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 premises 1994.
in Austin, Texas.
10.8 Amendment Number Two to the Quota Share Reinsurance Filed with Form 8-K dated January 18, 1995.
Agreement dated 8/10/91 between Registrant and UniLife
Insurance Co. of San Antonio, Texas
10.9 Office lease assumption and assignment agreement dated Filed herewith as Exhibit II
September 1, 1998, between Brokers National Life
Assurance Company, Walgreen Corporation and Charles
H. Morrison for premises in Austin
10.10 Sublease dated January 20, 1999 between Brokers Filed herewith as Exhibit III
National Life Assurance Company and PRG, Inc.
11 Statement re computation of per share earnings. Reference is made to the explanation of the
computation of per share earnings as shown in Note 1
to the Notes to Consolidated Financial Statements
filed herewith under item 14(a)(1) above which clearly
describes the same.
12 Statements re computation of ratios. Not applicable.
16 Letter Re Change in Certifying Accountant Filed with Form 8-K dated September 14, 1995.
22 Subsidiaries of Registrant Filed herewith.
</TABLE>
(b) Reports on Form 8-K
On September 25, 1998, the Company filed a Form 8-K that disclosed the Court had
entered a ruling on August 27, 1998, certifying the lawsuit mentioned in Part 2,
Item 1 as a class action suit. The class of plaintiffs includes 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 has filed an appeal of the certification
order.
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 31st day of March
1999.
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
3/31/99
- - --------------------------------------------- --------------------------
Wayne E. Ahart Chairman of the Board, Director
(Principal Executive Officer)
/S/ C. Donald Byrd
3/14/99
- - --------------------------------------------- --------------------------
C. Donald Byrd Vice Chairman of the Board and Director
/S/ Kenneth Tobey
3/6/99
- - --------------------------------------------- --------------------------
Kenneth Tobey President and Director
/S/ Barry N. Shamas
3/31/99
- - --------------------------------------------- --------------------------
Barry N. Shamas Executive Vice President, Treasurer and
Director (Principal Financial and
Accounting Officer)
/S/ Hayden Fry
03/15/99
- - --------------------------------------------- --------------------------
Hayden Fry Director
IV-3
<PAGE>
- - --------------------------------------------- --------------------------
John Greig Director
/S/ Roy Keppy
3/7/99
- - --------------------------------------------- --------------------------
Roy Keppy Director
/S/ Tom Landry
3/4/99
- - --------------------------------------------- --------------------------
Tom Landry Director
/S/ C. James McCormick
3/7/99
- - --------------------------------------------- --------------------------
C. James McCormick Director
/S/ James A. Mullins
3/8/99
- - --------------------------------------------- --------------------------
James A. Mullins Director
/S/ Robert R. Rigler
3/12/99
- - -------------------------------------------- --------------------------
Robert R. Rigler Director
/S/ Stanley Schoelerman
3/20/99
- - --------------------------------------------- --------------------------
Stanley Schoelerman Director
/S/ Orville Sweet
3/6/99
- - --------------------------------------------- --------------------------
Orville Sweet Director
/S/ Cecil Alexander
3/5/99
- - --------------------------------------------- --------------------------
Cecil Alexander Director
/S/ Richard Barclay
3/8/99
- - --------------------------------------------- --------------------------
Richard Barclay Director
IV-4
<PAGE>
/S/ Eugene A. Cernan
3/7/99
- - --------------------------------------------- --------------------------
Eugene A. Cernan Director
/S/ Roy Ledbetter
3/5/99
- - --------------------------------------------- --------------------------
Roy Ledbetter Director
/S/ John E. Miller
3/8/99
- - --------------------------------------------- --------------------------
John E. Miller Director
/S/ Chris Schenkel
3/8/99
- - --------------------------------------------- --------------------------
Chris Schenkel Director
IV-5
</TABLE>
<PAGE>
BNL Financial Corporation - 1998 Form 10-KSB
===============================================================================
===============================================================================
ANNUAL REPORT ON FORM 10-KSB
ITEM 14 (a) AND 14 (d)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
DES MOINES, IOWA
- - --------------------------------------------------------------------------------
Financial Statements Required by Item 8
<TABLE>
<CAPTION>
Page Number of 1998
Form 10-KSB
-------------------------
<S> <C>
Consolidated Balance Sheet, December 31, 1998 and 1997 E-2
Consolidated Statement of Operations and Comprehensive Income for the years ended December 31, 1998 and 1997 E-3
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1998 E-4
and 1997
Consolidated Statement of Cash Flows for the years ended December 31, 1998 and 1997 E-5
Notes to Consolidated Financial Statements E-6
Report of Independent Accountants on Financial Statements E-15
</TABLE>
E-1
<PAGE>
================================================================================
<TABLE>
- - -----------------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, December 31,
ASSETS 1998 1997
------------------ ------------------
<S> <C> <C>
Cash and cash equivalents $ 2,426,963 $ 714,539
Investments available for sale, at fair value (amortized cost
$9,692,368; 11,507,730; respectively ) 10,006,208 11,765,947
Investment in equity securities, common stock
at market (cost $108,123) 2,573 20,438
------------------ ------------------
Total Investments, Including Cash and
Cash Equivalents 12,435,744 12,500,924
Accrued investment income 195,652 225,042
Furniture and equipment, net 325,717 261,312
Deferred policy acquisition costs 379,917 433,695
Premium and policy loans 132,050 87,961
Receivable from reinsurer 33,531 26,677
Premiums due and unpaid 611,786 355,793
Other assets 213,379 256,449
------------------ ------------------
Total Assets $14,327,776 $14,147,853
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for future policy benefits $ 1,398,633 $ 1,352,555
Policy claims payable 2,508,175 1,368,630
Annuity deposits 3,259,195 3,336,323
Deferred annuity profits 521,212 615,737
Premium deposit funds 114,841 127,697
Supplementary contracts without life contingencies 129,944 56,031
Advanced and unallocated premium 352,999 328,814
Commissions payable 310,303 184,677
Other liabilities 528,507 364,429
------------------ ------------------
Total Liabilities 9,123,809 7,734,893
------------------ ------------------
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
Accumulated other comprehensive income 208,289 170,530
Accumulated deficit (9,714,686) (8,467,934)
Treasury stock, at cost, 138,795 shares (64,105) (64,105)
------------------ ------------------
Total Shareholders' Equity 5,203,967 6,412,960
------------------ ------------------
Total Liabilities and Shareholders' Equity $14,327,776 $14,147,853
================== ==================
- - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
E-2
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the years ended December 31, 1998 and 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Income:
Premium income $21,054,713 $11,532,718
Net investment income 807,342 859,749
Realized gains 57,563 75,754
------------------ -------------------
Total Income 21,919,618 12,468,221
------------------ -------------------
Expenses:
Increase (decrease) in liability for future policy benefits 39,224 (39,601)
Policy benefits and other insurance costs 18,971,791 10,221,754
Amortization of deferred policy acquisition costs 53,778 40,972
Operating expenses 3,431,929 2,780,237
Taxes, other than on income 669,648 396,471
------------------ -------------------
Total Expenses 23,166,370 13,399,833
------------------ -------------------
Loss from Operations before
Income Taxes (1,246,752) (931,612)
Provision for income taxes - -
------------------ -------------------
Net Loss ($1,246,752) ($931,612)
================== ===================
Net loss per common share (basic and diluted) $(0.05) $(0.04)
================== ===================
Weighted average number of fully
paid common shares 23,311,944 23,311,944
================== ===================
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period $ 95,323 $ 287,963
Reclassification adjustment for gains included
in net income (57,563) (75,754)
------------------ -------------------
Other comprehensive income 37,760 212,209
------------------ -------------------
Comprehensive Loss ($1,208,992) ($719,403)
================== ===================
- - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
E-3
</TABLE>
<PAGE>
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998 and 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive Treasury
-------------------------------
Shares Amount Capital Deficit Income Stock
-------------- ------------- --------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 23,311,944 $466,239 $14,308,230 ($7,536,322) ($41,679) ($64,105)
Accumulated other
Comprehensive income - - - - 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)
Accumulated other
Comprehensive income - - - - 37,759 -
Net loss - - - (1,246,752) - -
============== ============= ============== ================= ============ ============
Balance, December 31, 1998 23,311,944 $466,239 $14,308,230 ($9,714,686) $208,289 ($64,105)
============== ============= ============== ================= ============ ============
- - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
E-4
</TABLE>
<PAGE>
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998 and 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,246,752) ($931,612)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Realized gains on investments (57,563) (79,833)
Realized (gains) losses on sale of furniture and equipment -- 4,079
Depreciation
96,670 95,159
Amortization of deferred acquisition costs,
organization costs and state licenses acquired 56,887 44,082
Accretion of bond discount 3,647) (4,145)
Deferred policy acquisition costs (53,778) (40,972)
Change in assets and liabilities:
Decrease (increase) in receivable from reinsurer (6,854) 1,785
Decrease (increase) in accrued investment income 29,390 (2,941)
Increase (decrease) in liability for future policy benefits 46,078 (29,725)
Increase in policy claims payable 1,139,545 552,130
Decrease in annuity deposits and deferred profits (171,654) (154,047)
Decrease in premium deposit funds (12,856) (50,212)
Other, decrease 109,485 286,860
--------------- ---------------
Net Cash Used in Operating Activities (75,049) (309,392)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of investments 249,000 1,322,816
Proceeds from maturity or redemption of investments 10,427,683 3,274,836
Proceeds from sale of furniture and equipment -- 201
Purchase of furniture and equipment (163,012) (95,706)
Purchase of fixed maturity securities (8,800,110) (4,166,500)
--------------- ---------------
Net Cash Provided By Investing Activities 1,713,561 335,647
--------------- ---------------
Cash flows from financing activities:
Net payments on supplementary contracts 73,912 (14,485)
--------------- ---------------
Net Cash Provided By (Used In) Financing activities 73,912 (14,485)
--------------- ---------------
Net increase in cash and cash equivalents 1,712,424 11,770
Cash and cash equivalents, beginning of period 714,539 702,769
--------------- ---------------
Cash and cash equivalents, end of period $2,426,963 $714,539
=============== ===============
- - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
- - -----------------------------------------------------------------------------------------------------------------------------------
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), BNL Brokerage Corporation and National
Dental Benefits Association Inc.(NDB). Subsequent to year end the name of NDB
was changed to Consumers Protective Association, Inc. 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 is to
utilize dental insurance to attract agents who will market other BNLAC products
along with dental. 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. See Note 10. The Company is licensed to sell in 27 states as
of December 31, 1998. See Note 13. Substantially all of the Company's life
insurance in force is nonparticipating business.
Premiums from accident and health insurance are reported as earned when due
since these policies are short duration contracts.
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. As described in Note 11, lapse rate assumptions were
revised to reflect actual experience and reduce the deferred acquisition costs
to correspond to remaining active policies.
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. This
deferred annuity profit is being amortized based on lapse and mortality
assumptions (maximum of 30 years) which were revised as described in Note 11 to
reflect actual experience. Increases in the liability account for interest
credited to contracts are charged to expense. The interest rate assumptions
ranged from 5.5% to 6.75% during 1998 and 1997.
The liability for policy claims payable is composed of claims reported but not
paid and claims incurred but not reported. The Company has developed a procedure
for calculating incurred but not reported dental claims based on prior years
claims using dates incurred, reported to the insurance company and subsequently
paid.
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 as a component of
comprehensive income. 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 flow
disclosures, there have been no material federal income taxes or interest paid
for 1998 or 1997.
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 $473,767 and $377,098 at December 31, 1998 and
1997, respectively. Depreciation expense was $96,670 and $95,159 for the years
ended December 31, 1998 and 1997, respectively.
E-6
<PAGE>
1. Summary of Significant Accounting Policies (continued):
Other assets include agents' balances reduced by allowance for doubtful accounts
of $47,816 and $130,513 at December 31, 1998 and 1997, respectively. Reductions
in the allowance account were a credit to bad debt expense recorded in
operations of ($13,389) and ($11,678) for the years ended December 31, 1998 and
1997, respectively.
Other assets also include the cost of 26 state licenses acquired in 1991 as part
of the Statesmen Life Insurance Company acquisition. Such licenses are amortized
over the related estimated life of the license (40 years) using the
straight-line method. Amortization expense of approximately $3,109 was recorded
for each of the years ended December 31, 1998 and 1997.
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 9.
Certain amounts for the year ended December 31, 1997 have been reclassified to
conform with the presentation of December 31, 1998 amounts. The
reclassifications have no effect on net income for the year ended December 31,
1997.
Net loss per share is based on net loss divided by the weighted average number
of fully paid shares.
Effective January 1, 1998 the company adopted statement of accounting standards
#130, "Reporting Comprehensive Income". Under SFAS # 130, enterprises that
provide a full set of financial statements that report financial position,
results of operations, and cash flows should report comprehensive income in
addition to net income on the Statement of Operations.
2. Shareholders' Equity:
At December 31, 1998 and 1997, shareholders' equity includes approximately
$4,630,000 and $5,481,000 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. Minimum capital and surplus requirements vary
from $300,000 to as much as $3,000,000 in the states in which BNLAC is licensed.
The two states with the greatest capital and surplus requirements accounted for
less than four percent of gross income in 1998. The ability of the Company to
continue its premium growth and to continue marketing its products in its
current market areas is dependent on management's efforts to maintain adequate
capital and surplus requirements considering recent loss trends.
The states periodically increase minimum capital requirements, often allowing
companies with existing Certificates of Authority to continue doing business in
the state under the previous existing requirements (grand fathering). States in
which BNLAC is licensed to do business have increased minimum requirements to as
much as $5,000,000. Management actively monitors these developments to maintain
compliance with the requirements of each state. In February 1999, the Company
was notified that the State of Washington had increased its paid-in capital
stock requirements from $1,200,000 to $2,400,000. Insurance sales in Washington
are less than 1% of total premium and management believes that it was not in the
Company's best interest to invest additional surplus funds at this time.
Therefore, the Company voluntarily withdrew its Certificate of Authority from
the State of Washington.
Capital and surplus and net loss of BNLAC as reported on a statutory basis are
as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997
<S> <C> <C>
Capital and surplus $3,995,706 $5,136,292
Net loss ($999,128) ($645,603)
</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:
E-7
<PAGE>
2. Shareholders' Equity (continued):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------------------------- ------------------------------------------
Income/Loss Capital and Surplus Income/Loss Capital and Surplus
----------------- ---------------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Consolidated Reporting Under
Generally Accepted Accounting Principles ($1,246,752) $5,203,966 ($931,612) $6,412,960
Less Parent Company and BNL Equity 355,625 573,992 246,986 931,904
----------------- ---------------------- ----------------- ----------------------
Brokers National Life Assurance Company (891,127) 4,629,974 (684,626) 5,481,056
----------------- ---------------------- ----------------- ----------------------
Deferred Acquisition Costs $53,778 $(379,917) $40,972 $(433,695)
Reserve and Premium Adjustments (27,103) 158,229 (8,305) 192,191
Interest Maintenance Reserve/AVR (32,547) (379,454) 16,691 (344,286)
Unrealized appreciation of securities - (307,667) - (258,502)
Annuity Deposits and Related Adjustments (150,845) 521,211 (27,600) 615,736
Other 48,716 (246,670) 17,265 (116,208)
----------------- ---------------------- ----------------- ----------------------
BNLAC Statutory Basis ($999,128) $3,995,706 ($645,603) $5,136,292
================= ====================== ================= ======================
</TABLE>
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, 1998 were approximately
$9,500,000 for income tax reporting. The net operating loss carryovers expire in
years 2000 - 2011. The Company and its Subsidiaries will file separate income
tax returns for 1998.
A deferred tax asset of $3,570,000 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 $3,570,000
against the deferred tax asset. This represents a net increase of $430,000 in
the deferred tax asset for 1998 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
Unrealized Unrealized Estimated
December 31, 1998 Amortized Cost Gains Losses Market Value
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations of
US government corporations and agencies $8,870,176 $309,243 ($22,104) $9,157,315
Obligations of states and political subdivisions 297,725 15,835 - 313,560
Corporate securities 310,841 7,859 (1,055) 317,645
Mortgage-backed securities
GNMA 14,257 321 - 14,578
Public utility bonds 199,369 4,141 (400) 203,110
--------------- -------------- ------------- --------------
Totals $9,692,368 $337,399 ($23,559) $10,006,208
=============== ============== ============= ==============
E-8
<PAGE>
4. Investments (continued):
Gross Gross
Unrealized Unrealized Estimated
December 31, 1997 Amortized Cost Gains Losses Market Value
--------------- -------------- ------------- --------------
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
=============== ============== ============= ==============
</TABLE>
The amortized cost and estimated fair value of investments in fixed maturity
securities at December 31, 1998 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, 1998
----------------------------------
Estimated
Amortized Cost Market Value
--------------- ---------------
<S> <C> <C>
Due in one year or less $ 999,094 $ 1,004,140
Due after one year through five years 873,731 895,030
Due after five years through ten years 2,698,257 2,698,900
Due after ten years 5,107,029 5,393,560
--------------- ---------------
9,678,111 9,991,630
Mortgage-backed securities 14,257 14,578
--------------- ---------------
$9,692,368 $10,006,208
=============== ===============
</TABLE>
Proceeds from sales and maturities of investments in fixed maturity securities
for the years ended December 31, 1998 and 1997 were $10,676,683 and $4,597,652,
respectively. Gross gains of $57,618 and $80,143 and gross losses of $55 and
$310 were realized on those December 31, 1998 and 1997 sales, respectively.
Investment in equity securities at December 31, 1998 and 1997 represents common
stock investments as follows:
<TABLE>
<CAPTION>
1998 1997
Cost Market Value Cost Market Value
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Banks, trusts and
insurance companies $2 ,423 $813 $2,423 $438
Industrial, savings
and loans and other 105,700 1,760 105,700 20,000
------------- ------------- ------------ -------------
$108,123 $2,573 $108,123 $20,438
============= ============= ============ =============
</TABLE>
E-9
<PAGE>
4. Investments (continued):
Net investment income for the years ended December 31, 1998 and 1997 is as
follows:
December 31,
-------------------------------
1998 1997
------------- -------------
Interest on debt securities and
cash investments $827,902 $878,594
Dividends on equity securities - -
------------- -------------
827,902 878,594
Investment expenses (20,560) (18,845)
------------- -------------
Net investment income $807,342 $859,749
============= =============
Net realized gains and losses are summarized below:
December 31,
------------------------------
1998 1997
------------- -------------
Debt securities $57,563 $79,833
Equity securities - -
------------- -------------
$57,563 $79,833
============= =============
Included in 1998 and 1997 realized gains on debt securities is $1,815 and
$42,328, 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, 1998 the Company has received a total
of $748,895 from the rehabilitation plan.
5. Fair Value of Financial Instruments
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------- ---------------- ----------------
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents
(Note 1) $ 2,426,963 $ 2,426,963 (a) $ 714,539 $ 714,539(a)
Investments-fixed maturity, available for sale
(Note 4 & Note 1) 10,006,208 10,006,208 (b) 11,765,947 11,765,947(b)
Investments -equity securities
(Note 4 & Note 1) 2,573 2,573 (b) 20,438 20,438(b)
Other financial instruments-Assets 327,702 327,702 (a) 313,363 313,363(a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Assets $12,763,446 $12,763,446 $12,814,287 $12,814,287
================ ================ ================ ================
E-10
<PAGE>
5. Fair Value of Financial Instruments (continued):
1998 1997
---------------- ---------------- ---------------- ----------------
Carrying Fair Carrying Fair
Liabilities Amount Value Amount Value
---------------- ---------------- ---------------- ----------------
Premium deposit funds $ 114,841 $ 114,841 (a) $ 127,697 $ 127,697(a)
Supplementary contracts without life contingencies
(Note 1) 129,944 129,944 (a) 56,031 56,031(a)
Annuity deposits
(Note 1) 3,259,195 3,259,195 (a) 3,336,323 3,336,323(a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Liabilities $3,503,980 $3,503,980 $3,520,051 $3,520,051
================ ================ ================ ================
</TABLE>
(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.
6. Commitments and Contingencies:
The Company, BNL Equity Corporation and several officers in the Company are
defendants in a pending class action 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
intends to seek sanctions against appropriate parties to the extent permitted by
law.
The Company has entered into noncancelable operating leases for office space and
equipment. Future minimum payments under the leases are as follows:
1999 $181,000
2000 158,000
2001 147,000
2002 141,000
Thereafter 347,000
--------------
Total $974,000
==============
Related lease cost incurred for the years ended December 31, 1998 and 1997 was
$146,917 and $113,455, 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 $889,162
at December 31, 1998.
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.
1998 1997
-------------- --------------
Balance at January 1 $1,368,630 $816,500
Less reinsurance recoverable -- 5,161
-------------- --------------
Net Balance at January 1 1,368,630 811,339
-------------- --------------
E-11
<PAGE>
7. Liability for Unpaid Claims (continued):
1998 1997
-------------- --------------
Incurred related to:
Current year $16,120,733 $8,387,011
Prior years (42,064) 11,846
-------------- --------------
Total Incurred 16,078,669 8,398,857
-------------- --------------
Paid related to:
Current year 13,640,558 7,017,720
Prior years 1,298,566 823,846
-------------- --------------
Total Paid 14,939,124 7,841,566
-------------- --------------
Net Balance at December 31 2,508,175 1,368,630
Plus reinsurance recoverable - -
============== ==============
Balance at December 31 $2,508,175 $1,368,630
============== ==============
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 for its life insurance
policies 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 1997.
The Company began marketing a new Hospital Indemnity Plan in 1998 and retains
50% of the risk. The remaining risk is born by a reinsurer considered an
unauthorized reinsurer under Arkansas statutes. The reinsurance agreement
requires the reinsurer to maintain a deposit or letters of credit in a qualified
institution for the benefit of the Company, in an amount equal to liabilities
(insurance reserves) associated with the reinsured risk, as is required by
Arkansas statute for allowance of accounting recognition of the decrease in
risk.
Following is a summary of reinsurance for December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Percentage
Ceded To Assumed Of Amount
Other From Other Assumed To
December 31, 1998 Gross Amount Companies Companies Net Amounts Net
--------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Life Insurance in force (in thousands) $ 34,877 $13,684 $ 9,229 $ 30,422 30.3%
=============== ============= ============== ============== =============
Premiums-life insurance $ 350,829 $61,432 $25,654 $315,051 8.0%
Premiums-accident and health 20,507,123 29,133 - 20,477,990 -
--------------- ------------- -------------- -------------- -------------
Total insurance premiums $20,857,952 $90,565 $25,654 $20,793,041 0.1%
=============== ============= ============== ============== =============
December 31, 1997
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%
=============== ============= ============== ============== =============
</TABLE>
E-12
<PAGE>
9. 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 five years and the
duration of the plan is ten years. A four-member committee of Directors
administers the plan. During 1998 and 1997 the Company granted 255,575 and
208,050 stock options, respectively, with an exercise price of $.50 per share.
There were 565,350 stock options outstanding at December 31, 1998. 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 $1,650 and $1,500 in 1998 and 1997,
respectively. These values were computed using a binomial method as prescribed
in SFAS 123 and certain assumptions include risk free interest rate of 6.0%,
expected life of 3.0 years, expected volatility of 11% and no expected dividends
due to statutory limitations. The estimated weighted average remaining life of
the options is 2.2 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.
10. Concentrations
The majority of the Company's premium income growth and gross income continues
to be generated by the dental insurance products. This concentration makes the
Company increasingly dependent upon the success of this block of business and
any economic factors and risks unique to dental insurance. See Note 1.
11. Change in Accounting Estimate
Actuarial estimates relating to the amortization of deferred acquisition costs
and deferred liability reserves associated with an annuity product were revised
in 1998 after it was determined that lapse rate assumptions used to compute
these deferrals were significantly different from actual lapse rates. The
cumulative effect of this change in estimate was recorded as a $72,104 net
increase to current year income as is required by generally accepted accounting
principles. Of this current adjustment, $68,951 is the amount applicable to
prior years.
12. 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-13
<PAGE>
12. The Offering (continued):
e. All escrowed shares will be released August 1, 1999, if they have not been
released prior to that time.
13. Subsequent Events
No events have occurred subsequent to the close of the books on December 31,
1998, which have a material effect on the financial condition of the Company.
E-14
<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, 1998 and 1997 and the related
Consolidated Statements of Operations and Comprehensive Income, 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, 1998 and 1997, 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 SMITH, CARNEY & CO., p.c
February 13, 1999
E-15
<PAGE>
Exhibit I
ARTICLES OF INCORPORATION
OF
BNL FINANCIAL CORPORATION
Formerly
UNITED IOWA CORPORATION
I, the undersigned person, acting as incorporator of a corporation
organized under Chapter 496A, Code of Iowa (1983), as amended, hereby adopt the
following Articles of Incorporation for such corporation:
ARTICLE I
The name of the Corporation is United Iowa Corporation.
ARTICLE II
The Corporation shall have unlimited power to engage in and do any
lawful act concerning any and all lawful business for which a corporation may be
organized under this Act.
ARTICLE III
The aggregate number of shares which the Corporation shall have
authority to issue is twenty-one million (21,000,000) shares consisting of
twenty million (20,000,000) shares of Common Stock of no par value and one
million (1,000,000) shares of Preferred Stock, $2.00 par value. The Preferred
Stock may be issued from time to time in one or more series of any number of
shares, provided that the aggregate number of shares outstanding of all series
shall not exceed the total number of shares of Preferred Stock authorized by the
Article.
Authority is hereby vested in the Board of Directors from time to time
to authorize the issuance of the Preferred Stock of any series and to state and
express, in the resolution or resolutions creating and providing for the issue
of shares of any series, the designations, voting powers, if any, preferences
and relative participating, optional or other special rights and the
qualifications, limitations, and restrictions thereof of such series to the full
extent now or hereafter permitted by the laws of the State of Iowa in respect of
the matters set forth in the following clauses (a) through (h), inclusive:
(a) The designation of the series and the number of shares which shall
constitute such series, which number may be altered from time to time by like
action of the Board of Directors in respect of shares then unissued.
(b) The annual dividend rate on the shares of that series, the
conditions upon which and the time or times when such dividends are payable, the
preference to, or the relation to, the payment of the dividends payable on
shares of such series to the dividends payable on shares of any other class or
classes or any other series of stock, whether such dividends shall be cumulative
or non cumulative and, if cumulative, the dates from which dividends on shares
of such series shall be cumulative.
(c) The redemption price or prices, if any, and the time or times at
which, the terms and conditions upon which, shares of such series shall be
redeemable.
(d) The rights of shares of such series upon the liquidation,
dissolution or winding up of, or upon any distribution of the assets of, the
Corporation and the preference to, or the relation to, such rights of shares of
such series to the rights on any other class or classes or any other series of
stock of the Corporation.
(e) The voting rights, if any, of such series in addition to the voting
rights prescribed by law, and the terms of exercise of such voting rights.
(f) The rights, if any, of the holders of such shares of such series to
convert such shares into, or to exchange such shares for, shares of any other
class or classes of stock of the Corporation and the price or process or the
rates of exchange and the adjustments at which such shares shall be convertible
or exchangeable, and any other terms and conditions of such conversion or
exchange.
(g) The requirement of any sinking or purchase fund or funds to be
applied to the purchase or redemption of shares of such series and, if so, the
amount of such fund or funds and the manner of application.
(h) Any other preferences and relative participating, optional or other
special rights of shares of such series and qualifications, limitations or
restrictions thereof.
ARTICLE IV
The address of the initial registered office of the Corporation is 1300
Untied Central Bank Building, Des Moines, Iowa 50309, and the name of its
registered agent is Marshall J. Hunzelman.
ARTICLE V
The number of Directors constituting the initial Board of Directors is
(1) and the names and addresses of the persons who are to serve as Directors
until the first annual meeting of stockholders or until their successors are
elected and shall qualify are:
Name Address
Marshall J. Hunzelman 1300 United Central Bank Bld.
Des Moines, Iowa 50309
ARTICLE VI
The name and address of the incorporator is:
Marshall J. Hunzelman
1300 United Central Bank Building
Des Moines, Iowa 50309
ARTICLE VII
Deeds, mortgages, and leases for an initial stated term of five (5)
years or more shall be executed by the President or a Vice President and shall
be countersigned or attested by the Secretary or an Assistant Secretary.
Mortgage releases, leases for an initial stated term of less than five (5)
years, and other instruments affecting or relating to real estate but not
amounting to a conveyance or mortgage thereof may be executed by any one or more
of the officers of the Corporation.
ARTICLE VIII
No shareholder of this corporation shall have any pre-emptive right to
acquire unissued shares or securities convertible into such shares or carrying a
right to subscribe to or acquire shares.
ARTICLE IX
The effective date of this incorporation shall be at the time of the
filing of the Articles and its existence shall be perpetual.
/S/ Marshall J. Hunzelman
Marshall J. Hunzelman, Incorporator
STATE OF IOWA )
) SS.
COUNTY OF POLK)
On this 27th_ day of January, 1984, before me, the undersigned, a
Notary Public in and for the State of Iowa, personally appeared Marshall J.
Hunzelman, to me personally known to be the identical person whose name is
subscribed to and who executed the foregoing Articles of Incorporation and who
acknowledged the execution thereof to be his free and voluntary act and deed.
WITNESS MY HAND and notarial seal at Des Moines, Iowa, the day and year
last above written.
------------------------------------
Notary Public in and for the State of Iowa
(file with Secretary of State of Iowa January 27, 1984)
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION OF
BNL FINANCIAL CORPORATION
(Formerly)
UNITED IOWA CORPORATION
COME NOW, the undersigned President and Secretary of United Iowa
Corporation and hereby make and execute these Articles of Amendment to the
Articles of Incorporation of said corporation;
1. The name of the corporation is United Iowa Corporation and the effective
date of incorporation was January 27, 1984.
2. The Articles of Incorporation have been amended by adding the following as
new Article X:
"A director of this Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability ( i ) for any breach
of the director's duty of loyalty to the Corporation or its
shareholders , ( i i ) for acts or omissions not in good faith or which
involve intentional misconduct of a knowing violation of law, ( i i i )
for any transaction from which the director derived an improper
personal benefit , or ( i v ) under Section 496A.44 of the Code of
Iowa."
3. The date of the adoption of the amendment by its shareholders was August
11, 1987 .
4. As of the record date there were 10,579,958 shares outstanding and entitled
to vote on the amendment.
5. At the meeting, these shares were voted as follows:
FOR AGAINST
8,557,734 0
6. The amendment shall become effective on the date on which the Secretary of
State of the State of Iowa issues a Certificate of Amendment.
Dated this 25th day of September, 1987.
UNITED IOWA CORPORATION
By /S/ C. Don Byrd
Its President
By_/S/ Linda E. Leedom
Its Secretary
COMES NOW, C. Donald Byrd and States that he is the duly authorized and
acting President of United Iowa Corporation and acknowledges that the foregoing
Articles of Amendment have been executed by him on behalf of said corporation as
his and its voluntary act and deed.
/S/ C. Don Byrd
C. Donald Byrd
STATE OF IOWA )
) ss.
COUNTY OF POLK )
On this _25th_ day of September, A.D. , 1987 , before me, the
undersigned , a Notary Public in and for said County , in said State ,
personally appeared C. Donald Byrd , to me personally known , who , being by me
duly sworn , did say that he is the President of said corporation : that said
instrument was signed on behalf of said corporation by authority of its Board of
Directors: and that the said C. Donald Byrd as such officer , acknowledged the
execution of said instrument to be the voluntary act and deed of said
corporation , by it and by him voluntarily executed.
/S/ Marshall Huntzelman
Notary Public in and for the
State of Iowa
<PAGE>
EXHIBIT II
ASSIGNMENT AND ASSUMPTION AGREEMENT
By this Assignment and Assumption Agreement ("Assignment"), WALGREEN
CO., an Illinois corporation ("Assignor"), does hereby transfer, assign and set
over unto BROKERS NATIONAL LIFE ASSURANCE COMPANY, an Arkansas corporation
('Assignee"), all of Assignor's right, title and interest in and to that certain
lease dated September 27, 1985, by and between CHARLES H. MORRISON, Trustee, of
Travis County, Texas ("Landlord"), and Assignor as tenant, together with all
modifications, supplements and extensions thereof, if any (collectively, the
"Lease"), covering the premises commonly known as 2100 William Cannon Drive,
Austin, Texas, and legally described on Exhibit "A" attached hereto, to which
Landlord consents upon the conditions herein contained, all for good and
valuable consideration the sufficiency and receipt of which are hereby
acknowledged by the parties hereto, and the covenants and conditions hereinafter
provided.
TO HAVE AND TO HOLD the same unto the Assignee, its successors and
assigns forever.
1 This Assignment shall become effective upon the date of its execution
("Effective Date").
2. Except as expressly provided herein, Assignee hereby accepts this
Assignment and assumes performance of all of the covenants, agreements, terms,
provisions, conditions, limitations and other obligations accruing or to be paid
or performed on the part of the Assignor under the Lease on or after the
Effective Date. Assignor shall not be bound by any modifications made to the
Lease subsequent to the date of this Assignment.
3. Assignor hereby indemnities and agrees to hold harmless Assignee,
its successors and assigns, from and against any and all damage, loss,
liability, claim, cost, expense, action and causes of action (including, without
limitation, reasonable attorney's fees and costs) incurred by or asserted
against Assignee, its successors and assigns, arising from and in connection
with the Lease which are attributable to acts, omissions or events occurring
prior to the Effective Date.
4. Assignee hereby indemnifies and agrees to hold harmless Assignor,
its successors and assigns, from and against any and all damage, loss,
liability, claim. cost, expense, action and causes of action (including, without
limitation, reasonable attorneys' fees and costs) incurred by or asserted
against Assignor, its successors and assigns, arising from and in connection
with the Lease which are attributable to acts, omissions or events occurring on
or subsequent to the Effective Date.
5. (a) Assignor shall pay to Landlord the sum of nine thousand
seven hundred fifty dollars ($9,750.00) (the "Sum") per month, during the period
commencing on the Effective Date and continuing to and including the date that
is one hundred fifty (150) days thereafter (the "Period"). Such Sum shall be
payable on the first day of each month during the Period, in advance, and shall
be properly apportioned for any period less than a full calendar month;
provided, however, that if the Effective Date is not the first day of a month,
then such Sum payable hereunder for the such first partial month shall be
payable within five (5) days of said Effective Date.
(b) Notwithstanding anything contained in this Assignment to
the contrary, Assignor shall remain responsible for the payment of any
additional charges payable to Landlord under the Lease which may accrue during
the period.
(c) Except as indicated in Paragraph 5(b) above, this
Paragraph 5 shall not be deemed to place any obligations upon Assignor for the
payment of any rent or other charges under the Lease which may accrue after the
Effective Date.
6. Except with respect to William P. Skinner, Broker (the "Broker"),
each of the parties represents and warrants that it has engaged no broker or
finder and that no claims for brokerage commissions or finder's fees will arise
in connection with the execution of this Assignment and each of the parties
agrees to indemnify the other against and hold it harmless from liability
arising from any such claim arising as a result of its acts or omissions
(including, without limitation, the cost of attorneys' fees in connection
therewith). Pursuant to a separate agreement between Assignor and Broker,
Assignor has agreed to pay Broker a commission for its services.
7. This Assignment shall inure to the benefit of and shall be binding
upon the parties hereto, their successors, transferees and assigns.
8. In all other respects, said Lease and all of the terms thereof shall
remain unmodified and shall continue in full force and effect.
9. If the parties hereto are comprised of more then one person or
entity, the obligations imposed upon such parties under this Assignment shall be
joint and several.
10. The parties hereto have been afforded a full and fair opportunity
to seek advice from legal counsel and such parties acknowledge that Assignor's
attorney represents Assignor and not the Assignee.
11. The submission of this Assignment to Assignee and the Landlord for
examination and execution shall not bind Assignor in any manner, nor constitute
an offer by Assignor, and no agreement or other obligation of Assignor shall
arise until such time as this Assignment is fully executed and delivered by the
parties hereto.
12. All provisions of this Assignment have beer negotiated by the
parties hereto at arm's length and no party hereof shall be deemed the scrivener
of this Assignment. This Assignment shall not be construed for or against any
party hereto by reason of authorship or alleged authorship of any provision.
IN WITNESS WHEREOF, Assignor and Assignee have caused the Assignment to be duly
executed this 18th day of August 1998.
WALGREEN CO.
Witnesses:
L. M. Martin By John A. Rubino
Vice President
Attest
Kim Evans Nancy J Godfrey
Assistant Secretary
BROKERS NATIONAL LIFE ASSURANCE CO.
Witnesses:
Jeff Drees By Barry N. Shamas
Exec. Vice President
Tammy Barr Attest
Wayne E. Ahart
Chairman of the Board
LEASE AMENDMENT
This Lease Amendment ("Amendment") is made by and between CHARLES H. MORRISON,
Trustee, of Travis County, Texas ("Landlord"), and BROKERS NATIONAL LIFE
ASSURANCE COMPANY, an Arkansas corporation("Tenant").
WITNESSETH:
WHEREAS, by a Lease dated September 27, 1985, by and between Landlord,
and WALGREEN CO., an Illinois corporation ("Walgreens") (to all right title and
interest of which Tenant has succeeded by an Assignment and Assumption Agreement
dated July, 1998), as modified by a consent letter dated November 18, 1987, a
consent letter dated May 14, 1992, and a consent letter dated July 30,1996
(collectively, the "Lease"), covering the premises commonly known as 2100
William Cannon Drive, Austin, Texas ("Leased Premises"), which is contained
within a building which is part of a shopping center ("Shopping Center"); and
WHEREAS, Landlord and Tenant desire to modify said Lease as hereinafter
provided;
NOW, THEREFORE, in consideration of the of the covenants and conditions
hereinafter provided, and other good and valuable consideration, the sufficiency
of which is hereby acknowledged by the parties hereto, it is agreed by and
between Landlord and Tenant as follows:
1. This Amendment shall be effective upon the date of its execution
Landlord and Tenant ("Effective Date").
2. In consideration of the execution hereof. Tenant shall pay to
Landlord a sum of $37,500.00, payable no more than thirty (30) days after the
Effective Date. Furthermore, in addition to all monetary obligations payable to
Landlord under the Lease, commencing upon the Effective Date and continuing to
and including February 28, 2006 (the "Period"), Tenant shall pay to Landlord a
monthly sum ("Fee") of four hundred and twelve dollars ($412.00), payable on the
first day of each calendar month during such period. If the term of the Lease
should terminate prior to the expiration of the Period, and such termination is
due to a default by Tenant, then upon such termination Tenant shall pay to
Landlord a monetary amount equal to the sum of the Fees which would have been
payable to Landlord hereunder for the remainder of the period, but for such
termination. In no event, including, but not limited to, a default of the Lease
by Tenant. shall Walgreens be obligated to pay the Fees described in this
Paragraph 2.
3. From and after the Effective Date, Article 2(a)(2) of the Lease and
all references to said Article and/or to percentage rents payable to Landlord
pursuant to said Article throughout the Lease (including, but not limited to,
references in Articles 13, 19, and 22) shall be deleted.
4. Landlord covenants, represents and warrants that Landlord has legal
title to the entire Shopping Center and has the right to make this Agreement.
Tenant, upon the payment of rent and the keeping of agreements under the Lease
(as amended herein) on its part to be kept or performed, shall have peaceful and
uninterrupted possession of the Leased Premises during the continuance of the
Lease. Landlord covenants, represents and warrants that at the time of execution
of this Agreement, neither the Shopping Center, nor any portion thereof is
subject to any mortgage, deed of trust, assignment or other encumbrance
prohibiting this Agreement.
5. This instrument shall also bind and benefit, as the case may
require. the heirs, legal representatives, assigns and successors of the
respective parties.
6. In all other respects, the Lease and all of the applicable terms
thereof shall remain unmodified and shall continue in full force and effect.
7 Landlord has been afforded a full and fair opportunity to seek advice
from legal counsel and Landlord acknowledges that Tenant's attorney represents
Tenant and not Landlord.
8. The submission of this Agreement to Landlord for examination and
execution shall not bind Tenant in any manner, nor constitute an offer by
Tenant, and no agreement or other obligation of Tenant shall arise until such
time as this Agreement is fully executed and delivered by Landlord and Tenant.
9. All provisions of this Agreement have been negotiated by both
parties at arm's length and neither party shall be deemed the scrivener of This
Agreement. This Agreement shall not be construed for or against either party by
reason of authorship or alleged authorship of any provision.
10. If either of the parties hereto is comprised of more then
one person or entity, the obligations imposed upon such party(ies) under this
Amendment shall be joint and several.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment
under seal, as of the 20 day of August, 1998.
CHARLES H. MORRISON, Trustee
By /s/ Charles H. Morrison
BROKERS NATIONAL LIFE ASSURANCE COMPANY
By /s/ Barry N. Shamas
Title: Exec. V.P.
<PAGE>
Exhibit III
SUBLEASE AGREEMENT
THIS SUBLEASE is made as of the 20th day of January, 1999 , by and
between Brokers National Life Assurance Company ("Sublessor" and "Tenant") and
PRG, Inc. ("Sublessee").
For valuable consideration given and received to Sublessee and
Sublessee hereby agree to all of the terms and provisions set out below:
1. Premises. Sublessor hereby subleases to Sublessee and Sublessee
hereby leases from Sublessor Office all of suite 200 containing approximately
5588 square feet of rentable space on the 2nd ( ) floor ("Subleased Premises")
in the #301 Buildings ("Building") located at 301 Camp Craft Road , Austin,
Texas 78746 .
2. Prime Lease. Sublessor and Sublessee hereby recognize and
acknowledge that the premises to be sublet hereunder are subject to that certain
Lease by and between the Sublessor, as Tenant, Enclave KOW, LTD , as Landlord,
dated 03/24/1994 ("Prime Lease"). This Sublease shall at all times and in all
respects remain subordinate to the Prime Lease.
3. Term. The term of this sublease shall commence on the 20th day of
January, 1999 , and terminate at midnight on the 31st day of May, 1999 . Under
no circumstances shall this Sublease extend beyond the expiration of the term of
the Prime lease which is currently the 1st day of June, 1999, or the earlier
termination, surrender, or forfeiture of the Prime Lease, regardless of whether
the Prime Lease expires by its own terms, is terminated for Tenant's default, is
terminated by agreement of Landlord and Tenant, or is terminated, surrendered or
forfeited for any other reason. Sublessor shall advise Sublessee of any early
termination of this Sublease no less than fifteen (15) days prior to the
effective date of termination.
4. Rent. As rental for the Sublease and use of the Subleased Premises
("Base Rental'), Sublessee will pay Sublessor, the sum of $6,250.00* per month
on the first day of each calendar month, monthly in advance, for each and every
month during the term of this Sublease. If the Sublease term does not commence
on the first day of the calendar month, Sublessee will pay in advance a pro rata
part of such sum as rental for such partial month. During the term of this
Sublease, Sublessee shall be liable to Sublessor for its pro rata share of any
increase in the Basic Rental payable under the Prime Lease or for its pro rata
share of any costs or expenses charged to the Sublessor pursuant to the terms of
the Prime Lease. Sublessee's expenses will be apportioned for the Subleased
Premises only. * For four (4) months beginning 02/01/1999.
5. Use. Sublessee will use the Subleased Premises for general office
purposes and for no other use or purpose without the prior written consent of
Sublessor, which may be granted or withheld in a Sublessor's sole discretion and
judgement.
6. Incorporation of Terms. Except as otherwise provided herein, this
Sublease shall be subject to all the terms, covenants, and conditions contained
in the Prime Lease, and Sublessee agrees to be and shall be abound by all of the
provisions of the Prime Lease, except for the provisions specifying the
premises, the amount of rent and security deposit, as if all the terms of said
Prime Lease were set forth herein verbatim; provided, however, that for purposes
of this Sublease only, Sublessor shall be substituted in the place of Landlord,
and Sublessee shall be substituted in place of Tenant, and Subleased Premises
shall be substituted in place of Premises, wherever in said Prime Lease of terms
"Landlord" and "Tenant" and "Premises" appear.
7. Limitation of Liability and Indemnity. Neither Landlord nor
Sublessor shall be liable or responsible to Sublessee for any loss or damage to
any property or person occasioned by theft, act of God, public enemy,
injunction, riot, strike, insurrection, war, court order, requisition or order
of governmental body or authority, or for any damage or inconvenience that may
arise through repair or alteration of any part of the Building, or failure to
make any such repairs. Sublessee agrees that it will indemnify and hold
Sublessor and Landlord harmless from all sums, claims, and actions of every kind
by reason of any breach, violation or nonperformance of any term or conditions
on the part of the Sublessee under this Agreement. Additionally, Sublessee
agrees to idemnify and hold Sublessor and Landlord harmless from all claims,
actions, damages, liabilities, and expenses asserted against the Sublessor
and/or Landlord on account of injury to person or damage to property to the
extent that any such damage or injury may be caused, either proximately or
remotely, by and act or omission, whether negligent or not, of Sublessee or any
of its agents, servants, employees, contractors, patrons, or invitees (while
such invitees are on the Subleased Premises) or of any other person entering
upon the Subleased Premises under or with the expressed or implied invitation of
Sublessee, or if any such injury or damage may in any other way arise from or
out of the occupancy or use of Sublessee, its Sublessor and Landlord of the
Subleased Premises only, and no right of action shall accrue under this
paragraph to any third party by of subrogation or otherwise. Notwithstanding
anything to the contrary contained in the Sublease, Sublessor will indemnify,
defend and hold Sublessee harmless from claims for personal injury, death, or
property damages occurring in or about the Subleased Premises or the Premises
which are caused by the negligence or willful misconduct of Sublessor, its
agents, employees, contractors, or invitees.
8. Assignment. No assignment of subletting of the Subleased Premises or
any part thereof shall be made by Sublessee without Sublessor's prior written
consent, which shall not be unreasonably withheld, conditioned or delayed.
9. Consent. The parties hereto acknowledge that, pursuant to the
provisions of Paragraph 8 of the Prime Lease, any Sublease requires the prior
written consent of Landlord. Accordingly, unless Landlord shall manifest its
consent to this Sublease as designated below, this Sublease shall terminate by
Sublessor at any time if required by the Landlord, upon written notice from
Sublessor to Sublessee; whereupon all rights and obligations of the parties
hereunder shall terminate.
10. Tenant Improvements. Sublessor has made no representations or
warranties as to the condition of the Premises. Sublessee accepts the Premises
in its current "as-is" condition.
IN WITNESS HEREOF, the Sublessor and Sublessee have executed this
Sublease as of the date and year first written above.
SUBLESSOR: SUBLESSEE:
Brokers National Life Assurance Company Publishers Resource Group, Inc.
By: /s/ Barry N. Shamas By: /s/ Aileen H. Krassner
Name: Barry N. Shamas Name: Aileen H. Krassner
Title:Executive V.P. Title: President
LANDLORD'S CONSENT
The foregoing Sublease Agreement has been consented to by the Landlord
this day of .
LANDLORD:
By: /s/ Peter B. Hall
Name: Peter B. Hall
Its: President
<PAGE>
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<ARTICLE> 7
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<RESERVE-OPEN> 1368630
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