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, 1999 [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 1999 were $30,533,144.
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 31, 1999, can not be determined due to the
limited trading in the Company's stock throughout the year (see also Item 5 of
Form 10-KSB regarding the limited trading market for the Company's shares).
As of December 31, 1999, the Registrant had outstanding 23,173,149 shares
(excluding treasury shares) of Common Stock, no par value (which includes
10,703,790 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__
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<PAGE>
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I-8
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 owns (directly or indirectly) 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.
- ------------------------------------------ ----------------------------------
| | | |
| BNL Financial Corporation |----|Consumer Protective Association |
| | | (Inactive Association) |
- ------------------------------------------ ----------------------------------
|
- ------------------------------------------
| |
| BNL Equity Corporation |
| |
- ------------------------------------------
|
- -------------------------------------------
| |
| Brokers National Life Assurance Company |
| |
- -------------------------------------------
|
- -------------------------------------------
| |
| BNL Brokerage Corporation |
| |
- -------------------------------------------
Industry Segments
The operations of the Company are conducted through BNLAC, which in 1999 sold
life and accident and health insurance policies in 26 states. In 1987 BNLAC
began selling insurance in Iowa, and in 1992, BNLAC expanded its sales to other
states through the acquisition of Statesman Life Insurance Company. 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 requirements from $1,200,000 to $2,400,000.
Since our sales in Washington were less than 1% of total premium, the Company
decided to voluntarily withdraw 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 marketing of specialized or "niche" life and health insurance
products including: accidental death life insurance, a payroll deductible
10-year level term policy, level term family insurance policy, hospital
indemnity policy and dental insurance. These products are all designed to be
sold on a group or payroll deduction basis.
Statistics by line of business are as follows (gross before reinsurance):
<TABLE>
<CAPTION>
1999 1998
----------------- ---------------
I. Annualized Premiums and Annuity Deposits In Force:
- -----------------------------------------------------
<S> <C> <C>
Ordinary Life Insurance $306,000 $340,000
Individual Annuities(1) 179,000 216,000
Group Dental Insurance 32,233,000 24,778,000
Miscellaneous A&H insurance 93,000 84,000
----------------- ---------------
Total $32,811,000 $25,418,000
================= ===============
II. Collected Premiums and Annuity Deposits:
Ordinary Life Insurance $324,000 $368,000
Individual Annuities(1) 155,000 258,000
Group Dental Insurance 29,049,000 20,294,000
Miscellaneous A&H insurance 109,000 61,000
----------------- ------------------
Total $29,637,000 $20,981,000
================= ==================
III. Face Value of Insurance:
Ordinary Life Insurance $31,000,000 $35,000,000
Accidental Death Insurance 104,000,000 111,000,000
----------------- ------------------
Total $135,000,000 $146,000,000
================= ==================
<FN>
(1) Classified as a deposit liability on the financial statements.
</FN>
</TABLE>
Premiums collected by state are reflected in the following table:
<TABLE>
<CAPTION>
Group Dental &
State Life Premiums Annuity Accidental Death Total
- ----------------------- -------------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Georgia 10,178 - 2,359,516 2,369,694
Michigan 4,553 - 2,333,865 2,338,418
Minnesota 7,852 - 2,258,200 2,266,052
Indiana 10,656 - 2,169,276 2,179,932
Arkansas 26,991 - 2,132,431 2,159,422
Utah 3,078 - 2,004,994 2,008,072
Iowa 222,067 154,816 1,512,079 1,888,962
Mississippi 3,511 - 1,509,040 1,512,551
All Other States 34,857 - 12,879,215 12,914,072
-------------------- -------------------- ---------------------- --------------------
Total $323,743 $154,816 $29,158,616 $29,637,175
==================== ==================== ====================== ====================
</TABLE>
On December 31, 1999, BNLAC had 3,418 general agents and brokers in 26 states to
market its policies compared to 2,847 agents and brokers on December 31, 1998.
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
normally two percent higher in the first year and then level in all subsequent
years. These practices are common in the industry. There is considerable
competition for insurance agents and BNLAC competes with larger,
well-established life insurance companies for the services of agents. BNLAC
believes it is able to attract competent agents by offering competitive
compensation, efficient service to agents and customers and by developing
products to fill special needs within the marketplace.
BNLAC also collects overwrite commissions on sales of vision insurance policies
issued by Vision Service Plan and marketed by the BNLAC's agency force.
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 premium 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. Business Mens
Assurance Company was rated "A" (Excellent) by AM Best Company for 1998.
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
1999 $31,213,000 $11,371,000 $9,986,000 $29,828,000
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
Accidental Death Insurance
1999 $ 99,000,000 $ 93,425,000 $0 $5,575,000
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
</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 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.
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>
1999 $29,049,000 $0 $29,049,000 $0
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
</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>
1999 $20,694,000 $0 $20,694,000 72.4%
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
</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").
Because 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
- -------------- --------------- ------------------
1999 $755,552 6.2%
1998 777,937 6.6
1997 790,000 7.1
1996 757,000 6.8
1995 734,000 6.6
For information concerning realized and unrealized gains and losses on
securities see Note 4 of the Notes to Consolidated Financial Statements, page
E-8.
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.
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
1998 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.
The RBC requirements provide for four different levels of regulatory attention
depending on the ratio of a company's total adjusted capital (defined as the
total of its statutory capital, surplus, asset valuation reserve and 50% of
apportioned dividends) to its RBC. The "Company Action Level" is triggered if a
company's total adjusted capital is less than 100% but greater than or equal to
75% of its RBC, or if total adjusted capital is less than 125% of RBC and a
negative trend has occurred. The trend test calculates the greater of any
decreases in the margin (i.e., the amount in dollars by which a company's total
adjusted capital exceeds its RBC) between the current year and the prior year
and between the current year and the average of the past three years, and
assumes that the decrease could occur again in the coming year. If a similar
decrease in the margin in the coming year would result in an RBC of less than
95%, then Company Action Level would be triggered. At the Company Action Level,
a company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. The
"Regulatory Action Level" is triggered if a company's total adjusted capital is
less than 75% but greater than or equal to 50% of its RBC. At the Regulatory
Action Level the regulatory authority will perform a special examination of the
company and issue an order specifying corrective actions that must be followed.
The "Authorized Control Level" is triggered if a company's total adjusted
capital is less than 50% but greater than or equal to 35% of its RBC, and the
regulatory authority may take any action it deems necessary, including placing
the company under regulatory control. The "Mandatory Control Level" is triggered
if a company's total adjusted capital is less than 35% of its RBC, and the
regulatory authority is mandated to place the company under its control.
Calculations using the NAIC formula at December 31, 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 29, 2000, BNLAC had four executive officers, 41 full-time
administrative personnel and 1 part-time employee. BNLAC's administrative staff
supervises services for the agency force, policy underwriting, policy issuance
and service, billing and collections, life claims, accounting and bookkeeping,
preparation of reports to regulatory authorities and other matters. The Company
has not experienced any work stoppages or strikes and considers its relations
with its employees and agents to be excellent. None of the Company's employees
is presently represented by a union. BNLAC uses a third party administrator to
process dental claims.
ITEM 2. PROPERTIES
Neither the Company, BNLE or BNLAC own any real estate.
BNLAC leases 288 square feet of office space in Des Moines, IA at a rental of
$633 per month ($7,601 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.
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.
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. On February 10, 2000 the
Arkansas Supreme Court affirmed the class certification and held that the trial
court had subject matter jurisdiction of this case. The Arkansas Supreme Court
granted the Company's motion to stay the mandate while the Company appeals the
class certification to the United States Supreme Court.
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 overturn the action is successful, the Company's potential liability, if any,
would be limited to the named plaintiffs, Myra Jo Pearson, Paul Pearson and
James Stillwell. 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 June 17, 1999 in Little
Rock, Arkansas. 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>
<S> <C> <C> <C> <C> <C>
Wayne E. Ahart 12,528,877 Hayden Fry 12,523,203 C. James McCormick 12,525,103
C. Donald Byrd 12,529,879 John Greig 12,524,101 Robert R. Rigler 12,523,603
Kenneth Tobey 12,528,877 Roy Keppy 12,525,103 Chris Schenkel 12,525,103
Barry N. Shamas 12,531,079 Thomas Landry 12,523,603 L.Stanley Schoelerman 12,533,083
Cecil Alexander 12,525,103 Roy Ledbetter 12,533,083 Orville Sweet 12,533,083
Richard Barclay 12,533,083 John E. Miller 12,533,083
Eugene A. Cernan 12,525,103 James A. Mullins 12,533,083
</TABLE>
A total of 91,768 shares were voted against all directors.
The shareholders ratified the selection of Smith, Carney & Co., as the
Corporation's independent auditors for the fiscal year 1999. 12,458,631 shares
were voted in favor; 28,350 were voted against; and 59,404 shares abstained.
<PAGE>
================================================================================
================================================================================
II-3
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market for Stock
During 1999 the stock of the Company was traded on a workout basis. There has
been a limited trading market for the Company's securities during 1999. The
stock is not traded on any recognized market.
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 were released
from escrow on August 1, 1999.
Holders
As of December 31, 1999, there were 4,990 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, 1999, the Company had liquid assets of $1,419,618 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 1999, BNLAC collected approximately $30 million of
premiums and annuity deposits (gross before reinsurance) and $775,148 of
investment income. Other sources of cash flow are from the sale of investments
which produced gains of $27,745 in 1999 and overwrite commissions of $186,393 on
vision products.
The Company's investments are primarily in U.S. Government and Government
Agencies ($9,795,478) and other investment grade bonds ($549,367) 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, 1999 BNLAC had statutory capital and surplus
of $4,130,351. 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.
Results of Operations
Premium income for 1999 was $29,730,251 compared to $21,054,713 in 1998, an
increase of $8,675,538. This increase is due to the increase in group dental
insurance premiums written as the Company continues to expand its market share.
Net investment income was $775,148 in 1999 and $807,342 in 1998. The decrease
was due to calls on government agency bonds and the maturity of U.S. Treasury
bonds with higher yields than the bonds purchased to replace them.
Realized gains were $27,745 in 1999 compared to $57,563 in 1998. The realized
gains in 1999 and 1998 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 $83,703 in
1999 compared to $39,224 for the same period in 1998. The increase of $44,479 is
primarily due to an increase in unearned premium on the group dental insurance.
Policy benefits and other insurance costs were $24,954,260 in 1999 compared to
$18,971,791 in 1998. The increase was due to an increase in claims and
commissions resulting from the increase in insurance business in force. The
claims ratio on dental insurance, which represents the ratio of claims incurred
to premium earned, was 72.4% for 1999 compared 78.4% in 1998.
Amortization of deferred policy acquisition costs was $27,732 in 1999 and
$53,778 in 1998. The decrease was the result of an adjustment to the
amortization schedule in 1998 to reflect the increase in lapsed life policies.
Operating expenses were $4,390,661 in 1999 and $3,431,929 in 1998. This increase
was primarily due to increases in claims administrative expense, payroll, and
office rent - all of which relate to the increased volume of insurance in force,
and legal expenses. Despite this increase, the amount of such expenses expressed
as a percentage of premiums (on a statutory basis) declined from 14.5% in 1998
to 14.2% in 1999.
Taxes, other than on income were $869,809 for 1999 and $669,648 for 1998. The
increase was due to the premium taxes on the increased insurance premiums
collected.
The consolidated net operating gain for 1999 was $206,979 compared to a loss of
$1,246,752 in 1998. The positive turnaround was primarily due to the decrease in
the claims ratio on the group dental business. Modifications to rates and
benefits of the dental policies, which were implemented prior to and during
1999, have been effective in reducing the claims ratio. The rate increases on
group dental insurance has not had a negative impact on business in force or new
business written. During 1999, new dental business written increased 3% and
annual dental premiums in force increased from $24,778,000 at December 31, 1998
to $32,233,000 as of December 31, 1999, a 30% increase.
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, 1999 other comprehensive loss was
$1,105,812 compared to $37,760 income for the same period in 1998. The loss in
comprehensive income in 1999 was due to a rise in interest rates that
substantially lowered the market value of the Company's bond portfolio. Although
the bonds are marked available for sale, the Company has sufficient working
capital and other sources of funds available which should not make it necessary
to sell any bonds at a loss.
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages E-1 through E-14 attached to this Report is hereby
incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------------
None
<PAGE>
================================================================================
III-6
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 59 1984 Chairman of the Board and Director
C. Donald Byrd 58 1984 Vice Chairman of the Board and Director
Kenneth Tobey 41 1994 President and Director
Barry N. Shamas 52 1984 Executive Vice President, Treasurer and
Director
Cecil Alexander 63 1994 Director
Richard Barclay 62 1994 Director
Eugene A. Cernan 65 1994 Director
Hayden Fry 70 1984 Director
John Greig 64 1984 Director
Roy B. Keppy 76 1984 Director
Tom Landry 74 1984 Director
Roy Ledbetter 69 1994 Director
John E. Miller 70 1994 Director
James A. Mullins 65 1984 Director
C. James McCormick 74 1984 Director
Robert R. Rigler 76 1989 Director
Chris Schenkel 75 1994 Director
L. Stan Schoelerman 74 1984 Director
Orville Sweet 75 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.
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 from 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, 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
the 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 the 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, Explorer's Club, International MicroSpace; and Johnson
Engineering Corporation. Captain Cernan is also on the President's Engineering
Committee, Purdue University and is a member of the Board of Trustees of the U.
S. Naval Aviation Museum, NFL Alumni and Major League Baseball Players Alumni.
In addition, Captain Cernan has served as a consultant commentator to ABC News.
He served on the Board of AIC and FSL from 1980 and 1983, respectively, to 1987.
Hayden Fry was Head Football Coach at the University of Iowa from 1979 to 1999,
now retired. 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 was a
member of the National Board of Trustees of the Fellowship of Christian
Athletes. He served 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 was 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 Jaycees' 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; 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 Association. 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 Capitol
Cities - ABC Sports. From 1964 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.
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> <C>
Wayne E. Ahart, CEO 1999 $125,000 $0 $9,416 $0 - $0 $0
" 1998 $125,000 $0 $8,605 $0 - $0 $0
" 1997 $125,000 $0 $8,927 $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 1999 and 1998 the Company granted 185,150 and
255,575 stock options respectively, with an exercise price of $.50 per share. At
December 31, 1999, there were 750,500 options outstanding. No options were
exercised in 1999 or 1998. Under the fair value method, total compensation
recognized for grant of stock options was $0. The fair value of options granted
is estimated at $600 and $1,650 in 1999 and 1998 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 12% and no expected dividends due to statutory
limitations. The estimated weighted average remaining life of the options is 1.9
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 was granted in 1999 and 1998.
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, 1999, 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, 1999:
<TABLE>
<CAPTION>
Amount and Nature of
Title of Class Name and Address of Beneficial Owner Beneficial Ownership Percent of Class as of
(1) December 31, 1999
- ------------------- -------------------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
Common Stock Wayne E. Ahart 4,845,505(2)(3) 20.91%
#14 Club Estates Parkway
Austin, Texas 78738
Common Stock Barry N. Shamas 2,801,816(5) 12.09%
1095 Hidden Hills Dr.
Dripping Springs, Texas 78620
Common Stock Universal Guaranty Life Insurance 2,216,776(2) 9.57%
Company
5250 S. Sixth St. Rd.
Springfield, Illinois 62705
Common Stock C. Donald Byrd 1,452,719(4) 6.27%
631 47th Street
W. Des Moines, IA 37076
<FN>
(1)To the Company's knowledge, all shares are beneficially owned by, and
the sole voting and investment power is held by the persons named,
except as otherwise indicated.
(2)Wayne E. Ahart and Commonwealth Industries, Inc. ("CIC"), a parent of
Universal Guaranty Life Insurance Company ("UGL"), have agreed: (a) that
if Mr. Ahart sells his shares of the Company to a third party, Mr. Ahart
or the third party must also purchase UGL's shares of the Company at the
same price and on the same terms; and (b) in the event UGL receives a
bona fide offer to purchase its shares of the Company, Mr. Ahart has a
first right of refusal to purchase such shares on the same terms and
conditions.
(3)Includes 2,400,000 shares held in the name of National Iowa Corporation
and 2,178,926 shares held in the name of Arkansas National Corporation,
both of which are controlled by Mr. Ahart.
(4)All of Mr. Byrd's shares are subject to a right of first refusal of
the Company to acquire said shares on the same terms and conditions as
any proposed sale or other transfer by Mr. Byrd.
(5)Includes 1,400,000 shares held in the name of Life Industries of
Iowa, Inc., and 1,335,171 shares held in the name of Arkansas
Industries Corporation, both of which are controlled by Mr. Shamas.
</FN>
</TABLE>
Security Ownership of Management
The following table sets forth, as of December 31, 1999 certain information
concerning the beneficial ownership of the Company's Common Stock by each
director of the Company and by all directors and officers as a group:
<TABLE>
<CAPTION>
Amount and Nature of Percent of Class as of
Title of Class Name of Beneficial Owner Beneficial Ownership(1) December 31, 1999
- ----------------------- ----------------------------------- ------------------------- ---------------------------
<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 46,088 .20%
" 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) 10,649,947 45.96%
- ----------------------- -- -----------------------------------
<FN>
(1) To the Company's knowledge, all shares are beneficially owned by 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.
</FN>
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
<PAGE>
================================================================================
IV-4
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The information required by this section is set forth on page E-2 of this Report
and is incorporated herein by reference.
2. Financial Statement Schedules Included in item 14(a)
Page Number Form
10-KSB
----------------
Report of Independent Accountants on Financial Statement Schedule E-14
3. Exhibits
<TABLE>
<CAPTION>
No. Description Page or Method of Filing
- ------------- -------------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of BNL Financial Incorporated by reference to Exhibits 3.1 of the
Corporation, dated January 27, 1984 and Amendment to Company's Annual Report on Form 10-K for the period
Articles of Incorporation of BNL Financial ending December 31, 1993.
Corporation, dated November 13, 1987.
3.2 Bylaws of BNL Financial Corporation Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement No. 33-70318
4.1 Instruments defining the rights of security holders, Incorporated by reference to Exhibit 4 of the
including indentures Company's Registration Statement No. 2-94538 and
Exhibits 3.5 and 4 of Post-Effective Amendment No. 3
thereto.
4.2 Articles of Incorporation of BNL Financial Incorporated by reference to Exhibits 4.2 of the
Corporation, dated January 27, 1984 and Amendment to Company's Annual Report on Form 10-KSB for the period
Articles of Incorporation on BNL Financial ending December 31, 1998.
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 Office lease assumption and assignment agreement dated Incorporated by reference to Exhibits 10.9 of the
September 1, 1998, between Brokers National Life Company's Annual Report on Form 10-KSB for the period
Assurance Company and Walgreen Company and Charles H. ending December 31, 1998.
Morrison for premises in Austin.
10.4 Sublease dated January 20, 1999 between Brokers Incorporated by reference to Exhibits 10.10 of the
National Life Assurance Company and PRG, Inc. Company's Annual Report on Form 10-KSB for the period
ending December 31, 1998.
11 Statement re computation of per share earnings. Reference is made to the explanation of the
computation of per share earnings as shown in Note 1
to the Notes to Consolidated Financial Statements
filed herewith under item 14(a)(1) above which clearly
describes the same.
12 Statements re computation of ratios. Not applicable.
16 Letter Re Change in Certifying Accountant. Filed with Form 8-K dated September 14, 1995.
22 Subsidiaries of Registrant. Filed herewith.
</TABLE>
(b) Reports on Form 8-K
The Company did not file reports on Form 8-K for the period covered by this
report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 30th day of March
2000.
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 Chairman of the Board, Director 3/30/00
------------------
/S/ C. Donald Byrd Vice Chairman of the Board and Director 3/14/00
------------------
/S/ Kenneth Tobey President and Director 3/14/00
-----------------
/S/ Barry N. Shamas Executive V.P., Treasurer and Director 3/30/00
-------------------
/S/ Hayden Fry Director 3/30/00
----------------
/S/ Roy Keppy Director 3/7/00
---------------
/S/ C. James McCormick Director 3/7/00
----------------------
/S/ James A. Mullins Director 3/8/00
--------------------
/S/ Robert R. Rigler Director 3/12/00
--------------------
/S/ Stanley Schoelerman Director 3/20/00
-----------------------
/S/ Orville Sweet Director 3/06/00
------------------
/S/ Cecil Alexander Director 3/05/00
-------------------
/S/ Richard Barclay Director 3/08/00
-------------------
/S/ Eugene A. Cernan Director 3/07/00
--------------------
/S/ Roy Ledbetter Director 3/05/00
-----------------
/S/ John E. Miller Director 3/08/00
------------------
/S/ Chris Schenkel Director 3/08/00
------------------
</TABLE>
<PAGE>
BNL Financial Corporation - 1998 Form 10-KSB
================================================================================
================================================================================
E-1
ANNUAL REPORT ON FORM 10-KSB
ITEM 14 (a) AND 14 (d)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
DES MOINES, IOWA
- -------------------------------------------------------------------------------
Financial Statements Required by Item 8
<TABLE>
<CAPTION>
Page Number of 1999
Form 10-KSB
-------------------------
<S> <C>
Consolidated Balance Sheet, December 31, 1999 and 1998 E-2
Consolidated Statement of Operations and Comprehensive Income for the years ended December 31, E-3
1999 and 1998
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1999 E-4
and 1998
Consolidated Statement of Cash Flows for the years ended December 31, 1999 and 1998 E-5
Notes to Consolidated Financial Statements E-6
Report of Independent Accountants on Financial Statements E-14
</TABLE>
<PAGE>
===============================================================================
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS
December 31, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Cash and cash equivalents $ 1,419,619 $ 2,426,963
Investments available for sale, at fair value (amortized cost
$11,144,220; 9,692,368; respectively ) 10,344,845 10,006,208
Investment in equity securities, common stock
at market (cost $108,123) 3,312 2,573
------------------ ------------------
Total Investments, Including Cash and
Cash Equivalents 11,767,776 12,435,744
Accrued investment income 193,337 195,652
Furniture and equipment, net 438,147 325,717
Deferred policy acquisition costs 352,186 379,917
Premium and policy loans 135,680 132,050
Receivable from reinsurer 40,051 33,531
Premiums due and unpaid 760,941 611,786
Other assets 261,282 213,379
------------------ ------------------
Total Assets $13,949,400 $14,327,776
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for future policy benefits $ 1,488,857 $ 1,398,633
Policy claims payable 2,729,175 2,508,175
Annuity deposits 2,982,839 3,259,195
Deferred annuity profits 500,000 521,212
Premium deposit funds 118,703 114,841
Supplementary contracts without life contingencies 105,120 129,944
Advanced and unallocated premium 714,482 352,999
Commissions payable 410,903 310,303
Other liabilities 594,187 528,507
------------------ ------------------
Total Liabilities 9,644,266 9,123,809
------------------ ------------------
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 (loss) (897,523) 208,289
Accumulated deficit (9,507,707) (9,714,686)
Treasury stock, at cost, 138,795 shares (64,105) (64,105)
------------------ ------------------
Total Shareholders' Equity 4,305,134 5,203,967
------------------ ------------------
Total Liabilities and Shareholders' Equity $13,949,400 $14,327,776
================== ==================
- ----------------------------------------------------------------------------------------------------------------------------------
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, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Income:
Premium income $29,730,251 $21,054,713
Net investment income 775,148 807,342
Realized gains 27,745 57,563
------------------ -------------------
Total Income 30,533,144 21,919,618
------------------ -------------------
Expenses:
Increase in liability for future policy benefits 83,703 39,224
Policy benefits and other insurance costs 24,954,260 18,971,791
Amortization of deferred policy acquisition costs 27,732 53,778
Operating expenses 4,390,661 3,431,929
Taxes, other than on income 869,809 669,648
------------------ -------------------
Total Expenses 30,326,165 23,166,370
------------------ -------------------
Income (Loss) from Operations before
Income Taxes 206,979 (1,246,752)
Provision for income taxes - -
------------------ -------------------
Net Income (Loss) $206,979 ($1,246,752)
================== ===================
Net income (loss) per common share (basic and diluted) $0.01 $(0.05)
================== ===================
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 gain (loss) arising
during period $(1,078,067) $ 95,323
Reclassification adjustment for loss included
in net income (27,745) (57,563)
------------------ -------------------
Other comprehensive income (loss) (1,105,812) 37,760
------------------ -------------------
Comprehensive Loss ($898,833) ($1,208,992)
================== ===================
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
E-3
</TABLE>
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Common Stock Additional Other
------------------------------- Paid-In Accumulated Comprehensive Treasury
Shares Amount Capital Deficit Income Stock
-------------- ------------- --------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 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)
============== ============= ============== ================= ============== ============
Accumulated other
comprehensive loss - - - - (1,105,812) -
Net income - - - 206,979 - -
-------------- ------------- -------------- ----------------- -------------- -----------
Balance, December 31, 1998 23,311,944 $466,239 $14,308,230 ($9,507,707) $(897,523) ($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, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 206,979 ($1,246,752)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Realized gains on investments (28,399) (57,563)
Realized loss on sale of furniture and equipment 654 -
Depreciation 133,364 96,670
Amortization of deferred acquisition costs,
Organization costs and state licenses acquired 30,841 3,109
Accretion of bond discount 285 (3,647)
Change in assets and liabilities:
Increase in accrued investment income 2,315 29,390
Increase in receivable from reinsurer (6,520) (6,854)
Increase in premiums due and unpaid (149,155) (255,993)
Increase in liability for future policy benefits 90,224 46,078
Increase in policy claims payable 221,000 1,139,545
Decrease in annuity deposits and deferred profits (297,568) (171,654)
Increase (decrease) in premium deposit funds 3,862 (12,856)
Increase in advanced and unallocated premium 361,483 24,185
Increase in commissions payable 100,599 125,626
Other, decrease 11,029 215,667
--------------- ---------------
Net Cash Provided by (Used In) Operating Activities 680,993 (75,049)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of investments 420,000 249,000
Proceeds from maturity or redemption of investments 2,562,937 10,427,683
Proceeds from sale of furniture and equipment 4,000 -
Purchase of furniture and equipment (250,449) (163,012)
Purchase of fixed maturity securities (4,400,000) (8,800,110)
--------------- ---------------
Net Cash Provided By (Used In) Investing Activities (1,663,512) 1,713,561
--------------- ---------------
Cash flows from financing activities:
Net receipts (payments)
on supplementary contracts (24,825) 73,912
--------------- ---------------
Net Cash Provided By (Used In) Financing Activities (24,825) 73,912
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,007,344) 1,712,424
Cash and cash equivalents, beginning of period 2,426,963 714,539
--------------- ---------------
Cash and cash equivalents, end of period $1,419,619 $2,426,963
=============== ===============
- -----------------------------------------------------------------------------------------------------------------------------------
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 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 26 states as
of December 31, 1999. See Note 2. 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 1999 and 1998.
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 other short-term securities and US Treasury Bills.
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 1999 or 1998.
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 $560,184 and $473,767 at December 31, 1999 and
1998, respectively. Depreciation expense was $133,364 and $96,670 for the years
ended December 31, 1999 and 1998, respectively.
<PAGE>
E-6
1. Summary of Significant Accounting Policies (continued):
------------------------------------------------------
Other assets include agents' balances of $57,808 and $47,816 at December 31,
1999 and 1998, respectively, after reduction for allowance of doubtful accounts.
Reductions in the allowance account were a credit to bad debt expense recorded
in operations of ($9,000) and ($13,389) for the years ended December 31, 1999
and 1998, 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, 1999 and 1998.
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.
Net gain (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, 1999 and 1998, shareholders' equity includes approximately
$3,876,000 and $4,630,000 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 one percent of gross income in 1999. 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.
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 (grandfathering). 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
requirements from $1,200,000 to $2,400,000. Insurance sales in Washington were
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:
December 31,
-----------------------------------------
1999 1998
---- ----
Capital and surplus $4,130,351 $3,995,706
========== ==========
Net income (loss) $335,458 ($999,128)
======== ==========
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, 1999 December 31, 1998
-------------------------------------- --------------------------------------
Income/Loss Capital and Surplus Income/Loss Capital and Surplus
--------------- --------------------- -------------- ----------------------
<S> <C> <C> <C> <C>
Consolidated Reporting Under
Generally Accepted Accounting Principles $206,979 $4,305,135 ($1,246,752) $5,203,966
Attributable to Parent Company and BNL Equity 128,529 428,703 355,625 573,992
----------------- ---------------------- ----------------- ----------------------
Brokers National Life Assurance Company 335,508 3,876,432 (891,127) 4,629,974
----------------- ---------------------- ----------------- ----------------------
Deferred Acquisition Costs $27,732 $(352,185) $53,778 $(379,917)
Reserve and Premium Adjustments (121) 154,507 (27,103) 158,229
Interest Maintenance Reserve/AVR (3,829) (388,472) (32,547) (379,454)
Unrealized Appreciation (Depreciation)
of Securities - 785,038 - (307,667)
Annuity Deposits and Related Adjustments (21,209) 499,999 (150,845) 521,211
Other (2,623) (444,968) 48,716 (246,670)
----------------- ---------------------- ----------------- ----------------------
BNLAC Statutory Basis $335,458 $4,130,351 ($999,128) $3,995,706
================= ====================== ================= ======================
</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, 1999 were approximately
$9,700,000 for income tax reporting. The net operating loss carryovers expire in
years 2000 - 2012. The Company and its Subsidiaries will file separate income
tax returns for 1999.
A deferred tax asset of $3,500,000 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 $3,500,000
against the deferred tax asset. This represents a net decrease of $70,000 in the
deferred tax asset for 1999 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, 1999 Amortized Cost Gains Losses Market Value
- ----------------- --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations of
US government corporations and agencies $10,524,992 $ 88,021 ($828,099) $9,784,914
Obligations of states and political subdivisions 297,871 - (19,051) 278,820
Corporate securities 211,000 - (25,003) 185,997
Mortgage-backed securities
GNMA 10,257 307 - 10,564
Public utility bonds 100,000 - (15,450) 84,550
--------------- -------------- ------------- --------------
Totals $11,144,120 $ 88,328 ($887,603) $10,344,845
=============== ============== ============= ==============
E-8
<PAGE>
4. Investments (continued):
------------------------
Gross
Unrealized Unrealized Estimated
December 31, 1998 Amortized Cost Gains Losses Market Value
- ----------------- --------------- -------------- ------------- --------------
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
=============== ============== ============= ==============
</TABLE>
The amortized cost and estimated fair value of investments in fixed maturity
securities at December 31, 1999 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.
December 31, 1999
----------------------------------
Estimated
Amortized Cost Market Value
--------------- ---------------
Due in one year or less $ 149,911 $ 150,150
Due after one year through five years 1,029,383 992,203
Due after five years through ten years 2,097,103 1,932,760
Due after ten years 7,857,466 7,259,168
--------------- ---------------
11,133,863 10,334,281
Mortgage-backed securities 10,257 10,564
--------------- ---------------
$11,144,120 $10,344,845
=============== ===============
Proceeds from sales and maturities of investments in fixed maturity securities
for the years ended December 31, 1999 and 1998 were $2,982,927 and $10,676,683,
respectively. Gross gains of $28,119 and $57,618 and gross losses of $374 and
$55 were realized on those December 31, 1999 and 1998 sales, respectively.
Investment in equity securities at December 31, 1999 and 1998 represents common
stock investments as follows:
1999 1998
---- ----
Cost Market Value Cost Market Value
------- ------------- --------- -------------
Banks, trusts and
Insurance companies $2 ,423 $2,062 $2,423 $813
Industrial, savings
And loans and other 105,700 1,250 105,700 1,760
-------- ----------- ---------- -------------
$108,123 $3,312 $108,123 $2,573
========= =========== ========== =============
E-9
<PAGE>
4. Investments (continued):
------------------------
Net investment income for the years ended December 31, 1999 and 1998 is as
follows:
December 31,
-------------------------------
1999 1998
------------- -------------
Interest on debt securities and
cash investments $792,116 $827,902
Dividends on equity securities - -
------------- -------------
792,116 827,902
Investment expenses (16,968) (20,560)
------------- -------------
Net investment income $775,148 $807,342
============= =============
Net realized gains and losses are summarized below:
December 31,
------------------------------
1999 1998
------------- -------------
Debt securities $27,745 $57,563
Equity securities - -
------------- -------------
$27,745 $57,563
============= =============
Included in 1999 and 1998 realized gains on debt securities is $2,968 and
$1,815, 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, 1999 the Company has received a total of $751,863 from the
rehabilitation plan.
5. Fair Value of Financial Instruments
-----------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------- ---------------- ----------------
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
- ------ ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents
(Note 1) $ 1,419,619 $ 1,419,619 (a) $ 2,426,963 $ 2,426,963(a)
Investments-fixed maturity, available for sale
(Note 4 & Note 1) 10,344,845 10,344,845 (b) 10,006,208 10,006,208(b)
Investments -equity securities
(Note 4 & Note 1) 3,313 3,313 (b) 2,573 2,573(b)
Other financial instruments-Assets 329,018 329,018 (a) 327,702 327,702(a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Assets $12,096,795 $12,096,795 $12,763,446 $12,763,446
================ ================ ================ ================
E-10
<PAGE>
5. Fair Value of Financial Instruments (continued):
------------------------------------------------
1999 1998
---------------- ---------------- ---------------- ----------------
Carrying Fair Carrying Fair
Liabilities Amount Value Amount Value
- ----------- ---------------- ---------------- ---------------- ----------------
Premium deposit funds $ 118,703 $ 118,703 (a) $ 114,841 $ 114,841(a)
Supplementary contracts without life contingencies
(Note 1) 105,120 105,120 (a) 129,944 129,944(a)
Annuity deposits
(Note 1) 2,982,839 2,982,839 (a) 3,259,195 3,259,195(a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Liabilities $3,206,662 $3,206,662 $3,503,980 $3,503,980
================ ================ ================ ================
</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. Subsequent to year end the Arkansas Supreme Court affirmed
certification of the class. The Company plans to appeal that ruling to the
United States Supreme Court. 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. The
Company has expended a substantial amount to date in legal expenses. Future
litigation costs are not estimable at this time. 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:
2000 $170,000
2001 160,000
2002 153,000
2003 143,000
Thereafter 213,000
--------------
Total $839,000
==============
Related lease cost incurred for the years ended December 31, 1999 and 1998 was
$197,175 and $146,917, respectively.
The Company's wholly owned insurance subsidiary might be subject to losses
related to guaranty 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 $860,665
at December 31, 1999.
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.
1999 1998
-------------- --------------
Balance at January 1 $2,508,175 $1,368,630
Less reinsurance recoverable -- --
-------------- --------------
Net Balance at January 1 2,508,175 1,368,630
-------------- --------------
<PAGE>
E-11
7. Liability for Unpaid Claims (continued):
----------------------------------------
1999 1998
-------------- --------------
Incurred related to:
Current year $20,829,383 $16,120,733
Prior years 113,360 (42,064)
-------------- --------------
Total Incurred 20,942,743 16,078,669
-------------- --------------
Paid related to:
Current year 18,100,208 13,640,558
Prior years 2,621,535 1,298,566
-------------- --------------
Total Paid 20,721,743 14,939,124
-------------- --------------
Net Balance at December 31 2,729,175 2,508,175
Plus reinsurance recoverable - -
-------------- --------------
Balance at December 31 $2,729,175 $2,508,175
============== ==============
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 1998.
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, 1999 and 1998:
<TABLE>
December 31, 1999 Ceded To Assumed Percentage Of
- ----------------- Other From Other Amount
Gross Amount Companies Companies Net Amounts Assumed to Net
--------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Life Insurance in force (in thousands) $ 31,213 $ 11,371 $ 9,986 $ 29,828 33.5%
=============== ============= ============== ============== =============
Premiums-life insurance $ 323,302 $60,155 $ 28,617 $ 291,764 9.8%
Premiums-accident and health 29,155,507 36,057 99,146 29,218,596 0.3%
--------------- ------------- -------------- -------------- -------------
Total insurance premiums $29,478,809 $96,212 $ 127,763 $29,510,360 0.4%
=============== ============= ============== ============== =============
December 31, 1998
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%
=============== ============= ============== ============== =============
</TABLE>
E-12
<PAGE>
9. Benefit Plans for Certain Brokers/Agents and Employees
------------------------------------------------------
In 1994, the Board of Directors and shareholders 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 1999 and 1998 the Company granted 185,150 and
255,575 stock options, respectively, with an exercise price of $.50 per share.
There were 750,500 stock options outstanding at December 31, 1999. 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 $600 and $1,650 in 1999 and 1998,
respectively. These values were computed using a binomial method as prescribed
in SFAS 123 and certain assumptions include a risk free interest rate of 6.0%,
expected life of 3.0 years, expected volatility of 12% and no expected dividends
due to statutory limitations. The estimated weighted average remaining life of
the options is 1.9 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.
The Company has 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 was
granted in 1999 or 1998.
The Company has an Employee Pension Plan that is a qualified retirement plan
under the Internal Revenue Code. All employees who have attained age 21 and have
completed one year of service are eligible to contribute. Employer contributions
are discretionary and the Company did not contribute in 1999 or 1998.
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 in 1998 as a $72,104
net increase to current year income as is required by generally accepted
accounting principles. Of this current adjustment, $68,951 of the amount was
attributable to prior years.
12. Subsequent Events
-----------------
No events have occurred subsequent to the close of the books on December 31,
1999, which have a material effect on the financial condition of the Company.
E-13
<PAGE>
- --------------------------------------------------------------------------------
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
To the Board of Directors and Shareholders
BNL Financial Corporation and Subsidiaries
We have audited the accompanying Consolidated Balance Sheets of BNL Financial
Corporation and Subsidiaries as of December 31, 1999 and 1998 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, 1999 and 1998, 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 12, 2000
E-14
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<CIK> 0000757641
<NAME> BNL Financial Corporation
<CURRENCY> U.S. dollars>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 10344845
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3312
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10348157
<CASH> 1419619
<RECOVER-REINSURE> 40051
<DEFERRED-ACQUISITION> 352186
<TOTAL-ASSETS> 13949400
<POLICY-LOSSES> 4003680
<UNEARNED-PREMIUMS> 214352
<POLICY-OTHER> 3482839
<POLICY-HOLDER-FUNDS> 223823
<NOTES-PAYABLE> 0
0
0
<COMMON> 466239
<OTHER-SE> 3838895
<TOTAL-LIABILITY-AND-EQUITY> 13949400
29730251
<INVESTMENT-INCOME> 775148
<INVESTMENT-GAINS> 27745
<OTHER-INCOME> 0
<BENEFITS> 21150490
<UNDERWRITING-AMORTIZATION> 27732
<UNDERWRITING-OTHER> 3887473
<INCOME-PRETAX> 206979
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206979
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
<RESERVE-OPEN> 2508175
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 18100208
<PAYMENTS-PRIOR> 2621535
<RESERVE-CLOSE> 2729175
<CUMULATIVE-DEFICIENCY> (113360)
</TABLE>
