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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______to_____ .
Commission File No. 0-16880
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BNL FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
IOWA 42-1239454
(State of incorporation) (I.R.S. Employer Identification No.)
2100 W. William Cannon, Suite L
Austin, Texas 78745
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 383-0220
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No____
-
As of June 30, 2000, the Registrant had 23,311,944 shares of Common Stock, no
par value, outstanding.
Transitional Small Business Disclosure Format (check one) Yes___ No__X__
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<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
December 31,
ASSETS September 30, 2000 1999
(Unaudited) (Audited)
------------------------ ---------------------
Investments:
Investments available for sale, at fair value $12,090,983 $10,344,845
Equity securities, common stock 808 3,313
Cash and cash equivalents 1,070,252 1,419,618
------------------------ ---------------------
Total Investments 13,162,043 11,767,776
Accrued investment income 307,897 193,337
Furniture and equipment 403,704 438,147
Deferred policy acquisition costs 325,522 352,186
Receivable from reinsurer 40,051 40,051
Premiums due and unpaid 758,656 760,941
Deferred income tax asset 679,129 0
Other assets 383,063 396,962
------------------------ ---------------------
TOTAL ASSETS $16,060,065 $13,949,400
======================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liability for future policy benefits $1,400,604 $1,488,857
Policy claims payable 2,524,350 2,729,175
Premium deposit fund 108,406 118,703
Annuity deposits 2,797,123 2,982,839
Deferred annuity profits 496,417 500,000
Supplementary contracts without
life contingencies 86,635 105,120
Advanced and unallocated premium 412,230 714,482
Commissions payable 426,119 410,903
Other liabilities 583,266 594,187
------------------------ ---------------------
Total liabilities 8,835,150 9,644,266
------------------------ ---------------------
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) (543,272) (897,523)
Treasury stock, at cost, 138,795 shares (64,105) (64,105)
Accumulated deficit (6,942,177) (9,507,707)
------------------------ ---------------------
Total shareholders' equity 7,224,915 4,305,134
------------------------ ---------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $16,060,065 $13,949,400
======================== =====================
(See Accompanying Notes and Independent Accountants' Report)
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2
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<TABLE>
<CAPTION>
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Premium income .................................. $8,962,095 $7,410,959 $ 26,433,690 $ 21,527,171
Investment income ............................... 243,870 204,311 648,611 584,117
Realized gains on investments ................... (105,804) 17,073 (103,784) 22,556
------------- ------------ ----------- -----------
Total income ................................... 9,100,161 7,632,343 26,978,517 22,133,844
------------- ------------ ----------- -----------
EXPENSES:
Policy benefits and other insurance costs ....... 6,637,284 6,350,215 20,091,878 18,341,292
Increase in liability for future policy benefits. 8,199 (19,514) (88,253) (41,781)
Amortization of deferred policy acquisition costs 3,155 5,868 26,664 21,185
Operating expenses .............................. 1,412,158 1,103,912 4,194,585 3,137,072
Taxes, other than on income ..................... 276,589 203,323 825,506 647,094
------------- ------------ ----------- -----------
Total expenses ................................. 8,337,385 7,643,804 25,050,380 22,104,862
------------- ------------ ----------- -----------
OPERATING INCOME (LOSS)......................... 762,776 (11,461) 1,928,137 28,982
Provision for income taxes (benefits)............... (637,392) 0 (637,392) 0
------------- ------------ ----------- -----------
NET INCOME (LOSS)............................... $1,400,168 ($ 11,461) $2,565,529 $ 28,982
============= ============ =========== ===========
Net income per share ........................... $0.06 $0.00 $0.11 $0.00
============= ============ =========== ===========
Weighted average number
of shares ...................................... 23,311,944 23,311,944 23,311,944 23,311,944
============= ============ =========== ===========
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (loss) arising during
period..................................... $ 88,546 ($293,759) $250,468 ($956,041)
Reclassification adjustment for gains
included in net income..................... 105,805 (17,073) 103,784 (22,556)
------------- ------------ ----------- -----------
Other comprehensive income (loss)................... 194,351 (310,832) 354,252 (978,597)
------------- ------------ ----------- -----------
COMPREHENSIVE INCOME (LOSS).................... $1,594,519 ($322,293) $2,919,781 ($949,615)
============= ============ =========== ===========
<FN>
(See Accompanying Notes and Independent Accountants' Reports)
</FN>
</TABLE>
3
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<TABLE>
<CAPTION>
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Nine Months
Ended Ended
09/30/2000 09/30/1999
Cash flows from operating activities: (Unaudited) (Unaudited)
--------------------- ---------------------
<S> <C> <C>
Net income (loss) $2,565,529 $28,982
Adjustments to reconcile net income to net cash --------------------- ---------------------
provided by operating activities:
Realized (gain) loss on investments 104,584 (23,210)
Realized (gain) loss on sale of furniture and equipment (800) 654
Depreciation 93,948 106,409
Amortization of deferred acquisition
costs and state licenses acquired 28,996 23,517
Accretion of bond discount 1,373 357
Change in assets and liabilities:
Increase in accrued investment income (114,560) (72,082)
(Increase) decrease in premiums due and unpaid 2 285 (144,162)
Increase (decrease) in premium deposit fund (10,297) 13,972
Decrease in annuity deposits and deferred profits (189,299) (266,274)
Decrease in liability for future policy benefits (88,253) (41,781)
Decrease in policy claims payable (204,825) (73,000)
Increase (decrease) in advanced and unallocated premium (302,252) 252,343
Increase in commissions payable 15,216 54,383
Increase in deferred tax asset (679,129) 0
Other net 633 (112,378)
--------------------- ---------------------
Total adjustments (1,342,380) (281,252)
--------------------- ---------------------
Total cash provided by (used in) operating activities 1,223,149 (252,270)
--------------------- --------------------
Cash flows from investing activities:
Sales of debt securities 452,249 2,673,446
Sales of furniture and equipment 800 4,000
Purchase of furniture and equipment (59,506) (238,786)
Purchase of fixed maturity securities (1,947,572) (4,395,415)
--------------------- ---------------------
Net cash provided by (used in) investing activities (1,554,029) (1,956,755)
--------------------- ---------------------
Cash flows from financing activities:
Net payments on supplementary contracts (18,486) (18,826)
--------------------- ---------------------
Net cash (used in) financing activities (18,486) (18,826)
--------------------- ---------------------
Net increase (decrease) in cash and cash equivalents (349,366) (2,227,851)
Cash and cash equivalents, beginning of year 1,419,618 2,426,963
--------------------- ---------------------
Cash and cash equivalents, end of period $1,070,252 $ 199,112
===================== =====================
(See Accompanying Notes and Independent Accountants' Report)
</TABLE>
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1.
The accompanying Consolidated Financial Statements (unaudited) as of September
30, 2000 and for the quarter ended September 30, 2000 have been reviewed by
independent certified public accountants. The accompanying Consolidated
Financial Statements (unaudited) for the period ended September 30, 1999 have
not been reviewed by independent certified public accountants. In the opinion of
management, the aforementioned financial statements contain all adjustments
necessary to present fairly the financial position as of September 30, 2000, and
the results of operations for the periods ended September 30, 2000 and September
30, 1999, and the cash flows for the periods ended September 30, 2000 and
September 30, 1999.
The statements have been prepared to conform to the requirements of Form 10-QSB
and do not necessarily include all disclosures required by generally accepted
accounting principles (GAAP). The reader should refer to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999, previously filed
with the Commission, for financial statements for the year ended December 31,
1999, prepared in accordance with GAAP. Net income per share of common stock is
based on the weighted average number of outstanding common shares.
Note 2.
The dental claims loss ratio was 64.9% during the first nine months of 2000
compared to 72.9% for the same period in 1999. The decrease is in large part due
to management's continuing efforts to control the claims loss ratio through rate
strategies, modification of benefits, use of dental PPO networks and changes in
marketing strategies. However, part of the decline in the loss ratio is due to
an approximate $650,000 over estimation of the claims liability at December 31,
1999, which had the effect of reducing claims expense in 2000. Due to the
monthly fluctuation in claims received and the lag time in receiving the claims,
this accrual is difficult to estimate.
Note 3.
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 filed a petition for Writ of Certiorari
with the United States Supreme Court. On October 2, 2000, the petition was
denied. In due course, the case will proceed in the trial court. The Company
expects to obtain a favorable judgment in the case and believes the action is
frivolous and will both vigorously defend and seek redress for harm caused by
the lawsuit to the Company. 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 costs are not
estimable at this time.
Note 4.
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.
In the quarter ended September 30, 2000 the Company reduced the valuation
allowance against its deferred tax asset and recorded a net deferred tax asset
of $679,129. This reflects management's estimate of the future benefit that will
be realizable from use of approximately $7,600,000 in loss carryforwards that
expire in various amounts between years 2001 - 2012. Realization is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforward. Although realization is not assured, management believes it is
more likely than not that all of the net deferred tax asset will be realized.
However, the amount of the deferred tax asset considered realizable could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. Recording the deferred tax asset reduces the
current federal tax expense of $41,737, by a credit amount of $679,129, for a
net federal tax benefit of $637,392 at September 30, 2000.
5
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INDEPENDENT ACCOUNTANTS' REPORT
To The Board of Directors
BNL Financial Corporation
We have reviewed the accompanying Consolidated Balance Sheet of BNL Financial
Corporation and Subsidiaries as of September 30, 2000 and the related
Consolidated Statements of Income and Comprehensive Income and Cash Flows for
the three-month and nine-month period ended September 30, 2000. These financial
statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the Consolidated Balance Sheet of BNL Financial Corporation and
Subsidiaries as of December 31, 1999 and the related Consolidated Statements of
Income and Comprehensive Income, Stockholders' Equity, and Cash Flows for the
year then ended (not presented herein); and in our report dated February 12,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
Consolidated Balance Sheet as of December 31, 1999 is fairly stated, in all
material respects, in relation to the Consolidated Balance Sheet from which it
has been derived.
Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c.
November 9, 2000
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
At September 30, 2000, the Company had liquid assets of $1,070,252 in cash,
money market savings accounts and short-term certificates of deposit, all of
which can readily be converted to cash.
The major components of operating cash flows are premium, annuity deposits and
investment income. In the first nine months of 2000, BNLAC collected $26,346,722
of premiums and annuity deposits (gross before reinsurance) and the Company had
consolidated investment income of $648,611.
The Company's investments are primarily in U.S. Government and Government
Agencies and other investment grade bonds which have been marked to market and
classified as available for sale. The Company does not hedge its investment
income through the use of derivatives.
The Company's insurance operations are conducted through its wholly owned
subsidiary, Brokers National Life Assurance Company (BNLAC). At September 30,
2000, BNLAC had statutory capital and surplus of $6,099,404. 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. Management monitors the
minimum capital and surplus requirements to maintain compliance in each state in
which it is licensed.
Results of Operations
Premium income for the first nine months of 2000 was $26,433,690 compared to
$21,527,171 for the same period in 1999. The increase of $4,906,519, or 23%, was
due to an increase in insurance premiums written and group dental rate
increases.
Net investment income was $648,611 for the period ended September 30, 2000
compared to $584,117 for the same period in 1999. The increase was primarily due
to an increase in the size and yield of the bond portfolio in the first nine
months of 2000 compared to the same period in 1999.
Realized losses on investments were ($103,784) in the first nine months of 2000
compared to realized gain of $22,556 for the same period in 1999. The current
year realized loss is primarily due to the write down in book value of common
stock to reflect the decline in their market value.
In the first nine months of 2000, policy benefits and other insurance costs were
$20,091,878 compared to $18,341,292 for the same period in 1999. The increase
was due to an increase in claims and commissions resulting from the increase in
insurance business in force. The dental claims loss ratio was 64.9% during the
first nine months of 2000 compared to 72.9% for the same period in 1999. The
decrease is in large part due to management's continuing efforts to control the
claims loss ratio through rate strategies, modification of benefits, use of
dental PPO networks and changes in marketing strategies. However, part of the
decline in the loss ratio is due to an approximate $650,000 over estimation of
the claims liability at December 31, 1999, which had the effect of reducing
claims expense in 2000. Due to the monthly fluctuation in claims received and
the lag time in receiving the claims, this accrual is difficult to estimate.
For the period ended September 30, 2000, the decrease in liability for future
policy benefits was ($88,253) compared to ($41,781) in 1999. The larger decrease
in 2000 was due to a decrease in life reserves from surrendered policies.
8
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Amortization of deferred policy acquisition costs was $26,664 and $21,185 for
the first nine months of 2000 and 1999, respectively. Amortization of deferred
policy acquisition costs may vary in the future in relation to new life
insurance sales and lapses or surrenders of existing policies.
Operating expenses increased to $4,194,585 in the first nine months of 2000
compared to $3,137,072 for the same period in 1999. The increase in operating
expenses was primarily due to an increase in personnel and claims administrative
expense - which are all attributable to the increased volume of insurance in
force.
Taxes, other than on income, fees and assessments were $825,506 for the first
nine months of 2000 compared to $647,094 for the same period in 1999. The
increase was primarily due to an increase in premium taxes on the increased
premiums collected.
The provision for income taxes was a $637,392 benefit for the first nine months
of 2000 compared to $0 for the same period in 1999. The Company has reduced its
valuation allowance against its deferred tax asset and recorded a net deferred
tax asset of $679,129, reflecting the benefit of approximately $7,600,000 in
loss carryforwards that expire in various amounts between years 2001 - 2012.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforward. For the period ended September 30, 2000,
the Company had $41,737 of current federal tax expense which was offset by the
$679,129 deferred tax credit.
The income from operations for the first nine months of 2000 was $2,565,529
compared to $28,982 for the same period in 1999. Based on claim experience
during 2000, the estimate of claims liability at December 31, 1999 is overstated
by approximately $650,000. The over estimate for this liability has contributed
a corresponding increase in income during 2000. The remaining increase in income
was primarily due to an increase in premium income, lower dental insurance
claims ratio and the recognition of a deferred tax asset.
Forward-Looking Statements
All statement, trend analyses and other information contained in this report and
elsewhere (such as in filings by us with the Securities and Exchange Commission,
press releases, presentations by us or our management or oral statements)
relative to markets for our products and trends in our operations or financial
results, as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend," and other similar
expressions, constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
known and unknown risks, uncertainties and other factors which may cause actual
results to be materially different from those contemplated by the
forward-looking statements. Such factors include, among other things:
o general economic conditions and other factors, including prevailing
interest rate levels and stock and credit market performance which may
affect (among other things) our ability to sell our products, our
ability to access capital resources and the costs associated
therewith, the market value of our investments and the lapse rate and
profitability of policies
o customer response to new products and marketing initiatives
o mortality, morbidity and other factors which may affect the
profitability of our products o changes in the federal income tax laws
and regulations which may affect the relative income tax advantages of
our products
o regulatory changes or actions, including those relating to regulation
of financial services affecting (among other things) bank sales and
underwriting of insurance products and regulation of the sale,
underwriting and pricing of products
o the risk factors or uncertainties listed from time to time in our
filings with the Securities and Exchange Commission
9
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
On April 30, 1996, Myra Jo Pearson and Paul Pearson filed a class action
complaint in the Circuit Court of Pulaski County, Arkansas (3rd Division) naming
the Company, BNL Equity Corporation and several officers of the Company, as
defendants. The plaintiffs have alleged that the defendants violated the
Arkansas Securities Act in several respects in connection with the public
offerings of securities made by United Arkansas Corporation ("UAC") (now known
as BNL Equity Corporation) during the period from January 1989 until May 1992.
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.
The Company filed a petition for Writ of Certiorari with the United States
Supreme Court. On October 2, 2000, the petition was denied. 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. In due course, the case will proceed
in the trial court, Pulaski County Circuit Court, Little Rock, Arkansas. The
Company believes that the lawsuit is frivolous and will both vigorously defend
and seek redress for harm caused by the lawsuit.
Item 2. Changes in Securities.
None of the rights of the holders of any of the Company's securities were
materially modified during the period covered by this report. In addition, no
class of securities of the Company was issued or modified which materially
limited or qualified any class of its registered securities.
Item 3. Defaults Upon Senior Securities.
During the period covered by this report there was no material default in the
payment of any principal, interest, sinking or purchase fund installment, or any
other material default not cured within 30 days with respect to any indebtedness
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
There were no matters submitted to a vote of security holders.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 10-QSB
No reports or exhibits are being filed with this 10-QSB.
(b) Reports on Form 8-K
No reports were filed for the period covered by this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BNL FINANCIAL CORPORATION
(Registrant)
Date: November 10, 2000 /s/ Wayne E. Ahart
-------------------------------------
By: Wayne E. Ahart, Chairman of the Board
(Chief Executive Officer)
Date: November 10, 2000 /s/ Barry N. Shamas
-------------------------------------
By: Barry N. Shamas, Executive V.P.
(Chief Financial Officer)
10
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