SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001 [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
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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
--- ---
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K 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-K or any amendment to this Form 10-K.
-----
BNL Financial Corporation revenues for fiscal year 2001 were $39,569,741.
The estimated aggregate market value of the voting stock held by non-
affiliates of the Registrant as of December 31, 2001, cannot be determined
due to the limited trading in the Company's stock throughout the year (see
also Item 5 of Form 10-K regarding the limited trading market for the
Company's shares).
As of December 31, 2001, the Registrant had outstanding 20,451,980 shares
(excluding treasury shares) of Common Stock, no par value (which includes
10,741,802 shares owned by affiliates of the Registrant).
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
--------------------- ---------------------
None None
Transitional Small Business Disclosure Format Yes No X
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Total # of pages including cover page 44.
PART 1
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ITEM 1. BUSINESS
----------------
General
-------
BNL Financial Corporation (the "Company" or "Registrant") is an insurance
holding company incorporated in Iowa in January 1984. The Company's
administrative offices are located at 2100 West William Cannon, Suite L,
Austin, Texas 78745; its telephone number is (512) 383-0220.
The Company has four wholly owned subsidiaries, BNL Equity Corporation
("BNLE"), Brokers National Life Assurance Company ("BNLAC"), BNL Brokerage
Corporation and Consumers Protective Association (formerly National Dental
Benefit Association, Inc.). Consumers Protective Association is an inactive
association that was purchased for the purpose of marketing services,
including insurance products to members.
BNL Financial Corporation ----- Consumer's 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 2001
marketed life and accident and health insurance. 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.
In 2001, BNLAC received Certificates of Authority to market insurance in
Kansas, Arizona, Nevada, South Carolina and Texas. This increased the number
of states in which it is licensed to do business from 26 to 31. BNLAC is
licensed in 31 states to offer life and accident and health insurance on an
individual and group basis. In February 1999, the Company was notified that
the State of Washington had increased its common capital stock requirements
from $1,200,000 to $2,400,000. Since 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. During 2001, BNLAC increased its
common capital stock to $2,500,000 to comply with the State of Washington
statutory requirements. BNLAC has applied to Washington for a new Certificate
of Authority.
The Company conducts business in the industry segment "life, accident and
health insurers". Most of BNLAC's premium revenues are from sales of group
dental insurance sold primarily on a payroll deduction basis. Financial
information relating thereto is contained in the Selected Financial Data
below and the Financial Statements included as Exhibits to this Report.
1
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: a 10-year level term policy, group life,
hospital indemnity policy, group 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):
2001 2000
-------- --------
I. Annualized Premiums and Annuity
Deposits In Force:
Ordinary Life Insurance $280,000 $275,000
Individual Annuities (1) 135,000 147,000
Group Dental Insurance 38,421,000 34,784,000
Miscellaneous A&H insurance 239,000 56,000
---------- ----------
Total $39,075,000 $35,262,000
========== ==========
II. Collected Premiums and Annuity
Deposits:
Ordinary Life Insurance $288,000 $290,000
Individual Annuities 120,000 144,000
Group Dental Insurance 38,083,000 34,464,000
Miscellaneous A&H insurance 168,000 80,000
---------- ----------
Total $38,659,000 $34,978,000
========== ==========
III. Face Value of Insurance:
Ordinary Life Insurance $35,000,000 $28,000,000
Accidental Death Insurance 38,000,000 23,000,000
---------- ----------
Total $73,000,000 $51,000,000
========== ==========
(1) Classified as a deposit liability on the
financial statements.
Premiums collected by state are reflected in the following table:
Accident and
State Life Premiums Annuity Health Total
------------- ------------- --------- ------------ ---------
Georgia $12,032 $- $3,831,566 $3,843,598
Minnesota 6,510 91 2,972,112 2,978,713
Michigan 6,524 - 2,539,720 2,546,244
Oregon 372 - 2,627,420 2,627,792
Arkansas 26,848 - 2,375,280 2,402,128
Indiana 8,651 - 2,054,058 2,062,709
Iowa 181,593 119,208 1,629,734 1,930,535
Ohio 1,807 - 1,858,415 1,860,222
Idaho - - 1,829,768 1,829,768
All Other States 43,648 1,000 16,532,756 16,577,404
-------- -------- ----------- -----------
Total $287,985 $120,299 $38,250,829 $38,659,113
========= ======== =========== ===========
B. Group Dental Insurance
-------------------------
The following chart shows group dental insurance premiums collected for each
of the past five years ended December 31.
2
Gross
Premiums
Group Dental Insurance Collected
---------------------- ---------
2001 $38,083,000
2000 34,464,000
1999 29,049,000
1998 20,294,000
1997 10,877,000
The following chart shows group dental insurance claims paid and claims
ratios for each of the five years ended December 31. The incurred loss ratio
represents the ratio of incurred claims to premiums earned.
Gross Claims
Group Dental Insurance Claims Paid Ratio
---------------------- ------------ -------
2001 $24,821,000 65.5%
2000 22,504,000 63.8%
1999 20,694,000 72.4%
1998 14,859,000 78.4%
1997 7,842,000 75.7%
Agents' Commissions
-------------------
On December 31, 2001, BNLAC had 3,732 general agents and brokers in 27 states
to market its policies compared to 3,693 agents and brokers on December 31,
2000.
On all of its products BNLAC pays competitive commissions to agents. 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 collects overwrite commissions on sales of vision insurance policies
issued by Vision Service Plan and Security Life Insurance Company of America.
The vision policies are marketed by 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 reinsures 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.
------------------------------
Prior to October 31, 2001, the Company reinsured 100% of its Accidental
Death and Dismemberment insurance under a quota share reinsurance contract
with American National Insurance Company. American National Insurance Company
is rated "A+" Superior. Effective November 1, 2001, the Company entered into
a quota share reinsurance agreement with TIG Insurance Company. TIG accepts
50% of the risk on the first $20,000 of liability and 100% of the liability
thereafter. TIG is rated "B++" Fair.
All other individual 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.
3
BNLAC's Group Life and AD&D insurance are reinsured under a Quota Share
reinsurance agreement with Hannover Life Reassurance Company of America. The
reinsurer is liable for a 90% quota share on the life of each insured up to
the policy maximum of $65,000 on the group life insurance. Hannover Life
Reassurance Company of America was rated "A" (Excellent) by AM Best Company
for 2000.
The following chart shows life insurance in force net of reinsurance for each
of the five past years ended December 31.
Gross Net
Insurance Reinsurance Reinsurance Insurance
In Force Ceded Assumed In Force
--------- ----------- ----------- ---------
Life Insurance
--------------
2001 $34,515,000 $ 9,098,000 $0 $25,417,000
2000 28,127,000 7,722,000 0 20,405,000
1999 11,371,000 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
Accidental Death
Insurance
----------------
2001 $37,000,000 $37,000,000 $0 $0
2000 23,000,000 23,000,000 0 0
1999 102,000,000 96,425,000 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
The Company began marketing a Hospital Indemnity Plan in 1998 and retained
50% of the risk up through September 1, 2000. The Company discontinued the
reinsurance agreement due to favorable claims experience and currently
retains 100% of the risk.
(PAGE)
The Company has no direct exposure and does not consider any of its
reinsurance recoverable to be of doubtful collectibility due to the events of
September 11, 2001.
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 and ratio of net return on mean invested assets were as follows:
Net Net Return on
Investment Mean Invested
Year Income Assets
---- ---------- --------------
2001 $977,578 6.2%
2000 870,482 6.5%
1999 755,552 6.2%
1998 777,937 6.6%
1997 790,000 7.1%
For information concerning realized and unrealized gains and losses on
securities see Note 4 of the Notes to Consolidated Financial Statements, page
F-11.
Special Factors Relating to Accounting and Regulatory Reporting of
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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 ("NAIC"). 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.
4
Life insurance company revenues are generated primarily from premiums and
investment income. Commissions and other sales cost may exceed the amount of
first year life premiums but are generally less in later policy years. Life
insurance lapses and surrenders tend to occur more frequently in the earlier
years after a policy is sold. Statutory accounting rules for life insurance
companies require all life insurance policy acquisition costs be expensed
immediately and not spread over the expected duration of the policies. Health
insurance premiums are recorded the same for both Statutory and GAAP.
Statutory accounting practices also require that a relatively large portion
of life 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 concerning mortality costs and earnings.
Life 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 to bring such
Financial Statements into accordance with generally accepted accounting
principles, 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) 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;
e) 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; and
f) 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 and must be approved by the insurance commissioner if
it exceeds the lesser of 10% of surplus or net gain from operations for the
year.
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.
5
Most states have also enacted legislation which regulates insurance holding
company activities, including acquisitions, extraordinary dividends, the
terms of surplus notes, the terms of affiliate transactions and other related
matters. The Company and BNLAC are registered as a holding company group
pursuant to such legislation in Arkansas and BNLAC routinely reports to other
jurisdictions.
The NAIC, through the member regulatory 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 the 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 the
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, 2001 indicated that the ratios of total adjusted capital to RBC
for BNLAC would have been in excess of 595% and, therefore, 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.
In July 2000, the Arkansas Insurance Department conducted its triennial
statutory examination for the period ended December 31, 1999. No adjustments
were made to the financial statements of the Company as a result of the
examination.
6
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.
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 the last quarter of fiscal year 2000, BNLAC's A. M.
Best's financial performance rating was raised from "B-" (fair) to "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 4,100 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.
Personnel
---------
At December 31, 2001, BNLAC had four executive officers and 49 full-time
administrative personnel. 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 currently uses a third party
administrator to process dental claims.
ITEM 2. PROPERTIES
-------------------
Neither the Company, nor any of its subsidiaries own any real estate.
BNLAC leases 288 square feet of office space in Des Moines, IA at a rental of
$7,230 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 rental was $127,944 in fiscal
year 2001 and this rate will continue until the initial term of the lease
expires 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 of the new lease term.
BNLE leases office space in Sherwood, Arkansas at a rental of $14,400 per
year. BNLAC incurs 100% of the rental expense.
The Company owns the furniture and equipment used in the operation of its
business.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
On November 5, 2001, the boards of directors of the Company and BNL Equity
Corporation approved a settlement in the class action case of Myra Jo
Pearson, Paul Pearson and James Stilwell v. BNL Equity Corporation (Formerly
Known as United Arkansas Corporation), BNL Financial Corporation (Formerly
Known as United Iowa Corporation), and certain officers of the Company, in
Pulaski County Circuit Court, Third Division, No. 96-4971. The settlement,
which was approved by the Pulaski County Circuit Court and the Arkansas
Insurance Commissioner, subsequent to December 31, 2001, is subject to
various conditions, including the approvals by any other applicable
regulatory authorities and conditioned upon compliance with federal and state
securities laws.
7
As part of the settlement agreement, the Company has agreed to issue in
exchange bonds in the principal amount of $1.50, for each share of common
stock of BNL owned by the members of the Class. The Bonds shall be for a term
of twelve years with principal payable at maturity and shall bear interest at
the rate of 6% per annum payable annually from the previous fiscal year's
earnings of BNL. If any interest payment is not made, it will be added to the
principal and paid at maturity. The Bonds shall be fully callable and
redeemable at par at any time by BNL.
The Company has reflected the settlement provisions in the December 31, 2001
financial statements as recorded contingencies since management considers it
probable the settlement will be finalized in its current form in 2002. These
are reflected on the Balance Sheet as contingent long-term liabilities of
$4,269,404 and contingent treasury stock of a like amount and has no effect
on the Statement of Cash Flows. The settlement includes a provision for
paying Class Counsel collectively the single sum of $575,000 for all legal
fees, costs and expenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
No matters were submitted for a vote during the fourth quarter of 2001.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------------------
MATTERS
-------
Market for Stock
----------------
During 2001 the stock of the Company was traded on a workout basis.
Shareholders with company stock to sell contact the Company's home office and
are directed to potential buyers of the stock. There has been a limited
trading market for the Company's securities during fiscal 2001. The stock is
not traded on any established trading 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 were held in escrow until their release on August 1, 1999.
Holders
-------
As of December 31, 2001, there were 4,681 record holders of the Company's
common stock without consideration for contingent treasury shares to be
redeemed.
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. SELECTED FINANCIAL DATA
--------------------------------
The selected consolidated financial data presented below as of the end of and
for each of the years in the five-year period ended December 31, 2001 are
derived from the Company's consolidated financial statements. The
consolidated financial statements as of December 31, 2001 and 2000, and for
each of the years in the three-year period ended December 31, 2001 are
included elsewhere in this Form 10-K.
8
2001 2000 1999 1998 1997
---------- ----------- ----------- ----------- -----------
Total
Income..... $39,569,741 $36,182,730 $30,533,144 $21,919,618 $12,468,221
Net Income
(Loss).... $ 1,283,478 $ 3,444,483 $ 206,979 $(1,246,752) $ (931,612)
Net Income
(Loss) Per
Common Share $ .06 $ .15 $ .01 $ (.05) $ (.04)
Total Assets. $20,173,856 $17,580,271 $13,949,400 $14,327,776 $14,147,853
Total
Liabilities. $14,499,547 $ 9,073,346 $ 9,644,266 $ 9,123,809 $ 7,734,893
Average Shares
Outstanding 22,802,610 23,311,944 23,311,944 23,311,944 23,311,944
*This information should be read in conjunction with the disclosure concerning
the Management's Discussion and Analysis of Financial Condition and the
audited Financial Statements and Notes thereto set forth elsewhere in this
Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
In this section, we review the consolidated financial condition of the
Company at December 31, 2001, 2000 and 1999 and the consolidated results of
operations for the periods ended December 31, 2001, 2000 and 1999. Please
read this discussion in conjunction with the accompanying consolidated
financial statements, notes and selected financial data set forth elsewhere
in this Form 10-K.
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:
(i) 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; (ii) customer
response to new products and marketing initiatives: (iii) mortality,
morbidity and other factors which may affect the profitability of our
products (iv) changes in the federal income tax laws and regulations which
may affect the relative income tax advantages of our products (v) 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 (vi) the risk factors or uncertainties listed from time to time in
our filings with the Securities and Exchange Commission.
Management believes the Company's current critical accounting policies are
comprised of the following: Reserves for unpaid policy claims is a sensitive
accounting estimate unique to the insurance industry. Management uses an
independent actuary to formulate this estimate. Differences in the estimates
may result in revised claims expense which is recognized in the period in
which the difference is determined. See note 11 of the financial statements
for the effect on the year 2001.
The valuation allowance against deferred taxes is a sensitive accounting
estimate. 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. Although realization is not assured, management believes it is
more likely than not that all of the net deferred tax asset will be realized.
The accounting for the proposed litigation settlement is based on
management's estimation that it is probable the settlement will be approved
and ultimately finalized in its current form in 2002. When a transaction
originating prior to the balance sheet date involves potential losses and
depends on subsequent events estimated to be probable of occurrence, and the
amounts are known or measurable, generally accepted accounting
9
principles require the transaction to be recorded on the financial statements
as though the transaction had occurred. Ultimate resolution of the settlement
agreement is dependent on the Company obtaining the necessary approvals
subsequent to December 31, 2001.
Financial Condition
-------------------
2001 2000 1999
--------- ---------- ---------
Income from Operations
before Income Taxes $1,579,471 $2,734,483 $206,979
Book Value Per Share $0.28 $0.36 $0.19
Statutory Capital and Surplus
of Insurance Subsidiary $7,858,222 $7,003,585 $4,130,351
Stockholders' Equity - GAAP $5,674,309 $8,506,925 $4,305,134
A.M. Best Financial Rating B B B-
The Company's financial condition remained strong at the end of 2001 despite
the decline in Stockholders' Equity. This decline was due to a $4,269,404
increase in contingent treasury stock as a result of the settlement of the
class action lawsuit mentioned in "Legal Proceedings" above.
Liquidity and Capital Resources
-------------------------------
At December 31, 2001, the Company had liquid assets of $1,726,746 in cash,
money market savings accounts, and short-term certificates of deposit. All of
the non-cash liquid assets can readily be converted into cash.
The major components of operating cash flows are premiums, and investment
income while policy benefits are the most significant cash outflow. In 2001,
BNLAC collected approximately $38.6 million of premiums and annuity deposits
(gross before reinsurance) and $975,190 of investment income. Another source
of cash flow in 2001 was overwrite commissions of $304,185 on vision
products. At the same time the Company paid $24,856,711 in policy benefits.
The Company's investments are primarily in U.S. Government and Government
Agencies ($9,940,985) and other investment grade bonds ($4,390,833) 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.
Notes Receivable of $1,357,407 consists of a convertible debenture loan
from one of the Company's subsidiaries, BNL Equity Corporation (BNLE), to
EPSI Benefits, Inc. (EBI), a Texas Corporation. The loan bears interest at an
annual rate of 14%, payable monthly, with principal payments commencing
September 15, 2008 and a maturity date of August 15, 2015. To protect its
interest, BNLE may convert the debenture into 51% of the outstanding common
stock of EBI, subject to regulatory approval. The note is one of several
agreements entered into by the Company's subsidiaries which expand the
business relationship with EBI and its subsidiary, Employer Plan Services,
Inc. (EPSI), which provides dental claims processing and adjudication for the
Company's insurance subsidiary, BNLAC. BNLE receives a marketing fee from EBI
under a related marketing agreement. As part of the agreement, BNLAC agreed
to pledge $335,000 of bonds as guarantor for the operating line of credit of
EPSI in conjunction with these agreements. We estimate the Company and its
subsidiaries will have a positive cash flow of $315,000 in 2002 from the EBI
transaction.
On November 5, 2001, the Company's Board of Directors approved a settlement
of the class action lawsuit (see "Legal Proceedings") that includes a
$575,000 payment to Class Counsel. The payment is subject to various
conditions and regulatory approval; however, we believe it is probable that
it will occur in mid-2002. The $575,000 will be paid by BNLAC either through
dividends to BNL Financial Corporation or through intercompany expense
allocation.
Another term of the settlement is the issuance of Company bonds in the
principal amount of $1.50 in exchange for each share of the Company's common
stock owned by the members of the class. The bonds will have a 12- year term
and bear interest at the rate of 6% per annum, payable annually from the
previous fiscal year's earnings. We estimate the total principal amount of
the bonds will be approximately $4,269,404 and the annual interest expense
will be $256,000. We expect BNLAC will pay dividends to BNL Financial
Corporation for the payment of interest to the bondholders. The Company has
no plan to start a sinking fund for payment of the principal at maturity.
10
We believe liquid assets, along with investment income, premium income and
marketing fees will be sufficient to meet our long and short-term liquidity
needs. We do not have any current plans to borrow money for operations.
The Company conducts its insurance operations through its wholly owned
subsidiary, BNLAC. At December 31, 2001, BNLAC had statutory capital and
surplus of $7,858,222. 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 Certificate of Authority in the state of Washington due to an
increased minimum capital requirement in that state of $2,400,000. During
2001, BNLAC increased its common capital stock from $2,000,000 to $2,500,000,
to comply with Washington's capital requirements. BNLAC has applied for a new
Certificate of Authority from the state of Washington. Management monitors
these developments to maintain compliance with the requirements of each
state.
Results of Operations
---------------------
Premium income was $38,463,464 in 2001, $35,396,913 in 2000 and $29,730,251
in 1999. The increase in both years was due to an increase in group dental
insurance premiums written. In 2001, group dental insurance premium income
made up 98.6% of total premium income.
Net investment income was $1,029,457 in 2001, $888,238 in 2000 and $775,148
in 1999, an increase of 16% in 2001 and 15% in 2000. The Company used its
positive operating cash flow to increase its fixed maturity investment
portfolio in both years, which resulted in the increase in investment income.
In September 2001, the Company started receiving marketing fees from EBI per
the agreement mentioned above. The Company earned $60,589 of marketing fees
in 2001.
Realized capital gains and (losses)on investments was $16,231 in 2001,
($102,421) in 2000 and $27,745 in 1999. The realized loss in 2000 was
primarily due to the write down in value of certain equity securities. The
gains in 2001 and 1999 were due to gains on bonds sold in the normal course
of the Company's investment activity.
Increase (decrease) in liability for future policy benefits was $56,063 in
2001, ($85,852) in 2000 and $83,703 for the same period in 1999. The decrease
in 2000 was due to an increase in the number of surrendered life and annuity
policies during that year.
Policy benefits and other insurance costs increased from $24,954,260 in 1999,
to $26,679,474 in 2000 and to $29,570,207 in 2001. The increases were due to
an increase in claims and commissions resulting from the increase in
insurance premium collected. The claims ratio on dental insurance, which
represents the ratio of claims incurred to premium earned, was 65.5% in 2001,
63.8% for 2000 and 72.4% in 1999. In 2001, the claims ratio increased due to
a rise in dental costs.
Amortization of deferred policy acquisition costs was $29,844 in 2001,
$44,084 in 2000 and $27,732 in 1999. The increase in 2000 was due to a
write-off of the remaining deferred policy acquisition asset on an Accidental
Death Plan that was discontinued in 2000.
In 2001, the Company incurred $575,000 litigation settlement expense, which
is the award to the Class Counsel. In our opinion the settlement of the class
action lawsuit is in the best interests of our Company and its shareholders.
We have always felt, and continue to feel strongly, about the facts and the
lack of merit in the plaintiff's case. However, this settlement opportunity,
in light of its terms and the ability to eliminate risks of damage to our
business which are inherent in such litigation, provided an opportunity to
put an end to a protracted, expensive and time- consuming matter. The
Company's management can now focus on the business of the Company and the
opportunities in the marketplace.
Operating expenses were $6,525,350 in 2001, $5,726,013 in 2000 and $4,390,661
in 1999. Expenses increased in 2001 due to legal fees, settlement costs,
executive bonus incentive plan expenses and payroll expense. The increase in
2000 versus 1999 was a result of higher claims administration and personnel
costs attributable to the increase in volume of group dental business
processed in 2000.
11
Taxes, other than on income, were $1,233,806 for 2001, $1,084,528 for 2000
and $869,809 for 1999. The increase each year was due to the premium taxes on
the increased insurance premiums collected.
For 2001, the consolidated net income from operations before taxes was
$1,579,471compared to $2,734,483 in 2000 and $206,979 in 1999. The decline in
2001 is primarily due to the increase in operating expenses, policy benefits
expense and class action settlement expenses. Based on actual claims
experience during 2000, the estimate of claims liability at December 31, 1999
was found to be overstated by $648,816. The over estimate for this liability
has contributed a corresponding increase in income during the year 2000. The
remaining increase in net income from operations in 2000 versus 1999 was
primarily due to an increase in premium income and a reduction in the claims
ratio on the group dental business. Modifications to rates and benefits on
the dental policies, which were implemented prior to and during 1999, were
effective in reducing the claims ratio in 2000.
Earnings per share was $.06, $.15 and $.01 in 2001, 2000, and 1999,
respectively. The effect of the contingent treasury shares described in
Financial Condition was immaterial in 2001, but may have a material effect in
the future.
The provision for income taxes was $295,993 expense in 2001, compared to a
$710,000 benefit for 2000 and $0 in 1999. In 2000, the Company reduced its
valuation allowance against its deferred tax asset and recorded a net
deferred tax asset of $767,000, reflecting the benefit expected from using
approximately $6,700,000 in loss carryforwards that expire in various amounts
between 2001 and 2014. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforward. For the period
ended December 31, 2001, the Company had $52,993 of current federal tax
expense and $243,000 of deferred tax expense. In 2000, the Company had
$57,000 current federal tax expense, which was offset by the $767,000
deferred tax credit. See note 3 to the audited financial statements.
For the year ended December 31, 2001, other comprehensive gain was $90,760
compared to $757,308 in 2000 and a ($1,105,812) loss for the same period in
2000. The gain in comprehensive income in 2001 and 2000 was due to a decrease
in interest rates that increased 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.
Looking Forward
---------------
We are getting more and more opportunities to sell large groups. Each time
you get one, it makes it easier to get others. Selling large groups is a
two-edged sword. On one side you grow faster and have the potential to make
larger profits when claims are within our expected range. Also, the Company's
reputation is enhanced as a major player in the benefits market. However, on
the other hand, if claims on a big case are higher than expected, you lose
profits more rapidly. Also, when claims necessitate large rate increases, the
odds go up that you will lose the case to another carrier and the loss of a
big case is difficult to recoup.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
Market risk represents the potential loss resulting from adverse changes in
the value of financial instruments, either derivative or non-derivative,
caused by fluctuations in interest rates, foreign exchange rates, commodity
prices, and equity security prices. We handle market risks in accordance with
our established policies. The Company's conservative investment philosophies
minimize market risk and risk of default by investing in high quality debt
instruments, with staggered maturity dates. We did not have financial
instruments to manage and reduce the impact of changes in interest rates at
December 31, 2001 and December 31, 2000. We held various financial
instruments at December 31, 2001 and 2000, consisting of financial assets
reported in our Consolidated Balance Sheets (refer to Note 4). In the second
quarter of 2001 we invested $8,104 in call options for common stock for
trading purposes. Our risk on this investment is limited to our cost.
Interest Rate Risk - We are subject to interest rate risk through the
investment in fixed maturity securities, such as U.S. Government and
Government Agency securities and other investment grade bonds. The fair
market value of long-term, fixed-interest rate debt is subject to interest
rate risk. Generally, the fair value of fixed-interest rate debt will
increase as interest rates fall and will decrease as interest rates rise. The
estimated fair value of our fixed maturity securities at December 31, 2001
and December 31, 2000 was $14,331,818 and $13,561,719, respectively.
12
A one percentage point increase in prevailing interest rates would result in
a decrease in the estimated fair value of fixed maturity securities held at
December 31, 2001 of $1,300,000. Initial fair values were determined using
the current rates at which we could enter into comparable financial
instruments with similar remaining maturities. The estimated earnings and
cash flows impact for the twelve months of 2001 resulting from a one
percentage point increase in interest rates would be immaterial, holding
other variables constant.
Foreign-Exchange Rate Risk - We currently have no exposure to foreign
exchange rate risk because all of our financial instruments are denominated
in U.S. dollars and because we do not currently engage in any operations
outside of the United States.
Commodity Price Risk - We have no financial instruments subject to commodity
price risk.
Equity Security Price Risk - Fair value of equity securities at December 31,
2001 totaled $47,449, or only .4% of total investments and cash on a
consolidated basis. We do not hedge our equity price risk. As of December 31,
2001, a 20% adverse change in equity prices would result in an approximate
$13,300 decrease in the fair value of our equity securities. The preceding
discussion of estimated fair value of our financial instruments and the
sensitivity analyses resulting from hypothetical changes in interest rates
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements reflect our current
expectations and involve uncertainties. These forward-looking market risk
disclosures are selective in nature and only address the potential impact
from financial instruments. They do not include other potential effects which
could impact our business as a result of changes in interest rates,
foreign-exchange rates, commodity prices, or equity security prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
The information on pages F-1 through F-20 attached to this Report is hereby
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
13
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------
The directors and executive officers of the Company are as follows:
First Became
Director or
Executive
Name Age Officer Position
------------ --- --------- --------------------------------
Wayne E. Ahart 61 1984 Chairman of the Board and Director
C. Donald Byrd 60 1984 Vice Chairman of the Board and
Director
Kenneth Tobey 43 1994 President and Director
Barry N. Shamas 54 1984 Executive Vice President,
Treasurer and Director
Cecil Alexander 65 1994 Director
Richard Barclay 64 1994 Director
Eugene A. Cernan 67 1994 Director
Hayden Fry 72 1984 Director
John Greig 66 1984 Director
Roy B. Keppy 78 1984 Director
Roy Ledbetter 71 1994 Director
John E. Miller 72 1994 Director
James A. Mullins 67 1984 Director
C. James McCormick 76 1984 Director
Robert R. Rigler 78 1989 Director
Chris Schenkel 77 1994 Director
L. Stan Schoelerman 76 1984 Director
Orville Sweet 77 1984 Director
-----------------------------------------
The term of office of each director expires at the annual meeting of
shareholders upon the 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 with 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); and
(President) American Investors Corporation ("AIC") and its subsidiary, Future
Security Life Insurance Company ("FSL"), both of Austin, Texas (1980-1987).
Mr. Ahart has been owner and Chairman of the Board of Lone Star Pizza Garden
Inc. from 1986 to the present.
C. Don Byrd has been Vice Chairman of the Board of BNL, BNLE and BNLAC
since August 1, 1994. Mr. Byrd was President and a Director of BNL and
BNLAC since 1984 and 1986, respectively. Mr. Byrd was Agency Director of
FSL from 1983 to 1984 and Regional Director of AIC 1981 to 1983. He was an
agent and Regional Director of ITI and ITAC from 1974 to 1981.
14
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.
Since 1984 and 1986, respectively, he has served as Executive Vice President
and Director of BNL and BNLAC, which positions he presently holds. He served
in various capacities for ITI and ITAC, including Executive Vice President,
Senior Vice President, Treasurer and Financial Vice President beginning in
1976 through 1987. Mr. Shamas served as Executive Vice President,
Secretary/Treasurer and as Director of AIC and FSL from 1980 and 1983,
respectively, until 1987. From 1978 through 1987, Mr. Shamas served as a
Director and a member of the Executive Committee of LAC and LAAC.
Cecil L. Alexander is currently Vice President of Public Affairs for Arkansas
Power & Light Company, where he has been employed since 1980. Prior to
joining the AP&L Executive Staff, Mr. Alexander served for 16 years in the
Arkansas General Assembly, and during 1975-76, was Speaker of the House of
Representatives. Since 1971, Mr. Alexander has been involved in the real
estate business as a partner in Heber Springs Realty. He is a past president
of the Cleburne County Board of Realtors and has served on the governmental
affairs committee of the Arkansas Association of Realtors. Alexander is
currently on the Board of Directors of Mercantile Bank of Heber Springs, the
Board of Directors of the Arkansas Tourism Development Foundation, and the
Board of Directors of Baptist Foundation.
Richard L. Barclay, a Certified Public Accountant, has been engaged in public
accounting since 1961. He is a Partner in the firm of Beall, Barclay & Co.,
Certified Public Accountants in Rogers, Arkansas and an Executive Director of
the Policy and Budget committee for the Arkansas office of the governor. From
1961 to 1997, he was a Partner in the firm of Barclay, Yarborough & Evans,
Certified Public Accountants in Rogers, Arkansas. He is a member of the
Arkansas Society of Certified Public Accountants and of the American
Institute of Certified Public Accountants. He was a member of the Arkansas
House of Representatives from 1977 until 1991. He presently serves as a
Director of Federal Savings Bank, Rogers, Arkansas; and Vice President,
Arkansas State Chamber of Commerce.
Eugene A. Cernan has been President and Chairman of the Board of The Cernan
Corporation since 1981. In addition, he recently became Chairman of the Board
of Johnson Engineering Corporation which provides the National Aeronautics
and Space Administration (NASA) with Flight Crew Systems Development. Captain
Cernan retired from the U. S. Navy in 1976 after serving 20 years as a naval
aviator, 13 of which were dedicated to direct involvement with the U. S.
Space Program as a NASA Astronaut. Captain Cernan was the pilot on the Gemini
9 mission and the second American to walk in space; lunar module pilot of
Apollo 10; and Spacecraft Commander of Apollo 17, which resulted in the
distinction of being the last man to have left his footprints on the surface
of the moon. In 1973, he served as a Senior United States Negotiator in
discussions with USSR on the Apollo- Soyuz Mission. Mr. Cernan served as
Executive Consultant of 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; the United
States Space Foundation; the Young Astronaut Council; the 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 Association. 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
1998, 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 was the 1993
President of the AFCA. 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, after 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.
15
Roy E. Ledbetter presently serves as President and Chief Executive Officer of
Highland Industrial Park, a division of Highland Resources, Inc. in East
Camden, Arkansas. He holds a Bachelor of Science Degree in Education from
Southern Arkansas University at Magnolia, a Masters Degree in Education from
Henderson State University at Arkadelphia and an AMP from Harvard Business
School at Boston. In 1966, Mr. Ledbetter joined Highland Resources, Inc. and
coordinated organization of Southern Arkansas University Technical Branch;
was promoted to Division Manager (1972), Vice President and Division Manager
(1975), Senior Vice President (1980), and President in 1984. He is past
President of the Camden Chamber of Commerce; was 1977 Camden Jaycee's Man of
the Year; was awarded first annual Camden Area Chamber of Commerce Community
Service Award in 1983; served on Education Standards Committee of the State
of Arkansas; and presently serves on the Boards of East Camden and Highland
Railroad, Shumaker Public Service Corporation, Merchants and Planters Bank of
Camden, and First United Bancshares of El Dorado.
C. James McCormick is Chairman of the Board of McCormick, Inc., Best Way
Express, Inc., Emeritus, Inc., and President of JAMAC Corporation, all of
Vincennes, Indiana. He is also Vice Chairman of Golf Hosts, Inc. He is
the owner of CJ Leasing. Mr. McCormick is Chairman of the Board of
Directors and CEO of First Bancorp, Vincennes, Indiana; First Vice Chairman
of Vincennes University and a Life Director of the Indiana Chamber of
Commerce; and a member of the Indiana President's Organization and the
Indiana Automobile Dealers Association. He is a former Chairman of the
Board of the American Trucking Associations. Mr. McCormick is a Past
Chairman of the National Board of Trustees of The Fellowship of Christian
Athletes.
John E. Miller was a member of the State of Arkansas House of Representatives
from 1959 to 2000. 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, Lions World
Services for the Blind, State Board of Easter Seals, and Ouachita Baptist
University Board of Trustees.
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 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
over 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 was President and a Partner of Petersen Sheep & Cattle
Co., Spencer, Iowa from 1964 to 2001. 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.
(PAGE)
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.
16
ITEM 11. 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.
SUMMARY COMPENSATION TABLE
--------------------------
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
(A) (B) (C) (D) (E) (F) (G) (H) (I)
Other
Annual
Name and Option Restricted All Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary Bonus sation $ Award(s) SARs (#) Payouts (#) sation $
$
Wayne E. Ahart, CEO 2001 $125,000 $60,417 $10,462 $0 - $0 $0
" 2000 $125,000 $10,739 $12,625 $0 - $0 $0
" 1999 $125,000 $0 $9,416 $0 - $0 $0
Barry N. Shamas,
BExecutive V.P. 2001 $110,600 $39,217 $809 $0 - $0 $0
" 2000 $106,700 $10,189 $7,220 $0 - $0 $0
" 1999 $95,000 $0 $1,096 $0 - $0 $0
(PAGE)
C. Donald Byrd,
Vice Chairman of
the Board 2001 $92,500 $43,545 $3,922 $0 - $0 $0
" 2000 $90,000 $58,031 $3,893 $0 - $0 $0
" 1999 $80,500 $0 $3,463 $0 - $0 $0
Kenneth Tobey,
President 2001 $77,500 $42,295 $3,256 $0 - $0 $0
" 2000 $75,000 $56,781 $2,874 $0 - $0 $0
" 1999 $65,500 $0 $2,643 $0 - $0 $0
The total number of executive officers of the Company is four and the total
remuneration paid to all executive officers, as a group is $609,523 including
accrued bonuses of $25,837 each for Mr. Byrd and Mr. Tobey under the
Company's stock bonus plan. The Company does not have employment agreements
with any of its officers.
The Company does not have any employment or severance agreements with
officers or employees.
Compensation of Directors
-------------------------
Effective August 8, 2000 each director will receive a fee of $500 per
company, plus reasonable travel expenses for each meeting of the Board of
Directors attended. The Audit Committee receives $500 for each meeting
attended.
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. Options for an additional 1.75 million shares have been
authorized by the Board of Directors, including 500,000 shares in November
1997, 500,000 shares in March 2000 and 750,000 shares in June 2001. 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 2001, 2000 and 1999 the Company granted $119,525, $184,575 and
$185,150 stock options, respectively, with an exercise price of $.50 per
share. At December 31, 2001, there were 1,054,600 options outstanding. 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 $800, $1,200 and $600 in 2001,
2000 and 1999, respectively. These values were computed using a binomial
method as prescribed in SFAS 123 and certain assumptions include risk free
interest rate of 4.5%, expected life of 3 years, expected volatility of 10.6%
and no expected dividends due to statutory limitations. The estimated
weighted average remaining life of the options is 1.6 years.
17
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
either through the open market, Treasury shares or authorized but unissued
shares. Stock bonuses in the amount of $51,674 and $100,000 were granted in
2001 and 2000, respectively.
In 2001, the Board of Directors approved the 2001 Incentive Bonus Plan for
the benefit of certain officers of the Company. The plan provides for
semi-annual payment of cash bonuses based on 10% of consolidated pre tax
operating income. BNLAC bears its prorated share of the bonus expense based
on its pre-tax statutory profits. Bonus expense for 2001 was $144,662 under
this plan.
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, 2001, other than for ordinary travel and expense advances and
other reimbursable expenses, if any.
ITEM 12. 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, 2001:
Amount and Nature Percent of
Title of Class Name and Address of of Beneficial Class as of
Beneficial Owner Ownership December 31, 2001
-------------- ------------------- ---------------- -----------------
Common Wayne E. Ahart
Stock #14 Club Estates Parkway 4,845,505 (2)(3) 23.69%
Austin, Texas 78738
Common Barry N. Shamas 2,801,816 (5) 13.70%
Stock 1095 Hidden Hills Dr.
Dripping Springs,
Texas 78620
Common Universal Guaranty 2,216,776 (2) 10.84%
Stock Life Insurance Company
5250 S. Sixth St. Rd.
Springfield, Illinois
62705
Common C. Donald Byrd 1,517,269 7.42%
Stock 631 47th Street
W. Des Moines, IA 37076
(1) To the Company's knowledge, all shares are beneficially owned by, and
the sole voting and investment power is held by the persons named,
except as otherwise indicated.
(2) Wayne E. Ahart and Commonwealth Industries, Inc. ("CIC"), a parent of
Universal Guaranty Life Insurance Company ("UGL"), have agreed: (a) that
if Mr. Ahart sells his shares of the Company to a third party, Mr. Ahart
or the third party must also purchase UGL's shares of the Company at the
same price and on the same terms; and (b) in the event UGL receives a
bona fide offer to purchase its shares of the Company, Mr. Ahart has a
first right of refusal to purchase such shares on the same terms and
conditions.
(3) Includes 2,400,000 shares held in the name of National Iowa
Corporation and 2,178,926 shares held in the name of Arkansas National
Corporation, both of which are controlled by Mr. Ahart.
(4) All of Mr. Byrd's shares are subject to a right of first refusal of
the Company to acquire said shares on the same terms and conditions as
any proposed sale or other transfer by Mr. Byrd.
(5) Includes 1,400,000 shares held in the name of Life Industries of
Iowa, Inc., and 1,335,171 shares held in the name of Arkansas
Industries Corporation, both of which are controlled by Mr. Shamas.
18
Security Ownership of Management
--------------------------------
The following table sets forth, as of December 31, 2001, 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:
Amount and Nature Percent of
Title of Class Name and Address of of Beneficial Class as of
Beneficial Owner Ownership December 31, 2001
-------------- ------------------- ---------------- -----------------
Common Stock Wayne E. Ahart 4,845,505 (2) 23.69%
" Barry N. Shamas 2,801,816 (4) 13.70%
" C. Donald Byrd 1,517,269 (3) 7.42%
" Kenneth Tobey 822,312 4.02%
" C. James McCormick 137,084 (5) .67%
" Hayden Fry 69,047 .34%
" John Greig 50,102 .24%
" Roy Keppy 51,001 .25%
" James A. Mullins 50,000 .24%
" L. Stanley Schoelerman 50,000 .24%
" Orville Sweet 50,000 .24%
" Richard Barclay 46,088 .23%
" John E. Miller 46,088 .23%
" Cecil Alexander 37,088 .18%
" Eugene A. Cernan 37,088 .18%
" Roy Ledbetter 37,088 .18%
" Chris Schenkel 37,088 .18%
" Robert R. Rigler 3,295 .02%
" All Executive
Officers and
Directors as a 10,687,909 52.26%
group (18 persons)
---------------------------------------
(1) To the Company's knowledge, all shares are beneficially owned by, and the
persons named, except as otherwise indicated hold the sole voting and
investment power.
(2) Includes 2,400,000 shares held in the name of National Iowa
Corporation and 2,178,926 shares held in the name of Arkansas National
Corporation, both of which are controlled by Mr. Ahart.
(3) All of Mr. Byrd's shares are subject to a right of first refusal of
the Company to acquire said shares on the same terms and conditions as
any proposed sale or other transfer by Mr. Byrd.
(4) Includes 1,400,000 shares held in the name of Life Industries of
Iowa, Inc., and 1,335,171 shares held in the name of Arkansas
Industries Corporation, both of which are controlled by Mr. Shamas.
(5) Includes 10,000 shares held in the name of C. James McCormick and 90,000
shares divided equally among and held in the names of Mr. McCormick's
four children.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
None
19
PART IV
-------
ITEM 14. 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 F-1 to F-18 of
this Report and is incorporated herein by reference.
2. Financial Statement Schedules Included in Item 14(a)
Page
Number
Form 10-K
Report of Independent Accountants on Financial Statements F-2
The following financial statement schedule required to be filed by Paragraph
(d) of Item 14 of Form 10-K is submitted as a separate section of this
report.
Schedule III - Condensed Financial Information of Registrant F-19 to F-20
Schedules I and VI have been omitted as all required data is included in the
Notes to Consolidated Financial Statements.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been
omitted.
3. Exhibits
No. Description Page or Method of Filing
----- ---------------------------- ------------------------------
3.1 Articles of Incorporation of Incorporated by reference to BNL
Financial Corporation, Exhibit 3.1 of the Company's dated January 27,
1984 and Annual Report on Form 10-K for Amendment to Articles of the
period ending December 31, Incorporation of BNL Financial 1993.
Corporation, dated November 13, 1987.
3.2 By-laws of BNL Financial Incorporated by reference to
Corporation. Exhibit 3.2 of the Company's
Registration Statement No. 33-
70318
4.1 Instruments defining the rights Incorporated by reference to
of security holders, including Exhibit 4 of the Company's
indentures. 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 Corporation, Incorporated by reference to dated January
27, 1984 and Exhibits 4.2 of the Company's Amendment to Articles of
Annual Report on Form 10-KSB Incorporation on BNL Financial for the
period ending December Corporation, dated November 13, 31, 1998.
1987.
10.1 Form of Agreement between Incorporated by reference to Commonwealth
Industries Exhibit I of the Company's Corporation, American Investors
Quarterly Report on 10-QSB for Corporation and Wayne E. Ahart the
period ended September 30, regarding rights to purchase 1994.
shares of the Company.
10.2 Agreement dated December 21, Incorporated by reference to
1990 between Registrant and C. Exhibit I of the Company's
Donald Byrd granting Registrant Quarterly on 10-QSB for the
right of first refusal as to period ended March 31, 1996.
future transfers of Mr. Byrd's
shares of the Company's common
stock.
20
10.3 Office lease assumption and
assignment agreement dated Incorporated by reference to
September 1, 1998, between Exhibit 10.9 of the Company's
Brokers National Life Assurance Annual Report on Form 10-KSB
Company and Walgreen Company for the period ending December
and Charles H. Morrison for 31, 1998.
premises in Austin.
10.4 Sublease dated January 20, 2000
between Brokers National Life Incorporated by reference to
Assurance Company and PRG, Inc. Exhibit 10.10 of the Company's
Annual Report on Form 10-KSB for
the period ending December 31,
1998.
11 Statement Re computation of per Reference is made to the
share earnings. 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 Not applicable.
ratios.
16 Letter Re Change in Certifying Incorporated by reference to
Accountant. Exhibit I of the Company's
periodic Report on Form 8-K
dated September 14, 1995.
22 Subsidiaries of Registrant. Filed herewith.
(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 2002.
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:
SIGNATURE TITLE DATE
-------------------------- --------------------- -------------
/S/ Wayne E. Ahart 2/18/02
-------------------------- -------------
Wayne E. Ahart Chairman of the Board,
Director (Principal
Executive Officer)
/S/ C. Donald Byrd 2/25/02
-------------------------- -------------
C. Donald Byrd Vice Chairman of the
Board and Director
/S/ Kenneth Tobey 2/18/02
--------------------------- -------------
21
Kenneth Tobey President and Director
/S/ Barry N. Shamas 2/21/02
---------------------------- -------------
Barry N. Shamas Executive Vice
President, Treasurer
and Director (Principal
Financial and
Accounting Officer)
/S/ Hayden Fry 03/20/02
---------------------------- -------------
Hayden Fry Director
/S/ John Greig 03/20/02
---------------------------- --------------
John Greig Director
/S/ Roy Keppy 2/20/02
---------------------------- --------------
Roy Keppy Director
/S/ C. James McCormick 3/1/02
---------------------------- --------------
C. James McCormick Director
/S/ James A. Mullins 3/26/02
---------------------------- --------------
James A. Mullins Director
/S/ Robert R. Rigler 2/19/02
---------------------------- --------------
Robert R. Rigler Director
/S/ Stanley Schoelerman 2/21/02
----------------------------- --------------
Stanley Schoelerman Director
/S/ Orville Sweet 2/22/02
----------------------------- ---------------
Orville Sweet Director
/S/ Cecil Alexander 2/22/02
----------------------------- ---------------
Cecil Alexander Director
/S/ Richard Barclay 2/18/02
----------------------------- ---------------
Richard Barclay Director
22
/S/ Eugene A. Cernan 2/20/02
----------------------------- ---------------
Eugene A. Cernan Director
/S/ Roy Ledbetter 2/18/02
----------------------------- ---------------
Roy Ledbetter Director
/S/ John E. Miller 2/15/2002
----------------------------- ---------------
John E. Miller Director
/S/ Chris Schenkel 3/4/2002
----------------------------- ----------------
Chris Schenkel Director
23
ANNUAL REPORT ON FORM 10-K
ITEM 14 (a) AND 14 (d)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2001
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
DES MOINES, IOWA
---------------------------------------------------------------------------
Table of Contents
-----------------
Page Number of
2001 Form 10-K
--------------
Report of Independent Accountants on Financial F-2
Statements
Consolidated Balance Sheet, December 31, 2001 and F-3
2000
Consolidated Statement of Operations and F-4
Comprehensive Income for the years ended December 31,
2001, 2000 and 1999
Consolidated Statement of Changes in Shareholders' F-5
Equity for the years ended December 31, 2001 and 2000
Consolidated Statement of Cash Flows for the years F-6
ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements F-7
F-1
-----------------------------------------------------------------------
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, 2001 and 2000 and the
accompanying Consolidated Statements of Operations and Comprehensive Income,
Changes in Shareholders' Equity, and Cash Flows for the years ended December
31, 2001, 2000 and 1999. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and
2000, and the consolidated results of their operations and their consolidated
cash flows for the years ended December 31, 2001, 2000 and 1999 in conformity
with accounting principles generally accepted in the United States of
America.
Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c
February 9, 2002
F-2
BNL Financial Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2001 and 2000
December 31,
------------------------
2001 2000
------------------------
ASSETS
Cash and cash equivalents $ 1,726,746 $ 932,816
Investments in fixed maturities at
fair value (amortized cost 14,331,818 13,561,719
$14,349,209; $13,737,998;
respectively; partially pledged)
Other long-term investments - Note
receivable (Note 4) 1,357,407 -
Investment in equity securities,
at fair value (cost $86,100;
$37,147 respectively) 47,449 66,532
--------- ----------
Total Investments, Including
Cash and Cash Equivalents 17,463,420 14,561,067
Accrued investment income 224,100 248,297
Furniture and equipment, net 423,608 374,876
Deferred policy acquisition costs 278,258 308,102
Policy loans 115,652 98,863
Receivable from reinsurer 34,990 29,630
Premiums due and unpaid 786,345 946,775
Income tax assets 524,000 767,000
Other assets 323,483 245,661
---------- ----------
Total Assets $20,173,856 $17,580,271
=========== ===========
LIABILITIES
Liabilities for future policy
benefits $ 1,454,007 $ 1,392,584
Policy claims payable 2,446,935 2,446,350
Annuity deposits 2,866,464 2,805,220
Deferred annuity profits 496,338 469,623
Premium deposit funds 61,987 101,491
Supplementary contracts without
life contingencies 66,148 80,295
Advanced and unallocated premium 798,790 656,615
Commissions payable 623,484 440,640
Accrued taxes and expenses 491,513 450,409
Other liabilities 349,477 230,119
--------- ---------
Total Liabilities 9,655,143 9,073,346
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
Contingent settlement expense 575,000 -
Contingent long-term liabilities 4,269,404 -
--------- ----------
Total Commitments and
Contingencies 4,844,404 -
SHAREHOLDERS' EQUITY
Common stock, $.02 stated value,
45,000,000 shares Authorized;
23,311,944 issued and outstanding 466,239 466,239
Additional paid-in capital 14,313,000 14,308,230
Accumulated other comprehensive
income (loss) (49,455) (140,215)
Accumulated deficit (4,779,746) (6,063,224)
Contingent treasury stock 2,846,269;
0 shares, respectively (Note 6) (4,269,404) -
Treasury stock, at cost, 13,695;
138,795 shares, respectively (6,325) (64,105)
--------- ---------
Total Shareholders' Equity 5,674,309 8,506,925
--------- ---------
Total Liabilities and
Stockholders' Equity $20,173,856 $17,580,271
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
BNL Financial Corporation and Subsidiaries Consolidated Statements of
Operations and Comprehensive Income For the years ended December 31, 2001,
2000, and 1999
Year Ended December 31,
-------------------------------------
2001 2000 1999
-------------------------------------
Income
Premium income $38,463,464 $35,396,913 $29,730,251
Net investment income 1,029,457 888,238 775,148
Marketing fees (Note 4) 60,589 - -
Realized gains (losses) 16,231 (102,421) 27,745
---------- ---------- ----------
Total Income 39,569,741 36,182,730 30,533,144
---------- ---------- ----------
Expenses
Increase (decrease) in
liability for future policy
benefits 56,063 (85,852) 83,703
Policy benefits and other
insurance costs 29,570,207 26,679,474 24,954,260
Amortization of deferred
policy acquistion costs 29,844 44,084 27,732
Litigation settlement
expense (Note 6) 575,000 - -
Operating expenses 6,525,350 5,726,013 4,390,661
Taxes, other than on income 1,233,806 1,084,528 869,809
---------- ---------- ----------
Total Expenses 37,990,270 33,448,247 30,326,165
---------- ---------- ----------
Income from Operations
before Income Taxes 1,579,471 2,734,483 206,979
Provision for income
taxes (benefit) 295,993 (710,000) -
---------- ----------- ----------
Net Income $ 1,283,478 $ 3,444,483 $ 206,979
=========== =========== ==========
Net income per common share
(basic and diluted) $0.06 $0.15 $0.01
Weighted average number of
fully paid common shares 22,802,610 23,311,944 23,311,944
========== ========== ==========
Other comprehensive income, net of tax:
Unrealized gains on
securities:
Unrealized holding
gain (loss) arising
during period $ 106,990 $ 652,723 $ (1,078,067)
Reclassification adjustment
for gain (loss) included
in net income (16,230) 104,585 (27,745)
---------- ---------- -----------
Other Chomprehensive Income
(Loss) 90,760 757,308 (1,105,812)
---------- ---------- -----------
Comprehensive Income
(Loss) $ 1,374,238 $ 4,201,791 $ (898,833)
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
BNL Financial Corporation and Subsidiaries Consolidated Statements of Changes
in Shareholders' Equity For the years ended December 31, 2001, 2000 and 1999
Accumulated
Common Stock Additional Compre-
----------------- Paid-In Accumulated hensiv Treasury
Shares Amount Capital Deficit Income Stock
------ ------ ---------- ----------- ---------- --------
Balance,
January 1, 1999 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, 1999 23,311,944 $466,239 $14,308,230 $(9,507,707) $(897,523) $(64,105)
========== ======== =========== ============ ========== ========
Accumulated other
comprehensive
income - - - - 757,308 -
Net income - - - 3,444,483 - -
---------- -------- ----------- ------------ ---------- ---------
Balance,
December 31, 2000 23,311,944 $466,239 $14,308,230 $(6,063,224) $(140,215) $(64,105)
========== ======== =========== ============ ========== =========
Accumulated other
comprehensive
income - - - - 90,760 -
Contingent
treasury stock
(See Note 6) - - - - (4,269,404)
Sale of treasury
stock - - 4,770 - - 57,780
Net income - - - 1,283,478 - -
---------- -------- ----------- ------------ --------- -----------
Balance,
December 31, 2001 23,311,944 $466,239 $14,313,000 $(4,779,746) $(49,455) $(4,275,729)
========== ======== =========== ============ ========= ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
BNL Financial Corporation and Subsidiaries Consolidated Statements of Cash
Flows For the years ended December 31, 2001, 2000 and 1999
Year Ended December 31,
---------------------------------
2001 2000 1999
-------- -------- --------
Cash Flows from Operating Activities
Net income $1,283,478 $3,444,483 $206,979
Adjustments to reconcile net
income to net cash
Provided by operating activities:
Realized (gain) loss on
investments (13,968) 104,585 (28,399)
Realized (gain) loss on sale of
furniture and equipment (2,263) (2,163) 654
Depreciation 141,553 146,952 133,364
(Increase) decrease in deferred
tax asset 243,000 (767,000) -
Amortization of deferred
acquisition costs,
Organization costs and state
licenses acquired 36,923 44,084 30,841
Accretion of bond discount 1,135 1,250 285
Change in assets and liabilities:
(Increase) decrease in accrued
investment income 24,197 (54,960) 2,315
(Increase) decrease in receivable
from reinsurer (5,360) 10,421 (6,520)
(Increase) decrease in premiums
due and unpaid 160,430 (185,834) (149,155)
Increase (decrease) in liability
for future policy benefits 61,423 (96,273) 90,224
Increase (decrease) policy claims
payable 585 (282,825) 221,000
Increase (decrease) in annutiy
deposits and deferred profits 87,959 (207,996) (297,568)
Increase (decrease) in premium
deposit funds (39,504) (17,212) 3,862
Increase (decrease) in advanced
and unallocated premium 142,175 (57,867) 361,483
Increase in commissions payable 182,844 29,737 100,599
Increase in contingent settlement
expense liability 575,000 - -
Other, decrease 79,962 138,889 11,029
--------- --------- --------
Net Cash Provided by Operating
Activities 2,959,569 2,248,271 680,993
--------- --------- --------
Cash Flows from Investing Activities
Proceeds from sales of investments 293,440 - 420,000
Proceeds from maturity or redemption
of investments 10,414,084 1,052,149 2,562,937
Proceeds from sale of furniture and
equipment 7,171 2,163 4,000
Purchase of equity securities (131,579) (34,724) -
Purchase of furniture and
equipment (195,194) (83,682) (250,449)
Purchase of fixed maturity
securities (12,580,768) (3,646,155) (4,400,000)
----------- ---------- ----------
Net Cash Used in Investing
Activities (2,192,846) (2,710,249) (1,663,512)
----------- ---------- ----------
Cash Flows from Financing Activities
Sale of treasury stock 62,550 - -
Net payments on supplementary
contracts (35,343) (24,825) (24,825)
---------- ---------- ----------
Net Cash Provided (Used) in
Financing Activities 27,207 (24,825) (24,825)
---------- ---------- ----------
Net (Increase) Decrease in Cash
and Cash Equivalents 793,930 (486,803) (1,007,344)
Cash and Cash Equivalents,
Beginning of Period 932,816 1,419,619 2,426,963
---------- ---------- ----------
Cash and Cash Equivalents,
End of Period $1,726,746 $ 932,816 $1,419,619
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
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 $1,500. See Note 10. The Company is licensed to sell in 31 states as
of December 31, 2001. 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.
The income tax benefit includes management's estimate of the future benefit to
be derived from net operating loss carry forwards. In assessing the
realization of deferred income tax assets, management considers whether it is
more likely than not that the deferred income tax assets will be realized. The
ultimate realization of deferred income tax assets depends upon generating
future taxable income. If future income is not generated as expected, deferred
income tax assets may need to be written-off (no such write-offs have
occurred). See Note 3.
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 6.0% to 4.0% during 2001 and 2000.
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. Differences in estimates may result in revised claims
expense which is recognized in the period in which the difference is
determined.
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.
F-7
1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Cash equivalents are carried at amortized cost, which approximates fair value.
Cash equivalents represent other short-term securities. For purposes of the
Statement of Cash Flows, the Company considers all highly liquid short-term
investments to be cash equivalents. For purpose of cash flow disclosures,
there has been no material interest paid for 2001, 2000 or 1999. The Company
paid income taxes of $68,993 and $41,000 in 2001 and 2000, respectively. No
income taxes were paid in 1999.
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 $346,774 and $348,045 at December 31,
2001 and 2000, respectively. Depreciation expense was $141,553, $146,952 and
$133,364 for the years ended December 31, 2001, 2000 and 1999, respectively.
Other assets include agents' balances of $43,082 and $49,135 at December 31,
2001 and 2000, respectively, after reduction for allowance of doubtful
accounts. The allowance account had credit recorded of $8,938 in 2001, bad
debt expense recorded in operations of $8,200 for the year ended December 31,
2000 and a $9,000 credit recorded during the same period in 1999.
Other assets also include intangible assets of approximately $174,000. The
Company evaluates its intangible assets periodically for impairment by
evaluation of the future benefit of the underlying investments or rights
acquired. These assets include the cost of 26 state licenses acquired in 1991
as part of the Statesmen Life Insurance Company acquisition and certain loan
acquisition costs. Amortization expense of approximately $7,100, $3,109, and
$3,109 was recorded for each of the years ended December 31, 2001, 2000 and
1999, respectively.
The Company accounts for the 1994 Brokers and Agents Stock Option Plan using
the fair value method as required by SFAS No. 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 per share is based on net gain divided by the weighted average number
of shares. The weighted average number of shares was reduced for the
contingent treasury shares described in Note 6.
2. Shareholders' Equity
--------------------
At December 31, 2001 and 2000, shareholders' equity includes approximately
$9,199,685 and $7,886,000, respectively, of BNLAC net assets. The ability of
BNLAC to pay dividends to the Company is restricted under Arkansas insurance
laws and must be approved by the insurance commissioner if it exceeds the
lesser of 10% of surplus or net gain from operations for the year.
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 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.
Capital and surplus and net loss of BNLAC as reported on a statutory basis are
as follows:
December 31,
---------------------------------
2001 2000 1999
------ ------ ------
Capital and Surplus $7,858,222 $7,003,585 $4,130,351
========== ========== ==========
Net Income $1,443,426 $2,853,930 $ 335,458
========== ========== ==========
F-8
2. Shareholders' Equity (continued)
-------------------------------
Notes to Consolidated Financial Statements
The following is a reconciliation of consolidated net income and shareholders'
equity per the financial statements included herein to BNLAC unconsolidated
net income and capital and surplus on a statutory basis:
December 31, 2001 December 31, 2000 December 31, 1999
--------------------- --------------------- ----------------------
Income Capital and Income Capital and Income Capital and
Surplus Surplus Surplus
-------- ----------- -------- ----------- -------- -------------
Consolidated reporting
under generally accepted
accounting principles $1,283,478 $5,674,308 $3,444,483 $8,506,925 $206,979 $4,305,135
Attributable to Parent
Company and BNL Equity 57,013 (3,525,377) 123,143 620,681 (128,529) 428,703
--------- --------- --------- --------- --------- ----------
Brokers National Life
Assurance Company 1,226,465 9,199,685 3,321,340 7,886,244 335,508 3,876,432
Deferred aquisition cost 30,399 (278,260) 44,083 (308,101) 27,732 (352,185)
Reserve and premium
adjustments 30,884 44,636 (60,502) 40,799 (121) 154,507
Interest maintenance
reserve/AVR 17,113 (330,480) 20,604 (395,843) (3,829) (388,472)
Unrealized appreciation of
securities - 64,254 - 127,854 - 785,038
Annuity deposits and related
adjustments 14,808 580,495 (30,377) 541,979 (21,209) 499,999
Income tax credit 260,000 (38,000) (548,000) (548,000) - -
Other (136,243)(1,384,108) 106,782 (341,347) (2,623) (444,968)
--------- ---------- ---------- ---------- --------- ----------
BNLAC Statutory Basis $1,443,426 $7,858,222 $2,853,930 $7,003,585 $335,458 $4,130,351
========= ========== ========== ========== ========= ==========
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 Company and its Subsidiaries file consolidated income tax returns.
In 2000, the Company reduced the 100% valuation allowance against its deferred
tax asset and recorded a net deferred tax asset of $767,000. This reflected
management's revised estimate of the future benefit that will be realizable
from use of loss carry forwards. Recording the deferred tax asset reduced the
federal tax expense of $57,000 by a credit amount of $767,000, for a net
federal tax benefit of $710,000 at December 31, 2000.
At December 31, 2001 and 2000, respectively, the Company had gross deferred
tax assets of $2,450,000 and $2,300,000 with corresponding valuation
allowances of $1,926,000 and $1,533,000 resulting from net operating loss
carryovers and temporary differences primarily related to the life insurance
subsidiary. The resulting net deferred tax asset is $524,000 and $767,000 at
December 31, 2001 and 2000, respectively. Realization of the deferred tax
asset is dependent on generating sufficient taxable income prior to expiration
of the loss carry forward. 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 carry forward period are reduced.
Income tax benefit was as follows:
2001 2000 1999
----------- ---------- ---------
Current tax provisions $ 52,993 $ 57,000 $ -
Deferred tax benefit 243,000 (767,000) $ -
-------- ---------- ---------
Total income tax provision
(benefit) $295,993 $(710,000) $ -
======== ========== =========
F-9
3. Income Taxes (continued)
The reconciliation of income taxes computed at the federal statutory income
tax rate to total income taxes for the years ended December 31, 2001, 2000 and
1999 is as follows:
2001 2000 1999
---------- ---------- ----------
Book income before tax $1,579,471 $ 2,734,483 $ 206,979
========== =========== ==========
Income tax computed at
statutory rate (34%) $ 537,020 $ 929,724 $ 70,373
Valuation allowance for
AMT credit 52,993 57,000 -
Revision of valuation
allowance (25,510) (1,231,862) (70,373)
Rate differential (268,510) (464,862) -
------------- ------------ -----------
Total income tax provision
(benefit) $ 295,993 $ (710,000) $ -
============= =========== ===========
The Company has net operating loss carry forwards available for income tax
purposes at December 31, 2001 as follows:
Expiring
----------------
2002 $ 283,675
2003 99,275
2004 24,065
2005 72,992
2006 545,898
2007 327,344
2008 341,837
2009 249,082
2010 256,324
2011 225,497
2012 385,074
2018 753,214
2019 133,929
2020 65,199
----------
$3,763,405
==========
F-10
4. Investments
-----------
The amortized cost and estimated market value of investments in fixed maturity
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 2001 Cost Gains Losses Value
----------------- --------- ---------- ---------- --------
US Treasury securities and
obligations of US government
corporations and agencies $9,900,784 $203,083 $(162,882) $ 9,940,985
Obligations of states and
political subdivisions 298,196 11,804 - 310,000
Corporate securities 3,256,735 756 (45,066) 3,212,425
Mortgage-backed securities
GNMA 493,140 - (21,232) 471,908
Public utility bonds 400,354 4,896 (8,750) 396,500
----------- -------- --------- -----------
Totals $14,349,209 $220,539 $(237,930) $14,331,818
=========== ======== ========= ===========
December 31, 2000
-----------------
US Treasury securities and
obligations of US government
corporations and agencies $13,020,746 $195,222 $(353,693) $12,862,275
Obligations of states and
political subdivisions 298,028 972 (500) 298,500
Corporate securities 211,000 - (10,885) 200,115
Mortgage-backed securities
GNMA 9,006 - (2,177) 6,829
Public utility bonds 199,218 3,782 (9,000) 194,000
----------- -------- ---------- -----------
Totals $13,737,998 $199,976 $(376,255) $13,561,719
=========== ======== ========== ===========
The amortized cost and estimated fair value of investments in fixed maturity
securities at December 31, 2001 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, 2001
-----------------------
Estimated
Amortized Market
Cost Value
--------- ---------
Due in one year or less $ 226,085 $ 230,625
Due after one year through five years - -
Due after five years through ten years 2,901,024 2,877,450
Due after ten years 10,728,960 10,751,835
---------- ----------
13,856,069 13,859,910
Mortgage-backed securities 493,140 471,908
---------- ----------
$14,349,209 $14,331,818
=========== ===========
F-11
4. Investments (continued)
-----------------------
Proceeds from sales and maturities of investments in fixed maturity securities
and equity securities for the years ended December 31, 2001, 2000 and 1999
were $10,614,580, $1,052,149 and $2,982,937, respectively. Gross gains were
$14,472, $1,220 and $28,119 and gross losses were $504, $105,804 and $374 as
of December 31, 2001, 2000 and 1999, respectively.
Investment in equity securities at December 31, 2001 and 2000 represents
common stock investments as follows:
2001 2000
----------------- -----------------
Market Market
Cost Value Cost Value
------ --------- ------ ---------
Banks, trusts
and insurance companies $68,790 $31,929 $37,147 $66,532
Industrial, savings
and loans and other 17,398 15,520 - -
-------- ------- ------- ------
$86,188 $47,449 $37,147 $66,532
Net investment income for the years ended December 31, 2001, 2000 and 1999 is
as follows:
2001 2000 1999
------------ ----------- ----------
Interest on debt securities
and cash investments $1,061,759 $908,487 $792,116
Dividends on equity securities - - -
---------- -------- --------
1,061,759 908,487 792,116
Investment expenses (32,302) (20,249) (16,968)
---------- -------- --------
Net investment income $1,029,457 $888,238 $775,148
========== ======== ========
Net realized gains and losses are summarized below:
2001 2000 1999
----------- ---------- -----------
Debt securities $ 3,558 $ 1,120 $ 28,399
Equity securities 10,410 (105,705) -
Fixed assets 2,263 2,164 (654)
-------- --------- ----------
$16,231 $(102,421) $ 27,745
======== ========= =========
Notes Receivable of $1,357,407 consists of a convertible debenture loan from
one of the Company's subsidiaries, BNL Equity Corporation (BNLE), to EPSI
Benefits, Inc. (EBI), a Texas Corporation. The loan bears interest at an
annual rate of 14%, payable monthly, with principal payments commencing
September 15, 2008 and a maturity date of August 15, 2015. To protect its
interest, BNLE may convert the debenture into 51% of the outstanding common
stock of EBI, subject to regulatory approval. The note is one of several
agreements entered into by the Company's subsidiaries which expand the
business relationship with EBI and its subsidiary, Employer Plan Services,
Inc. (EPSI), which provides substantially all of the A&H claims processing
and adjudication for the Company's insurance subsidiary, BNLAC. BNLE
receives a marketing fee from EBI under a related marketing agreement. As a
part of the agreement, BNLAC agreed to pledge $335,000 of bonds as guarantor
for the operating line of credit of EPSI in conjunction with these agreements.
F-12
4. Investments (continued)
-----------------------
Investment in equity securities at December 31, 2001, includes an investment
of $8,104 in call options on common stock held for trading purposes. These are
stated at $25 which approximates market value.
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
capital.
5. Fair Value of Financial Instruments
-----------------------------------
2001 2000
--------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------- ----------------------
Assets
------
Cash and Cash Equivalents
(Note 1) 1,726,746 1,726,746 (a) 932,816 932,816 (a)
Investments-fixed
maturity, available
for sale (Note 4 &
Note 1) 14,331,818 14,331,818 (b) 13,561,719 13,561,719 (b)
Investments - equity
securities
(Note 4 & Note 1) 47,449 47,449 (b) 66,532 66,532 (b)
Notes receivable
(Note 4) 1,357,407 1,357,407 (a) - -
Other financial
instruments - Assets 417,824 417,824 (a) 347,160 347,160 (a)
----------- ---------- ---------- ----------
Total financial
instruments - Assets $17,881,244 $17,881,244 $14,908,227 $14,908,227
=========== =========== ========== ===========
Liabilities
- -----------
Premium deposit funds $ 61,987 $ 61,987 (a) $ 101,491 $ 101,491 (a)
Supplementary contracts
without life
contingencies (Note 1) 66,148 66,148 (a) 80,295 80,295 (a)
Annuity deposits
(Note 1) 2,866,464 2,866,464 (a) 2,805,220 2,805,220 (a)
------------ ---------- ---------- ---------
Total financial
instruments-
Liabilities $ 2,994,599 $ 2,994,599 $ 2,987,006 $ 2,987,006
=========== =========== =========== ===========
(a) The indicated assets and liabilities are carried at book value, which
approximates 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 and Supplemental Cash Flow Information
--------------------------------------------------------------------
On November 5, 2001, the Board of Directors of the Company and BNL Equity
Corporation approved a settlement in the class action case of Myra Jo Pearson,
Paul Pearson and James Stilwell v. BNL Equity Corporation (Formerly Known as
United Arkansas Corporation), BNL Financial Corporation (Formerly Known as
United Iowa Corporation), and certain Officers of the Company, Pulaski County
Circuit Court, Third Division, No. 96-4971. The settlement, which was approved
by the Pulaski County Circuit Court and the Arkansas Insurance Commissioner,
subsequent to December 31, 2001, is subject to various conditions, including
the approvals by any other applicable regulatory authorities and conditioned
upon compliance with federal and state securities laws.
F-13
6. Commitments and Contingencies and Supplemental Cash Flow Information
(continued)
As part of the settlement agreement, the Company shall issue and exchange its
bonds in the principal amount of $1.50 for each share of common stock of BNL
owned by the members of the Class. The Bonds shall be for a term of twelve
years with principal payable at maturity and shall bear interest at the rate
of 6% per annum payable annually from the previous fiscal year's earnings of
BNL. If any interest payment is not made, it will be added to the principal
and paid at maturity. The Bonds shall be fully callable and redeemable at par
at any time by BNL.
The Company has reflected the settlement provisions in the December 31, 2001
financial statements as recorded contingencies since management considers it
probable the settlement will be finalized in its current form in 2002. These
are reflected on the Balance Sheet as contingent long-term liabilities of
$4,269,404 and contingent treasury stock of a like amount and has no effect on
the Statement of Cash Flows. The settlement includes a provision for paying
Class Counsel collectively the single sum of $575,000 for all legal fees,
costs and expenses. Additional expenses for registration of the bonds and the
incidental costs are not determinable at this time.
The Company has entered into noncancelable operating leases for office space
and equipment. Future minimum payments under the leases are as follows:
2002 $ 217,000
2003 181,000
2004 150,000
2005 100,000
----------
Total $ 648,000
==========
Related lease cost incurred for the years ended December 31, 2001, 2000 and
1999 was $225,470, $218,301 and $197,175, respectively.
The Company's wholly owned insurance subsidiary may 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.
The Company's insurance subsidiary is guarantor on the operating line of
credit of a third party in the amount of $250,000. See Note 4 regarding
related note receivable transaction.
Cash deposits in excess of federally insured limits are approximately
$1,148,207 at December 31, 2001.
For information regarding minimum capital requirements to maintain a license
to sell in various states, see Note 2.
F-14
7. Liability for Unpaid Claims
Activity in the liability for unpaid claims is summarized as follows.
---------- ----------
2001 2000
---------- ----------
Balance at January 1 $2,446,350 $2,729,175
less reinsurance
recoverable - -
--------- ---------
Net Balance at January 1 2,446,350 2,729,175
--------- ---------
Incurred related to:
Current year 24,975,905 22,872,405
Prior years (143,953) (648,816)
---------- ----------
Total Incurred 24,831,952 22,223,589
---------- ----------
Paid related to:
Current year 22,528,970 20,426,055
Prior years 2,302,397 2,080,359
---------- ----------
Total Paid 24,831,367 22,506,414
Net Balance at December 31 2,446,935 2,446,350
Plus reinsurance
recoverable - -
--------- ---------
Balance at December 31 $2,446,935 $2,446,350
========= =========
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.
Prior to October 31, 2001, the Company reinsured 100% of its Accidental
Death and Dismemberment insurance under a quota share reinsurance contract
with American National Insurance Company. American National Insurance Company
is rated "A+" Superior. Effective November 1, 2001, the Company entered into a
quota share reinsurance agreement with TIG Insurance Company. TIG accepts 50%
of the risk on the first $20,000 of liability and 100% of the liability
thereafter. TIG is rated "B++" Fair.
BNLAC's Accidental Death Benefit riders are reinsured 100% through a Bulk ADB
reinsurance agreement with Business Mens Assurance Company. Business Mens
Assurance Company was rated "A" (Excellent) by AM Best Company for 2000.
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.
BNLAC's Group Life and AD&D insurance are reinsured under a Quota Share
reinsurance agreement with Hannover Life Reassurance Company of America. The
reinsurer is liable for a 90% quota share on the life of each insured up to
the policy maximum of $65,000 on the group life insurance. Hannover Life
Reassurance Company of America was rated "A" (Excellent) by AM Best Company
for 2000.
The Company began marketing a Hospital Indemnity Plan in 1998 and retained 50%
of the risk up through September 1, 2000. The Company discontinued the
reinsurance agreement due to the favorable claims experience and currently
retains 100% of the risk.
F-15
8. Reinsurance (continued)
Following is a summary of reinsurance for December 31, 2001 and 2000:
Percentage
Ceded Assumed Of Amount
Gross Other From Other Net Assumed
December 31, 2001 Amount Companies Companies Amounts To Net
----------------- --------- --------- ------- ---------- ------
Life insurance in
force (in thousands) $ 34,515 $ 9,098 $ - $ 25,417 0.0%
========== ======== ====== ========== =====
Premiums-life
insurance $ 409,631 $ 41,574 $ - $ 368,057 0.0%
Premiums-accident and
health 38,014,998 12,881 - 38,002,117 0.0%
----------- ------- ------ ----------- -----
Total insurance
premiums $38,424,629 $ 54,455 $ - $38,370,174 0.0%
=========== ======== ====== =========== =====
December 31, 2000
-----------------
Life insurance in
force (in thousands) $ 28,127 $ 7,722 $ - $ 20,405 0.0%
========== ======= ==== ========== =====
Premiums-life
insurance $ 292,961 $(3,102) $ - $ 296,063 0.0%
Premiums-accident and
health 34,904,579 22,723 - 34,881,856 0.0%
---------- ------ ---- ---------- -----
Total insurance
premiums $35,197,540 $19,621 $ - $35,177,919 0.0%
=========== ======= ===== =========== =====
December 31, 1999
-----------------
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%
=========== ======= ======== =========== ======
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 an
incentive to sales persons of BNLAC. Initially 250,000 shares were available
under the plan. Options for an additional 1.75 million shares have been
authorized by the Board of Directors, including 500,000 shares in November
1997, 500,000 shares in March 2000, and 750,000 in June 2001. 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 2001,
2000 and 1999, the Company granted 119,525, 184,575 and 185,150 stock options,
respectively, with an exercise price of $.50 per share. There were 1,054,600
stock options outstanding at December 31, 2001. 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 $800, $1,200 and $600 in 2001, 2000 and 1999,
respectively. These values were computed using a binomial method as prescribed
in SFAS No. 123 and certain assumptions include a risk free interest rate of
4.5%, expected life of 3.0 years, expected volatility of 10.5% and no expected
dividends due to statutory limitations. The estimated weighted average
remaining life of the options is 1.6 years. The options do not have a dilutive
effect on earnings per share at this time, but may have such an effect in the
future. See Note 1.
In 2001, the Board of Directors approved the 2001 Incentive Bonus Plan for
the benefit of certain Officers of the Company. The plan provides for semi-
annual payment of cash bonuses based on 10% of consolidated pre-tax operating
income. The life company subsidiary bears its prorata share of the bonus
expense based on its pre-tax statutory profits. Bonus expense for 2001 was
$144,662 under this plan.
F-16
9. Benefit Plans for Certain Brokers/Agents and Employees (continued)
------------------------------------------------------------------
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. Stock bonuses in the amount of $51,674
and $100,000 were granted in 2001 and 2000, respectively.
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. The Company did not contribute in 2001, 2000
or 1999.
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. The
Company has no distinctly reportable business segments.
11. Change in Accounting Estimate
------------------------------
Based on claims experience in 2001 and 2000, the estimate of claims liability
at December 31, 2000 and 1999 was overstated by approximately $145,000 and
$650,000, respectively. The over estimate of this liability has contributed a
corresponding decrease in claims expense in 2001 and 2000.
In 2000, the Company revised the estimated valuation allowances against its
deferred tax asset. See Note 3.
12. Subsequent Events
-----------------
No events have occurred subsequent to the close of the books on December 31,
2001, which have a material effect on the financial condition of the Company.
Certain regulatory approvals relating to the litigation settlement were
received subsequent to year end. See Note 6.
F-17
13. Unaudited Quarterly Results of Operations
-----------------------------------------
The summary unaudited quarterly results of operations were as follows:
Quarter Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- -------------- ------------
2001
----
Premium Income $ 9,497,093 $ 9,333,401 $ 9,675,834 $ 9,957,136
Net Investment Income 247,658 248,820 270,399 262,580
Marketing Fees 22,989 37,600
Realized Gains (Losses) 679 10,964 1,314 3,274
Expenses (9,040,238) (9,424,414) (10,167,970) (9,653,641)
----------- ----------- ------------ -----------
Net Income $ 705,192 $ 168,771 $ (197,434) $ 606,949
Earnings Per Share
(Basic and Diluted) $ 0.03 $ 0.01 $ (0.01) $ 0.02
=========== ========== ============ ==========
Comprehensive Income
(Loss) $ 865,116 $ 228,244 $ (53,606) $ 334,484
2000
----
Premium Income $ 8,701,580 $ 8,770,015 $ 8,962,095 $ 8,963,223
Net Investment Income 202,056 202,685 243,870 239,627
Realized Gains (Losses) 1,220 800 (105,804) 1,363
Expenses (8,534,204) (8,178,789) (7,699,993) (8,325,261)
----------- --------- --------- ---------
Net Income $ 370,652 $ 794,711 $ 1,400,168 $ 878,952
=========== =========== ============ ==========
Earnings Per Share
(Basic and Diluted) $ 0.02 $ 0.03 $ 0.06 $ 0.05
=========== =========== ============ ==========
Comprehensive Income $ 566,816 $ 758,446 $ 1,594,519 $ 1,282,010
=========== =========== ============ ==========
F-18
Item 14 (d) - Schedule III
BNL Financial Corporation (Parent Company)
Condensed Financial Information of Registrant
Balance Sheets
2001 2000
---------- ---------
Assets
Cash and cash equivalents $ 20,693 $ 3,296
Investments, at fair value 98,750 96,500
Investment in equity
securities, at fair value 686 632
--------- --------
Total Investments, Including
Cash and Cash Equivalents 120,129 100,428
Accrued investment income 1,463 2,330
Furniture and equipment, net 42 7,559
Investment in Unconsolidated
Subsidiaries and Affiliates,
at equity (eliminated in
consolidated statements) 9,492,444 8,078,467
Income tax asset 236,000 219,000
Other assets 99,045 101,143
--------- ---------
Total Assets $9,949,123 $8,508,927
========== ==========
Liabilities
Contingent long-term
liabilities 4,269,404 $ -
Other liabilities 5,408 2,003
--------- ----------
Total Liabilities 4,274,812 2,003
--------- ----------
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 14,313,000 14,308,230
Retained earnings (4,779,745) (6,063,225)
Contingent treasury stock
2,846,269; 0 shares,
respectively (4,269,404) -
Treasury stock, at cost,
13,695; 138,795 shares,
respectively (6,325) (64,105)
Unrealized appreciation
(depreciation) of
securities (49,454) (140,215)
(depreciation) of securities --------- ---------
Total Shareholders' Equity 5,674,311 8,506,924
--------- ---------
Total Liabilities and
Shareholders' Equity $9,949,123 $8,508,927
========== ==========
F-19
BNL Financial Corporation (Parent Company)
Condensed Financial Information of Registrant
Statement of Operations
2001 2000 1999
---------- ---------- ----------
Income
Net investment income $ 6,768 $ 6,986 $ 7,669
Realized gains (losses) 2,608 (55,060) 765
---------- ---------- ---------
Total Income 9,376 (48,074) 8,434
---------- ---------- ---------
Expenses
General and administrative 68,907 58,554 117,799
---------- ---------- ---------
Total Expenses 68,907 58,554 117,799
---------- ---------- ---------
Income (loss) from
operations before income
taxes (59,531) (106,628) (109,365)
Provision for income taxes
(benefit) (17,000) (219,000) -
---------- ---------- ---------
Net income (loss) before
equity in undistributed
income of Subidiaries (42,531) 112,372 (109,365)
Equity in undistributed
income of Subsidiaries 1,326,009 3,332,111 316,344
--------- --------- ---------
Net Income $ 1,283,478 $ 3,444,483 $ 206,979
========== ========== ==========
Net Income Per Common
Share (Basic and
Diluted) $ .06 $ 0.15 $ 0.01
========== ========== ==========
BNL Financial Corporation (Parent Company)
Condensed Financial Information of Registrant
Statements of Cash Flows
2001 2000 1999
----------- ---------- ----------
Cash Flows from Operating
Activities
Net income 1,283,478 3,444,483 206,979
Adjustments to
compute cash
provided by
operating
activities: (1,326,469) (3,454,781) (237,441)
Net Cash --------- --------- ---------
Provided (Used)
by Operating
Activities (42,991) (10,298) (30,462)
--------- --------- ---------
Cash Flows from Investing
Activities
Proceeds from maturity
or redemption of
investments - 1,220 765
Proceeds from sale of
furniture and equipment 2,608 1,600 -
-------- -------- -------
Net Cash Provided by
Investing Activities 2,608 2,820 765
-------- -------- -------
Cash Flows from Financing
Activities
Sale of treasury
stock 57,780 - -
-------- --------- -------
Net Cash Provided
by Financing
Activities 57,780 - -
-------- --------- -------
Net Increase
(Decrease) in
Cash and Cash
Equivalents 17,397 (7,478) (29,697)
Cash and Cash
Equivalents,
Beginning of
Period 3,296 10,774 40,471
-------- -------- --------
Cash and Cash
Equivalents,
End of Period $ 20,693 $ 3,296 $ 10,774
========= ======== ========
F-20