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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______to_____ .
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Commission File No. 0-16880
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BNL FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
IOWA 42-1239454
(State of incorporation) (I.R.S. Employer Identification No.)
2100 W. William Cannon, Suite L
Austin, Texas 78745
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 383-0220
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No____
As of September 30, 2002, the Registrant had 20,567,504 shares of Common Stock,
no par value, outstanding.
5
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
To The Board of Directors
BNL Financial Corporation
We have reviewed the accompanying Consolidated Balance Sheet of BNL Financial
Corporation and Subsidiaries as of September 30, 2002 and the related
Consolidated Statements of Income and Comprehensive Income and Cash Flows for
the nine-month periods ended September 30, 2002 and 2001. These financial
statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the Consolidated Balance Sheet of BNL Financial Corporation and
Subsidiaries as of December 31, 2001 and the related Consolidated Statements of
Income and Comprehensive Income and Cash Flows for the year then ended (not
presented herein); and in our report dated February 9, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying Consolidated Balance Sheet as of
December 31, 2001 is fairly stated, in all material respects, in relation to the
Consolidated Balance Sheet from which it has been derived.
Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c.
November 14, 2002
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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ASSETS
September 30, December 31,
2002 (Unaudited) 2001 (Audited)
--------------------- -------------------
Cash and cash equivalents $ 3,424,942 $ 1,726,746
Investment in fixed maturities available for sale, at fair value (amortized
cost $2,449,501; $14,349,209, respectively) 2,511,100 14,331,818
Investment in fixed maturities held to maturity, at adjusted book value
(fair value $11,586,510) See Note 4. 11,586,510 -
Note receivable 1,357,407 1,357,407
Investment in common stock (cost $191,608; $86,100, respectively) 58,770 47,449
--------------------- -------------------
Total Investments, Including Cash and Cash Equivalents 18,938,729 17,463,420
Accrued investment income 249,087 224,100
Furniture and equipment, net 463,570 423,608
Deferred policy acquisition costs 258,492 278,258
Policy loans 123,884 115,652
Receivable from reinsurer 34,990 34,990
Premiums due and unpaid 875,766 786,345
Income tax assets 394,000 524,000
Intangible assets 169,505 173,867
Other assets 148,190 149,616
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Total Assets $21,656,213 $20,173,856
===================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for future policy benefits $ 1,524,955 $ 1,454,007
Policy claims payable 2,419,552 2,446,935
Annuity deposits 2,841,446 2,866,464
Deferred annuity profits 483,533 496,338
Premium deposit funds 56,594 61,987
Supplementary contracts without life contingencies 91,899 66,148
Advanced and unallocated premium 477,458 798,790
Commissions payable 665,926 623,484
Accrued taxes and expenses 643,656 491,513
Other liabilities 356,634 349,477
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Total Liabilities 9,561,653 9,655,143
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COMMITMENTS AND CONTINGENCIES (NOTE 2)
Contingent settlement expenses payable 575,000 575,000
Contingent long-term liabilities 4,269,404 4,269,404
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Total Commitments and Contingencies 4,844,404 4,844,404
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Shareholders' Equity:
Common stock, $.02 stated value, 45,000,000 shares
authorized, (23,428,350; 23,311,944 respectively) shares issued and
outstanding 468,567 466,239
Additional paid-in capital 14,362,558 14,313,000
Accumulated other comprehensive income (loss) (98,009) (49,455)
Accumulated deficit (3,213,556) (4,779,746)
Contingent Treasury stock, 2,846,269 shares (Note 2) (4,269,404) (4,269,404)
Treasury stock, at cost (0, 13,695 shares; respectively) 0 (6,325)
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Total Shareholders' Equity 7,250,156 5,674,309
--------------------- -------------------
Total Liabilities and Shareholders' Equity $21,656,213 $20,173,856
===================== ===================
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(See accompanying notes and Independent Accountants' Report)
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
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Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- -----------------------------
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- -------------- -------------- ----------------
Income:
Premium income $10,443,117 $ 9,675,833 $30,723,715 $28,506,328
Net investment income 299,162 270,399 897,765 766,877
Marketing fees 37,389 22,989 111,544 22,989
Realized gains (loss) (95,961) 1,314 (140,278) 12,957
--------------- -------------- -------------- ---------------
Total Income 10,683,707 9,970,535 31,592,746 29,309,151
--------------- -------------- -------------- ---------------
Expenses:
Increase (decrease) in liability for
future policy benefits 47,836 5,188 70,947 17,088
Policy benefits and other insurance cos 7,889,578 7,566,698 23,392,168 22,044,979
Amortization of deferred policy acquisition
costs 9,015 4,571 19,766 29,278
Contingent settlement expense - 575,000 - 575,000
Operating expenses 1,812,669 1,743,369 5,323,721 4,852,013
Taxes, other than on income 313,927 326,850 975,954 915,974
--------------- -------------- -------------- ---------------
Total Expenses 10,073,025 10,221,676 29,782,556 28,434,332
--------------- -------------- -------------- ---------------
Income (Loss) from Operations
before Income Taxes 610,682 (251,141) 1,810,190 874,819
Provision for income taxes (benefit) 50,000 (53,707) 244,000 198,293
--------------- -------------- -------------- ---------------
Net Income (Loss) $560,682 ($197,434) $1,566,190 $676,526
=============== ============== ============== ===============
Net income (loss)per common share
(basic and diluted) $0.03 ($0.01) $0.08 $0.03
=============== ============== ============== ===============
Weighted average number of fully
Paid common shares 20,582,081 23,311,944 20,582,081 23,311,944
=============== ============== ============== ===============
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gain (loss)
arising during period $ (100,917) $145,141 $(188,833) $376,184
Reclassification adjustment for gain
(loss) included in net income 95,961 (1,313) 140,279 (12,956)
--------------- -------------- -------------- ---------------
Other Comprehensive Income (Loss) (4,956) 143,828 (48,554) 363,228
--------------- -------------- -------------- ---------------
Comprehensive Income $ 555,726 ($53,606) $ 1,517,636 $ 1,039,754
=============== ============== ============== ===============
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(See accompanying notes and Independent Accountants' Report)
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended
September 30,
-------------------------------------
2002 2001
(Unaudited) (Unaudited)
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Cash flows from operating activities:
Net income $ 1,566,190 $ 676,526
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized loss (gain) on investments 140,278 (12,958)
Decrease in deferred tax asset 130,000 162,000
Depreciation 142,530 85,265
Amortization of deferred acquisition costs,
organization costs and state licenses acquired 24,128 32,579
Accretion of bond discount 1,125 1,200
Change in assets and liabilities:
(Increase) decrease in accrued investment income (24,987) 15,065
Decrease in premiums due and unpaid (89,421) (9,802)
Increase in liability for future policy benefits 70,948 17,089
Decrease in policy claims payable (27,383) (78,000)
Increase (decrease) in annuity deposits and deferred (37,823) 54,327
profits
Decrease in premium deposit funds (5,393) (37,935)
Decrease in advanced and unallocated premium (321,333) (192,277)
Increase in commissions payable 42,442 69,250
Increase in contingent settlement expense - 575,000
Other, decrease (increase) 152,492 (47,496)
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Net Cash Provided By Operating Activities 1,763,793 1,309,833
----------------- ----------------
Cash flows from investing activities:
Proceeds from sales of fixed maturity securities 4,165,307 5,963,852
Proceeds from sales of equity securities 174,293 84,877
Proceeds from sales of furniture and equipment - (294)
Purchase of furniture and equipment (182,491) (107,597)
Purchase of fixed maturity securities (4,124,625) (4,620,674)
Purchase of equity securities (182,044) (123,511)
Note receivable - (1,357,407)
----------------- ----------------
Net Cash Provided By (Used In) Investing Activities (149,560) (160,754)
----------------- ----------------
Cash flows from financing activities:
Treasury shares sold 6,325 62,550
Exercised stock options and stock bonus 51,886 -
Net (payments) receipts on supplementary contracts 25,752 (33,269)
----------------- ----------------
Net Cash Provided By Financing Activities 83,963 29,281
----------------- ----------------
Net Increase In Cash and Cash Equivalents 1,698,196 1,178,360
Cash And Cash Equivalents, Beginning Of Period 1,726,746 932,816
----------------- ----------------
Cash And Cash Equivalents, End Of Period $ 3,424,942 $2,111,176
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(See accompanying notes and Independent Accountant's Report)
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Note 1.
The accompanying Consolidated Financial Statements (unaudited) as of September
30, 2002 and September 30, 2001 have been reviewed by independent certified
public accountants. In the opinion of management, the aforementioned financial
statements contain all adjustments necessary to present fairly the financial
position as of September 30, 2002, and the results of operations for the periods
ended September 30, 2002 and September 30, 2001, and the cash flows for the
periods ended September 30, 2002 and September 30, 2001.
The statements have been prepared to conform to the requirements of Form 10-Q
and do not necessarily include all disclosures required by generally accepted
accounting principles (GAAP). The reader should refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, previously filed with
the Commission, for financial statements for the year ended December 31, 2001,
prepared in accordance with GAAP. Net income per share of common stock is based
on the weighted average number of outstanding common shares.
Note 2.
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, 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.
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 September 30, 2002
and 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.
Note 3.
In March 2002, the Board of Directors approved the 2002 Non-Director,
Non-Executive Stock Option Plan, subject to any necessary authorizations from
any regulatory authority. The plan is intended to assist the Company in
attracting and retaining individuals of outstanding ability and to promote
concurrence of their interests with those of the Shareholders of the Company. No
options have been issued under the Plan and the plan has no material effect on
the financial statements of the Company.
Note 4.
Effective September 30, 2002, the Company elected to change its accounting
treatment for approximately $11.6 million of debt securities in its investment
portfolio in accordance with SFAS No. 115. These securities, formerly accounted
for as "Available for Sale" and reflected in the financial statements at market
value, will be accounted for as "Hold to Maturity". This reclassification
requires the Company to report the bond's value on the balance
-6-
sheet at fair market value at the date of reclassification. In accordance with
SFAS No. 115, $1,817, the combined total of the unrealized holding gains and
losses and the unamortized premium and discounts at the date of
reclassification, will be amortized against income over the remaining life of
the bonds. The unrealized holding gains & losses of $33,444, reflected as a
component of "Accumulated Other Comprehensive Income" in Stockholders Equity on
the reclassification date, will also be amortized to income over the remaining
life of the bonds.
Previously the bonds were classified as Available for Sale and carried on the
balance sheet at market value with the unrealized gain or loss recorded in the
surplus section of the balance sheet. This reclassification more accurately
reflects management's ability and intent to hold the bonds until maturity. No
further adjustments to surplus will be made as bond values change.
Approximately $2.5 million of the bond portfolio remains classified as Available
for Sale. The bonds include; Telecommunication, Utilities, Automobile bonds and
U. S. Treasury Bonds that have large unrealized profits. The Company may sell
these bonds before they mature.
-7-
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results
of Operations
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In this section, we review the consolidated results of operations for the nine
months ended September 30, 2002 and 2001 and significant changes in the
consolidated financial condition of the Company. This discussion should be read
in conjunction with the accompanying consolidated financial statements, notes
and selected financial data.
Forward-Looking Statements
All statements, 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; and (vi) the risk
factors or uncertainties listed from time to time in our filings with the
Securities and Exchange Commission.
Liquidity and Capital Resources
At September 30, 2002, we had liquid assets of $3,424,942 in cash, money market
savings accounts, Treasury Bills and short-term certificates of deposit.
The major components of operating cash flows are premium income and investment
income while policy benefits are the most significant cash outflow. In the first
nine months of 2002, BNLAC collected $30,426,605 of premiums and annuity
deposits (gross before reinsurance) and we had consolidated investment income of
$897,765. Other sources of cash flow in 2002 were overwrite commissions of
$328,280 on vision products and marketing fees from EPSI Benefits Inc. of
$111,544. The Company paid $19,579,501 of policy benefits in the first nine
months of 2002.
The Company's investments are primarily in U.S. Government, Government Agency
and other investment grade bonds. See Note 4 to the Consolidated Financial
Statements regarding reclassification of certain debt securities to "Hold to
Maturity" classification. We do not hedge our investment income through the use
of derivatives.
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.
Our insurance operations are conducted through Brokers National Life Assurance
Company ("BNLAC"). At September 30, 2002, BNLAC had statutory capital and
surplus of $9,622,555. 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 $4,000,000. Management monitors the minimum capital and surplus
requirements to maintain compliance in each state in which it is licensed.
-8-
Consolidated Results of Operations
Premium income for the third quarter of 2002 was $10,443,117 compared to
$9,675,833 for the same period in 2001. For the first nine months of 2002
premium income was $30,723,715 compared to $28,506,328 for the same period in
2001. The increase of 7.9% for the third quarter and 7.8% for the first nine
months was due to an increase in group dental insurance premiums written.
Net investment income was $299,162 for the third quarter of 2002 compared to
$270,399 for the third quarter of 2001. Net investment income was $897,765 for
the nine-month period ended September 30, 2002 compared to $766,877 for the same
period in 2001. The 10.6% increase for the third quarter and 17.1% increase for
the first nine months were primarily due to an increase in the amount of
investments purchased with the positive cash flow from operations and the
interest on the note receivable from EPSI Benefits Inc.
The Company received $37,389 of marketing fees from EPSI Benefits Inc. in the
third quarter of 2002 compared to $22,989 for the third quarter of 2001.
Marketing fees were $111,544 for the first nine months of 2002 compared $22,989
in 2002. The Marketing Fees are collectable in conjunction with the expanded
business relationship of the Company with EPSI Benefits Inc. which became
effective July 25, 2001.
Realized gains (loss) on investments were ($95,961) for the third quarter of
2002 and ($140,278) for the first nine months of 2002 compared to $1,314 for the
third quarter and $12,957 for the first nine months in 2001. The loss in 2002
was due to a mark down in the book value of $200,000 par value MCI Bonds, which
created a year to date realized loss of $147,988. The decrease in book value of
the bonds was appropriate due to the financial problems of WorldCom (parent of
MCI).
For the third quarter of 2002, increase in liability for future policy benefits
was $47,836 compared to $5,188 for the same period in 2001. For the nine-month
period ended September 30, 2002, liability for future policy benefits expense
was $70,947 compared to $17,088 for the same period in 2001. The increase in
expense for both periods in 2002 was due to a decline in lapsed life insurance
policies compared to the same periods in 2001.
Policy benefits and other insurance costs consist primarily of commission
expense and group dental insurance claims expense. Policy benefits and other
insurance costs increased to $7,889,578 in the third quarter of 2002 from
$7,566,699 for the third quarter of 2001. In the first nine months of 2002,
policy benefits and other insurance costs were $23,392,168 compared to
$22,044,980 for the same period in 2001. The increase for both periods in 2002
was due to an increase in claims and commissions resulting from the increase in
group insurance premium. The claims ratio on group dental insurance, which
represents the ratio of claims incurred to premium earned, was 65.7% for the
first nine months of 2002 compared to 66.8% for the same period of 2001.
Amortization of deferred policy acquisition costs was $9,015 and $4,571 for the
third quarter and $19,766 and $29,278 for the first nine months of 2002 and
2001, respectively. Amortization of deferred policy acquisition costs vary in
relation to lapses or surrenders of existing policies. A reduction in lapsed
policies will decrease the amortization expense.
For the third quarter of 2002, operating expenses were $1,812,669 compared to
$1,743,369 for the same period in 2001. Operating expenses were $5,323,721 in
the first nine months of 2002 compared to $4,852,013 for the same period in
2001. Operating expenses that have increased in 2002 are personnel expenses,
claims administration expenses and general office expense attributable to the
increase in volume of business processed.
In the third quarter of 2001, $575,000 of legal fees were incurred as part of a
settlement in a class action lawsuit
Taxes, other than on income, fees and assessments, were $313,927 for the third
quarter of 2002 compared to $326,849 for the third quarter of 2001. Taxes, other
than on income, fees and assessments, were $975,954 for the first nine months of
2002 compared to $915,973 for the first nine months of 2001. The increase for
the year was primarily due to an increase in premium taxes on the increase in
premiums collected. The tax expense is less for the third quarter of 2002 due to
premium tax refunds received.
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The provision for federal income taxes in the third quarter of 2002 includes
$65,000 current expense and ($15,000) deferred tax credit compared to ($1,707)
current federal tax credit and $53,000 deferred tax benefit in the third quarter
of 2001. The provision for federal income taxes in the first nine months of 2002
was $114,000 current expense and $130,000 deferred tax expense compared to
$36,293 current expense and $162,000 deferred tax expense for the same period in
2001. For the first nine months of 2002, the Company's current federal tax
expense was reduced due to a change in the Alternate Minimum Tax laws for 2001
and 2002. In 2001 and 2002, the Company continued to reduce the deferred tax
asset appropriately as net operating loss carryovers are utilized.
Net income for the third quarter of 2002 was $560,681 compared to ($197,434) for
the same period in 2001. The increase in net income for the third quarter of
2002 compared to the same period in 2001 was due to a decrease in legal expenses
and an increase in premium income. Net income for the first nine months of 2002
was $1,566,190 and $676,526 for the same period in 2001. The increase was
primarily due to an increase in premium income, net investment income and a
decrease in legal expenses.
Item 3. 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. We did not have financial instruments to manage and reduce
the impact of changes in interest rates at September 30, 2002 and December 31,
2001. We held various financial instruments at September 30, 2002 and 2001,
consisting of financial assets reported in our Consolidated Balance Sheets.
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 September 30, 2002 and December 31, 2001 was $14,097,610 and
$14,331,818, respectively.
Based on testing at December 31, 2001, a one-percentage point increase would
result in a decrease in the estimated fair value of fixed maturity securities 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 first nine
months of 2002 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.
Commodity Price Risk - We have no financial instruments subject to commodity
price risk.
Equity Security Price Risk - Equity securities at September 30, 2002 totaled
$58,770, or only .3% of total investments and cash on a consolidated basis.
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.
-10-
Item 4. Internal Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports pursuant to the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and its Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurances
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as that term is defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective in timely alerting the Company's Chief
Executive Officer and Chief Financial Officer to material information required
to be disclosed in the periodic reports filed with the SEC.
In addition, the Company's Chief Executive Officer and Chief Financial
Officer have reviewed the Company's internal controls, and there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls subsequent to the date of the last
evaluation.
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PART II -- OTHER INFORMATION
Item 1. 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. The Company has filed a Form
S4 Registration Statement to register the exchange transaction.
As part of the settlement agreement, the Company has agreed to issue bonds in
the principal amount of $1.50, in exchange 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 September 30, 2002
and 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 2. Changes in Securities.
None of the rights of the holders of any of the Company's securities were
materially modified during the period covered by this report. In addition, no
class of securities of the Company was issued or modified which materially
limited or qualified any class of its registered securities.
Item 3. Defaults Upon Senior Securities.
During the period covered by this report there was no material default in the
payment of any principal, interest, sinking or purchase fund installment, or any
other material default not cured within 30 days with respect to any indebtedness
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the time period
covered by this filing.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 10-Q.
(a) Exhibits
Exhibit Number Description of Exhibit
- ----------------------- ---------------------------------------------------
99.1 Certificate of Chief Executive Officer of BNL
Financial Corporation pursuant to 18 U.S.C.ss.1350
99.2 Certificate of Chief Financial Officer of BNL
Financial Corporation pursuant to 18 U.S.C.ss.1350
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(b) Reports on Form 8-K.
The Company did not file a Form 8-K during the period covered by this document.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BNL FINANCIAL CORPORATION
(Registrant)
/s/ Wayne E. Ahart
Date: November 14, 2002 ___________________________________
By: Wayne E. Ahart, Chairman of the Board
(Chief Executive Officer)
/s/ Barry N. Shamas
Date: November 14, 2002 ____________________________________
By: Barry N. Shamas, Executive V.P.
(Chief Financial Officer)
Certification
I, Wayne E. Ahart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BNL Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Wayne E. Ahart
-----------------------
Wayne E. Ahart
Chairman of the Board
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Certification
I, Barry N. Shamas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BNL Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Barry N. Shamas
-----------------------
Barry N. Shamas
Executive Vice President
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Exhibit 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF BNL FINANCIAL CORPORATION
PURSUANT TO 18 U.S.C.ss.1350
In connection with the accompanying report on Form 10-Q for the period ending
September 30, 2002 and filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Wayne E. Ahart, Chief Executive Officer of BNL
Financial Corporation, hereby certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and
2. The information contained in this Report fairly presents, in all
material respects the financial condition and results of operations of
the Company.
/s/ Wayne E. Ahart
- -----------------------
Wayne E. Ahart
Chief Executive Officer
November 14, 2002
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Exhibit 99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF BNL FINANCIAL CORPORATION
PURSUANT TO 18 U.S.C.ss.1350
In connection with the accompanying report on Form 10-Q for the period ending
September 30, 2002 and filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Barry N. Shamas, Chief Financial Officer of BNL
Financial Corporation, hereby certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and
2. The information contained in this Report fairly presents, in all
material respects the financial condition and results of operations of
the Company.
/s/ Barry N. Shamas
- -----------------------
Barry N. Shamas
Chief Financial Officer
November 14, 2002
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