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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 June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______to_____ .
Commission File No. 000-16880
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BNL FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
IOWA 42-1239454
(State of incorporation) (I.R.S. Employer Identification No.)
2100 W. William Cannon, Suite L
Austin, Texas 78745
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 383-0220
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No____
As of June 30, 2004, the Registrant had 19,417,554 shares of Common Stock, no
par value, outstanding.
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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 June 30, 2004 and the related Consolidated
Statements of Income and Comprehensive Income for the three-month and six-month
periods ended June 30, 2004 and 2003 and the Consolidated Statements of Cash
Flows for the six month periods ended June 30, 2004 and 2003. These interim
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, 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 the accompanying interim consolidated financial statements for them
to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the Consolidated Balance Sheet of BNL
Financial Corporation and Subsidiaries as of December 31, 2003 and the related
Consolidated Statements of Income and Comprehensive Income, Changes in
Shareholders' Equity and Cash Flows for the year then ended (not presented
herein); and in our report dated February 9, 2004, 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, 2003 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.
August 13, 2004 /s/ Smith Carney & Co.
1
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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ASSETS
June 30 December 31,
2004 (Unaudited) 2003 (Audited)
-------------------- -------------------
Cash and cash equivalents $4,090,229 $ 3,398,661
Investment in fixed maturities, at fair value Available for Sale (amortized
cost $886,446, $1,245,558, respectively) 953,625 1,457,988
Investment in fixed maturities, at amortized cost, Held to Maturity (fair
value $15,393,179; $15,173,490, respectively) 15,535,915 15,120,096
Other long-term investments 1,557,407 1,527,407
Investment in equity securities (cost $362,058; $339,509, respectively) 420,796 373,214
-------------------- -------------------
Total Investments, Including Cash and
Cash Equivalents 22,557,972 21,877,366
Accrued investment income 207,578 183,713
Furniture and equipment, net 496,067 486,000
Deferred policy acquisition costs 289,680 220,937
Policy loans 153,219 144,122
Receivable from reinsurer 31,065 31,065
Premiums due and unpaid 754,067 1,059,950
Income tax assets 227,000 195,136
Intangible assets 158,170 162,237
Other assets 179,832 194,728
-------------------- -------------------
Total Assets $25,054,650 $24,555,254
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for future policy benefits $ 2,008,483 $ 1,577,978
Policy claims payable 2,331,661 2,578,992
Annuity deposits 2,761,491 2,777,665
Deferred annuity profits 401,117 425,980
Premium deposit funds 39,054 40,260
Supplementary contracts without life contingencies 56,841 69,596
Advanced and unallocated premium 966,023 1,127,148
Commissions payable 557,937 433,257
Accrued taxes and expenses 686,474 777,128
Bonds payable 2,759,155 3,025,499
Other liabilities 387,303 370,569
-------------------- -------------------
Total Liabilities 12,955,539 13,204,072
-------------------- -------------------
COMMITMENTS AND CONTINGENCIES
Contingent long-term liabilities 480,428 660,447
-------------------- -------------------
Total Commitments and Contingencies 480,428 660,447
-------------------- -------------------
Shareholders' Equity:
Common stock, $.02 stated value, 45,000,000 shares authorized, 20,980,760;
20,980,760 shares issued and outstanding, respectively 419,616 419,616
Additional paid-in capital 10,790,730 10,787,911
Accumulated other comprehensive income 81,536 177,768
Accumulated surplus 1,465,853 457,336
Contingent Treasury stock, 320,285; 440,298 shares respectively (480,428) (660,447)
Treasury stock, at cost; 1,242,921; 1,098,493 shares respectively (658,624) (491,449)
-------------------- -------------------
Total Shareholders' Equity 11,618,683 10,690,735
-------------------- -------------------
Total Liabilities and Shareholders' Equity $25,054,650 $24,555,254
==================== ===================
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(See accompanying notes and Independent Accountants' Report)
2
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
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Three Months Ended Six Months Ended
June 30 June 30
-------------------------------- -----------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- -------------- ---------------- --------------
Income:
Premium income $10,720,870 $10,079,609 $ 21,509,605 $20,430,953
Net investment income 255,333 247,274 490,180 490,147
Marketing fees 41,409 33,915 83,076 66,249
Realized gains 320,398 101,754 319,904 100,459
--------------- -------------- ---------------- --------------
Total Income 11,338,010 10,462,552 22,402,765 21,087,808
--------------- -------------- ---------------- --------------
Expenses:
Liability for future policy benefits expense 6,605 (9,862) 430,505 44,265
Policy benefits and other insurance costs 8,240,679 7,628,475 16,295,317 15,186,647
Amortization of deferred policy acquisition costs 9,202 6,362 14,256 11,069
Operating expenses 2,070,437 1,886,627 3,877,727 3,726,965
Taxes, other than income, fees and assessments 234,095 298,638 614,681 675,410
--------------- -------------- ---------------- --------------
Total Expenses 10,561,018 9,810,240 21,232,486 19,644,356
--------------- -------------- ---------------- --------------
Income from Operations before
Income Taxes 776,992 652,312 1,170,279 1,443,452
Provision for income taxes 103,982 111,750 161,761 314,000
--------------- -------------- ---------------- --------------
Net Income $ 673,010 $ 540,562 $ 1,008,518 $1,129,452
=============== ============== ================ ==============
Net income per common share (basic and diluted) $0.03 $0.02 $0.05 $0.05
=============== ============== ================ ==============
Weighted average number of fully
paid common shares 19,415,273 20,250,423 19,426,714 20,252,734
=============== ============== ================ ==============
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gain (loss) arising
during period $ (13,315) $174,464 $ 1,673 $238,260
Reclassification adjustment for loss included
in net income (93,346) (8,452) (97,905) (7,156)
--------------- -------------- ---------------- --------------
Other Comprehensive Income (Loss) (106,661) 166,012 (96,232) 231,104
--------------- -------------- ---------------- --------------
Comprehensive Income $566,349 $706,574 $ 912,286 $1,360,556
=============== ============== ================ ==============
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(See accompanying notes and Independent Accountants' Report)
3
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended
June 30,
-------------------------------------
2004 2003
(Unaudited) (Unaudited)
----------------- ----------------
Cash flows from operating activities:
Net income $ 1,008,518 $ 1,129,452
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized gain on investments (310,167) (100,459)
Realized loss on furniture and fixtures 3,263 0
Decrease (increase) in deferred tax asset (11,000) 25,998
Depreciation 104,400 110,642
Amortization of deferred acquisition costs,
organization costs and intangibles 14,256 13,977
Accretion of bond discount 4,844 4,949
Change in assets and liabilities:
(Increase) decrease in accrued investment income (13,151) 22,654
Decrease in premiums due and unpaid 305,343 96,224
Increase in liability for future policy benefits 430,505 44,265
Decrease in policy claims payable (247,331) (149,994)
Decrease in annuity deposits and deferred profits (41,037) (15,957)
Decrease in premium deposit funds (1,206) (1,513)
Decrease in advanced and unallocated premium (161,125) (361,035)
(Increase) decrease in commissions payable 124,680 (28,420)
Other, decrease (76,008) (48,446)
----------------- ----------------
Net Cash Provided By Operating Activities 1,134,784 742,337
----------------- ----------------
Cash flows from investing activities:
Proceeds from sales of furniture and equipment 23,800 3,791
Proceeds from maturity or redemption - Available for Sale Investments 1,620,060 1,638,306
Proceeds from maturity or redemption - Held to Maturity Investments 3,316,080 1,950,000
Proceeds from sales of equity securities 86,628 0
Purchase of furniture and equipment (141,530) (90,024)
Purchase of fixed maturity securities - Held to Maturity Investments (4,905,679) (5,256,299)
Purchase of equity securities (109,629)
(47,971)
Other investments - Line of credit advanced 0 (30,000)
----------------- ----------------
Net Cash Used In Investing Activities (110,270) (1,832,197)
----------------- ----------------
Cash flows from financing activities:
Net (payments) receipts on supplementary contracts (12,755) (13,510)
Treasury shares purchased (162,224) (67,227)
Treasury shares sold 14,289 0
Bonds payable purchased (191,498) (35,096)
Exercised stock options and stock bonus 19,242 19,892
----------------- ----------------
Net Cash Used In Financing Activities (332,946) (95,941)
----------------- ----------------
Net Increase In Cash and Cash Equivalents 691,568 (1,185,801)
Cash And Cash Equivalents, Beginning Of Period 3,398,661 5,660,879
----------------- ----------------
Cash And Cash Equivalents, End Of Period $ 4,090,229 $ 4,475,078
================= ================
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(See accompanying notes and Independent Accountant's Report)
4
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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 June 30,
2004 and June 30, 2003 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 June 30, 2004, and the results of operations for the three and
six month periods ended June 30, 2004 and June 30, 2003, and the cash flows for
the six month periods ended June 30, 2004 and June 30, 2003. All such
adjustments are of a normal recurring nature except as described in Note 2
below.
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, 2003, previously filed with
the Commission, for financial statements for the year ended December 31, 2003,
prepared in accordance with GAAP. Net income per share of common stock is based
on the weighted average number of outstanding common shares.
Note 2.
The liability for future policy benefits includes a benefit reserve of
approximately $411,000 for the individual dental policies in force at June 30,
2004. The Company has marketed this product since 2001 and was notified by its
actuary in the first quarter of 2004, that new reserve rules prescribed by most
state insurance departments now require additional reserves be established to
more properly match premiums and benefits for this product. The effect of this
change in reserve estimate on the net income in the period ended June 30, 2004
is approximately $265,000 ($.01 per share) after considering the tax effect and
a related increase in deferred acquisition costs.
5
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
In this section, we review the consolidated results of operations for the six
months ended June 30, 2004 and 2003 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) world
conflict, including but not limited to the war in Iraq, which may affect
consumers spending trends and priorities; (iii) customer response to new
products and marketing initiatives: (iv) mortality, morbidity and other factors
which may affect the profitability of our products; (v) changes in the federal
income tax laws and regulations which may affect the relative income tax
advantages of our products; (vi) 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 (vii) the risk factors or
uncertainties listed from time to time in our filings with the Securities and
Exchange Commission.
Liquidity and Capital Resources
At June 30, 2004, we had liquid assets of $4,090,229 in cash, money market
savings accounts, U.S. Treasury Bills and short-term certificates of deposit.
All of the non-cash liquid assets can readily be converted to cash.
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
half of 2004, BNLAC collected $21,853,643 of premiums and annuity deposits
(gross before reinsurance) and we had consolidated investment income of
$490,180. Other sources of cash flow in 2004 were overwrite commissions of
$254,385 on vision products and marketing fees from EPSI Benefits Inc. of
$83,076. The Company paid $13,472,519 of policy benefits in the first half of
2004.
The Company's investments are primarily in U.S. Government, Government Agency
and other investment grade bonds. We do not hedge our investment income through
the use of derivatives.
Other long term investments of $1,557,407 consists of, in part, a convertible
debenture loan in the amount of $1,357,407 from BNL Financial Corporation
(BNLF), 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, BNLF 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, Brokers National Life Assurance Company
("BNLAC"). BNLF receives a marketing fee from EBI under a related marketing
agreement
Other long-term investments include an operating line of credit agreement with
an advance amount of $200,000. On October 15, 2002 BNLAC and EPSI entered into a
loan agreement whereby BNLAC will provide EPSI with a $200,000 line of credit
maturing October 15, 2004. The line of credit is at prime, 4.75%, with interest
payable monthly to BNLAC.
6
During the third quarter of 2003, the Company became a third party indemnitor by
entering into a series of bond indemnity and guarantee agreements totaling
approximately $445,000 in conjunction with a marketing agreement with a third
party, Employer Plan Services Inc. (EPSI). The Company received personal
guarantees from the owners of EPSI to effectively limit potential liability
under the guarantee agreement. With regard to the bond indemnities, the Company
will be obligated only if EPSI, EPSI'S parent and its shareholders, who are the
primary obligors, were all to become insolvent. Management considers the
likelihood of the Company realizing a liability under these agreements to be
remote.
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 BNLAC. At June 30, 2004, BNLAC
had statutory capital and surplus of $12,869,255. 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 $5,000,000. Management monitors the minimum
capital and surplus requirements to maintain compliance in each state in which
it is licensed.
Consolidated Results of Operations
Premium income for the second quarter of 2004 was $10,720,870 compared to
$10,079,609 for the same period in 2003. The increase of 6% for the quarter was
due to an increase in group and individual dental business. Premium income for
the first half of 2004 was $21,509,605 compared to $20,430,953 for the same
period in 2003. The increase of 5% was due to an increase in group and
individual dental premium in the first half of 2004.
Net investment income was $255,333 for the second quarter of 2004 compared to
$247,274 for the second quarter of 2003. Net investment income for the first
half of 2004 was $490,180 compared to $490,147 for the same period in 2003. The
3% increase for the quarter was due to an increase in fixed maturities in 2004
compared to 2003.
The Company received $41,409 of marketing fees from EPSI Benefits Inc. in the
second quarter of 2004 compared to $33,915 for the same period last year. For
the first half of 2004 marketing fees were $83,076 compared to $66,249 for the
same period of 2003. The increase in marketing fees in 2004 is due to an
increase in the number of insureds serviced by EPSI Benefits Inc.
Realized gains on investments were $320,398 for the second quarter of 2004
compared to a gain of $101,754 for the same period in 2003. For the first half
of 2004 realized gains were $319,904 compared to $100,459 for the same period in
2003. The realized gains in 2004 and 2003 are primarily due to the purchase of a
portion of the Company's outstanding debentures at less than face value and in
the second quarter of 2004 the Company had a realized gain of approximately
$103,000 on disposal of MCI bonds.
For the second quarter of 2004, liability for future policy benefits expense was
$6,605 compared to $(9,862) for the same period in 2003. For the six-month
period ended June 30, 2004, liability for future policy benefits expense was
$430,505 compared to $44,265 for the same period in 2003. The increase for the
first half of 2004 and second quarter of 2004 were due to a $411,000 increase in
benefit expense reserve for individual dental insurance. See Note 2 to the
financial statements.
Policy benefits and other insurance costs were $8,260,679 in the second quarter
of 2004 compared to $7,628,475 for the same period in 2003. In the first six
months of 2004 policy benefits and other insurance costs were $16,295,317
compared to $15,186,647 for the same period in 2003. The increase was primarily
due to an increase in policy benefits and commissions on group and individual
dental insurance. The claims ratio on group dental insurance, which represents
the ratio of claims incurred to premium earned, was 64.56% for the first half of
2004 compared to 63.75% for the first half of 2003.
7
Amortization of deferred policy acquisition costs was $9,202 and $6,362 for the
second quarter and $14,256 and $11,069 for the first half of 2004 and 2003,
respectively. Amortization of deferred policy acquisition costs vary in relation
to lapses or surrenders of existing policies.
For the second quarter of 2004 operating expenses were $2,070,437 compared to
$1,886,627 for the same period in 2003. Operating expenses were $3,877,727 in
the first six months of 2004 compared to $3,726,965 for the same period in 2003.
The increase for both periods was primarily due to an increase in payroll
expense, actuary expense and postage expense due to additional insurance plans
offered, an actuary review of individual dental rates and an increase in
policies and promotional material mailed.
Taxes, other than on income, fees and assessments, were $234,095 for the second
quarter of 2004 compared to $298,638 for the second quarter of 2003. Taxes,
other than on income, fees and assessments, were $614,681 for the first half of
2004 compared to $675,410 for the same period in 2003. The decrease for both
periods was primarily due to the refund of premium taxes in 2004, which is due
to overpayment of quarterly estimated tax payments in 2003.
The provision for income taxes in the second quarter of 2004 includes $88,982
current tax expense and $15,000 deferred tax expense compared to $114,750
current tax expense and $(3,000) deferred tax expense in the second quarter of
2003. The provision for income taxes in the first half of 2004 was $129,897
current tax expense and $31,864 deferred tax expense compared to $281,000
current expense and $33,000 deferred tax expense for the same period in 2003.
The current tax expense decreased for the first half 2004 compared to 2003 due
to the decrease in operating profits.
Income from operations before income taxes for the second quarter of 2004 was
$776,992 compared to $652,312 for the same period in 2003. For the first half of
2004 income from operations before income taxes was $1,170,279 compared to
$1,443,452 for the same period in 2003. The increase for the second quarter was
due to the reduction in taxes, other than on income and gain on redemption of
bonds payable as described above. The decrease for the first half of the year
was primarily due to the increase in the benefit expense reserve set up on the
individual dental insurance described above.
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 hold financial instruments to specifically
manage and reduce the impact of changes in interest rates at June 30, 2004 and
December 31, 2003. We did however hold various financial instruments at June 30,
2004 and 2003, 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 June 30, 2004 and December 31, 2003 was $16,346,804 and
$16,631,478, respectively.
Based on testing at December 31, 2003 a one percentage point increase would
result in a decrease in the estimated fair value of fixed maturity securities of
$469,000. 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 six
months of 2004 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.
8
Equity Security Price Risk - Equity securities at June 30, 2004 totaled
$420,796, or only 1.7% 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.
4. Internal Control 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.
9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The Company was not a part of any new legal proceedings during the second
quarter of 2004.
In 2001, the Board of Directors of the Company approved a settlement in the
class action case brought by certain shareholders. The settlement, which was
approved by the Pulaski County Circuit Court and the Arkansas Insurance
Commissioner, was subject to various conditions, including the approvals by any
other applicable regulatory authorities and conditioned upon compliance with
federal and state securities laws. As of December 31, 2002, all requisite
approvals were received and redemption of the stock began in 2003.
As part of the settlement agreement, the Company issued its 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 are for a term of twelve years,
effective December 15, 2002, with principal payable at maturity and bear
interest at the rate of 6% per annum payable annually from the previous fiscal
year's earnings of BNL and will impact earnings per share to the extent of
approximately $.013 per share. If any interest payment is not made, it will be
added to the principal and paid at maturity. The Bonds are fully callable and
redeemable at par at any time by BNL.
During 2003, the Company reclassified Contingent Long Term Liabilities and
Contingent Treasury Stock in the amount of $3,637,288 to Bonds Payable and
Treasury Stock, respectively, in accordance with the character of the litigation
settlement of 2001 and the performance of all duties there under. The $3,637,288
of Treasury Stock was retired and returned to authorized but not issued status.
The remaining Contingent Long Term Liabilities and Contingent Treasury Stock in
the amount of $480,428 represents shares that may or may not have rights to
exchange under the settlement and, as such, are contingent on determination of
their status.
The settlement is reflected in the first quarter of 2004 as bonds payable of
$2,759,155, contingent long-term liabilities of $480,428 and contingent treasury
stock of same amount and had no effect on the Statement of Cash Flows other than
the purchase of bonds mentioned above.
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.
The Company's Annual Meeting of Shareholders was held on May 18, 2004 n Des
Moines, Iowa. At the annual meeting, the following individuals were elected to
the Company's Board of Directors; 13,121,096 voted in favor of Ahart, Shamas,
and Schenkel; the holders of 13,119,092 voted in favor of Byrd; the holders of
13,122,296 voted in favor of Tobey, Alexander, Barclay, Keppy, Ledbetter,
Mullins and Sweet; the holders of 13,121,294 voted in favor of Fry and
Schoelerman; the holders of 13,122,596 voted in favor of Greig, Cernan, Miller
and McCormick; and the holders of 13,121,594 voted in favor of Rigler; 66,959
shares were withheld from all nominees.
10
The shareholders also ratified the selection of Smith, Carney & Co. p.c. as the
Company' independent auditor for the fiscal year 2004. 13,078,574 shares were
voted in favor of ratifying such selection of independent auditor, 15,502 were
voted against, and 95,479 shares abstained from voting on the matter.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 10-Q.
None
(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)
Date: August 13, 2004
/s/ Wayne E. Ahart
-----------------------
By: Wayne E. Ahart, Chairman of the Board
(Chief Executive Officer)
/s/ Barry N. Shameas
Date: August 13, 2004 ____________________________
By: Barry N. Shamas, Executive V.P.
(Chief Financial Officer)
11
===============================================================================
13
Certifications
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: August 13, 2004
/s/ Wayne E. Ahart
-----------------------
Wayne E. Ahart
Chairman of the Board
12
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: August 13, 2004
/s/ Barry N. Shamas
-----------------------
Barry N. Shamas
Chief Financial Officer
13
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
June 30, 2004 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.
- -----------------------
Wayne E. Ahart
Chief Executive Officer
August 13, 2004
14
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
June 30, 2004 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
August 13, 2004
15