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, 2004 [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 disclosure of delinquent filers pursuant 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.__X___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes___ No_X__
BNL Financial Corporation revenues for fiscal year 2004 were $44,906,665.
The estimated aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 31, 2004 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, 2004, the Registrant had outstanding 19,047,114 shares
(excluding treasury shares) of Common Stock, no par value (which includes
10,899,678 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__
Total # of pages including cover page 52.
PART 1
ITEM 1. BUSINESS
General
BNL Financial Corporation (the "Company" or "Registrant" or "BNLF") 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.
In March 2004, BNL Equity Corporation ("BNLE"), the immediate subsidiary of the
Company was dissolved and its assets, including the stock of Brokers National
Life Assurance Company ("BNLAC"), were distributed to BNLF. All outstanding
shares of BNLAC are now owned directly by BNLF.
The Company has three wholly owned subsidiaries, Brokers National Life Assurance
Company, 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)
------------------------------------- ----------------------------------
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Brokers National Life Assurance Company
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BNL Brokerage Corporation
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Industry Segments
The operations of the Company are conducted through BNLAC, which in 2004
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 2004, BNLAC received a Certificate of Authority to market insurance in New
Mexico. This increased the number of states in which it is licensed to do
business to 36. BNLAC is currently licensed in 36 states to offer life and
accident and health insurance on an individual and group basis.
The Company conducts business in the "life, accident and health insurers"
industry segment. 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.
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, individual dental and group dental insurance. Most of these products are
designed to be sold on a group or payroll deduction basis.
2
Statistics by line of business are as follows (gross before reinsurance):
2004 2003
---------------- ---------------
I. Annualized Premiums and Annuity Deposits In Force:
Ordinary Life Insurance $ 293,000 $ 254,000
Individual Annuities(1) 106,000 112,000
Group Dental Insurance 39,652,000 38,207,000
Miscellaneous A&H insurance 1,946,000 1,303,000
---------------- ---------------
Total $41,997,000 $39,876,000
================ ===============
II. Collected Premiums and Annuity Deposits:
Ordinary Life Insurance $ 288,000 $ 292,000
Individual Annuities(1) 85,000 112,000
Group Dental Insurance 40,681,000 38,813,000
Miscellaneous A&H insurance 1,773,000 1,016,000
----------------- ----------------
Total $42,827,000 $40,233,000
================= ================
III. Face Value of Insurance:
Ordinary Life Insurance $37,000,000 $38,000,000
Accidental Death Insurance 66,000,000 52,000,000
----------------- ----------------
Total $103,000,000 $90,000,000
================= ================
(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 $ 13,942 $- $3,873,856 $3,887,798
Oregon 6,955 - 3,199,602 3,206,557
Minnesota 5,667 - 3,036,691 3,042,358
Louisiana 8,652 - 2,649,806 2,658,458
Arkansas 24,979 - 2,478,360 2,503,339
Michigan 6,531 - 2,430,842 2,437,373
Ohio 2,789 988 2,166,984 2,170,761
Idaho 562 - 2,103,345 2,103,907
Indiana 9,756 - 1,927,877 1,937,633
All Other States 208,646 84,278 18,585,763 18,878,687
-------------------- -------------------- ---------------------- --------------------
Total $288,479 $ 85,266 $42,453,126 $42,826,871
==================== ==================== ====================== ====================
The following chart shows group dental insurance premiums collected for each of
the past five years ended December 31.
Gross
Premiums
Group Dental Insurance Collected
----------------
2004 $40,681,000
2003 38,813,000
2002 39,734,000
2001 38,083,000
2000 34,464,000
3
The following chart shows group dental insurance claims paid and claims ratios
for each of the five years ended December 31. The incurred claims loss ratio
represents the ratio of incurred claims to premiums earned.
Gross Claims
Group Dental Insurance Claims Paid Ratio
----------------------
---------------- ----------------
2004 25,044,000 62.3%
2003 24,279,000 62.7%
2002 25,772,000 64.9%
2001 24,821,000 65.5%
2000 22,504,000 63.8%
Agents' Commissions
On December 31, 2004, BNLAC had 4,837 general agents and brokers that market its
policies in 34 states compared to 4,590 agents and brokers on December 31, 2003
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, Security Life Insurance Company of America and
Avesis Incorporated. 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.
BNLAC's Accidental Death Benefit riders are reinsured 100% through a Bulk ADB
reinsurance agreement with Generali USA Life Reassurance Company ("Generali"),
formerly Business Men's Assurance Company. Generali was rated "A" (Excellent) by
AM Best Company for 2003.
BNLAC's individual life insurance products in excess of $35,000 are reinsured
with Generali under an automatic treaty up to $175,000 and under a facultative
treaty for amounts over $175,000.
BNLAC's Group Life insurance is reinsured under a Quota Share reinsurance
agreement with Hannover Life Reassurance Company of America. The reinsurer is
liable for 90% of the risk 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 2003.
Effective November 1, 2003, BNLAC entered into a quota share reinsurance
agreement with Hannover Life Reassurance Company of America for the Accidental
Death and Dismemberment plan. Hannover Life Reassurance Company of America
accepts 90% of the risk. Hannover Life Reassurance Company of America was rated
"A" (Excellent) by AM Best Company in 2003.
BNLAC has entered into a quota share reinsurance agreement with Hartford Life
and Accident Insurance Company for its Group Life and Accidental Death and
Dismemberment plans that is effective January 1, 2005 and will replace Hannover
Life Reassurance Company of America. Hartford was rated "A+" (Superior) by AM
Best Company for 2003.
4
BNLAC's Short Term Disability insurance is reinsured under a Quota Share
reinsurance agreement with Fortis Benefits Insurance Company of Kansas City,
Missouri. The reinsurer is liable for 75% of the risk on each policy. Fortis
Benefits Insurance Company was rated "A" by AM Best Company for 2003.
The following chart shows life insurance and accidental death 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
2004 $37,207,000 $11,752,000 $ 0 $25,455,000
2003 37,832,000 12,782,000 0 25,050,000
2002 37,045,000 11,443,000 0 25,602,000
2001 34,515,000 9,098,000 0 25,417,000
2000 28,127,000 7,722,000 0 20,405,000
Accidental Death Insurance
2004 $65,629,000 $59,238,000 $ 0 $6,391,000
2003 52,095,000 46,885,500 0 5,209,500
2002 44,000,000 39,600,000 0 4,400,000
2001 37,000,000 37,000,000 0 0
2000 23,000,000 23,000,000 0 0
Investments
BNLAC invests its available funds in a certificate of deposit, US Treasury
Bills, 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
- -------------- --------------- ------------------
2004 $879,351 4.4%
2003 854,548 4.2%
2002 1,041,679 5.6%
2001 977,578 6.2%
2000 870,482 6.5%
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 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 going-concern considerations.
Certain statutory accounting practices differ from generally accepted accounting
principles as applied to the Company's audited financial statements.
Life insurance company revenues are generated primarily from premiums and
investment income. Commissions and other sales cost may exceed the amount of
first year 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.
5
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 of
the State of Arkansas, 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.
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 as
well.
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")
6
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, 2004 indicated that the
ratios of total adjusted capital to RBC for BNLAC would have been in excess of
1,112% 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.
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 2002, BNLAC's A. M. Best's financial performance
rating was raised from "B " (Fair) to "B+" (Very Good).
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 774 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 of their popularity in the employee benefit market. Second, BNLAC
7
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, 2004 BNLAC had four executive officers and 63 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. The Company currently has no employees which are
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.
During the first half of 2002 the Company leased 12,150 square feet of office
space in Austin, Texas, under a seven year, triple net lease. In July 2002 the
Company expanded its offices in an adjacent building and increased the space it
leases by 1,596 square feet. The annual base rent for the 12,150 square feet was
$137,578 a year and the cost for the additional space is $19,152 per year. The
lease rate will remain in affect until the initial term of the lease expires in
2005. Effective January 1, 2003, the Company leased an additional 798 square
feet in the adjacent building at a rate of $9,576 per year. The Company has an
option to 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 on
the initial 12,150 square feet of office space. In 2005, the Company has
negotiated a lease for new office space in Austin, Texas that is contingent upon
the current lessee vacating the space by April 15, 2005. The cost of the lease
is not materially greater than the current lease.
BNLE leases approximately 1,400 square feet of office space in Sherwood,
Arkansas at a rental of $17,450 per year. BNLAC incurs 100% of the rental
expense.
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 and its subsidiaries own the majority of the furniture and equipment
used in the operation of its business.
ITEM 3. LEGAL PROCEEDINGS
In 2001, the Board of Directors of the Company and BNL Equity Corporation
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. The estimated annual impact to earnings per share was
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 thereunder. The $3,637,288
of Treasury Stock was retired and returned to authorized but not issued status.
The $660,447 Contingent Long Term Liabilities and Contingent Treasury Stock on
the Balance Sheet in 2003 represents shares the Company had not been able to
determine the status regarding their right to exchange under the settlement
agreement. During 2004 the Company determined that $518,517 of the Contingent
Long Term Liabilities and Contingent Treasury Stock should not be included in
the settlement agreement. The remaining $141,930 were reclassified to Bonds
Payable and Treasury Stock.
8
In 2004 and 2003, the Company made cash offers to bond holders for the purchase
of bonds. Bond purchases resulted in a reduction of Bonds Payable of $1,163,456
and $611,789 in 2004 and 2003; respectively. Gains from early extinguishments of
the debt were $495,462 and $424,727 in 2004 and 2003; respectively.
..
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote during the fourth quarter of 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Stock
During 2004 the Company made three separate offers to its shareholders to redeem
their stock for its book value of $.53, $.60 and $.63 a share; respectively. The
offers resulted in the purchase of 913,339 shares of stock for $542,012. In 2003
the Company made two separate offers to its shareholders to redeem their stock
for its book value of $.47 and $.53 a share; respectively. The offers resulted
in the purchase of 974,541 shares of stock for $477,023. The stock is not traded
on any established trading market.
Holders
As of December 31, 2004 there were 2,723 record holders of the Company's common
stock.
Dividends
The Company has not declared any dividends on its common stock to date and has
no present plans to pay any dividends in the foreseeable future. The Company's
ability to declare and pay dividends in the future will be dependent upon its
earnings and the cash needs for expansion. In addition, payment of dividends by
BNLAC is regulated under Arkansas insurance laws.
Equity Compensation Plan Information
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 were authorized by
the Board of Directors. The option period may not exceed a term of five years
and the duration of the plan was ten years, expiring December 14, 2004. A
four-member committee of Directors administers the plan. During 2004, 2003 and
2002, the Company granted 129,575, 131,925, and 154,855 stock options,
respectively, with an exercise price of $1.00 per share for those granted in
2004, $.75 per share for those granted in 2003 and $.50 per share for those
granted in 2002. There were 515,955 stock options outstanding at December 31,
2004. The number of options expiring or forfeited were 199,500 and 437,500 in
2004 and 2003, respectively. There were 38,350 options exercised in 2004 and
38,525 options exercised in 2003. Under the fair value method, total
compensation recognized for grant of stock options was $4,000 in 2004. The fair
value of options granted is estimated at $4,000, $0 and $1,596 in 2004, 2003 and
2002. These values were computed using a binomial method as prescribed in SFAS
No. 123 and certain assumptions include a risk free interest rate of 5.0%,
expected life of 3.0 years, expected volatility of 14.0% and no expected
dividends due to statutory limitations. The estimated weighted average remaining
life of the options is 1.5 years and the weighted average exercise price is
$.76. 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 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.
The Company granted 60,300 options with an exercise price of $.75 in 2004 and
55,700 options with an exercise price of $.50 in 2003. The fair value of options
granted is estimated at $11,000 in 2004 and $10,940 in 2003. This value was
computed using a binomial method as prescribed in SFAS No. 123 and certain
assumptions include a risk free interest rate of 5.0%, expected life of 10.0
years, expected volatility of 14.0% and no expected dividends due to statutory
limitations. The estimated weighted average remaining life of the options is 8.4
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.
9
The table below reflects the Equity Compensation Plans as of December 31, 2004.
Number of securities remaining
available for future issuance
under equity compensation
Number of Securities to be Weighted Average exercise plans (excluding securities
issued upon exercise of price of outstanding reflected in column (a)
Plan Category outstanding options options
- ------------------------------ -------------------------------- --------------------------- ------------------------------
Approved by security holders
- ------------------------------
Brokers and Agents Plan 515,955 $.76 -
Not approved by security
holders
- ------------------------------
Employee Plan 116,000 $.56 134,000
Transfer Agent and Registrar
BNL Financial Corporation 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, 2004 are
derived from the Company's consolidated financial statements. The consolidated
financial statements as of December 31, 2004 and 2003, and for each of the years
in the three-year period ended December 31, 2004 are included elsewhere in this
Form 10-K.
2004 2003 2002 2001 2000
------------ ------------- ------------ ------------ ------------
Total Income............................$44,906,665 $42,505,179 $42,367,834 $39,569,741 $36,182,730
Net Income ..............................$2,652,503 $2,736,355 $2,500,727 $1,283,478 $3,444,483
Net Income Per
Common Share.............................$.....14 $ .14 $ .12 $ .06 $ .15
Total Assets............................$26,058,520 $24,555,254 $22,133,342 $20,173,856 $17,580,271
Total Liabilities.......................$12,798,984 $13,204,072 $13,822,575 $14,499,547 $9,073,346
Average Shares Outstanding...............19,184,245 20,082,075 20,469,480 22,802,610 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, 2004, 2003 and 2002 and the consolidated results of operations
for the periods ended December 31, 2004, 2003 and 2002. Please read this
discussion in conjunction with the accompanying consolidated financial
statements and notes.
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,"
10
"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 (vii) 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 are 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 to our financial statements for the effect on the year 2004.
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.
At December 31, 2004 and 2003, respectively, the Company had gross deferred tax
assets of $807,542 and $1,004,000 with corresponding valuation allowances of
$706,542 and $808,865 resulting from net operating loss carryovers and temporary
differences primarily related to the life insurance subsidiary. The valuation
allowance is primarily due to statutory limitations on the use of net operating
losses. The resulting net deferred tax asset is $101,000 and $195,136 at
December 31, 2004 and 2003, 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.
The provision for income tax is as follows:
2004 2003 2002
------------------- ------------------- ------------------
Current tax provisions $ 355,183 $ 519,949 $ 174,000
Deferred tax provision 113,000 85,036 202,000
------------------- ------------------- ------------------
Total income tax provision $468,183 $604,985 $376,000
=================== =================== ==================
The reconciliation of income taxes computed at the federal statutory income tax
rate to total income taxes for the years ended December 31, 2004, 2003 and 2002
is as follows:
11
2004 2003 2002
------------------- -------------------- --------------------
Book income before tax $3,120,686 $3,341,340 $2,876,727
=================== ==================== ====================
Income tax computed at statutory rate (34%) $ 1,061,033 $ 1,136,056 $ 978,088
Valuation allowance for AMT credit 126,317 138,507 56,000
Revision of valuation allowance (102,323) (101,550) (169,045)
Rate differential (616,844) (568,028) (489,043)
------------------- -------------------- --------------------
Total income tax provision (benefit) $ 468,183 $ 604,985 $ 376,000
=================== ==================== ====================
The Company has net operating loss carry forwards for income tax purposes at
December 31, 2004 as follows:
Expiring
---------------------
2005 $ 38,024
2006 545,898
2007 286,096
2008 202,779
2009 162,019
2010 185,160
2011 65,880
2012 192,537
2018 254,814
2019 130,716
2020 65,199
2023 73,260
2024 28,624
----------------
$ 2,231,006
================
Financial Condition
2004 2003 2002
------------------- -------------------- ----------------
Income from Operations before
Income Taxes $3,120,686 $3,341,340 $2,876,727
Book Value Per Share $0.70 $0.55 $0.41
Statutory Capital and Surplus of
Insurance Subsidiary $13,438,168 $12,348,394 $10,716,560
Stockholders' Equity - GAAP $13,259,536 $10,690,735 $8,310,767
A.M. Best Financial Rating B+ B+ B+
The Company's financial condition strengthened during 2004 due to the increase
in net income from operations.
Liquidity and Capital Resources
At December 31, 2004 the Company had liquid assets of $3,809,913 in cash, U.S.
Treasury Bills, money market savings accounts, and short-term certificates of
deposit. All of the non-cash liquid assets can readily be converted into cash.
12
The major components of operating cash flows are premiums and investment income
while policy benefits are the most significant cash outflow. In 2004, BNLAC
collected approximately $42.8 million of premiums and annuity deposits (gross
before reinsurance) and $975,485 of investment income. Another source of cash
flow in 2004 was overwrite commissions of $461,443 on vision products. At the
same time the Company paid $31,766,217 in policy benefits and other insurance
costs.
Approximately $664,488 of the bond portfolio is 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. The bonds include;
automobile bonds, government agencies and U. S. Treasury Bonds that have
unrealized profits. The Company may sell these bonds before they mature.
Approximately $17.0 million of the bond portfolio is classified as Held to
Maturity and is carried on the Balance Sheet at amortized cost. This
classification reflects management's ability and intent to hold the bonds until
maturity. No adjustments to surplus are made as bond values change.
The table below discloses the unrealized gains and losses on the "Held to
Maturity" bonds.
Portfolio Designated "Held to Maturity" Gross Gross
Unrealized Unrealized Estimated
December 31, 2004 Amortized Cost Gains Losses Market Value
- ----------------- --------------- -------------- ------------- --------------
US Treasury securities and obligations of
US government corporations and agencies $12,386,696 $9,500 $111,199 $12,284,997
Corporate securities 2,676,720 88,353 13,898 2,751,175
Mortgage-backed securities
GNMA 1,942,557 3,190 24,217 1,921,530
--------------- -------------- ------------- --------------
Totals $17,005,973 $101,043 $149,314 $16,957,702
=============== ============== ============= ==============
In the third quarter of 2004, BNLAC received notification from the Arkansas
Insurance Department that its bond portfolio exceeded the 20% investment
limitation for certain federal agencies as they relate to its investment in
Federal Home Loan Bank bonds. The Company immediately sold $900,000, par value,
of its Federal Home Loan Bank bonds for a loss of $4,490 to initiate compliance
with the Arkansas statute. For GAAP purposes the bonds were classified as held
to maturity. Further discussions with the Arkansas Insurance Department revealed
the Department's intent was not to have the Company dispose of any of its block
of Federal Home Loan Bank bonds, but instead request permission to exceed the
20% investment limitation. The Company then requested and was granted permission
by the Arkansas Insurance Department to exceed the 20% investment limitation.
The Company has determined its held to maturity fixed securities portfolio was
not tainted since the bond sales were due to an unusual and isolated occurrence
that could not be reasonably foreseen. BNLAC held Federal Home Loan Bank Bonds
totaling 27% of statutory assets at December 31, 2004.
The Company's investments are primarily in U.S. Government and Government
Agencies ($14,803,740 amortized book value) and other investment grade bonds
($2,287,058 amortized book value). The Company does not hedge its 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 the Company, 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, BNLAC. BNLF receives a marketing fee from EBI under a related
marketing agreement.
Other long-term investments also include an operating line of credit agreement
in the amount of $200,000. On October 15, 2003 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 was renewed and extended with
interest only payments to August 1, 2005, thereafter EPSI will pay principal and
interest over 60 equal monthly installments until paid in full. The line of
credit is at prime, 5.25%, with interest payable monthly to BNLAC.
On November 5, 2001 the Company's Board of Directors approved a settlement of
the class action lawsuit (see "Legal Proceedings") that included a $575,000
payment to Class Counsel, which was paid in December 2002.
13
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 have a 12-year term and bear interest at
the rate of 6% per annum, effective December 15, 2002 payable annually from the
previous fiscal year's earnings. The total principal amount of class action
bondholders at December 31, 2004 is $2,007,339 compared to $3,025,499
bondholders and $660,447 contingent bondholders at December 31, 2003. Bond
interest expense was $115,101, and $189,985 in 2004 and 2003; respectively.
BNLAC will pay dividends to BNL Financial Corporation for the payment of
interest to the bondholders. The maximum amount of dividends, which can be paid
by Arkansas domiciled insurance companies to shareholders without prior approval
of the insurance commissioner, is subject to restrictions relating to statutory
surplus. The Arkansas Insurance Commissioner has reviewed and approved the
settlement. The Company does not expect the dividend restrictions to impact its
ability to meet its cash needs. The Company has no plan to start a sinking fund
for payment of the principal at maturity.
In 2004, BNLAC paid dividends totaling $1,150,000 to BNLF for the purchase of
Company stock and bonds and for other general operating funds compared to
$857,734 dividends paid in 2003. In 2005, the Company has negotiated with
Universal Guaranty Life Insurance Company to purchase 2,216,776 shares of BNL
Financial Corporation's common stock for $2,300,000. The transaction is pending
regulatory approval. BNLAC will use short term investments to fund the dividends
it will pay to the Company to purchase the stock.
The following table reflects all long-term contractual obligations of the
Company as of December 31, 2004.
Long-Term Contractual Obligations Total < 1 Year 1-3 Years 3-5 Years > 5 Years
- --------------------------------- ----- -------- --------- --------- ---------
Bonds and Related Future Interest Payable* $3,214,000 $120,000 $242,000 $242,000 $2,610,000
Operating Lease Obligations 203,000 169,000 34,000 - -
Liability for Future Policy Benefits & Annuity
Deposits** - - - - -
Supplementary Contracts 66,000 17,000 33,000 16,000 -
* Interest payments are made only if the Company is profitable.
** Payment of liability is dependent on death of the insured or demand of the
annuitant.
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.
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 $5,000,000 in the states in which BNLAC is licensed.
Results of Operations
Premium income was $43,146,365 in 2004, $40,809,336 in 2003, and $41,237,420 in
2002. The 6% increase in 2004 was due to new sales of group and individual
dental insurance and increased renewal premiums from a reduction in the lapse
rates on existing business. The decrease of 1% in 2003 was due to the loss of
three large dental groups at the end of 2002 and the first quarter of 2003. In
2004, group dental insurance premium income made up 95.3% of total premium
income.
Net investment income was $975,485 in 2004, $970,382 in 2003, and $1,148,225 in
2002, an increase of 1% in 2004, and a decrease of 12% in 2003. The slight
increase in 2004 was due to an increase in investment in fixed maturities and an
increase in interest rates. The decrease in 2003 was primarily due to the
general decline in interest rates.
The Company receives marketing fees from EBI per the marketing agreement
mentioned above. The Company received marketing fees of $165,275 in 2004,
$146,107 in 2003 and $143,619 in 2002. The increase in 2004 was due to an
increase in third party administrator income at EBI in 2004.
The Company had a realized gain on debt extinguishments of $495,462 in 2004 and
$424,726 in 2003 due to the purchase of debentures payable at less than par
value.
Realized capital gains and (losses) on investments were $124,077 in 2004,
$154,628 in 2003 and ($161,430) in 2002. The realized gain in 2004 and 2003 are
primarily from the sale of U.S. Treasury bonds. The realized loss in 2002 was
primarily due to the write down in value of certain bonds and stock.
14
Increase in liability for future policy benefits was $687,619 in 2004, $34,377
in 2003 and $93,518 in 2002. The increase in 2004 was primarily due to a
$611,410 increase in additional contract reserves on the individual dental
policies. Beginning in 2004, new reserve rules prescribed by most state
insurance departments require additional reserves be established to more
properly match premiums and benefits for this product. The Company was also
required to set up deferred acquisition costs on the individual dental plans
that reduced general and administrative expenses by $155,410. The decrease in
2003 was due to a slight decrease in the number of whole life insurance policies
in force.
Policy benefits and other insurance costs decreased from $30,789,481 in 2002, to
$30,108,152 in 2003 and increased to $31,766,217 in 2004. The increase in 2004
was due to an increase in claims and commissions resulting from the increase in
group and individual dental premium collected and commissions paid on a
recruiting bonus program. The decrease in 2003 was the result of a $900,000
reduction in group dental claims. The claims ratio on group dental insurance,
which represents the ratio of claims incurred to premium earned, was 62.3% in
2004, 62.7% in 2003 and 64.1% in 2002. The claims ratio has steadily decreased
over the last three years as a result of renewal rate adjustments.
Amortization of deferred policy acquisition costs was $29,973 in 2004, $30,403
in 2003 and $26,918 in 2002. Amortizaton of deferred policy acquisition costs
varies in relation to lapses or surrenders of existing policies.
Operating expenses were $7,957,447 in 2004, $7,664,081 in 2003 and $7,249,662 in
2002. The 4% increase in expenses in 2004 was primarily due to an increase in
payroll expenses, employee benefits and actuarial expense which increased due to
an increase in business in force, new plans of insurance available for sale and
increased state filings. The increase in expenses in 2003 was due to an increase
in executive bonus incentive plan expenses, which increase with profits, payroll
expense and marketing expense associated with increased product and sales
promotion.
Taxes other than on income were $1,344,723 in 2004, $1,326,826 in 2003 and
$1,331,528 for 2002. The increase in 2004 was due to premium taxes on the
increase in collected premiums. The decrease in 2003 was due to a decrease in
premium taxes on fewer premiums collected.
For 2004, the consolidated net income from operations before taxes was
$3,120,686 compared to $3,341,340 in 2003 and $2,876,727 in 2002. The decrease
in 2004 was primarily due to the increase in additional contract reserves on the
individual dental plan. The increase in 2003 was due to a decrease in claims on
group dental business and an increase in realized gains.
Earnings per share was $.14, $.14, and $.12 in 2004, 2003 and 2002,
respectively. The effect of the treasury shares described in Note 6 to the
financial statements was immaterial in 2004 and 2003 and increased earnings per
share by $.015 in 2002.
The provision for income taxes was $468,183 in 2004, $604,985 in 2003 and
$376,000 in 2002. For the periods ended December 31, 2004, 2003 and 2002, the
Company had $355,183, $519,949 and $174,000 of current federal tax expense and
$113,000, $85,036 and $202,000 of deferred tax expense; respectively. The
decrease in 2004 was due to a reduction in net income and an over accrual of
approximately $36,000 in 2003. The increase in 2003 is due to the net operating
losses of the life insurance subsidiary being fully utilized in 2002.
For the year ended December 31, 2004, other comprehensive income was ($87,603)
compared to $56,053 in 2003 and $171,170 for the same period in 2002. The
comprehensive income in 2003 and 2002 was due to a decrease in interest rates
that increased the market value of the Company's bond portfolio. The decrease in
comprehensive income for the period ended December 31, 2004 was due to an
increase in interest rates and the reclassification adjustment for realized
losses of $126,364.
Looking Forward
BNLAC plans to apply for authority to market insurance products in additional
states in the upcoming year. In 2004 we received approval to market insurance in
New Mexico and we currently have an application pending for a certificate of
authority in Wisconsin.
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
15
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, 2004 and December 31, 2003. We held various financial instruments
at December 31, 2004 and 2003, consisting of financial assets reported in our
Consolidated Balance Sheets (refer to Note 4).
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, 2004 and December 31, 2003 was $17,622,189 and
$16,631,478, respectively.
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, 2004 of approximately $504,000. 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 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 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,
2004 totaled $628,821, or only 2.8% of total investments and cash on a
consolidated basis. We do not hedge our equity price risk. As of December 31,
2004, a 20% adverse change in equity prices would result in an approximate
$100,000 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-22 attached to this Report is hereby
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. 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
disclosure. In designing and evaluating the disclosure controls and procedures,
16
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.
ITEM 9B. FORM 8K FILINGS
The Company did not file reports on Form 8-K for the fourth quarter of the year
covered by this report.
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 Officer
Name Age Position
- ---------------------------- -------- --------------------- -----------------------------------------------
Wayne E. Ahart 64 1984 Chairman of the Board and Director
C. Donald Byrd 63 1984 Vice Chairman of the Board and Director
Kenneth Tobey 46 1994 President and Director
Barry N. Shamas 57 1984 Executive Vice President, Treasurer and
Director
Cecil Alexander 68 1994 Director
Richard Barclay 67 1994 Director
Eugene A. Cernan 70 1994 Director
Hayden Fry 75 1984 Director
John Greig 69 1984 Director
Roy B. Keppy 81 1984 Director
Roy Ledbetter 74 1994 Director
John E. Miller 74 1994 Director
James A. Mullins 70 1984 Director
C. James McCormick 79 1984 Director
Robert R. Rigler 81 1989 Director
Chris Schenkel 80 1994 Director
L. Stan Schoelerman 79 1984 Director
Orville Sweet 80 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.
17
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 served as Chairman of the Board of BNLE from 1988 to 2004 and 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.
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 retired 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 Advisory Board of
Directors of V.E. Bank of Heber Springs, the Board of Directors of the Arkansas
Tourism Development Foundation, and the Board of Directors of the Baptist
Foundation.
Richard L. Barclay, a Certified Public Accountant, recently retired as Director
of Arkansas Department of Finance and Administration and as the state's Chief
Fiscal Officer. He has returned to private practice with Beall, Barclay & Co.,
Certified Public Accountants in Rogers, Arkansas. He is an advisory Director of
Regions Bank of Rogers. He serves as past President and Board member of the
Arkansas Society of Certified Public Accountants and is a member of the American
Institute of Certified Public Accountants. He was a member of the Arkansas House
of Representatives from 1977 until 1992.
Eugene A. Cernan has been President and Chairman of the Board of The Cernan
Corporation since 1981. 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 National Air and Space Museum
and Smithsonian Educational Foundation. Captain Cernan is also 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.
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.
18
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 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.
Roy E. Ledbetter is retired 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 former 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 the former Vice Chairman of Golf Hosts, Inc. He
is the owner of CJ Leasing, LLC. Mr. McCormick is former Chairman of the Board
of Directors and CEO of First Bancorp, Vincennes, Indiana; former Chairman of
the Vincennes University board of trustees and a Life Director of the Indiana
Chamber of Commerce; and a former member of the Young President's Organization.
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, State Advocacy Services,
Lions World Services for the Blind, State Board of Easter Seals, Williams
Baptist College Board of Trustees and Izard County Chapter of the American Red
Cross.
James A. Mullins has owned and operated Prairie Flat Farms, Corwith, Iowa since
1969. He was a Director of the Omaha Farm Credit Bank from 1985 to 1994, a
Director of the Federal Farm Credit Banks Funding Corporation from 1986 to 1994,
and Director of the US Meat Export Federation from 1988 to 1995. He served as
Chairman of the Foreign Trade Committee, National Cattlemen's Association (1988
- - 1993). He was Chairman of the US Meat Export Federation until 1994. He was
Chairman of the National Livestock & Meat Board in 1983; Chairman of the Beef
Industry Council in 1979 and 1980; and Chairman of the Omaha Farm Credit Bank in
1988 and 1989.
Robert R. Rigler has been Chairman of the Board of Security State Bank, New
Hampton, Iowa since 1989; he served as its President and CEO from 1968 to 1989.
Mr. Rigler was Iowa Superintendent of Banking from 1989 to 1991. He was a member
of the Iowa Transportation Commission from 1971 to 1986 and served as its
Chairman from 1973 to 1986. He was a member of the Iowa State Senate from 1955
to 1971 and served as a Majority and Minority Floor Leader.
Chris Schenkel is a retired television sportscaster of CBS Sports and ABC
Sports, New York, New York, from 1952 to 1999. He also served as Spokesperson
for Owens-Illinois, Toledo, Ohio, from 1976 to 1995, for whom he spoke 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 University, Lawrence,
Kansas. He has three Honorary Doctorate Degrees and a Lifetime Achievement Emmy.
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.
19
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.
Audit Committee
The Company's audit committee consists of three members of the board of
directors, Richard Barclay, Robert Rigler and John Greig. Mr. Barclay, a
Certified Public Accountant, is the committee's financial expert and is
independent of management. See description of board members for additional
information.
Compensation Committee
The Company's compensation committee consists of three members of the board of
directors, C. James McCormick, Roy Ledbetter and Orville Sweet. C. James
McCormick is Chairman of the committee. See description of board members for
additional information.
Code of Ethics
The Company has a code of ethics that applies to all employees of the Company.
To receive a copy of the Company's code of ethics without charge, contact:
Ms. Pam Randolph
BNL Financial Corporation
7530 Hwy. 107
Sherwood, Arkansas 72120
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.
20
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(A) (B) (C) (D) (E) (F) (G) (H) (I)
Other
Annual Restricted All Other
Name and Principal Compen Stock Options/SARs LTIP Compen
Position Year Salary Bonus $ -sation $ Award(s) $ (#) Payouts $ -sation $
- ----------------------------- -------- ------------ ------------ ----------- -------------- ------------ ------------- ------------
Wayne E. Ahart, CEO 2004 $127,500 $150,098 $76,629 $0 - $0 $0
" 2003 $125,000 $184,288 $42,658 $0 - $0 $0
" 2002 $125,000 $154,506 $54,086 $0 - $0 $0
Barry N. Shamas, Executive
V.P. 2004 $116,666 $102,462 $17,920 $0 - $0 $0
" 2003 $110,600 $100,347 $18,028 $0 - $0 $0
" 2002 $110,600 $62,430 $18,237 $0 - $0 $0
C. Donald Byrd, Vice
Chairman of the Board 2004 $101,667 $99,847 $27,136 $0 - $0 $0
" 2003 $95,824 $98,769 $26,734 $0 - $0 $0
" 2002 $92,500 $51,283 $26,570 $0 - $0 $0
Kenneth Tobey, President 2004 $91,667 $99,016 $11,104 $0 - $0 $0
" 2003 $79,583 $105,099 $9,369 $0 - $0 $0
" 2002 $77,500 $55,033 $12,136 $0 - $0 $0
The total number of executive officers of the Company is four and the total
remuneration paid to all executive officers in 2004, as a group, is $1,021,712
including bonuses of approximately $100,000 under the Company's stock bonus plan
and $291,839 under the executive incentive bonus plan. The Company has accrued
bonuses payable at December 31, 2004, of approximately $100,000 under the stock
bonus plan and approximately $131,000 under the executive 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
Each director receives a fee of $500 per company, plus reasonable travel
expenses for each meeting of the Board of Directors attended. The Audit and
Compensation Committees receives $500 for each meeting attended.
Benefit Plans
See Equity Compensation Plans for a description of the 1994 Agents' Nonqualified
Stock Option Plan and the 2002 Non-Director, Non-Executive Stock Option Plan.
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 was $312,069, $334,134 and
$287,673 under this plan for 2004, 2003 and 2002, respectively.
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 $100,000,
$100,000 and $100,000 were granted in 2004, 2003 and 2002, 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 contributed $57,698, $46,138 and $32,565 in 2004,
2003 and 2002, respectively.
21
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, 2004, 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, 2004:
Amount and Nature of Percent of Class as of
Title of Class Name and Address of Beneficial Owner Beneficial Ownership (1) December 31, 2004
- ------------------- -------------------------------------- -------------------------- -------------------------
Common Stock Wayne E. Ahart 1,982,653(2)(3)(7) 10.41%
8017 Cobblestone
Austin, Texas 78735
Common LeRene Ahart 1,982,652(6)(7) 10.41%
Stock 14 Club Estates Pkwy
Austin, TX 78735
Common Stock Barry N. Shamas 2,801,816(5) 14.71%
1095 Hidden Hills Dr.
Dripping Springs, Texas 78620
Common Stock Universal Guaranty Life Insurance 2,216,776(2) 11.64%
Company
5250 S. Sixth St. Rd.
Springfield, Illinois 62705
Common Stock C. Donald Byrd 1,615,743(4) 8.31%
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. On March 21, 2005, the Company entered into a conditional
agreement with UGL to purchase the 2,216,776 shares which it owns for a
purchase price of $2,300,000. If the purchase is closed, the agreement
between Mr. Ahart and CIC-UGL will be terminated. Mr. Ahart's shares
will not be purchased.
(3) Includes 133,290 shares owned directly by Wayne Ahart and 1,200,000
shares held in the name of National Iowa Corporation and 649,363 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.
(6) Includes 133,290 shares owned directly by LeRene Ahart and 1,200,000
shares owned by National Iowa Corporation and 649,363 shares owned by
Arkansas National Corporation. Wayne Ahart controls Arkansas National
Corporation and National Iowa Corporation and votes the BNL Financial
Corporation shares owned by both companies.
(7) Wayne E. Ahart has voting control , either directly or through Arkansas
National Corporation and National Iowa Corporation, of 4,712,216 shares
24.74% of the issued and outstanding common stock of BNLF.
Security Ownership of Management
The following table sets forth, as of December 31, 2004, 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:
22
Amount and Nature of
Beneficial Ownership(1) Percent of Class as of
Title of Class Name of Beneficial Owner December 31, 2004
- ----------------------- ----------------------------------- ------------------------- ---------------------------
Common Stock Wayne E. Ahart 1,982,563(2) 10.41%
" Barry N. Shamas 2,801,816(4) 14.71%
" C. Donald Byrd 1,615,743(3) 8.31%
" Kenneth Tobey 914,786 4.70%
" C. James McCormick 137,084(5) .70%
" Hayden Fry 69,047 .36%
" John Greig 50,102 .26%
" Roy Keppy 51,001 .26%
" James A. Mullins 50,000 .26%
" L. Stanley Schoelerman 50,000 .26%
" Orville Sweet 50,000 .26%
" Richard Barclay 46,088 .23%
" John E. Miller 47,111 .24%
" Cecil Alexander 37,088 .19%
" Eugene A. Cernan 37,088 .19%
" Roy Ledbetter 37,088 .19%
" Chris Schenkel 37,088 .19%
" Robert R. Rigler 3,295 .02%
" All Executive Officers and
Directors as a group (18 persons) 8,016,988 42.09%
- ----------------------- -- -----------------------------------
(1) To the Company's knowledge all shares are beneficially owned by the
persons named, except as otherwise indicated, and they hold the sole
voting and investment power.
(2) Includes 133,290 shares owned directly by Wayne Ahart and 1,200,000
shares held in the name of National Iowa Corporation and 649,363
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
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated by reference from
our Proxy Statement.
23
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The information required by this section is set forth on page F-1 to F-19 of
this Report and is incorporated herein by reference.
2. The following financial statement schedule required to be filed by
Paragraph (d) of Item 15 of Form 10-K is submitted as a separate section of this
report.
Schedule III - Condensed Financial Information of Registrant F-20 to F-22
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.
No. Description Page or Method of Filing
- ------------- ------------------------------------------------------ --------------------------------------------------------
3.1 Articles of Incorporation of BNL Financial Incorporated by reference to Exhibit 3.1 of the
Corporation, dated January 27, 1984 and Amendment to Company's Annual Report on Form 10-K for the period
Articles of Incorporation of BNL Financial ending December 31, 1993.
Corporation, dated November 13, 1987.
3.2 By-laws of BNL Financial Corporation. Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement No. 33-70318
4.1 Instruments defining the rights of security holders, Incorporated by reference to Exhibit 4 of the
including indentures. Company's Registration Statement No. 2-94538 and
Exhibits 3.5 and 4 of Post-Effective Amendment No. 3
thereto.
4.2 Articles of Incorporation of BNL Financial
Corporation, dated January 27, 1984 and Amendment to Incorporated by reference to Exhibits 4.2 of the
Articles of Incorporation on BNL Financial Company's Annual Report on Form 10-KSB for the period
Corporation, dated November 13, 1987. ending December 31, 1998.
10.1 Form of Agreement between Commonwealth Industries Incorporated by reference to Exhibit I of the
Corporation, American Investors Corporation and Wayne Company's Quarterly Report on 10-QSB for the period
E. Ahart regarding rights to purchase shares of the ended September 30, 1994.
Company.
10.2 Agreement dated December 21, 1990 between Registrant Incorporated by reference to Exhibit I of the
and C. Donald Byrd granting Registrant right of first Company's Quarterly Report on 10-QSB for the period
refusal as to future transfers of Mr. Byrd's shares of ended March 31, 1996.
the Company's common stock.
23
10.3 Office lease assumption and assignment agreement dated Incorporated by reference to Exhibit 10.9 of the
September 1, 1998, between Brokers National Life Company's Annual Report on Form 10-KSB for the period
Assurance Company and Walgreen Company and Charles H. ending December 31, 1998.
Morrison for premises in Austin.
10.4 Sublease dated January 20, 2000 between Brokers Incorporated by reference to Exhibit 10.10 of the
National Life Assurance Company and PRG, Inc. Company's Annual Report on Form 10-KSB for the period
ending December 31, 1998.
24
11 Statement Re computation of per share earnings. Reference is made to the explanation of the
computation of per share earnings as shown in Note 1
to the Notes to Consolidated Financial Statements
filed herewith under Item 14(a)(1) above which clearly
describes the same.
12 Statements re computation of ratios. Not applicable.
16 Letter Re Change in Certifying Accountant. Incorporated by reference to Exhibit I of the
Company's periodic Report on Form 8-K dated September
14, 1995.
21 Subsidiaries of Registrant. Filed herewith.
31.1 Certification of Chief Executive Officer Filed herewith - E1
Section 302
31.2 Certification of Chief Financial Officer Filed herewith - E2
Section 302
32.1 Certification of Chief Executive Officer Filed herewith - E3
Section 906
32.2 Certification of Chief Financial Officer Filed herewith - E3
Section 906
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
2005.
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 Chairman of the Board, Director 03/30/2005
-------------------
Wayne E. Ahart
(Principal Executive Officer)
/S/ C. Donald Byrd Vice Chairman of the Board and Director 03/15/2005
--------------------
C. Donald Byrd
/S/ Kenneth Tobey President and Director 03/15/2005
--------------------
Kenneth Tobey
25
/S/ Barry N. Shamas Executive Vice President, Treasurer and Director 03/30/2005
---------------------
Barry N. Shamas
(Principal Financial and Accounting Officer)
/S/ Hayden Fry Director 03/15/2005
---------------
Hayden Fry
/S/ John Greig Director 03/15/2005
----------------
John Greig
/S/ Roy Keppy Director 03/15/2005
---------------
Roy Keppy
/S/ C. James McCormick Director 03/15/2005
----------------------
C. James McCormick Director
/S/ James A. Mullins Director 03/15/2005
--------------------
James A. Mullins
/S/ Robert R. Rigler Director 03/15/2005
-----------------------
Robert R. Rigler
/S/ Stanley Schoelerman Director 03/15/2005
------------------------
Stanley Schoelerman
/S/ Orville Sweet Director 03/15/2005
-----------------
Orville Sweet
/S/ Cecil Alexander Director 03/15/2005
-------------------
Cecil Alexander
/S/ Richard Barclay Director 03/15/2005
-------------------
Richard Barclay
/S/ Eugene A. Cernan Director 03/15/2005
--------------------
Eugene A. Cernan
26
/S/ Roy Ledbetter Director 03/15/2005
-----------------
Roy Ledbetter
/S/ John E. Miller Director 03/15/2005
-------------------
John E. Miller
/S/ Chris Schenkel Director 03/15/2005
------------------
Chris Schenkel
27
ANNUAL REPORT ON FORM 10-K
ITEM 15 (a) AND 15 (d)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
DES MOINES, IOWA
- -------------------------------------------------------------------------------
Table of Contents
Page Number of 2004
Form 10-K
-------------------------
Item 15(a) Financial Statements
Report of Independent Accountants on Financial Statements F-2
Consolidated Balance Sheet, December 31, 2004 and 2003 F-3
Consolidated Statement of Operations and Comprehensive Income for the years ended December 31,
2004, 2003 and 2002 F-4
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 2004,
2003 and 2002 F-5
Consolidated Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7
Item 15(d) - Schedule III, Condensed Financial Information of Registrant F-20
F-1
- ------------------------------------------------------------------------------
BNL Financial Corporation and Subsidiaries
Report of Independent Registered Public Accounting Firm
- -----------------------------------------------------------------------------
To the Board of Directors and Shareholders
BNL Financial Corporation and Subsidiaries
We have audited the consolidated financial statements of BNL Financial
Corporation and Subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the
consolidated results of their operations and their consolidated cash flows for
each of the years ended December 31, 2004, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information required to be set
forth therein.
Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c.
February 7, 2005 /s/ Smith, Carney & Co
F-2
- ------------------------------------------------------------------------------------------------------------------------------------
BNL Financial Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2004 and 2003
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------
ASSETS 2004 2003
----------------- ----------------
Cash and cash equivalents $3,809,913 $3,398,661
Investments in fixed maturities at fair value, Available for Sale (amortized
cost $589,521; $1,245,558; respectively) 664,488 1,457,988
Investments in fixed maturities at amortized cost, Held to Maturity (fair
value $16,957,702; $15,173,490; respectively) 17,005,973 15,120,096
Other long-term investments - (Note 4) 1,557,407 1,527,407
Investment in equity securities, at fair value
(cost $588,885, $339,509, respectively) 628,821 373,214
----------------- ---------------
Total Investments, Including Cash and Cash Equivalents 23,666,602 21,877,366
Accrued investment income 183,197 183,713
Furniture and equipment, net 434,799 486,000
Deferred policy acquisition costs 346,373 220,937
Policy loans 153,470 144,122
Receivable from reinsurer 34,121 31,065
Premiums due and unpaid 855,959 1,059,950
Income tax assets 101,000 195,136
Intangible assets 154,483 162,237
Other assets 128,516 194,728
----------------- ---------------
Total Assets $26,058,520 $24,555,254
================= ===============
LIABILITIES
Liabilities for future policy benefits $2,268,652 $1,577,978
Policy claims payable 2,235,929 2,578,992
Annuity deposits 2,783,838 2,777,665
Deferred annuity profits 373,985 425,980
Premium deposit funds 36,024 40,260
Supplementary contracts without life contingencies 55,799 69,596
Advanced and unallocated premium 659,498 1,127,148
Commissions payable 483,655 433,257
Accrued taxes and expenses 810,437 777,128
Bonds payable 2,007,339 3,025,499
Payable for Securities 650,000 -
Other liabilities 433,828 370,569
----------------- ---------------
Total Liabilities 12,798,984 13,204,072
----------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
Contingent long-term liabilities - 660,447
----------------- ---------------
Total Commitments and Contingencies - 660,447
----------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, $.02 stated value, 45,000,000 shares authorized;
20,980,760 shares issued and outstanding 419,616 419,616
Additional paid-in capital 10,829,800 10,787,911
Accumulated other comprehensive income 90,165 177,768
Accumulated surplus 3,109,839 457,336
Contingent treasury stock 0; 440,298 shares, respectively (Note 6) - (660,447)
Treasury stock, at cost, 1,933,646; 1,098,493 shares, respectively (1,189,884) (491,449)
----------------- ---------------
Total Shareholders' Equity 13,259,536 10,690,735
----------------- ---------------
Total Liabilities and Shareholders' Equity $26,058,520 $24,555,254
================= ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-2
- -----------------------------------------------------------------------------------------------------------------------------------
BNL Financial Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
For the years ended December 31, 2004, 2003, and 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------
2004 2003 2002
------------------ ----------------- ----------------
Income
Premium income $43,146,365 $40,809,336 $41,237,420
Net investment income 975,485 970,382 1,148,225
Marketing fees (Note 4) 165,275 146,107 143,619
Realized gain on debt retirements 495,462 424,726 -
Realized gains (losses) 124,078 154,628 (161,430)
------------------ ----------------- ----------------
Total Income 44,906,665 42,505,179 42,367,834
------------------ ----------------- ----------------
Expenses
Increase in liability for future policy benefits 687,619 34,377 93,518
Policy benefits and other insurance costs 31,766,217 30,108,152 30,789,481
Amortization of deferred policy acquisition costs 29,973 30,403 26,918
Operating expenses 7,957,447 7,664,081 7,249,662
Taxes, other than on income 1,344,723 1,326,826 1,331,528
------------------ ----------------- ----------------
Total Expenses 41,785,979 39,163,839 39,491,107
------------------ ----------------- ----------------
Income from Operations before
Income Taxes 3,120,686 3,341,340 2,876,727
Provision for income taxes 468,183 604,985 376,000
------------------ ----------------- ----------------
Net Income $ 2,652,503 $ 2,736,355 $ 2,500,727
================== ================= ================
Net income per common share (basic and diluted) $0.14 $0.14 $0.12
================== ================= ================
Weighted average number of fully
paid common shares 19,184,245 20,082,075 20,469,480
================== ================= ================
Net Income (as above) $ 2,652,503 $ 2,736,355 $ 2,500,727
------------------ ----------------- ----------------
Other comprehensive income (loss), net of tax: Unrealized gains on securities:
Unrealized holding gain arising during period
(net of $18,482 and $42,000 of deferred taxes 38,761 210,680 9,741
in 2004 and 2003; respectively)
Reclassification adjustment for gain (loss)
included in net income (126,364) (154,627) 161,429
------------------ ----------------- ----------------
Other Comprehensive Income (Loss) (87,603) 56,053 171,170
------------------ ----------------- ----------------
Comprehensive Income $2,564,900 $2,792,408 $2,671,897
================== ================= ================
The accompanying notes are an integral part of the consolidated financial statements.
F-3
- -----------------------------------------------------------------------------------------------------------------------------------
BNL Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2004, 2003 and 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Accumulated Other
------------------------- Paid-In (Deficit) Comprehensive Treasury
Shares Amount Capital Surplus Income Stock
---------- ------------- -------------- ----------------- -------------- ---------------
Balance, December 31, 2001 23,311,944 $466,239 $14,313,000 $(4,779,746) $(49,455) $(4,275,729)
========== ============= ============== ================= ============== ===============
Accumulated other
comprehensive income - - - - 171,170 -
Sale of treasury stock - - 523 - - 6,325
Purchase treasury stock - - - - - (97,734)
Stock options exercised 55,550 1,111 26,664 - - -
Sale of common stock 52,153 1,043 25,033 - - -
Stock options granted - - 1,596 - - -
Net income - - - 2,500,727 - -
----------- ------------- -------------- ----------------- -------------- ---------------
Balance, December 31, 2002 23,419,647 $468,393 $14,366,816 $(2,279,019) $121,715 $(4,367,138)
============ ============= ============== ================= ============== ===============
Accumulated other comprehensive
income - - - - 56,053 -
Sale of treasury stock - - 5,317 - - 83,309
Purchase of treasury stock - - - - - (505,355)
Stock options exercised 38,125 763 18,662 - - -
Purchase of common stock (52,153) (1,043) (25,033) - - -
Stock options granted - - 10,940 - - -
Retirement of treasury
Stock (2,424,859) (48,497) (3,588,791) - - 3,637,288
Net income - - - 2,736,355 - -
------------- ------------- -------------- ----------------- -------------- ---------------
Balance, December 31, 2003 20,980,760 $419,616 $10,787,911 $457,336 $177,768 $(1,151,896)
============= ============= ============== ================= ============== ===============
Accumulated other comprehensive
income - - - - (87,603) -
Sale of treasury stock - - 23,239 - - 41,312
Purchase of treasury stock - - - - - (619,262)
Stock options exercised - - 3,650 - - 20,761
Stock options granted - - 15,000 - - -
Contingent Treasury Stock - - - - - 519,201
See Note 6
Net income - - - 2,652,503 - -
------------- ------------- -------------- ----------------- -------------- ---------------
Balance, December 31, 2004 20,980,760 $419,616 $10,829,800 $3,109,839 $90,165 ($1,189,884)
============= ============= ============== ================= ============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-4
- -----------------------------------------------------------------------------------------------------------------------------------
BNL Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2004, 2003 and 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------
2004 2003 2002
------------- ---------------- ---------------
Cash Flows from Operating Activities
Net income $2,652,503 $2,736,355 $2,500,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized (gain) loss on investments (131,796) (152,951) 161,429
Realized (gain) loss on sale of furniture and equipment 7,719 (1,677) -
Realized gain on debt extinguishments (495,462) (424,726) -
Depreciation 209,851 195,425 224,660
Decrease in deferred tax asset 113,000 84,000 202,000
Amortization of deferred acquisition costs, and bond issuance cost 66,078 36,218 32,733
Accretion of bond discount 3,749 24,473 3,541
Common stock and stock options granted 15,000 31,440 1,596
Change in assets and liabilities:
Decrease in accrued investment income 517 2,805 37,582
(Increase) decrease in receivable from reinsurer (3,056) 1,171 2,754
(Increase) decrease in premiums due and unpaid 203,991 (138,942) (134,663)
Increase in liability for future policy benefits 690,674 33,208 90,765
Increase (decrease) in policy claims payable (343,063) 221,443 (89,386)
Decrease in annuity deposits and deferred profits (45,822) (121,962) (37,195)
Decrease in premium deposit funds (5,236) (3,565) (18,162)
Increase (decrease) in advanced and unallocated premium (467,650) 387,292 (58,934)
Increase (decrease) in commissions payable 50,398 (12,211) (178,016)
Decrease in contingent settlement expense liability - - (575,000)
Other, increase (3,157) 7,014 215,423
------------ ---------------- ---------------
Net Cash Provided by Operating Activities 2,518,238 2,904,810 2,381,854
------------ ---------------- ---------------
Cash Flows from Investing Activities
Proceeds from sales of investments 1,150,475 1,102,540 484,376
Proceeds from maturity or redemption - Available for Sale Investments 793,634 - 4,503,229
Proceeds from maturity or redemption - Held to Maturity Investments 7,293,903 6,503,497 3,336,000
Proceeds from sale of furniture and equipment 58,388 10,976 -
Purchase of equity securities (360,453) (163,885) (224,325)
Purchase of furniture and equipment (224,757) (227,882) (263,938)
Purchase of fixed maturity securities, Available for Sale - - (4,526,454)
Purchase of fixed maturity securities, Held to Maturity (9,580,134) (11,756,299) (1,603,133)
Other Investments - Line of credit advanced (30,000) (30,000) (140,000)
------------ ---------------- ---------------
Net Cash Provided (Used) in Investing Activities (898,944) (4,561,053) 1,565,755
------------ ---------------- ---------------
Cash Flows from Financing Activities
Sale of treasury stock 64,550 58,797 6,848
Purchase of treasury stock (619,262) (477,023) (97,734)
Net change in supplementary contracts (13,797) (20,111) 23,559
Sale of common stock - - 26,076
Stock options exercised 24,411 19,425 27,775
Debt extinguishments (663,944) (187,063) -
------------ ---------------- ---------------
Net Cash Used in Financing Activities (1,208,042) (605,975) (13,476)
------------ ---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 411,252 (2,262,218) 3,934,133
Cash and Cash Equivalents, Beginning of Period 3,398,661 5,660,879 1,726,746
------------ ---------------- ---------------
Cash and Cash Equivalents, End of Period $3,809,913 $3,398,661 $5,660,879
============ ================ ===============
The accompanying notes are an integral part of the consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
F-5
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. In March 2004, BNL Equity Corporation (BNLE), the immediate
subsidiary of the Company was dissolved and its assets, including the stock of
("BNLAC"), were distributed to BNLF. All outstanding shares of BNLAC are now
owned directly by BNLF.
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 most significant
income component is sales of dental insurance for which the maximum annual risk
per policy is $2,000. See Note 10. The Company is licensed to sell in 36 states
as of December 31, 2004. 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 long 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 asset includes management's estimate of the future benefit to be
derived from net operating loss carry forwards and the difference in tax basis
of assets and liabilities. 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 are revised periodically to reflect
actual experience. Increases in the liability account for interest credited to
contracts are charged to expense. The interest rate assumptions ranged from 4.0%
to 3.0% during 2004 and 2003.
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.
Before September 30, 2002 the Company classified all of 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
classified as available for sale are recorded as a component of comprehensive
income.
F-7
Effective September 30, 2002, the Company elected to divide its portfolio and
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 held to maturity.
This classification change reflects management's intent and ability to hold this
block of securities, and other securities purchased subsequently and so
designated, to their maturity. This reclassification required the Company to
report the bond's value on September 30, 2002 at fair market value at the date
of reclassification. New purchases designated by management as part of the held
to maturity portfolio will be presented on the financial statements at amortized
book value and, therefore, unlike the available for sale portfolio, no
adjustments to surplus will be made as bond values change. The election to
change the method of accounting had no material effect on the financial
statements of the Company in 2002 but could have a material effect in the future
since surplus will not be adjusted as described above.
Realized gains or losses on sale of all investments are determined on a specific
identification basis. Investments in equity securities are carried at fair
value.
Cash equivalents are carried at amortized cost, which approximates fair value.
Cash equivalents represent other short-term securities. 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
was no material interest paid in 2002. The Company made debenture interest
payments of $69,307 and $71,681 in 2004 and 2003; respectively. The Company made
cash payments for income taxes of $255,809, $582,833 and $173,472 in 2004, 2003
and 2002, respectively.
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 $531,219 and $487,709 at December 31, 2004 and
2003, respectively. Depreciation expense was $209,851, $195,425, and $224,660,
for the years ended December 31, 2004, 2003 and 2002, respectively.
Other assets include agents' balances of $52,086 and $61,028 at December 31,
2004 and 2003, respectively, after reduction for allowance of doubtful accounts.
The allowance account had a credit recorded of $2,500 and $1,000 in 2004 and
2003, respectively and an expense of $5,562 in 2002.
The Company adopted Statement #142 of the Financial Accounting Standards Board
in the first quarter of 2003, as required. The adoption had no material effect
on the financial statements of the Company. The new accounting rule changes the
methods of accounting for intangible assets, which generally were amortized over
40 years under previous rules. The new standard requires that intangible assets
be separately presented on the face of the Balance Sheet and be periodically
tested for impairment of their market value and written off immediately to the
extent the value is found to be impaired. As indicated on the face of the
Balance Sheet, the Company has intangible assets of $154,483 and $162,237 at
December 31, 2004 and 2003 respectively. 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 $7,744, $5,800 and $5,800 was recorded for each of the years ended
December 31, 2004, 2003 and 2002, respectively. The Company tested its
intangible assets for impairment by evaluating the future benefit of the
underlying investments or rights acquired in association with these assets.
The Company accounts for the 1994 Brokers and Agents Stock Option Plan and the
2002 Nondirector, Nonexecutive 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 2003 weighted average number of shares was reduced for the
contingent treasury shares described in Note 6.
2. Shareholders' Equity
During 2004 and 2003, the Company made cash offers to shareholders for the
purchase of stock. Stock purchases amounted to $542,012 for 913,339 shares in
2004 and $477,023 for 974,541 shares in 2003 and are included in Treasury Stock
at December 31, 2004. In order to purchase additional company common stock in
2004, the Company was required to file a Schedule TO with the Securities and
Exchange Commission. Included in the cost of the Treasury Stock purchased in
2004 is $77,250 which represents a portion of the cost to complete the TO
filing.
F-8
2. Shareholders' Equity (continued)
At December 31, 2004 and 2003, shareholders' equity includes approximately
$14,478,420 and $13,477,574, 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. In March of 2003,
the Arkansas Insurance Department approved the payment of up to a maximum of
$1,138,400 of dividend payments by BNLAC to the Company in order to facilitate
the purchase of bonds from debenture holders. BNLAC paid $1,150,000 and $857,734
of dividends to its parent company in 2004 and 2003 respectively.
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 $5,000,000 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 income of BNLAC as reported on a statutory basis are
as follows:
December 31,
--------------------------------------------------------------
2004 2003 2002
---------------- ------------------- -------------------
Capital and Surplus $13,438,168 $12,348,394 $10,716,560
=========== =========== ===========
Net Income $ 2,216,168 $ 2,383,349 $ 2,599,946
=========== =========== ===========
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, 2004 December 31, 2003 December 31, 2002
----------------------------- ------------------------------ --------------------------
Capital and Capital and Capital and
Income Surplus Income Surplus Income Surplus
-------------- ------------- ------------- -------------- ------------- -----------
Consolidated reporting under
generally accepted accounting principles $2,652,503 $13,259,536 $2,736,355 $10,690,735 $2,500,727 $ 8,310,767
Attributable to Parent Company and BNL
Equity 411,805 (1,218,884) 249,925 (2,786,839) 81,348 (3,478,014)
-------------- ------------- ------------- -------------- ------------- -------------
Brokers National Life Assurance Company 2,240,698 14,478,420 2,486,430 13,477,574 2,419,379 11,788,781
Deferred acquisition costs 125,437 (346,373) 30,403 (220,936) 26,908 (251,339)
Reserve and premium adjustments (14,650) 232,610 (14,650) 40,502 23,800 48,318
Interest maintenance reserve/AVR (91,609) (627,679) (103,250) (519,676) 7,769 (322,711)
Unrealized appreciation of securities - 64,656 - (209,113) - (53,321)
Annuity deposits and related adjustment (120,137) 373,985 (92,311) 518,659 (18,280) 577,258
Income tax credit 79,000 33,000 31,000 (22,136) 129,000 (96,000)
Other (2,571) (770,451) 45,728 (716,480) 11,369 (974,426)
-------------- ------------- ------------- -------------- ------------- -------------
BNLAC Statutory Basis $2,216,168 $13,438,168 $2,383,350 $12,348,394 $2,599,945 $10,716,560
============== ============= ============= ============== ============= =============
F-9
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.
At December 31, 2004 and 2003, respectively, the Company had gross deferred tax
assets of $807,542 and $1,004,000 with corresponding valuation allowances of
$706,542 and $808,865 resulting from net operating loss carryovers, and
temporary differences primarily related to the life insurance subsidiary. The
valuation allowance is primarily due to statutory limitations on the use of net
operating losses. The resulting net deferred tax asset is $101,000 and $195,136
at December 31, 2004 and 2003, 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.
The provision (benefit) for income tax is as follows:
2004 2003 2002
------------------- ------------------- ------------------
Current tax provisions $ 335,183 $ 519,949 $ 174,000
Deferred tax provision 113,000 85,036 202,000
------------------- ------------------- ------------------
Total income tax provision $468,183 $604,985 $376,000
=================== =================== ==================
The reconciliation of income taxes computed at the federal statutory income tax
rate to total income taxes for the years ended December 31, 2004, 2003 and 2002
is as follows:
2004 2003 2002
------------------- -------------------- --------------------
Book income before tax $3,120,686 $3,341,340 $2,876,727
=================== ==================== ====================
Income tax computed at statutory rate (34%) $ 1,061,033 $ 1,136,056 $ 978,088
Valuation allowance for AMT credit 126,317 138,507 56,000
Revision of valuation allowance (102,323) (101,550) (169,045)
Rate differential (616,844) (568,028) (489,043)
------------------- -------------------- --------------------
Total income tax provision (benefit) $ 468,183 $ 604,985 $376,000
==================== ==================== ====================
F-10
3. Income Taxes (continued)
The Company has net operating loss carry forwards for income tax purposes at
December 31, 2004 as follows:
Expiring
---------------------
2005 $38,024
2006 545,898
2007 286,096
2008 202,779
2009 162,019
2010 185,160
2011 65,880
2012 192,537
2018 254,814
2019 130,716
2020 65,199
2023 73,260
2024 28,624
----------------
$2,231,006
================
4. Investments
The amortized cost and estimated market value of investments in fixed maturity
securities are as follows:
Portfolio Designated "Held to Maturity"
(Note 1) Gross Gross
Unrealized Unrealized Estimated
December 31, 2004 Amortized Cost Gains Losses Market Value
- ----------------- --------------- -------------- ------------- --------------
US Treasury securities and obligations of
US government corporations and agencies $12,386,696 $9,500 $111,199 $12,284,997
Corporate securities 2,676,720 88,353 13,898 2,751,175
Mortgage-backed securities
GNMA 1,942,557 3,190 24,217 1,921,530
--------------- -------------- ------------- --------------
Totals $17,005,973 $101,043 $149,314 $16,957,702
=============== ============== ============= ==============
Portfolio Designated "Available for Sale"
(Note 1) Gross Gross
Unrealized Unrealized Estimated
December 31, 2004 Amortized Cost Gains Losses Market Value
- ----------------- --------------- -------------- ------------- --------------
US Treasury securities and obligations of
US government corporations and agencies $ 402,637 $ 73,601 $ 1,750 $474,488
Corporate securities 186,884 3,116 - 190,000
--------------- -------------- ------------- --------------
Totals $589,521 $ 76,717 $ 1,750 $664,488
=============== ============== ============= ==============
F-11
4. Investments (continued)
Portfolio Designated "Held to Maturity"
(Note 1) Gross Gross
Unrealized Unrealized Estimated
December 31, 2003 Amortized Cost Gains Losses Market Value
- ----------------- --------------- -------------- ------------- --------------
US Treasury securities and obligations of
US government corporations and agencies $11,541,392 $ 63,196 $70,725 $11,533,863
Obligations of states and political subdivisions 298,566 8,434 - 307,000
Corporate securities 1,958,402 62,704 2,531 2,018,575
Mortgage-backed securities
GNMA 1,321,736 509 8,193 1,314,052
--------------- -------------- ------------- --------------
Totals $15,120,096 $134,843 $81,449 $15,173,490
=============== ============== ============= ==============
Portfolio Designated "Available for Sale"
(Note 1) Gross Gross
Unrealized Unrealized Estimated
December 31, 2003 Amortized Cost Gains Losses Market Value
- ----------------- --------------- -------------- ------------- --------------
US Treasury securities and obligations of
US government corporations and agencies $ 499,767 $105,121 $ 4,000 $600,888
Corporate securities 440,679 112,700 479 552,900
Public utility bonds 305,112 - 912 304,200
--------------- -------------- ------------- --------------
Totals $1,245,558 $217,821 $ 5,391 $1,457,988
=============== ============== ============= ==============
The amortized cost and estimated fair value of investments in fixed maturity
securities at December 31, 2004 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.
Held to Maturity Available for Sale
------------------------------------- ---------------------------------------
December 31, 2004 December 31, 2004
------------------------------------- ---------------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------------- ---------------- ---------------- ------------------
Due in one year or less $ 994,805 $ 989,000 $ - $ -
Due after one year through five years 6,105,825 6,014,500 - -
Due after five years through ten years 2,882,230 2,935,375 - -
Due after ten years 5,080,556 5,097,297 589,521 664,488
--------------- ---------------- ---------------- ------------------
15,063,416 15,036,172 589,521 664,488
Mortgage-backed securities 1,942,557 1,921,530 - -
--------------- ---------------- ---------------- ------------------
$17,005,973 $16,957,702 $589,521 $664,488
=============== ================ ================ ==================
Proceeds from sales and maturities of investments in fixed maturity securities
and equity securities for the years ended December 31, 2004, 2003 and 2002 were
$9,257,055 $7,606,037, $8,323,605 respectively. Gross gains were $146,584,
$155,003 and $17,725 and gross losses were $4,863 $2,052 and $70 as of December
31, 2004, 2003 and 2002, respectively. In 2002 the Company had losses recognized
due to permanent impairment of value in fixed maturity and equity securities of
$179,084.
F-12
4. Investments (continued)
In the third quarter of 2004, BNLAC received notification from the Arkansas
Insurance Department that its bond portfolio exceeded the 20% investment
limitation for certain federal agencies as they relate to its investment in
Federal Home Loan Bank bonds. The Company immediately sold $900,000, par value,
of its Federal Home Loan Bank bonds for a loss of $4,490 to initiate compliance
with the Arkansas statute. For GAAP purposes the bonds were classified as held
to maturity. Further discussions with the Arkansas Insurance Department revealed
the Department's intent was not to have the Company dispose of any of its block
of Federal Home Loan Bank bonds, but instead request permission to exceed the
20% investment limitation. The Company then requested and was granted permission
by the Arkansas Insurance Department to exceed the 20% investment limitation.
The Company has determined its held to maturity fixed securities portfolio was
not tainted since the bond sales were due to an unusual and isolated occurrence
that could not be reasonably foreseen. BNLAC held Federal Home Loan Bank Bonds
totaling 27% of statutory assets at December 31, 2004.
During 2004 the Company invested in preferred stock and at December 31, 2004 the
cost and market value was $200,000.
Investment in equity securities at December 31, 2004 and 2003 represents common
and preferred stock investments as follows:
2004 2003
------------------------------- -------------------------------
Market Market
Cost Value Cost Value
------------- ------------- ------------- -------------
Banks, trusts and
insurance companies $ 83,606 $ 86,983 $ 2,423 $ 580
Industrial, savings
and loans and other 505,279 541,838 337,086 372,634
------------- ------------- ------------- -------------
$588,885 $628,821 $339,509 $373,214
============= ============= ============= =============
Net investment income for the years ended December 31, 2004, 2003 and 2002 is as
follows:
2004 2003 2002
------------------- --------------------- -------------------
Interest on debt securities and
cash investments $984,799 $985,613 $1,180,356
Dividends on equity securities 5,589 954 20
------------------- --------------------- -------------------
990,388 986,567 1,180,376
Investment expenses (14,903) (16,185) (32,151)
------------------- --------------------- -------------------
Net Investment Income $975,485 $970,382 $1,148,225
=================== ===================== ===================
Net realized gains and losses are summarized below:
2004 2003 2002
------------------- --------------------- ---------------------
Debt securities $ 123,075 $ 152,951 $ (100,746)
Equity securities 10,521 - (60,683)
Fixed assets (9,519) 1,677 -
------------------- --------------------- ---------------------
$ 124,077 $ 154,628 $ (161,429)
=================== ===================== =====================
F-13
4. Investments (continued)
Other long-term investments of $1,557,407 and $1,527,407 in 2004 and 2003
respectively, consists of, in part, a convertible debenture loan in the amount
of $1,357,407 from the Company, 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, the Company 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. BNLF
receives a marketing fee from EBI under a related marketing agreement.
Other long-term investments also include an operating line of credit agreement
in the amount of $200,000 and $170,000 in 2004 and 2003 respectively. On October
15, 2003 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 was renewed and extended with interest only payments to August 1, 2005,
thereafter EPSI will pay principal and interest over 60 equal monthly
installments until paid in full. The line of credit is at prime, 5.25%, with
interest payable monthly to BNLAC.
Regulatory authorities require certain Company investments to be deposited or
pledged for the benefits of policyholders as a condition of doing business in
certain states. The carrying values of these investment deposits are
approximately $4,000,000 as of December 31, 2004 and 2003.
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
2004 2003
---------------- ---------------- ---------------- ----------------
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
- ------ ---------------- ---------------- ---------------- ----------------
Cash and Cash Equivalents
(Note 1) $ 3,809,913 $ 3,809,913 (a) $ 3,398,661 $ 3,398,661 (a)
Investments-fixed maturity, available for sale
(Note 4 & Note 1) 664,488 664,488 (b) 1,457,988 1,457,988 (b)
Investments-fixed maturity, held to maturity
(Note 4 & Note 1) 17,005,973 16,957,702 (b) 15,120,096 15,173,490 (b)
Investments -equity securities
(Note 4 & Note 1) 628,821 628,821 (b) 373,214 373,214 (b)
Notes receivable (Note 4) 1,557,407 1,557,407 (a) 1,527,407 1,527,407 (a)
Preferred stock (Note 4 & Note 1) 200,000 200,000 (a) - -
Other financial instruments-Assets 394,363 394,363 (a) 398,452 398,452 (a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Assets $24,260,965 $24,212,694 $22,275,818 $22,329,212
================ ================ ================ ================
F-14
5. Fair Value of Financial Instruments (continued)
2004 2003
---------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- ---------------- ----------------
Liabilities
Premium deposit funds $ 36,024 $ 36,024 (a) $ 40,260 $ 40,260 (a)
Bonds payable 2,007,339 2,007,339 (a) 3,025,499 3,025,499
Supplementary contracts without life contingencies
(Note 1) 55,799 55,799 (a) 69,596 69,596 (a)
Annuity deposits
(Note 1) 2,783,838 2,783,838 (a) 2,777,665 2,777,665 (a)
---------------- ---------------- ---------------- ----------------
Total financial instruments-Liabilities $4,883,000 $ 4,883,000 $5,913,020 $ 5,913,020
================ ================ ================ ================
(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
In 2001, the Board of Directors of the Company and BNL Equity Corporation
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 thereunder. The $3,637,288
of Treasury Stock was retired and returned to authorized but not issued status.
The $660,447 Contingent Long Term Liabilities and Contingent Treasury Stock on
the Balance Sheet in 2003 represents shares the Company had not been able to
determine the status regarding their right to exchange under the settlement
agreement. During 2004 the Company determined that $518,517 of the Contingent
Long Term Liabilities and Contingent Treasury Stock should not be included in
the settlement agreement. The remaining $141,930 was reclassified to Bonds
Payable and Treasury Stock.
In 2004 and 2003, the Company made cash offers to bond holders for the purchase
of bonds. Bond purchases resulted in a reduction of Bonds Payable of $1,159,406
and $611,789 in 2004 and 2003; respectively. Gains from early extinguishments of
the debt were $495,462 and $424,727 in 2004 and 2003; respectively.
In 2004 and 2003, the Company became a third party indemnitor by entering into a
series of bond indemnity and guarantee agreements with various terms totaling
approximately $545,000 in conjunction with a marketing agreement with third
parties, EPSI Benefits Inc. (EBI) and Employer Plan Services Inc. (EPSI). The
purpose of these agreements is to assist EPSI in becoming licensed in additional
states. The Company received personal guarantees from the owners of EPSI to
effectively limit potential liability under the guarantee agreements. With
regard to the bond indemnity, 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.
F-15
6. Commitments and Contingencies and Supplemental Cash Flow Information
(continued)
The Company has entered into noncancelable operating leases for office space and
equipment. Future minimum payments under the leases are as follows:
2005 $ 169,000
2006 24,000
2007 10,000
--------------
Total $ 203,000
==============
Related lease cost incurred for the years ended December 31, 2004, 2003 and 2002
was $272,349, $268,892, and $226,769. 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.
Periodically in the ordinary course of business the Company exceeds federally
insured limits in its operating accounts. Cash deposits in excess of federally
insured limits are approximately $1,750,000 at December 31, 2004.
See Note 2 for information regarding minimum capital requirements to maintain a
license to sell in various states.
7. Liability for Unpaid Claims
Activity in the liability for unpaid claims is summarized as follows.
-------------- --------------
2004 2003
-------------- --------------
Balance at January 1 $ 2,588,992 $ 2,357,549
less reinsurance recoverable 10,000 -
-------------- --------------
Net Balance at January 1 2,578,992 2,357,549
-------------- --------------
Incurred related to:
Current year 26,649,186 25,356,105
Prior years (252,342) (300,762)
-------------- --------------
Total Incurred 26,396,844 25,055,343
-------------- --------------
Paid related to:
Current year 24,412,258 22,777,113
Prior years 2,327,649 2,056,787
-------------- --------------
Total Paid 26,739,907 24,833,900
-------------- --------------
Net Balance at December 31 2,235,929 2,578,992
Plus reinsurance recoverable - 10,000
-------------- --------------
Balance at December 31 $ 2,235,929 $ 2,588,992
============== ==============
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
F-16
8. Reinsurance (continued)
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.
BNLAC's Accidental Death Benefit riders are reinsured 100% through a Bulk ADB
reinsurance agreement with Generali USA Life Reassurance Company ("Generali"),
formerly Business Men's Assurance Company. Generali was rated "A" (Excellent) by
AM Best Company for 2003.
BNLAC's individual life insurance products in excess of $35,000 are reinsured
with Generali under an automatic treaty up to $175,000 and under a facultative
treaty for amounts over $175,000.
BNLAC's Group Life insurance is reinsured under a Quota Share reinsurance
agreement with Hannover Life Reassurance Company of America. The reinsurer is
liable for 90% of the risk 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 2003.
Effective November 1, 2003, BNLAC entered into a quota share reinsurance
agreement with Hannover Life Reassurance Company of America for the Accidental
Death and Dismemberment plan. Hannover Life Reassurance Company of America
accepts 90% of the risk. Hannover Life Reassurance Company of America was rated
"A" (Excellent) by AM Best Company in 2003.
BNLAC has entered into a quota share reinsurance agreement with Hartford Life
and Accident Insurance Company for its Group Life and Accidental Death and
Dismemberment plans. The agreement is effective January 1, 2005 and will replace
Hannover Life Reassurance Company of America. Hartford was rated A+ (Superior)
by AM Best Company for 2003.
BNLAC's Short Term Disability insurance is reinsured under a Quota Share
reinsurance agreement with Fortis Benefits Insurance Company of Kansas City,
Missouri. The reinsurer is liable for 75% of the risk on each policy. Fortis
Benefits Insurance Company was rated "A" by AM Best Company for 2003.
Following is a summary of reinsurance for December 31, 2004, 2003 and 2002:
Percentage
Ceded To Assumed From Of Amount
Other Other Assumed To
December 31, 2004 Gross Amount Companies Companies Net Amounts Net
- ----------------- --------------- ------------- -------------- --------------- --------------
Life insurance in force (in thousands) $ 37,207 $ 11,752 $ - $ 25,455 0.0%
=============== ============= ============== ============== =============
Premiums-life insurance $ 241,724 $ 61,668 $ - $ 180,056 0.0%
Premiums-accident and health 42,199,595 35,937 - 42,163,658 0.0%
--------------- ------------- -------------- -------------- -------------
Total insurance premiums $42,441,319 $ 97,605 $ - $42,343,714 0.0%
=============== ============= ============== ============== =============
December 31, 2003
Life insurance in force (in thousands) $ 37,832 $ 12,782 $ - $ 25,050 0.0%
=============== ============= ============== ============== =============
Premiums-life insurance $ 327,062 $ 34,889 $ - $ 292,173 0.0%
Premiums-accident and health 40,108,502 31,535 - 40,076,967 0.0%
--------------- ------------- -------------- -------------- -------------
Total insurance premiums $40,435,564 $ 66,424 $ - $40,369,140 0.0%
=============== ============= ============== ============== =============
December 31, 2002
Life insurance in force (in thousands) $ 37,046 $ 11,443 $ - $ 25,603 0.0%
=============== ============= ============== ============== =============
Premiums-life insurance $ 392,709 $ 42,269 $ - $ 350,440 0.0%
Premiums-accident and health 40,547,310 18,669 - 40,528,641 0.0%
--------------- ------------- -------------- -------------- -------------
Total insurance premiums $40,940,019 $ 60,938 $ - $40,879,081 0.0%
=============== ============= ============== ============== =============
F-17
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 were authorized by
the Board of Directors. 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 2004, 2003 and 2002, the Company granted 129,575,
131,925 and 154,855 stock options, respectively, with an exercise price of $1.00
per share for those granted in 2004, $.75 per share for those granted in 2003
and $50 per share for those granted in 2002. There were 515,955 stock options
outstanding at December 31, 2004. The number of options expiring or forfeited
were 199,500 and 437,500 in 2004 and 2003, respectively. There were 38,350
options exercised in 2004 and 38,525 options exercised in 2003. Under the fair
value method, total compensation recognized for grant of stock options was
$4,000 in 2004. The fair value of options granted is estimated at $4,000, 0$ and
$1,596 in 2004, 2003 and 2002. These values were computed using a binomial
method as prescribed in SFAS No. 123 and certain assumptions include a risk free
interest rate of 5.0%, expected life of 3.0 years, expected volatility of 14.0%
and no expected dividends due to statutory limitations. The estimated weighted
average remaining life of the options is 1.5 years and the weighted average
exercise price is $.76. 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.
BNLAC bears its prorata share of the bonus expense based on its pre-tax
statutory profits. Bonus expense was $312,069, $334,134 and $287,673 under this
plan for 2004, 2003 and 2002, respectively.
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.
The Company granted 60,300 options with an exercise price of $.75 in 2004 and
55,700 options with an exercise price of $.50 in 2003. The fair value of options
granted is estimated at $11,000 in 2004 and $10,940 in 2003. This value was
computed using a binomial method as prescribed in SFAS No. 123 and certain
assumptions include a risk free interest rate of 5.0%, expected life of 10.0
years, expected volatility of 14.0% and no expected dividends due to statutory
limitations. The estimated weighted average remaining life of the options is 8.4
years. The options do not have a dilutive effect on earnings per share at this
time, but may have such an effect in the future. See Note 1.
The Company has a stock bonus plan for the benefit of certain Officers of the
corporation. The plan provides for a bonus based on consolidated after-tax
profits subject to specified limits. The bonus amount, net of taxes, will be
used to purchase stock in the Company. Stock bonuses in the amount of $100,000
were granted and charged to expense in each of the years 2004, 2003 and 2002,
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 contributed $57,698, $46,138 and $32,565 in 2004,
2003 and 2002, respectively.
10. Concentrations
The majority of the Company's premium income 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
In 2002, management evaluated the balances of certain potential liabilities that
were originally recorded on a contingent basis. It was determined that the
remaining amounts, approximately $195,000 of liability, were owed to sales
agents who never contracted to sell for the company and the possibility is
remote any claim will be made for the back commissions. Accordingly, the
liability was reduced by this amount and 2002 commission expense reduced by a
like amount.
F-18
11. Change in Accounting Estimate (continued)
Based on claims experience in 2004 and 2003, the estimate of claims liability at
December 31, 2003 and 2002 was overstated by approximately $133,113 and
$300,000; respectively (adjusted for loss adjustment expense in 2003.) The over
estimate of this liability has contributed a corresponding decrease in claims
expense in 2004 and 2003.
The liability for future policy benefits includes an additional contract reserve
of approximately $611,410 for the individual dental policies. 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 December 31, 2004 is
approximately $378,000 ($.02 per share) after considering the tax effect and a
related increase in deferred acquisition costs.
12. Subsequent Events
In 2005, the Company has negotiated a lease for new office space in Austin,
Texas that is contingent upon the current lessee vacating the space by April 15,
2005. The cost of the lease per square foot is less than the current lease.
In 2005, the Company has negotiated with Universal Guaranty Life Insurance
Company to purchase 2,216,776 shares of BNL Financial Corporation's common stock
for $2,300,000. The transaction is pending regulatory approval.
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
------------------ ------------------- ----------------- ----------------
2004
Premium Income $10,788,735 $ 10,720,870 $ 10,863,281 $ 10,773,480
Net Investment Income 234,847 255,333 242,661 242,644
Marketing Fees 41,668 41,409 40,972 41,226
Realized Gains (Losses) (495) 320,398 114,716 184,920
Expenses (10,729,248) {10,665,000) (10,602,428) ( 10,257,486)
------------------ ------------------- ----------------- ----------------
Net Income $ 335,507 $ 673,010 $ 659,202 $ 984,784
================== =================== ================= ================
Earnings Per Share (Basic and Diluted) $ 0.02 $ 0.03 $ 0.03 $ 0.04
================== =================== ================= ================
Comprehensive Income (Loss) $ 345,936 $ 566,349 $ 600,046 $ 1,052,569
================== =================== ================= ================
2003
Premium Income $10,351,344 $ 10,079,609 $ 10,204,943 $ 10,173,440
Net Investment Income 242,874 247,274 231,602 248,632
Marketing Fees 32,333 33,915 37,353 42,506
Realized Gains (Losses) (1,295) 101,754 144,455 334,440
Expenses (10,036,367) ( 9,921,990) (9,745,758) (10,064,709)
------------------ ------------------- ----------------- ----------------
Net Income $ 588,889 $ 540,562 $ 872,595 $ 734,309
================== =================== ================= ================
Earnings Per Share (Basic and Diluted) $ 0.03 $ 0.02 $ 0.04 $ 0.04
================== =================== ================= ================
Comprehensive Income (Loss) $ 653,980 $ 706,574 $ 792,171 $ 639,683
================== =================== ================= ================
F-19
Item 15(d) - Schedule III, Condensed Financial Information of Registrant
BNL Financial Corporation (Parent Company)
Balance Sheets
2004 2003
------------------ -------------------
Assets
Cash and cash equivalents $ 30,275 $ 63,896
Investments, at fair value 198,250 98,000
Investment in equity securities, at fair value 575 575
------------------ -------------------
Total Investments, Including Cash and Cash
Equivalents 229,100 162,471
Accrued investment income 9,771 1,482
Loan to EPSI 1,357,407 -
Investment in Unconsolidated Subsidiaries and
Affiliates, at equity (eliminated in consolidated
statements) 14,478,408 14,269,615
Income tax asset 76,000 110,000
Other assets 198,570 109,040
------------------ -------------------
Total Assets $ 16,349,256 $ 14,652,608
================== ===================
Liabilities
Contingent long-term liabilities $ - $ 660,447
Bonds payable 2,007,339 3,025,499
Loan from Brokers National Life Assurance Co. 800,802 -
Other liabilities 281,579 122,234
------------------ -------------------
Total Liabilities 3,089,720 3,808,180
------------------ -------------------
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 10,829,800 10,787,911
Retained earnings 3,109,839 457,336
Contingent treasury stock 0; 440,298 shares,
respectively - (660,447)
Treasury stock, at cost, 1,933,646; 794,288 shares,
respectively (1,189,884) (337,756)
Unrealized appreciation of securities 90,165 177,768
------------------ -------------------
Total Shareholders' Equity 13,259,536 10,844,428
------------------ -------------------
Total Liabilities and
Shareholders' Equity $16,349,256 $14,652,608
================== ===================
F-20
Item 15(d) - Schedule III, Condensed Financial Information of Registrant
BNL Financial Corporation (Parent Company)
Statement of Operations
2004 2003 2002
------------------ ------------------- -----------------
Income
Net investment income $ 199,917 $ 5,146 $ 6,229
Marketing fees 165,275 - -
Realized gain on debt extinguishment 495,462 424,726 -
Realized gains 1,800 477 -
------------------ ------------------- -----------------
Total Income 862,454 430,349 6,229
------------------ ------------------- -----------------
Expenses
General and administrative 224,820 115,019 65,148
Interest expense 184,408 189,985 11,930
------------------ ------------------- -----------------
Total Expenses 409,228 305,004 77,078
------------------ ------------------- -----------------
Income (loss) from operations before income taxes 453,226 125,345 (70,849)
Provision for income taxes (benefit) 41,421 53,000 73,000
------------------ ------------------- -----------------
Net income (loss) before equity in undistributed
income of subsidiaries 411,805 72,345 (143,849)
Equity in undistributed income of subsidiaries 2,240,698 2,664,010 2,644,576
------------------ ------------------- -----------------
Net Income $2,652,503 $2,736,355 $2,500,727
================== =================== =================
Net Income Per Common Share (Basic and Diluted) $ .14 $ .14 $ .12
================== =================== =================
F-21
Item 15(d) - Schedule III, Condensed Financial Information of Registrant
BNL Financial Corporation (Parent Company)
Statements of Cash Flows
2004 2003 2002
------------------ ------------------- -----------------
Cash Flows from Operating Activities
Net income $2,652,503 $2,736,355 $2,500,727
Adjustments to compute cash provided by
operating activities: (2,640,980) (2,932,546) (2,502,028)
------------------ ------------------- -----------------
Net Cash Provided (Used) by Operating
Activities 11,523 (196,191) (1,301)
------------------ ------------------- -----------------
Cash Flows from Investing Activities
Proceeds from maturity or redemption of
investments - 100,000 -
Purchase of fixed maturity security - (100,000) -
Dividend from subsidiary 1,150,000 760,000
Proceeds from sale of furniture and equipment 1,800 - -
------------------ ------------------- -----------------
Net Cash Provided by Investing Activities 1,151,800 760,000 -
------------------ ------------------- -----------------
Cash Flows from Financing Activities
Purchase of treasury stock (619,262) (421,065) -
Sale of treasury stock 64,550 62,550 6,848
Stock options exercised 24,411 19,425 -
Debt extinguishments (666,643) (187,063) -
------------------ ------------------- -----------------
Net Cash Provided (Used) by
Financing Activities (1,196,944) (526,153) 6,848
------------------ ------------------- -----------------
Net Increase (Decrease) in Cash and Cash
Equivalents (33,621) 37,656 5,547
Cash and Cash Equivalents, Beginning of
Period 63,896 26,240 20,693
------------------ ------------------- -----------------
Cash and Cash Equivalents, End of Period $ 30,275 $ 63,896 $ 26,240
================== =================== =================
F-22
===============================================================================
Exhibit 31.2
Certification of Chief Executive Officer
Section 302
I, Wayne E. Ahart, certify that:
1. I have reviewed this Annual report on Form 10-K of BNL Financial
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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
annual 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: March 30, 2005
/s/ Wayne E. Ahart
-----------------------
Wayne E. Ahart
Chairman of the Board
E-1
Exhibit 31.2
Certification of Chief Financial Officer
Section 302
I, Barry N. Shamas, certify that:
1. I have reviewed this Annual report on Form 10-K of BNL Financial
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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
annual 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: March 30, 2005
/s/ Barry N. Shamas
-----------------------
Barry N. Shamas
Executive V. P.
E-2
Exhibit 32.1
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 10K for the period ending
December 31, 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.
/s/ Wayne E. Ahart
- -----------------------
Wayne E. Ahart
Chief Executive Officer
March 30, 2005
Exhibit 32.2
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 10Kfor the period ending
December 31, 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
March 30, 2005
E-3