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 plans to lease an additional 798 square feet effective January 1, 2004 for $9,576 a year. The Company may renew the lease for another ten years at the rate of $126,000 for the first five years and $129,000 for the second five years of the new lease term on the initial 12,150 square feet of office space.
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, 2003 are derived from the Company's consolidated financial statements. The consolidated financial statements as of December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003 are included elsewhere in this Form 10-K.
Forward-Looking Statements All statement, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the Securities and Exchange Commission, press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith, the market value of our investments and the lapse rate and profitability of policies; (ii) 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.
At December 31, 2003 and 2002, respectively, the Company had gross deferred tax assets of $1,004,000 and $1,080,000 with corresponding valuation allowances of $808,865 and $758,000 resulting from net operating loss carryovers and temporary
The reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes for the years ended December 31, 2003, 2002 and 2001 is as follows:
The Company has net operating loss carry forwards for income tax purposes at December 31, 2003 as follows:
2005 $ 38,024 2006 545,898 2007 286,096 2008 202,779 2009 162,019 2010 185,160 2011 65,880 2012 310,402 2018 347,054 2019 130,716 2020 65,199 2023 121,507 ----------------
The Company's financial condition strengthened during 2003 due to the increase in net income.
Liquidity and Capital Resources At December 31, 2003 the Company had liquid assets of $3,398,661 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.
The major components of operating cash flows are premiums and investment income while policy benefits are the most significant cash outflow. In 2003, BNLAC collected approximately $40.2 million of premiums and annuity deposits (gross before reinsurance) and $970,382 of investment income. Another source of cash flow in 2003 was overwrite commissions of $332,566 on vision products. At the same time the Company paid $30,108,152 in policy benefits and other insurance costs.
Approximately $1.46 million 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; telecommunication, utilities, automobile bonds and U. S. Treasury Bonds that have large unrealized profits. The Company may sell these bonds before they mature.
Approximately $15.1 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 Company did not sell any of the bonds designated as Held to Maturity in 2003.
The Company's investments are primarily in U.S. Government and Government Agencies ($11,590,917 amortized book value) and other investment grade bonds ($3,980,214 amortized book value). The Company does not hedge its investment income through the use of derivatives.
Other long term investments of $1,527,407 consists of, in part, a convertible debenture loan in the amount of $1,357,407 from one of the Company's subsidiaries, BNL Equity Corporation (BNLE), to EPSI Benefits, Inc. (EBI), a Texas Corporation. The loan bears interest at an annual rate of 14%, payable
monthly, with principal payments commencing September 15, 2008 and a maturity date of August 15, 2015. To protect its interest, BNLE may convert the debenture into 51% of the outstanding common stock of EBI, subject to regulatory approval. The note is one of several agreements entered into by the Company's subsidiaries which expand the business relationship with EBI and its subsidiary, Employer Plan Services, Inc. (EPSI), which provides substantially all of the A&H claims processing and adjudication for the Company's insurance subsidiary, BNLAC. BNLE receives a marketing fee from EBI under a related marketing agreement.
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 verified class action bondholders is $3,025,499. Contingent bond liability is $660,447. Bond interest expense was $189,985 in 2003. 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.
The following table reflects all long-term contractual obligations of the Company as of December 31, 2003.
Realized capital gains and (losses) on investments was $154,628 in 2003, ($161,430) in 2002 and $16,231 in 2001. The realized gain in 2003 is primarily from the sale of U.S. Treasury bonds. The realized loss in 2002 was primarily due to the write down in value of MCI Bonds and Conseco Inc. common stock. The Company had a realized gain on debt extinguishments of $424,726 in 2003 due to the purchase of debentures payable at less than par value.
Increase in liability for future policy benefits was $34,377 in 2003, $93,518 in 2002 and $56,063 in 2001. The decrease in 2003 was due to a slight decrease in the number of whole life insurance policies in force. The increase in 2002 and 2001 was due to increases in life insurance in force.
Amortization of deferred policy acquisition costs was $30,403 in 2003, $26,918 in 2002 and $29,844 in 2001. Amortizaton of deferred policy acquisition costs varies in relation to lapses or surrenders of existing policies.
Operating expenses were $7,664,081 in 2003, $7,249,662 in 2002 and $6,525,350 in 2001. 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. The increase in expenses in 2002 was due to an increase in payroll expense, employee insurance expense and depreciation expense.
Taxes other than on income were $1,326,826 in 2003, $1,331,528 in 2002 and $1,233,806 for 2001. The decrease in 2003 was due to a decrease in premium taxes on fewer premiums collected. The increase in 2002 was due to the premium taxes on the increased insurance premiums collected.
Earnings per share was $.14, $.12, and $.06 in 2003, 2002 and 2001, respectively. The effect of the treasury shares described in Note 6 to the financial statements was immaterial in 2003 and 2001 and increased earnings per share $.015 in 2002.
The provision for income taxes was $604,985 in 2003, $376,000 in 2002 and $295,993 in 2001. For the periods ended December 31, 2003, 2002 and 2001, the Company had $519,949, $174,000 and $52,993 of current federal tax expense and $85,036, $202,000 and $243,000 of deferred tax expense; respectively. The increase in 2003 is due to the net operating losses of the life insurance subsidiary being fully utilized in 2002.
Looking Forward BNLAC plans to apply for authority to market insurance products in additional states in the upcoming year. In March 2003 we received approval to market insurance in Alaska and West Virginia and we currently have applications pending for certificates of authority in Wisconsin and New Mexico.
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, 2003 and December 31, 2002 was $16,631,478 and $12,401,507, 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, 2003 of approximately $469,000. Initial fair values were determined using the current rates at which we could enter into comparable financial instruments with similar remaining maturities. The estimated earnings and cash flows impact for the twelve months of 2004, resulting from a one percentage point increase in interest rates, would be immaterial, holding other variables constant.