The Company leases 12,150 square feet of office space in Austin, Texas, under a seven year, triple net lease. The annual base rental was $127,944 in fiscal year 2001 and this rate will continue until the initial term of the lease expires in 2005. The Company may renew the lease for another ten years at the rate of $126,000 for the first five years and $129,000 for the second five years of the new lease term.
Total Income..... $39,569,741 $36,182,730 $30,533,144 $21,919,618 $12,468,221 Net Income (Loss).... $ 1,283,478 $ 3,444,483 $ 206,979 $(1,246,752) $ (931,612) Net Income (Loss) Per Common Share $ .06 $ .15 $ .01 $ (.05) $ (.04) Total Assets. $20,173,856 $17,580,271 $13,949,400 $14,327,776 $14,147,853 Total Liabilities. $14,499,547 $ 9,073,346 $ 9,644,266 $ 9,123,809 $ 7,734,893 Average Shares Outstanding 22,802,610 23,311,944 23,311,944 23,311,944 23,311,944
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------------ RESULTS OF OPERATIONS ---------------------
In this section, we review the consolidated financial condition of the Company at December 31, 2001, 2000 and 1999 and the consolidated results of operations for the periods ended December 31, 2001, 2000 and 1999. Please read this discussion in conjunction with the accompanying consolidated financial statements, notes and selected financial data set forth elsewhere in this Form 10-K.
The valuation allowance against deferred taxes is a sensitive accounting estimate. The Company follows Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which prescribes the liability method of accounting for deferred income taxes. Under the liability method, companies establish a deferred tax liability or asset for the future tax effects of temporary differences between book and tax basis of assets and liabilities. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized.
Liquidity and Capital Resources ------------------------------- At December 31, 2001, the Company had liquid assets of $1,726,746 in cash, money market savings accounts, and short-term certificates of deposit. All of the non-cash liquid assets can readily be converted into cash.
The major components of operating cash flows are premiums, and investment income while policy benefits are the most significant cash outflow. In 2001, BNLAC collected approximately $38.6 million of premiums and annuity deposits (gross before reinsurance) and $975,190 of investment income. Another source of cash flow in 2001 was overwrite commissions of $304,185 on vision products. At the same time the Company paid $24,856,711 in policy benefits.
Results of Operations --------------------- Premium income was $38,463,464 in 2001, $35,396,913 in 2000 and $29,730,251 in 1999. The increase in both years was due to an increase in group dental insurance premiums written. In 2001, group dental insurance premium income made up 98.6% of total premium income.
Realized capital gains and (losses)on investments was $16,231 in 2001, ($102,421) in 2000 and $27,745 in 1999. The realized loss in 2000 was primarily due to the write down in value of certain equity securities. The gains in 2001 and 1999 were due to gains on bonds sold in the normal course of the Company's investment activity.
Increase (decrease) in liability for future policy benefits was $56,063 in 2001, ($85,852) in 2000 and $83,703 for the same period in 1999. The decrease in 2000 was due to an increase in the number of surrendered life and annuity policies during that year.
Policy benefits and other insurance costs increased from $24,954,260 in 1999, to $26,679,474 in 2000 and to $29,570,207 in 2001. The increases were due to an increase in claims and commissions resulting from the increase in insurance premium collected. The claims ratio on dental insurance, which represents the ratio of claims incurred to premium earned, was 65.5% in 2001, 63.8% for 2000 and 72.4% in 1999. In 2001, the claims ratio increased due to a rise in dental costs.
Operating expenses were $6,525,350 in 2001, $5,726,013 in 2000 and $4,390,661 in 1999. Expenses increased in 2001 due to legal fees, settlement costs, executive bonus incentive plan expenses and payroll expense. The increase in 2000 versus 1999 was a result of higher claims administration and personnel costs attributable to the increase in volume of group dental business processed in 2000.
Taxes, other than on income, were $1,233,806 for 2001, $1,084,528 for 2000 and $869,809 for 1999. The increase each year was due to the premium taxes on the increased insurance premiums collected.
For 2001, the consolidated net income from operations before taxes was $1,579,471compared to $2,734,483 in 2000 and $206,979 in 1999. The decline in 2001 is primarily due to the increase in operating expenses, policy benefits expense and class action settlement expenses. Based on actual claims experience during 2000, the estimate of claims liability at December 31, 1999 was found to be overstated by $648,816. The over estimate for this liability has contributed a corresponding increase in income during the year 2000. The remaining increase in net income from operations in 2000 versus 1999 was primarily due to an increase in premium income and a reduction in the claims ratio on the group dental business. Modifications to rates and benefits on the dental policies, which were implemented prior to and during 1999, were effective in reducing the claims ratio in 2000.
Earnings per share was $.06, $.15 and $.01 in 2001, 2000, and 1999, respectively. The effect of the contingent treasury shares described in Financial Condition was immaterial in 2001, but may have a material effect in the future.
For the year ended December 31, 2001, other comprehensive gain was $90,760 compared to $757,308 in 2000 and a ($1,105,812) loss for the same period in 2000. The gain in comprehensive income in 2001 and 2000 was due to a decrease in interest rates that increased the market value of the Company's bond portfolio. Although the bonds are marked available for sale, the Company has sufficient working capital and other sources of funds available which should not make it necessary to sell any bonds at a loss.
Looking Forward --------------- We are getting more and more opportunities to sell large groups. Each time you get one, it makes it easier to get others. Selling large groups is a two-edged sword. On one side you grow faster and have the potential to make larger profits when claims are within our expected range. Also, the Company's reputation is enhanced as a major player in the benefits market. However, on the other hand, if claims on a big case are higher than expected, you lose profits more rapidly. Also, when claims necessitate large rate increases, the odds go up that you will lose the case to another carrier and the loss of a big case is difficult to recoup.
The information on pages through attached to this Report is hereby incorporated by reference.