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 will lease 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.
In this section, we review the consolidated financial condition of the Company at December 31, 2002, 2001 and 2000 and the consolidated results of operations for the periods ended December 31, 2002, 2001 and 2000. 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.
At December 31, 2002 and 2001, respectively, the Company had gross deferred tax assets of $1,080,000 and $2,450,000 with corresponding valuation allowances of $758,000 and $1,926,000 resulting from net operating loss carryovers and temporary differences primarily related to the life insurance subsidiary. The resulting net deferred tax asset is $322,000 and $524,000 at December 31, 2002 and 2001, 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 Company has net operating loss carry forwards for income tax purposes at December 31, 2002 as follows:
Expiring --------------------- 2003 $ 99,275 2004 24,065 2005 72,992 2006 545,898 2007 286,096 2008 202,779 2009 162,019 2010 185,160 2011 124,464 2012 385,074 2018 347,054 2019 130,716 2020 65,199 2021 67,492 ----------------
The Company's financial condition strengthened during 2002 due to the increase in net income.
Previously, the bonds were classified as Available for Sale and carried on the Balance Sheet at market value with the unrealized gain or loss recorded in the surplus section of the Balance Sheet. This reclassification more accurately reflects management's ability and intent to hold the bonds until maturity. No further adjustments to surplus will be made as bond values change.
The Company did not sell any of the bonds designated as Held to Maturity in 2002.
Other long term investments of $1,497,407 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. As part of the agreement, BNLAC agreed to pledge $335,000 of bonds as guarantor for an operating line of credit from BankOne for EPSI through October 15, 2002.
Other long-term investments also includes an operating line of credit agreement with an advance amount of $140,000. On October 15, 2002 BNLAC and EPSI entered into a loan agreement whereby BNLAC will provide EPSI with a $200,000 line of credit maturing October 15, 2004 that replaced the one with BankOne. The line of credit is at prime, 4.75%, 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.
Results of Operations Premium income was $41,237,420 in 2002, $38,463,464 in 2001, and $35,396,913 in 2000. The increase in both years was due to an increase in group dental insurance premiums written. In 2002, group dental insurance premium income made up 93.8% of total premium income.
Realized capital gains and (losses) on investments was ($161,430) in 2002, $16,231 in 2001, and ($102,421) in 2000. The realized loss in 2002 was primarily due to the write down in value of MCI Bonds and Conseco common stock. The gains in 2001 were due to gains on bonds sold in the normal course of the Company's investment activity. The realized loss in 2000 was primarily due to the write down in value of certain equity securities.
Policy benefits and other insurance costs increased from $26,679,474 in 2000 to $29,570,207 in 2001 and $30,789,481 in 2002. The increases were due to an increase in claims and commissions resulting from the increase in group dental insurance in force. The claims ratio on dental insurance, which represents the ratio of claims incurred to premium earned, was 64.1% in 2002, 65.5% in 2001, and 63.8% 2000. The claims ratio has remained relatively constant over the last three years due to the Company's constant monitoring of rates and trends in dental costs.
Amortization of deferred policy acquisition costs was $26,918 in 2002, $29,844 in 2001, and $44,084 in 2000. The costs were higher in 2000 due to a write-off of the remaining deferred policy acquisition asset on an Accidental Death Plan that was discontinued in 2000.
revenue, investment income and marketing fees. 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 overstatement of this liability contributed a corresponding increase in income during the year 2000.
Earnings per share was $.12, $.06 and $.15 in 2002, 2001, and 2000, respectively. The effect of the contingent treasury shares described in Financial Condition was immaterial in 2001 and increased earnings per share $.015 in 2002.
The provision for income taxes was $376,000 expense in 2002, $295,993 expense in 2001, and a $710,000 benefit in 2000. For the periods ended December 31, 2002 and 2001, the Company had $173,723 and $52,993 of current federal tax expense and $202,277 and $243,000 of deferred tax expense; respectively. In 2000, the Company reduced its valuation allowance against its deferred tax asset and recorded a net deferred tax asset of $767,000, reflecting the benefit expected from using approximately $6,700,000 in loss carry forwards that expire in various amounts between 2001 and 2014. In 2000, the Company had $57,000 current federal tax expense, which was offset by the $767,000 deferred tax credit.
For the year ended December 31, 2002, other comprehensive income was $171,170 compared to $90,760 in 2000 and $757,308 for the same period in 2000. The 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. The increase in comprehensive income for the period ended December 31, 2002 was due to the reclassification adjustment for realized losses of $161,429 in 2002.