The Company owns the furniture and equipment used in the operation of its business.
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, 2001 are derived from the Company's consolidated financial statements. The consolidated financial statements as of December 31, 2001 and 2000, and for each of the years in the three-year period ended December 31, 2001 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) customer response to new products and marketing initiatives: (iii) mortality, morbidity and other factors which may affect the profitability of our products (iv) changes in the federal income tax laws and regulations which may affect the relative income tax advantages of our products (v) 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 (vi) 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 is 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 of the financial statements for the effect on the year 2001.
The accounting for the proposed litigation settlement is based on management's estimation that it is probable the settlement will be approved and ultimately finalized in its current form in 2002. When a transaction originating prior to the balance sheet date involves potential losses and depends on subsequent events estimated to be probable of occurrence, and the amounts are known or measurable, generally accepted accounting
principles require the transaction to be recorded on the financial statements as though the transaction had occurred. Ultimate resolution of the settlement agreement is dependent on the Company obtaining the necessary approvals subsequent to December 31, 2001.
2001 2000 1999 --------- ---------- --------- Income from Operations before Income Taxes $1,579,471 $2,734,483 $206,979 Book Value Per Share $0.28 $0.36 $0.19 Statutory Capital and Surplus of Insurance Subsidiary $7,858,222 $7,003,585 $4,130,351 Stockholders' Equity - GAAP $5,674,309 $8,506,925 $4,305,134 A.M. Best Financial Rating B B B-
The Company's financial condition remained strong at the end of 2001 despite the decline in Stockholders' Equity. This decline was due to a $4,269,404 increase in contingent treasury stock as a result of the settlement of the class action lawsuit mentioned in "Legal Proceedings" above.
The Company's investments are primarily in U.S. Government and Government Agencies ($9,940,985) and other investment grade bonds ($4,390,833) which have been marked to market and classified as available for sale. The Company does not hedge its investment income through the use of derivatives.
Notes Receivable of $1,357,407 consists of a convertible debenture loan 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 dental 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 the operating line of credit of EPSI in conjunction with these agreements. We estimate the Company and its subsidiaries will have a positive cash flow of $315,000 in 2002 from the EBI transaction.
On November 5, 2001, the Company's Board of Directors approved a settlement of the class action lawsuit (see "Legal Proceedings") that includes a $575,000 payment to Class Counsel. The payment is subject to various conditions and regulatory approval; however, we believe it is probable that it will occur in mid-2002. The $575,000 will be paid by BNLAC either through dividends to BNL Financial Corporation or through intercompany expense allocation.
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 will have a 12- year term and bear interest at the rate of 6% per annum, payable annually from the previous fiscal year's earnings. We estimate the total principal amount of the bonds will be approximately $4,269,404 and the annual interest expense will be $256,000. We expect BNLAC will pay dividends to BNL Financial Corporation for the payment of interest to the bondholders. The Company has no plan to start a sinking fund for payment of the principal at maturity.
The Company conducts its insurance operations through its wholly owned subsidiary, BNLAC. At December 31, 2001, BNLAC had statutory capital and surplus of $7,858,222. BNLAC is required to maintain minimum levels of statutory capital and surplus, which differ from state to state, as a condition to conducting business in those states in which it is licensed. The State of Arkansas, which is the legal domicile of BNLAC, requires a minimum of $2,300,000 in capital and surplus. The highest requirement in any state in which BNLAC is licensed is $3,000,000. Some states in which BNLAC is licensed have increased these requirements to as much as $5,000,000, but, in general, BNLAC may continue to operate under the lower minimum requirements in effect when it first became licensed in the applicable state. BNLAC voluntarily withdrew its Certificate of Authority in the state of Washington due to an increased minimum capital requirement in that state of $2,400,000. During 2001, BNLAC increased its common capital stock from $2,000,000 to $2,500,000, to comply with Washington's capital requirements. BNLAC has applied for a new Certificate of Authority from the state of Washington. Management monitors these developments to maintain compliance with the requirements of each state.
In September 2001, the Company started receiving marketing fees from EBI per the agreement mentioned above. The Company earned $60,589 of marketing fees in 2001.
In 2001, the Company incurred $575,000 litigation settlement expense, which is the award to the Class Counsel. In our opinion the settlement of the class action lawsuit is in the best interests of our Company and its shareholders. We have always felt, and continue to feel strongly, about the facts and the lack of merit in the plaintiff's case. However, this settlement opportunity, in light of its terms and the ability to eliminate risks of damage to our business which are inherent in such litigation, provided an opportunity to put an end to a protracted, expensive and time- consuming matter. The Company's management can now focus on the business of the Company and the opportunities in the marketplace.
The provision for income taxes was $295,993 expense in 2001, compared to a $710,000 benefit for 2000 and $0 in 1999. 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 carryforwards that expire in various amounts between 2001 and 2014. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforward. For the period ended December 31, 2001, the Company had $52,993 of current federal tax expense and $243,000 of deferred tax expense. In 2000, the Company had $57,000 current federal tax expense, which was offset by the $767,000 deferred tax credit. See note 3 to the audited financial statements.