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.
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.
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,"
Management believes the Company's current critical accounting policies are comprised of the following:
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 Company has net operating loss carry forwards for income tax purposes at December 31, 2004 as follows:
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.
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.
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.
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.
The following table reflects all long-term contractual obligations of the Company as of December 31, 2004.
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.
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.
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.
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.
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
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.