The Amended Facility requires the Company to suspend dividends on its common stock and defer payments of interest on its Trust Debentures unless the Company has made $25 million of permanent principal prepayments on the Amended Facility by March 15, 2000. The Amended Facility contains certain covenants that require the Company to maintain minimum statutory surplus levels, minimum cumulative statutory net income levels and minimum cumulative GAAP net income levels.
The principal sources of funds for the Company's insurance subsidiaries are premiums, investment income and proceeds from the sale or maturity of invested assets. Such funds are used principally for the payment of claims, operating expenses, commissions and the purchase of investments. On a consolidated basis, net cash used in operations for the year ended December 31, 1998 and 1997, was $47.1 million and $59.2 million, respectively. The negative cash flow from operations in 1998 related primarily to the net loss incurred in 1998. The negative cash flow from operations in 1997 related primarily to the return of a loss reserve portfolio relating to a pro rata reinsurance contract commuted at the end of 1996 and the Shelby unearned premium portfolio transfer to the reinsurance facility. These transactions had the combined effect of reducing cash flow from operations by $73.2 million in 1997.
Vesta manages its exposure to market risk by selecting investment assets with characteristics such as duration, yield, and liquidity to reflect the underlying characteristics of the related insurance.
The Company is currently developing its Y2K contingency plans for its business areas by developing detailed plans to allow the Company to process its business should one or more systems, internal and/or external, cause a disruption in the normal daily processing. Such plans are scheduled to be completed by June, 1999, and tested by the user community in the third quarter of 1999.
We have audited the consolidated balance sheet of Vesta Insurance Group, Inc. and subsidiaries as of December 31, 1997 and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flow for each of the years in the two-year period ended December 31, 1997. In connection with our audits of the consolidated financial statements, we also have audited the 1997 and 1996 financial statement schedules as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of Vesta's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
VESTA INSURANCE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Amounts in thousands except per share data)
In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This pronouncement is effective for periods beginning January 1, 1999 with early application encouraged. The Company implemented SOP 98-1 in 1998. The adoption of this standard did not have a material impact on the Company's financial position, results of operations or cash flows.
At December 31, 1998, the Company has unsecured reinsurance recoverables from reinsurers that are in excess of 3% of statutory surplus, the largest of which is $31 million.
On January 31, 1997, Vesta Capital Trust I, a Delaware business trust controlled by the Company, sold $100 million of its 8.525% Deferrable Capital Securities. These securities have a 30 year maturity and are not redeemable except in certain limited circumstances. These securities were sold in a private placement transaction to qualified institutional buyers and were not registered under Securities Act of 1933 pursuant to an exemption from registration provided by Rule 144A promulgated thereunder. A portion of the proceeds from the sale of these securities were used to repay indebtedness under the Company's existing lines of credit and for general corporate purposes. As required by the Company's amended bank facility, the Company will defer interest under the Indenture dated January 31, 1997 which will result in the deferral of distributions under the amended and restated Declaration of Trust dated January 31, 1997.
At December 31, 1998, the Company had borrowed $70 million under its $200 million line of credit for general corporate purposes and for a capital contribution of $25 million to the Company's principal insurance subsidiary, Vesta Fire Insurance Corporation. The credit agreement related to this line of credit contains certain covenants that require, among other things, the Company to maintain a certain consolidated net worth ("Consolidated Net Worth Covenant"), maintain a certain amount of earnings before interest and taxes available for the payment of interest and dividend expense, ("Fixed Charge Coverage Ratio"), cause each insurance subsidiary to maintain a certain total adjusted statutory capital, ("Adjusted Statutory Capital Covenant"), and that limits the amount of indebtedness of the companies. As of December 31, 1998, the Company was not in compliance with all of its financial covenants.
The Company's actual and pro forma information follows (in thousands except for earnings per share information):
Summarized pro-forma results of the discontinued commercial and reinsurance segments for the last three years are as follows: