The Company incurred a loss from operations in each of the four years ending December 31, 1994. A recapitalization plan was initiated in 1993. At that time, bank debt was extinguished, resulting in an extraordinary gain, net of income taxes, in the amount of $9.2 million. The note payable of $10.0 million was cancelled in June of 1994 and exchanged for 7 million newly issued shares of the Company's common stock. During the first quarter of 1995, a common stock rights offering was successfully completed, and $5 million of additional capital was raised and contributed to the insurance subsidiary. In addition, the Company entered into a $2 million promissory note in the second quarter of 1995. The proceeds of the note were also contributed to the capital of the insurance subsidiary.
The Company began in 1993 to produce business in its MGA capacity for an unaffiliated insurance carrier. The Company receives a commission for produ- cing, underwriting, and servicing such business. In addition, the Company began in 1994 to act as a servicing carrier for the Kentucky Assigned Risk Plan.
Based on its recent earning history, the Company has determined that a valuation allowance of $19.9 million should be established against the net deferred tax asset at December 31, 1995.
Liquidity relates to the Company's ability to produce sufficient cash to fulfill contractual obligations, primarily to policyholders. Sources of liquidity include premium collections, service fee income, investment income and sales and maturities of investments.
There have been no shareholder dividends declared during the last three years, and there is not a likelihood that any will be considered during 1996. Long- term debt outstanding has been reduced to an insignificant amount as a conse- quence of the exchange of debt for common shares during 1994.
One of the Company's insurance subsidiaries fell below the minimum required statutory surplus at December 31,1994. During the first half of 1995, capital contributions of $7.4 million were completed which strengthened the statutory surplus of the subsidiary. As of December 31, 1995, the subsidiary has statu- tory surplus in excess of the minimum required amount, but less than the authorized control level of RBC. This shortfall is being addressed by various means, including a planned capital contribution of over $6 million in the second quarter of 1996.
For purposes of the Statements of Cash Flows, the Company considers both cash and temporary cash investments within the caption "Cash and temporary cash investments" to be those highly liquid investments purchased with an initial maturity of three months or less. At December 31, 1994, the Company had book cash overdrafts of $3.9 million, which are classified as "other liabilities" in the accompanying balance sheet. At December 31, 1995, the Compnay had no book cash overdrafts.
Cash Accumulation Trust - National Money Market Fund 6,365 First Union Bank - Repurchase Agreement Fund 3,538
A reconciliation of the differences between income taxes (benefit) on income (loss) before extraordinary items computed at the federal statutory income tax rate and tax expense (benefit) from operations is as follows: