<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-8483
CENTRAL RESERVE LIFE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1017531
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17800 ROYALTON ROAD, STRONGSVILLE, OHIO 44136
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (440) 572-2400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common Stock at June 30,
1998 was 4,195,172.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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A. Consolidated Condensed Balance Sheets
B. Consolidated Condensed Statements of Operations
C. Consolidated Condensed Statements of Shareholders' Equity
D. Consolidated Condensed Statements of Cash Flows
E. Notes to Consolidated Condensed Financial Statements
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CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held to maturity, at amortized cost $ 10,894,475 $ 11,898,627
Fixed maturities available for sale, at fair value 75,263,612 67,961,886
------------- -------------
Total fixed maturities 86,158,087 79,860,513
Policy loans 95,343 96,211
Short-term investments, at cost which approximates market 5,835,901 1,970,406
------------- -------------
Total investments 92,089,331 81,927,130
Cash (1,200,469) 5,632,459
Cash - restricted 4,325,623 3,930,956
Accrued investment income 1,329,764 1,123,693
Premiums receivable 1,546,094 2,098,243
Reinsurance receivable 31,025,085 26,215,765
Property and equipment, net 10,495,258 10,966,512
Deferred federal income taxes 1,206,792 1,356,000
Other assets 2,969,981 2,552,819
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$ 143,787,459 $ 135,803,577
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims $ 23,736,795 $ 24,903,497
Other policy claims and benefits payable 67,725,624 56,186,802
Deferred reinsurance gain 13,795,603 10,000,000
Other policyholders' funds 7,925,973 7,565,341
Other liabilities 5,872,071 7,237,067
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119,056,066 105,892,707
Note payable (Note 4) 20,000,000 20,000,000
Mortgage note payable 8,342,817 8,399,028
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Total liabilities 147,398,883 134,291,735
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Shareholders' equity:
Non-Voting Preferred shares, no par value, authorized
2,000,000 none issued - -
Common shares, no par value, stated value $.50, authorized
30,000,000 issued and outstanding 4,195,172 in 1998 and
1997 (800,000 are reserved for warrants) 2,097,586 2,097,586
Additional paid-in capital 4,122,319 4,122,319
Accumulated other comprehensive income 900,904 611,264
Retained earnings (accumulated deficit) (10,732,233) (5,319,327)
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Total shareholders' equity (deficit) (3,611,424) 1,511,842
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$ 143,787,459 $ 135,803,577
============= =============
</TABLE>
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<PAGE> 4
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Gross premiums $ 65,425,641 $ 65,731,268 $ 131,358,647 $ 133,437,405
Reinsurance ceded (27,252,397) (835,196) (57,022,472) (1,317,264)
------------- ------------- ------------- -------------
Net premiums 38,173,244 64,896,072 74,336,175 132,120,141
Net investment income 2,082,767 1,592,919 4,033,442 3,217,774
Net realized gains (losses) 745 22,476 (8,352) 23,326
------------- ------------- ------------- -------------
40,256,756 66,511,467 78,361,265 135,361,241
------------- ------------- ------------- -------------
BENEFITS, LOSSES AND EXPENSES:
Benefits, claims, losses and settlement
expenses 29,913,223 51,696,958 58,136,669 104,901,447
Commissions 6,382,539 8,901,410 12,811,244 18,086,274
Other operating expenses 6,008,271 9,931,037 10,953,334 18,492,717
Interest expense and financing costs 1,007,518 201,161 1,872,924 402,927
------------- ------------- ------------- -------------
43,311,551 70,730,566 83,774,171 141,883,365
------------- ------------- ------------- -------------
Income (loss) before Federal income taxes (3,054,795) (4,219,099) (5,412,906) (6,522,124)
Federal income tax expense (benefit) - (671,000) - (1,146,000)
============= ============= ============= =============
Net income (loss) $ (3,054,795) $ (3,548,099) $ (5,412,906) $ (5,376,124)
============= ============= ============= =============
Earnings (loss) per common share:
Basic $ (.73) $ (.85) $ (1.29) $ (1.29)
Diluted $ (.73) $ (.85) $ (1.29) $ (1.29)
Previously reported N/A $ (.83) N/A $ (1.26)
</TABLE>
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<PAGE> 5
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED TOTAL
ADDITIONAL EARNINGS OTHER SHAREHOLDERS'
COMMON PAID-IN (ACCUMULATED COMPREHENSIVE EQUITY
SHARES CAPITAL DEFICIT) INCOME (LOSS) (DEFICIT)
-------------- -------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
1997
BALANCE, JANUARY 1, 1997 $2,072,586 $4,005,819 $15,637,029 ($247,637) $21,467,797
Exercise of stock options 25,000 116,500 141,500
Comprehensive income (loss):
Net income (loss) (5,376,124) (5,376,124)
Other comprehensive
income, net:
Unrealized holding gain on
securities 69,633 69,633
Reclassification adjustment
for gains included in net income 15,396 15,396
------------- ---------------
Other comprehensive income 85,029 85,029
---------------- ------------- ---------------
Comprehensive income (loss) (5,376,124) 85,029 (5,291,095)
-------------- -------------- ---------------- ------------- ---------------
BALANCE, JUNE 30, 1997 $2,097,586 $4,122,319 $10,260,905 ($162,608) $16,318,202
============== ============== ================ ============= ===============
1998
BALANCE, JANUARY 1, 1998 $2,097,586 $4,122,319 ($5,319,327) $611,264 $1,511,842
Comprehensive income (loss):
Net (loss) (5,412,906) (5,412,906)
Other comprehensive income, net:
Unrealized gain on securities 284,128 284,128
Reclassification adjustment
for gains included in net income 5,512 5,512
------------- ---------------
Other comprehensive income 289,640 289,640
---------------- ------------- ---------------
Comprehensive income (loss) (5,412,906) 289,640 (5,123,266)
-------------- -------------- ---------------- ------------- ---------------
BALANCE, JUNE 30, 1998 $2,097,586 $4,122,319 ($10,732,233) $900,904 ($3,611,424)
============== ============== ================ ============= ===============
</TABLE>
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<PAGE> 6
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,412,906) $ (5,376,124)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 478,528 518,539
Net realized (gains) losses 8,352 (23,326)
Deferred federal income taxes 149,208 -
Changes in assets and liabilities:
Restricted cash (394,667) (121,493)
Premiums receivable 552,149 (230,272)
Reinsurance receivable 1,294,415 (668,084)
Federal income taxes recoverable - 1,099,530
Accrued investment income (206,071) 26,241
Other assets (986,104) (1,977,037)
Future policy benefits, claims and funds payable 12,731,220 2,217,069
Other liabilities (529,462) (1,104,412)
------------ ------------
Net cash provided by (used in) operating activities 7,684,662 (5,639,369)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases (18,203,555) (479,265)
Sales -
Maturities and calls 11,182,151 3,824,023
Securities held-to-maturity:
Purchases - -
Maturities and calls 1,004,152 -
Net (additions) deletions to furniture and equipment 728 (372,866)
Net proceeds (purchase) of investments - short-term (3,865,495) (1,871,092)
Policy loans 868 5,271
------------ ------------
Net cash provided by (used in) investing activities (9,881,151) 1,106,071
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in annuity account balances 271,476 694,761
Decrease in annuity account balances (2,172,223) (1,746,621)
Principal payments on long-term debt (56,210) (51,136)
Proceeds from exercise of stock options - 141,500
Reinsurance ceding allowance (2,679,482) -
Proceeds from note payable - 5,200,000
------------ ------------
Net cash provided by (used in) financing activities (4,636,439) 4,238,504
------------ ------------
Net increase (decrease) in cash (6,832,928) (294,794)
Cash at beginning of year 5,632,459 4,649,832
------------ ------------
Cash at end of quarter $ (1,200,469) $ 4,355,038
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 397,852 $ 402,927
Cash paid (received) during the period for income taxes - -
</TABLE>
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<PAGE> 7
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
D. Notes to Consolidated Condensed Financial Statements
----------------------------------------------------
1. These consolidated condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1997, as certain information and footnote disclosures required to be
included with financial statements prepared in accordance with generally
accepted accounting principles have either been condensed or omitted.
2. The consolidated condensed balance sheets at June 30, 1998 and the
consolidated condensed statements of operations and cash flows for the six
months ended June 30, 1998 and 1997 were prepared without audit. In the
opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of June 30, 1998 and the results of operations for the six months then
ended and cash flows for the six months then ended.
3. The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992. (A
current examination of the tax returns for 1993 through 1996 was started in
April 1998.) During the third quarter of 1994, the IRS issued a proposal
for adjustments to the Company's returns for 1991 and 1992. The proposed
deficiencies were approximately $2.4 million of which $215,303 was paid in
1994 and $590,000 paid in 1997. The balance primarily deals with whether or
not the Company's subsidiary, Central Reserve Life Insurance Company
("Central"), qualified as a life company, for tax purposes. The Company is
vigorously protesting the proposed deficiency and based on discussions with
counsel, management believes existing law supports the Company's position.
Therefore, the Company has not recorded a liability for the difference. On
May 18, 1998, the United States Tax Court ruled that the case may be
decided without the need for a trial.
If the IRS were to prevail in its position that Central no longer qualifies
as a life company for tax purposes, approximately $2.6 million of tax and
interest would be payable and Federal income taxes would increase in the
future. Presently, as a small life company, Central is permitted, among
other things, a deduction from the first $3 million of income of 60% or
$1.8 million. As Central's income increases above $3 million, the special
deduction is reduced proportionately. Besides relying on favorable existing
case law, Central may have, under certain circumstances, the ability to
change and market policies that could insure its qualifications as a life
company for tax purposes in the future, if the need arises.
4. Note Payable - The $20 million note payable, which was due June 30, 1998
with interest payable monthly at 8.5% was extended to July 3, 1998, at
which time it was paid in full from the proceeds of the Equity Financing.
See Recent Events in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A") section.
5. Earnings Per Share - In February 1997, FASB issued Statement No. 128,
"Earnings Per Share". The Company adopted Statement 128, as required, for
its December 31, 1997
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<PAGE> 8
consolidated financial statements. Prior quarters have been restated where
appropriate. For the quarters presented, the Company presents both basic
and diluted earnings (loss) per share. Basic earnings (loss) per share is
computed by dividing the income (loss) available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share reflects the potential dilution that
could occur if common stock equivalents (options/warrants) were exercised
and then shared in the earnings of the Company.
In computing diluted earnings per share, only potential common shares that
are dilutive, those that reduce earnings per share, are included. The
exercise of options and warrants is not assumed if the result would be
antidilutive, such as when a loss from continuing operations is reported.
The Company reported such a loss in both quarters and periods for 1998 and
1997, therefore the basic and diluted (loss) per share are the same. The
weighted average number of shares used in the calculation was 4,195,172 for
1998 and 1997.
6. On January 1, 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income". Statement 130 established standards for reporting
and display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by shareholders and
distributions to shareholders and includes net income. Comprehensive income
for the six month period ended June 30, 1998 and 1997 has been presented in
the accompanying unaudited statements of shareholders' equity.
7. Reinsurance - Central entered into a 50/50 quota-share reinsurance treaty
with Reassurance Company of Hannover ("Hannover") in December 1997 on
certain group accident and health policies. Under the provisions of the
treaty, Central cedes 50% of the premiums for these policies and in return
receives reimbursement for 50% of the claims plus a commission and expense
allowance. The following table reflects the effect of the Hannover
reinsurance treaty for the period. Other reinsurance is considered
immaterial for the Company.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997
---------------------- ---------------------
<S> <C> <C>
Benefits, claims, etc. $103,142,809 $104,901,447
Reinsurance recoverable (45,006,140) -
---------------------- ---------------------
Net $58,136,669 $104,901,447
====================== =====================
Commissions $18,343,076 $18,086,274
Commission allowance (5,531,832) -
---------------------- ---------------------
Net $12,811,244 $18,086,274
====================== =====================
Other operating expenses $16,933,034 $18,492,717
Expense allowance (5,979,700) -
---------------------- ---------------------
Net $10,953,334 $18,492,717
====================== =====================
</TABLE>
8. The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results for the full year.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT EVENTS: On March 30, 1998, the Company entered into an amended and
restated Stock Purchase Agreement ("the Equity Financing") in which the Company
agreed to issue and sell 7,300,000 Common Shares at $5.50 per share and warrants
to purchase an additional 3,650,000 Common Shares at an exercise price of $5.50
per share for an aggregate purchase price of $40,150,000. On June 26, 1998, the
shareholders of the Company approved the Equity Financing. The transaction
closed on July 3, 1998 and is therefore not reflected in the accompanying June
30, 1998 financial statements. The proceeds received in July 1998 were used to
pay the $20 million loan described in Note 4 to the accompanying Consolidated
Condensed Financial Statements, plus interest, and related transaction expenses,
such as legal, printing, accounting and investment banking fees. After these
fees are paid, which are charged against surplus, the Company estimates that
there will be a net increase in surplus of approximately $37 million. On a pro
forma basis, total shareholder's equity would be approximately $33 million or
approximately $2.90 per share.
On August 1, 1998, Central entered into an agreement with United Benefit Life
Insurance Company ("UBL") to reinsure 100% of the major medical policies of UBL,
covering approximately 100,000 lives with estimated annual premiums of $100
million. Concurrently, Central ceded 80% of the business to Reassurance Company
of Hannover ("Hannover"), thereby assuming a net risk of 20%. Reserves for
estimated claims of $36,500,000 were assumed by Central for which UBL
transferred assets of $16,500,000, net of a $20,000,000 ceding allowance
provided by Central. Central received a $20,000,000 ceding allowance from
Hannover for the 80% thereby creating a zero effect on statutory surplus
regarding the allowances. The agreement also provides Central with access to
UBL's current sales force.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations. The Company entered into an Administrative Services Agreement
in March 1998 to outsource its computer operations with an independent vendor.
The vendor is already in compliance with the Year 2000 issue. The Company does
not expect that there will be material additional costs incurred by the Company
for the Year 2000 issue.
RESULTS OF OPERATIONS: During the three months ending June 30, 1998, gross
premiums were $65,425,641, down slightly from $65,731,268 in the same quarter in
1997. For the six month period ending June 30, 1998, gross premiums were
$131,358,647, down approximately 1.5% from $133,437,405 for the same period in
1997. Reinsurance premiums ceded increased to $57,022,472 for the six month
period ending June 30, 1998 compared to $1,317,264 for the same period in 1997.
The increase is due to the 50/50 quota-share reinsurance treaty entered into
with Reassurance Company of Hannover ("Hannover") in December 1997. Net premiums
were down to $74,336,175 or 43% for the six months ending June 30, 1998 from
$132,120,141 for the same period in 1997, mainly as a result of the Hannover
treaty. Net certificates in force for the six months ending June 30, 1998
decreased 1,380 or 1% to 103,307 from 104,687 at December 31,
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<PAGE> 10
1997. This compares to a decrease of 11,617 for the same period in 1997. New
certificates issued during the first six months of 1998 were 18,138, up 20% from
15,178 for the same period in 1997. Lapses were 19,518 for the period in 1998,
down 20% from 24,339 for the same period in 1997. The larger number of lapses in
1997 was primarily due to a conversion program of older products in several
states along with rate increases for all renewal policies. The increase in new
certificates issued in 1998 was also related to the infusion of capital into
Central, improving the Risk-Based Capital levels above regulatory action levels,
making Central's marketing position more stable.
Net investment income increased to $2,082,767 or 30% for the quarter ending June
30, 1998 from $1,592,919 for the same quarter in 1997. For the six months ending
June 30, 1998 net investment income increased to $4,033,442 or 25% from
$3,217,774 for the same period in 1997. The increase for both the quarter and
six month period were due to the positive cash flow in 1998 compared to a
negative cash flow in 1997 plus the increase in 1998 due to the Equity Financing
and surplus note in Central.
The benefits and claims incurred loss ratio for the quarter and six month period
ending June 30, 1998 was 78.4% and 78.2%, respectively, down from 79.7% and
79.4% for the same quarter and period in 1997. For the six months ending June
30, 1998, benefits and claims incurred before the Hannover reinsurance offset
were $103,142,809, down approximately 1.7% from $104,901,447 for the same period
in 1997. Although many of the benefit programs the Company took actions on are
taking longer to develop than originally anticipated, some programs did start to
generate some savings during the last month of the second quarter. These
programs such as rating actions, underwriting changes, claim procedures and
certain managed care programs are scheduled to produce greater savings in the
third and fourth quarters of 1998.
Commissions for the quarter ending June 30, 1998 were $9,189,911, before an
allowance of $2,807,372 from the Hannover Reinsurance treaty or a net of
$6,382,539 compared to $8,901,410 for the same period in 1997. The increase was
primarily due to the increase in new certificates sold in 1998.
Commissions were $12,811,244 for the six months ending June 30, 1998 after an
allowance of $5,531,832 from the Hannover reinsurance treaty. Before the
reinsurance allowance, the commissions were $18,343,076 or 14% of premiums in
the first half of 1998 compared to $18,086,274 or 13.7% of premiums in the
comparable period of 1997. The increase was primarily due to the increase in new
certificates issued.
Operating expenses for the second quarter ending June 30, 1998 were $9,033,070
before the Hannover reinsurance allowance of $3,024,799 for a net amount of
$6,008,271. For the same quarter in 1997 the operating expenses were $9,931,037.
The reduction in personnel and other expenses taken in the first quarter of 1998
was the major contributing factor for the lower expenses in the quarter.
Operating expenses were $10,953,334 for the six months ending June 30, 1998
after an expense allowance of $5,979,700 from the Hannover reinsurance treaty.
Before reinsurance other operating expenses were $16,933,034 or 12.9% of
premiums in the first half of 1998 compared to $18,492,717 or 14% for the same
period in 1997. Included in other operating expenses is approximately $1.5
million in net outsourcing expenses for the second quarter of 1998 as a result
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<PAGE> 11
of the Company outsourcing its computer operations. The savings the Company is
realizing with the outsourcing and the elimination of any material expenses
required for the conversion to the year 2000 has offset the outsourcing
expenses. The Company continues to monitor expenses and look for ways to reduce
them.
Interest expense and financing costs increased to $1,872,924 in the first half
of 1998 compared to $402,927 for the same period in 1997. The major reason for
the increase was the interest on the $20,000,000 loan entered into in December
1997.
The Company incurred net losses of $3,054,795 ($.73 per share) for the quarter
and $5,412,906 ($1.29 per share) for the six months ending June 30, 1998. This
compares to net losses of $3,548,099, after a tax benefit of $671,000 ($.85 per
share), for the quarter and $5,376,124, after a tax benefit of $1,146,000 ($1.29
per share), for the six months ending June 30, 1997.
The book value of the Common Shares at June 30, 1998 was a negative $.86 per
share compared to a positive $.36 at December 31, 1997. As indicated in the
MD&A, the book value at June 30, 1998 would have been approximately a positive
$2.90 per share had the closing of the equity financing transaction taken place
on June 30, 1998 instead of July 3, 1998.
Federal income taxes would increase in the future if the IRS, as indicated in
note 3 to the consolidated condensed financial statements, were to pursue
litigation and prevail in their position that Central no longer qualifies as a
life company for tax purposes. Presently, as a small life company, Central is
permitted, among other things, a deduction from the first $3,000,000 of income
of 60% or $1,800,000, which is decreased by 15% for amounts over $3,000,000. As
Central's income increases, the effect is lowered. Management is relying on
existing case law applied favorably to another taxpayer to resolve this issue.
Also, Central may have, under certain circumstances, the ability to change and
market policies that could insure it's qualification as a life company for tax
purposes in the future, if the need arises.
LIQUIDITY AND CAPITAL RESOURCES: Liquidity is the ability of an enterprise to
generate adequate amounts of cash to meet its financial commitments. The major
needs for cash are to enable Central to pay claims and expenses as they come
due. Central's primary sources of cash are premiums and investment income.
Central's payments consist of current claim payments to insureds, managed care
expenses, operating expenses such as salaries, employee benefits, commissions,
taxes, etc., and shareholder dividends payable to the Company. The Company has,
in the past, relied on the dividend from Central to enable it to pay dividends
to shareholders. Central and the Company discontinued paying dividends at the
end of 1996. By statute, the state regulatory authorities set minimum liquidity
standards to protect both policyholders and shareholders and limit the dividends
payable by Central to the Company.
The majority of the Company's assets are in investments which were $92,089,331
after a net unrealized holding gain (before taxes of $464,102) of $1,365,006
(see below), or 64% of the total assets at June 30, 1998. Fixed maturities are
the primary investment of the Company and were $86,158,087 or 94% of total
investments at June 30, 1998. Other investments consist of short-term securities
and policy loans. The Company is carrying fixed maturities of $10,894,475 at
amortized cost (held to maturity) and fixed maturities of $75,263,612 at
estimated fair value (available for sale) at June 30, 1998. The Company does not
hold any so-called "junk" bonds or what are generally considered high-yield type
securities, and 98% of the bonds are of investment
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<PAGE> 12
grade quality. In accordance with Statement of Financial Accounting Standards
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company recorded an increase in investments of $1,365,006 to
reflect the reporting of investments classified as available for sale at fair
value (estimated market value), which was higher than amortized cost. The amount
is reflected in shareholders' equity as "accumulated other comprehensive
income," net of $464,102 for taxes. In addition to the fixed maturities, the
Company also had $5.8 million in short-term investments at June 30, 1998.
During the first half of 1998, total assets increased about $8 million, which
was offset by an increase in total liabilities of about $13 million after debt.
The major reasons for the increase in assets were due to the positive cash flow
in 1998 from the premiums of Central and the increase in reinsurance receivable
resulting from the Hannover reinsurance treaty.
The liabilities accrued for future policy benefits and policy claims payable
were increased 13%, to strengthen reserves and to cover the backlog created in
the first quarter of 1998, in part, by the loss of personnel, to $91,462,419 at
June 30, 1998 from $81,090,299 at December 31, 1997 or about $10 million.
Certain group accident and health reserves increased approximately $12 million,
to $67.3 million from $55.5 million, however this increase was offset by
surrenders of annuity policies during the period. Based on claims paid through
June 30, 1998, management believes the reserves established at December 31, 1997
were adequate. Shareholders' equity decreased to a negative $3,611,424 due to
the 1998 operating loss, which included the strengthening of reserves and costs
incurred relative to seeking additional capital. Although the Company's
consolidated equity was a deficit of $3,611,424, including unrealized holding
gain of $900,904, Central's statutory capital and surplus was $24,190,616 at
June 30, 1998, which was above all Risk-Based Capital action levels. Central's
capital and surplus includes $14 million from the cancellation of a surplus note
in the second quarter and the benefit of the $10 million ceding allowance from
the Hannover reinsurance treaty.
The Company believes that cash flow from operating activities and additional
funds will be sufficient to meet its currently anticipated operating and capital
expenditure requirements. However, the Company may seek additional equity or
debt financing if it determines that such financing is necessary. There is no
assurance that the Company will be able to obtain such financing on terms that
are favorable to the Company.
IMPACT OF INFLATION: Inflation rates impact the Company's financial condition
and operating results in several areas. Changes in inflation rates impact the
market value of the investment portfolio and yields on new investments.
Inflation has had an impact on claim costs and overall operating costs and,
although it has been lower in the last few years, hospital and medical costs
have still increased at a higher rate than general inflation. While to a certain
extent these increased costs are offset by interest rates (investment income),
the rate of income from investments has not increased proportionately with
increased hospital and medical costs. The Company will continue to establish
premium rates in accordance with trends in hospital and medical costs along with
concentrating on various cost containment programs. However, there can be no
assurance that these efforts by the Company will fully offset the impact of
inflation or that premiums will equal or exceed increasing health care costs.
-12-
<PAGE> 13
FORWARD LOOKING STATEMENTS: This report on Form 10-Q contains both historical
and forward-looking statements. Forward-looking statements are statements other
than historical information or statements of current condition. These
forward-looking statements relate to the plans and objectives of the Company for
future operations. In light of the risks and uncertainties inherent in all
future projections, the inclusion of the forward-looking statements should not
be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially from those in the
forward-looking statements, including the following: (i) the failure to
successfully implement the business plan for the Company including the cost
reduction component of the business plan; (ii) failure to successfully integrate
the reinsurance of policies of United Benefit Life Insurance Company into the
business of the Company; (iii) rising healthcare costs; (iv) business conditions
and competition in the health care industry; and (v) developments in healthcare
reform and other regulatory issues. The foregoing review of important factors
should not be construed as exhaustive and should be read in conjunction with
other cautionary statements that are included in this report. The Company
undertakes no obligation to update forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
---------------------------
All items of Part II other than Item 4 and Item 6 are either inapplicable to
Registrant or would not require a response.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
a) A Special Meeting of Shareholders was held on June 26, 1998.
b) Proxies were solicited for the election of directors by Central Reserve
Life Corporation's management pursuant to Regulation 14 under the
Securities Exchange Act of 1934. There was no solicitation in opposition to
management's nominees as listed in the proxy statement, and all of such
nominees were elected to the classes indicated in the proxy statement
pursuant to the vote of the stockholders.
c) The following matters were voted upon:
1. An equity financing transaction to issue and sell 7,300,000 common
shares and warrants to purchase an additional 3,650,000 common shares
for an aggregate purchase price of $40,150,000.
<TABLE>
<S> <C>
For 2,690,359
Against 283,641
Withheld 47,312
</TABLE>
2. To consider and vote upon a proposal which provides for the amendment
and restatement of the Code of Regulations of the Company to eliminate
the classification of the Board of Directors of the Company for
purposes of director elections.
<TABLE>
<S> <C>
For 2,911,910
Against 55,442
Withheld 53,960
</TABLE>
3. To consider and vote upon a proposal which provides for an amendment
to the Company's Amended Articles of Incorporation to increase the
Company's total authorized shares by increasing the number of
authorized Common Shares from 15,000,000 to 30,000,000.
<TABLE>
<S> <C>
For 2,927,334
Withheld 44,007
Against 49,971
</TABLE>
The total number of shares of the Company's Common Stock, no par value,
outstanding as of May 21, 1998, the record date for the Special Meeting, was
4,195,172.
-14-
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
a) Exhibits.
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL RESERVE LIFE CORPORATION
Date: August 12, 1998 By: Frank W. Grimone
------------------------ --------------------------------
Frank W. Grimone
Senior Executive Vice President
Date: August 12, 1998 By: Frank W. Grimone
------------------------ --------------------------------
Frank W. Grimone
Principal Financial Officer and
Chief Accounting Officer
-15-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CENTRAL RESERVE LIFE CORPORATION AS FILED
ON FORM 10Q FOR THE SIX MONTHS ENDING JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000215403
<NAME> Central Reserve Life Corporation
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 75,263,612
<DEBT-CARRYING-VALUE> 10,894,475
<DEBT-MARKET-VALUE> 10,917,722
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 92,089,331
<CASH> 3,125,154
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 143,787,459
<POLICY-LOSSES> 23,736,795
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 67,725,624
<POLICY-HOLDER-FUNDS> 7,925,973
<NOTES-PAYABLE> 28,342,817
0
0
<COMMON> 2,097,586
<OTHER-SE> (5,709,010)
<TOTAL-LIABILITY-AND-EQUITY> 143,787,459
74,336,175
<INVESTMENT-INCOME> 4,033,442
<INVESTMENT-GAINS> (8,352)
<OTHER-INCOME> 0
<BENEFITS> 58,136,669
<UNDERWRITING-AMORTIZATION> 23,764,578
<UNDERWRITING-OTHER> 1,872,924
<INCOME-PRETAX> (5,412,906)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,412,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,412,906)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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</TABLE>
