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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-9138
FIRST CENTRAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 11-2648222
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
266 MERRICK ROAD, LYNBROOK, NEW YORK 11563
(Address of principal executives office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 593-7070
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value $.10 per share American Stock Exchange
9% Convertible Subordinated Debentures due 2000 American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports 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. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K. [X]
At April 10, 1997, 5,986,608 shares of the Registrant's Common Stock were
outstanding and the aggregate market value (based upon the last reported sale of
the Common Stock on the American Stock Exchange on said date) of such shares
held by non-affiliates of the Registrant was approximately $9,336,000 (for
purposes of calculating the preceding amount only, all current directors and
executive officers of the Registrant are assumed to be affiliates).
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FIRST CENTRAL FINANCIAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS PAGE
PART I
ITEM 1. BUSINESS ....................................................... 1
ITEM 2. PROPERTIES ....................................................... 18
ITEM 3. LEGAL PROCEEDINGS................................................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 18
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................ 20
ITEM 6. SELECTED FINANCIAL DATA .......................................... 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 33
Independent Auditor's Report...................................... 49
Consolidated Balance Sheets at December 31, 1996
and 1995 ...................................................... 51
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994 .............................. 52
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1996, 1995, and 1994............... 53
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995, and 1994......................... 54
Notes to Consolidated Financial Statements........................ 55
Supplementary Data -- Quarterly Financial Data
(Unaudited)..................................................... 76
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES............................ 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT ..................................................... 35
ITEM 11. EXECUTIVE COMPENSATION ........................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................. 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ................................................... 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K ............................................ 44
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PART I
ITEM 1. BUSINESS.
GENERAL
First Central Financial Corporation (referred to herein as "First
Central" or the "Registrant"), a corporation incorporated under the laws of the
State of New York on May 18, 1983, is the parent company of First Central
Insurance Company ("First Central Insurance") and Mercury Adjustment Bureau,
Inc. ("Mercury"). Until March 10, 1997 First Central Insurance wrote multiple
lines of property and casualty insurance including Commercial Multiple Peril,
Workers' Compensation, General Liability, Automobile Liability and Physical
Damage, Products Liability, Fire, Allied Lines, Boiler and Machinery, Glass,
Burglary and Theft, and Inland Marine. On March 10, 1997, First Central
Insurance ceased to write any new business. First Central continues to process
renewals and service its existing business and expects to cease renewals on
private passenger automobile policies. Mercury is a licensed insurance adjuster
and represents the interests of a number of property and casualty insurers and
self-insurers who conduct insurance business in the State of New York. Unless
otherwise indicated, references to First Central include its subsidiaries.
During 1996, First Central Insurance encountered intense competition
and experienced a reduction in premiums written while at the same time, loss and
loss adjustment expenses increased significantly. For the quarter ended December
31, 1996, First Central Insurance incurred a charge to earnings of $11.5 million
for the purpose of increasing loss reserves, the primary reason First Central
reported a loss of $13.1 million or $2.19 per share (after tax benefits) for the
year ended December 31, 1996. See "--Loss and Loss Adjustment Expense Reserves."
First Central Insurance's losses from operations resulted in its
statutory surplus declining from $25.7 million at December 31, 1995 to $12.3
million at December 31, 1996 with earned surplus declining from $8.9 million
(excluding unrealized gains) to a deficit of $4.3 million (excluding unrealized
gains) during the same period. Primarily as a result of First Central
Insurance's current financial condition, in February 1997, A.M. Best & Co., Inc.
("Best") reduced the B++ (Very Good) rating it assigned to First Central
Insurance in June 1996 to D (Very Vulnerable). See "-- Best Rating."
First Central Insurance is precluded from paying dividends to First
Central while it has a deficiency in earned surplus. Since the only material
source of income to First Central is dividends from First Central Insurance,
First Central will not declare any further dividends on its common stock for the
foreseeable future. In addition, unless First Central obtains another source of
funds, First Central will be unable to pay its $1.8 million sinking fund
obligation under its 9% Convertible Subordinated Debentures due 2000 (the
"Debentures") on August 1, 1997. Failure to pay the August 1, 1997 sinking fund
obligation will constitute a default under the Debentures entitling the holders
to accelerate the entire $4.9 million outstanding principal balance.
In informal discussions with the New York State Insurance Department
(the "Insurance Department"), the Insurance Department requested that First
Central Insurance submit and implement a plan designed to improve operations and
raise additional capital. Such a plan will involve, among other things, the
revision of operations to attain future profitability by raising underwriting
standards, curtailing operating expenses, revising agreements to achieve a
reduction in loss adjustment expenses, restructuring
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the claims department to achieve more favorable settlements of claims and
restructuring management positions. First Central Insurance has engaged outside
consultants to review the activities of the various operating departments and
make recommendations, where necessary, for changes within those departments. The
plan also requires First Central Insurance to raise additional capital and First
Central has engaged an investment banker to assist in this effort. Without the
additional capital, First Central Insurance's surplus may be insufficient to
enable it to remain in operation. Pending implementation of the plan and the
raising of additional capital, First Central Insurance has ceased the writing of
new insurance business.
The events and uncertainties discussed above raise substantial doubt
about First Central's ability to continue as a going concern. There can be no
assurance that First Central will be successful in its attempt to revise
operations, or raise additional capital and resume normal operations.
In October 1996, Andrew W. Attivissimo was engaged as President and
Chief Operating Officer of each of First Central and First Central Insurance. In
February 1997, Mr. Attivissimo was also appointed as Chairman and Chief
Executive Officer of First Central and First Central Insurance, succeeding
Martin J. Simon, the founder of First Central.
BEST RATING
In February 1997, Best reduced First Central Insurance's Best rating to
D (Very Vulnerable). From June 1996 to February 1997, First Central Insurance
was rated B++ (Very Good) by Best. Best is one of the predominant services
engaged in the industry-wide rating of insurers and reinsurers. Best's ratings
are based on an analysis of the financial condition and operating performance of
an insurance company. The ratings are classified in fifteen levels: A++ and A+
(Superior), A and A- (Excellent), B++ and B+ (Very Good), B and B- (Adequate),
C++ and C+ (Fair), C and C- (Marginal), D (Very Vulnerable), E (Under State
Supervision), F (In Liquidation). According to Best, the ratings constitute
Best's opinion of the relative financial strength of insurance companies in
comparison to industry performance and the ability of such companies to
discharge their responsibilities to policyholders, and are based upon twelve
factors, i.e., profitability, leverage/capitalization, liquidity, spread of
risk, quality and appropriateness of the reinsurance program, quality and
diversification of assets, adequacy of policy/loss reserves, adequacy of
surplus, capital structure, management's experience and objectives, market
presence and policyholder's confidence. Best does not rate securities issued by
insurers and insurance holding companies. The ratings assigned by Best are not
indicative of any determination by Best concerning the relative value or
performance of the rated company's securities.
According to Best's Insurance Reports for Property and Casualty
Insurers, the D (Very Vulnerable) rating received by First Central Insurance is
assigned to those insurers who have demonstrated poor overall performance when
compared to the standards established by Best. D companies have current ability
to meet their policyholder obligations, but their financial strength is
extremely vulnerable to unfavorable changes in underwriting or economic
conditions.
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LINES OF BUSINESS
On March 10, 1997, First Central Insurance ceased to write any new
business. First Central Insurance continues to process renewals and service its
existing business and expects to cease renewals on private passenger automobile
policies. The lines of insurance written by First Central Insurance in 1996 and
1995 were:
Commercial Multiple Peril: This line represented 57.5% of total direct
premiums written in 1996 (53.4% in 1995) and 53.6% of net premiums earned (50.7%
in 1995). Losses incurred represented 61.0% of premiums earned (70.2% in 1995)
for this line of business.
Workers' Compensation: This line represented 12.7% of total direct
premiums written in 1996 (12.5% in 1995) and 13.5% of net premiums earned (13.8%
in 1995). Losses incurred represented 7.2% of premiums earned (50.9% in 1995)
for this line of business. Losses incurred for 1996 would have been 46.9% of
premiums earned but for the reduction of previously established reserves. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Losses and Loss Adjustment Expense Reserves."
General Liability: This line represented 15.7% of total direct premiums
written in 1996 (23.2% in 1995) and 19.7% of net premiums earned (23.5% in
1995). Losses incurred represented 155.5% of premiums earned (62.0% in 1995) for
this line of business.
Automobile Liability: This line represented 10.5% of total direct
premiums written in 1996 (7.7% in 1995) and 9.8% of net premiums earned (8.5% in
1995). Losses incurred represented 137.9% of premiums earned (80.7% in 1995) for
this line of business.
Automobile Physical Damage: This line represented 2.6% of total direct
premiums written in 1996 (2.2% in 1995) and 2.4% of net premiums earned (2.6% in
1995). Losses incurred represented 49.2% of premiums earned (47.7% in 1995) for
this line of business.
Other Lines: Products liability, fire, allied lines, boiler and
machinery, glass, burglary and theft, and inland marine were the other lines
written in 1996. They represented 1.0% of total direct premiums written (1.0% in
1995) and 1.0% of net premiums earned (0.9% in 1995). Losses incurred
represented 28.6% of premiums earned (26.6% in 1995) for these lines of
business.
In lines written as a percentage of direct premiums written, i.e.,
increases in commercial multiple peril, workers' compensation, automobile
liability and decreases in general liability and automobile physical damage,
during 1996, First Central Insurance did not effect any material changes in the
location of business, the geographic mix thereof or the types of risks insured.
INSURANCE RISK RATING
First Central Insurance's minimum premium rates for commercial multiple
peril, workers' compensation, general liability, automobile liability,
automobile physical damage, products liability, fire, allied lines, glass,
burglary and theft, and inland marine insurance heretofore have been established
in accordance with rates recommended by the Insurance Services Office ("ISO"), a
bureau engaged in the nationwide publication of premium rates recommended for
use by property and casualty insurers.
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Management believes that by strictly adhering to a policy of charging minimum
rates which did not fall below ISO recommendations, it maximized First Central
Insurance's potential for achieving profits from underwriting operations. ISO
has, however, begun to phase out the publication of such rates and instead has
begun to publish certain other data that may assist insurance companies in
establishing rates. Management intends to continue to set its rates based, in
part, on ISO rate recommendations for as long as such recommendations are
disseminated, and thereafter, to set its rates based on data provided by ISO.
PREMIUMS WRITTEN, REINSURANCE CEDED AND PREMIUMS EARNED
The following table sets forth direct premiums written, reinsurance
ceded, net premiums written, decrease (increase) in unearned premiums, and net
premiums earned by First Central Insurance for five years ended December 31,
1996. Direct premiums written are the total premiums written less cancellations.
Reinsurance ceded is the premiums written applicable to reinsured risks which
First Central Insurance has ceded to other insurers. Net premiums written are
the direct premiums written less all premiums ceded. Net premiums earned are the
net premiums written attributable to those portions of the policies expiring
within the accounting period. The decrease (increase) in unearned premiums
represents the deficiency (excess) of net premiums written over net premiums
earned during the accounting period.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Direct premiums written $ 56,712 $ 72,294 $ 65,593 $ 53,023 $ 39,189
Reinsurance ceded (9,908) (21,726) (10,163) (6,531) (4,151)
-------- -------- -------- -------- --------
Net premiums written 46,804 50,568 55,430 46,492 35,038
Decrease (increase) in unearned
premiums 2,108 2,466 (5,369) (3,678) (5,582)
-------- -------- -------- -------- --------
Net premiums earned $ 48,912 $ 53,034 $ 50,061 $ 42,814 $ 29,456
======== ======== ======== ======== ========
</TABLE>
PREMIUMS WRITTEN, PREMIUMS EARNED AND LOSSES EXPERIENCED
One means of measuring the underwriting experience of a property and
casualty insurer is by its "combined ratio." This ratio is the sum of (1) the
ratio of losses incurred to net premiums earned (the "loss ratio"), (2) the
ratio of loss adjustment expenses incurred to net premiums earned (the "loss
adjustment expense ratio"), (3) the ratio of underwriting expenses incurred to
net premiums written (the "underwriting expense ratio"). The insurance industry
attains the combined ratio of an insurance company based on ("SAP") Statutory
Accounting Principles. Based on SAP, the combined ratio for First Central
Insurance for the year ended 1996 is 133.3%. The combined ratio reflects the
underwriting experience of an insurer but does not reflect loss of premium
balances, federal or state income taxes nor income from investments. The actual
profitability of property and casualty insurers also depends on net income from
investments. The insurance industry considers a combined ratio under 100% to
indicate underwriting profitability and a combined ratio over 100% to indicate
an underwriting loss. This
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consideration is based on industry data and not accounting principles since a
combined ratio under 100% can mathematically show an underwriting loss due to
the fact that the underwriting expense ratio is based on net written premiums
and the loss and loss adjustment expense ratios are based on net earned
premiums.
The following table shows for First Central Insurance, on the basis of
Generally Accepted Accounting Principles ("GAAP"), net premiums written, net
premiums earned, losses incurred and the loss ratio for each of the five years
ended December 31, 1996, by line of business written. The table also includes,
on a GAAP basis, loss ratio, loss adjustment expense ratio, underwriting expense
ratio and combined ratio information as reported on a consolidated basis by
First Central.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial Multiple Peril:
Net Premiums Written..... $ 25,712 $ 24,973 $ 26,405 $ 23,176 $ 17,526
Net Premiums Earned...... 26,221 26,870 23,024 21,202 14,329
Losses Incurred.......... 16,000 18,873 9,927 7,075 5,960
Loss Ratio............... 61.0 70.2 43.1 33.4 41.6
Workers' Compensation:
Net Premiums Written..... $ 6,319 $ 6,843 $ 9,457 $ 8,461 $ 6,549
Net Premiums Earned...... 6,594 7,299 9,263 8,273 5,202
Losses Incurred.......... 478 3,712 3,857 4,809 2,908
Loss Ratio............... 7.2 50.9 41.6 58.1 55.9
General Liability:
Net Premiums Written..... $ 7,850 $ 12,879 $ 12,467 $ 7,045 $ 3,693
Net Premiums Earned...... 9,629 12,469 10,733 5,727 3,611
Losses Incurred.......... 14,975 7,726 5,109 1,825 831
Loss Ratio............... 155.5 62.0 47.6 31.9 23.0
Automobile Liability:
Net Premiums Written..... $ 5,268 $ 4,242 $ 4,973 $ 5,357 $ 4,788
Net Premiums Earned...... 4,791 4,487 4,838 5,114 3,943
Losses Incurred.......... 6,607 3,619 3,762 4,493 3,093
Loss Ratio............... 137.9 80.7 77.8 87.9 78.4
Automobile Physical Damage:
Net Premiums Written..... $ 1,162 $ 1,092 $ 1,677 $ 2,111 $ 2,148
Net Premiums Earned...... 1,172 1,355 1,857 2,123 2,066
Losses Incurred.......... 577 647 936 1,411 1,153
Loss Ratio............... 49.2 47.7 50.4 66.5 55.8
All Categories (including
above categories and all
others):
Net Premiums Written..... $ 46,804 $ 50,568 $ 55,430 $ 46,492 $ 35,038
Net Premiums Earned...... 48,912 53,034 50,061 42,814 29,456
Losses Incurred.......... 38,782 34,724 23,514 20,061 14,130
Loss Ratio............... 79.3 65.5 47.0 46.9 48.0
Loss Adjustment Expenses
Incurred................ $ 9,935 $ 7,337 $ 6,110 $ 5,714 $ 2,680
Loss Adjustment Expenses
Ratio................... 20.3 13.8 12.2 13.3 9.1
Expenses Incurred........ $ 18,223 $ 17,129 $ 17,283 $ 16,352 $ 13,215
Expenses Ratio........... 38.9 33.9 31.2 35.2 37.7
GAAP Ratio............... 138.5 113.2 90.4 95.4 94.8
Operating Income (Loss).. $(18,028) $ (6,156) $ 3,154 $ 687 $ (569)
</TABLE>
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RELATIONSHIP BETWEEN NET PREMIUMS AND SURPLUS
Insurance industry practices generally suggest that property and
casualty insurance companies maintain net premiums written at a level no more
than 300% of "surplus to policyholders" as calculated in accordance with
Statutory Accounting Principles. See " -- Regulation". For the five years ended
December 31, 1996, First Central Insurance's percentages of net premiums written
to statutory surplus, based upon the annual statements filed by it with the
Insurance Department were as follows:
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
380% 192% 272% 211% 194%
The significant increase in First Central Insurance's percentage of net
premiums written to statutory surplus during 1996 was primarily due to the
decrease in statutory surplus resulting from First Central Insurance incurring a
charge to earnings of $11.5 million in the quarter ended December 31, 1996 for
the purpose of increasing loss reserves. See " -- General" and " -- Loss and
Loss Adjustment Expense Reserves." First Central Insurance expects that the
reduction in its statutory surplus will result in significantly reduced premium
volume for the foreseeable future.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
First Central Insurance maintains reserves for unpaid losses and unpaid
loss adjustment expenses for all lines of insurance written. These reserves are
intended to cover the probable ultimate cost of settling all losses incurred and
unpaid, including those not yet reported. First Central Insurance establishes
reserves on a case by case basis by evaluating reported claims based upon the
type of risk involved, knowledge of the circumstances surrounding each claim,
the severity of injury or damage and the potential for ultimate exposure, the
policy provisions relating to the type of loss, and by estimating unreported
claims on the basis of statistical information with respect to the probable
number and nature of claims arising from occurrences which have not yet been
reported. In addition to case basis reserves, loss and loss adjustment expense
reserves also include incurred-but-not-reported ("IBNR") reserves. IBNR reserves
are reserves for insured losses that have occurred but have not been reported to
the insurance company and losses that have not been adequately reserved for with
case based reserves.
Loss reserves are estimates only at a given point in time of what the
insurer expects to pay on losses, based on facts and circumstances then known,
and it is possible that the ultimate liability may exceed or be less than such
estimates. The estimates are not precise inasmuch as, among other things, they
are based on predictions of future events, estimates of future trends in claim
severity and frequency and other variable factors. During the loss settlement
period, which may be as long as several years, it often becomes necessary to
refine and adjust the estimates of liability on a claim either upward or
downward, and even then the ultimate liability may exceed or be less than the
estimates. Inflationary pressures and escalations of repair costs, medical
expenses and the sizes of injury awards have necessitated periodic upward
adjustments in reserves over the loss settlement periods by most casualty and
property insurers.
Loss adjustment expense reserves to cover the ultimate cost of
investigating all losses and defending lawsuits arising from such losses are
established each year based on historical data such as the
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ratio of loss expenses paid to claims paid over the preceding years and on the
basis of currently available information. Adjustments required to be made in the
amount of outstanding loss reserves each year may require corresponding changes
in the loss adjustment expense reserves.
The following factors are taken into consideration in determining
current year adjustments to loss and loss adjustment expense reserves recorded
in prior years; (1) the accumulation of individual case estimates for losses
reported prior to the close of the accounting period; (2) estimates for
unreported losses based on past experience modified for current trends; and (3)
estimates of expenses for investigating and adjusting claims based upon past
experience. First Central Insurance makes implicit provisions for the effects of
inflation and for the combined effects of a number of factors (including
inflation) which may cause future changes in severities. It does not, however,
employ any significant reserving assumptions in determining its loss reserves
other than the foregoing developed facts. The Insurance Department requires,
pursuant to Statutory Accounting Principles, that loss ratios in each of the
three most recent years be not less than 60% of its annual net earned premiums
for general liability line of business, (65% in the case of workers'
compensation line of business and 75% for automobile line of business), and to
establish, to the extent necessary, reserves which conform to such assumptions
("Excess Statutory Reserves"). That assumption is only employed by First Central
Insurance with respect to the filing of such annual statements. Excess Statutory
Reserves are not utilized in connection with the development of loss reserves
employed in the actual operation of First Central Insurance's business nor are
such Excess Statutory Reserves required to be established under GAAP.
The year to year estimation and re-estimation of loss and loss
adjustment expense reserve requirements is an inexact science. Reserves do not
represent an exact calculation of liability, but rather are estimates involving
actuarial and statistical projections at a given time of First Central
Insurance's expectations of the ultimate costs of the settlement and
administration of claims based on facts and circumstances then known,
predictions of future events, estimates of future trends in claims frequency and
severity and other variable factors such as inflation and new theories of
liability. It is First Central Insurance's practice to maintain reserves at or
near the middle point of an "actuarial reasonableness range" established by its
independent actuary to evaluate the adequacy of reserves. To the extent that
future changes in known data do not take place precisely in accordance with an
insurer's historically developed loss reserving assumptions, such reserves, when
viewed as of a particular point in time, most likely will be either deficient,
i.e., lower than the amount needed to cover known loss and loss adjustment
expenses, or redundant, i.e., greater than the amount required with respect
thereto.
During 1995 and 1996, First Central Insurance increased total net
reserves by $18.1 million and $20.9 million, respectively, to maintain its total
loss reserves at or near the middle point of the actuarial reasonableness range.
The primary cause of the reserve increase in each of 1995 and 1996 was
significant adverse development stemming from poor loss experience on policies
written from 1992 through 1995, a period during which First Central Insurance
substantially increased premium writings. In particular, beginning in 1993,
First Central Insurance wrote policies for two large customers which resulted in
extremely poor loss experience. Such business accounted for approximately
$355,000, $3.3 million and $3.3 million of First Central Insurance's total
written premiums in 1993, 1994 and 1995, respectively.
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Based on First Central Insurance's past loss experience, prior
management responsible for claims policy increased total net reserves by
approximately $2.0 million, $2.5 million and $3.3 million in the first, second
and third quarters of 1995, respectively, including increases in IBNR reserves
of $1 million, $960,000 and $370,000 during such periods, respectively. However,
after a review of case files during the fourth quarter of 1995, First Central
Insurance's independent actuary recommended a substantial IBNR reserve increase
for the fourth quarter of 1995 because of the adverse development mentioned
above. The $8.95 million increase in IBNR reserves in the fourth quarter of 1995
brought First Central Insurance's total reserves at December 31, 1995 in line
with the estimate of First Central Insurance's independent actuary. Accordingly,
First Central Insurance believed that total reserves had been adequately
strengthened during 1995 for 1995 and years prior thereto.
Total net reserves were increased by approximately $2.2 million, $2.5
million and $3.8 million in the first, second and third quarters of 1996,
respectively, including increases in IBNR reserves of $250,000, $2 million and
$1.35 million during such periods, respectively. However, 1996 witnessed
continuing adverse loss development and, accordingly, during the fourth quarter
of 1996, First Central Insurance performed an intensive evaluation of its case
files, particularly those claims with low initial case reserves. The claims file
evaluation consisted of a review of approximately 750 sample files identified by
the independent actuary. In the fourth quarter of 1996, First Central Insurance
transferred approximately $14 million in IBNR reserves to case reserves as a
result of the case reserve file review and to compensate for further adverse
loss development. It had been believed that the level of IBNR reserves would be
sufficient to absorb such a transfer, but the continuing 1996 adverse loss
development, which became apparent during the actuarial review, necessitated a
further strengthening of IBNR reserves. The actuarial estimate of the required
increase was $7.6 million. By this time, new management was in office and
increased IBNR reserves by a further $3.8 million over that recommended by First
Central Insurance's independent actuary based upon new management's evaluation
of recent loss experience. Total net reserves at December 31, 1996 are above but
near the middle point of the actuarial reasonableness range.
The reserve strengthening in the fourth quarters of 1995 and 1996
resulted from significant adverse development stemming from extremely poor loss
experience on policies written from 1992 through 1995, and prior management that
was responsible for claims policy basing quarterly reserve estimate adjustments
on historical loss experience.
In connection with the Insurance Department's triennial audit, First
Central Insurance is in discussions with the Insurance Department concerning a
number of issues including the adequacy of First Central Insurance's reserves at
December 31, 1996. It is new management's and First Central Insurance's
independent actuary's estimate that total net reserves at December 31, 1996 are
adequate.
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The following table presents the development of First Central
Insurance's reserves for losses and loss adjustment expenses (net of reinsurance
receivables) of its underwriting activities for the years ended December 31,
1986 through December 31, 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Reserves for Losses
and Loss Adjustment
Expenses(1).......... $8,910 $14,897 $18,067 $21,632 $22,702 $25,874 $28,703 $38,074 $48,928 $67,095 $88,026
Reserves Re-estimated
As of:
One Year Later........ 9,105 15,109 17,685 20,461 23,172 26,985 32,902 43,957 61,923 87,199
Two Years Later....... 8,722 14,106 16,078 20,214 23,705 29,831 36,980 52,224 66,523
Three Years Later..... 8,481 12,694 15,719 19,081 24,914 29,860 42,351 63,963
Four Years Later...... 8,207 12,751 14,839 20,367 26,253 32,785 48,354
Five Years Later...... 8,094 12,270 15,289 20,388 27,098 35,537
Six Years Later....... 7,733 12,475 14,831 20,739 28,527
Seven Years Later..... 7,731 11,892 15,008 21,411
Eight Years Later..... 7,272 11,841 15,142
Nine Years Later...... 7,143 11,941
Ten Years Later....... 7,189
Cumulative Redundancy
(Deficiency).......... 1,721 2,956 2,925 221 (5,825) (9,663) (19,648) (25,889) (17,595) (20,104)
Cumulative Amount of
Liability Paid:
One Year Later........ 1,501 3,078 3,870 6,653 7,496 8,494 10,259 13,806 37,472 46,917
Two Years Later....... 2,730 4,950 7,225 10,452 12,310 14,565 18,785 27,693 54,518
Three Years Later..... 4,084 7,212 9,747 13,121 16,927 19,816 28,340 39,186
Four Years Later...... 5,426 8,713 11,567 15,913 20,167 25,568 34,901
Five Years Later...... 6,205 9,661 12,899 17,522 22,963 28,992
Six Years Later....... 6,667 10,597 13,196 18,559 24,727
Seven Years Later..... 7,134 10,654 13,662 19,468
Eight Years Later..... 7,052 10,888 13,885
Nine Years Later...... 7,122 11,012
Ten Years Later....... 7,181
</TABLE>
(1) Includes reserves for loss adjustment expenses with respect to estimates of
losses sustained and reported in the subject year, but not reported until a
subsequent year net of reinsurance recoverables.
9
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<PAGE>
The amounts of First Central Insurance's reserves for losses and loss
adjustment expenses for the year ended December 31, 1996, determined on the
basis of GAAP, were less than the amounts of such reserves determined in
accordance with Statutory Accounting Principles ("SAP"). Such variance resulted
from the following fundamental differences in the manner in which reserves are
determined under GAAP and SAP: (a) as a result of adjustments for intercompany
eliminations required in connection with the preparation of First Central's GAAP
basis financial statements, the GAAP basis reserves for expected loss adjustment
expenses payable to Mercury were reduced by $571,367; and (b) conforming to the
Insurance Department statutory accounting principles, First Central Insurance
did have an "Excess Statutory Reserve" of $2,580,000 in 1996.
First Central Insurance does not discount its loss and loss adjustment
expense reserves for financial reporting purposes.
RECONCILIATION OF LOSS RESERVES
First Central Insurance's aggregate reserves for insurance losses and
loss adjustment expenses as of December 31, 1996, 1995 and 1994, as determined
on the basis of GAAP but presented net of reinsurance recoverables, and the
changes made therein during such years were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Reserves at Beginning of Year:
Losses ....................................... $ 59,550 $ 42,048 $ 31,832
Loss Adjustment Expenses...................... 7,545 6,880 6,242
--------- --------- ---------
67,095 48,928 38,074
Increase in Loss and Loss
Adjustment Expense Reserves:
Insured Events of Current Year................ 28,934 29,066 23,741
Insured Events of Prior Years................. 19,783 12,995 5,883
--------- --------- ---------
48,717 42,061 29,624
--------- --------- ---------
Payments of Losses and Loss
Adjustment Expenses:
Insured Events of Current Year................ 4,513 5,057 4,964
Insured Events of Prior Years................. 23,273 18,837 13,806
--------- --------- ---------
27,786 23,894 18,770
--------- --------- ---------
Reserves at End of Year........................ $ 88,026 $ 67,095 $ 48,928
========= ========= =========
</TABLE>
The reserves at the end of 1996, 1995 and 1994 are net of reinsurance
recoverables of $18,768,000, $19,542,000 and $24,589,000 respectively.
The year to year increases in loss reserves are a result of significant
adverse developments from both case reserve strengthening and poor loss
experience emanating from accident years 1992 through 1995, a period during
which First Central Insurance substantially increased premium writings. During
10
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<PAGE>
that period, First Central Insurance wrote certain business which resulted in
extremely poor loss experience.
Although management, after consultation with its independent actuary,
believes that First Central Insurance's overall reserve levels are adequate to
provide for its obligations under existing policies, actual losses and loss
adjustment expenses paid may deviate, perhaps substantially, from reserves
reflected in the Company's financial statements. For example, volatile and
unanticipated adverse loss and expense developments may occur particularly with
respect to policies insuring liability, such as general liability, personal
injury and workers' compensation for which losses may not emerge for several
years following the year in which coverage was underwritten. See " -- Loss and
Loss Adjustment Expense Reserves" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Loss and Loss Adjustment
Expense Reserves."
First Central Insurance is a member of certain "assigned risk"
reinsurance pools, mainly for automobile insurance, under which all insurers
doing business in a particular state provide coverage for insureds who could not
otherwise secure insurance in the open market. Participation in such pools (or
direct writing of insurance for assigned risks) is a condition to writing the
applicable lines of insurance in New York. Pool participants issue insurance for
assigned risks on a pro rata basis which compares the volume of their voluntary
insurance written in a state to all voluntary insurance written therein. Such
assigned risk writings are made as and when requests are made for the same by
the Insurance Department. First Central Insurance became a pool participant in
1981. First Central Insurance wrote approximately $1,288,000, $1,411,000, and
$412,000 of assigned risk business in 1996, 1995 and 1994, respectively.
GEOGRAPHICAL DISTRIBUTION
First Central Insurance is licensed to conduct insurance business in
Connecticut, New York and Pennsylvania. However, all of the business previously
conducted by First Central Insurance and the income derived therefrom, except
for approximately $90,000, $183,000 and $300,000 of direct premiums written in
Pennsylvania and Connecticut in 1996, 1995 and 1994, respectively, has resulted
from policies issued in New York.
REINSURANCE CEDED
A reinsurance transaction takes place when an insurance company
transfers (cedes) a portion or all of its exposure on insurance directly written
by it to another insurer which assumes the exposure in return for a portion or
all of the premium. Insurance is ceded principally (a) to reduce net liability
on individual risks, (b) to protect against catastrophic losses and (c) to
maintain desired ratios of net premiums written to statutory surplus. Most
reinsurance is written under contracts (treaties) in which the coverage is
either on a "quota share" basis, where the reinsurer shares proportionately in
premiums and losses, or on an "excess" basis where only losses above a fixed
point (retention) are reinsured. First Central Insurance is a party to
reinsurance contracts under which certain types of policies are automatically
reinsured without the need for further approval of the reinsurers which have
agreed to cover the types of risks involved ("treaty" reinsurance). First
Central Insurance also is a party from time to time to reinsurance contracts
which relate to an individual policy or type of risk and require the specific
agreement of the reinsurer as to each risk with respect to which reinsurance is
assumed ("facultative" reinsurance).
11
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<PAGE>
The ceding of reinsurance does not discharge the original insurer from
its primary liability to the policyholder and the ceding company is required to
pay the loss if the assuming company fails to meet its obligations under the
reinsurance agreement. For regulatory reporting purposes, the practice of
insurers, subject to certain statutory limitations and as permitted by
regulatory authorities, is to account for reinsured risks to the extent of the
reinsurance ceded as though they were not risks for which the original insurer
is liable and to deduct the portion of unearned premiums related to ceded
reinsurance from the liability for unearned premiums. While this practice is
prescribed for regulatory purposes, it is not in accordance with generally
accepted accounting principles as established by FASB Statement No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." Statement No. 113, which First Central adopted on January 1, 1993,
requires reporting of estimated reinsurance receivables arising from reinsurance
contracts and amounts paid to the reinsurer relating to the unexpired portion of
reinsured contracts (prepaid reinsurance premiums) separately as assets, with
reserves for losses and loss adjustment expenses and the liability for unearned
premiums stated at their gross amounts.
The following table shows the amount of reinsurance premiums ceded by
First Central Insurance for five years ended December 31, 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$9,908,000 $21,726,000 $10,162,000 $6,531,000 $4,151,000
</TABLE>
Since July 1988, National Reinsurance Corp. ("Nat Re") has reinsured a
portion of every risk underwritten by First Central Insurance. On October 4,
1996 General Reinsurance Corp. ("Gen Re") acquired National Reinsurance Corp.
("Nat Re"). First Central Insurance has reinsurance agreements with either Nat
Re or Gen Re as specifically identified herein. As of January 1, 1996, First
Central Insurance's retention is $250,000 per loss for all lines of property and
casualty insurance. Under the terms of the reinsurance treaty, Nat Re will
assume up to $750,000 of any loss in excess of First Central Insurance's
retention on any one loss not exceeding $1.0 million. In addition to the $1.0
million limit, as of January 1, 1994, First Central Insurance, pursuant to an
excess agreement with Nat Re is reinsured for an additional $1.0 million (for a
total of $2.0 million limit) for workers' compensation coverage and as of
January 1, 1992, First Central Insurance, pursuant to automatic facultative
arrangements with Munich American Reinsurance Company and as of January 1, 1993,
Swiss Reinsurance, is reinsured for an additional $3.5 million (for a total of
$4.5 million limit) on a pro rata basis for property coverage. Additionally,
there are other reinsurance companies with which First Central Insurance has
facultative arrangements on an individual risk basis. In April 1995, First
Central Insurance's treaty with Nat Re was changed so that the reinsurance
premiums ceded to Nat Re would be based on written premiums rather than earned
premiums and the premium rate was increased prospectively with First Central
Insurance being entitled to a commission on the reinsurance premium. The treaty
change caused First Central Insurance to record a liability, "Funds held for
reinsurance treaty," for amounts due Nat Re. This liability is paid as the
reinsurance premiums are earned. Effective December 8, 1995, with respect to
losses occurring on or after December 1, 1994, First Central Insurance entered
into a quota share commercial umbrella liability reinsurance agreement, in which
First Central Insurance will cede 90% of applicable policy premiums written to
CNA and, in which CNA will assume 90% of applicable losses. In addition, First
Central Insurance also has an excess of loss commercial reinsurance umbrella
liability agreement with CNA, in which 100% of the premiums that are allocated
to the limits in excess of
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<PAGE>
$1,000,000 are to be ceded to CNA and, in which CNA will assume 100% of
applicable losses in excess of $1,000,000. First Central Insurance has not
effected any significant additions to or changes in its reinsurance retention
other than as hereinabove described.
INVESTMENTS AND INVESTMENT PORTFOLIO
As is customary in the insurance industry, an insurer seeks to derive
income from underwriting and investments, with most of its net income
attributable to investment income. New York law regulates the types, quality and
concentration of investments that may be made by First Central Insurance. First
Central Insurance is generally permitted to invest, within specified limits and
subject to certain qualifications, in federal, state and municipal obligations,
corporate bonds, preferred stocks and common stocks, real estate mortgages and
real estate.
First Central Insurance has not heretofore realized any unusually large
gains, nor has it suffered any unusually large losses with respect to the
disposition of its investments. As of January 1, 1994, First Central adopted
FASB Statement No. 115 "Accounting for Certain Investments in Debt and Equity
Securities," which requires that management classify its investments in debt
securities and equity securities, with readily determinable fair values. In
accordance with FASB Statement No. 115, securities other than those classified
as "held to maturity," are stated at fair value. Unrealized gains and losses on
securities stated at fair value will, depending on their character, affect First
Central's statement of income or shareholders' equity. Realized and unrealized
gains and losses on securities classified as "held for trading" are recognized
in First Central's income statement. Unrealized gains and losses on securities
classified as "available for sale" are reported, net of the related deferred tax
effect, as increases or decreases in shareholders' equity and realized gains and
losses on such securities are included in earnings.
Statutory accounting principles require that investments in equity
securities be reported at market value and that investments in debt securities
be reported at amortized cost, unless a writedown below cost is prescribed by
the National Association of Insurance Commissioners Securities Valuation Office.
Insurance industry practices oblige First Central Insurance to maintain net
premiums written at a level of no more than 300% of "surplus to policyholders".
See "Business -- Regulation." Accordingly, First Central Insurance's ability to
write additional premiums is subject to increases and decreases in such surplus
which is significantly dependent upon investment results. Except for three fixed
income securities with an aggregate market value of $684,100, First Central's
investments in fixed income securities are of investment grade quality. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Net Investment Income; Realized Gains." The value of First Central
Insurance's fixed income securities is affected by the fluctuation of interest
rates, among other factors. The value of First Central Insurance's equity
investments is affected by conditions prevailing in equity markets from time to
time, among other factors.
The following tables summarize First Central's investments and the
results therefore during the five years ended December 31, 1996, as reported on
the basis of GAAP:
13
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
------ -- ------ -- ------ -- ------ -- ------ --
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. Government Notes and
Securities ............................. $ 53,763 49.6 $ 33,670 33.4 $ 9,486 11.6 $ 9,196 12.4 $ 5,649 9.6
Municipal Bonds ......................... 20,638 19.1 30,397 30.2 19,926 24.3 19,756 26.7 21,158 36.1
Corporate Bonds ......................... 4,151 3.8 4,293 4.3 10,419 12.7 14,068 19.1 10,036 17.1
Foreign Bonds ........................... 728 0.7 696 0.7 681 0.8 631 .9 581 1.0
-------- ----- ------- ------ -------- ----- ------- ----- ------- -----
Total Fixed Maturities ............... 79,280 73.3 69,056 68.6 40,512 49.4 43,651 59.1 37,424 63.8
-------- ------ ------- ------ -------- ----- ------- ----- ------- -----
Equity Securities:
Preferred Stock ......................... 5,390 5.0 6,633 6.6 16,990 20.7 15,743 21.3 7,309 12.5
Common Stock, including Limited
Partnerships and Mutual Funds .......... 13,425 12.3 22,072 21.9 15,812 19.3 9,732 13.2 9,103 15.5
-------- ----- ------- ------ -------- ----- ------- ----- ------- -----
Total Equity Securities .............. 18,815 17.3 28,705 28.5 32,802 40.0 25,475 34.5 16,412 28.0
-------- ----- ------- ------ -------- ----- ------- ----- ------- -----
Short-Term Investments:
Money Market Accounts and
Certificates of Deposit ................ 10,217 9.4 2,918 2.9 8,759 10.6 4,753 6.4 4,808 8.2
-------- ----- ------- ------ -------- ----- ------- ----- ------- -----
Total Investments ......................... $108,311 100.0 $100,679 100.0 $82,073 100.0 $73,879 100.0 $58,644 100.0
======== ===== ======= ===== ======= ===== ======== ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Average investments (1) ......................... $104,495 $ 91,376 $ 77,976 $ 66,262 $ 55,378
Change in unrealized (losses) gains
on available-for-sale investments .............. 274 6,590 (5,877) (983) (188)
Net investment income (2) ....................... 5,000 4,905 4,784 3,979 3,417
Realized gains .................................. 1,909 1,100 951 2,114 1,192
Net investment income as a percentage
of total average investments ................... 4.7% 5.4% 6.1% 6.0% 6.2%
Realized gains as a percentage
of total average investments ................... 1.1% 1.2% 1.2% 3.2% 2.2%
</TABLE>
(1) Investments based on average of beginning and ending period balances.
(2) After deduction of investment expenses and before federal income taxes.
RISK-BASED CAPITAL
The computation of risk-based capital is a method of evaluating the
minimum amount of capital which is appropriate for an insurance company to
maintain in order to support its overall business operations considering its
size and risk profile. Risk-based capital is calculated by applying a formula
promulgated by the National Association of Insurance Commissioners which
incorporates various asset, premium and reserve items. First Central Insurance's
risk-based capital at December 31, 1996 is at the "regulatory action level"
requiring First Central Insurance to submit a comprehensive plan to the
Insurance Department. First Central Insurance is preparing a comprehensive plan
designed to improve
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<PAGE>
operations and raise additional capital. The plan will address First Central
Insurance's risk-based capital position.
REGULATION
First Central Insurance is subject to regulation and supervision by the
Connecticut, New York and Pennsylvania Insurance Departments and by the
insurance commissioners or similar officials in any other jurisdiction in which
it will be licensed to transact business. Such regulation and supervision
includes, among other things, requirements of capital and surplus, solvency
standards, granting and revoking licenses to transact business and the licensing
of agents, approval of policy forms and rates, restrictions on the amount of
risks assumed, deposits of securities, methods of computing reserves and the
types and concentration of investment permitted. First Central Insurance is
required to file detailed annual and other reports on its financial condition,
affairs and management with such regulatory agencies and is subject to periodic
examinations.
First Central Insurance is subject to regulation under the insurance
holding company statutes of Connecticut, New York, and Pennsylvania. These
regulations generally require subsidiaries of insurance holding companies and
insurers which are subsidiaries of holding companies to register and file
certain reports, and require prior regulatory agency approval of changes in
control of an insurer and of intercorporate transfers of assets within the
holding company structure. In many states, including New York, where First
Central Insurance is incorporated, "control" is presumed to exist if 10% or more
of the voting securities of the insurer are owned or controlled by a party,
although the regulatory authority may find that "control" in fact does or does
not exist where a person either owns or controls a lesser or greater amount of
securities. The New York Insurance Law provides that no corporation or other
person, except an insurer already licensed by the Insurance Department, may
acquire control of First Central, unless it has given notice to First Central
Insurance and obtained prior written approval of the Insurance Department for
such acquisition. Such requirements may affect First Central's ability to obtain
a capital investment as will be required for First Central to pay its sinking
fund obligation under the Debentures and to provide First Central Insurance with
such additional capital as will enable it to resume normal operations.
Most states require insurers licensed by their respective insurance
regulatory authorities to participate in insurance guaranty associations. These
associations assess insurance companies a percentage of premiums written for the
relevant line of insurance to fund claims of policyholders of insolvent
insurance companies. First Central Insurance is required to pay to the New York
Property/Casualty Insurance Security Fund (the "Guaranty Fund") one half of one
percent of its net direct written premiums on policies insuring property or
risks located in New York. However, no contributions are required to be made
whenever the net value of the Guaranty Fund is at least $150,000,000. As of
December 31, 1992 the Guaranty Fund's net value exceeded $150,000,000 therefore,
no contributions by First Central Insurance were required after February 15,
1993.
As of December 31, 1996 in accordance with regulatory guidelines, a
$300,000 par value U.S. Treasury Note, was held on deposit by the Insurance
Department.
15
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<PAGE>
INVESTIGATION AND SETTLEMENT OF CLAIMS
Upon the reporting of claims by policyholders First Central Insurance
first verifies coverage and then the claim is investigated by adjusters retained
by First Central Insurance. These adjusters estimate the initial reserves for
non-bodily injury claims and issue a report on all claims. The report is then
reviewed by First Central Insurance's Claims Department. First Central Insurance
attempts to settle claims as quickly as possible. If the claim cannot be settled
and results in litigation, First Central Insurance may retain outside legal
counsel. Legal defense law firms are assigned on the basis of venue and severity
of the case. Presently, First Central Insurance uses approximately 30 law firms.
Since the inception of First Central Insurance's business operations, the law
firm of Simon, Drabkin & Margulies ("Simon, Drabkin") has performed subrogation
and defense services required by First Central Insurance. Martin J. Simon, and
Ralph Drabkin, each a director of First Central, are senior partners of Simon,
Drabkin. During the years ended December 31, 1996 and 1995, approximately 17.0%
and 23.1%, respectively, of all litigation assigned by First Central Insurance
to legal defense firms were defended by Simon, Drabkin.
In September 1988, First Central acquired Mercury, a claim adjustment
and investigation company. Mercury represents the interests of First Central
Insurance and a number of other casualty insurers and self insurers. First
Central Insurance employs the services of other adjusters and will continue to
employ the services of other adjusters in addition to Mercury. During the years
ended December 31, 1996 and 1995, approximately 75.4% and 79.1%, respectively,
of all claim adjustments and investigations were assigned to Mercury.
No changes have been effected in First Central Insurance's claim
payment patterns due to portfolio loss transfers, structured settlements or any
other transactions or circumstances.
MARKETING
Prior to 1996, First Central Insurance's programs were marketed almost
exclusively through its general agents. During 1996, First Central Insurance
marketed its programs primarily through its approximately 45 general agents and
commenced marketing of its programs through insurance brokers. First Central
Insurance pays competitive commission rates to its general agents and brokers.
On March 10, 1997, First Central Insurance ceased to write any new
business. First Central Insurance continues to process renewals and service its
existing business and expects to cease renewals on private passenger automobile
policies. First Central Insurance has held meetings with its agents to explain
its efforts to improve operations and raise additional capital and keeps them
informed of recent developments. Other than the termination by First Central
Insurance of one agent, no general agent has discontinued conducting business
with First Central Insurance since March 10, 1997.
During the years ended December 31, 1996 and 1995, approximately 14.2%
and 12.7% respectively, of all insurance written by First Central Insurance was
sold through Simon Agency of New York ("Simon New York"), a licensed insurance
agency, the stock of which is owned by Joan Dollinger and Audrey Goodman (the
respective wives of Joel Dollinger and Allan Goodman, former Vice Presidents and
former directors of First Central and First Central Insurance each of whom
resigned in March 1997) and Sheryle Harwood, who are Mr. Simon's
daughters. Commissions earned by Simon New York from business placed with First
Central Insurance during 1996 and 1995 was approximately $1.6 million and $1.8
million,
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<PAGE>
respectively. Such commissions were paid at a rate comparable to those paid by
First Central Insurance to other agents.
COMPETITION
The insurance industry is highly competitive. First Central Insurance
is subject to intense competition from insurers offering insurance programs
similar to those offered by First Central Insurance, from insurers offering
other types of insurance programs and from other segments of the financial
services industry. In order to compete more effectively, First Central Insurance
has adopted ISO Rates. (See "Business -- Insurance Risk Rating"). Many of First
Central Insurance's competitors have well established agency systems or numerous
sales agents which afford them a competitive advantage over smaller companies
possessing limited resources, such as First Central Insurance. First Central
Insurance is a minor factor in the insurance industry and is more vulnerable
than its larger competitors due to its relatively small capital and surplus.
Primarily as a result of First Central Insurance's current financial
condition, in February 1997, Best reduced First Central Insurance's rating to D
(Very Vulnerable). See "-- Best Rating." The change in rating has adversely
impacted policy renewals. The continuation of a D rating will severely affect
First Central Insurance's future ability to compete with other insurers.
During 1996, First Central Insurance marketed its insurance programs
primarily through its approximately 45 general agents and commenced marketing
its programs through insurance brokers. On March 10, 1997, First Central
Insurance ceased to write any new business. First Central Insurance continues to
process renewals and service its existing business and expects to cease renewals
on private passenger automobile policies. First Central Insurance has held
meetings with its agents to explain its efforts to improve operations and raise
additional capital and keeps them informed of recent developments. Other than
the termination by First Central Insurance of one agent, no general agent has
discontinued conducting business with First Central Insurance since March 10,
1997.
EMPLOYEES
At December 31, 1996, First Central Insurance employed approximately
106 people, of whom seven were executive personnel. At December 31, 1996,
Mercury employed approximately 38 people. Management believes that its
relationship with its employees is satisfactory.
CERTAIN CONSIDERATIONS
The operating results and financial condition of First Central as a
whole and, in particular of First Central Insurance, are affected by numerous
factors and circumstances peculiar to the property and casualty insurance
industry, some of which First Central can neither predict nor control. Revenue
and profitability trends of First Central Insurance, both generally and within
individual business lines, are affected by factors such as (1) volatile and
unanticipated adverse loss and expense developments, particularly within lines
of business for which losses may not emerge for several years following the year
in which the coverage was underwritten; (2) legally-imposed regulatory capital
requirements and related limitations on the ability of First Central Insurance
to underwrite new insurance business and renew desirable business currently
written; (3) the ability of First Central Insurance to enter into suitable
reinsurance arrangements; (4) competitive pressures on the pricing of product
lines offered by First
17
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Central Insurance and the historical cyclicality of its industry as a whole; (5)
fluctuations in interest rates, which affect the market value of First Central
Insurance's investment portfolio, the income yield of the portfolio and the
default and prepayment rates of the portfolio; (6) inflationary pressures which
affect the magnitude of losses and loss adjustment expenses; (7) emerging legal
precedents and trends which, among other things, may have a significant specific
impact on settlement amounts and other circumstances affecting the development
of losses and expenses for environmental and other liability lines of business;
(8) the occurrence of natural disasters and catastrophic losses of other origin;
(9) financial condition ratings of First Central Insurance as announced and
published by industry rating organizations; and (10) general economic conditions
and trends which have both direct and indirect affects on the demand for
property and casualty insurance.
In addition to the above-described risks and uncertainties affecting
property and casualty insurers, First Central and, in particular, First Central
Insurance are directly and specifically affected by certain other risks and
uncertainties related to and resulting from the present financial condition of
First Central Insurance.
ITEM 2. PROPERTIES.
First Central Insurance owns its home office building, located at 266
Merrick Road, Lynbrook, New York, (the "Building"). The Building consists of
approximately 30,000 square feet of office space and 2,000 square feet of retail
space. Management believes that the Building is suitable for First Central's
purposes for the foreseeable future. Approximately 8,900 square feet of office
and retail space is leased to seven unaffiliated tenants who paid approximately,
$203,000 and $205,000 in rent during 1996 and 1995, respectively. Effective
December 1, 1995 through November 30, 1996 Simon New York had a lease for 3,900
square feet of office space in the Building. Since December 1, 1996, Simon New
York has occupied such space on a month-to-month basis. Rent received from Simon
New York in 1996 was approximately $76,800.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which First Central,
First Central Insurance or Mercury is a party or of which any of their property
is the subject, except for claims arising in the ordinary course of business of
First Central Insurance. First Central Insurance has established reserves with
respect to such claims that, in the opinion of its management, make adequate
provision for the ultimate amount of losses and adjustment expenses incurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning all
executive officers of First Central. Executive officers are elected by the Board
of Directors to serve at the pleasure of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ---------
<S> <C> <C>
Andrew W. Attivissimo 57 Chairman, President, Chief Executive
Officer, Chief Operating Officer
Harvey Mass 60 Senior Vice President
Joan M. Locascio 39 Treasurer, Vice President, and Chief
Financial Officer
Raymond F. Brancaccio 69 Vice President and Secretary
</TABLE>
ANDREW W. ATTIVISSIMO was elected as President and Chief Operating
Officer of First Central and First Central Insurance and as a director of First
Central Insurance on October 31, 1996. On February 12, 1997, Mr. Attivissimo was
elected as Chairman and Chief Executive Officer of First Central and First
Central Insurance and on March 26, 1997, Mr. Attivissimo was appointed as a
director of First Central. For five years prior to joining First Central, Mr.
Attivissimo was President of Empire Insurance Group.
HARVEY MASS has been a director of First Central Insurance since August
1980 and a director of First Central since June, 1983. On October 11, 1985 he
was elected as a Vice President of both First Central and First Central
Insurance. From 1973 to December 31, 1991, Mr. Mass served as Vice President and
production manager of Simon New York.
JOAN M. LOCASCIO served as both First Central Insurance's and First
Central's Controller from October 1986 to November 1993. On June 12, 1990 she
was elected Treasurer and a director of First Central and First Central
Insurance. On April 10, 1992 she became Vice President of First Central and
First Central Insurance. Mrs. Locascio oversees the financial accounting
operations of First Central and is First Central's Chief Financial Officer.
RAYMOND F. BRANCACCIO has been a director of First Central Insurance
since June 1989. He was elected Vice President of First Central on March 18,
1992, and of First Central Insurance in January 1988. Mr. Brancaccio has been
Secretary of First Central Insurance since June 1990 and of First Central since
February 1992. Mr. Brancaccio oversees First Central Insurance's Underwriting
and Processing sections.
Martin J. Simon resigned as Chairman and Chief Executive Officer of
First Central and First Central Insurance on February 12, 1997. Mr. Simon is a
director of First Central and First Central Insurance and has entered into a
consulting agreement with First Central. Joel I. Dollinger and Allan R. Goodman
resigned from their positions with First Central and First Central Insurance
effective March 12, 1997. Mr. Dollinger was a director and Executive Vice
President of both First Central and First Central Insurance and Mr. Goodman was
a director and Vice President of both First Central and First Central Insurance.
See "Executive Compensation -- Employment/Termination Agreements."
19
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
First Central's common stock, par value, $.10 per share ("Common
Stock"), is listed on the American Stock Exchange. The high and low sales prices
of the Common Stock, presented on a quarterly basis during 1996 and 1995, are
shown below.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First Quarter...................... 7 5 3/4
Second Quarter..................... 7 5 3/8
Third Quarter...................... 6 3 5/8
Fourth Quarter..................... 4 1/2 3 1/2
1995
First Quarter...................... 7 3/8 5 3/4
Second Quarter..................... 7 3/4 6 5/8
Third Quarter...................... 7 3/4 6 1/2
Fourth Quarter..................... 7 6 1/8
</TABLE>
As of December 31, 1996, there were approximately 481 holders of record
of First Central's Common Stock.
DIVIDENDS
As the principal asset of First Central, First Central Insurance
provides the only material source of cash for the payment of dividends by First
Central. Under the insurance laws of the State of New York, cash dividends to
shareholders may be declared or distributed by First Central Insurance only from
earned surplus. In addition, among other statutory restrictions, dividends are
limited in any twelve month period to the lesser of ten percent of
policyholders' surplus as shown in the insurer's last annual statement on file
with the Insurance Department, or one hundred percent of adjusted net investment
income during such twelve month period, unless the Insurance Department
authorizes a greater dividend. Any payment of dividends by First Central
Insurance to First Central would result in a reduction in its capacity to write
new insurance business, since the volume of insurance that can be written is
determined by the available surplus of First Central Insurance. Any payment of
dividends by First Central Insurance may be further limited to maintain the
acceptable industry standard relationship of net premiums written not to exceed
three times surplus. First Central Insurance's total Surplus to Policyholders as
of December 31, 1996 amounted to $12.3 million (computed on the basis of SAP).
However, by reason of the foregoing statutory restrictions, First Central
Insurance cannot distribute dividends to First Central due to a deficiency in
earned surplus of approximately $4,276,000 excluding unrealized gains of
$775,126.
First Central declared dividends on the Common Stock of $0.12, $0.12
and $0.105 per share respectively in 1996, 1995 and 1994. The declaration and
payment of dividends in the future will depend, subject to the discretion of the
Board of Directors, upon First Central's and First Central Insurance's earnings,
financial condition, business needs, capital and surplus requirements,
government
20
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<PAGE>
regulations, and other relevant factors. First Central does not expect to
declare any further dividends on the Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the consolidated financial statements of First Central and related
footnotes appearing elsewhere herein and Management's Discussion and Analysis of
Financial Condition and Results of Operations. The selected financial data, with
the exception of the ratio of earnings to fixed charges for each of the five
years in the period ended December 31, 1996, are derived from First Central's
audited consolidated financial statements for such years.
<TABLE>
<CAPTION>
OPERATIONS STATEMENT DATA
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net Premiums Earned .............................. $ 48,912 $ 53,034 $ 50,061 $ 42,814 $ 29,456
Net Investment Income ............................ 5,000 4,905 4,784 3,979 3,417
Realized Gains ................................... 1,909 1,100 951 2,114 1,192
Total Premiums and Other
Revenues ....................................... 57,017 59,897 56,265 49,447 34,622
Losses ........................................... 38,782 34,724 23,514 20,061 14,130
Loss Adjustment Expenses ......................... 9,935 7,337 6,110 5,714 2,680
Interest Expense ................................. 513 607 642 827 1,053
Total Expenses ................................... 71,046 60,493 48,605 43,496 31,178
Income (Loss) Before Income
Taxes .......................................... (14,029) (595) 7,660 5,952 3,444
Income Taxes (Benefit) ........................... (917) (956) 1,944 1,450 512
Net Income (Loss) ................................ $(13,112) $ 361 $ 5,716 $ 4,502 $ 2,932
Per Share Data:
Primary:
Net Income (Loss) ............................ $ (2.19) $ 0.06 $ 0.97 $ 0.80 $ 0.53
======== ======== ======== ======== ========
Fully Diluted:
Net Income (Loss) ............................ $ (2.19) $ 0.06 $ 0.90 $ 0.75 $ 0.53
======== ======== ======== ======== ========
Cash Dividends Declared ........................ $ 0.12 $ 0.12 $ 0.105 $ 0.10 $ 0.10
======== ======== ======== ======== ========
Ratio of Earnings (Losses) to
Fixed Charges ................................ (19.9):1 0.2:1 9.3:1 5.9:1 3.4:1
======== ======== ======== ======== ========
</TABLE>
21
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<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
DECEMBER 31
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992*
---- ---- ---- ---- ----
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
ASSETS:
Fixed Maturities........................... $ 79,280 $ 69,056 $ 40,512 $ 43,651 $ 37,424
Equity Securities.......................... 18,814 28,705 32,802 25,475 16,412
Short-Term Investments..................... 10,217 2,918 8,759 4,753 4,808
------------ ------------- ------------ ------------- ------------
Total Investments.......................... 108,311 100,679 82,073 73,879 58,644
Other Assets............................... 58,787 67,781 59,656 34,043 28,375
------------ ------------- ------------ ------------- ------------
Total Assets............................... $ 167,098 $ 168,460 $ 141,729 $ 107,922 $ 87,019
============ ============= ============ ============= ============
POLICY LIABILITIES & ACCRUALS:
Losses..................................... $ 97,437 $ 78,887 $ 66,500 $ 38,392 $ 27,865
Loss Adjustment Expenses................... 9,357 7,749 7,017 6,414 4,715
Unearned Premium........................... 31,340 36,296 32,529 26,451 22,523
------------ ------------- ------------ ------------- ------------
138,134 122,932 106,046 71,257 55,103
Convertible Subordinated
Debentures................................ 4,900 6,330 6,755 7,815 9,815
Other Liabilities.......................... 4,568 5,860 1,690 2,096 1,850
------------ ------------- ------------ ------------- ------------
Total Liabilities.......................... 147,602 135,122 114,491 81,168 66,768
------------ ------------- ------------ ------------- ------------
Total Shareholders' Equity................. 19,496 33,338 27,238 26,754 20,251
------------ ------------- ------------ ------------- ------------
Total Liabilities and Shareholders'
Equity.................................... $ 167,098 $ 168,460 $ 141,729 $ 107,922 $ 87,019
============ ============= ============ ============= ============
Book Value per Share....................... $ 3.26 $ 5.57 $ 4.54 $ 4.60 $ 3.65
============ ============= ============ ============= ============
</TABLE>
* Restated to reflect adoption of Statement of Financial Accounting Standards
No. 113, effective January 1, 1993.
22
<PAGE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During 1996, First Central Insurance encountered intense competition
and experienced a reduction in premiums written while at the same time, loss and
loss adjustment expenses increased significantly. For the quarter ended December
31, 1996, First Central Insurance incurred a charge to earnings of $11.5 million
for the purpose of increasing loss reserves, the primary reason First Central
reported a loss of $13.1 million or $2.19 per share (after tax benefits) for the
year ended December 31, 1996.
First Central Insurance's losses from operations resulted in its
statutory surplus declining from $25.7 million at December 31, 1995 to $12.3
million at December 31, 1996 with earned surplus declining from $8.9 million to
a deficit of $4.3 million during the same period. Primarily as a result of First
Central Insurance's current financial condition, in February 1997, A.M. Best &
Co., Inc. ("Best") reduced the B++ (Very Good) rating it assigned to First
Central Insurance in June 1996 to D (Very Vulnerable). See "Business -- Best
Rating."
First Central Insurance is precluded from paying dividends to First
Central while it has a deficiency in earned surplus. Since the only material
source of income to First Central is dividends from First Central Insurance,
First Central will not declare any further dividends on its common stock for the
foreseeable future. In addition, unless First Central obtains another source of
funds, First Central will be unable to pay its $1.8 million sinking fund
obligation under the Debentures on August 1, 1997. Failure to pay the August 1,
1997 sinking fund obligation will constitute a default under the Debentures
entitling the holders to accelerate the entire $4.9 million outstanding
principal balance.
In informal discussions with the Insurance Department, the Insurance
Department requested that First Central Insurance submit and implement a plan
designed to improve operations and raise additional capital. Such a plan will
involve, among other things, the revision of operations to attain future
profitability by raising underwriting standards, curtailing operating expenses,
revising agreements to achieve a reduction in loss adjustment expenses,
restructuring the claims department to achieve more favorable settlements of
claims and restructuring management positions. First Central Insurance has
engaged outside consultants to review the activities of the various operating
departments and make recommendations, where necessary, for changes within those
departments. The plan also requires First Central Insurance to raise additional
capital and First Central has engaged an investment banker to assist in this
effort. Without the additional capital, First Central Insurance's surplus may be
insufficient to enable it to remain in operation. Pending implementation of the
plan and the raising of additional capital, First Central Insurance has ceased
the writing of new insurance business.
The events and uncertainties discussed above raise substantial doubt
about First Central's ability to continue as a going concern. There can be no
assurance that First Central will be successful in its attempt to revise
operations to attain future profitability, raise additional capital and resume
normal operations.
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<PAGE>
<PAGE>
In October 1996, Andrew W. Attivissimo was engaged as President and
Chief Operating Officer of each of First Central and First Central Insurance. In
February 1997, Mr. Attivissimo was also appointed as Chairman and Chief
Executive Officer of First Central and First Central Insurance, succeeding
Martin J. Simon, the founder of First Central. See "Executive Officers of the
Registrant."
RESULTS OF OPERATIONS
PREMIUMS WRITTEN AND EARNED
The following table illustrates First Central Insurance's direct
premiums written and net premiums earned on a category-by-category basis for
1996, 1995, and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Commercial Multiple Peril:
Direct Premiums Written. . . . $32,582 $38,619 $32,862
Net Premiums Earned. . . . . . 26,221 26,870 23,024
Workers' Compensation:
Direct Premiums Written. . . . $ 7,176 $ 9,013 $10,557
Net Premiums Earned. . . . . . 6,594 7,299 9,263
General Liability:
Direct Premiums Written. . . . $8,904 $16,757 $13,821
Net Premiums Earned. . . . . . 9,629 12,469 10,733
Automobile Liability:
Direct Premiums Written. . . . $5,936 $ 5,531 $ 5,595
Net Premiums Earned. . . . . . 4,791 4,487 4,838
Automobile Physical Damage:
Direct Premiums Written. . . . $1,483 $ 1,606 $ 2,118
Net Premiums Earned. . . . . . 1,172 1,355 1,857
All Categories (including those
set forth above and others):
Direct Premiums Written. . . . $56,712 $72,294 $65,593
Net Premiums Earned. . . . . . 48,912 53,034 50,061
</TABLE>
Direct premiums written decreased for the year ended December 31, 1996
when compared to the year ended December 31, 1995 by 21.6% due primarily to the
termination of two significant customers with extremely poor loss experience,
premium rate competition and the lead paint exclusion placed on First Central
Insurance's general liability and commercial multiple peril policies for eight
months during 1996. Direct premiums written increased from 1994 to 1995, by
10.2% primarily due to the expansion of First Central Insurance's markets and
concentrated efforts by First Central Insurance's marketing department.
24
<PAGE>
<PAGE>
Net premiums earned decreased from 1996 to 1995 and increased when
comparing 1995 to 1994 by 7.8% and 5.9%, respectively. The decrease experienced
in 1996 was attributable to the aforementioned factors effecting direct premiums
written. The 1995 increase in earned premiums was attributable to the increases
in premiums written due to an expansion of First Central Insurance's markets.
Net premiums written decreased 7.4% in 1996 when compared to 1995, the
decrease was attributed to the aforementioned factors affecting direct premiums
written, offset by the decrease in ceded premiums written in 1996 of 54.4% when
compared to 1995.
Although direct premiums written increased, net premiums written
decreased approximately $4,900,000 in 1995 when compared to 1994 because ceded
premiums increased by approximately $11,600,000 during the same period. The
increase in ceded premiums was the result of a change in First Central
Insurance's reinsurance treaty as of April 1, 1995. The treaty with Nat Re was
changed so that premiums ceded would be based on direct written premiums rather
than earned premiums and the premium rate was increased prospectively with First
Central Insurance being entitled to a commission on the ceded premiums. The
treaty change caused First Central Insurance to record a liability, "Funds held
for reinsurance treaty," for amounts due the reinsurer of $2,610,641 and
$3,704,947 at December 31, 1996 and 1995, respectively. This liability is paid
as the ceded premiums are earned.
NET INVESTMENT INCOME; REALIZED GAINS
During 1996, First Central reduced its holdings of equity securities by
approximately $10,000,000 to 17.4% of investments from 28.5% of investments in
1995. During 1996, First Central also increased its holdings in fixed maturities
by approximately $10,000,000 to 73.3% of investments from 68.6% in 1995. The
increase was principally in U.S. Government securities while holdings in
municipal bonds and mortgage backed securities were decreased in 1996. Holdings
of municipal bonds were decreased in part because of a change in tax planning
strategy and in part to increase portfolio yields. As of December 31, 1996,
short-term investments, principally money market accounts, was 9.4% of total
investments, an increase from 2.9% of total investments in 1995. In 1996, net
investment income increased 2.0% when compared to 1995 primarily due to a
decline in investment expenses of approximately $89,000. First Central
recognized a net realized gain of $1,909,211 in 1996 as compared to the net
realized gain of $1,100,200 in 1995. The increase in net realized gain in 1996
was primarily a result of favorable market conditions experienced during 1996.
During 1995 First Central Insurance sold approximately $16,400,000 of
preferred stock and corporate debt securities and purchased government
securities, therefore showing an increase in interest received on government
securities while a decrease in corporate bond interest and dividends on
preferred stock. In 1995, net investment income increased 2.5% when compared to
1994. This increase was due to the 22.7% (approximately $18,600,000) increase in
invested assets during 1995. First Central Insurance recognized a net realized
gain of $1,100,200 in 1995 as compared to the net realized gain of $950,898 in
1994. The increase in realized gains in 1995 was principally due to an increase
in the market value of First Central Insurance's investment portfolio resulting
from favorable stock and bond market conditions evident in 1995.
GAAP and SEC Staff Accounting Bulletin No. 59 require the portion of
the unrealized loss of an individual security to be recognized as a realized
loss in the accounting period when the holder determines that such portion of
the decline in the market value is other than temporary. Temporary
25
<PAGE>
<PAGE>
declines in the market value of First Central Insurance's debt securities
classified as held-to-maturity at December 31, 1995 did not effect First Central
Insurance's carrying value of such securities, since First Central Insurance had
the ability and the intent to hold these investments to maturity, at which time
their full face value was expected to be received at no loss to First Central
Insurance. Temporary fluctuations in the market value of available-for-sale
securities are reflected in shareholders' equity as unrealized holding gains or
losses net of applicable deferred income taxes; however, any decline in the
value of the security below its cost considered to be "other than temporary" is
accounted for as a realized loss. Once an investment is written down to reflect
an other than temporary decline, the write-down establishes a new cost basis for
the security.
As of December 31, 1996, First Central had three available-for-sale
securities that experienced a decline in market value considered other than
temporary. As discussed below, in 1995 the carrying amount of Discovery Zone
Inc. Subordinated Notes due 2000 was reduced to the December 31, 1995 market
value of $772,500. During 1996, First Central Insurance sold $1,058,000 par
value of such notes for $166,708, realizing a loss on disposal of $256,492, and
reduced the carrying amount of the notes to the December 31, 1996 market value
of $97,100. Additionally, First Central's holdings in Masco Technology Inc.
Convertible Subordinated Debentures and its interest in Boston Financial
Qualified Housing L.P. were written down to their December 31, 1996 market value
of $415,000 and $172,000, respectively. The aggregate loss attributed to the
write down of the Discovery Zone, Masco and Boston Financial investments was
$472,136 in 1996.
During 1995, one security experienced a decline in market value
considered other than temporary. As of December 31, 1995, First Central
Insurance held $3,000,000 par value of the Discovery Zone Inc. Subordinated
Notes due 2000 and realized a loss of $555,281 on this security, lowering the
carrying amount to the December 31, 1995 market value of $772,500.
At December 31, 1996, fixed maturity securities with an amortized cost
of $45,284,608 and an estimated market value of $45,019,345 were reclassified
from the "held-to-maturity" classification to the "available-for-sale"
classification because of uncertainties about First Central Insurance's ability
to hold these securities until their maturity. The change in classification did
not materially affect total shareholders' equity as of December 31, 1996, but it
resulted in 100% of First Central's Insurance's fixed maturities portfolio being
classified as available-for-sale. In the opinion of management,
available-for-sale classifications of the fixed maturities portfolio is
appropriate in the present circumstances. At December 31, 1996, the net
unrealized appreciation applicable to First Central Insurance's
available-for-sale securities amounted to $768,517, net of deferred taxes of
$532,000. Unrealized holding gains amounted to $3,079,854 and unrealized holding
losses totaled $1,779,337 before deferred taxes. At December 31, 1995, the net
unrealized appreciation applicable to First Central Insurance's available-for
sale securities amounted to $759,808, net of deferred taxes of $392,000.
Unrealized holding gains amounted to $3,005,195 and unrealized holding losses
totaled $1,853,387 before deferred taxes.
LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES
The amount of losses and the related loss adjustment expenses are
dependent upon a number of factors, including claims frequency and the number
and type of policies written. These factors may fluctuate from year to year, and
not necessarily in any relationship to the amount of premiums written or earned.
26
<PAGE>
<PAGE>
The year to year estimation and re-estimation of loss and loss
adjustment expense reserve requirements is an inexact science. Reserves do not
represent an exact calculation of liability, but rather are estimates involving
actuarial and statistical projections at a given time of First Central
Insurance's expectations of the ultimate costs of the settlement and
administration of claims based on facts and circumstances then known,
predictions of future events, estimates of future trends in claims frequency and
severity and other variable factors such as inflation and new theories of
liability. It is First Central Insurance's practice to maintain reserves at or
near the middle point of an "actuarial reasonableness range" established by its
independent actuary to evaluate the adequacy of reserves. To the extent that
future changes in known data do not take place precisely in accordance with an
insurer's historically developed loss reserving assumptions, such reserves, when
viewed as of a particular point in time, most likely will be either deficient,
i.e., lower than the amount needed to cover known loss and loss adjustment
expenses, or redundant, i.e., greater than the amount required with respect
thereto. See "Business -- Loss and Loss Adjustment Expense Reserves."
During 1995 and 1996, First Central Insurance increased total net
reserves by $18.1 million and $20.9 million, respectively, to maintain its total
loss reserves at or near the middle point of the actuarial reasonableness range.
The primary cause of the reserve increase in each of 1995 and 1996 was
significant adverse development stemming from poor loss experience on policies
written from 1992 through 1995, a period during which First Central Insurance
substantially increased premium writings. In particular, beginning in 1993,
First Central Insurance wrote policies for two large customers which resulted in
extremely poor loss experience. Such business accounted for approximately
$355,000, $3.3 million and $3.3 million of First Central Insurance's total
written premiums in 1993, 1994 and 1995, respectively.
Based on First Central Insurance's past loss experience, prior
management responsible for claims policy increased total net reserves by
approximately $2.0 million, $2.5 million and $3.3 million in the first, second
and third quarters of 1995, respectively, including increases in IBNR reserves
of $1 million, $960,000 and $370,000 during such periods, respectively. However,
after a review of case files during the fourth quarter of 1995, First Central
Insurance's independent actuary recommended a substantial IBNR reserve increase
for the fourth quarter of 1995 because of the adverse development mentioned
above. The $8.95 million increase in IBNR reserves in the fourth quarter of 1995
brought First Central Insurance's total reserves at December 31, 1995 in line
with the estimate of First Central Insurance's independent actuary. Accordingly,
First Central Insurance believed that total reserves had been adequately
strengthened during 1995 for 1995 and years prior thereto.
Total net reserves were increased by approximately $2.2 million, $2.5
million and $3.8 million in the first, second and third quarters of 1996,
respectively, including increases in IBNR reserves of $250,000, $2 million and
$1.35 million during such periods, respectively. However, 1996 witnessed
continuing adverse loss development and, accordingly, during the fourth quarter
of 1996, First Central Insurance performed an intensive evaluation of its case
files, particularly those claims with low initial case reserves. The claims file
evaluation consisted of a review of approximately 750 sample files identified by
the independent actuary. In the fourth quarter of 1996, First Central Insurance
transferred approximately $14 million in IBNR reserves to case reserves as a
result of the case reserve file review and to compensate for further adverse
loss development. It had been believed that the level of IBNR reserves would be
sufficient to absorb such a transfer, but the continuing 1996 adverse loss
development, which became apparent during the actuarial review, necessitated a
further strengthening of IBNR reserves. The actuarial estimate of the required
increase was $7.6 million. By this time, new management was in office and
increased IBNR reserves by a further $3.8 million over that recommended by First
Central Insurance's independent actuary based upon new management's evaluation
of recent loss experience. Total net reserves at December 31, 1996 are above but
near the middle point of the actuarial reasonableness range.
27
<PAGE>
<PAGE>
The reserve strengthening in the fourth quarters of 1995 and 1996
resulted from significant adverse development stemming from extremely poor loss
experience on policies written from 1992 through 1995, and prior management that
was responsible for claims policy basing quarterly reserve estimate adjustments
on historical loss experience.
In connection with the Insurance Department's triennial audit, First
Central Insurance is in discussions with the Insurance Department concerning a
number of issues including the adequacy of First Central Insurance's reserves at
December 31, 1996. It is new management's and First Central Insurance's
independent actuary's estimate that total net reserves at December 31, 1996 are
adequate.
In 1996, incurred losses increased approximately $4,058,000, 11.7%,
when compared to 1995 despite the decrease in net premiums written of
approximately $3.8 million. Components of the increase included an increase of
approximately $1,835,000 in the amount of additional unpaid loss reserves
established, an increase in paid losses net of subrogation recoverables of
approximately $1,184,000 and a decrease in paid losses ceded of approximately
$1,040,000.
In 1995, incurred losses increased approximately $11,210,000, 47.7%
when compared to 1994. This increase was due primarily to an approximate
$7,400,000 increase in IBNR reserves and approximately $3,800,000 increase in
paid losses during the 1995 year when compared to 1994. During 1995, IBNR
reserves were increased $8,400,000 in the fourth quarter for a total annual
increase of approximately $11,300,000.
In 1996, incurred loss adjustment expenses increased 35.4% when
compared to 1995. The increase was due to the rising legal fees associated with
settling cases during 1996. To reduce legal fees, during the second quarter of
1996 First Central Insurance implemented pretrial fixed fees for certain
categories of cases and negotiated lower hourly rates for legal services. In
1995 incurred loss adjustment expenses increased 20.1% over the corresponding
period in 1994. This increase was due primarily to the increase in expenses
relating to increased losses resulting from higher premium volume.
First Central Insurance's loss ratios (losses incurred to earned
premium) on its commercial multiple peril line of insurance were 61.0% in 1996,
70.2% in 1995 and 43.1% in 1994. The decrease in loss ratio experienced in 1996
was primarily due to greater underwriting selectivity. The increased loss ratio
in the 1995 year was due primarily to an approximately $6,800,000 increase in
IBNR reserves when compared to 1994.
28
<PAGE>
<PAGE>
In 1996, First Central Insurance's loss ratio on its workers'
compensation line decreased to 7.2%. This decrease is the result of a reduction
in previously established workers' compensation reserves for the 1993 policy
year. Were it not for the reduction in previously established reserves, the 1996
loss ratio would have been 46.9%. In 1995 First Central Insurance's loss ratio
on its workers' compensation line of business increased to 50.9% primarily due
to approximately $1,600,000 increase in IBNR reserves when compared to 1994.
First Central Insurance's loss ratios on its general liability line of
insurance were 155.5% in 1996, 62.0% in 1995, and 47.6% in 1994. The 155.5% loss
ratio in 1996 was due principally to an increase in unpaid loss reserves and
paid losses and the decrease in paid losses ceded and subrogation receivables
discussed under 1996 incurred losses above. The loss ratio in 1995 increased
primarily due to an increase in IBNR reserves of approximately $2,400,000 when
compared to 1994.
First Central Insurance's loss ratio on its automobile liability line
of insurance increased to 137.9% in 1996 from 80.7% in 1995 and 77.8% in 1994,
primarily due to adverse underwriting experience and lack of a rate increase
since December 1993 in the private passenger portion of the automobile liability
line of business.
First Central Insurance's loss ratio on automobile physical damage line
of business did not vary significantly as it was: 49.2% in 1996, 47.7% in 1995,
and 50.4% in 1994.
UNDERWRITING EXPENSES AND UNDERWRITING EXPENSE RATIO
Underwriting Expenses are a combination of policy acquisition costs and
other operating expenses as shown on the statement of operations.
In 1996 First Central's underwriting expenses increased 6.4% when
compared to 1995. This increase was a result of other operating expenses
increasing 33.3% offset by policy acquisition costs decreasing 3.0% during 1996
when compared to 1995. The decrease in policy acquisition costs were primarily
due to the decrease in commission and premium tax expenses associated with the
reduced premium volume. On a ceded basis, commissions were reduced as a result
of the January 1996 and April 1995 reinsurance treaty endorsements described in
"Reinsurance Ceded" above. The increase in other operating expenses was
primarily due to statutory assessments on workers' compensation lines and an
increase in amortization expense resulting from the write-off of goodwill.
In 1995 First Central's underwriting expenses decreased 0.9% when
compared to 1994. This was a result of First Central Insurance's policy
acquisition costs decreasing 1.0% and other operating expenses decreasing 0.7%
when compared to the same period in 1994. The decrease in underwriting expenses
was primarily due to an increase in ceded commissions and a decrease in rent
offset by increases in commissions, premium taxes, real estate expenses, payroll
and depreciation.
INTEREST EXPENSE
First Central's interest expense in 1996, 1995 and 1994 was
approximately $513,000, $607,000, and $642,000, respectively. Interest expense
was attributable primarily to interest paid on the Debentures. The interest
expense decrease is due to First Central's retiring $1,430,000, $425,000 and
$1,060,000 principal amount of debentures in 1996, 1995 and 1994, respectively.
29
<PAGE>
<PAGE>
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts during 1996, 1995 and 1994 was
$3,592,223, $695,865 and $1,056,557, respectively. The 1996 increase in doubtful
accounts resulted from a comprehensive review of outstanding balances and First
Central Insurance's determination that the collectability of certain auditable
workers' compensation and commercial packaged policy receivables is
questionable. The 1995 decrease in the provision was due to a smaller percentage
of auditable policies issued effecting the 1995 year.
OTHER OPERATING EXPENSES
1996 operating expenses increased by 33.2% when compared to 1995,
primarily due to statutory assessments on workers' compensation lines and an
increase in amortization expense resulting from the write-off of goodwill.
Operating expenses remained consistent for 1995 when compared to 1994.
NET INCOME (LOSS)
During 1996, First Central incurred a net loss of approximately
$13,100,000 compared to net income of approximately $361,000 in 1995. During
1996, First Central Insurance experienced a reduction in premiums written. At
the same time, loss and loss adjustment expenses increased primarily as a result
of an increase in loss reserves of approximately $18,798,000 over 1995. See
"-- Losses and Loss Adjustment Expense Reserves." Net investment income,
realized gain on investments, claims adjusting revenues increased and earned
premiums, interest expense and policy acquisition costs decreased; doubtful
accounts and other operating expenses increased.
Net income decreased 93.7% in 1995 when compared to 1994. This was a
result of an increase in IBNR reserves and paid losses (see "-- Losses and Loss
Adjustment Expense Reserves") as offset by increases in earned premiums, net
investment income, realized gains, and claims adjusting revenue and a decrease
in interest expense, underwriting expenses and doubtful accounts and income
taxes.
REINSURANCE
First Central Insurance reinsures a portion of substantially all of the
risks which it underwrites. First Central Insurance has entered into reinsurance
treaties with Nat Re covering all risks underwritten by First Central Insurance.
First Central Insurance also maintains an automatic facultative property loss
reinsurance facility with Munich American, Gen Re, and Swiss Re. See "Business
- -- Reinsurance Ceded" and Note 4 of the Notes to First Central's Consolidated
Financial Statements for a discussion of those treaties.
In 1996, First Central Insurance ceded premiums of $9,908,347 on
$56,712,187 of direct written premium whereas, in 1995, premiums of $21,725,782
were ceded on $72,293,513 of direct written premium. The decrease in ceded
premiums for 1996 resulted from a change in First Central Insurance's
reinsurance treaty as of April 1, 1995 which changed the method in which ceded
premiums are calculated from earned to written premiums. Paid losses recovered
by First Central Insurance in 1996 and 1995 amounted to approximately $5,553,000
and $6,592,000, respectively. Incurred losses on a ceded basis amounted to
approximately $4,754,000 and $1,479,000 for 1996 and 1995, respectively.
30
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<PAGE>
As of January 1, 1996, First Central Insurance's retention per loss
under its reinsurance treaty with Nat Re was increased from $200,000 to
$250,000. This change had the effect of reducing First Central's ceded written
premium percentage from 16.92% to 12.31% from January 1, 1996 through June 30,
1996. Beginning July 1, 1996, the ceded written premium percentage increased to
13.85%. In addition, First Central received a contingency commission payment
from Nat Re in the amount of $242,798.
The reinsurance treaty between Swiss Re and First Central Insurance
provides for a contingent commission based on favorable loss ratios. The 1996
and 1995 loss ratios produced contingent commissions of $50,777 and $62,110,
respectively.
Although First Central Insurance believes it will be able to maintain
its heretofore satisfactory relations with its reinsurers, the ability of First
Central Insurance to directly underwrite increased volumes of insurance could be
materially adversely affected in the event that one or more of its reinsuring
arrangements is terminated and First Central Insurance is unable to replace or
increase its reinsurance coverage.
LIQUIDITY AND CAPITAL RESOURCES
The business capacity of an insurance company is based on its liquidity
and capital resources. Insurance statutes and regulations which apply to
insurers require maintenance of prescribed amounts in capital and surplus as
well as statutory deposits with insurance authorities. The assets of insurers
are maintained in statutorily prescribed investments. Insurers are also required
to set up and have reserves for losses and loss adjustment expenses.
Furthermore, substantial statutory and regulatory restrictions are imposed upon
an insurer's ability to declare and pay cash dividends. See "-- Investments and
Investment Portfolio", "Business -- Regulation," "Market for Registrant's Common
Equity and Related Stockholder Matters -- Dividends" and "Business -- Losses and
Loss Adjustment Expense Reserves" for a discussion of the foregoing factors as
they relate to First Central Insurance. See also "-- Reinsurance."
In 1996, First Central's liquidity and capital resources relative to
its assets decreased significantly primarily as a result of First Central
Insurance's losses from operations during 1996. First Central's Shareholder's
Equity at December 31, 1996 declined to approximately $19.5 million.
First Central Insurance's losses from operations resulted in its earned
surplus declining to a deficit of $4,276,000 (excluding unrealized gains). First
Central Insurance will be precluded from paying dividends to First Central by
reason of its earned surplus deficiency. Since the only material source of
income to First Central are dividends from First Central Insurance, First
Central will not declare any further dividends on its common stock for the
foreseeable future. Management anticipates that Mercury will be able to pay a
dividend to First Central sufficient for it to pay the August 1, 1997 interest
of $220,500 due on the Debentures. However, unless First Central obtains another
source of funds, First Central will be unable to pay the August 1, 1997 sinking
fund obligation of $1.8 million on the Debentures. First Central is not
currently in default under such Debentures but failure to pay either the
aforementioned interest or sinking fund obligation will constitute a default
under the Debentures entitling the holders to accelerate the outstanding amount,
currently $4.9 million.
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<PAGE>
The Insurance Department has requested that First Central Insurance
submit and implement a plan designed to improve operations and raise additional
capital. See "-- Recent Developments." Pending implementation of the operational
and financial plan and the raising of additional capital, on March 10, 1997,
First Central Insurance ceased to write new business. First Central Insurance
continues to process renewals and service its existing business and expects to
cease renewals on private passenger automobile policies. First Central has
engaged an investment banker to assist in its effort to raise additional
capital.
First Central Insurance's Statutory Surplus declined from $25.7 million
at December 31, 1995 to $12.3 million at December 31, 1996. Based upon the
required relationships between Net Premiums Written and Statutory Surplus, First
Central Insurance expects that the reduction in Statutory Surplus will result in
a significantly reduced premium volume for the foreseeable future. Primarily as
a result of First Central Insurance's current financial condition, in February
1997, Best reduced First Central Insurance's rating to D (Very Vulnerable). See
"Business -- Best Rating." The change in rating has adversely impacted policy
renewals. The continuation of a D rating will severely affect First Central
Insurance's future ability to compete with other insurers. It is anticipated
that a reduced premium volume would have a further negative impact on First
Central Insurance's liquidity and capital resources. Without additional capital,
First Central Insurance's surplus may be insufficient to enable it to remain in
operation.
The computation of risk-based capital is a method of evaluating the
minimum amount of capital which is appropriate for an insurance company to
maintain in order to support its overall business operations considering its
size and risk profile. First Central Insurance's risk-based capital at December
31, 1996 is at the "regulatory action level" requiring First Central Insurance
to submit a comprehensive capital plan to the Insurance Department. See
"Business -- Risk-Based Capital."
The events and uncertainties discussed above raise substantial doubt
about First Central's ability to continue as a going concern. There can be no
assurance that First Central will be successful in its attempt to revise
operations to attain future profitability, raise additional capital and resume
normal operations.
INCOME TAXES
The Tax Reform Act of 1986 (the "1986 Tax Act"), and the Revenue
Reconciliation Act of 1990 (the "1990 Tax Act"), contain provisions which
significantly affect the taxation of insurance companies. Some of the major
provisions of the 1986 Tax Act and the 1990 Tax Act are summarized below.
The 1986 Tax Act contained provisions which significantly increased the
federal income tax liabilities of property and casualty insurance companies,
including First Central Insurance. Under the 1986 Tax Act, the reserve deduction
for unpaid losses previously allowed to property and casualty insurance
companies was modified in a manner which has resulted in increases in First
Central Insurance's taxable income. Although First Central Insurance still is
able to establish reserves for the estimated amount of losses incurred, the
amount of such reserves must be discounted to reflect the present value of its
liability to pay anticipated claims (using a discount rate of 100% of the
average of the applicable federal mid-term rates). Furthermore, with respect to
investments acquired after August 7, 1986, the 1986 Tax Act reduced the loss
reserve deduction of property and casualty companies by 15% of any tax exempt
interest income and the deductible portion of dividends received. The 1986 Tax
Act also requires property and casualty companies to reduce their annual
deduction for unearned premiums by 20%.
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For First Central Insurance, taxes payable increased due to a
requirement of the 1990 Tax Act to reduce deductions for paid and unpaid losses
by the estimated salvage and subrogation recoverable on those losses. That
change was effective for First Central Insurance's 1990 tax year, but the 1990
Tax Act provided a fresh-start adjustment that permits 87% of the estimated
salvage and subrogation recoverable as of December 31, 1990 to be excluded from
taxable income.
In addition to the foregoing provisions of the 1986 Tax Act and the
1990 Tax Act, which specifically affects the tax treatment of property and
casualty insurance companies, both Acts also contain provisions which are
applicable to corporations generally, including First Central. Among such
provisions are (1) a decrease of the maximum federal income tax rate on
corporations to 34%; (2) a decline of the dividends received deduction for
corporations to 70%; (3) a repeal of the investment tax credit; (4) a change in
the depreciation rules; and (5) replacement of the 15% corporate add-on minimum
tax with an expanded alternative minimum tax (imposed at a 20% rate) under
which, among other items, (a) tax-exempt interest earned on certain newly issued
bonds and (b) for years after 1989, 75% of the amount by which a corporation's
pre-tax financial statement income exceeds the alternative minimum taxable
income are treated as tax preference items.
Management does not believe that the provisions of either of such Acts
have materially affected First Central's future liquidity. Management further
believes that increases in First Central's federal income tax liability
occasioned by reason of the Acts' provisions have not materially impacted upon
First Central's future results of operations or its sources or uses of capital
resources.
First Central had gross deferred tax assets of approximately $9,153,000
and $7,115,000 and gross deferred tax liabilities of approximately $2,175,000
and $2,650,000 as of December 31, 1996 and 1995, respectively. A $4,028,000
valuation allowance has been established with respect to the gross deferred tax
asset at December 31, 1996. Management believes that it is more likely than not
that the deferred tax asset may not be fully realized due to the uncertainties
with respect to First Central's future profitability. A valuation allowance was
not required at December 31, 1995.
CAPITAL COMMITMENTS
On January 17, 1995 First Central Insurance purchased the premises in
which it's corporate offices are located for a purchase price of $4,000,000 in
cash. Prior to purchasing the Building, management analyzed the relative
benefits and costs of the purchase verses, among other things, the renewal of
(i) First Central Insurance's lease which was to expire on November 30, 1995 and
(ii) Mercury's lease in the same building which was to expire on March 31, 1995.
Neither First Central, First Central Insurance, nor Mercury made any
material commitment for capital for 1996 and, does not anticipate any for 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is submitted on pages 51 to 76.
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.
There have been no changes or disagreements with accountants.
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<PAGE>
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
IDENTIFICATION OF DIRECTORS
The following table sets forth the names and ages and principal
occupations of each of the First Central's directors and the year in which each
was first elected a director. First Central's Board of Directors is comprised of
three classes with four directors in each class. Directors serve three year
terms. At April 10, 1997, there were one Class I and two Class III director
positions vacant.
CLASS I DIRECTORS:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- -------------------------------- --------- ----------------------------------------------------- ------------------
<S> <C> <C> <C>
Saul Erdman 72 Director of First Central; Consultant 1993
Herbert Friedman 78 Director of First Central 1991
Martin J. Simon 77 Director of First Central; member of the 1983
law firm of Simon, Drabkin & Margulies
CLASS II DIRECTORS:
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- -------------------------------- --------- ----------------------------------------------------- ------------------
Harvey Mass 60 Senior Vice President and Director of 1983
First Central and First Central Insurance
Joseph P. Ciorciari 40 Director of First Central; President of 1990
Mercury Adjustment Bureau, Inc.
Ralph J. Drabkin 58 Director of First Central; member of the 1987
law firm of Simon, Drabkin & Margulies
Joan M. Locascio 39 Chief Financial Officer, Treasurer and 1990
Director of First Central and First Central
Insurance
CLASS III DIRECTORS:
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- -------------------------------- --------- ----------------------------------------------------- ------------------
Andrew W. Attivissimo 57 Chairman, President, Chief Executive 1997
Officer, Chief Operating Officer and
Director of First Central and First Central
Insurance
Harvey Jacobs 54 Director of First Central; Attorney 1996
</TABLE>
35
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<PAGE>
CLASS I DIRECTORS
SAUL ERDMAN became a director of First Central in September 1993. From
1982 to February 1993, Mr. Erdman was the sole stockholder and President of
Seven-Up Bottling Co. of Rhode Island. Mr. Erdman is a consultant to major soft
drink companies in the northeastern United States.
HERBERT V. FRIEDMAN became a director of the First Central Insurance in
November 1981. Mr. Friedman was elected as a director of First Central in June
1991. Mr. Friedman is a retired insurance broker and formerly devoted his time
to Herbert V. Friedman, Inc., a company wholly owned by the Friedman family
which specializes in placing and administering group insurance coverage.
MARTIN J. SIMON served as the President and Chairman of First Central
Insurance from August 1980 to October 1996 and as Chairman, President and Chief
Executive Officer of First Central from June 1983 to February 1997. From 1943
through 1967, Mr. Simon practiced law as an individual practitioner. Since 1968
he has been a senior partner of the law firm of Simon, Drabkin & Margulies.
Between 1947 and 1955, Mr. Simon co-owned and operated a New York licensed
insurance agency. Since 1955, Mr. Simon has solely owned and operated several
insurance agencies licensed by the State of New York. Included among them are:
Simon General Agency, Inc., a general insurance agency, Simon Commercial Corp. a
property and casualty agency which is the largest shareholder of First Central;
Simon Agency International, Ltd., an excess and surplus lines insurance agency;
and Simon Life Agency, Inc., a life insurance agency. Mr. Simon is a director of
Continental Bank and Winston Resources Inc. See "Certain Relationships and
Related Transactions."
CLASS II DIRECTORS
JOSEPH P. CIORCIARI became a director of First Central in June 1990.
From September 1985 to June 1987, Mr. Ciorciari was employed by First Central
Insurance as a commercial lines underwriter. In July 1993, Mr. Ciorciari was
elected director of Mercury and is the President of Mercury. Mr. Ciorciari is
the husband of Martin J. Simon's niece.
RALPH J. DRABKIN became a director of First Central in March 1987. Mr.
Drabkin has engaged in the practice of law in New York City since his admission
to the New York Bar in 1963. Mr. Drabkin is Mr. Simon's law partner and a member
of the law firm of Simon, Drabkin & Margulies. Mr. Drabkin is the presiding
Village Justice of the Village of Woodsburgh, New York. See "Certain
Relationships and Related Transactions."
JOAN M. LOCASCIO became a director of First Central Insurance and a
director of First Central in June 1990. Ms. Locascio oversees the financial
accounting operations of First Central and is First Central's Chief Financial
Officer. From July 1993 to April 1995 Ms. Locascio served as a director of
Mercury. Ms. Locascio served as both First Central Insurance's and First
Central's Controller from October 1986 to November 1993. In June 1990, she was
elected Treasurer and a director of First Central
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<PAGE>
and First Central Insurance. In April 1992, she became a Vice President of First
Central and First Central Insurance. Ms. Locascio served as Secretary of Simon
Commercial Corp. from 1991 until April 1995.
HARVEY MASS has been a director of First Central Insurance since August
1980 and a director of First Central since June 1983. From September 1988 until
June 1994, Mr. Mass served as a director of Mercury. In October 1985 he was
elected as a Vice President of both First Central and First Central Insurance.
From 1973 to December 1991, Mr. Mass served as Vice President and production
manager of Simon General Agency, Inc.
CLASS III DIRECTORS
ANDREW W. ATTIVISSIMO was elected as President and Chief Operating
Officer of First Central and First Central Insurance and as a director of First
Central Insurance on October 31, 1996. On February 12, 1997, Mr. Attivissimo was
elected as Chairman and Chief Executive Officer of First Central and First
Central Insurance and on March 26, 1997, Mr. Attivissimo was appointed as a
director of First Central. For more than five years prior to joining First
Central, Mr. Attivissimo was President of Empire Insurance Group.
HARVEY JACOBS became a director of First Central and First Central
Insurance in October 1996. For more than the past five years, Mr. Jacobs has
practiced law as a sole practitioner.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Louis V. Siracusano, who resigned as a director of First Central in
March 1997, was a member of First Central's Compensation Committee. Mr.
Siracusano is a senior partner of the law firm of McKenna, Siracusano, Fehringer
& Chinese which performs subrogation and claims defense services for the
Insurance Company. During 1996, the Insurance Company paid aggregate fees of
$410,000 to this firm. Seymour D. Uslan, who resigned as a director of First
Central in September 1996, was also a member of First Central's Compensation
Committee. Mr. Uslan served without remuneration as Vice President of First
Central and First Central Insurance from August 1980 and June 1983,
respectively, until August 1985.
DIRECTOR NOMINATION ARRANGEMENT
Pursuant to an agreement between First Central and Mr. Simon dated
February 12, 1997, if Mr. Simon is in good health and beneficially owns 75% of
such number of shares of Common Stock as he owned on such date, the Board of
Directors will nominate and recommend Mr. Simon for election to the Board at the
1998 Annual Meeting of Shareholders. See "Executive Compensation -- Employment."
IDENTIFICATION OF EXECUTIVE OFFICERS
See Item 4A. "Executive Officers of the Registrant."
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<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership on Forms 3, 4 and 5 with the Commission and the
American Stock Exchange. Officers, directors and greater than ten percent
stockholders are required by the Commission's regulation to furnish the Company
with copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received, the Company believes that all of its officers, directors and greater
than ten percent beneficial owners complied with all filing requirements
applicable to them with respect to transactions during fiscal year 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below sets forth certain information concerning
compensation paid or accrued in 1996 to the Chief Executive Officer of First
Central and the four executive officers whose total salary and bonus in 1996
exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) (1)
- ------------------------------------------ ------------ -------------- ------------ -----------------------
<S> <C> <C> <C> <C>
Martin J. Simon, 1996 211,608 13,000 --
President, Chief Executive Officer 1995 242,258 12,000 --
and Chairman (2) 1994 211,400 12,000 --
Joel I. Dollinger, 1996 158,667 10,287 189
Executive Vice President (3) 1995 139,287 9,500 3,818
1994 117,753 8,500 5,146
Allan R. Goodman, 1996 157,267 10,287 189
Vice President (3) 1995 137,077 9,500 3,847
1994 120,790 8,500 5,308
Harvey Mass, 1996 139,413 10,287 189
Senior Vice President 1995 126,354 9,500 3,401
1994 111,047 8,500 4,786
Raymond F. Brancaccio, 1996 115,995 6,500 155
Vice President and Secretary 1995 104,375 9,500 3,401
1994 91,067 8,500 4,786
</TABLE>
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<PAGE>
- -------------------
(1) Company contribution made under First Central Financial's Profit Sharing
Plan
(2) As of February 12, 1997, no longer employed by First Central
(3) As of March 12, 1997, no longer employed by First Central.
The following table sets forth the value of options and warrants to
purchase Common Stock held by the executive officers identified in the Summary
Compensation Table above at December 31, 1996.
FISCAL YEAR END OPTION/WARRANT VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
COMMON STOCK UNDERLYING UNEXERCISED OPTIONS/WARRANTS AT
OPTIONS/WARRANTS AT DECEMBER 31, 1996 DECEMBER 31, 1996
NAME EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE($)(1)
----- --------------------------- -------------------------------
<S> <C> <C>
Martin J. Simon 37,500/12,500 0/0
Allan R. Goodman 10,000/0 0/0
Joel I. Dollinger 20,000/0 0/0
Harvey Mass 20,000/0 0/0
Raymond F. Brancaccio 20,000/0 0/0
</TABLE>
- ------------
(1) Based on the closing price of First Central's Common Stock on the American
Stock Exchange on December 31, 1996.
EMPLOYMENT/TERMINATION AGREEMENTS
Martin J. Simon resigned as Chairman and Chief Executive Officer of
First Central and First Central Insurance on February 12, 1997. On such date,
Mr. Simon entered into a consulting agreement with First Central which also
provided for the termination of his employment agreement with First Central. The
consulting agreement provides for Mr. Simon to render consulting services to
First Central for which he will be paid at the rate of $104,000 per annum during
the period from March 1, 1997 through December 31, 1999. In the event of Mr.
Simon's death such payments are to be paid to his beneficiary. Through December
31, 1999, First Central will pay for group medical insurance coverage for Mr.
Simon and his family, and will provide Mr. Simon with an office. If Mr. Simon is
in good health and beneficially owns 75% of such number of shares of Common
Stock as he owned on February 12, 1997, the Board of Directors will nominate and
recommend Mr. Simon for election to the Board at the 1998 Annual Meeting of
Shareholders. Mr. Simon and First Central agreed to mutual releases not
including acts constituting willful misconduct, intentionally wrongful acts, or
conduct constituting criminal behavior.
Mr. Simon's employment agreement was effective January 1, 1994, and
would have expired on December 31, 1998. The agreement provided for an annual
base salary of $190,000, or such greater amount as the Board of Directors
determined, and for Mr. Simon to receive amounts payable under incentive or
bonus plans adopted by First Central for the benefit of senior executives. In
the event of
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<PAGE>
<PAGE>
Mr. Simon's disability, compensation at the above rate would have been payable
for three years from the date of such disability. The agreement also provided
for the payment of a benefit to Mr. Simon's beneficiary in the event of his
death while employed by First Central.
Raymond F. Brancaccio and Harvey Mass each entered into employment
agreements with First Central effective May 1, 1994. The term of each of the
agreements is three years, expiring on April 30, 1997. The agreements each
provide for an annual base salary and for such executives to receive amounts
payable under incentive or bonus plans adopted by First Central for the benefit
of senior executives. The base salaries for each executive during the years
ended April 30, 1995, 1996 and 1997, respectively, are as follows: Mr.
Brancaccio, $95,014, $105,414, $118,414; and Mr. Mass, $114,086, $124,486,
$137,486. In the event of disability (defined as the inability to perform duties
for a period of six consecutive months or for an aggregate of nine months in any
consecutive twelve month period) compensation is payable for twelve months from
the date of such disability. The agreements also provide for the payment of a
benefit to the respective executive's beneficiary in the event of death while
employed by First Central. Such benefit is payable periodically during the year
after the executive's death (less any period that the executive received
disability payments if he dies while disabled) and will equal the sum, during
such period, of (i) the executive's then current base salary and (ii) an amount
equal to the cost of health insurance under the Company's health insurance
plans.
Joel I. Dollinger and Allan R. Goodman each resigned from their
positions with First Central and First Central Insurance effective March 12,
1997. Mr. Dollinger and Mr. Goodman each entered into an agreement with First
Central which provides for the termination of their respective employment
agreement with First Central and for the continued payment of their base salary
through April 30, 1997. The base salaries under their employment agreements
during the years ended April 30, 1995, 1996 and 1997, respectively, were as
follows: Mr. Dollinger, $130,256, $140,656, $153,656; Mr. Goodman, $127,402,
$137,802, $150,802. The employment agreements were otherwise identical to those
of Mr. Brancaccio and Mr. Mass described above.
40
<PAGE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information at April 10, 1997
(unless otherwise indicated), with respect to shares of Common Stock
beneficially owned by each person known by the Company to be the beneficial
owner of more than five percent of the outstanding Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS
- ----------------------------------------------------- --------------------------- ------------
<S> <C> <C>
Martin J. Simon...................................... 1,223,077 (2) 20.3
266 Merrick Road
Lynbrook, New York 11563
FMR Corp ............................................ 598,700 (3) 10.0
82 Devonshire Street
Boston, Massachusetts 02109
Dimensional Fund Advisors ........................... 368,200 (4) 6.2
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
</TABLE>
The following table sets forth certain information at April 10, 1997 as
to shares of Common Stock beneficially owned by First Central's directors, the
Chief Executive Officer, the other four executive officers identified in the
Summary Compensation Table above and the directors and executive officers of
First Central as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS
- -------------------------------------------------------- --------------------------- ---------
<S> <C> <C>
Andrew W. Attivissimo................................... 0 -
Raymond F. Brancaccio................................... 2,286(5) *
Joseph P. Ciorciari..................................... 1,311(6) *
Joel I. Dollinger....................................... 10,200(7) *
Ralph J. Drabkin........................................ 54,400(8) *
Saul Erdman............................................. 58,205 *
Herbert V. Friedman..................................... 33,003 *
Allan R. Goodman........................................ 1,800(9) *
Harvey Jacobs........................................... 0 -
Joan M. Locascio........................................ 532 *
Harvey Mass............................................. 75,127(10) 1.3
Martin J. Simon......................................... 1,223,077(2) 20.3
All executive officers and directors
as a group (12 persons)............................ 1,459,941(11) 24.2
</TABLE>
- -----------------
* Less than one percent
(1) Except to the extent otherwise indicated, to the best of First
Central's knowledge, each of the indicated persons or entities
exercises sole voting and investment power with respect to all shares
beneficially owned by him.
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<PAGE>
(2) Includes 934,382 shares owned by Simon Commercial Corp., 41,263 shares
owned by Simon General Agency, Inc., 26,100 shares owned by Simon
Agency International, Ltd. and 15,107 shares owned by Simon Life Agency
Inc. Mr. Simon has sole voting and investment power with respect to
such shares. Also includes 37,500 shares issuable upon exercise of
currently exercisable stock options.
(3) Based upon data set forth in a Schedule 13G filed by FMR Corp. in
February 1996 with the Securities and Exchange Commission. Various
persons have the right to receive or the power to direct the receipt of
dividends from, or the proceeds from the sale of such shares.
(4) Based upon data set forth in a Schedule 13G filed in February with the
Securities and Exchange Commission by Dimensional Fund Advisors Inc.
("Dimensional"), a registered investment advisor. Dimensional is deemed
to have beneficial ownership of 368,200 shares of First Central stock
as of December 31, 1996, all of which are held in portfolios of DFA
Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
(5) Jointly owned by Mr. Brancaccio and his spouse.
(6) Includes 1,076 shares which are jointly owned by Mr. Ciorciari and his
spouse. Mr. and Mrs. Ciorciari may be deemed to share the voting and
investment powers with respect to such shares. Also includes 135 shares
held by Mr. and Mrs. Ciorciari as custodian for their children and 100
shares owned by a child of Mr. and Mrs. Ciorciari.
(7) Includes 200 shares held by Mr. Dollinger's spouse as custodian for Mr.
and Mrs. Dollinger's children, as to which Mr. Dollinger disclaims
beneficial ownership. Mr. Dollinger resigned from First Central
effective March 12, 1997.
(8) Jointly owned by Mr. Drabkin and his spouse. Mr. and Mrs. Drabkin may
be deemed to share the voting and investment powers with respect to
such shares.
(9) Includes 1,300 shares held by Mr. and Mrs. Goodman as custodians for
their children, as to which Mr. Goodman disclaims beneficial ownership.
Mr. Goodman resigned from First Central effective March 12, 1997.
(10) Includes 39,362 shares jointly owned by Mr. Mass and his spouse. Mr.
and Mrs. Mass may be deemed to share the voting and investment powers
with respect to such shares. Also includes 820 shares owned by Mrs.
Mass as to which Mr. Mass disclaims beneficial ownership.
(11) Includes 37,500 shares issuable upon exercise of a currently
exercisable option.
42
<PAGE>
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Simon Agency of New York ("Simon New York") is a general insurance
agency owned by Sheryl Harwood, Joan Dollinger and Audrey Goodman who are Martin
J. Simon's daughters. Mrs. Dollinger and Mrs. Goodman are the spouses of Joel I.
Dollinger and Allan R. Goodman, respectively. Mr. Dollinger and Mr. Goodman
resigned as Executive Vice President and Vice President respectively, of First
Central and First Central Insurance in March 1997. During 1996, premiums written
by Simon New York amounted to approximately 14.2% of the direct gross premiums
written by First Central Insurance. At December 31, 1996, the commissions earned
by Simon New York from business placed with First Central Insurance during 1996
were approximately $1,610,000. These commissions are at a rate comparable to
those paid by First Central Insurance to unrelated agents. Effective December 1,
1995 through November 1996, Simon New York had a lease for 3,900 square feet of
office space in the Building. Since December 1, 1996, Simon New York has
occupied such space on a month-to-month basis. Rent received from Simon New York
in 1996 was approximately $76,800.
Mr. Simon and Ralph J. Drabkin are senior partners of Simon, Drabkin &
Margulies which performs subrogation and claims defense services for First
Central Insurance. During 1996, First Central Insurance paid aggregate fees of
approximately $792,000 to this firm.
Louis V. Siracusano resigned as a director of First Central in March
1997. Mr. Siracusano is a senior partner of the law firm McKenna, Siracusano,
Fehringer & Chinese which performs subrogation and claims defense services for
First Central Insurance. During 1996, First Central Insurance paid aggregate
fees of $410,000 to this firm.
43
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Independent Auditor's Report
Consolidated Balance Sheets at December 31, 1996 and
1995
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
The financial statement schedules filed as part of this report
are as follows:
Independent Auditor's Report on Financial Statement
Schedules
Schedule I Summary of Investments - Other than
Investments in Related Parties
Schedule II Condensed Financial Information of
Registrant
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule V Valuation and Qualifying Accounts
Schedule VI Supplemental Information Concerning
Property-Casualty Insurance Operations
44
<PAGE>
<PAGE>
(3) Exhibits:
Exhibit
No. Description
--- ------------
3.1 Certificate of Incorporation of First Central Financial Corporation
("First Central") a copy of which was filed with the Commission on
December 6, 1984 as Exhibit 3.1 to First Central's Registration
Statement on Form S-18 (Reg. No. 2-94804-NY) and is hereby incorporated
herein by this reference).
3.2 Certificate of Amendment of Certificate of Incorporation of First
Central dated the 30th day of November 1984 (a copy of which was filed
with the Commission on December 10, 1984 as Exhibit 3.2 to First
Central's Registration Statement on Form S-18 (Reg. No. 2-94804-NY) and
is hereby incorporated herein by this reference).
3.3 Certificate of Amendment of Certificate of Incorporation of First
Central dated July 23, 1993 (a copy of which was filed with the
Commission on August 15, 1994 as Exhibit 3.1 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
3.4 Amended and Restated By-Laws of First Central, dated as of May 18, 1994
(a copy of which was filed with the Commission on August 15, 1994 as
Exhibit 3.2 to First Central's Quarterly Report on Form 10-Q and is
hereby incorporated by this reference).
4.1 Specimen copy of First Central's common stock certificate (a copy of
which was filed with the Commission on December 10, 1984 as Exhibit 4.1
to First Central's Registration Statement on Form S-1 (Reg. No.
2-94804-NY), and is hereby incorporated herein by this reference).
4.2 Specimen copy of First Central's 9% Convertible Subordinated Debenture
Due 2000 (a copy of which was filed as Exhibit 4.2 to Registrant's
Amendment No. 1 to its Registration Statement on Form S-1, Reg. No.
33-25264, and is hereby incorporated herein by this reference).
4.3 Indenture dated as of September 1, 1988 between First Central and
United States Trust Company of New York as Trustee (a copy of which was
filed with the Commission on October 31, 1988 as Exhibit 4.3 to First
Central's Registration Statement on Form S-1 (Reg. No. 33-25264), and
is hereby incorporated herein by this reference).
10.1 Facultative Reinsurance Agreement dated September 25, 1987 between
Munich American Reinsurance Company and First Central Insurance (a copy
of which was filed with the Commission on August 15, 1994 as Exhibit
10.8 to First Central's Quarterly Report on Form 10-Q and is hereby
incorporated by this reference).
10.2 Addendum No. 1 to the Reinsurance Agreement between First Central
Insurance and Munich American Reinsurance Company, dated July 28, 1988
(a copy of which was filed with the Commission on August 15, 1994 as
Exhibit 10.9 to First Central's Quarterly Report on Form 10-Q and is
hereby incorporated by this reference).
45
<PAGE>
<PAGE>
10.3 Addendum No. 2 to the Reinsurance Agreement between First Central
Insurance and Munich American Reinsurance Company, dated January 1,
1989 (a copy of which was filed with the Commission on August 15, 1994
as Exhibit 10.10 to First Central's Quarterly Report on Form 10-Q and
is hereby incorporated by this reference).
10.4 Addendum No. 3 to the Reinsurance Agreement between First Central
Insurance and Munich American Reinsurance Company, dated January 1,
1992 (a copy of which was filed with the Commission on August 15, 1994
as Exhibit 10.11 to First Central's Quarterly Report on Form 10-Q and
is hereby incorporated by this reference).
10.5 Addendum No. 4 to the Reinsurance Agreement between First Central
Insurance and Munich American Reinsurance Company, dated June 18, 1993
(a copy of which was filed with the Commission on August 15, 1994 as
Exhibit 10.12 to First Central's Quarterly Report on Form 10-Q and is
hereby incorporated by this reference).
10.6 Form of Indemnity Agreement (a copy of which was filed with the
Commission on August 15, 1994 as Exhibit 10.20 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.7 Agreement of Tax Allocation between First Central and First Central
Insurance (a copy of which was filed with the Commission on August 15,
1994 as Exhibit 10.21 to First Central's Quarterly Report on Form 10-Q
and is hereby incorporated by this reference).
10.8 Property Facultative Automatic Reinsurance Agreement between First
Central Insurance and North American Reinsurance Corp., effective
January 1, 1993 (a copy of which was filed with the Commission on
August 15, 1994 as Exhibit 10.22 to First Central's Quarterly Report on
Form 10-Q and is hereby incorporated by this reference).
10.9 Stock Option, dated September 10, 1993, granted to Martin J. Simon by
First Central (a copy of which was filed with the Commission on August
15, 1994 as Exhibit 10.31 to First Central's Quarterly Report on Form
10-Q and is hereby incorporated by this reference).
10.10 Software License Agreement, dated May 4, 1994, between the Wheatley
Group, Ltd. and First Central Insurance (a copy of which was filed with
the Commission on August 15, 1994 as Exhibit 10.33 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.11 Multiple Line Excess of Loss Reinsurance Agreement between First
Central Insurance and National Reinsurance Corporation, dated January
1, 1994 (a copy of which was filed with the Commission on August 15,
1994 as Exhibit 10.34 to First Central's Quarterly Report on Form 10-Q
and is hereby incorporated by this reference).
10.12 Endorsement No. 1 of Agreement No. 3522-01002 Multiple Line Excess of
Loss Reinsurance Agreement between First Central Insurance and National
Reinsurance Corporation, dated January 1, 1994 (a copy of which was
filed with the Commission on August 15, 1994 as Exhibit 10.35 to First
Central's Quarterly Report on Form 10-Q and is hereby incorporated by
this reference).
46
<PAGE>
<PAGE>
10.13 Investment Advisory Agreement, dated June 30, 1994 between First
Central Insurance and Cramer Rosenthal McGlynn, Inc. (a copy of which
was filed with the Commission on August 15, 1994 as Exhibit 10.36 to
First Central's Quarterly Report on Form 10-Q and is hereby
incorporated by this reference).
10.14 Contract of Sale, dated October 18, 1994 between Lynbrook Court
Associates and First Central Insurance (a copy of which was filed with
the Commission on March 31, 1994 as Exhibit 10.37 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
*10.15 Stock Option, dated October 31, 1996, granted to Andrew W. Attivissimo
by First Central.
*10.16 Employment Agreement, dated as of October 31, 1996 between Andrew W.
Attivissimo and First Central.
*10.17 Endorsement No. 1 of Multiple Line Excess of Loss Reinsurance Agreement
No. 3522-01003 between First Central Insurance and National Reinsurance
Corporation.
*10.18 Endorsement No. 2 of Multiple Line Excess of Loss Reinsurance Agreement
No. 3522-01003 between First Central Insurance and National Reinsurance
Corporation.
*10.19 Commercial Umbrella Liability Quota Share and Excess of Loss
Reinsurance Agreement, AR 6245, between First Central Insurance Company
and Continental Casualty Company.
*11 Computation of Per Share Earnings.
*12 Computation of Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries (incorporated by reference to Exhibit 22 to the
Registrant's Amendment No. 1 to its Registration Statement on Form S-1
Reg. No. 33-25264).
*23 Consent of McGladrey & Pullen, LLP.
*27 Financial Data Schedule.
- -------------------------
* filed herewith
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the last quarter of
fiscal 1996.
47
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FIRST CENTRAL FINANCIAL CORPORATION
BY: /s/ Andrew W. Attivissimo
------------------------------------
April 14, 1997 Andrew W. Attivissimo, Chairman, President,
Chief Executive Officer and Chief Operating
Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman, President, Chief Executive April 14, 1997
/s/ Andrew W. Attivissimo Officer, Chief Operating Officer,
- ------------------------------------- and Director
Andrew W. Attivissimo
/s/ Joseph P. Ciorciari Director April 14, 1997
- -------------------------------------
Joseph P. Ciorciari
/s/ Ralph J. Drabkin Director April 14, 1997
- -------------------------------------
Ralph J. Drabkin
Director April , 1997
- -------------------------------------
Saul Erdman
/s/ Herbert V. Friedman Director April 14, 1997
- -------------------------------------
Herbert V. Friedman
/s/ Harvey Jacobs Director April 14, 1997
- -------------------------------------
Harvey Jacobs
/s/ Joan M. Locascio Chief Financial Officer, Treasurer, (Chief April 14, 1997
- ------------------------------------- Financial and Accounting Officer), Vice
Joan M. Locascio President and Director
/s/ Harvey Mass Senior Vice President and Director April 14, 1997
- -------------------------------------
Harvey Mass
/s/ Martin J. Simon Director April 14, 1997
- -------------------------------------
Martin J. Simon
</TABLE>
48
<PAGE>
<PAGE>
[McGladrey & Pullen, LLP Letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
First Central Financial Corporation
Lynbrook, New York
We have audited the accompanying consolidated balance sheets of First Central
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Central
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 18 to the
consolidated financial statements, the Company has incurred significant losses
from operations and its capital has been reduced to a level which allows the New
York State Insurance Department authority to take regulatory action. The
Company, after discussions with the New York Insurance Department has agreed not
to write any new business. In addition the New York Insurance Department has
requested that the Company prepare a comprehensive plan detailing how the
Company plans on improving its financial condition. A.M. Best & Co. Inc., one of
the predominant services engaged in the industry-wide rating of insurers and
reinsurers, amended the rating of First Central Insurance Company from a B++ to
a D (very vulnerable). In addition, unless First Central Financial Corporation
is able to obtain financial resources, the Company will be unable to satisfy its
sinking fund requirement with respect to its 9% convertible subordinated
49
<PAGE>
<PAGE>
debentures. These issues raise substantial doubt about the Company's ability to
continue as a going concern. Managements' plans in regard to these matters are
also described in Note 18 to the consolidated financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ McGladrey & Pullen, LLP
New Haven, Connecticut
February 25, 1997, except for
Notes 1 and 18 as to which the date
is March 24, 1997
50
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1996 1995
----------------------------------------
<S> <C> <C>
ASSETS
Investments (Note 3)
Securities available-for-sale, at market value:
Fixed maturities (amortized cost 1996 - $79,563,688;
1995 - $35,181,479) $ 79,279,962 $ 35,640,019
Equity securities (cost; 1996 - $17,230,459; 1995 -
$28,011,278) 18,814,702 28,704,546
Fixed maturities securities held-to-maturity at amortized cost
(market 1995 - $33,693,837) -- 33,415,757
Short-term investments, at cost, which approximates market 10,216,742 2,918,369
----------------------------------------
Total Investments 108,311,406 100,678,691
Cash 4,112,441 1,499,829
Accrued investment income 1,379,187 835,720
Agents' balances, less allowance for doubtful accounts
(1996 - $3,554,074; 1995 - $1,554,074 (Note 7) 11,607,913 17,871,850
Reinsurance receivables on unpaid losses (Note 4) 18,767,712 19,541,811
Reinsurance receivables on paid losses 466,480 817,681
Prepaid reinsurance premiums 5,358,744 8,206,455
Federal income taxes recoverable 4,092,473 2,467,225
Other receivables 184,429 333,234
Deferred policy acquisition costs (Note 5) 4,541,520 6,351,976
Deferred debenture costs 280,807 438,603
Deferred income taxes (Note 6) 2,950,000 4,465,000
Property and equipment less accumulated depreciation
(1996 - $1,323,113; 1995 - $1,639,866) (Note 13) 4,400,192 4,523,949
Other assets 645,027 428,325
----------------------------------------
$ 167,098,331 $ 168,460,349
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities (Note 8)
Unpaid losses $ 97,436,974 $ 78,887,340
Unpaid loss adjustment expenses 9,357,095 7,749,141
Unearned premiums 31,339,850 36,295,661
----------------------------------------
Total Policy Liabilities 138,133,919 122,932,142
Funds held for reinsurance treaty 2,610,641 3,704,947
Reinsurance payable (Note 4) 785,104 1,393,663
Convertible subordinated debentures (Note 12) 4,900,000 6,330,000
Other liabilities 1,172,527 761,988
----------------------------------------
Total Liabilities 147,602,191 135,122,740
----------------------------------------
Commitments and contingencies (Notes 4, 13 and 16)
Shareholders' Equity (Notes 3, 9, 10, 12, and 14)
Common Stock, par value $.10 per share authorized --
20,000,000 shares; issued (1996 -- 6,589,012 shares;
1995 - 6,589,012 shares) 658,902 658,902
Additional paid-in capital 13,209,395 13,209,395
Net unrealized appreciation on securities
available-for-sale, net of deferred taxes
(1996 -- $532,000; 1995 -- $392,000) 768,517 759,806
Retained earnings 8,990,468 22,826,898
----------------------------------------
23,627,282 37,455,001
Less treasury stock, at cost (1996 -- 602,404 shares;
1995 - 600,404 shares) (4,131,142) (4,117,392)
----------------------------------------
Total Shareholders' Equity 19,496,140 33,337,609
----------------------------------------
$ 167,098,331 $ 168,460,349
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
51
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums written - Direct (Note 7) $ 56,712,187 $ 72,293,513 $ 65,592,939
Reinsurance ceded (Note 4) (9,908,347) (21,725,782) (10,162,490)
--------------------------------------------------------------------
Net Premiums Written 46,803,840 50,567,731 55,430,449
Decrease (increase) in unearned premiums 2,108,100 2,466,212 (5,369,722)
--------------------------------------------------------------------
Net Premiums Earned 48,911,940 53,033,943 50,060,727
Net investment income (Note 3) 5,000,496 4,904,755 4,783,872
Realized gain on investments (Note 3) 1,909,211 1,100,200 950,898
Claims adjusting revenues 935,954 653,714 469,228
Rental income 259,320 204,690 --
--------------------------------------------------------------------
Total Revenues 57,016,921 59,897,302 56,264,725
--------------------------------------------------------------------
EXPENSES
Losses 38,782,310 34,724,208 23,514,168
Loss adjustment expense (Notes 7 and 8) 9,934,964 7,337,057 6,109,775
Policy acquisition costs (Note 5) 12,309,853 12,691,206 12,813,100
Interest expense 513,266 606,619 641,696
Provision for doubtful accounts 3,592,223 695,865 1,056,557
Other operating expenses 5,913,502 4,437,794 4,469,784
--------------------------------------------------------------------
Total Expenses 71,046,118 60,492,749 48,605,080
--------------------------------------------------------------------
Income (Loss) Before Income Taxes (Benefit) (14,029,197) (595,447) 7,659,645
Income Taxes (Benefit) (Note 6) (917,000) (956,000) 1,943,500
--------------------------------------------------------------------
Net Income (Loss) $(13,112,197) $360,553 $ 5,716,145
====================================================================
Per Share Data:
Primary:
Net Income (Loss) $ (2.19) $ 0.06 $ 0.97
============ ============ ============
Fully Diluted:
Net Income (Loss) $ (2.19) $ 0.06 $ 0.90
============ ============ ============
Cash Dividends Declared $ 0.12 $ 0.12 $ 0.105
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
52
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
NET UNREALIZED
NET UNREALIZED (DEPRECIATION)
ADDITIONAL APPRECIATION APPRECIATION ON
COMMON STOCK PAID-IN ON EQUITY SECURITIES
SHARES AMOUNT CAPITAL SECURITIES AVAILABLE-FOR-
SALE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 6,384,205 $ 638,421 $11,988,787 $(103,712) $--
Add (deduct):
Net income
Cash dividends declared (.105 per
share)
Purchase shares of treasury stock
Increase in unrealized depreciation on
securities available-for-sale net of
deferred taxes (5,741,161)
Issuance of additional shares 192,307 19,231 1,150,764
Adoption of SFAS No. 115 (Note 3) 103,712 (88,712)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 6,576,512 657,652 13,139,551 -- (5,829,873)
Add (deduct):
Net income
Cash dividends declared (.12 per
share)
Purchase shares of treasury stock
Decrease in unrealized depreciation on
securities available-for-sale net of
deferred taxes 6,589,679
Issuance of additional shares 12,500 1,250 69,844
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 6,589,012 658,902 13,209,395 -- 759,806
Add (deduct):
Net loss
Cash dividends declared (.12 per
share)
Purchase shares of treasury stock
Increase in unrealized appreciation on
securities available-for-sale net of
deferred taxes 8,711
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 6,589,012 $ 658,902 $13,209,395 $ -- $ 768,517
====================================================================================================================================
<CAPTION>
RETAINED TREASURY STOCK
EARNINGS SHARES AMOUNT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 $ 18,108,824 566,204 $(3,878,504) $ 26,753,816
Add (deduct):
Net income 5,716,145 5,716,145
Cash dividends declared (.105 per
share) (635,174) (635,174)
Purchase shares of treasury stock 6,200 (40,638) (40,638)
Increase in unrealized depreciation on
securities available-for-sale net of
deferred taxes (5,741,161)
Issuance of additional shares 1,169,995
Adoption of SFAS No. 115 (Note 3) 15,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 23,189,795 572,404 (3,919,142) 27,237,983
Add (deduct):
Net income 360,553 360,553
Cash dividends declared (.12 per
share) (723,450) (723,450)
Purchase shares of treasury stock 28,000 (198,250) (198,250)
Decrease in unrealized depreciation on
securities available-for-sale net of
deferred taxes 6,589,679
Issuance of additional shares 71,094
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 22,826,898 600,404 (4,117,392) 33,337,609
Add (deduct):
Net loss (13,112,197) (13,112,197)
Cash dividends declared (.12 per
share) (724,233) (724,233)
Purchase shares of treasury stock 2,000 (13,750) (13,750)
Increase in unrealized appreciation on
securities available-for-sale net of
deferred taxes 8,711
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $ 8,990,468 602,404 $(4,131,142) $ 19,496,140
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
53
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------------
1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $(13,112,197) $ 360,553 $ 5,716,145
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 6,351,976 7,339,084 6,451,030
Provision for depreciation and amortization 664,625 609,227 518,419
Provision for losses on uncollectible receivables 3,592,223 695,865 318,356
Net realized investment gains (1,909,211) (1,100,200) (950,898)
Provision for deferred federal income taxes 1,374,997 (1,580,000) (1,002,000)
Change in operating assets and liabilities:
(Increase) decrease in accrued investment income (543,467) 108,750 (102,492)
Change in agents' balances and unearned premiums (379,492) (2,126,712) 1,198,641
Change in unpaid losses, unpaid loss adjustment expenses, and
reinsurance recoverable 21,282,888 17,593,650 11,423,279
Deferred policy acquisition costs (4,541,520) (6,351,976) (7,339,084)
Other items, net (2,168,286) (2,029,992) 704,574
----------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,612,536 13,518,249 16,935,970
----------------------------------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturities (72,350,090) (80,118,996) (18,183,594)
Sales and maturities of fixed maturities 60,614,645 54,768,768 18,452,975
Purchases of equity securities (11,446,117) (17,574,355) (34,367,822)
Sales of equity securities 24,711,117 29,587,427 22,148,307
Net (purchases) sales of short-term investments (7,298,373) 5,840,995 (4,006,878)
Purchases of property and equipment (63,124) (3,571,521) (542,577)
Deposit on purchase of building -- -- (401,000)
----------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,831,942) (11,067,682) (16,900,589)
----------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on convertible subordinated debentures (1,430,000) (425,000) (1,060,000)
Principal payments on capital lease obligations -- (84,744) (159,681)
Cash dividend paid (724,232) (723,450) (635,174)
Proceeds from issuance of shares of common stock -- 71,094 1,169,995
Purchase of shares of common stock for the treasury (13,750) (198,250) (40,638)
----------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (2,167,982) (1,360,350) (725,498)
----------------------------------------------------------
INCREASE (DECREASE) IN CASH 2,612,612 1,090,217 (690,117)
CASH AT BEGINNING OF YEAR 1,499,829 409,612 1,099,729
----------------------------------------------------------
CASH AT END OF YEAR $ 4,112,441 $ 1,499,829 $ 409,612
==========================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments (receipts) for:
Interest $ 566,000 $ 624,000 $ 681,000
==========================================================
Income Taxes, net of refund of $1,700,000 in 1996 $ (630,000) $ 2,934,000 $ 2,102,000
==========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
54
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
First Central Financial Corporation ("First Central" or the "Company") is a New
York State corporation. First Central's wholly-owned subsidiaries are First
Central Insurance Company ("First Central Insurance"), a property/casualty
insurance company, and Mercury Adjustment Bureau, Inc. ("Mercury"), a claim
adjustment and investigation company.
Revenues are derived principally through First Central Insurance, which is
engaged in insuring property and casualty risks (principally commercial multiple
peril, workers' compensation, general liability, automobile liability and
physical damage in the State of New York). First Central Insurance cedes to
reinsurers a certain portion of its coverages to limit its share of potential
losses on individual claims (see Note 4).
As more fully described in Note 18 "Going Concern Uncertainty and Liquidity",
the New York Insurance Department has requested First Central to submit and
implement a plan designed to improve operations and raise additional capital. On
March 10, 1997, pending implementation of the plan and raising additional
capital, First Central Insurance has ceased the writing of new insurance
business. However, First Central Insurance will continue to process renewals and
service its existing business.
First Central Insurance receives a significant portion of its business from a
general agent who is deemed to be a related party (see Note 7) and one other who
is not a related party accounting for 9.9% in 1996, 11.4% in 1995 and 9.7% in
1994 of premiums written. The loss of the business relationship that First
Central Insurance has with either of these two general agents could have a
materially adverse effect upon its future operations.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements, which have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP") and which,
with respect to First Central Insurance, differ in some respects from the
Statutory Accounting Principles ("SAP") prescribed or permitted by the
regulatory authorities, follows:
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts and operations of First Central, First Central Insurance
and Mercury after eliminating all significant intercompany balances and
transactions.
Accounting Estimates: Management considers available facts and knowledge of
existing circumstances when establishing estimated amounts included in the
financial statements. While it does not generally expect significant near-term
changes in estimated amounts reflected in the accompanying consolidated
financial statements, operating in the insurance industry requires management to
utilize historical experience and assumptions about future events and
circumstances in order to develop estimates of material reported amounts and
disclosures. Included among the material (or potentially material) reported
amounts and disclosures that require extensive use of estimates are (1) salvage
and subrogation, (2) fair values of investments in securities and other
financial instruments, (3) policy liabilities, (4) deferred
55
<PAGE>
<PAGE>
policy acquisition costs, (5) allowance for doubtful accounts, (6) reinsurance
recoverables, and (7) asset impairment. Estimates regarding all of the preceding
are inherently subject to change and are reassessed by management as of each
reporting date.
Risks and Uncertainties: The operating results and financial condition of First
Central as a whole and, in particular of First Central Insurance, are affected
by numerous factors and circumstances peculiar to the property and casualty
insurance industry, some of which First Central can neither predict nor control.
Revenue and profitability trends of First Central Insurance, both generally and
within individual business lines, are affected by factors such as (1) volatile
and unanticipated adverse loss and expense developments, particularly within
lines of business for which losses may not emerge for several years following
the year in which the coverage was underwritten; (2) legally-imposed regulatory
capital requirements and related limitations on the ability of First Central
Insurance to underwrite new insurance business and renew desirable business
currently written; (3) the ability of First Central Insurance to enter into
suitable reinsurance arrangements; (4) competitive pressures on the pricing of
product lines offered by First Central Insurance and the historical cyclicality
of its industry as a whole; (5) fluctuations in interest rates, which affect the
market value of First Central Insurance's investment portfolio, the income yield
of the portfolio and the default and prepayment rates of the portfolio; (6)
inflationary pressures which affect the magnitude of losses and loss adjustment
expenses; (7) emerging legal precedents and trends which, among other things,
may have a significant specific impact on settlement amounts and other
circumstances affecting the development of losses and expenses for environmental
and other liability lines of business; (8) the occurrence of natural disasters
and catastrophic losses of other origin; (9) financial condition ratings of
First Central insurance as announced and published by industry rating
organizations; (10) general economic conditions and trends which have both
direct and indirect affects on the demand for property and casualty insurance;
and (11) geographic concentration of writing business primarily in New York.
In addition to the above-described risks and uncertainties affecting property
and casualty insurers, First Central and, in particular, First Central Insurance
are directly and specifically affected by certain other risks and uncertainties
related to and resulting from the present financial condition of First Central
Insurance. Such risks and uncertainties are disclosed in the accompanying Note
18 "Going Concern Uncertainty and Liquidity".
Recognition of Premium Revenues: Premiums are recognized as revenue ratably over
the terms of the related insurance policies (generally one year). Unearned
premiums are calculated using the daily pro-rata basis.
Investment in Debt and Marketable Equity Securities: First Central has
investments in debt and marketable equity securities. Debt securities consist
primarily of obligations of the U.S. government, state governments and domestic
corporations. Marketable equity securities consist primarily of common and
preferred stocks that are traded or listed on national exchanges.
FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", requires that management determine the appropriate classification
of securities at the date individual investment securities are acquired and that
the appropriateness of such classification be reassessed at each balance sheet
date. The classification of these securities and the related accounting policies
are as follows:
Securities held-to-maturity: Securities classified as held-to-maturity are those
debt securities First Central has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premiums or discounts and other-than-temporary declines in
fair value.
56
<PAGE>
<PAGE>
Securities available-for-sale: Securities classified as available-for-sale are
those debt securities that First Central intends to hold for an indefinite
period of time but not necessarily to maturity and equity securities not
classified as held for trading. Any decision to sell a security classified as
available-for-sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the First Central's
assets and liabilities, liquidity needs, regulatory capital considerations, and
other similar factors. Securities available-for-sale are reported at fair value
adjusted for other-than-temporary declines in fair value. Unrealized gains or
losses are reported as increases or decreases in shareholders' equity, net of
the related deferred tax effect. Realized gains or losses, determined on the
first-in, first-out method, are included in earnings.
Securities held-for-trading: Trading securities, if any, which are generally
held for the short term in anticipation of market gains, are recorded at their
fair value. Realized and unrealized gains and losses on trading account assets
are recognized in the income statement.
Premiums and discounts on investments in debt securities are amortized over
their contractual lives. Interest on debt securities is recognized in income as
accrued, and dividends on marketable equity securities are recognized in income
when declared. Realized gains and losses including losses from declines in value
of specific securities determined by management to be other-than-temporary, are
included in income. Realized gains and losses are determined on the basis of the
first-in, first-out method. Short-term investments are stated at cost, which
appropriates market.
Policy Acquisition Costs: Commissions, premium taxes, and other costs that vary
with and are primarily related to the production of new and renewal business are
deferred and amortized over the terms of the policies or reinsurance treaties to
which they relate. Deferred policy acquisition costs are limited to the amounts
estimated to be recoverable from the related unearned premiums after giving
effect to anticipated losses, loss adjustment expenses, and expenses necessary
to maintain the premiums in force, which are based on reasonable groupings of
business, consistent with the manner of acquiring, servicing, and measuring the
profitability of such business. When the anticipated losses, loss adjustment
expenses, and policy maintenance expenses exceed the related unearned premiums,
and anticipated investment income, a provision for the indicated deficiency is
recorded.
Insurance Liabilities: The liabilities for unpaid losses and loss adjustment
expenses represent estimated amounts determined from loss reports and individual
cases and an amount, based on past experience of First Central Insurance and
comparable industry experience, for losses incurred but not reported. Such
liabilities are necessarily based on estimates and, while First Central
Insurance believes that the amounts included in the accompanying financial
statements are adequate, the ultimate liabilities may vary from the estimated
amounts provided. The methods for making such estimates and for establishing the
resulting liabilities are continually reviewed by the claims department, and any
adjustments are reflected in earnings in the year of change. As of September
1991, First Central Insurance retained an actuarial firm, Stergiou and Gruber
Risk Consultants, who on a quarterly basis, reviews loss reserves and prepares
annual reports. The liabilities for unpaid losses and loss adjustment expenses
are reported net of estimated salvage and subrogation recoverable of
approximately, $1,691,000 and $1,663,000 at December 31, 1996 and December 31,
1995, respectively.
Reinsurance: In the normal course of business, First Central Insurance seeks to
reduce the losses arising from insured claims by reinsuring certain levels of
risk among the various lines of business with reinsurers. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy. The effects of subsequent changes to the
estimates are recognized into earnings in the year of change.
57
<PAGE>
<PAGE>
FASB Statement No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" requires First Central to report
estimated reinsurance receivables arising from reinsurance contracts and amounts
paid to the reinsurer relating to the unexpired portion of reinsured contracts
(prepaid reinsurance premiums) separately as assets.
Income Taxes: First Central, First Central Insurance, and Mercury file a
consolidated federal income tax return.
Deferred taxes are provided on a liability method which requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carry forwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Amortization and Depreciation: Goodwill, included in other assets, was amortized
on a straight-line basis over a period of 40 years. In 1996, due to an
impairment in its value, the company expensed unamortized goodwill of
approximately $275,000. Amortization of the costs associated with the issuance
of the convertible subordinated debentures is provided using the effective
interest method (see Note 12). Equipment is recorded at cost and is being
depreciated using the straight-line method over periods ranging from five to
seven years. Building and improvements are also recorded at cost and are being
depreciated using that straight-line method over thirty-nine years.
Income (Loss) Per Share Data: Primary net income per share is based on the
weighted average number of shares of common stock and common stock equivalents
(warrants and options) outstanding during each year. Fully diluted net income
(loss) per share assumes, the conversion of the convertible subordinated
debentures (date of issue September l, l988) except when the effects of such
conversion are antidilutive. For the years ended December 3l, 1996, 1995, and
l994 the weighted average number of shares used in the primary earnings per
share computation were 5,987,373, 6,037,606 and 5,926,401, respectively. For the
years ended December 31, 1996, 1995 and 1994 weighted average number of shares
used in the fully diluted earnings per share computation were 5,987,373,
6,037,606 and 6,836,758, respectively.
NOTE 3--INVESTMENTS
Since most of First Central's investments consist of securities that are traded
in national, regional or secondary securities markets, they are subject to
fluctuations in overall market performance and are potentially subject to
heightened levels of market risk attributable to issuer, industry, geographic
region or other concentrations. Investments in fixed maturity securities subject
First Central to credit risk, and concentrations in such securities of single
issuers, issuers located in the same geographic region, issuers operating in the
same or similar industries, or securities backed by similar collateralizing
assets potentially subject First Central to heightened levels of credit risk.
First Central's investment portfolio is regularly reviewed and the extent of its
diversification is considered in conjunction with other risk management and
performance objectives. Management is of the opinion that First Central's
investment portfolio as of December 31, 1996 is sufficiently diversified so that
First Central is not subject to undue levels of market or credit risk associated
with concentrations.
58
<PAGE>
<PAGE>
During 1996, First Central reduced its investment in mortgage-backed securities
to less than 1% of the carrying amount of the investment portfolio. Other than
its limited investment in mortgage-backed securities, First Central does not
invest in or otherwise use derivative financial instruments in the management of
its investment portfolio. First Central's equity securities portfolio is
comprised of issues purchased based on their expected total return potential and
not for the purpose of realizing gains on short-term price changes. As of
December 31, 1996 and 1995, First Central's investment portfolio included no
securities held for trading purposes.
At December 31, 1996, First Central reassessed its ability to hold certain
securities to maturity and determined that fixed maturity securities with an
amortized cost of $45,284,608 and an estimated market value of $45,019,345
should be reclassified from the "held-to-maturity" category to the
"available-for-sale" category because of uncertainties about First Central's
ability to hold these securities until their maturity date (see "Note 18 - Going
Concern Uncertainty and Liquidity"). The change in classification resulted in
the unrealized loss on these securities of $265,263 being recorded as a
reduction of the unrealized appreciation on securities available-for-sale
component of shareholders' equity.
At December 31, 1996 and 1995, the amortized cost, gross unrealized holding
gains, gross unrealized holding losses and estimated market values of
investments in available-for-sale securities and held-to-maturity securities are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Available-for-sale securities at
December 31, 1996:
Fixed maturity securities:
U.S. government securities $53,388,815 $ 158,995 $ 713,152 $52,834,658
Mortgage backed securities 918,305 9,936 -- 928,241
Obligations of states and political
subdivisions 20,337,039 312,931 11,832 20,638,138
Corporate Obligations 4,171,730 4,680 25,007 4,151,403
Debt securities issued by a foreign
government 747,799 -- 20,277 727,522
----------- ----------- ----------- -----------
Total Fixed Maturities 79,563,688 486,542 770,268 79,279,962
Equity securities 17,230,459 2,593,312 1,009,069 18,814,702
----------- ----------- ----------- -----------
Total $96,794,147 $ 3,079,854 $ 1,779,337 $98,094,664
=========== =========== =========== ===========
</TABLE>
59
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------------- ----------------- -----------
<S> <C> <C> <C> <C>
Available-for-sale securities at
December 31, 1995:
Fixed maturity securities:
U.S. government securities $10,184,178 $ 195,333 $ 5,530 $10,373,981
Mortgage backed securities 3,075,406 29,483 -- 3,104,889
Obligations of states and political
subdivisions 17,572,941 343,054 47,652 17,868,343
Corporate Obligations 4,348,954 82,178 138,326 4,292,806
----------- ----------- ----------- -----------
Total Fixed Maturities 35,181,479 650,048 191,508 35,640,019
Equity securities 28,011,278 2,355,147 1,661,879 28,704,546
----------- ----------- ----------- -----------
Total $63,192,757 $ 3,005,195 $ 1,853,387 $64,344,565
=========== =========== =========== ===========
Held-to-maturity securities at
December 31, 1995:
Fixed maturity securities:
U.S. government securities $20,191,262 $ 60,742 $ 126 $20,251,878
Obligations of states and political
subdivisions 12,528,495 246,918 11,704 12,763,709
Debt securities issued by a foreign
government 696,000 -- 17,750 678,250
----------- ----------- ----------- -----------
Total $33,415,757 $ 307,660 $ 29,580 $33,693,837
=========== =========== =========== ===========
</TABLE>
60
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<PAGE>
The amortized cost and estimated market value of fixed maturities at December
31, 1996, by contractual maturity are shown below. Actual maturities may be
different because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale
------------------------------
Amortized
Cost Market Value
------------------------------
<S> <C> <C>
Due in one year or less $ 8,077,790 $ 8,206,057
Due after one year through five years 30,973,161 30,829,111
Due after five years through ten years 32,340,713 31,877,066
Due after ten years through twenty years 7,007,748 7,182,628
Due after twenty years 1,164,276 1,185,100
----------- -----------
$79,563,688 $79,279,962
========== ===========
</TABLE>
At December 31, 1996 and 1995, investments in fixed maturity securities carried
at an amortized cost of approximately $300,000 were on deposit with regulatory
authorities as required by law.
The change in the difference between cost (principally amortized cost of bonds
and notes) and estimated market values for fixed maturities and equity
securities for 1996, 1995 and 1994 is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities:
Estimated market value $ 79,279,962 $ 69,333,856 $ 40,471,401
Amortized cost 79,563,688 68,597,236 43,363,752
------------ ------------ ------------
Unrealized appreciation (depreciation)
at end of year (283,726) 736,620 (2,892,351)
Unrealized appreciation (depreciation)
at beginning of year 736,620 (2,892,351) 519,041
------------ ------------ ------------
Change in unrealized
appreciation (depreciation) $ (1,020,346) $ 3,628,971 $ (3,411,392)
============ ============ ============
Equity securities:
Estimated market value $ 18,814,702 $ 28,704,546 $ 32,801,833
Cost 17,230,459 28,011,278 38,782,895
------------ ------------ ------------
Unrealized appreciation (depreciation) at end
of year 1,584,243 693,268 (5,981,062)
Unrealized appreciation (depreciation) at
beginning of year 693,268 (5,981,062) (103,712)
------------ ------------ ------------
Change in unrealized
appreciation (depreciation) $ 890,975 $ 6,674,330 $ (5,877,350)
============ ============ ============
</TABLE>
61
<PAGE>
<PAGE>
The major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividends:
Fixed maturities $3,776,339 $3,261,685 $2,513,033
Equity securities 864,338 1,696,494 2,083,238
Short-term investments 736,981 413,103 342,688
---------- ---------- ----------
Total interest and dividends 5,377,658 5,371,282 4,938,959
Less investment expenses 377,162 466,527 155,087
---------- ---------- ----------
NET INVESTMENT INCOME $5,000,496 $4,904,755 $4,783,872
========== ========== ==========
</TABLE>
Purchases and proceeds from sales and redemptions of investment securities, and
gross realized gains and losses on sales of investment securities during 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
PROCEEDS ON GROSS GROSS
PROCEEDS MATURITIES AND REALIZED REALIZED
1996: PURCHASES ON SALES REDEMPTIONS GAINS LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available-for-sale:
Fixed maturities $72,350,090 $38,174,387 $20,922,822 $ 313,465 $ 888,342
Equities 11,446,117 24,709,917 1,200 3,436,550 952,370
----------- ----------- ----------- ----------- -----------
83,796,207 62,884,304 20,924,022 3,750,015 1,840,712
Fixed maturities classified
as held-to-maturity -- -- 1,517,436 5,988 6,080
----------- ----------- ----------- ----------- -----------
$83,796,207 $62,884,304 $22,441,458 $ 3,756,003 $ 1,846,792
=========== =========== =========== =========== ===========
</TABLE>
Included in the gross realized losses for 1996 is $472,136 in other than
temporary write-down of securities.
<TABLE>
<CAPTION>
PROCEEDS ON GROSS GROSS
PROCEEDS MATURITIES AND REALIZED REALIZED
1995: PURCHASES ON SALES REDEMPTIONS GAINS LOSSES
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available-for-sale:
Fixed maturities $48,221,637 $50,341,365 $ 927,968 $ 890,797 $ 1,038,856
Equities 17,574,355 29,587,427 -- 2,404,760 1,163,302
----------- ----------- ----------- ----------- -----------
65,795,992 79,928,792 927,968 3,295,557 2,202,158
Fixed maturities classified
as held-to-maturity 31,897,359 -- 3,499,435 6,801 --
----------- ----------- ----------- ----------- -----------
$97,693,351 $79,928,792 $ 4,427,403 $ 3,302,358 $ 2,202,158
=========== =========== =========== =========== ===========
</TABLE>
Included in gross realized losses for 1995 is $555,281 in other than temporary
write-down of securities.
62
<PAGE>
<PAGE>
In December 1995, a One-Time Reassessment of the Classification of Securities
under FASB Statement 115 was implemented, allowing an enterprise to reassess the
appropriateness of the classifications of all securities held at that time and
account for any resulting reclassification at fair value. This reclassification
must have been completed no later than December 31, 1995. In accordance with
this reclassification, on December 4, 1995, First Central Insurance transferred
$10,391,000 par value of held-to-maturity securities to the available-for-sale
category.
NOTE 4--REINSURANCE
The assets for future policy benefits and losses, claims, and loss adjustment
expenses were $18,767,712 and $19,541,811 at December 31, 1996 and 1995,
respectively, for estimated recoveries under reinsurance treaties. Reinsurance
recoverable on unearned premium reserves were approximately $5,359,000 and
$8,206,000 at December 31, 1996, and 1995, respectively.
Ceded reinsurance premiums were approximately $9,908,000, $21,726,000 and
$10,163,000 in 1996, 1995 and 1994, respectively. Ceded reinsurance premiums
earned were approximately $12,756,000, $15,493,000 and $9,454,000 for the years
ended 1996, 1995, and 1994, respectively. Reinsurance recoveries on loss and
loss adjustment expenses incurred were approximately $5,175,000, $1,824,000 and
$21,067,000 for 1996, 1995, and 1994, respectively.
Effective January 1, 1993, through December 31, 1995, First Central Insurance
reinsures business with limits up to $1,000,000 with a retention level at
$200,000. Effective January 1, 1996, First Central Insurance increased its
retention level to $250,000 continuing the same level of limits. First Central
Insurance also has an excess agreement to reinsure worker's compensation
coverage for a total of $2,000,000 and automatic facultative arrangements to
reinsure property for a total of $4,500,000.
At December 31, 1996 and 1995, a loss contingency (after deducting funds
deposited by or due to such reinsurers) exists with respect to reinsurance
receivables and prepaid reinsurance premiums, part or all of which would become
an actual loss in the event any of the reinsuring companies are unable, at some
later date, to meet their obligations to First Central Insurance under the
existing reinsurance agreements.
63
<PAGE>
<PAGE>
At December 31, 1995 under the terms of a reinsurance treaty, First Central
Insurance was holding escrow trust funds of $13,374 which were included in
short-term investments and used for the payment of all applicable reinsured
losses and loss adjustment expenses.
At December 31, 1996 and 1995 reinsurance payable totaling $785,104 and
$1,393,663, respectively, principally represents premiums due to reinsurance
companies in connection with the arrangements described above.
Effective January 1, 1996, endorsement (no. 1) to the Nat Re excess of loss
reinsurance agreement reduced First Central's rate used to calculate ceded
written premiums and payments due to Nat Re, from 16.92% to 12.31%, for the
period January 1, 1996 through June 30, 1996. Beginning July 1, 1996, the rate
used to calculate premiums and payments increased to 13.85%, in accordance with
the no. 2 endorsement to the policy. In addition, First Central received a
contingency commission payment in the amount of $242,798.
During 1995 an endorsement to the reinsurance treaty changed the calculation of
reinsurance premiums. The result of this endorsement was a decrease in net
premiums written, a decrease in unearned premiums and a liability for funds held
for reinsurance treaty of $2,610,641 and $3,704,947 at December 31, 1996 and
December 31, 1995, respectively.
Contingent commissions based on First Central Insurance's loss ratio with Swiss
Re were earned of $50,777, $62,110 and $91,226 in 1996, 1995, and 1994
respectively.
NOTE 5--POLICY ACQUISITION COSTS
The major components of policy acquisition costs charged to operations are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
1996 1995 1994
---------------- --------------- ------------
<S> <C> <C> <C>
Amortization of deferred acquisition costs $ 6,351,976 $ 7,339,084 $ 6,451,030
Other (Commissions, payroll fees, premium taxes, and other
costs directly related to production of premiums--see Note 7) 5,957,877 5,352,122 6,362,070
----------- ----------- -----------
$12,309,853 $12,691,206 $12,813,100
=========== =========== ===========
</TABLE>
64
<PAGE>
<PAGE>
NOTE 6--INCOME TAXES
Income tax expense consists of the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------
1996 1995 1994
------------------ ----------------- -----------------
<S> <C> <C> <C>
Current:
U.S. federal $(2,381,000) $ 540,000 $ 2,862,500
State and local 89,000 84,000 83,000
----------- ----------- -----------
(2,292,000) 624,000 2,945,500
Deferred, U.S. federal 1,375,000 (1,580,000) (1,002,000)
----------- ----------- -----------
$ (917,000) $ (956,000) $ 1,943,500
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
components of the net deferred tax assets at December 31, are presented below:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1996 1995
----------------- -------------
<S> <C> <C>
Deferred Tax Assets:
Loss reserve discounting $6,111,000 $4,669,000
Unearned premium reserve 1,767,000 1,910,000
Allowance for bad debts 1,265,000 534,000
Other 10,000 2,000
---------- ----------
Deferred Tax Assets before Valuation
Allowance 9,153,000 7,115,000
Less Valuation Allowance 4,028,000 --
---------- ----------
Deferred Tax Assets After Valuation Allowance 5,125,000 7,115,000
---------- ----------
Deferred Tax Liabilities:
Deferred policy acquisition costs 1,544,000 2,159,000
Net unrealized appreciation on securities
available-for-sale 532,000 392,000
Salvage and subrogation receivable 99,000 99,000
---------- ----------
Deferred Tax Liabilities 2,175,000 2,650,000
---------- ----------
Net Deferred Tax Assets $2,950,000 $4,465,000
========== ==========
</TABLE>
A $4,028,000 valuation allowance has been established with respect to the
deferred tax assets at December 31, 1996 because management believes it is more
likely than not that the deferred tax assets will not be fully realized.
65
<PAGE>
<PAGE>
The following table reconciles the federal statutory income tax rate to First
Central's effective income tax rate on income before income taxes:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ ---------------------------- ---------------------------
Amount % Amount % Amount %
------------------------------ ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed at statutory
tax rate $(4,770,000) 34 $ (201,000) 34 $ 2,604,000 34
Add (deduct):
State tax, net of federal benefit 59,000 (0) 55,000 (9) 55,000 1
Tax exempt interest (431,000) 3 (477,000) 81 (420,000) (6)
Dividend exclusion (178,000) 1 (363,000) 61 (459,000) (6)
Other 375,000 (2) 30,000 (5) 163,500 2
Valuation allowance on deferred tax 4,028,000 (29) -- -- -- --
----------- --- ----------- ----- ----------- -----
INCOME TAXES $ (917,000) 7 $ (956,000) 162 $ 1,943,500 25
=========== === =========== ===== =========== =====
</TABLE>
NOTE 7--RELATED PARTY AND OTHER SIGNIFICANT TRANSACTIONS
During each of the years ended December 31, 1996, 1995, and 1994, approximately
14.2%, 12.7%, and 12.5% respectively, of all insurance written by First Central
Insurance was sold through Simon New York, Inc. ("Simon New York") a licensed
general insurance agency, which also writes insurance for other unrelated
insurance companies, the stock of which is owned by Joan Dollinger and Audrey
Goodman (the respective wives of Joel Dollinger and Allan Goodman, former Vice
Presidents and former Directors of First Central) and Sheryl Harwood, who are
Mr. Simon's three daughters. At December 31, 1996 and 1995 the premiums
receivable from Simon New York were approximately $2.2 million and $3.3 million
respectively. Simon New York is paid commissions ranging from 15% to 22.5% on
the different lines of business produced. These commissions are comparable to
those paid by First Central Insurance to unrelated agents. In accordance with
the general agents' agreements with their subagents and brokers, approximately
75% of these commissions are paid to the subagents and brokers. A summary of the
transactions with Simon New York and Simon Commercial is presented below:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Premiums written $8,044,000 $9,202,000 $8,230,000
========== ========== ==========
Commissions (policy acquisition costs) $1,610,000 $1,805,000 $1,581,000
========== ========== ==========
</TABLE>
Claims settlement legal services are provided by several law firms.
The former President and a Director of First Central are partners in one of the
firms; fees paid to this firm for 1996, 1995, and 1994 were approximately
$792,000, 798,000 and $722,000 respectively. Another former Director is a
partner in a law firm providing claim services; fees paid to this firm for 1996,
1995 and 1994 were $410,000, $323,000 and $341,000 respectively.
66
<PAGE>
<PAGE>
NOTE 8--LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at January 1 $ 86,636 $ 73,516 $ 44,806
Less reinsurance recoverables 19,541 24,588 6,732
-------- -------- --------
Net Balance at January 1 67,095 48,928 38,074
-------- -------- --------
Incurred related to:
Current year 28,934 29,066 23,741
Prior years 19,783 12,995 5,883
-------- -------- --------
Total incurred 48,717 42,061 29,624
-------- -------- --------
Paid related to:
Current year 4,514 5,057 4,964
Prior years 23,272 18,837 13,806
-------- -------- --------
Total paid 27,786 23,894 18,770
-------- -------- --------
Net Balance at December 31 88,026 67,095 48,928
Plus reinsurance recoverables 18,768 19,541 24,589
-------- -------- --------
Balance at December 31 $106,794 $ 86,636 $ 73,516
======== ======== ========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for claims and claim adjustment expenses increased by approximately
$19,783,000, $12,995,000 and $5,883,000 in 1996, 1995 and 1994, respectively.
The increases are a result of significant adverse developments stemming from
both case reserve strengthening and poor liability experience emanating from
accident years 1992 through 1995, when the company substantially increased its
premium writings. During the 1992 through 1995 policy years the Company wrote
risk purchasing group and other business which resulted in extremely poor
liability experience. Additionally, because of a high ratio of IBNR to case
reserves and continuing poor loss experience in 1996, Stergiou & Gruber Risk
Consultants ("S&G"), First Central Insurance's actuary, recommended that First
Central Insurance perform a complete evaluation of its case reserves. During the
third quarter of 1996, pursuant to this recommendation, First Central Insurance
commenced a selected sample review of open claims. This review was done
separately from First Central Insurance's normal claim adjustment activity. The
review was completed in the fourth quarter of 1996 and resulted in First Central
Insurance increasing its case reserves by approximately $14,000,000. The review
also caused S&G to evaluate IBNR reserves using different methodologies than in
prior years since First Central Insurance's emerging loss development patterns
did not match industry-wide patterns. Based on S&G's actuarial report,
management decided to increase IBNR reserves to near the middle point of the
actuarial range of reasonableness used in the establishment of such reserves.
In establishing the liability for unpaid claims and claim adjustment expenses
related to environmental claims management considers facts currently known and
the current state of the law and coverage litigation, liabilities are recognized
for known claims (including the cost of related litigation) when sufficient
information has been developed to indicate the involvement of a specific
insurance policy, and
67
<PAGE>
<PAGE>
management can reasonably estimate its liability. Estimates of the liabilities
are reviewed and updated continually.
NOTE 9--SHAREHOLDERS' EQUITY AND RESTRICTIONS
In June 1990, First Central's Board of Directors awarded a five-year warrant to
an investment advisor, to purchase 50,000 shares of First Central's Common Stock
at an exercise price of $6.97 per share. In conjunction with the issuance of
this warrant, 50,000 shares of First Central's Common Stock were reserved for
future issuance. This warrant expired in June of 1995.
In June 1990, First Central's shareholders approved a proposal authorizing First
Central to issue warrants to non-employee directors of First Central to purchase
an aggregate of not more than 250,000 shares of First Central's Common Stock.
The Board of Directors is to determine the terms and conditions of the warrants,
as well as the recipients, subject to the limitations that: (i) the exercise
price of the warrants is not to be less than the market value of First Central's
Common Stock at the date of Grant, (ii) the expiration date of the warrants is
not to be more than five years from the date of grant, and (iii) the maximum
number of shares of First Central's Common Stock issuable upon exercise of any
warrant is not to exceed 10,000 shares. On March 18, 1992, the Committee awarded
warrants to purchase up to an aggregate of 160,000 shares of Common Stock at an
exercise price of $5.6875 per share to the non-employee Directors of First
Central and First Central Insurance as a group. These warrants expired March
18,1997. No warrants have been awarded since 1992. 12,500 warrants were
exercised in 1995. No warrants were exercised in 1996 and 1994.
During 1992, in connection with the private placement of common stock to an
institutional investor, First Central issued a three year warrant to purchase
114,286 shares of common stock at an exercise price of $7.00 per share. In March
1993, in connection with another private placement of common stock to a second
institutional investor, First Central issued a two year warrant ("Series A
Warrant") to purchase 153,846 shares of common stock at an exercise price of
$7.00 per share, and a three year warrant ("Series B Warrant") at an exercise
price of $7.50 per share. In March 1993, the first placement was modified to
conform to the terms of the second placement which resulted in cancellation of
the warrant for 114,286 shares and issuance of one Series A Warrant and one
Series B Warrant for 123,077 shares of common stock each. In December, 1993, in
connection with a second private placement to the second institutional investor,
First Central issued one Series B Three-Year Warrant for 153,846 shares of
common stock. During 1994, in connection with private placements to two
institutional investors and a reinsurance company, First Central issued a two
year Series C common stock purchase warrant to each of these investors to
purchase a total of 192,307 shares of common stock at an exercisable price of
$7.50 per share. The Series A Warrant expired in 1995. The Series B and C
warrants expired in 1996.
In September 1993 First Central issued to Martin J. Simon an option to purchase
up to 50,000 shares of common stock at an exercise price of $5.31 per share.
Such option is exercisable with respect to 25% of the shares covered by the
option each year commencing in 1994 and expires in 1998. No options were
exercised in 1996, 1995 and 1994.
In October 1996 subject to shareholder approval, First Central issued Andrew W.
Attivissimo an option to purchase up to 50,000 shares of common stock at an
exercise price equivalent to the lowest trading price of a share of common stock
between issue and approval date. Such option is exercisable with respect to 25%
of the shares covered by the option each year commencing on the first
anniversary of the effective date and an additional 25% after each successive
anniversary of the effective date.
68
<PAGE>
<PAGE>
At December 31, 1996, approximately $12,330,000 of consolidated shareholders'
equity based on SAP represents net assets of First Central Insurance that cannot
be transferred in the form of dividends, loans, or advanced to First Central
without prior approval from the New York State Insurance Department. Generally,
the net assets of First Central Insurance available for transfer to First
Central are limited to the amounts that its net assets exceed minimum statutory
requirements (approximately $1,233,000 at December 31, 1996), however, payments
of such amounts as dividends must be paid out of earned surplus (as defined),
are subject to statutory restriction, and may be subject to approval by the
insurance regulatory authorities. At December 31, 1996 First Central Insurance
had an earned surplus deficit of approximately $4,276,000; accordingly, First
Central Insurance cannot pay any dividends to First Central at this time.
NOTE 10--STATUTORY-BASIS INFORMATION
The following is a reconciliation of the net income (loss) and shareholders'
equity, as determined in accordance with Statutory Accounting Principles, to the
corresponding GAAP amounts included in the accompanying financial statements:
<TABLE>
<CAPTION>
NET INCOME
------------------------------------------------------------
YEARS ENDED DECEMBER 31
------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) income of First Central
Insurance--Statutory basis, as reported $ (9,430,896) $ 1,065,475 $ 4,681,606
Statutory audit adjustments 489,755 -- --
------------ ------------ ------------
NET INCOME (LOSS) -- STATUTORY BASIS, AS
ADJUSTED (8,941,141) 1,065,475 4,681,606
------------ ------------ ------------
Adjustments to convert from statutory basis
to GAAP
Change in deferred policy acquisition costs (1,810,456) (987,108) 888,054
Deferred income taxes (1,375,000) 1,580,000 1,002,000
Bad debt provision -- (232,138) (399,611)
Write-down of investments (292,136) (555,281) --
Fixed assets 43,749 -- --
------------ ------------ ------------
(3,433,843) (194,527) 1,490,443
------------ ------------ ------------
Net income (loss) -- GAAP
First Central Insurance (12,374,984) 870,948 6,172,049
First Central (889,515) (779,989) (674,587)
Mercury 152,302 269,594 218,683
------------ ------------ ------------
CONSOLIDATED NET INCOME (LOSS) --GAAP
BASIS $(13,112,197) $ 360,553 $ 5,716,145
============ ============ ============
</TABLE>
69
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
------------------------------------
DECEMBER 31
------------------------------------
1996 1995
------------------------------------
<S> <C> <C>
Shareholders' equity of First Central
Insurance--statutory basis as reported $ 10,535,210 $ 26,350,816
Statutory audit adjustments 1,794,877 (686,000)
------------ ------------
SHAREHOLDERS' EQUITY -- STATUTORY BASIS, AS ADJUSTED 12,330,087 25,664,816
------------ ------------
Adjustments to convert from statutory basis to GAAP: Add (deduct):
Deferral of policy acquisition costs 4,541,520 6,351,976
Restoration of nonadmitted assets 4,140,951 2,001,754
Deferred income tax assets 2,950,000 4,465,000
Excess statutory reserve 2,580,000 --
Allowance for doubtful accounts (3,554,074) (1,554,074)
Unrealized (loss) gain on fixed maturities classified as available
-for-sale (283,726) 458,540
Write-down of security -- 130,719
------------ ------------
10,374,671 11,853,915
------------ ------------
Shareholders' equity (deficit) -- GAAP
First Central Insurance 22,704,758 37,518,731
First Central 1,119,135 218,845
Mercury 722,247 650,033
Portion of convertible subordinated debenture proceeds
contributed to First Central Insurance (5,050,000) (5,050,000)
------------ ------------
CONSOLIDATED SHAREHOLDERS' EQUITY--GAAP BASIS $ 19,496,140 $ 33,337,609
============ ============
</TABLE>
70
<PAGE>
<PAGE>
NOTE 11--PRINCIPAL LINES OF BUSINESS
First Central Insurance offers various types of property and casualty insurance
to its policyholders. The risks are geographically located principally in the
State of New York. Revenues and earnings from operations, by principal line of
business, are as follows:
<TABLE>
<CAPTION>
Commercial
Multiple Workers' General
Peril Compensation Liability
----------- --------------- -------------
<S> <C> <C> <C>
1996:
Earned premium and other revenues $ 31,322,232 $ 7,698,120 $ 9,563,228
Loss from operations before
income taxes (7,706,936) (1,894,147) (2,353,063)
1995:
Earned premium and other revenues $ 29,580,003 $ 8,105,131 $ 15,254,580
Loss from operations before
income taxes (294,059) (80,574) (151,648)
1994:
Earned premium and other revenues $ 26,802,088 $ 9,599,684 $ 12,654,761
Income from operations before
income taxes 3,648,724 1,306,861 1,722,766
<CAPTION>
Automobile
Automobile Physical
Liability Damage Other Total
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
1996:
Earned premium and other revenues $ 6,417,408 $ 1,415,994 $ 599,939 $ 57,016,921
Loss from operations before
income taxes (1,579,024) (348,410) (147,617) (14,029,197)
1995:
Earned premium and other revenues $ 5,024,806 $ 1,293,542 $ 639,240 $ 59,897,302
Loss from operations before
income taxes (49,952) (12,859) (6,355) (595,447)
1994:
Earned premium and other revenues $ 5,048,164 $ 1,701,861 $ 458,167 $ 56,264,725
Income from operations before
income taxes 687,236 231,684 62,374 7,659,645
</TABLE>
In determining other revenues and income from operations before income taxes,
certain significant items not directly associated with a line of business are
allocated. Net investment income including realized gains and losses are
allocated to lines of business on the basis of a formula. Claims Adjusting
Reserves are also allocated on the basis of the same formula. Certain operating
expenses are allocated on the basis of premiums written. Assets are generally
not identifiable as to line of business. Periodically, the methods and
allocation formulas are revised to more closely approximate the results of each
principal line of business.
NOTE 12--CONVERTIBLE SUBORDINATED DEBENTURES
In 1988, First Central privately placed $10,300,000 of its convertible
subordinated debentures and, in conjunction therewith, received net proceeds of
approximately $9,111,000, of which $5,050,000 was contributed by First Central
to the capital of First Central Insurance. In 1989, an additional $1,950,000 of
convertible subordinated debentures were issued and net proceeds of
approximately $1,600,000 were received by First Central.
The debentures were issued pursuant to a trust indenture, dated September 1,
1988, between First Central and United States Trust Company, as trustee. The
debentures bear annual interest of 9%, payable semiannually, commencing February
1, 1989. In each of the years ended 1996, 1995 and 1994, interest paid amounted
to approximately $560,000, $603,000 and $677,000, respectively.
71
<PAGE>
<PAGE>
The debentures are convertible at any time prior to maturity, unless previously
redeemed, into shares of First Central's Common Stock at a conversion price of
$7.50 per share prior to August 1, 2000, maturity, subject to adjustment under
certain conditions. At December 31, 1996, 653,333 shares of First Central's
Common Stock remain reserved for future issuance upon conversion. The debentures
are redeemable, at any time, at the option of First Central.
Commencing August 1, 1993, mandatory annual sinking fund payments of 15% of the
original principal amount plus accrued interest to maturity must be made to
retire at least 75% of the debentures prior to maturity. Through August 1, 1997,
the annual principal amount payable to the Trustee is $1,837,500. First Central
may credit other redemptions of the debentures against the sinking fund
requirements. As of December 31, 1996, First Central has satisfied its
requirements through other redemptions of approximately $6,965,000 in principal
and $385,000 in conversions. The debentures are subordinated to all existing and
future senior indebtedness of First Central (none was outstanding at December
31, 1996 and 1995), as provided in the indenture (see "Note 18" -- regarding the
company's ability to satisfy sinking fund requirements).
Future required principal payments for the convertible subordinated debentures
are $1,837,500 in 1997 and $3,062,500 in 2000. (See Note 18 which discusses the
Company's abilities to satisfy the sinking fund requirement).
NOTE 13--BUILDING PURCHASE AND OPERATING LEASES
On January 17, 1995, First Central Insurance purchased its home office building,
located at 266 Merrick Road, Lynbrook, New York, (the "Building") for $4,000,000
in cash. The Building consists of approximately 30,000 square feet of office
space and 2,000 square feet of retail space. The approval to acquire real estate
required by the State of New York Insurance Department was obtained on December
27, 1994. The Company has assumed the leases of the tenants of the Building.
Management believes that the Building is suitable for First Central's purposes
for the foreseeable future.
Approximately 8,900 square feet of office and retail space is seven unaffiliated
tenants who have paid $203,504 and $204,690 in rent during 1996 and 1995
respectively.
During 1996 and 1995, Simon New York paid $76,800 and $88,323, respectively to
First Central Insurance for rent. Effective December 1, 1995 through November
30, 1996, Simon New York had a lease for 3,900 square feet of office space.
Since December 1, 1996 Simon New York has occupied such space on a
month-to-month basis. First Central Insurance subleased 3,900 square feet of its
leased office space to Simon New York under a sublease agreement that expired
November 30, 1995.
Minimum rentals receivable under operating leases for the next five years are as
follows:
Years ending December 31:
1997 - $90,647
1998 - $58,082
1999 - $54,831
2000 - $53,361
2001 - $28,810
72
<PAGE>
<PAGE>
NOTE 14--STOCK OPTIONS
During 1990, First Central adopted the 1990 Stock Incentive Plan ("Plan"). The
plan expired by its terms during 1995. The plan provided for up to 250,000
shares of First Central's common stock to be awarded and issued and/or for the
award of options or stock appreciation rights. In 1992, options to purchase
125,000 shares of common stock at an exercise price of $5.6875 per share were
awarded under the plan. The options are exercisable with respect to 25% of the
shares covered by such options each year commencing in 1994 and expire in March
1997. No options were exercised in 1996. During 1995 options to purchase 12,500
shares of common stock were exercised. During 1994, options to purchase 5,000
shares of common stock were cancelled and no options exercised. No common stock
or stock appreciation rights were issued under the plan.
In October 1996, subject to shareholder approval, First Central issued Andrew W.
Attivissimo an option to purchase up to 50,000 shares of common stock at an
exercise price equivalent to the lowest trading price of a share of common stock
between issue and approval date. Such option is exercisable with respect to 25%
of the shares covered by the option each year commencing on the first
anniversary of the effective date and an additional 25% after each successive
anniversary of the effective date.
In September 1993 First Central issued to Martin J. Simon an option to purchase
up to 50,000 shares of common stock at an exercise price of $5.31 per share.
Such option is exercisable with respect to 25% of the shares covered by the
option each year commencing in 1994 and expires in 1998. No options were
exercised in 1996, 1995 and 1994.
NOTE 15--PROFIT SHARING AND 401(k) PLANS
Profit Sharing Plan: The Company has a profit-sharing plan for those employees
who meet the eligibility requirements set forth in the plan. The plan covers
substantially all of the Company's full-time employees. The amount of the annual
expense attributable to the plan is at the discretion of the Company's Board of
Directors. The Company expensed $0, $62,800 and $90,000 to the plan for the
years ended December 31, 1996, 1995 and 1994, respectively.
401(k) Plan: In 1993, the Company established a defined contribution 401(k) plan
for its employees which generally allows participants who meet the eligibility
requirements set forth in the plan to make contributions by salary deductions up
to allowable IRS limits on a tax-deferred basis. The Company does not make or
match contributions to the plan.
NOTE 16--COMMITMENTS AND CONTINGENCIES
During 1996, there were employment agreements with eight employees of the
Company. One of the agreements was terminated on February 12, 1997, two of the
agreements were terminated effective March 12, 1997 and four of the agreements
expire on April 30, 1997. Such agreements provide or provided for terms
ranging from three to six years, a base salary which is specified in each of the
agreements and benefit payments in the event of death or disability during the
term of the agreement. On February 12, 1997, the Company entered into a
consulting agreement with a director of the Company which provides for
compensation to be paid through December 31, 1999 notwithstanding such
director's death, disability or inability to render consulting services.
The minimum annual commitments under the agreements are: 1997 -- $579,092;
1998 -- $345,666; and 1999 -- $379,000.
73
<PAGE>
<PAGE>
NOTE 17--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, short-term investments, balances due on account from
agents, reinsurers and others, and accounts payable approximate their carrying
amounts as reflected in the consolidated balance sheets due to their short-term
availability or maturity.
The fair values of debt and equity securities have been determined from
nationally quoted market prices and by using values supplied by independent
pricing services. These fair values are disclosed together with carrying amounts
in Note 3.
The fair value of the Company's convertible debentures approximate its stated
amount of $4,900,000 based on current interest rates and the Company's common
stock price.
NOTE 18--GOING CONCERN UNCERTAINTY AND LIQUIDITY
The Company's consolidated financial statements for the year ended December 31,
1996 have been prepared on a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. As a result of the 1996 loss incurred First Central's
Shareholders' Equity at December 31, 1996 declined to approximately $19.5
million and First Central Insurance's Statutory Surplus declined to
approximately $12.3 million. Based upon the required relationships between Net
Premiums Written and Statutory Surplus, First Central Insurance Company expects
that the reduction in Statutory Surplus will result in a significantly reduced
premium volume for the foreseeable future.
First Central Insurance company has a statutory deficiency in Earned Surplus
resulting from its loss from operations. Therefore, it will be precluded from
paying dividends to First Central by reason of such deficiency. The only
material source of income to First Central are dividends from First Central
Insurance Company and Mercury. Management anticipates that Mercury will be able
to pay a dividend to First Central sufficient for it to pay the August 1, 1997
interest of $220,500 due on its 9% Convertible Subordinated Debenture. However,
unless management is able to raise funds from other sources, First Central will
not be able to pay the August 1, 1997 sinking fund obligation of $1,837,500 on
the Debentures. First Central is not currently in default under such Debentures
but failure to pay either the aforementioned interest or sinking fund obligation
will constitute a default under the Debentures entitling the holders to
accelerate the outstanding amount, currently $4,900,000.
Based on a preliminary release of First Central Insurance's operating results
for the year ended December 31, 1996, A.M. Best & Company ("Best"), one of the
predominant services engaged in the industry-wide rating of insurers and
reinsurers, amended First Central Insurance's rating to D (Very Vulnerable). The
change in rating is adversely impacting both policy renewals and new business
written. Although, at this time a reduction in the volume of premiums written is
necessary to comply with regulatory requirements, continuation of a D rating
will severely affect First Central Insurance's future ability to compete with
other insurers.
The New York State Insurance Department has required First Central Insurance to
submit and implement a plan designed to improve operations and raise additional
capital. Such a plan will involve the revision of operations to attain future
profitability by raising underwriting standards, curtailing operating expenses,
revising agreements to achieve a reduction in loss adjustment expenses,
restructuring the claims department to achieve more favorable settlements of
claims and restructuring management positions. First
74
<PAGE>
<PAGE>
NOTE 18--GOING CONCERN, UNCERTAINTY, AND LIQUIDITY--Continued
Central Insurance engaged outside consultants to review the activities of the
various operating departments and make recommendations, where necessary, for
changes within those departments. The plan also requires First Central Insurance
to raise additional capital and First Central has engaged an investment banker
to assist in this effort. Without the additional capital, First Central
Insurance's surplus may be insufficient to enable it to remain in operation.
Pending implementation of the plan and the raising of additional capital, First
Central Insurance has ceased the writing of new insurance business.
The events and uncertainties discussed above raise substantial doubt about the
Company's ability to continue as a going concern. There can be no assurance that
the Company will be successful in its attempt to revise operations to attain
future profitability; raise additional capital and resume normal operations. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
75
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for 1996 and
1995:
<TABLE>
<CAPTION>
1996
-------------------------------------------
(Dollars in Thousands, except per share data)
1st 2nd 3rd 4th
--- --- --- ---
<S> <C> <C> <C> <C>
Net premiums written $ 11,356 $ 14,075 $ 13,760 $ 7,613
Net premiums earned 12,936 12,669 12,971 10,336
Net investment income and realized
gains 1,918 1,657 1,261 2,074
Claims adjusting revenues 192 289 282 173
Rental and misc. income 52 67 63 77
Total revenues 15,098 14,682 14,577 12,660
Total expenses 13,900 14,509 14,181 28,456
Net income (loss) $ 831 $ 186 $ 296 $(14,425)
Net income (loss) per common share:
Primary:
Net Income (loss) $ 0.14 $ 0.03 $ 0.05 $ (2.41)
Fully diluted:
Net Income (loss) $ 0.13 $ 0.03 $ 0.05 $ (2.40)
<CAPTION>
1995
-----------------------------------------
(Dollars in Thousands, except per share data)
1st 2nd 3rd 4th
--- --- --- ---
<S> <C> <C> <C> <C>
Net premiums written $ 14,569 $ 10,824 $ 12,451 $ 12,724
Net premiums earned 12,824 13,338 13,851 13,021
Net investment income and realized
gains 1,431 1,671 1,606 1,297
Claims adjusting revenues 149 155 166 184
Rental and misc. income 129 158 (133) 50
Total revenues 14,533 15,322 15,490 14,552
Total expenses 12,692 12,879 13,373 21,549
Net income (loss) $ 1,473 $ 1,812 $ 1,519 $ (4,443)
Net income (loss) per common share:
Primary:
Net Income (loss) $ 0.25 $ 0.30 $ 0.25 $ (0.74)
Fully diluted:
Net Income (loss) $ 0.23 $ 0.27 $ 0.24 $ (0.68)
</TABLE>
Primary net income (loss) per common share is based on the weighted average
number of shares of common Stock and common stock equivalents (warrants and
options) outstanding during each period. Fully diluted net income (loss) per
common share assumes the conversion of the convertible subordinated debentures,
common stock equivalents (warrants and options), outstanding during each period
except when effect is fully diluted.
76
<PAGE>
<PAGE>
[Mc Gladrey & Pullen, LLP Letterhead]
INDEPENDENT AUDITOR'S REPORT
ON THE SUPPLEMENTAL SCHEDULES
To the Board of Directors and Shareholders
First Central Financial Corporation
Lynbrook, New York
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedules I, II, III, IV, V and VI are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not a part
of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
Our report covering the basic consolidated financial statements indicates that
there is substantial doubt as to the Company's ability to continue as a going
concern, the outcome of which cannot presently be determined and that the
consolidated financial statements do not include any adjustments, that might
result from the outcome of this uncertainty,
/s/ McGladrey & Pullen, LLP
New Haven, Connecticut
February 25, 1997, except for
Notes 1 and 18 as to
which the date is
March 24, 1997
77
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES.
December 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- -----------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities securities, available-for-sale:
Bonds:
United States Government and government
agencies & authorities $ 53,388,815 $ 52,834,658 $ 52,834,658
States, municipalities, and political subdivisions 20,337,039 20,638,138 20,638,138
Mortgage backed securities 918,305 928,241 928,241
All other corporate bonds 4,171,730 4,151,403 4,151,403
Foreign governments 747,799 727,522 727,522
----------------------------------------------------
Total 79,563,688 79,279,962 79,279,962
----------------------------------------------------
Equity securities, available-for-sale:
Common Stocks:
Public utilities 291,813 494,375 494,375
Bank, trust, and insurance companies 1,388,732 1,894,256 1,894,256
Industrial, miscellaneous, and all other 10,096,039 11,036,071 11,036,071
Nonredeemable preferred stocks 5,463,875 5,390,000 5,390,000
----------------------------------------------------
Total 17,240,459 18,814,702 18,814,702
----------------------------------------------------
Fixed maturity securities, held-to-maturity:
Bonds:
United States Government and government
agencies and authorities -- -- --
States, municipalities, and political subdivisions -- -- --
Mortgage backed securities -- -- --
Foreign governments -- -- --
----------------------------------------------------
Total -- -- --
----------------------------------------------------
Short-term Investments 10,216,742 10,216,742 10,216,742
----------------------------------------------------
Total investments $107,020,889 $108,311,406 $108,311,406
====================================================
</TABLE>
78
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION
(Parent Company)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Cash $ 7,840 $ 8,708
Securities available-for-sale at market value:
Equity securities (cost; 1996 -- $172,000; 1995 -- $352,000) 133,700 166,000
Short term investments, at cost 316,651 612,826
Investment in subsidiaries, at equity 23,427,005 38,474,024
Due from subsidiary 470,115 292,573
Deferred debenture costs 280,807 438,603
Equipment less accumulated depreciation
(1996 -- $874,995; 1995 -- $1,080,988) 33,006 5,204
Other assets 52,923 98,733
---------------------------------
$ 24,722,047 $ 40,096,671
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible subordinated debentures $ 4,900,000 $ 6,330,000
Other liabilities 325,907 429,062
---------------------------------
5,225,907 6,759,062
---------------------------------
Shareholders' equity:
Common Stock -- par value $.10 per share; authorized -- 200,000
shares; issued (1996 -- 6,589,012 shares; 1995 -- 6,589,012
shares) 658,902 658,902
Additional paid in capital 13,209,395 13,209,395
Net unrealized appreciation on securities available
for sale, net of deferred taxes 768,517 759,806
Retained earnings 8,990,468 22,826,898
---------------------------------
23,627,282 37,455,001
Less treasury stock, at cost
(1996 -- 602,404 shares, 1995 -- 600,404 shares) (4,131,142) (4,117,392)
---------------------------------
19,496,140 33,337,609
---------------------------------
$ 24,722,047 $ 40,096,671
=================================
</TABLE>
See Note to Condensed Financial Statements
79
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION
(Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Cash dividend from subsidiaries $ 2,380,088 $ 2,200,000 $ 1,565,000
Investment income 6,393 10,177 14,684
Realized loss on write-down of security (180,000) (45,000) --
Equipment rental income from subsidiary -- 84,744 159,681
------------------------------------------------------
TOTAL REVENUES 2,206,481 2,249,921 1,739,365
------------------------------------------------------
EXPENSES
Interest expense 512,794 594,763 636,975
Operating expenses--net 637,114 614,654 542,977
------------------------------------------------------
TOTAL EXPENSES 1,149,908 1,209,417 1,179,952
------------------------------------------------------
Income before intercompany tax allocation and
equity in undistributed net income of
subsidiaries 1,056,573 1,040,504 559,413
Intercompany tax credit 434,000 379,507 331,000
------------------------------------------------------
Income before equity in undistributed
net income of subsidiaries 1,490,573 1,420,011 890,413
Equity in undistributed net income (loss) of
subsidiaries (14,602,770) (1,059,458) 4,825,732
------------------------------------------------------
NET INCOME (LOSS) $(13,112,197) $ 360,553 $ 5,716,145
======================================================
</TABLE>
See Note to Condensed Financial Statements
80
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION
(Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(13,112,197) $ 360,553 $ 5,716,145
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Undistributed net income (loss) of subsidiaries (net of dividends
from subsidiaries of $2,380,088 in 1996; $2,200,000 in
1995; and $1,565,000 in 1994) 14,602,770 1,059,458 (4,825,732)
Provisions for depreciation and amortization 481,752 502,700 432,445
Net realized investment loss 180,000 45,000 --
(Increase) decrease in due from subsidiaries (177,542) (100,333) (126,781)
Changes in other assets and other liabilities (72,035) (31,365) (83,247)
Other -- -- 56,000
------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,902,748 1,836,013 1,168,830
------------------------------------------------------
INVESTING ACTIVITIES
Purchases of equity securities -- (397,000) --
Net (purchases) sales of short-term investments 296,175 (78,329) 481,613
Purchases of property & equipment (31,809) -- --
------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 264,366 (475,329) 481,613
------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on convertible subordinated debenture (1,430,000) (425,000) (1,060,000)
Principal payments on capital lease obligations -- (84,744) (159,681)
Cash dividends paid (724,232) (723,450) (635,174)
Proceeds from issuance of shares of common stock -- 71,094 1,169,995
Purchases of shares of common stock for treasury (13,750) (198,250) (39,223)
Cash contributed to insurance subsidiary -- -- (920,000)
------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (2,167,982) (1,360,350) (1,644,083)
------------------------------------------------------
INCREASE (DECREASE) IN CASH (868) 334 6,360
CASH AT BEGINNING OF YEAR 8,708 8,374 2,014
------------------------------------------------------
CASH AT END OF YEAR $ 7,840 $ 8,708 $ 8,374
======================================================
</TABLE>
See Note to Condensed Financial Statements
81
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION
(Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and the related notes thereto of
First Central Financial Corporation and Subsidiaries.
82
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------
RESERVES FOR OTHER
DEFERRED UNPAID CLAIMS CLAIMS
POLICY AND LOSS AND
ACQUISITION ADJUSTMENT UNEARNED BENEFITS
COSTS EXPENSES PREMIUMS PAYABLE
<S> <C> <C> <C> <C>
1996:
Commercial multiple peril $2,566,280 $ 41,812,643 $17,709,230 $ -
Workers' Compensation 547,655 14,910,441 3,779,222 -
General liability 755,910 39,087,444 5,216,340 -
Automobile liability 502,190 10,540,996 3,465,480 -
Automobile physical damage 119,071 59,369 821,679 -
Other 50,414 383,176 347,899 -
---------- ------------ ----------- -----
$4,541,520 $106,794,069 $31,339,850 $ -
========== ============ =========== =====
1995:
Commercial multiple peril $3,480,511 $ 40,250,608 $19,887,898 $ -
Workers' Compensation 759,233 16,469,019 4,338,316 -
General liability 1,338,871 22,219,793 7,650,409 -
Automobile liability 549,904 7,211,450 3,142,192 -
Automobile physical damage 156,671 87,069 895,231 -
Other 66,786 398,542 381,615 -
---------- ------------ ----------- -----
$6,351,976 $ 86,636,481 $36,295,661 $ -
========== ============ =========== =====
1994:
Commercial multiple peril $4,068,600 $ 34,711,740 $18,033,472 $ -
Workers' Compensation 934,097 13,943,931 4,140,247 -
General liability 1,363,878 17,898,339 6,045,188 -
Automobile liability 657,171 6,318,412 2,912,816 -
Automobile physical damage 237,047 145,713 1,050,675 -
Other 78,291 498,284 347,017 -
---------- ------------ ----------- -----
$7,339,084 $ 73,516,419 $32,529,415 $ -
========== ============ =========== =====
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------------------------------
BENEFITS AMORTIZATION
CLAIMS OF DEFERRED
NET LOSSES AND POLICY OTHER NET
PREMIUM INVESTMENT SETTLEMENT ACQUISITIONS OPERATING PREMIUMS
REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
<S> <C> <C> <C> <C> <C> <C>
1996:
Commercial multiple peril $26,220,809 $2,747,021 $20,296,675 $3,480,511 $3,170,122 $25,711,678
Workers' Compensation 6,594,238 675,140 1,244,071 759,233 797,250 6,319,204
General liability 9,628,682 838,714 18,505,678 1,338,871 1,164,117 7,850,227
Automobile liability 4,790,990 562,820 7,828,353 549,904 579,235 5,267,898
Automobile physical damage 1,171,784 124,185 671,051 156,671 141,670 1,162,356
Other 505,437 52,616 171,446 66,786 61,108 492,477
----------- ---------- ----------- ---------- ---------- -----------
$48,911,940 $5,000,496 $48,717,274 $6,351,976 $5,913,502 $46,803,840
=========== ========== =========== ========== ========== ===========
1995:
Commercial multiple peril $26,869,904 $2,422,190 $22,666,218 $4,068,600 $2,248,633 $24,972,635
Workers' Compensation 7,298,994 663,697 4,403,050 934,097 610,823 6,842,680
General liability 12,469,204 1,249,138 9,462,259 1,363,878 1,043,497 12,878,535
Automobile liability 4,486,743 411,462 4,607,670 657,171 375,477 4,242,145
Automobile physical damage 1,354,661 105,923 732,518 237,047 113,366 1,092,060
Other 554,437 52,345 189,550 78,291 46,400 539,676
----------- ---------- ----------- ---------- ---------- -----------
$53,033,943 $4,904,755 $42,061,265 $7,339,084 $4,438,196 $50,567,731
=========== ========== =========== ========== ========== ===========
1994:
Commercial multiple peril $23,023,758 $2,278,830 $13,170,288 $3,299,280 $2,055,728 $26,404,675
Workers' Compensation 9,262,704 816,207 4,143,022 1,010,623 827,041 9,457,343
General liability 10,732,899 1,075,963 6,577,404 1,096,519 958,311 12,467,120
Automobile liability 4,837,692 429,217 4,682,543 706,013 431,944 4,973,311
Automobile physical damage 1,857,186 144,700 1,092,327 286,217 165,823 1,676,626
Other 346,488 38,955 (41,641) 52,378 30,937 451,374
----------- ---------- ----------- ---------- ---------- -----------
$50,060,727 $4,783,872 $29,623,943 $6,451,030 $4,469,784 $55,430,449
=========== ========== =========== ========== ========== ===========
</TABLE>
83
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------ ----------- ---------- ---------- ----------- --------
Ceded to Assumed Percentage
Gross other From Other of Amount
Amount Companies Companies Net Amount Assumed to Net
----------- ----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Property and liability insurance premiums $56,712,187 $ 9,908,347 $ - $46,803,840 -
=========== =========== ========== =========== ========
Year ended December 31, 1995:
Property and liability insurance premiums $72,293,513 $21,725,782 $ - $50,567,731 -
=========== =========== ========== =========== ========
Year ended December 31, 1994:
Property and liability insurance premiums $65,592,939 $10,162,490 $ - $55,430,449 -
=========== =========== ========== =========== ========
</TABLE>
84
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------- ------------ -------------------------------- -------------------- ---------
ADDITIONS
--------------------------------
Balance at Charged to Balance
Beginning Costs and Charged to Other at End
of Period Expenses Accounts -- Describe Deductions--Describe of Period
------------ -------------------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts--
Premiums receivable and agents'
balances:
1996 $1,554,000 $2,000,000 - $ - $3,554,000
============ ================================ ==================== ==========
1995 $1,322,000 $ 232,000 - $ - $1,554,000
============ ================================ ==================== ==========
1994 $ 987,000 $ 335,000 - $ - $1,322,000
============ ================================ ==================== ==========
Allowance for deferred income taxes assets:
1996 $ - $4,028,000 - $ - $4,028,000
============ ================================ ==================== ==========
</TABLE>
85
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------- ---------------- ---------------------- ----------------- -------------- -------------
Net Reserves for Discount
Deferred Unpaid Claims if any
Affiliation Policy and Claims Deducted Net
With Acquisition Adjustment in Net Unearned Premiums
Registrant Costs Expenses Column C Premiums Earned
------------ ----------- ------------------ ----------- -------------- -----------
<C> <C> <C> <C> <C> <C>
1996 Consolidated $4,541,520 $88,026,357 - $25,981,106 $48,911,940
1995 Consolidated 6,351,976 67,094,670 - 28,089,206 53,033,943
1994 Consolidated 7,339,084 48,926,842 - 30,555,418 50,060,727
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------
COLUMN A CONT... COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ----------------- ---------------- ---------------------------- ---------------- -------------- -------------
Claims and Claim
Adjustment Expenses Amortization
Incurred Related to of Deferred Paid Claims
Affiliation Net ------------------------- Policy and Claim Net
With Investment (1) (2) Acquisition Adjustment Premiums
Registrant Income Current Year Prior Years Costs Expenses Written
- ----------------- ---------------- ---------------------------- ---------------- -------------- ------------
<C> <C> <C> <C> <C> <C> <C>
1996 Consolidated $5,000,496 $28,894,000 $20,516,000 $6,351,976 $28,479,000 $46,803,840
1995 Consolidated 4,904,755 29,066,000 12,995,000 7,339,084 23,894,000 50,567,731
1994 Consolidated 4,783,872 23,741,000 5,883,000 6,451,030 18,770,000 55,430,449
</TABLE>
86
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION
STOCK OPTION
OPTION dated this 31st day of October 1996, granted by First Central
Financial Corporation, a New York corporation (hereinafter the "Company"), to
Andrew W. Attivissimo (the "Holder").
WHEREAS, in order to induce the Holder to render services on behalf of
the Company as President and Chief Operating Officer or in such other offices in
which the Holder shall serve as a result of agreement between the Company and
the Holder, the Company desires to afford the Holder the opportunity to purchase
shares of its Common Stock, par value $.10 per share (the "Common Stock"), as
hereinafter provided; and
WHEREAS, on October 31, 1996, the Board of Directors authorized the
grant of the option conferred hereby to the Holder.
NOW, THEREFORE, in consideration of the foregoing premises, the Company
hereby agrees as follows:
1. Grant of Option. (a) Subject to the authorization by the Company's
shareholders as provided for in paragraph 1(b) below, the Company hereby grants
to the Holder an option (the "Option") to purchase up to an aggregate of 50,000
shares of Common Stock (such number of shares being subject to adjustment as
provided in paragraph 6 hereof) on the terms and subject to the conditions
hereinafter set forth. The Holder shall not have any of the rights of a
shareholder of the Company with respect to the shares of Common Stock covered by
the Option except to the extent that one or more certificates for such shares
shall be delivered to him upon the due exercise of the Option.
<PAGE>
<PAGE>
(b) In accordance with Section 505(d) of the Business
Corporation Law of the State of New York, the grant of the Option is subject to
approval at a meeting of the Company's shareholders by the affirmative vote of
the holders of a majority of all outstanding shares entitled to vote thereon and
the Option shall be subject to such authorization. If the shareholders shall
fail to approve the Option, the Option shall be null and void. If the
shareholders shall approve the Option, the Option shall be deemed granted and
effective on October 31, 1996, (the "Effective Date"). The date of such
shareholder approval shall hereinafter be referred to as the "Approval Date."
2. Purchase Price. The purchase price per share of the shares of Common
Stock to be issued upon exercise of the Option shall be the arithmetic mean of
the high and low trading prices of a share of the Common Stock on the American
Stock Exchange on (i) the Effective Date or (ii) the Approval Date, whichever is
lower.
3. Expiration Date; Vesting of Option. (a) Subject to the provisions of
paragraph 5 hereof, the Option shall expire at 5:00 P.M. New York time on
October 30, 2006 (the "Expiration Date"), and any portion of the Option
remaining unexercised after such time shall be cancelled without further notice
or action.
(b) Subject to the provisions of paragraph 5 hereof, the
Option may be exercised according to the following vesting schedule: 25% of the
shares covered by the Option may be exercised after the first anniversary of the
Effective Date and an additional 25% of the shares covered by the Option may be
exercised after each successive anniversary of the Effective Date.
4. Non-transferability. The Option, and the rights and privileges
conferred hereby, are not transferable by the Holder other than by will or under
the laws of descent and distribution. During the Holder's lifetime, no one other
than the Holder shall have the right or entitlement to exercise the Option. The
Option may not be assigned (by contract or by operation
2
<PAGE>
<PAGE>
of law), transferred (except as provided above), pledged, hypothecated or
otherwise encumbered. Any attempted assignment, transfer, pledge, hypothecation
or other disposition of the Option contrary to the provisions hereof, and the
levy of any execution, attachment or similar process upon the Option, shall
render the Option null and void.
5. Termination of Employment. (a) In the event that the employment of
the Holder is terminated by the Company or a subsidiary of the Company for
"Cause" (as defined in the Employment Agreement dated as of October 31, 1996
between the Company and Holder) the Option shall expire upon such termination of
employment. So long as the Holder shall continue to be an employee of the
Company or any of its subsidiaries, the Option shall not be affected by any
change of duties or position. Nothing contained in the Option shall confer upon
the Holder any right to continue in the employ of the Company or its
subsidiaries or interfere with the right of the Company or any such subsidiary
to terminate the Holder's employment at any time.
(b) If the Holder shall die while employed by the Company or
its subsidiaries, the Option may be exercised at any time prior to the first
anniversary of the Holder's death or the expiration date of the Option,
whichever shall first occur, by the person or persons to whom the Holder's
rights under the Option shall pass by will or the laws of descent and
distribution, but only to the extent that the Holder was entitled to exercise
the Option at the date of Holder's death.
(c) If termination of employment occurs by reason other than
for Cause, the Holder may exercise the Option at any time prior to (i) the
expiration of twelve months from the date of such termination of employment, or
(ii) the expiration date of the Option, whichever shall first occur but only to
the extent that the Holder was entitled to exercise the Option on the date of
such termination of employment.
3
<PAGE>
<PAGE>
6. Adjustments upon Changes in Capitalization. (a) The aggregate number
and class of shares of Common Stock covered by the Option and the price per
share thereof (but not the total price) shall be proportionately adjusted for
any increase or decrease in the number of outstanding shares of Common Stock
issued by the Company as a result of a stock split, split-up or consolidation of
shares or any like capital adjustment or reclassification of shares, or the
payment of any stock dividend, or any other similar increase or decrease in the
number of outstanding shares of Common Stock, without receipt of consideration
by the Company.
(b) Subject to any required action by its shareholders, if the
Company shall be the surviving corporation in any merger or consolidation,
except as otherwise provided below, the aggregate number of shares of Common
Stock subject to the Option shall be adjusted so as to pertain and apply to the
securities to which the Holder would have been entitled in such merger or
consolidation had he exercised the Option prior to such merger or consolidation.
(c) Upon the dissolution or liquidation of the Company or upon
a merger or consolidation of the Company in a transaction in which all or
substantially all of the shareholders of the Company receive cash, securities of
another company or other consideration in exchange for their shares of Common
Stock, whether or not the Company is the surviving corporation, or upon a sale
of all or substantially all of the assets of the Company, the Option shall
terminate, but the Holder may, immediately prior to any such transaction
exercise the Option, in whole or in part, as to the full number of shares which
he or she would otherwise have been entitled to purchase during the remaining
term of the Option irrespective of any vesting provisions herein.
Notwithstanding the foregoing, the Company may elect not to permit the Holder to
exercise the Option immediately prior to such event in accordance with the
foregoing, but in lieu thereof the Company may, in its discretion and
immediately prior to any such dissolution, liquidation, merger, consolidation or
sale, substitute or cause to be substituted a new option for the Option, such
new option to be applicable to the stock of the surviving or acquiring
corporation or any of its affiliates and to be on terms no less favorable to the
Holder than those contained in the Option.
4
<PAGE>
<PAGE>
(d) Adjustments under this Section 6 shall be made by the
Stock Option Committee ("Committee") of the Board of Directors whose
determination as to adjustments shall be final, binding and conclusive.
7. Securities Regulations. (a) If at any time the Committee shall in
its discretion determine that the listing, registration or qualification of the
shares of Common Stock subject to the Option upon any securities exchange or
under any federal or state law, or the approval or consent of any governmental
regulatory body, is necessary or desirable in connection with the issuance or
purchase of such shares hereunder, upon the determination of the Committee, the
Option shall not be exercisable in whole or in part unless such listing,
registration, qualification, approval or consent shall have been effected or, in
lieu thereof, the Committee may impose such conditions upon exercise of the
Option, as it determines to be appropriate.
(b) Unless at the time of the exercise of the Option a
registration statement under the Securities Act of 1933, as amended (the "Act"),
is in effect as to such shares, any shares of common stock purchased by the
Holder upon exercise of the Option shall be acquired for investment and not for
sale or distribution, and if the Company so requests, upon any exercise of the
Option, in whole or in part, the Holder will execute and deliver to the Company
a certificate to such effect. The Company shall not be obligated to issue any
shares pursuant to the Option if, in the opinion of counsel to the Company, the
shares to be so issued are required to be registered or otherwise qualified
under the Act or under any other applicable statute, regulation or ordinance
affecting the sale of securities, unless and until such shares have been so
registered or otherwise qualified.
(c) The Holder understands and acknowledges that, under
existing law, unless at the time of the exercise of the Option a registration
statement under the Act is in effect as to shares of Common Stock covered by the
Option: (i) any shares purchased by the Holder upon exercise of the Option may
be required to be held indefinitely unless such shares are subsequently
registered under the Act or an exemption from such registration is available;
5
<PAGE>
<PAGE>
(ii) any sales of such shares made in reliance upon Rule 144 promulgated under
the Act may be made only in accordance with the terms and conditions of that
Rule (which, under certain circumstances, restricts the number of shares which
may be sold); (iii) in the case of securities to which Rule 144 is not
applicable, compliance with Regulation A promulgated under the Act or some other
disclosure exemption will be required; (iv) certificates for shares to be issued
to the Holder hereunder shall bear a legend to the effect that the shares have
not been registered under the Act and that the shares may not be sold,
hypothecated or otherwise transferred in the absence of an effective
registration statement under the Act relating thereto or an opinion of counsel
satisfactory to the Company that such registration is not required; and (v) the
Company will place an appropriate "stop transfer" order with its transfer agent
with respect to such shares. In addition, the Holder understands and
acknowledges that the Company has no obligation to furnish to the Holder
information necessary to enable the Holder to make sales under Rule 144.
(d) As soon as reasonably practicable after the Approval Date,
the Company will use its best efforts to register under the Act the shares
subject to the Option pursuant to a registration statement on Form S-8. In the
event a registration statement under the Act is not in effect as to the shares
of Common Stock covered by the Option and an exemption from registration under
the Act is not available with respect to the sale of shares of Common Stock
acquired by the Holder from the exercise of the Option (the "Purchased Shares"),
within 15 days after the Company's receipt of the Holder's written request, the
Company shall purchase the Purchased Shares at a price equal to the fair market
value of the Common Stock. For the purpose of this paragraph 7(d), fair market
value shall be deemed to be the arithmetic mean of the high and low trading
prices for such shares on the American Stock Exchange or any other national
securities exchange on which the Company's Common Stock may be listed, on the
date the Holder's request is received by the Company, or if such date shall not
be a day during which shares of the Common Stock were traded, then on the next
date immediately preceding such date during which such trades were effected.
6
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8. Loans and Financial Accommodations to Grantees. (a) In order to
assist the Holder with the acquisition of shares of Common Stock pursuant to the
exercise of the Option, including the payment of any taxes resulting from such
exercise, the Committee may, in its discretion authorize (i) the extension of a
loan to the Holder by the Company, (ii) the payment by the Holder of the
purchase price of such shares in installments, (iii) the guarantee by the
Company of a loan obtained by the Holder from a third party or (iv) make such
other reasonable arrangements to facilitate the exercise of the Option in
accordance with applicable law.
(b) The Committee shall determine the terms of any loan or
guarantee made pursuant hereto, including the interest rate and other terms of
repayment thereof, and whether such loan or guarantee shall be secured or
unsecured. Each loan shall be evidenced by a promissory note having a maximum
term to maturity of not more than sixty (60) months. The maximum amount of any
loan or guarantee shall be the option price for shares purchased upon exercise
of the Option plus (i) related interest payments and (ii) the amount of tax
liability incurred by the Holder as a result of the exercise of the Option. No
amount loaned to the Holder and no amount the repayment of which is guaranteed
by the Company shall be used for any purpose other than payment of (i) the
purchase price of shares acquired upon the exercise of the Option, (ii) taxes
attributable to such exercise and (iii) interest.
9. Method of Exercising Option. (a) The Option may be exercised by
executing and delivering an Option Exercise Notice in the form attached hereto
as Exhibit A. Such notice shall be accompanied by payment of the full purchase
price as follows: (i) in cash by certified or bank check payable to the order of
the Company or (ii) at the discretion of the Committee by delivering Common
Stock already owned by the Holder, each such share of Common Stock to be valued
at its fair market value (as defined in paragraph 9(b)), (iii) by delivering a
combination of a certified or bank check and Common Stock (each such share of
Common Stock to be valued in accordance with paragraph 9(b)) or (iv) by any
other proper method specifically approved by the Committee.
7
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(b) For the purpose of any computation under paragraph 9(a) of
the fair market value per share of Common Stock, such value shall be deemed to
be the arithmetic mean of the high and low trading prices for such shares on the
American Stock Exchange or any other national securities exchange on which the
Company's Common Stock may be listed, on the date of exercise of the Option, or
if such date shall not be a day during which shares of the Common Stock were
traded, then on the next date immediately preceding such date during which such
trades were effected.
(c) If the Option should be exercised in part only, the
Company shall, upon surrender of the Option for cancellation, execute and
deliver a new option evidencing the rights of the Holder to purchase the balance
of the shares of Common Stock purchasable hereunder. All shares purchased
hereunder shall be deemed to be fully paid and non-assessable.
10. Conditions to Issuance of Shares. The Company shall not be required
to issue any certificate for shares of Common Stock purchased upon the exercise
of the Option unless (i) such shares are at the time of such exercise listed on
the American Stock Exchange or any other national securities exchange on which
the Company's Common Stock may then be listed and (ii) the prior approval of
such issuance has been obtained from any state regulatory body having
jurisdiction (but nothing herein contained shall be deemed to require the
Company to register or qualify as a foreign corporation in any state or, except
as to any matter or transaction relating to the issuance or delivery of such
shares, to consent to service of process in any state).
11. General. The Option shall be construed in accordance with the laws
of the State of New York and shall be binding upon the Company and inure to the
benefit of the Holder and any successors of the business of the Company, but
neither the Option nor any rights or privileges conferred hereunder shall be
assignable by the Holder.
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IN WITNESS WHEREOF, the Company has caused the Option to be duly
executed by its duly authorized officer, on the day and year first above
written.
FIRST CENTRAL FINANCIAL CORPORATION
By: /S/ MARTIN J. SIMON
-------------------------------------
Martin J. Simon
Chairman and Chief Executive Officer
Agreed and Accepted:
/S/ ANDREW W. ATTIVISSIMO
- ------------------------
Andrew W. Attivissimo
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EXHIBIT A
FORM OF OPTION EXERCISE NOTICE
___________ ___, 199__
First Central Financial Corporation
266 Merrick Road
Lynbrook, New York 11563
Attention: President
Ladies and Gentlemen:
The undersigned hereby irrevocably elects to exercise the within
Option to the extent of purchasing _____ shares of Common Stock at $____ per
share for an aggregate purchase price of $__________.
Enclosed is payment of the purchase price as follows (check
applicable box):
[ ] 1. Payment in Cash.
Certified or bank check in the aggregate amount of the exercise
price, payable to First Central Financial Corporation.
[ ] 2. Payment with Common Stock or Common Stock and Cash.
(a) Delivery of Certificate No.(s)__________ representing
_________ shares of Common Stock, duly endorsed to
First Central Financial Corporation. The shares of
Common Stock evidenced by such certificate have been
valued at $_____ per share, in accordance with Section
9(b) of the Option. I understand that if the enclosed
certificate represents more full shares of Common
Stock than are necessary to cover the exercise price,
the Company will deliver to the undersigned a
certificate covering the excess number of full shares.
(b) Check for the remaining exercise price of $_______,
payable to First Central Financial Corporation
(required if a fractional share is involved or if
payment is being made only partly with Common Stock).
A-1
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Please have the certificate representing said shares forwarded
to me as indicated below.
Instructions: PLEASE PRINT YOUR NAME BELOW (FIRST, MIDDLE
INITIAL, LAST). If joint tenancy is requested, please mark the box below and
list both names in full.
Mr. Soc. Sec. #
Mrs. Soc. Sec. #
Miss Soc. Sec. #
Ms. Soc. Sec. #
Joint Tenancy [ ]
Street Address___________________________________
City________________ State_________ Zip Code______
Very truly yours,
______________________
(Signature)
______________________
(Signature)
A-2
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of this 31st day of October, 1996, by and between
FIRST CENTRAL FINANCIAL CORPORATION, a New York corporation, with offices at 266
Merrick Road, Lynbrook, New York 11563 (the "Corporation") and Andrew W.
Attivissimo, residing at 151 Yukon Drive, Woodbury, New York 11797 (the
"Executive").
W I T N E S S E T H :
WHEREAS, the Corporation and Executive desire to enter into an
agreement, which will set forth all of the terms of employment of Executive.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereto agree as follows:
1. The Corporation hereby employs Executive as its President and Chief
Operating Officer to perform such duties incidental thereto and such other
duties as the Chairman of the Board or the Board of Directors of the Corporation
may from time to time reasonably assign consistent with such offices. In such
capacity, Executive shall report to and be subject to the direction and control
of the Chairman of the Board and the Board of Directors of the Corporation.
2. Executive hereby accepts such employment and agrees that throughout
the period of his employment hereunder, he will devote his full time, attention,
knowledge and skills, faithfully, diligently and to the best of his ability, in
furtherance of the business of the Corporation. During the period of Executive's
employment hereunder, Executive shall not be
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<PAGE>
entitled to additional compensation for serving as a director, officer or
employee of the Corporation or any of its subsidiaries or affiliates. The
principal place of performance by Executive of his duties hereunder shall be the
Corporation's corporate headquarters located in the New York City metropolitan
area.
3. This Agreement shall become effective as of October 31, 1996 (the
"Effective Date"). The initial term of Executive's employment hereunder shall be
for a period commencing October 31, 1996 and ending on December 31, 1999 (the
"Initial Term"), unless his employment is terminated prior to the expiration of
said period pursuant to the provisions hereof. Executive's employment hereunder
shall be automatically renewed for successive twelve month periods thereafter
(each a "Renewal Term"), unless (i) either party shall advise the other, by
written notice delivered not less than three months prior to the then current
expiration date, of his or its desire not to extend the term of Executive's
employment hereunder beyond such date or (ii) Executive's employment hereunder
is terminated prior to the expiration of any Renewal Term pursuant to the
provisions hereof.
4. The Corporation may terminate Executive's employment upon written
notice for any reason effective upon the date of such notice if for cause and
otherwise effective as set forth in subparagraph (b) below.
(a) If Executive's employment is terminated for "cause,"
Executive will receive only the salary actually earned and payable to Executive
through the date of the termination of Executive's employment, together with any
accrued employee benefits through the date of termination, and Executive will
not otherwise be entitled to any further compensation of any kind. For purposes
of this Agreement, "cause" shall mean: an action by Executive constituting
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actual (as distinguished from statutory) fraud against the Corporation;
misappropriation of funds or property of the Corporation for Executive's own
use; embezzlement of the Corporation's property; or a material and intentional
breach by Executive of the provisions to be performed by him pursuant to this
Agreement.
(b) If Executive's employment is terminated (i) other than for
"cause" (which shall be effective on not less than 60 days notice) or, (ii) by
the Corporation advising the Executive pursuant to Paragraph 3 above that it
does not desire to extend the term of Executive's employment hereunder beyond
the then current expiration date of the Initial Term or any Renewal Term, as the
case may be, under circumstances where the Executive has advised the
Corporation, not less than three months prior to the then current expiration
date of the Initial Term or such Renewal Term, that Executive desires to extend
the term of Executive's employment hereunder into the first or following Renewal
Term, Executive will receive, as damages, and as Executive's sole right and
remedy on account of such termination, the total compensation and benefits, as
set forth in subparagraphs (a), (b), (c) and (d) of Paragraph 5 below
(hereinafter referred to as "Total Compensation and Benefits") to which
Executive would otherwise have been entitled under this Agreement for a period
equal to one year from the date of such termination. Notwithstanding the above,
in the event that Executive's employment with the Corporation is terminated by
Executive within six months after a "change of control" (as hereinafter
defined), Executive shall receive the Total Compensation and Benefits (i) for a
period equal to one year from the date of such termination or (ii) in the event
such Termination occurs during the Initial Term, for one year from the date of
such termination or the remaining portion of the Initial Term, whichever is
longer. The Total Compensation and Benefits shall be payable
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when and as the same would otherwise have been payable in accordance with the
Corporation's normal procedures. Executive shall not be required to mitigate
Executive's damages by seeking other employment and any compensation earned by
Executive on account of other employment during the period referred to above
(without regard to when such compensation is paid), shall not be applied in
reduction of the Corporation's obligations to Executive. For purposes of this
Paragraph 4, a resignation by Executive for any of the following reasons shall
be deemed a termination of Executive's employment by the Company without cause:
(i) Executive shall be assigned duties, performance requirements or working
conditions significantly different from or at significant variance with those
provided in Paragraph 1 hereof, (ii) Executive's authority shall be reduced or
Executive shall be placed in a position of lesser stature than provided in
Paragraph 1 hereof or (iii) Executive's Total Compensation and Benefits shall be
decreased. A "change of control" shall mean any transaction or series of
transactions (as a result of a tender offer, merger, consolidation or otherwise)
that results in, or that is in connection with any person, entity or group
acting in concert acquiring "beneficial ownership" (as defined in Rule 13d-3
under the Securities Exchange Act of 1934), directly or indirectly, of greater
than twenty percent of the aggregate voting power of all classes of common
equity of the Corporation.
5. (a) As compensation for his services, the Corporation will pay to
Executive the following gross salary amounts during the term of Executive's
employment hereunder.
(i) A base salary payable in equal installments no less
frequently than semi-monthly at the rate of $175,000 per annum during the period
from the Effective Date through August 31, 1997, $225,000 per annum during the
period from September 1, 1997 through August 31, 1998, $275,000 per annum during
the period from September 1, 1998
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<PAGE>
through August 31, 1999, and during the period from September 1, 1999 through
December 31, 1999 either (x) $275,000 per annum in the event this Agreement is
not extended for the first Renewal Term or (y) the rate per annum to be paid
during the first Renewal Term as determined in accordance with the following
sentence. Executive's base salary for any Renewal Term shall be determined by
the Board of Directors (or the Compensation Committee thereof) at least four
months in advance of the expiration of the Initial Term or any Renewal Term, as
appropriate.
(ii) Any amounts payable to Executive under existing incentive
or bonus plans or those adopted by the Corporation for the benefit of senior
executive employees.
(b) Executive shall also be entitled to participate, to the extent
he is eligible under the terms and conditions thereof, (i) in any
hospitalization, life insurance and medical service plan generally available to
senior executive employees of the Corporation which is in effect at the time and
during the term of his employment hereunder, and (ii) in any pension,
profit-sharing, retirement or other plan, and all other employee benefits and
perquisites, including, without limitation, not less than four weeks vacation.
In the event that Executive is ineligible to participate due to government
regulations in any pension, profit-sharing, retirement or other plan, the
Corporation shall provide to Executive an amount equal to the benefit such plan
would have provided had Executive been so eligible. The Corporation shall be
under no obligation to institute or continue the existence of any such employee
plan, benefit or perquisite.
(c) Upon the commencement of employment of Executive and every two
years thereafter, the Corporation agrees to provide Executive with use of a
luxury vehicle of Executive's choice from the following list:
(i) Cadillac Seville STS; or
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(ii) Lincoln Signature Series.
At his discretion, Executive shall be entitled to substitute a luxury
vehicle of comparable value. The Corporation further agrees to reimburse
Executive for all necessary vehicle expenses.
(d) Notwithstanding anything to the contrary herein contained,
nothing shall prevent the Board of Directors or the Compensation Committee
thereof from increasing the base salary or other compensation of Executive
during the period of employment hereunder but in no event shall such
compensation be decreased without the written consent of Executive.
6. The Corporation shall reimburse Executive for all reasonable
expenses incurred by him in connection with the performance of his duties
hereunder or which may inure to the benefit of the Corporation.
7. Subject to ratification by the Corporation's shareholders, in
consideration of the acceptance by Executive of the terms and conditions of this
Agreement, the Corporation shall grant to Executive an option to purchase from
the Corporation shares of the Corporation's common stock, par value $.10 per
share. The aggregate number of shares subject to such option, the exercise price
and the other terms and conditions of such option are specified in the form of
Stock Option Agreement attached as Exhibit A hereto. The Corporation shall
submit the grant of options to Executive for ratification at the next regularly
scheduled annual meeting of the Corporation's shareholders.
8. During the period of his employment hereunder, Executive will not
directly or indirectly own, manage, operate, join, control, participate in,
invest in, or otherwise be connected with, in any manner, whether as an officer,
director, employee, partner, investor or
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<PAGE>
otherwise, any business entity which is engaged in any business in which the
Corporation or any of its subsidiaries is engaged. Nothing herein contained
shall be deemed to prohibit Executive from investing in securities of a company
if the securities of such company are listed for trading on a national stock
exchange or traded in the over-the-counter market and Executive's holdings
therein represent less than three percent of the total number of shares or
principal amount of other securities of such company outstanding.
9. (a) Executive represents and warrants to the Corporation that
neither: the execution and delivery of this Agreement by Executive nor the
performance by Executive of any of Executive's obligations hereunder constitute
or will constitute a violation or breach of, or a default under, any agreement,
arrangement or understanding, or any other restriction of any kind, to which
Executive is a party or by which Executive is bound; provided however that
Executive is a party to an agreement dated May 9, 1996 with his prior employer,
Empire Insurance Group (the "Separation Agreement") which contains the following
restriction (the "Restriction") (the term "you" refers to the Executive and the
term "Empire" refers to Empire Insurance Group):
"2. Through December 31, 1997, you agree
not to (a) call upon or solicit any customer of
Empire or any of Empire's affiliates with a view to
engaging in the property and casualty business, ..."
Executive and the Corporation agree that until January 1, 1998 Executive's
duties hereunder do not include, and Executive agrees that he will refrain from,
the calling upon or solicitation of, or discussions with any other employee of
the Corporation which discussions contemplate the
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calling upon or solicitation of, any agency, broker, producer or policyholder
which does business with or is a customer of Empire or any of Empire's
affiliates. While the Executive's duties are subject to the foregoing
limitations, the Executive duties as Chief Operating Officer do include general
supervision of all of the operations of the Corporation and its insurance
subsidiaries including the Corporation's marketing and selling efforts. The
Corporation will indemnify and defend and hold Executive harmless against any
loss, damage, claim or action suffered by Executive which loss, damage, claim or
action is based upon a claim by Empire that the exercise of Executive's duties
in accordance with the foregoing violates the Restriction contained in the
Separation Agreement.
(b) Paragraph 2 of the Separation Agreement also contains a hiring
restriction in subparagraph (b) of Paragraph 2 of the Separation Agreement (the
"Hiring Restriction") and an agreement not to disclose the terms of the
Separation Agreement in the third paragraph of Paragraph 2 of the Separation
Agreement (the "Non-Disclosure Restriction").
With respect to each of the Hiring Restriction and the
Non-Disclosure Restriction, provided that the Executive has fully observed and
complied with such restriction, the Corporation will indemnify and hold
Executive harmless against any loss, damage, claim or action suffered by
Executive which loss, damage, claim or action is based upon a claim by Empire
that Executive has breached such restriction.
10. Executive shall hold in a fiduciary capacity for the benefit of the
Corporation all information, knowledge and data relating to or concerned with
its operations, sales, business and affairs ("Information"), and, except as may
be required by law, he shall not, at any time hereafter, use, disclose or
divulge any Information to any person, firm or corporation other than
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to the Corporation or its designees or except as may otherwise be required in
connection with the business and affairs of the Corporation. The term
"Information" shall not include information that becomes generally available to
the public other than as a result of a disclosure by Executive.
11. (a) In the event that, at any time during the period of his
employment hereunder, Executive shall become "Disabled" (as that term is
hereinafter defined), he shall continue to receive the full amount of the Total
Compensation and Benefits to which he was otherwise entitled under Paragraph 5
hereof until the expiration of twenty-four months after the date he shall be
deemed to have become Disabled. Upon the expiration of twenty-four months from
the date Executive is deemed to have become Disabled (i) Executive shall not be
entitled to receive any further Total Compensation and Benefits until he shall
cease to be Disabled and shall have resumed his duties hereunder and (ii) either
the Corporation or the Executive shall have the right to terminate Executive's
employment hereunder by three months written notice given at any time prior to
the time Executive shall have resumed his duties hereunder. In the event that
Executive shall cease to be Disabled and, prior to any such termination he shall
resume his duties hereunder, he shall be entitled to receive, from and after the
date on which he shall have resumed his duties, the full amount of Total
Compensation and Benefits to which he is otherwise entitled hereunder as if he
had never been Disabled.
(b) For the purposes of this Agreement, Executive shall be deemed
to have become Disabled when by reason of physical or mental incapacity,
Executive shall not be able to perform his duties hereunder for a period of six
consecutive months or for an aggregate of nine months in any consecutive period
of twelve months. In the event that Executive shall
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dispute any determination of his Disability hereunder, the matter shall be
resolved by the determination of three physicians qualified to practice medicine
in the State of New York, one to be selected by each of the Corporation and
Executive and the third to be selected by the designated physicians. During the
period in which the determination of Executive's Disability shall be under
review, Executive shall continue to be treated for all purposes of this
Agreement as an employee of the Corporation, enjoying the full status with full
compensation to which he would otherwise be entitled under this Agreement.
The Corporation may, but shall not be obligated to, apply for and pay
the premiums upon disability insurance covering Executive under policies
providing for the payment thereunder directly to Executive. If Executive shall
receive benefits under any of such policies, the Corporation shall be entitled
to deduct the amount equal to the benefits so received from the salary which it
otherwise would have been required to pay to Executive hereunder.
12. Executive's employment hereunder shall terminate upon his death,
and the Corporation shall pay the Total Compensation and Benefits to such person
or persons as Executive shall, at his option, from time to time designate by
written instrument delivered to the Corporation, each subsequent designation to
be deemed to revoke all prior designations (the "Beneficiary"), or if no such
designation is made, to Executive's estate. The Total Compensation and Benefits
shall be paid until the expiration of twenty-four months from the date of
Executive's death (the "Benefit Term") except that in the event that Executive
dies while Disabled, the Benefit Term shall be reduced by a period of time equal
to the period during which he shall have received payments pursuant to
subparagraph (a) of Paragraph 11 hereof. The health insurance portion of Total
Compensation and Benefits shall be equal to the cost of
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health insurance for members of Executive's family covered by the Corporation's
health insurance plans at the time of Executive's death. The Total Compensation
and Benefits shall be payable in equal installments no less frequently than
semi-monthly commencing with the Corporation's first payroll period after
Executive's death occurs, except that the cost of health insurance may, at the
Corporation's option, be paid directly by the Corporation to the Corporation's
health insurance carrier. After Executive's death, the Corporation shall pay to
the Beneficiary or Executive's estate, as appropriate, any amounts due Executive
under the Corporation's incentive, bonus, pension, profit sharing, retirement or
other employee benefit plans in accordance with the terms of such plans. For
purposes of this paragraph 12, Total Compensation and Benefits shall not include
vehicles or vehicle expenses.
13. The Corporation may, but shall not be obligated to, insure the
Executive's life for the benefit of the Corporation. The Executive will
cooperate with the Corporation in connection therewith, by submitting to medical
and other examinations and otherwise assisting the Corporation in obtaining such
insurance.
14. In the event of a breach by the Executive of any obligations under
this Agreement, the parties hereto acknowledge that the Corporation will not
have an adequate remedy at law, and shall be entitled to such equitable and
injunctive relief as may be available to restrain violations of the provisions
of this Agreement. Nothing herein shall be construed as prohibiting the parties
hereto from pursuing any other remedies available at law or in equity for such
breach, including the recovery of damages for such breach.
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15. This Agreement constitutes the entire agreement of the parties
hereto and no amendment or modification hereof shall be valid or binding unless
made in writing and signed by the party against whom enforcement thereof is
sought.
16. Any notice required, permitted or desired to be given pursuant to
any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or sent by
certified mail, return receipt requested, postage and fees prepaid as follows:
If to the Corporation at:
First Central Financial Corporation
266 Merrick Road
Lynbrook, New York 11563
Attn: Secretary
If to Executive at:
Mr. Andrew W. Attivissimo
151 Yukon Drive
Woodbury, New York 11797
Either of the parties hereto may at any time and from time to time change the
address to which notice shall be sent hereunder by notice to the other party
given under this Paragraph 16. The date of the giving of any notice sent by mail
shall be the date of the posting of the mail.
17. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors, heirs and assigns. The
Corporation agrees that in the event of a sale of assets it shall take whatever
action it legally can in order to cause such assignee to expressly assume the
liabilities, obligations and duties of the Corporation hereunder.
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18. No course of dealing nor any delay on the part of the
Corporation or Executive in exercising any rights hereunder shall operate as a
waiver of any such rights. No waiver of any default or breach of this Agreement
shall be deemed a continuing waiver or a waiver of any other breach or default.
19. This Agreement shall be governed, interpreted and construed
in accordance with the laws of the State of New York applicable to agreements
entered into and to be performed entirely therein.
20. If any clause, paragraph, section or part of this Agreement
shall be held or declared to be void, invalid or illegal, for any reason, by any
court of competent jurisdiction, such provision shall be ineffective but shall
not in any way invalidate or affect any other clause, paragraph, section or part
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
FIRST CENTRAL FINANCIAL
CORPORATION
By: /S/ MARTIN J. SIMON
-------------------------------------
Martin J. Simon
Chairman and Chief Executive Officer
/S/ ANDREW W. ATTIVISSIMO
-------------------------------------
Andrew W. Attivissimo
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ENDORSEMENT NO. 1
attached to and made part of the
MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT NO. 3522-01003
between
FIRST CENTRAL INSURANCE COMPANY
Lynbrook, New York
(hereinafter referred to as the "COMPANY")
and
NATIONAL REINSURANCE CORPORATION
Stamford, Connecticut
(hereinafter referred to as the "REINSURER")
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<PAGE>
IT IS MUTUALLY AGREED that effective at 12:01 a.m., January 1, 1996, as respects
in force, new and renewal business, this Agreement is amended as follows:
1. As respects losses occurring after the effective time and date hereof,
the SCHEDULE OF REINSURANCE, appearing in ARTICLE 6 - LIABILITY OF THE
REINSURER, is deleted and replaced by the following:
SCHEDULE OF REINSURANCE
COMPANY LIMIT OF LIABILITY OF THE
CLASS OF BUSINESS RETENTION REINSURER
Property $250,000 Each Risk $750,000
Each risk, subject to a
maximum of $2,250,000 in
any one Loss Occurrence.
Casualty $250,000 Each Occurrence $750,000 Each Occurrence
Combination of Above $250,000 Each Combination $250,000 Each Combination
Retentions Loss Loss
2. ARTICLE 9 - REINSURANCE PREMIUM is deleted in its entirety and replaced
by the following:
ARTICLE 9 - REINSURANCE PREMIUM
THE COMPANY shall cede to the REINSURER 12.31% of the subject written
premium of the COMPANY during the term of this Agreement on all
business the subject matter of this Agreement.
THE COMPANY shall continue to hold the cash equivalent of the unearned
premium reserve, notwithstanding the fact that the REINSURER shall
assume unearned premium reserve as a liability on its books.
3. As of the effective time and date of this Endorsement, the parties
hereto shall make all necessary entries in their books reflecting the
changes effected by this Endorsement.
All other terms and conditions remain unchanged.
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IN WITNESS WHEREOF, the parties hereto have caused its Endorsement No. 1 to be
executed in duplicate, in Lynbrook, New York this day of , 1996.
FIRST CENTRAL INSURANCE COMPANY
/s/
----------------------------------
ATTEST /s/
------------------------------
And in Stamford, Connecticut, this 2nd day of October, 1996.
NATIONAL REINSURANCE CORPORATION
/s/
----------------------------------
Senior Vice President
ATTEST /s/
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- 3 -
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ENDORSEMENT NO. 2
attached to and made a part of the
MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT NO. 3522-01003
between
FIRST CENTRAL INSURANCE COMPANY
Lynbrook, New York
(hereinafter referred to as the "COMPANY")
and
NATIONAL REINSURANCE CORPORATION
Stamford, Connecticut
(hereinafter referred to as the "REINSURER")
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IT IS MUTUALLY AGREED that effective at 12:01 a.m., July 1, 1996, as respects in
force, new and renewal business, this Agreement is amended as follows:
1. ARTICLE 9 - REINSURANCE PREMIUM is deleted in its entirety and replaced
by the following:
ARTICLE 9 - REINSURANCE PREMIUM
The COMPANY shall cede to the REINSURER 13.85% of the subject written
premium of the COMPANY during the term of this Agreement on all
business the subject matter of this Agreement.
The COMPANY shall continue to hold the cash equivalent of the unearned
premium reserve, notwithstanding the fact that the REINSURER shall
assume such unearned premium reserve as a liability on its books.
2. As of the effective time and date of this Endorsement, the parties
hereto shall make all necessary entries in their books reflecting the
changes effective by this Endorsement.
All other terms and conditions remain unchanged.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement No. 2 to be
executed in duplicate, in Lynbrook, New York, this day of October, 1996.
FIRST CENTRAL INSURANCE COMPANY
/s/
----------------------------------
ATTEST /s/
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And in Stamford, Connecticut, this 2nd day of October, 1996.
NATIONAL REINSURANCE CORPORATION
/s/
----------------------------------
Senior Vice President
ATTEST /s/
------------------------------
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FIRST CENTRAL INSURANCE COMPANY
COMMERCIAL UMBRELLA LIABILITY
QUOTA SHARE AND EXCESS OF LOSS
REINSURANCE AGREEMENT AR 6245
1994 AGREEMENT YEAR
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<PAGE>
COMMERCIAL UMBRELLA LIABILITY QUOTA SHARE AND EXCESS OF LOSS
REINSURANCE AGREEMENT
ARTICLE PAGE
------- ----
COVERAGE I 2
TERM AND CANCELLATION II 3
TERRITORY III 4
EXCLUSIONS IV 4
DEFINITIONS V 11
OTHER REINSURANCE VI 13
EXTRA CONTRACTUAL OBLIGATIONS 13
AND EXCESS LIMITS LIABILITY VII
REPORTS AND REMITTANCES VIII 14
RESERVES AND FUNDING IX 15
LOSS NOTICES AND SETTLEMENTS X 17
OFF SET XI 18
SALVAGE AND SUBROGATION XII 18
WARRANTY XIII 19
DELAYS, ERRORS, OR OMISSIONS XIV 19
AMENDMENTS XV 20
ACCESS TO RECORDS XVI 20
INSOLVENCY XVII 20
ARBITRATION XVIII 21
SEVERABILITY IXX 23
TAXES XX 23
CURRENCY XXI 23
SERVICE OF SUIT XXII 24
AGENCY XXIII 25
INTERMEDIARY XXIV 25
ARTICLE PAGE
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EXHIBIT A (QUOTA SHARE)
LIMIT OF LIABILITY 1 27
REINSURANCE PREMIUM AND
CEDING COMMISSION 2 27
EXHIBIT B (EXCESS OF LOSS) 1 28
RETENTION AND LIMIT
REINSURANCE PREMIUM AND
CEDING COMMISSION 2 28
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COMMERCIAL LIABILITY QUOTA SHARE AND
EXCESS OF LOSS RETENTION REINSURANCE AGREEMENT
THIS AGREEMENT is made and entered into by and between FIRST CENTRAL
INSURANCE COMPANY, LYNBROOK, NEW YORK, and any other companies owned or
controlled by First Central Insurance Company (hereinafter called the "Company")
of the one part, and CONTINENTAL CASUALTY COMPANY, CHICAGO, ILLINOIS
(hereinafter called the "Reinsurer") of the other part.
WITNESSETH:
That in consideration of the mutual covenants hereinafter contained and
upon the terms and conditions hereinbelow set forth, the parties hereto agree as
follows:
ARTICLE 1
COVERAGE
The Reinsurer will indemnify the Company, subject to the limits set
forth in the Exhibits attached hereto, in respect to losses that may accrue to
the Company under all policies classified by the Company as:
COMMERCIAL UMBRELLA LIABILITY
All reinsurance for which the Reinsurer will be obligated by virtue of
this Agreement will be subject to the same terms and conditions, rates,
interpretations, waivers, modifications, and alterations as the respective
policies of the Company to which this Agreement applies. Nothing herein will in
any manner create any obligations or establish any rights against the
Reinsurance in favor of any third parties or any persons not parties to this
Agreement except as provided in the Insolvency Article.
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ARTICLE II
TERMS AND CANCELLATION
This Agreement will apply to all losses occurring on or after December
1, 1994 12:01 a.m. standard time (as defined in the Company's policies) on
policies written or renewed with effective dates on or after December 1, 1994
12:01 a.m. standard time, and will remain in full force and effect until
canceled as hereinafter provided.
This Agreement may be canceled (or the Reinsurer's participation
reduced) any December 1 by either party giving at least 90 days prior notice by
certified or registered mail to the other party. During any such period of
notice the Reinsurer will remain bound by the terms of this Agreement.
In the event this Agreement is canceled (or the Reinsurer's
participation reduced) in accordance with the aforementioned procedure, the
Reinsurer will remain liable for all losses under polices in force until their
expiration or renewal dates, whichever come first, but in no event will the
Reinsurer's liability extend for a run-off period longer than 12 months plus
extensions and odd time not to exceed 18 months in all from the date of
cancellation. The Reinsurer will return immediately, on a pro rata basis as of
the date its liability ceases, the unearned premium less ceding commission on
those policies that remain in force beyond the run-off period, if any.
Alternatively, the Company may elect to cancel (or reduce) the
Reinsurer's liability on a cut-off basis as of the date of cancellation, and the
Reinsurer will not be liable for any losses occurring (or the percentage thereof
equal to the amount of participation reduction) on or after
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the cancellation date and will return immediately to the Company the unearned
premium less ceding commission as of that date, computed on a monthly pro rata
basis.
Notwithstanding the other provisions in this Article, in the event the
Company's policies are written in jurisdiction where cancellation, renewal, or
nonrenewal is regulated by the insurance authorities, and the Company is bound
by such regulations and statutes of said jurisdiction or a jurisdicial decision,
the Reinsurer will remain liable on any such policies in force at cancellation
date of this Agreement (and will receive the premium therefor) until the date
each expires or until the first renewal date when the Company can lawfully
nonrenew said policies, whichever occurs first. If, however, the Company intends
to hold the business net and for its own account, or has other reinsurance
agreements that would apply to such business, the Reinsurer will not be liable
for longer than the run-off period set forth above.
Notwithstanding the cancellation of this Agreement (or the Reinsurer's
participation) as hereinabove provided, its provisions will continue to apply to
all unfinished business hereunder to the end that all obligations and
liabilities incurred by each party hereunder will be fully performed and
discharged.
ARTICLE III
TERRITORY
The territorial scope of this Agreement will follow that of the
Company's policies.
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ARTICLE IV
EXCLUSIONS
No reinsurance indemnity will be afforded under this Agreement for:
A. Liability assumed by the Company under any form of treaty
reinsurance; however, local agency reinsurance accepted in the
normal course of business and/or policies written by another
carrier at the Company's request and reinsured 100% by the
Company will not be excluded hereunder.
B. Property business.
C. Accident and health insurance.
D. Financial guarantee coverage.
E. War risk, bombardment, invasion, insurrection, rebellion,
revolution, military or usurped power, or confiscation by
order of any government or public authority, as excluded under
a reinsured policy containing a standard war exclusion clause.
F. All business derived from any Pool, Association (including
Joint Underwriting Association), Syndicate, Exchange, Plan, or
other facility directly as a member, subscriber, or
participant or indirectly by way of reinsurance.
G. Loss or liability excluded by the Insolvency Funds Exclusion
Clause attached to the Agreement.
H. Loss or liability excluded by the "Nuclear Incident Exclusion
Clause -- Liability -- Reinsurance" attached to this
Agreement, or as may be revised hereafter by the Lloyd's
Underwriters' Non-Maine Association.
I. Policies issued by the Company to insurance or reinsurance
companies (each hereafter referred to as "insurer") which
provides insurance against liability of the insurer for any
damages resulting from alleged or actual tortious conduct by
the insurer in the handling of claims made against any of its
policyholders or in the handling of any other business matters
with any of its policyholders.
J. "Bodily injury," "personal injury," or "property damage"
arising out of:
1. Inhaling, ingesting, or prolonged physical exposure
to asbestos or goods or product containing asbestos;
or
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2. The use of asbestos in constructing or manufacturing
any good, products, or structure; or
3. The removal of asbestos from any good, product, or
structure; or
4. The manufacture, transportation, storage, disposal of
asbestos or goods or products containing asbestos.
The coverage afforded by this Agreement does not
apply to payment for the investigation or defense of
any loss, injury or damage or any cost, fine, or
penalty or for any expense, claim or suit related to
this Exclusion.
K. As respects General Liability, all loss and/or liability
accruing to the Company as a result of:
1. Bodily injury or property damage arising out of the
actual, alleged, or threatened discharge, release, or
escape of pollutants:
(a) at or from premises owned, rented or
occupied by the named insured;
(b) at or from any site or location used by or
for the named insured or others for the
handling, storage, disposal, processing, or
treatment of waste;
(c) which are at any time transported, handled,
stored, treated disposed of, or processed
as, waste by or for the named insured or any
person or organization form whom the named
insured may be legally responsible; or
(d) at or from any site or location on which the
named insured or any contractors of
subcontractors working directly or
indirectly on behalf of the named insured
are preforming operations:
(i) if the pollutants are brought on or
to the site or location in
connection with such operations; or
(ii) if the operations are to test for,
monitor, clean up, remove, contain,
treat, detoxify, or neutralize the
pollutants;
2. Any loss, cost or expense arising out of any
governmental direction or request that the named
insured test for, monitor, clean up, remove, contain,
treat, detoxify, or neutralize pollutants.
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"Pollutants" means any solid, liquid, gaseous, or
thermal irritant or contaminant, including smoke,
vapor, soot, fumes, acids, alkalis, chemicals, and
waste. Waste includes materials to be recycled,
reconditioned, or reclaimed
Subparagraphs 1(a) and 1(d)(i) above do not apply to
bodily injury or property damage caused by heat,
smoke, or fumes from hostile fire. As used in this
Exclusion, a hostile fire means one that becomes
uncontrollable or breaks out from where it was
intended to be.
L. Products recall.
M. Pharmaceutical manufacturers.
N. Claims made coverage on policies issued by the Company, except
claims made coverage written in conjunction with Employees
Benefit coverage for commercial package business.
O. Retroactive liability coverage.
P. Professional Liability other than:
1. Nurses;
2. Morticians;
3. Beauty Shop and Barber Shop;
4. Funeral Directors Professional Liability.
5. Incidental Medical Malpractice for school districts;
6. Druggists, except chain stores with 5 or more
locations;
7. Optometrists;
8. Hearing aid suppliers.
Q. Directors' and Officers' Liability.
R. Employers Liability under the Federal Employers Liability Act,
United States Longshoremen's and Harbor Workers' Compensation
Act or Jones Act.
S. Errors and Omissions insurance.
T. Workers Compensation and Occupational Disease; however, this
Exclusion will not apply to Employers Liability.
U. Fidelity, Surety, or Forgery.
V. Ocean Marine, except pleasure craft under 50 feet in length.
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W. Kidnap, ransom and/or extortion coverage, except as respects
dishonest and fraudulent acts by employees of the uninsured
under Fidelity bonds.
X. Fiduciary Liability arising from the Employee Retirement
Income Security Act of 1974, or amendments thereto.
Y. Single event/special coverage.
Z. Securities Act Liability Insurance (S.E.C. Liability).
AA. Blood banks.
BB. Sexual abuse or sexual misconduct.
CC. Professional trucking companies.
DD. Automobile Liability with respect to any vehicle used
principally as:
1. Taxis;
2. Vehicles used for racing;
3. Ambulances in towns having a population of 10,00 or
more, except ambulances when used as funeral cars;
4. Fire trucks and police emergency trucks in towns
having a population of 10,000 or more;
5. Newspaper delivery in towns having a population of
25,000 or more.
6. Vehicles engaged in transporting and distributing
fireworks, fuses, nitroglycerine, explosives and
ammunition.
EE. General Liability (Other Liability) with respect to:
1. Concerns engaged in the demolition of vessels or the
demolition of buildings more than three stories in
height;
2. Product Liability for risks covering the manufacture
and wholesale distribution of drugs and chemical,
beauty parlor preparations, beauty preparations,
aviation parts, volatile oils, insecticides, tobacco,
and animal feed (other than custom blending of grain
without chemical additives); however this Exclusion
applies only when the risks are involved in both the
manufacture and wholesale distribution of the above
items;
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3. Advertisers', Broadcasters', and Telecasters'
Liability; however, this Exclusion applies to any
Personal Injury Liability;
4. Railroad operations, including street, railways,
except side tract agreement coverages;
5. Aircraft or airports as respects coverage for all
liability arising out of the ownership, maintenance,
or use of any aircraft or flight operations;
6. Tunnel construction more than 50 feet in length;
7. Bridge, tunnel, dam or reservoir construction or
operation;
8. Amusement parks or amusement devices;
9. All mining operations;
10. Onshore and offshore gas and oil drilling operations;
11. Manufacture, production, refining, storage
distribution, or transportation of natural or
artificial fuel gas, butane, propane, or liquefied
petroleum gases or gasoline, except gasoline
distribution in rural areas or where such
distribution presents less than 25% or total revenue;
12. Manufacture of fireworks, fuses, nitroglycerine,
celluloid, and pyroxlin;
13. Manufacture of any explosive substance intended for
use as an explosive (Note: "Explosive" as used in
this Article means any substance manufactured for the
express purpose of exploding as differentiated from
other commodities used industrially and which are
only fortuitously explosive, such as gasoline, fuel
gases, and dye-stuff);
14. Manufacture of any product (other than fireworks and
fuses) in which any explosive substance is an
ingredient;
15. Loading of any such explosive substance into
containers for use as explosive objects, propellant
charges, or detonating devices, and the incidental
storage thereof;
16. Handling, transportation, or storage (or any one or
more of them) of fireworks, fuses, nitroglycerine,
explosives, ammunition, or ammonium nitrate;
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17. Municipalities or governmental entities having a
population of 10,000 or more;
18. State or governmental agencies, unless the Riot
Exclusion Endorsement is attached;
19. Stevedoring;
20. Gas or electric utilities, including municipal risks
operating these utilities;
21. Banks and other financial institutions, unless the
policy contains a standard Financial Institutions
Endorsement;
22. Boiler manufacturing, installation, or service;
however, this Exclusion does not apply to plumbing
contractors;
23. Community television or cable television operations;
24. Elevator or hoist manufacturing, installation,
inspection, or repair;
25. Inspection services, claims services, and rating
bureaus;
26. Logging and lumbering risks, except lumberyards;
27. Warehousing and bailee operation, including Motor
Trust Cargo and terminal risks, unless liability for
personal injury in the insured's care, custody, or
control is excluded from the Company's Commercial
Umbrella Liability policy;
28. Security and alarm installations and service;
however, this Exclusion does not apply to locksmiths;
29. Ski lodges, lifts, cable cars and tows;
30. Sprinkler and fire suppression equipment
manufacturing, installation, inspection, and repair;
31. School boards or school districts having a student
population of 10,000 or more;
32. Any watercraft exceeding 50 feet in length.
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Notwithstanding the foregoing, the exclusions J. and K. will not apply
where a legal action and/or legal order modifies application of such exclusion
under the reinsured policy. Additionally, the Company will notify the Reinsurer
if application of either of said exclusions under the original primary policy is
being modified by any legal action and/or court order.
Furthermore, exclusions DD. and EE. will not apply if the risks
excluded are only incidental to the regular operations of a risk covered
hereunder, that is, they are 10% or less of an insured's gross receipts.
Any reinsurance falling within the scope of one or more of the
exclusions set forth in DD. and EE. that is specially accepted by the Reinsurer
from the Company will be covered under this Agreement and will be subject to the
terms hereof, except as such terms will be modified by the special acceptance.
If the Company is bound, without the knowledge and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
business falling within the scope of exclusions P. through EE., the reinsurance
coverage provided hereunder will apply to such business, but only until the
Company can effect cancellation of such coverage in accordance with either a)
the cancellation provisions in its policy; or b) the cancellation provisions
required by the insurance regulatory authorities having jurisdiction over the
policy, whichever allows for the greater length of time, but in no event beyond
12 months plus odd time (not exceeding 15 months in all) from discovery of the
risk by the Company.
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ARTICLE V
DEFINITIONS
"Policies" as used in this Agreement will mean all policies, contracts,
binders, or agreements of insurance or reinsurance, whether written or oral, as
intended to be covered hereunder.
"Renewed" as used in this Agreement will include those policies, if
any, issued for more than one year as of their next annual anniversary or annual
installment date.
"Occurrence" as used in this Agreement, unless otherwise defined in the
policies reinsured hereunder, will mean each and every disaster, casualty,
accident, or loss or series of disasters, casualties, accidents, or losses
arising out of one event. Without limiting the generality of the foregoing, as
respects coverage written with an aggregate limit of liability on a policy
period basis, concurrence will be further held to mean all insured losses
subject to the application of the same aggregate limit in the same policy
period. Such "occurrence" will be deemed to have taken place on the effective
date of said policy period.
"Loss" as used in this Agreement will mean the amount of any
settlement, award, or judgment paid by the Company or for which the Company has
become liable to pay (including interest accrued prior to final judgment if
included as part of loss on reinsured policies) after deduction of all
recoveries, salvages, and subrogation, and inuring reinsurance whether recovered
or not. Loss will not include loss expense, unless loss expense is included
within the limit of liability on the policies reinsured hereunder.
"Loss expense" as used in this Agreement will mean all expenses
incurred by the Company in the investigation, appraisal, adjustment, litigation
and/or defense of claims under
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policies reinsured hereunder, including court costs, interest accrued prior to
final judgment if included as part of expense or reinsured policies, and
interest accrued after final judgment, but excluding internal office expenses,
salaries, per diem, and other remuneration of regular Company employees.
"Net written premium" as used in this Agreement will mean the gross
written premium of the Company for the classes of business reinsured hereunder
as specified in the Coverage Article, less returned premium for cancellations
and reductions, and less premium for reinsurance as set forth in the Other
Reinsurance Article.
ARTICLE VI
OTHER REINSURANCE
The Company may purchase facultative reinsurance on any subject risk it
deems advisable, and the premium for that portion of the Company's policy
reinsured elsewhere will be deducted from the gross subject premium hereunder.
ARTICLE VII
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY
This Agreement will extend to cover any losses arising from claims
related extra contractual obligations and/or excess limits liability.
"Extra contractual obligations" as used in this Agreement will mean
those liabilities not covered under any other provision of this Agreement, which
arise from the handling of any claim or business covered hereunder; such
liabilities arising because of, but not limited to, the following: failure to
settle within the policy limit, by reason of alleged or actual negligence,
fraud, or bad faith in rejecting an offer of settlement, in the preparation
of the defense, in the trial of any action against the insured or reinsured, or
in the preparation or prosecution of an
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appeal consequent upon such action. In no event will coverage for extra
contractual obligations be provided under this Agreement to the extent such
coverage is not permitted under New York law.
"Excess limits liability" as used in this Agreement will mean damages
payable in excess of the policy limit as a result of alleged or actual
negligence, fraud, or bad faith in failing to settle and/or rejecting a
settlement within the policy limit, in the preparation of the defense, in the
trial of any action against the insured or reinsured, or in the preparation or
prosecution of an appeal consequent upon such action. Excess limits liability is
any amount for which the Company would have been contractually liable to pay had
it not been for the limits of the reinsured policy.
There will be no recovery hereunder where the extra contractual
obligation or excess limits liability has been incurred due to fraud committed
by a member of the board of directors or a corporate officer of the Company,
acting individually, collectively, or in collusion with a member of the board of
directors, a corporate officer, or a partner of any other corporation,
partnership, or organization involved in the defense or settlement of a claim on
behalf of the Company.
The date on which any extra contractual obligation and/or excess limits
liability is incurred by the Company will be deemed, in all circumstances, to be
the date of the original loss. Nothing in this Article will be construed to
create a separate or distinct loss apart from the original covered loss that
gave rise to the extra contractual obligations and/or excess limits liability
discussed in the preceding paragraphs. As respects Exhibit A (Quota Share), the
Reinsurer's liability for extra contractual obligations and/or excess limits
liability will not exceed
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its pro rata share of an additional policy cession limit. As respects Exhibit B
(Excess of Loss), the Reinsurer's liability for extra contractual obligations
and/or excess limits liability will be in addition to the indemnification
coverage set forth int he Retention and Limit Section, but the Reinsurer's
additional liability as respects extra contractual obligations and/or excess
limits liability will not exceed an additional policy cession limit, plus its
proportionate share of loss expense connected therewith.
ARTICLE VIII
REPORTS AND REMITTANCES
Within 30 days after the close of each month, the Company will furnish
the Reinsurer with a report summarizing the gross premium, premium ceded less
return premium and commission, monies recovered, and net balance due the
Reinsurer. Amounts due the Reinsurer will be remitted with said report.
In addition, the Company will furnish the Reinsurer with a monthly
statement showing the unearned premium, the total reserves for outstanding
losses including loss expense, and such other information as may be required by
the Reinsurer for completion of its NAIC annual statements.
ARTICLE IX
RESERVES AND FUNDING
(This Article is only applicable if the Reinsurer cannot qualify for
credit by each governmental authority having jurisdiction over the
Company's reserves.)
As regards policies issued by the Company coming within the scope of
this Agreement, the Company agrees that, when it files with the Insurance
Department or sets up on its books reserves for losses (including loss and loss
expense paid by the Company but not recovered from
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the Reinsurer, loss and loss expense reported and outstanding, and an allowance
for IBNR as determined by the Company) and/or unearned premium, which it is
required by law to set up, it will forward to the Reinsurer a statement showing
the proportion of such reserves applicable to it. The Reinsurer hereby agrees
that it will fund such reserves by cash advances, Trust Agreements, escrow
accounts for the benefit of the Company, Letters of Credit, or a combination
thereof. The Reinsurer will have the option of determining the method of funding
referred to above provided it is acceptable to the Company and the applicable
regulatory authorities.
If the Reinsurer's choice of funding is or includes a Letter of Credit,
it will apply for and secure delivery to the Company of a clean, irrevocable,
unconditional Letter of Credit, dated on or before December 31 of the year in
which the request is made, issued by a member of the Federal Reserve System or
any bank approved for use by the NAIC Securities Valuation Office, and
containing provisions acceptable to the insurance regulatory authorities having
jurisdiction over the Company's reserves in an amount equal to the Reinsurer's
proportion of said reserves. The Letter of Credit will be issued for a period of
not less than one year, and will be automatically extended for one year from its
date of expiration or any future expiration date unless 30 days prior to any
expiration date the issuing bank notifies the Company be registered mail that
the issuing bank elects not to consider the Letter of Credit extended for any
additional period. An issuing bank, not a member of the Federal Reserve System
or not chartered in the state of domicile of the Company, will provide 60 days
notice to the Company prior to any expiration in the event of nonextension.
Notwithstanding any other provisions of this Agreement, the Company or
its court-appointed successor in interest may draw upon the cash advances,
Trust Agreements, escrow
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accounts and/or Letters of Credit at any time without diminution because of the
insolvency of the Company or of the Reinsurer for one or more of the following
purposes only:
A. To reimburse the Company for the Reinsurer's share of unearned
premium on policies reinsured hereunder on account of
cancellations of such policies.
B. To pay the Reinsurer's share or to reimburse the Company for
the Reinsurer's share of any loss reinsured by this Agreement,
which has not been otherwise paid.
C. To make refund of any sum in excess of the actual amount
required to pay the Reinsurer's share of any liability
reinsured by this Agreement.
D. In the event of nonextension of Letters of Credit as provided
for above, to establish deposits of the Reinsurer's share of
reserves for losses and/or unearned premium under this
Agreement.
E. To pay any other amounts the Company claims are due under this
Agreement.
The issuing bank will have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to ensure that withdrawals are made only upon the order
of properly authorized representatives of the Company.
At annual intervals, or more frequently as agreed but never more
frequently than semi-annually, the Company will prepare and forward to the
Reinsurer a statement to reflect the Reinsurer's share of reserves for losses
and/or unearned premium. If the statement shows that the Reinsurer's share of
such reserves exceeds the balance available through cash advances, Trust
Agreements, escrow accounts and/or Letters of Credit as of the statement date,
then the Reinsurer will, within 30 days after receipt of notice os such excess,
make an adjustment to increase the amount available. If, however, the statement
shows that the Reinsurer's share of such reserves is less than the balance
available through the chosen method of funding as of the statement date,
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then the Company will, within 30 days after receipt of written request from the
Reinsurer, release such excess by making the appropriate adjustment.
ARTICLE X
LOSS NOTICES AND SETTLEMENTS
The Company will advise the Reinsurer promptly of all losses that, in
the opinion of the Company, may involve the Reinsurer under this Agreement and
of all subsequent developments pertaining thereto that may materially affect
them as well. Inadvertent omission in dispatching the aforementioned notices
will in no way affect the obligation of the Reinsurer under this Agreement,
provided the Company informs the Reinsurer of such omission promptly upon
discovery.
The Company will have the right to settle all claims under its
policies. The settlements, provided they are within the terms of this Agreement,
will be unconditionally binding on the Reinsurer in proportion to its
participation in this Agreement. When so requested, however, the Company will
afford the Reinsurer, at the Reinsurer's own expense, an opportunity to be
associated with the Company in the defense of any claim, suit, or proceeding
involving this Agreement, and the Company and the Reinsurer will cooperate in
every respect in such defense. Amounts due the Company hereunder in the
settlement of loss and loss expense will be payable by the Reinsurer immediately
upon being furnished by the Company with reasonable evidence of the amount paid
or to be paid as respectively set forth in the Limit of Liability Section and in
the Retention and Limit Section of the Exhibits.
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ARTICLE XI
OFFSET
The Company and the Reinsurer hereunder will be entitled to deduct from
amounts due the other party under this Agreement any amounts due itself from the
other party under this Agreement. In the event of the insolvency of a party
hereto, however, offsets will only be allowed in accordance with the provisions
of Section 7427 of the Insurance Law of the sate of New York.
ARTICLE XII
SALVAGE AND SUBROGATION
The Reinsurer will be credited with its share of salvage and/or
subrogation in respect of claims and settlements under this Agreement, less its
share of recovery expense. Unless the Company and Reinsurer agree to the
contrary, the Company will enforce its right to salvage and/or subrogation and
will prosecute all claims arising out of such right. Should the Company refuse
or neglect to enforce this right, the Reinsurer is hereby empowered and
authorized to institute appropriate action in the name of the Company.
Amounts recovered from salvage and/or subrogation will always be used
to reimburse the excess reinsurer (and the Company, should it carry a portion
excess coverage net) before being used in any way to reimburse the Company and
the Reinsurer hereon, who will share pro data in any remainder. If the amount
recovered exceeds the recovery expense, such expense will be borne by each party
in proportion to its benefit from the recovery. If the recovery expense exceeds
the amount recovered, the amount recovered (if any) will be applied to the
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reimbursement of recovery expense and the remaining expense will be borne by
each party in proportion to its liability for the loss before recovery was
attempted.
ARTICLE XIII
WARRANTY
It is hereby warranted that the maximum policy limits on the policies
reinsured by this Agreement will be $2,000,000. Should the Company wish to cede
policies having limits in excess of $2,000,000 to this Agreement, prior approval
of the Reinsurer will be required.
ARTICLE XIV
DELAYS, ERRORS, OR OMISSIONS
Inadvertent delays, errors, or omissions made in connection with this
Agreement or any transaction hereunder will not relieve either party from any
liability that would have attached had such delay, error, or omission not
occurred, provided always that such error or omissions rectified immediately
upon discovery. The liability of the Reinsurer under this Agreement will in no
event exceed the respective limits specified in the Limit of Liability Section
and in the Retention and Limit Section of the Exhibits, nor will the Reinsurer's
liability be extended to cover any risks, perils, or classes of insurance
excluded herein except as set forth in the Exclusions Article.
ARTICLE XV
AMENDMENTS
This Agreement may be altered or amended in any of its terms and
conditions by mutual consent of the Company and the Reinsurer by addenda hereto,
which will then constitute a part of this Agreement.
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ARTICLE XVI
ACCESS TO RECORDS
Provided the Company received prior notice, the Reinsurer or its
designated representatives will have the right to inspect at any reasonable
time, all records of the Company that pertain in any way to this Agreement.
ARTICLE XVII
INSOLVENCY
(If more than one reinsured Company is referenced in the Preamble to
this Agreement, this Article will apply severally to each such Company.)
In the event of the Company's insolvency, the reinsurance afforded by
this Agreement will be payable by the Reinsurer on the basis of the Company's
liability under the policies reinsured without diminution because of the
Company's insolvency or because its liquidator, receiver, conservator, or
statutory successor has failed to pay all or a portion of any claims, subject
however to the right of the Reinsurer to offset against such funds due
hereunder, any sums that may be payable to it by said insolvent Company in
accordance with the Offset Article. The reinsurance will be payable by the
Reinsurer directly to the Company, its liquidator, receiver, conservator, or
statutory successor except (a) where this Agreement specifically provides
another payee of such reinsurance in the event of the Company's insolvency and
(b) where the Reinsurer, with the consent of the direct insured or insured, has
assumed such policy obligations of the Company as direct obligations of itself
to the payees under such policies in substitution for the Company's obligation
to such payees. Then, and in that event only, the Company, with the prior
approval by the Superintendent of Insurance of the state of New York of the
Certificate of
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Assumption on New York risks, is entirely released from its obligation and the
Reinsurer will pay any loss directly to payees under such policies.
The Company's liquidator, receiver, conservator, or statutory successor
will give written notice of the pendency of a claim against the Company under
the policies reinsured within a reasonable time after such claim is filed in the
insolvency proceeding. During the pendency of such claim, the Reinsurer may
investigate said claim and interpose in the proceeding where the claim is to be
adjudicated, at its own expense, any defense that it may deem available to the
Company, its liquidator, receiver, conservator, or statutory successor. The
expense thus incurred by the Reinsurer will be chargeable against the Company,
subject to court approval, as part of the expenses of conservation or
liquidation to the extent that such proportionate share of the benefit will
accrue to the Company solely as a result of the defense undertaken by the
Reinsurer.
ARTICLE XIII
ARBITRATION
As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Agreement,
illuding the formation or validity thereof, will be submitted for decision to a
panel of three arbitrators. Notice requesting arbitration will be in wilting and
sent certified or registered mail, return receipt requested.
One arbitrator will be chosen by each party and the two arbitrators
will, before instituting the hearing, choose an impartial third arbitrator who
will preside at the hearing. If either party fails to appoint its arbitrator
within 30 days after being requested to do so by the other party, the latter
after 10 days notice by certified or registered mail of its intention to do so,
may appoint the second arbitrator.
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If the two arbitrators are unable to agree upon the third arbitrator
within 30 days of their appointment, the third arbitrator will be selected from
a list of six individuals (three named by each arbitrator) by a judge of the
federal district court having jurisdiction over the geographical area in which
the arbitration is to take place, or if the federal court declines to act, the
state court having general jurisdiction in such area.
All arbitrators will be disinterested active or former executive
officers of insurance or reinsurance companies or underwriters at Lloyd's,
London.
Within 30 days after notice of appointment of all arbitrators, the
panel will meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
The panel will be relieved of all judicial formality and will not be
bound by the strict rules of procedure and evidence. Unless the panel agrees
otherwise, arbitration will take place in Lynbrook, New York, but the venue may
be changed when deemed by the panel to be in the best interest of the
arbitration proceeding. Insofar as the arbitration panel looks to substantive
law, it will consider the law of the State of New york. The decision of any two
arbitrators when rendered in writing will be final and binding. The panel is
empowered to grant interim relief as it may deem appropriate.
The panel will make its decision considering the custom and practice of
the applicable insurance and reinsurance business as promptly as possible
following the termination of the hearings. Judgment upon the award may be
entered in any court having jurisdiction thereof.
Each party will bear the expense of its own arbitrator and will jointly
and equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration will be allocated by the panel. The panel
may, at its discretion, award such further costs and
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expenses as it considers appropriate, including but not limited to attorneys
fees, to the extent permitted by law.
ARTICLE XIX
SEVERABILITY
If any provision of this Agreement will be rendered illegal or
unenforceable by the laws, regulations or public policy of any state,, such
provision will be considered void in such state, but this will not affect the
validity or enforceability of any other provision of this Agreement or the
enforceability of such provision in any other jurisdiction.
ARTICLE XX
TAXES
The Company will pay all taxes on premiums reported to the Reinsurer on
this Agreement.
ARTICLE XXI
CURRENCY
The sign "S" in this Agreement refers to United States of American
Dollars. Therefore, premiums due the Reinsurer and loss payment due the Company
hereunder will be in United States of America Dollars.
ARTICLE XXII
SERVICE OF SUIT
(This Article applies if the Reinsurer is unauthorized in any state,
territory, or district of the United States of America that has
jurisdiction over the Company and in which a subject suit has been
instituted. This Article is not intended to conflict with or override
the parties' obligation to arbitrate their disputes in accordance with
the Arbitration Article.)
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In the event the Reinsurer fails to pay any amount claimed due
hereunder, the Reinsurer, at the request of the Company, will submit to the
jurisdiction of a court of competent jurisdiction within the United States and
will comply with all requirements necessary to give that court jurisdiction.
Nothing in this Article constitutes or should be understood to constitute a
waiver of the Reinsurer's right to commence an action in any court of competent
jurisdiction in the United States, to remove an action to a United States
District Court, or to seek a transfer of a case to another court as permitted by
the laws of the United States or of any state in the United States. Service of
process in such suit may be made upon Mendes and Mount, 750 Seventh Avenue, New
York, New York 10019-6829, or another party specifically designated below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In any suit instituted against it upon this Agreement, the Reinsurer
will abide by the final decision of such court or of any appellate court in the
event of an appeal.
The above named are authorized and directed to accept service of
process on behalf of the Reinsurer in any such suit and/or upon the request of
the Company to give a written undertaking to the Company that they will enter a
general appearance upon the Reinsurer's behalf in the event such a suit is
instituted.
Further, pursuant to any statue of any state, territory, or district of
the United States that makes provision therefor, the Reinsurer hereby designates
the Superintendent, Commissioner, or Director of Insurance or other officer
specified for that purpose in the statute (or his successor or successors in
office) as its true and lawful attorney upon whom may be served any lawful
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process in any action, suit, or proceeding instituted b y or on behalf of the
Company or any beneficiary, hereunder arising out of this Agreement, and hereby
designates the above named as the person to whom the said officer is authorized
to mail such process or a true copy thereof.
ARTICLE XXIII
AGENCY
For purposes of sending and receiving notices and payments required by
this Agreement, the reinsured Company that is set forth in the Preamble to this
Agreement will be deemed the agent of all other reinsured Companies referenced
in the Preamble. In no event, however, will any reinsured Company be deemed the
agent of another with respect to the terms of the Insolvency Article.
ARTICLE XXIII
INTERMEDIARY
Aon Re Inc. is hereby recognized as the Intermediary negotiating this
Agreement for all business hereunder. Correspondence regarding Agreement terms,
including provisional notice of cancellation (if applicable), will be
transmitted through Aon Re Inc., Metro Center, One Station Place, Stamford,
Connecticut 06902. All statements for premiums, return premiums, commissions,
taxes, losses, loss expense, salvages, and loss settlements will be transmitted
through Aon Re Inc., 123 North Wacker Drive, Chicago, Illinois 60606. Payments
by the Company to Aon Re Inc. will be deemed payment to the Reinsurer. Payments
by the Reinsurer to Aon Re Inc. will be deemed payment to the Company only to
the extent that such payments are actually received by the Company.
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3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their duly authorized representatives.
Signed at LYNBROOK, NEW YORK
FIRST CENTRAL INSURANCE COMPANY
Signature: /s/ Title: Exec. V.P.
----------------------------- ---------------------------
Attest: /s/ Date: 12/8/95
----------------------------- ---------------------------
Signed at CHICAGO, ILLINOIS
CONTINENTAL CASUALTY COMPANY
Signature: /s/ Title: Group Vice President
----------------------------- ---------------------------
Attest: /s/ Date: January 3, 1996
----------------------------- ---------------------------
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EXHIBIT A
(Quota Share)
SECTION I
LIMIT OF LIABILITY
The Company will cede to the Reinsurer, and the Reinsurer will accept,
a 90% quota share participation in respect to all business written or renewed by
the Company with an effective date on or after the inception of this Agreement
and specified in the Coverage Article. The limit of liability to the Reinsurer
will not exceed $900,000 each and every occurrence, and in the aggregate where
applicable, each and every policy, plus its proportionate share of loss expense.
Should any loss involve this reinsurance, the obligation of the Reinsurer will
be immediately and automatically reinstated as to any subsequent loss for the
full amount of reinsurance as set forth above.
The Reinsurer will bear its pro rata share of all loss expenses in
addition to its limit of liability set forth above unless loss expense is
included within the limit of liability of the reinsured policies.
SECTION 2
REINSURANCE PREMIUM AND CEDING COMMISSION
The Company will cede to the Reinsurer its proportionate share of the
net written premium allocated to the first $1,000,000 of each policy written or
renewed with an effective date on or after the inception of the Agreement, less
the ceding commission set forth below.
The Reinsurer will allow the Company a flat ceding commission of 25% on
the net written premium ceded. The commission will include premium taxes of all
kinds, local board assessments, and all other expenses and charges whatsoever
based on the premium for business ceded under this Agreement.
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EXHIBIT B
(Excess of Loss)
SECTION I
RETENTION AND LIMIT
No claim will be made hereunder unless the Company has first sustained
a loss of $1,000,000 each and every occurrence, and in the aggregate where
applicable, each and every policy, inclusive of recoveries from underlying
Exhibit A. The Reinsurer will then indemnify the Company for the amount of loss
in excess of $1,000,000 each and every occurrence, and in the aggregate where
applicable, each and every policy. The limit of liability to the Reinsurer will
not exceed $1,00,000 each and every occurrence, and in the aggregate where
applicable, each and every policy, plus its proportionate share of loss expense.
Should any loss involve this reinsurance, the obligation of the Reinsurer will
be immediately and automatically reinstated as to any subsequent loss for the
full amount of reinsurance as set forth above.
Loss expense, where incurred in connection with claims involving this
reinsurance, and not included within the limit of liability of the reinsured
policies, will be apportioned between the Company and the Reinsurer in
proportion to their respective interests as finally determined in addition to
the retention and limit set forth above. However, in the event a verdict or
judgment is reduced by an appeal or a settlement, subsequent to the entry of the
judgment is reversed outright, the loss expense incurred in securing such final
reduction or reversal will be prorated between the Reinsure and the Company in
the proportion that each benefits from such reduction or reversal, and the
expenses incurred up to the time of the original verdict or judgment will be (a)
prorated in proportion to each party's interest in such verdict or judgment, or
(b) added to the Company's loss when the terms and conditions of the Company's
policies reinsured hereunder include loss expense as part of the policy limit.
SECTION 2
REINSURANCE PREMIUM AND CEDING COMMISSION
The Company will pay the Reinsurer 100% of the net written premium
allocated to limits in excess of the first $1,000,000 of each policy written or
renewed with an effective date on or after the inception of this Agreement, less
the ceding commission set forth below.
The Reinsurer will allow the Company a flat ceding commission of 25% on
the net written premium ceded. The commission will include premium taxes of all
kinds, local board assessments, and all other expenses and charges whatsoever
based on the premium for business ceded under this Agreement.
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INSOLVENCY FUNDS EXCLUSIONS CLAUSE
This Agreement excludes all liability of the Company arising by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, plan, pool, association fund or other arrangement, howsoever
denominated, established, or governed that provides for any assessment of or
payment or assumption by the Company of part or all of any claim, debt, charge,
fee, or other obligation of an insurer, or its successors or assigns, which has
been declared by any competent authority to be insolvent, or which is otherwise
deemed unable to meet any claim, debt, charge, fee, or other obligation in whole
or in part.
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U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
(Approved by Lloyd's Underwriters' Non-Marine Association)
(1) This reinsurance does not cover any loss or liability accruing to
the Reassured as a member of, or subscriber to, any association of insurers or
reinsurer formed for the purpose of covering nuclear energy risks or as a direct
or indirect reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of paragraph (1) of
this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph (2) from
the time specified in clause iii in this paragraph (2) shall be deemed following
provisions (specified as the limited exclusion provision).
Limited Exclusion Provision:
I. It is agreed that the policy does not apply under any
liability coverage.
to { injury, sickness, disease, death or destruction
{ bodily injury or property damage
with respect to which an insured under the policy is also an insured
under a nuclear energy liability policy issued by Nuclear Energy
Liability Insurance Association, Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or would
be an insured under any such policy but for its termination upon
exhaustion of its limit of liability.
II. Family Automobile Policies (liability only), Special
Automobile Policies (private passenger automobiles, liability
only). Farmers Comprehensive PersonaL Liability Policies
(liability only). Comprehensive Personal Liability policies
(liability only) or policies of a similar nature; and the
liability portion of combination forms related to the four
classes of policies stated above, such as the Comprehensive
Dwelling Policy and the applicable types of Homeowners
Policies.
III. The inception dates and thereafter of all original policies as
described in II above, whether new, renewal or replacement,
being policies which either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the
Limited Exclusion Provision set forth above; provided this
paragraph (2) shall not be applicable to Family Automobile
Policies, Special Automobile Policies, or policies or
combination policies of a similar nature, issued by the
Reassured on New York risks, until 90 days following approval
of the Limited Exclusion Provision by the Governmental
Authority having jurisdiction thereof.
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph (1)
of this clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverage:
Owners, Landlords and Tenants Liability, Contractual
Liability, Elevator Liability, Owners or
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Contractors (including railroad) Protective Liability,
Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers
Liability, Garage Liability, Automobile Liability (including
Massachusetts Motor Vehicle or Garage Liability)
shall be deemed to include, with respect to such overages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
in the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
I. Under any Liability Coverage, {injury, sickness, disease,
to death or destruction
{bodily injury or property
damage
(a) with respect to which an insured under the
policy is also an insured under a nuclear
energy liability policy issued by Nuclear
Energy Liability Insurance Association,
Mutual Atomic Energy Liability Underwriters
or Nuclear Insurance Association of Canada,
or would be an insured under any such policy
but for its termination upon exhaustion of
its limit of liability; or
(b) resulting from the hazardous properties of
nuclear material and with respect to which
(1) any person or organization is required
to maintain financial protection pursuant to
the Atomic Energy Act of 1954, or any law
amendatory thereof, or (2) the insured is,m
or had this policy not been issued would be,
entitled to indemnity from the United States
of America, or any agency thereof, under any
agreement entered into by the Untied States
of America, or any agency thereof, with any
person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision
{immediate medical or surgical relief to
relating to expenses incurred with
{respect to first aid
{bodily injury, sickness, disease or death
to resulting from the hazardous
{properties of nuclear bodily injury
material and arising out of the operation of a nuclear
facility by any person or organization.
III. Under any Liability Coverage, to {injury, sickness, disease,
death or destruction
bodily injury or property
damage
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resulting from the hazardous properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility
owned by, or operated by or on behalf of, an insured
or (2) has been discharged or dispersed therefrom;
(b) the nuclear material is contained in spent fuel or
waste at any time possessed, handled, used,
processed, stored, transported or disposed of by or
on behalf of an insured; or
(c) the injury, sickness, disease, death or destruction
bodily injury or property damage arising out of the
furnishing by an insured of services, materials,
parts or equipment in connection with the planning,
construction, maintenance, operation or use of any
nuclear facility, but if such facility is located
within the United States of America, its territories,
or possessions of Canada.
this exclusion (c) applies only
to injury to or destruction of property at such
nuclear facility
proper damage to such nuclear facility and
any property thereat.
IV. As used in this endorsement:
"hazardous properties" include, radioactive, toxic or explosive
properties: "nuclear material" means source material, special nuclear
material or byproduct material: "source material", "special nuclear
material", and "byproduct material" have the meanings given them in the
Atomic Energy Act of 1954 or in any law amendatory thereof: "spent
fuel" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor: "waste"
means any waste material (1) containing byproduct material and (2)
resulting from the operation by any person or organization of any
nuclear facility included within the definition of nuclear facility
under paragraph (a) or (b) thereof: "nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1)
separating the isotopes of uranium or plutonium, (2)
processing or utilizing spent fuel, or (3) handling,
processing or packaging waste.
(c) any equipment or devise used for the processing,
fabricating or alloying of special nuclear material
if at any time the total amount of such material in
the custody of the insured at the premises where such
equipment or devise is located consists of or
contains more than 25 grams of plutonium or uranium
233 or any combination thereof, or more than 250
grams of uranium 235.
(d) any structure, basin, excavation, premises or place
prepared or used for the storage or disposal of
waste.
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations: "nuclear reactor" means any
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apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of
fissionable material: With respect to injury to or destruction of
property, the word "injury" or "destruction" "property damage" includes
all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after lst May,
1960, provided this paragraph (3) shall not be applicable to
(i) Garage and Automobile Policies issued by the
Reassured on New York risks. or
(ii) statutory liability insurance required under
Chapter 90, General Laws of Massachusetts,
until 90 days following approval of the
Broad Exclusion Provision by the
Governmental Authority having
jurisdiction thereof.
(4) Without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that paragraphs
(2) and (3) above are not applicable to original liability
policies of the Reassured in Canada and that with respect to
such policies this Clause shall be deemed to include the
Nuclear Energy Liability Exclusion Provisions adopted by the
Canadian Underwriters' Association or the Independent
Insurance Conference of Canada.
- --------------------------------------------------------------------------------
*NOTE. The words printed in italics in the Limited Exclusion Provision
and in the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.
21/9/67
N.M.A. 1590
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NUCLEAR INCIDENT EXCLUSION CLAUSE-LIABILITY-REINSURANCE-CANADA
1. This Agreement does not cover any loss or liability accruing
to the Reinsured as a member of or subscriber to, any
association of insurers or reinsurers formed for the purpose
of covering nuclear energy risks or as a direct or indirect
reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of paragraph 1 of
this clause it is agreed that for all purposes of this
Agreement all the original liability contracts of the
Reinsured, whether new, renewal or replacement, of the
following classes, namely,
Personal Liability,
Farmers' Liability,
Storekeepers Liability.
which become effective on or after 31st December 1984, shall
be deemed to include, from their inception dates and
thereafter, the following provisions -
Limited Exclusion Provision.
This Policy does not apply to bodily injury or property damage
with respect to which the Insured is also insured under a
contract of nuclear energy liability insurance (whether the
Insured is unnamed in such contract and whether or not it is
legally enforceable by the Insured) issued by the Nuclear
Insurance Association of Canada or any other group or pool of
insurers or would be an Insured under any such policy but for
its termination upon exhaustion of its limits of liability.
With respect to property, loss of use of such property shall
be deemed to be property damage.
3. Without in any way restricting the operation of paragraph 1 of
this clause it is agreed that for all purposes of this
Agreement all the original liability contracts of the
Reinsured, whether new, renewal or replacement, of any class
whatsoever (other than Personal Liability, Farmers' Liability,
Storekeepers' Liability or Automobile Liability contracts),
which become effective on or after 31st December 1984, shall
be deemed to include from their inception dates and
thereafter, the following provision: -
Broad Exclusion Provision
It is agreed that this Policy does not apply:
(a) To liability imposed by or arising under the Nuclear
Liability Act; nor
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(b) to bodily injury or property damage with respect to
which an Insured under this policy is also insured
under a contract of nuclear energy liability
insurance (whether the Insured is unnamed in such
contract and whether or not it is legally enforceable
by the Insured) issued by the Nuclear Insurance
Association of Canada or any other insurer or group
or pool of insurers or would be an Insured under any
such policy but for its termination upon exhaustion
of its limit of liability; nor
(c) to bodily injury or property damage resulting
directly or indirectly from the nuclear energy hazard
arising from:
(i) the ownership, maintenance, operation or use
of a nuclear facility by or on behalf of an
Insured;
(ii) the furnishing by an Insured of services,
materials, parts or equipment in connection
with the planning, construction, maintenance,
operation or use of any nuclear facility; and
(iii) the possession, consumption, use, handling,
disposal or transportation of fissionable
substances, or of other radioactive material
(except radioactive isotopes, away from a
nuclear facility, which have reached the
final stage of fabrication so as to be usable
for any scientific, medical, agricultural,
commercial or industrial purpose) used,
distributed, handled or sold by an Insured.
As used in this Policy:
1. The term "nuclear energy hazard" means the
radioactive, toxic, explosive, or other hazardous
properties of radioactive material;
2. The term "radioactive material" means uranium,
thorium, plutonium, neptunium, their respective
derivatives and compounds, radioactive isotopes of
other elements and any other substances that the
Atomic Energy Control Board may, by regulation,
designate as being prescribed substances capable of
releasing atomic energy, or as being requisite for
the production, use or application of atomic energy;
3. The term "nuclear facility" means:
(a) any apparatus designed or used to sustain
nuclear fission in a self-supporting chain
reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or
more of them;
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(b) any equipment or device designed or used for
(i) separating the isotopes of plutonium,
thorium and uranium or any one or more of
them, (ii) processing or utilizing spent
fuel, or (iii) handling, processing or
packaging waste;
(c) any equipment or device used for the
processing, fabricating or alloying of
plutonium, thorium or uranium enriched in
the isotope uranium 233 or in the isotope
uranium 235, or any one or more of them if
at any time the total amount of such
material in the custody of the Insured at
the premises where such equipment or device
is located consists of or contains more than
25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams
of uranium 235;
(d) any structure, basin, excavation, premises
or place prepared or used for the storage or
disposal of waste radioactive material;
and includes the site on which any of the foregoing
is located, together with all operations conducted
thereon and all premises used for such operations.
4. The term "fissionable substance" means any prescribed
substance that is, or from which can be obtained, a
substance capable of releasing atomic energy by
nuclear fission.
5. With respect to property, loss of use of such
property shall be deemed to be property damage.
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<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF PER COMMON SHARE EARNINGS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY
Net income applicable to common shares $(13,112,197) $ 360,553 $ 5,716,145
============ ============ ============
Weighted average number of primary common shares:
Outstanding 5,987,154 5,986,127 5,883,261
Issuable upon assumed exercise of dilutive warrants 219 51,479 43,140
------------ ------------ ------------
TOTAL 5,987,373 6,037,606 5,926,401
============ ============ ============
Primary earnings per common share (2.19) 0.060 0.965
============ ============ ============
FULLY DILUTED
Net income applicable to common shares $(13,112,197) $ 360,553 $ 5,716,145
Add interest and amortization of debentures (net of
tax) 338,444 386,768 420,404
------------ ------------ ------------
TOTAL $(12,773,753) $ 747,321 $ 6,136,549
============ ============ ============
Weighted average number of primary common
shares 5,987,154 5,986,127 5,883,261
Increase to assumed exercise of stock options and
conversion of convertible debt to reflect
maximum dilution effect 653,333 886,108 953,497
------------ ------------ ------------
TOTAL 6,640,487 6,872,235 6,836,758
============ ============ ============
Fully diluted earnings per common share (2.19)* 0.060* 0.898
============ ============ ============
</TABLE>
* In computing fully diluted earnings per share for 1996 and 1995, interest and
amortization of debentures, assumed exercise of stock options and the conversion
of convertible debt is excluded as conversion would increase earnings per share.
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (Loss) Before Income Taxes
and Taxes on Realized Gains $(14,029,197) $ (595,447) $ 7,659,645 $ 5,951,889 $ 3,443,824
Fixed Charges
Interest Expense on EDP Equipment -- 6,510 13,783 35,651 38,868
Interest Expense on Debt 513,266 594,763 626,475 786,819 1,012,730
Interest Component of Rent Expense -- 0 112,000 112,000 112,000
Amortization Debt Issue Costs 157,796 103,093 170,044 268,389 283,384
------------ ------------ ------------ ------------ ------------
Total Fixed Charges 671,062 704,366 922,302 1,202,859 1,446,982
============ ============ ============ ============ ============
Total Earnings (Losses) (See Note) $(13,358,135) $ 108,919 $ 8,581,947 $ 7,154,748 $ 4,890,806
============ ============ ============ ============ ============
Ratio of Earnings (Losses) to Fixed
Charges (19.9):1 0.2:1 9.3:1 5.9:1 3.4:1
------------ ------------ ------------ ------------ ------------
</TABLE>
NOTE: For the purpose of computing the ratio of earnings to fixed charges
(i) earnings represent net income, plus income taxes and any taxes on
realized investment gains plus fixed charges and (ii) fixed charges
represent interest expense, plus amortization of capitalized debenture
costs plus the interest components of rent expense under operating
leases.
<PAGE>
<PAGE>
[McGladrey & Pullen, LLP Letterhead]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8, filed with the Securities and Exchange Commission (the
"Commission") on September 16, 1994 (Reg. No. 33-84082) and the Registration
Statement on Form S-8 filed with the Commission on April 17, 1992 (Reg. No.
33-47296) of our report, dated February 25, 1997, except for Notes 1 and 18 as
to which the date is March 24, 1997, which appears on pages 49 and 50 of the
annual report on Form 10-K of First Central Financial Corporation for the year
ended December 31, 1996.
/s/ McGladrey & Pullen, LLP
New Haven, Connecticut
April 14, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 79,279,962 35,640,019
<DEBT-CARRYING-VALUE> 0 33,415,757
<DEBT-MARKET-VALUE> 0 33,693,837
<EQUITIES> 18,814,702 28,704,546
<MORTGAGE> 0 0
<REAL-ESTATE> 3,918,512 3,999,404
<TOTAL-INVEST> 108,311,406 100,678,691
<CASH> 4,112,441 1,499,829
<RECOVER-REINSURE> 466,480 817,681
<DEFERRED-ACQUISITION> 4,541,520 6,351,976
<TOTAL-ASSETS> 167,098,331 168,460,349
<POLICY-LOSSES> 106,794,069 86,636,481
<UNEARNED-PREMIUMS> 31,339,850 36,295,661
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 4,900,000 6,330,000
<COMMON> 658,902 658,902
0 0
0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 167,098,331 168,460,349
56,712,187 72,293,513
<INVESTMENT-INCOME> 5,000,496 4,904,755
<INVESTMENT-GAINS> 1,909,211 1,100,200
<OTHER-INCOME> 1,195,274 858,404
<BENEFITS> 48,717,274 42,061,265
<UNDERWRITING-AMORTIZATION> 12,309,853 12,691,206
<UNDERWRITING-OTHER> 5,913,502 4,437,794
<INCOME-PRETAX> (14,029,197) (595,447)
<INCOME-TAX> (917,000) (956,000)
<INCOME-CONTINUING> (13,112,197) 360,553
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,112,197) 360,553
<EPS-PRIMARY> (2.19) .06
<EPS-DILUTED> (2.19) .06
<RESERVE-OPEN> 67,095,000 48,928,000
<PROVISION-CURRENT> 28,934,000 29,066,000
<PROVISION-PRIOR> 19,783,000 12,995,000
<PAYMENTS-CURRENT> 4,513,000 5,057,000
<PAYMENTS-PRIOR> 23,273,000 18,837,000
<RESERVE-CLOSE> 88,026,000 67,095,000
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
