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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 Identification Number)
of incorporation or organization)
266 MERRICK ROAD, LYNBROOK, NEW YORK 11563
(Address of principal executive offices)
(Zip Code)
(516) 593-7070
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Shares Outstanding at August 12, 1997
Title of Class (excluding 602,404 treasury shares)
- ---------------------------------------------------- -----------------------------------------------------
<S> <C>
Common Stock, Par Value $.10 Per Share 5,986,608
</TABLE>
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE NO.
ITEM I FINANCIAL STATEMENTS........................................ 1
Consolidated Balance Sheets................................. 1
Consolidated Statements of Operations....................... 3
Consolidated Statements of Changes in Shareholders' Equity.. 4
Consolidated Statements of Cash Flows....................... 5
Notes to Consolidated Financial Statements.................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 14
SIGNATURES.................................................. 16
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED) *
<S> <C> <C>
ASSETS
Investments
Securities available-for-sale, at market value:
Fixed maturities (amortized cost 1997 - $85,431,988;
1996 - $79,563,688) $ 84,979,891 $ 79,279,962
Equity securities, (cost: 1997 - $252,729;
1996 - $17,230,459) 221,619 18,814,702
Short-term investments, at cost, which approximates
market 17,891,894 10,216,742
------------ ------------
Total Investments 103,093,404 108,311,406
Cash 4,356,310 4,112,441
Accrued investment income 1,337,991 1,379,187
Agents' balances, less allowance for doubtful accounts
(1997 - $1,554,074; 1996 - $3,554,074) 4,585,177 11,607,913
Reinsurance receivables on unpaid losses 18,322,531 18,767,712
Reinsurance receivables on paid losses 862,961 466,480
Prepaid reinsurance premiums 2,244,395 5,358,744
Federal income taxes recoverable 3,932,648 4,092,473
Other receivables 434,156 184,429
Deferred policy acquisition costs 3,713,403 4,541,520
Deferred debenture costs 248,226 280,807
Deferred income taxes 2,950,000 2,950,000
Property, plant and equipment less accumulated depreciation
(1997 - $1,437,696; 1996 - $1,323,113) 4,307,302 4,400,192
Other Assets 339,580 645,027
------------ ------------
$150,728,084 $167,098,331
============ ============
</TABLE>
* The balance sheet at December 31, 1996 has been derived from audited
consolidated financial statements at that date.
The accompanying notes are an integral part of these statements.
1
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FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED) *
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities
Unpaid losses $ 103,419,708 $ 97,436,974
Unpaid loss adjustment expenses 11,454,916 9,357,095
Unearned premiums 17,498,343 31,339,850
------------- -------------
Total Policy Liabilities 132,372,967 138,133,919
Funds held for reinsurance treaty 1,471,682 2,610,641
Reinsurance payable 1,563,919 785,104
Convertible subordinated debentures 4,900,000 4,900,000
Other liabilities 1,207,591 1,172,527
------------- -------------
Total Liabilities 141,516,159 147,602,191
------------- -------------
Commitments and Contingencies
Shareholders' Equity
Common Stock, par value $.10 per share;
authorized - 20,000,000 shares; issued (1997 -
6,589,012 shares; 1996 - 6,589,012 shares) 658,902 658,902
Additional paid-in capital 13,209,395 13,209,395
Net unrealized (depreciation) appreciation on
securities available-for-sale, net of deferred taxes
of (1997 - $0; 1996 - $532,000) (483,207) 768,517
Retained earnings (42,023) 8,990,468
------------- -------------
13,343,067 23,627,282
Less treasury stock, at cost (1997 - 602,404
shares; 1996 - 602,404 shares) (4,131,142) (4,131,142)
------------- -------------
Total Shareholder's Equity 9,211,925 19,496,140
------------- -------------
$ 150,728,084 $ 167,098,331
============= =============
</TABLE>
* The balance sheet at December 31, 1996 has been derived from audited
consolidated financial statements at that date.
The accompanying notes are an integral part of these statements.
2
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FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums Written - Direct $ 11,854,848 $ 31,974,146 $ 2,901,772 $ 16,934,735
Reinsurance ceded (2,970,025) (6,543,060) (1,249,475) (2,859,357)
----------------------------- -----------------------------
Net Premiums Written 8,884,823 25,431,086 1,652,297 14,075,378
Decrease(Increase) in unearned premiums 10,727,158 174,625 7,160,242 (1,405,807)
----------------------------- -----------------------------
Net Premiums Earned 19,611,981 25,605,711 8,812,539 12,669,571
------------ ------------ ------------ ------------
Net investment income 2,733,568 2,538,263 1,345,788 1,342,766
Realized gain (loss) on investments 2,267,824 1,036,031 2,110,170 313,906
Claims adjusting revenues 543,233 481,093 298,749 288,817
Rental and Miscellaneous income 110,181 119,420 54,259 67,210
----------------------------- -----------------------------
Total Revenues 25,266,787 29,780,518 12,621,505 14,682,270
------------ ------------ ------------ ------------
Expenses
Losses 20,353,208 14,121,728 12,297,050 7,800,553
Loss adjustment expense 8,136,990 4,727,475 4,075,116 1,683,674
Policy acquisition cost 3,899,484 5,910,067 1,927,922 2,991,832
Interest expense 220,500 282,407 110,250 139,926
Doubtful accounts 161,518 464,697 86,486 336,966
Other operating expenses 2,172,878 2,903,046 1,040,607 1,556,356
----------------------------- -----------------------------
Total Expenses 34,944,578 28,409,420 19,537,431 14,509,307
----------------------------- -----------------------------
Income (Loss) Before Income Taxes (9,677,791) 1,371,098 (6,915,926) 172,963
Income Taxes (Benefit) (645,300) 354,400 (648,300) (13,000)
----------------------------- -----------------------------
Net Income (Loss) $ (9,032,491) $ 1,016,698 $ (6,267,626) $ 185,963
============================= =============================
Per Share Data:
Net Income (Loss):
Primary ($1.51) $0.17 ($1.05) $0.03
------ ----- ------ -----
Fully Diluted ($1.51) $0.17 ($1.05) $0.03
------ ----- ------ -----
Cash Dividends Paid $0.03 $0.06 $0.00 $0.03
------ ----- ------ -----
</TABLE>
The accompanying notes are an integral part of these statements.
3
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FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NET UNREALIZED
(DEPRECIATION)
ADDITIONAL APPRECIATION
COMMON STOCK PAID-IN ON SECURITIES RETAINED TREASURY STOCK
SHARES AMOUNT CAPITAL AVAILABLE EARNINGS SHARES AMOUNT TOTAL
FOR SALE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996* 6,589,012 $658,902 $13,209,395 $ 768,517 $8,990,468 602,404 $(4,131,142) $19,496,140
Add (deduct):
Net (Loss) (9,032,491) (9,032,491)
Decrease in unrealized appreciation (1,251,724) (1,251,724)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 6,589,012 $658,902 $13,209,395 $ (483,207) ($42,023) 602,404 $(4,131,142) $ 9,211,925
===================================================================================================================================
</TABLE>
* The balance sheet at December 31, 1996 has been derived from audited
consolidated financial statements at that date.
The accompanying notes are an integral part of these statements.
4
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FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) ($9,032,491) $ 1,016,698
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred policy acquisition costs 4,541,520 6,351,976
Provision for depreciation and amortization 160,582 171,723
Provision for losses on uncollectible agents' balances 161,518 464,697
Net realized investment gains (2,267,824) (1,036,031)
Provision for deferred federal income taxes 532,000 (386,000)
Changes in operating assets and liabilities
Decrease (Increase) in accrued investment income 41,196 (646,371)
Change in agents' balances and unearned premiums (5,141,662) (2,036,830)
Change in unpaid losses, unpaid loss adjustment
expenses, and reinsurance recoverables 8,129,255 5,269,231
Deferred policy acquisition costs (3,713,403) (6,637,657)
Other items, net 1,432,380 1,694,797
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,156,929) 4,226,233
------------ ------------
INVESTING ACTIVITIES
Purchases of fixed maturities (23,077,425) (40,531,975)
Sales and maturities of fixed maturities 16,989,688 31,395,866
Purchases of equity securities (1,318,485) (5,714,543)
Sales of equity securities 20,691,574 12,515,785
Net purchases of short-term investments (7,675,152) (1,556,011)
Purchases of property and equipment (27,767) (10,291)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,582,433 (3,901,169)
------------ ------------
FINANCING ACTIVITIES
Reduction of Convertible Subordinated Debenture 0 (500,000)
Cash dividend paid (181,635) (362,331)
Purchases of treasury stock 0 (13,750)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (181,635) (876,081)
------------ ------------
INCREASE (DECREASE) IN CASH 243,869 (551,017)
CASH AT BEGINNING OF YEAR 4,112,441 1,499,829
------------ ------------
CASH AT END OF SECOND QUARTER $ 4,356,310 $ 948,812
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 221,000 $ 303,000
============ ============
Income Taxes, net of refund of $1,362,000, in 1997
and $1,115,000 in 1996 $ (1,336,000) $ (1,062,000)
============ ============
</TABLE>
5
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FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods. The financial statements for
the periods reported should be read in conjunction with the financial statements
and related notes contained in First Central's Annual Report on Form 10-K for
the year ended December 31, 1996.
2. GOING CONCERN UNCERTAINTY AND LIQUIDITY
First Central's financial statements for the three and six-month
periods ended June 30, 1997 and 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 losses incurred, First Central's Shareholders' Equity
at June 30, 1997 and December 31, 1996 declined to approximately $9.2 million
and $19.5 million, respectively and First Central Insurance's Statutory Surplus
declined to approximately $4.7 million and $12.3 million at June 30, 1997 and
December 31, 1996, respectively. 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.
First Central Insurance has a statutory deficiency in Earned Surplus
resulting from its losses from operations and is 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 and Mercury.
As of August 1, 1997 First Central was unable to raise funds from other sources,
and accordingly, First Central did not pay the August 1, 1997 sinking fund
obligation of $1,837,500 and interest of $220,500 on its 9% Convertible
Subordinated Debentures due 2000 (the "Debentures"). The failure to pay either
the aforementioned interest or sinking fund obligations before August 31, 1997
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 ("A.M. 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 policy renewals. 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 ability to compete with other insurers.
The New York State Insurance Department has requested that First
Central Insurance submit and implement a plan designed to improve operations and
raise additional capital. Such plan involves 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 engaged outside consultants to review the activities of the
various
6
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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 investment bankers 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. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
3. PER SHARE DATA
Income per common share is based upon the weighted average number of
shares outstanding for the periods reported. Fully diluted income (loss) per
share assumes the conversion of the Debentures, except when the effects of such
conversions are antidilutive. Such weighted average number of shares outstanding
were as follows:
For the six-month periods ended June 30,
Basic Primary Fully Diluted
--------- --------- -------------
1997........... 5,986,608 5,986,608 5,986,608
1996........... 5,988,327 6,019,135 6,019,135
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 1997 consists of the
following:
Land $ 1,000,000
Building 3,039,313
Equipment 1,705,685
-----------
Sub-total 5,744,998
Less accumulated depreciation:
Building 161,247
Equipment 1,276,449
-----------
Total $ 4,307,302
===========
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL INFORMATION
First Central Financial Corporation ("First Central") 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 new business. First
Central Insurance 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.
RECENT DEVELOPMENTS
During the first six months of 1997, First Central Insurance continued
to experience a reduction of premiums written and significantly increased losses
and loss adjustment expense. First Central reported a loss of $9,032,491 or
$1.51 per share for the six month period ended June 30, 1997. Such loss was
primarily the result of a decrease in net premiums earned of $5,993,730 and an
aggregate increase in losses and loss adjustment expense of $9,640,995 when
compared with the second quarter of 1996. See "--Loss and Loss Adjustment
Expense."
First Central Insurance's losses from operations resulted in its
statutory surplus declining from $12.3 million at December 31, 1996 to $4.7
million at June 30, 1997 with earned surplus declining from a deficit of $4.3
million to a deficit of $10.2 million during the same period. 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, First Central was unable to pay its $1.8 million sinking fund
obligation, and $220,500 interest payment under First Central's Convertible
Subordinated Debentures due 2000 (the "Debentures") on August 1, 1997. The
failure to pay the sinking fund and interest obligations by August 31, 1997 will
constitute a default under the Debentures entitling the holders to accelerate
the entire $4.9 million outstanding principal balance. Primarily as a result of
First Central Insurance's financial condition, in February 1997, A.M. Best &
Co., Inc. ("A.M. Best") changed the B++ (Very Good) rating it assigned to First
Central Insurance in June 1996 to D (Very Vulnerable).
The New York State Insurance Department, has requested that First
Central Insurance submit and implement a plan designed to improve operations and
raise additional capital. Such plan involves, among other things, the
revision of operations to attain future profitability by raising underwriting
standards, curtailing operating expenses, revising agreements to lower attorney
fees 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 investment bankers 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
8
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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.
NET INCOME - EARNINGS
First Central reported net loss for the three and six month periods
ended June 30, 1997 of $6,267,626 or $1.05 per share primary and fully diluted
and $9,032,491 or $1.51 per share primary and fully diluted, respectively. The
decrease in net income is due primarily to a decrease in earned premiums and
increases in loss and loss adjustment incurred offset in part by increases in
realized gains, claims adjusting revenue, net investment income, rental income
and decreased policy acquisition costs, other operating expenses, interest and
doubtful accounts.
PREMIUMS WRITTEN AND EARNED
Direct written premiums of $2,901,772 and $11,854,848 for the three and
six month periods ended June 30, 1997, decreased 82.9% and 62.9% when compared
to the corresponding periods of 1996. The decrease in premium writing was a
result of First Central Insurance's ceasing to write new business after
March 10, 1997 and policy renewals being adversely impacted by the
institution of a lead paint exclusion during the first
quarter of 1997 and the change of First Central Insurance's A.M. Best
rating in February 1997 to D (Very Vulnerable).
Net premiums earned decreased $3,857,032 (30.4%) and $5,993,730 (23.4%)
for the three and six month periods ended June 30, 1997, when compared to the
same period in 1996 as a result of lower premium volume. The rate of decrease in
earned premiums is less than the rate of decrease in written premiums since
premiums are earned over a 365 day period following a policy's effective date.
NET INVESTMENT INCOME; REALIZED GAINS
First Central's net investment income of $1,345,788 and $2,733,568 for
the three and six month periods ended June 30, 1997, respectively, represents a
0.2% and 7.7% increase over the net investment income from the three and six
month periods ending June 30, 1996, respectively. Changes in First Central
Insurance's investment portfolio from holdings of 73.3% in fixed maturities,
22.4% in equity securities and 4.3% in short-term investments as of June 30,
1996 to 82.4% in fixed maturities, 0.2% in equity securities and 17.4% in
short-term investments as of June 30, 1997 produced increased interest income on
U.S. government securities which offset a decrease in dividend income and
interest income on other fixed maturity holdings for the three and six month
periods ended June 30, 1997, when compared to the same periods in 1996.
9
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First Central's net realized gain on investments for the three and six
month periods ended June 30, 1997 was $2,110,170 and $2,267,824 respectively,
representing a increase of 572.2% and 118.9% respectively, over the
corresponding periods in 1996. The increase in net realized gains on investments
resulted primarily from the sale by First Central Insurance of substantially all
of its holding in common and preferred stocks during the second quarter of 1997.
At June 30, 1997 First Central held 82.4% of its invested assets in
fixed maturities available-for-sale, 0.2% in equity securities (common stocks)
available for sale and 17.4% in short-term investments (principally money
markets). At December 31, 1996, First Central held 73.2% of its invested assets
in fixed maturities available-for-sale, 17.4% in equity securities (common and
preferred stocks) available for sale and 9.4% in short-term investments.
At June 30, 1997, the total net unrealized loss applicable to First
Central's available-for-sale securities amounted to $483,207. The unrealized
loss is not net of deferred taxes. At December 31, 1996 the total net unrealized
gain applicable to First Central's available-for-sale securities was $768,517
net of deferred taxes of $532,000.
In accordance with FASB Statement No. 115, the following is the
investment classifications at June 30, 1997. Under Statement No. 115,
unrealized loss or gains on available-for-sale investments are reported as
a reduction or increase in shareholders equity.
CHARGE TO
JUNE 30, 1997 COST MARKET SURPLUS
------------------------------------------------------------------------
Debt Securities:
Available for Sale 85,431,988 84,979,891 (452,097)
------------------------------------------
Equity Securities:
Available for Sale 252,729 221,619 (31,110)
-----------
Less deferred taxes 0
-----------
Reduction of Shareholder's Equity & Investments $ (483,207)
===========
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. At June 30, 1997
100% of the debt securities held by First Central remain classified as
available-for-sale.
10
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LOSS AND LOSS ADJUSTMENT EXPENSE
It has been First Central Insurance's practice to maintain reserves at
or near the middle range of an actuarial reasonableness range established by its
independent actuary to evaluate the adequacy of reserves. First Central
Insurance's reserves are analyzed on a quarterly basis by such independent
actuarial firm. As of June 30, 1997 and December 31, 1996, the actuary indicates
that the mid-point of the actuarial reasonableness range was $95,773,000 and
$85,126,000, respectively. First Central Insurance's carried net reserves on a
statutory basis were $96,986,000 and $88,599,000 at June 30, 1997 and December
31, 1996 respectively. The reserves above the midpoint at June 30, 1997 and at
December 31, 1996 were allocated to the workers' compensation line of business
where First Central Insurance's historical loss ratio of less than 65% per year
(for the prior three years) would result in a reduction of statutory surplus if
such reserves were not increased to reflect a 65% loss ratio.
During the three and six month periods ended June 30, 1997, incurred
losses net of reinsurance increased by 57.6% and 44.1% respectively, when
compared to the corresponding periods in 1996. Such increases were due primarily
to adverse development continuing to emerge in First Central Insurance's loss
reserves.
During the three and six month periods ended June 30, 1997 incurred
loss adjustment expenses, net of reinsurance, increased by 142.0% and 72.1%,
respectively when compared to the corresponding periods in 1996. The increase
for the three and six month period resulted from a large increase in legal fees
when compared to the same periods of 1996.
UNDERWRITING EXPENSES
Underwriting expenses are a combination of policy acquisition costs and
other operating expenses as shown on the income statement. Policy acquisition
costs decreased by 35.6% and 34.0% respectively for the three and six months
ended June 30, 1997 as compared to the corresponding periods in 1996. Other
operating expenses decreased by 33.1% and 25.2% respectively for the three and
six month periods ended June 30, 1997 as compared to the corresponding periods
in 1996. The decrease in policy acquisition cost for the three and six month
periods ended June 30, 1997 when compared to 1996 was primarily due to lower
commission and premium tax expense directly associated to the lower premium
volume experienced in 1997 offset in part by a $350,679 assessment to New York
Public Automobile Pool based on automobile assignment risk business. The
decrease of 33.1% and 25.2% in operating expenses for the three and six month
periods ended June 30, 1997 when compared to the same periods in 1996 was
attributed to cost containment procedures instituted in the first quarter of
1997.
PROVISION FOR DOUBTFUL ACCOUNTS
Provision for doubtful accounts decreased by 74.3% and 65.2% in the
three and six month periods ended June 30, 1997 compared to the corresponding
period in 1996. The decrease for the three and six month periods was primarily
the result of a reduction in the amount of uncollectible premiums on policy
audits.
11
<PAGE>
<PAGE>
INTEREST EXPENSE
Interest expense decreased 21.2% for the three and six month periods
ended June 30, 1997 when compared to corresponding periods in 1996. This
decrease is due to the reduction of $930,000 in the principal amount outstanding
of the Debentures from $5,830,000 at June 30, 1996 to $4,900,000 at June 30,
1997.
FINANCING ACTIVITIES
For the six month period ended June 30, 1997 net cash used in First
Central's operating activities was $5,156,929 as compared to cash provided for
of $4,226,233 from the six month period ended June 30, 1996. The change in cash
used for operating activities was due primarily to the net operating loss
experienced in 1997. For the six month period ended June 30, 1997 net cash
provided by investing activities was $5,582,433 which was a result of First
Central Insurance selling substantially all of its equity portfolio during the
second quarter of 1997.
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.
During 1996 and the six month period ended June 30, 1997, 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. First Central Insurance's losses from operations resulted in its
earned surplus declining to a deficit of $10,227,985 (excluding unrealized gains
and losses) as of June 30, 1997. 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. First Central was
unable to pay the August 1, 1997 sinking fund obligation of $1.8 million
and interest of $220,500 on the Debentures. The failure to pay the
aforementioned interest and sinking fund obligations by August 31, 1997
will constitute a default under the Debentures entitling the holders to
accelerate the outstanding amount, currently $4.9 million.
The Insurance Department has requested that First Central Insurance
submit and implement a plan designed to improve operations and raise additional
capital. 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 investment bankers to assist in
its effort to raise additional capital.
12
<PAGE>
<PAGE>
First Central Insurance's Statutory Surplus declined from $12.3 million
at December 31, 1996 to $4.7 million at June 30, 1997. 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, A.M. Best reduced First Central Insurance's rating to D (Very Vulnerable).
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.
Since First Central Insurance does not intend to write new business until new
capital has been obtained, First Central Insurance may need to liquidate certain
securities during the third quarter of 1997 to pay Loss, Loss Adjustment Expense
and/or operation expenses. During the second quarter First Central Insurance
transferred from invested assets approximately $8,000,000 to operating cash.
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.
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 it attempt to revise
operations to attain future profitability, raise additional capital and resume
normal operations.
First Central had gross deferred tax assets of approximately $8,277,000
and $9,153,000 and gross deferred tax liabilities of approximately $1,194,000
and $2,175,000 at June 30, 1997 and at December 31, 1996, respectively. A
$4,133,000 and 4,028,000 valuation allowance has been established with respect
to the gross deferred tax asset at June 30, 1997 and 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.
CAPITAL COMMITMENTS
Neither the Company nor its subsidiaries made any material commitment
for capital expenditures.
13
<PAGE>
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. 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).
4.4 Form of Common Stock Purchase Warrant (a copy of which was filed with
the Commission on August 15, 1994 as Exhibit 4.4 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
4.5 Form of First Central's 1990 Stock Incentive Plan Stock Option (a copy
of which was filed with the Commission on August 15, 1994 as Exhibit
4.5 to First Central's Quarterly Report on Form 10-Q and is hereby
incorporated by this reference).
14
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<PAGE>
11 Computation of Per Share Earnings.
*27 Financial Data Schedule (filed only with the electronic EDGAR filing
of this document).
- -------------------------
* filed herewith
B. Reports on Form 8-K.
One report was filed on Form 8-K during the three-month period ended
June 30, 1997.
A Form 8-K was filed with the Securities and Exchange Commission on
May 22, 1997 with respect to the Company's May 21, 1997 press release announcing
that the Company had signed a letter of intent for the sale of control of the
company.
15
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CENTRAL FINANCIAL CORPORATION
DATED: 8/14/97 BY: /s/ Andrew W. Attivissimo
----------------- -----------------------------
Andrew W. Attivissimo
President, Chairman, Chief
Executive Officer, Chief
Operating Officer (Principal
Executive Officer)
DATED: 8/14/97 BY: /s/ Joan M. Locascio
----------------- -----------------------------
Joan M. Locascio, Treasurer,
Vice President (Chief Financial
and Accounting Officer)
16
<PAGE>
<PAGE>
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES Exhibit 11
COMPUTATION OF PER COMMON SHARE EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PRIMARY
Net income applicable to common shares ($9,032,491) $1,016,698 $3,289,676
=========== ========== ==========
Weighted average number of primary common shares:
Outstanding 5,986,608 5,988,327 5,966,425
Issuable upon assumed exercise of dilutive warrants 0 30,808 52,909
----------- ---------- ----------
TOTAL 5,986,608 6,019,135 6,019,334
=========== ========== ==========
Primary earnings per common share ($1.51) $0.169 $0.547
======= ====== ======
FULLY DILUTED
Net income applicable to common shares ($9,032,491) $1,016,698 $3,289,676
Add interest and amortization of debentures
(net of tax) 145,530 183,051 194,436
----------- ---------- ----------
TOTAL ($8,886,961) $1,199,749 $3,484,112
=========== ========== ==========
Weighted average number of primary common shares:
Outstanding 5,986,608 5,988,327 5,966,425
Increase to assumed exercise of stock options and
conversion of convertible debt to reflect maximum
dilution effect 653,333 778,197 955,728
----------- ---------- ----------
TOTAL 6,639,941 6,766,524 6,922,153
=========== ========== ==========
Fully diluted earnings per common share ($1.51) $0.169 $0.503
======= ====== ======
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 84,979,891
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 221,619
<MORTGAGE> 0
<REAL-ESTATE> 3,878,066
<TOTAL-INVEST> 103,093,404
<CASH> 4,356,310
<RECOVER-REINSURE> 862,961
<DEFERRED-ACQUISITION> 3,713,403
<TOTAL-ASSETS> 150,728,084
<POLICY-LOSSES> 114,874,624
<UNEARNED-PREMIUMS> 17,498,343
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,900,000
<COMMON> 658,902
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 150,728,084
11,854,848
<INVESTMENT-INCOME> 2,733,568
<INVESTMENT-GAINS> 2,267,824
<OTHER-INCOME> 653,414
<BENEFITS> 28,490,198
<UNDERWRITING-AMORTIZATION> 3,899,484
<UNDERWRITING-OTHER> 2,172,878
<INCOME-PRETAX> (9,677,791)
<INCOME-TAX> (645,300)
<INCOME-CONTINUING> (9,032,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,032,491)
<EPS-PRIMARY> (1.51)
<EPS-DILUTED> (1.51)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
