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 March 31, 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 of incorporation (I.R.S. Employer Identification Number)
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.
Shares Outstanding at May 13, 1997
Title of Class (excluding 602,404 treasury shares)
- ---------------------------------------------------- -----------------------------------------------------
Common Stock, Par Value $.10 Per Share 5,986,608
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 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
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1997 1996
--------------------- ---------------------
(UNAUDITED) *
ASSETS
Investments
Securities available-for-sale, at market value:
Fixed maturities (amortized cost 1997 - $81,477,474;
1996 - $79,563,688) $79,657,591 $79,279,962
Equity securities, (cost: 1997 - $14,286,317;
1996 - $17,230,459) 15,470,357 18,814,702
Short-term investments, at cost, which approximates
market 12,564,579 10,216,742
--------------------- ---------------------
Total Investments 107,692,527 108,311,406
Cash 2,278,623 4,112,441
Accrued investment income 1,389,744 1,379,187
Agents' balances, less allowance for doubtful accounts
(1997 - $3,554,074; 1996 - $3,554,074) 8,288,675 11,607,913
Reinsurance receivables on unpaid losses 19,317,421 18,767,712
Reinsurance receivables on paid losses 1,077,755 466,480
Prepaid reinsurance premiums 3,804,285 5,358,744
Federal income taxes recoverable 4,848,473 4,092,473
Other receivables 466,288 184,429
Deferred policy acquisition costs 4,312,002 4,541,520
Deferred debenture costs 264,738 280,807
Deferred income taxes 2,950,000 2,950,000
Property and equipment less accumulated depreciation
(1997 - $1,377,571; 1996 - $1,323,113) 4,367,428 4,400,192
Other Assets 417,977 645,027
--------------------- ---------------------
$161,475,936 $ 167,098,331
===================== =====================
* 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
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 30, DECEMBER 31,
1997 1996
-------------------- --------------------
(UNAUDITED) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities
Unpaid losses $100,132,317 $97,436,974
Unpaid loss adjustment expenses 10,475,253 9,357,095
Unearned premiums 26,218,475 31,339,850
-------------------- --------------------
Total Policy Liabilities 136,826,045 138,133,919
Funds held for reinsurance treaty 2,196,646 2,610,641
Reinsurance payable 1,369,804 785,104
Convertible subordinated debentures 4,900,000 4,900,000
Other liabilities 640,529 1,172,527
-------------------- --------------------
Total Liabilities 145,932,808 147,602,191
-------------------- --------------------
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 - $216,000; 1996 - $532,000) (419,845) 768,517
Retained earnings 6,225,602 8,990,468
-------------------- --------------------
19,674,054 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 15,542,912 19,496,140
-------------------- --------------------
$ 161,475,936 $ 167,098,331
==================== ====================
* 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
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
1997 1996
------------------- --------------------
(UNAUDITED) (UNAUDITED)
Revenues
Premiums Written - Direct $8,953,076 $15,039,411
Reinsurance ceded (1,720,550) (3,683,703)
------------------- --------------------
Net Premiums Written 7,232,526 11,355,708
Decrease in unearned premiums 3,566,916 1,580,432
------------------- --------------------
Net Premiums Earned 10,799,442 12,936,140
Net investment income 1,387,780 1,195,497
Realized gain on investments 157,654 722,125
Claims adjusting revenues 244,484 192,276
Rental and Miscellaneous income 55,922 52,210
------------------- --------------------
Total Revenues 12,645,282 15,098,248
------------------- --------------------
Expenses
Losses 8,056,158 6,321,175
Loss adjustment expense 4,061,874 3,043,801
Policy acquisition costs 1,971,562 2,918,235
Interest expense 110,250 142,481
Provision for doubtful accounts 75,032 127,731
Other operating expenses 1,132,271 1,346,690
------------------- --------------------
Total Expenses 15,407,147 13,900,113
------------------- --------------------
Income (Loss) Before Income Taxes (2,761,865) 367,400
Federal and State Income Taxes 3,000 1,198,135
------------------- --------------------
Net Income (Loss) $(2,764,865) $830,735
=================== ====================
Per Share Data:
Net Income:
Primary ($0.46) $0.14
======= =====
Fully Diluted ($0.46) $0.13
======= =====
Cash Dividends Paid $0.03 $0.03
===== =====
The accompanying notes are an integral part of these statements.
3
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
NET UNREALIZED
(DEPRECIATION)
ADDITIONAL APPRECIATION ON
COMMON STOCK PAID-IN SECURITIES RETAINED TREASURY STOCK
SHARES AMOUNT CAPITAL AVAILABLE- EARNINGS SHARE AMOUNT TOTAL
FOR-SALE
- ------------------------------------------------------------------------------------------------------------------------------------
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) (2,764,865) (2,764,865)
Change in unrealized appreciation (1,188,362) (1,188,362)
(depreciation) on securities
available-for-sale
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 6,589,012 $658,902 $13,209,395 $ (419,845) $6,225,602 602,404 $(4,131,142) $15,542,912
====================================================================================================================================
* 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
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
1997 1996
------------------- -------------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net Income (Loss) $(2,764,865) $ 830,735
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Amortization of deferred policy acquisition costs 4,541,520 6,351,976
Provision for depreciation and amortization 80,272 69,771
Provision for losses on uncollectible agents' balances 75,033 127,732
Net realized investment gains (157,654) (722,125)
Provision for deferred federal income taxes 748,000 (158,003)
Changes in operating assets and liabilities
Increase in accrued investment income (10,557) (190,330)
Change in agents' balances and unearned premiums (736,405) (1,768,674)
Change in unpaid losses, unpaid loss adjustment
expenses, and reinsurance recoverables 2,652,517 2,845,374
Deferred policy acquisition costs (4,312,002) (6,121,461)
Other items, net (531,034) 843,105
------------------- --------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (415,175) 2,108,100
------------------- --------------------
INVESTING ACTIVITIES
Purchases of fixed maturities (6,605,607) (31,736,959)
Sales and maturities of fixed maturities 4,562,813 30,220,200
Purchases of equity securities (615,360) (3,816,416)
Sales of equity securities 3,796,750 8,685,397
Net (purchases) sales of short-term investments (2,347,837) (4,693,026)
Purchases of property and equipment (27,767) 10,581
------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (1,237,008) (1,330,223)
------------------- --------------------
FINANCING ACTIVITIES
Cash dividend paid (181,635) (181,320)
------------------- --------------------
NET CASH USED IN FINANCING ACTIVITIES (181,635) (181,320)
------------------- --------------------
INCREASE (DECREASE) IN CASH (1,833,818) 596,557
CASH AT BEGINNING OF YEAR 4,112,441 1,499,829
------------------- --------------------
CASH AT END OF FIRST QUARTER $2,278,623 $ 2,096,386
=================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 220,500 $ 284,907
=================== ====================
Income Taxes $ 22,000 $ 32,000
=================== ====================
5
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 consolidated financial statements for the three months
ended March 31, 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 March 31,
1997 and December 31, 1996 declined to approximately $15.5 million and $19.5
million, respectively and First Central Insurance's Statutory Surplus declined
to approximately $10.8 million and $12.3 million at March 31, 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. 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 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 Debentures due 2000. 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 ("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 future 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 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
6
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 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. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
3. PER SHARE DATA
Income (loss) 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 First Central's 9% Convertible
Subordinated Debentures due 2000, except when the effects of such conversion are
antidilutive.
For the three-month periods ended March 31,
Basic Primary Fully Diluted
----- ------- -------------
1997........... 5,986,657 5,986,657 5,986,657
1996........... 5,987,685 5,995,491 6,641,018
4. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1997 consists of the following:
Land $ 1,000,000
Building 3,039,313
Equipment 1,705,686
------------------
Sub-total 5,744,999
Less accumulated depreciation 1,377,571
------------------
Total $ 4,367,427
==================
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
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 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.
RECENT DEVELOPMENTS
During the first three 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
$2,764,865 or $0.46 per share for the three month period ended March 31, 1997.
Such loss was primarily the result of a decrease in net premiums earned of
$2,136,698 and an aggregate increase in losses and loss adjustment expense of
$2,753,056 when compared with the first 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 $10.8
million at March 31, 1997 with earned surplus declining from a deficit of $4.3
million to a deficit of $5.3 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, unless First Central obtains another source of funds, First Central
will be unable to pay its $1.8 million sinking fund obligation under First
Central's 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. 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 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
8
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.
In February 1997, Andrew W. Attivissimo President and Chief Operating
Officer of each of First Central and First Central Insurance 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.
RESULTS OF OPERATIONS
NET INCOME LOSS
First Central reported net loss for the three month period ended March
31, 1997 of $2,764,865 or $0.46 per share primary and $0.46 per share fully
diluted compared to net income of $830,735 or $.14 per share primary and $0.13
per share fully diluted for the three month period ended March 31, 1996. The
decrease in net income is due primarily to a decrease in earned premiums and
realized gains on investments and increases in loss and loss adjustment expense
incurred offset in part by increases in claims adjusting revenue, net investment
income, rental income and decreased policy acquisition costs, other operating
expenses, interest and provision for doubtful accounts.
PREMIUMS WRITTEN AND EARNED
Direct written premiums of $8,953,076 for the three month period ended
March 31, 1997, decreased 40.5% when compared to the corresponding period of
1996. The decrease in premium writing was a result of First Central Insurance's
institution of a lead paint exclusion during the first quarter of 1997, the
change of First Central Insurance's A.M. Best rating in February 1997 to D (Very
Vulnerable) and to First Central Insurance's ceasing to write new business after
March 10, 1997.
Net premiums earned decreased $2,136,698 (16.5%) for the three month
period ended March 31, 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 $1,387,780 for the three month
period ended March 31, 1997, represents a 16.1% increase over the net investment
income from the three month period ending March 31, 1996. Changes in First
Central Insurance's investment portfolio from holdings of 68.0% in fixed
maturities (24.4% in government securities), 24.5% in equity securities and 7.5%
in short-term investments as of March 31, 1996 to 74.0% in fixed maturities
(50.3% in government securities), 14.4% in equity securities and 11.7% in
short-term investments as of March 31, 1997 produced increased interest income
on government securities which offset a decrease in dividend income and interest
income on other fixed maturity holdings compared to the three month period ended
March 31, 1996. First Central's net realized gain on investments for the three
month period ended March 31, 1997 was $157,654, a decline of $564,471 over the
corresponding period in 1996. The decrease in net realized gains on investments
resulted primarily from a reduction in sales of equity securities due to First
Central's
9
smaller holdings in equity securities during the first quarter of 1997 when
compared to the first quarter of 1996, and more favorable market conditions
experienced in the first three months of 1996.
At March 31, 1997 First Central held 74.0% of its invested assets in
fixed maturities available-for-sale, 14.4% in equity securities (common and
preferred stocks) available for sale and 11.7% 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 March 31, 1997, the total net unrealized loss applicable to First
Central's available-for-sale securities amounted to $419,845. The unrealized
loss is net of deferred taxes of $216,000. 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 March 31, 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
MARCH 31, 1997 COST MARKET SURPLUS
----------------------------------------------------------------------------------------
Debt Securities:
Available for Sale 81,477,474 79,657,591 (1,819,883)
-------------------------------------------------------------
Equity Securities:
Available for Sale 14,286,317 15,470,357 1,184,040
--------------------
Less deferred taxes 216,000
--------------------
Reduction of Shareholder's Equity & Investments $ (419,843)
====================
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 March 31, 1997
100% of the debt securities held by First Central remain classified as
available-for-sale.
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 independence
actuary. As of March 31, 1997 and December 31, 1996, the independent actuary
indicates that the mid-point of the actuarial reasonableness range was
$87,619,000 and $85,126,000, respectively. First Central Insurance's carried net
reserves on a statutory basis were $91,648,000 and $88,599,000 at March 31, 1997
and December 31, 1996 respectively. The reserves above the midpoint of
approximately $4,000,000 at March 31, 1997 and approximately $3,500,000 at
December 31, 1996 were allocated to
10
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 month period ended March 31, 1997, incurred losses net
of reinsurance increased by 27.4% when compared to the corresponding period in
1996. Such increases were due primarily to an approximate $550,000 increase in
the change in loss reserves and an approximate $1,200,000 increase in net paid
losses.
During the three month period ended March 31, 1997 incurred loss
adjustment expenses, net of reinsurance, increased by 33.4% when compared to the
corresponding period in 1996. The increase for the three-month period was
primarily due to a $525,000 settlement relating to disputed legal fees with one
of First Central Insurance's former insurance defense law firms.
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 32.4% for the three months ended March 31, 1997 as compared
to the corresponding period in 1996. Other operating expenses decreased by 15.9%
for the three month period ended March 31, 1997 as compared to the corresponding
period in 1996. The decrease in policy acquisition cost for the first quarter of
1997 when compared to 1996 was primarily due to lower commission and premium tax
expense directly associated to the lower premium volume experienced in the first
quarter of 1997. The decrease of 15.9% in operating expenses was attributed to
cost containment procedures instituted in the first quarter of 1997.
PROVISION FOR DOUBTFUL ACCOUNTS
Provision for doubtful accounts decreased by 41.3% for the three month
period ended March 31, 1997 compared to the corresponding period in 1996. The
decrease for the three-month period was primarily the result of a reduction in
the amount of uncollectible premiums on auditable policies.
INTEREST EXPENSE
Interest expense decreased 22.6% for the three month period ended March
31, 1997 when compared to corresponding period in 1996. This decrease is due to
the reduction of $1,430,000 in the principal amount outstanding of the
Debentures from $6,330,000 at March 31, 1996 to $4,900,000 at March 31, 1997.
FINANCING ACTIVITIES
For the three month period ended March 31, 1997 net cash used in First
Central's operating activities was $415,175 as compared to cash provided for of
$2,108,100 from the three-month period ended March 31, 1996. The change in cash
used for operating activities was due primarily to the net operating loss
experienced in the first quarter of 1997.
11
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 three month period ended March 31, 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 $5,290,740 (excluding unrealized gains)
as of March 31, 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. 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.
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 $12.3 million
at December 31, 1996 to $10.8 million at March 31, 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 second quarter of 1997 to pay Loss, Loss Adjustment Expense and/or
operation expenses.
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.
12
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.
First Central had gross deferred tax assets of approximately $9,125,000
and $9,153,000 and gross deferred tax liabilities of approximately $1,349,000
and $2,175,000 at March 31, 1997 and at December 31, 1996, respectively. A
$4,826,000 and $4,028,000 valuation allowance has been established with respect
to the gross deferred tax asset at March 31, 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.
First Central funded its February 1, 1997 interest payment of $220,500
under the Debentures from the dividends it received from First Central Insurance
during the 1996 year.
CAPITAL COMMITMENTS
Neither the Company nor its subsidiaries made any material commitment
for capital expenditures.
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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).
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*10.1 Agreement, dated February 12, 1997, among Martin J. Simon, First
Central and First Central Insurance.
*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.
During the three-month period ended March 31, 1997 one report on Form 8-K was
filed with the Securities and Exchange Commission with respect to Item 5-Other
Events. Such report was filed on February 20, 1997.
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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: 5/14/97 BY: /s/ Andrew W. Attivissimo
------------- ------------------------------------
Andrew W. Attivissimo
President, Chairman, Chief Executive Officer,
Chief Operating Officer (Principal Executive
Officer)
DATED: 5/14/97 BY: /s/ Joan M. Locascio
------------ ---------------------------------------------
Joan M. Locascio, Treasurer, Vice President
(Chief Financial and Accounting Officer)
16