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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


                                        i


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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



                                       ii


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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.


                                        2


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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.


                                        3


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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


                                        4


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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>


                                        5


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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


                                        6


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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.



                                        7


<PAGE>

<PAGE>



        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.



                                        8


<PAGE>

<PAGE>





         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


<PAGE>

<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


<PAGE>

<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


<PAGE>

<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


                                       12


<PAGE>

<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


                                       14


<PAGE>

<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


<PAGE>

<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,


                                       16


<PAGE>

<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


<PAGE>

<PAGE>



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.


                                       18


<PAGE>

<PAGE>



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


<PAGE>

<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


<PAGE>

<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


<PAGE>

<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.


                                       23


<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


<PAGE>

<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.


                                       31


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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%.


                                       32


<PAGE>

<PAGE>




         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.


                                       33


<PAGE>

<PAGE>



ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURES.

         There have been no changes or disagreements with accountants.


                                       34


<PAGE>

<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


<PAGE>

<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


                                       36


<PAGE>

<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."


                                       37


<PAGE>

<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>



                                       38


<PAGE>

<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


                                       39


<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.



                                       41
<PAGE>

<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

<PAGE>

<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>