<PAGE>   1
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
                               ------------------
 
                                   FORM 10-K
 
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996                COMM. FILE NO. 0-8483
 
                        CENTRAL RESERVE LIFE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                      Ohio
                          ---------------------------
                        (STATE OR OTHER JURISDICTION OF
                         INCORPORATION OR ORGANIZATION)

                                   34-1017531
                       ---------------------------------
                     I.R.S. EMPLOYER IDENTIFICATION NUMBER
 
<TABLE>
<CAPTION>
<S>                                            <C>
    17800 Royalton Road, Strongsville, Ohio                         44136
  -------------------------------------------                     ---------
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>
 
                                 (216) 572-2400
                ------------------------------------------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
       Securities Registered Pursuant to Section 12(b) of the Act:  None
 
          Securities Registered Pursuant to Section 12(g) of the Act:
 
                        Common Shares, without par value
                     -------------------------------------
                                (TITLE OF CLASS)
 
     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                YES [X]  NO [ ]
 
     Indicate 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [  ]
 
     State the aggregate market value of the voting stock held by non-affiliates
of the Registrant.
 
             $20,984,933 computed based on the closing price of the
                        Common Shares on March 17, 1997.
 
     The number of Common Shares, without par value, outstanding as of March 17,
1997:  4,145,172.
--------------------------------------------------------------------------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
6, 1997, into Part III, Items 10, 11, 12, and 13.
--------------------------------------------------------------------------------
<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS
 
(a) GENERAL DEVELOPMENT OF BUSINESS
 
     Central Reserve Life Corporation (the "Registrant") was incorporated in
1964 as Citation Life Insurance Company under the laws of the State of Ohio. The
present name was adopted in 1976. Unless the context indicates otherwise, the
term "Company" as herein used will refer to Central Reserve Life Corporation
only.
 
     The Company is a holding company conducting its business through several
subsidiaries. More detailed information regarding the Company's subsidiaries is
set forth below.
 
  (1) INSURANCE OPERATIONS
 
     The Company owns 100% of Central Reserve Life Insurance Company
("Central"), which is its principal operating subsidiary.
 
     Central is an Ohio domiciled Life and Accident and Health insurance
company. Central was incorporated in 1963 and commenced business in 1965. The
Company acquired Central in 1973. As of December 31, 1996, Central was licensed
to transact business in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South
Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming
(35 states).
 
  (2) OTHER OPERATIONS
 
     In March 1983, the Company acquired Western Reserve Administrative
Services, Inc. ("Western"), an Ohio corporation which administers claims for
self-insured companies. Western also administers Central's Gemini product which
is a partially self-funded group plan for small companies.
 
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
     Effective December 31, 1995, the Company redefined its reporting segments,
merging the group life and group accident and health segments together, and
combining the life and annuity segments. The Company's current operating
organization comprises three segments: group life and health; life insurance and
annuities; and corporate and other.
 
     The following table presents the revenues and income (loss) on a GAAP basis
for the last three years attributable to the Company's industry segments. The
Company does not allocate investment assets or identifiable assets by industry
segment.
 
<TABLE>
<CAPTION>
                                                       1996             1995             1994
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
Revenues:
  Group Life and Health..........................  $262,509,577     $237,257,385     $228,313,768
  Life Insurance and Annuities...................     2,186,184        2,170,138        1,729,842
  Corporate and Other............................       189,834          381,571          157,601
                                                   ------------     ------------     ------------
                                                   $264,885,595     $239,809,094     $230,201,211
                                                   ============     ============     ============
Income (loss) before Federal income taxes:
  Group Life and Health..........................  $(11,735,521)    $  6,180,636     $  7,577,364
  Life Insurance and Annuities...................      (183,995)        (241,685)        (927,206)
  Corporate and Other............................      (214,434)           8,274          222,831
                                                   ------------     ------------     ------------
                                                   $(12,133,950)    $  5,947,225     $  6,872,989
                                                   ============     ============     ============
</TABLE>
 
                                        1
<PAGE>   3
 
(c) NARRATIVE DESCRIPTION OF BUSINESS
 
     The operational aspects of the Company's business are primarily in Central;
therefore, this section will contain information that only pertains to Central.
 
  (1) BUSINESS AND PRINCIPAL PRODUCT
 
Products
 
     Central specializes in meeting the insurance needs of small to midsized
businesses and individuals. Among the products Central offers are life
insurance, annuities, accident and health insurance, long-term disability
insurance and short-term major medical insurance.
 
     Central's principal product is group insurance, which accounted for about
98% of its premiums in 1996. Approximately 3% of the group premiums were for
life insurance and 97% were for accident and health insurance.
 
     Central provides for its customers a comprehensive package of more than 25
managed care controls which help (a) keep insureds' out-of-pocket expenses down,
(b) ensure affordability of the plans, and (c) keep rates attractive at renewal
time. Among these managed care controls are hospital inpatient and outpatient
billing review, independent utilization management, physician code review,
hospital audit review, premium reduction renewal options, a hospice care
program, and the National Physician Data Bank ReviewSM, a refinement of
Central's former reasonable and customary charge controls.
 
     Also included as a part of Central's managed care programs are Preferred
Provider Organization (PPO) health plans which are available to both groups and
individuals. Through its PPO plans, Central is able to offer customers a network
of hospitals and physicians that provide medical services at discounted rates.
PPO networks which Central contracts with are situated in 16 states. For
customers located outside Central's existing PPO service areas, Central offers a
supplemental hospital program, through which it offers discounted hospital rates
by contracting with national PPO networks.
 
Marketing
 
     Central's products are marketed through the establishment of general
agencies in Midwestern, Southeastern, and Southwestern states. Regional sales
managers are responsible for recruiting and training the general agents. The
general agents, who are trained by Central, are required to recruit agents in
their area, conduct seminars for the agents and train them in the benefits,
underwriting requirements and general conditions under which Central's insurance
plans operate.
 
     Central supports the general agents in the recruiting and training of
agents through sales brochures and literature, assistance with seminars, and a
video training program. Central enhances and facilitates the general agents' and
writing agents' sales efforts through its Co-op Advertising Program, sales and
promotional literature and various sales contests.
 
     Internally, Central's organization supports the agents and emphasizes
customer service with a unique "team" approach. Organized around geographically
dedicated groups of employees, each team consists of several specialists for
each region.
 
Underwriting
 
     Central controls the quality of its business by maintaining specific
underwriting standards and guidelines. When not restricted by state regulatory
agencies, Central medically underwrites each individual by requiring enrollment
applications, medical health history questionnaires and, in some cases, medical
records.
 
     While members of each group are individually underwritten, Central takes
into account certain group characteristics, such as size, location and industry.
For a discussion of certain business risks, other than underwriting, see Note 1
to the consolidated financial statements and the Results of Operations section
of the Management's Discussion and Analysis (MD&A) section on page 11.
 
                                        2
<PAGE>   4
 
  (2) INSURANCE VOLUME, POLICIES AND CERTIFICATES
 
     Although insurance volume (amount of life insurance) is generally a guide
to statistical information for most insurance companies, policies and
certificates in force are a more informative statistic for Central because of
the large percent of business generated in the group accident and health area.
Central requires each insured to carry group life insurance, but the average
requirement is only $10,000. Accordingly, it is more informative to focus on the
number of certificates in force as opposed to volume of insurance.
 
     Following are tables reflecting statistical information on Central's
business.
 
<TABLE>
<CAPTION>
                                                   1996               1995               1994
                                              --------------     --------------     --------------
<S>                                           <C>                <C>                <C>
LIFE INSURANCE VOLUME:
  Insurance Written.........................  $  458,000,000     $  467,588,000     $  459,830,000
  In force..................................  $1,293,673,000     $1,175,823,000     $1,012,860,000
  Reinsured.................................  $   80,895,000     $   50,751,000     $   41,424,000
GROUP POLICIES:
  Beginning of Year.........................          41,884             41,385             40,491
  Issued during Year........................          19,732             21,926             22,400
  Terminations..............................         (18,074)           (21,427)           (21,506)
                                              --------------     --------------     --------------
  End of Year...............................          43,542             41,884             41,385
                                              ==============     ==============     ==============
GROUP CERTIFICATES:
  Beginning of Year.........................         113,720            102,959            105,536
  Issued during Year (new)..................          36,574             44,398             31,270
  Terminations (net of additions)...........         (33,990)           (33,637)           (33,847)
                                              --------------     --------------     --------------
  End of Year...............................         116,304            113,720            102,959
                                              ==============     ==============     ==============
</TABLE>
 
  (3) GEOGRAPHIC DISTRIBUTION
 
     The geographic distribution of direct premiums and annuity considerations
received (before reinsurance) by Central during 1996 is as follows:
 
<TABLE>
<CAPTION>
                  STATE                      AMOUNT        PERCENT OF TOTAL
                                          ------------     ----------------
<S>                                       <C>              <C>
Ohio....................................  $ 84,598,786            32.3%
Indiana.................................    30,673,933            11.7
Arizona.................................    17,242,140             6.5
Michigan................................    15,664,988             6.0
Tennessee...............................    15,126,965             5.8
Colorado................................    13,652,224             5.2
Alabama.................................    12,161,306             4.7
North Carolina..........................    11,964,123             4.6
Missouri................................    10,870,215             4.2
Virginia................................    10,668,820             4.1
Pennsylvania............................    10,297,340             3.9
West Virginia...........................     8,420,610             3.2
Kansas..................................     8,039,026             3.1
South Carolina..........................     6,113,400             2.3
Other...................................     6,462,489             2.4
                                          ------------           -----
          Total.........................  $261,956,365           100.0%
                                          ============           =====
</TABLE>
 
  (4) AGENTS
 
     Central's insurance policies are sold by licensed agents and general agents
(brokers). Regional Sales Managers service the brokers. Central does not have
agents who sell exclusively for it. The licensed agents and brokers who produce
insurance business for Central generally have affiliations with and serve in a
similar capacity for one or more other companies which may be competitive with
Central, and a portion of their business may be written by such other companies.
Such agents and brokers are compensated by Central for
 
                                        3
<PAGE>   5
 
business produced by them on a cash commission basis at rates which are believed
to be competitive with those of other life insurance companies.
 
     As of December 31, 1996, Central had 86 brokers/general agents and 13,689
agents licensed.
 
  (5) INVESTMENTS
 
     An important earnings factor for Central, as well as all insurance
companies, is the income from its investment portfolio. The investment
objectives for insurance companies are to maximize yields, preserve principal
and maintain liquidity. Investments must comply with the insurance laws of the
state of domicile. These laws prescribe the kind, quality and concentration of
investments which may be made. Due to the restrictive nature of these laws,
there may be occasions when Central may be precluded from making certain
otherwise attractive investments. As of December 31, 1996, 97.5% of Central's
fixed maturities was of investment grade quality. Central and the Company do not
invest in "junk" bonds or derivatives such as futures, forwards, swaps, and
option contracts, and other financial instruments with similar characteristics
and substantially all its investments are in fixed maturities. However, Central
does invest in mortgage-backed securities some of which are collateralized
mortgage obligations (CMO's). These investments, besides having a credit risk,
also have the risk of prepayment, during a decline in interest rates, and the
risk of extension during a rise in interest rates. Central constantly monitors
these securities and has reduced its exposure in CMO's in 1996 by selling
certain securities and investing proceeds, from the sales and from maturities,
in short term maturities.
 
     The following tables show various aspects of the fixed maturities
investment portfolio of the Company as of December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                           CARRYING
                                                                             VALUE        PERCENT
                                                                          -----------     --------
<S>                                                                       <C>             <C>
PORTFOLIO MATURITY
  Due in one year or less..........................................       $ 1,807,438         2.3%
  Due after one year through five years............................        23,234,911        29.2
  Due after five years through ten years...........................        24,306,751        30.6
  Due after ten years..............................................         2,055,925         2.6
                                                                           51,405,025
  Mortgage-backed securities (4.7 average years)...................        28,096,837        35.3
                                                                          -----------       -----
                                                                          $79,501,862       100.0%
                                                                          ===========       =====
</TABLE>
 
<TABLE>
<CAPTION>
                                                                               CARRYING VALUE
                                         AMORTIZED       ESTIMATED        ------------------------
                                           COST         FAIR VALUE          AMOUNT        PERCENT
                                        -----------     -----------       -----------     --------
<S>                                     <C>             <C>               <C>             <C>
PORTFOLIO DISTRIBUTION
  U.S. Treasury securities............  $17,121,621     $17,163,000       $17,281,426        21.7%
  U.S. Agencies.......................    5,885,671       5,906,617         5,906,617         7.5
  Obligations of states,
     municipalities and political
     subdivisions.....................      600,000         597,246           597,246          .8
  Corporate bonds.....................   26,284,461      26,096,656        26,096,656        32.8
  Foreign bonds.......................    1,537,836       1,523,080         1,523,080         1.9
  Mortgage-backed securities:
     Federal Home Loan Mortgage.......   11,872,581      11,833,979        11,881,133        14.9
     Federal National Mortgage........    7,615,354       7,603,438         7,614,505         9.6
     Other............................    8,831,975       8,601,677         8,601,199        10.8
                                        -----------     -----------       -----------       -----
                                        $79,749,499     $79,325,693       $79,501,862       100.0%
                                        ===========     ===========       ===========       =====
</TABLE>
 
                                        4
<PAGE>   6
 
<TABLE>
<CAPTION>
                                                                           AMORTIZED
                                                                              COST
                                                                          (000 OMITTED)      PERCENT
                                                                          -------------      --------
<S>                                                                       <C>                 <C>
QUALITY RATING
  Aaa..............................................................       $    48,886          61.3%
  Aa...............................................................             4,865           6.1
  A................................................................            17,385          21.8
  Baa..............................................................             6,619           8.3
  Ba...............................................................             1,914           2.4
  NR...............................................................                80            .1
                                                                          -----------         -----
                                                                          $    79,749         100.0%
                                                                          ===========         =====
</TABLE>
 
  (6) RESERVES
 
     Central is required by the insurance laws of the states in which it is
licensed to set up statutory reserves to meet policy obligations on its ordinary
life policies. These reserves are amounts which, with additions from premiums to
be received and with interest on such reserves compounded annually at certain
assumed rates, are calculated to be sufficient to meet policy obligations as
they mature. The various actuarial factors are determined from mortality tables
and interest rates in effect when the policy is issued. The ordinary life
policies currently issued by Central are valued on the Commissioner's Standard
Ordinary Table of Mortality of 1980 under the Commissioners' Reserve Valuation
Method and the Net Level Premium Method. The guaranteed interest rate on
policies currently being issued is 4.5%. On policies issued previously to the
current series, guaranteed interest rates were as specified in the various
policies and range from 2.5% to 6%. Under the Commissioners' Reserve Valuation
Method, the amount of reserve provided in the first policy year is less than
under the Net Level Premium Method, but in subsequent years greater additions to
reserves are required. To the extent that the rate of income realized on
investments is greater or less than the assumed interest rate used in the
calculation of reserves, reported earnings are increased or decreased, as the
case may be.
 
     The majority of Central's reserves and liabilities for claims, however, are
for its group accident and health business. Statutory and regulatory
requirements are generally less explicit for health insurance reserves and
liabilities than for ordinary life insurance. For its group accident and health
business Central establishes an Active Life Reserve plus a liability for due and
unpaid claims, claims in course of settlement, and incurred but unreported
claims as well as a reserve for the present value of amounts not yet due on
claims. These reserves and liabilities are dependent upon many factors, such as
economic and social conditions, inflation (overall and hospital costs
specifically), changes in doctrines of legal liability and damage awards for
pain and suffering. Therefore, the reserves and liabilities established are
necessarily based on extensive estimates and prior years' statistics. A
consulting actuary is retained by Central to assist in the estimation process
and to certify to the statutory reserves.
 
  (7) REINSURANCE
 
     As is customary among most insurance companies, Central reinsures portions
of the life insurance policies it writes, thereby providing a greater
diversification of risk and minimizing Central's exposure on major risks. While
the effect of reinsurance is to lessen risks to the writing company, it may also
lower income. Although the ceding of reinsurance does not discharge the original
insurer from its primary liability to its policyholder, the insurance company
that assumes the coverage assumes the related liability and becomes the ultimate
source of payment. The maximum amount of exposure that Central retains on any
life is $50,000 on ordinary life and group life. No retention is maintained over
age 70. Maximum retention on impaired risks is $10,000. Central also has
reinsurance on group accident and health claims. Effective January 1, 1995,
Central's reinsurance treaty provides that all individual claims in excess of
$500,000 are 100% reinsured. The overall effect of reinsurance is not material
to the Company's financial condition. Reinsurance treaties in effect at December
31, 1996 were with The Cologne Life Reinsurance Company, Life ReAssurance
Corporation of America and Business Men's Assurance Company.
 
                                        5
<PAGE>   7
 
  (8) REGULATION
 
     Central, in common with other insurance companies operating in the states
in which it is licensed, is subject to regulation and supervision by state
insurance regulatory agencies (See Capital Resources page 10). These regulatory
bodies have broad administrative powers relating to standards of solvency, which
must be met on a continuing basis, granting and revoking of licenses, licensing
of agents, approval of policy forms, maintenance of adequate reserves, form and
content of financial statements, types of investments permitted, issuance and
sale of stock and other matters pertaining to insurance. Central is required to
file detailed annual statements with the respective state regulatory bodies and
is subject to periodic examination by the regulators. The most recent regulatory
examination for Central was made as of December 31, 1995.
 
  (9) COMPETITION
 
     The insurance business is highly competitive. There are over 1,700 legal
reserve life insurance companies in the United States, of which over 650 are
operating in Ohio, Central's principal state of operation. Many of these have
been in business for long periods of time, and have substantially greater
financial resources, larger selling organizations and broader diversification of
risks than Central. Many of these companies are mutual companies, whose earnings
inure to the benefit of their policyholders. Central's principal marketing is in
rural areas where they compete with regional insurance companies. In other areas
it markets its PPO products to compete with the larger insurance companies.
However, the Company believes that the policies and premium rates of Central are
generally competitive with those offered by other companies selling similar
types of insurance in Ohio.
 
  (10) EMPLOYEES
 
     As of December 31, 1996 Central had 527 employees. The Registrant has no
employees of its own.
 
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
 
     The Company has no foreign operations. Its domestic operations during 1996
were primarily in Ohio.
 
ITEM 2. PROPERTIES
 
     The Company owns its home office building, located at 17800 Royalton Road,
Strongsville, Ohio. The building, which consists of 121,625 square feet of gross
floor area, was occupied in late 1990 by the Company and all its subsidiaries.
Central, the principal operating subsidiary, entered into a 15 year triple net
lease agreement with the Company for 100% of the space. All operations are
conducted in this building.
 
ITEM 3. LEGAL PROCEEDINGS
 
     Other than ordinary routine litigation incidental to the business, the Ohio
Department of Insurance regulatory matter described under "Management's
Discussion and Analysis -- Capital Resources," and the matter regarding Federal
income taxes reflected in Note 5 to the consolidated financial statements,
neither the Company nor any of its subsidiaries is party to any material pending
legal proceeding nor is any of their property the subject thereof.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
 
EXECUTIVE OFFICERS OF THE COMPANY AND CENTRAL
 
     Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the following
information is reported below.
 
                                        6
<PAGE>   8
 
     (a) The executive officers of the Company and Central are as follows:
 
<TABLE>
<CAPTION>
        NAME OF                                                                    OFFICER
   EXECUTIVE OFFICER         AGE                     POSITION                       SINCE
-----------------------    --------     -----------------------------------    ----------------
<S>                        <C>          <C>                                    <C>
Fred Lick, Jr.                65        Chairman of the Board, President &           2/74
                                        Chief Executive Officer and
                                        Director
Frank W. Grimone              61        Senior Executive Vice President &            5/74
                                        Chief Financial Officer
Glen A. Laffoon               57        Executive Vice President -- Product         12/74
                                        Development
James A. Weisbarth            45        Executive Vice President, Treasurer          5/83
                                        &
                                        Assistant Secretary
Robert S. Zarick              60        Executive Vice                               5/87
                                        President -- Administration
</TABLE>
 
     The current one year terms of office of the executive officers listed above
began May 16, 1996, with their election to office by the Board of Directors at
its meeting following the annual meeting of shareholders held on such date.
There are no arrangements or understandings known to the Company between any
executive officer and any other person pursuant to which any officer was elected
to office. There is no family relationship between any director or executive
officer and any other director or executive officer of the Company.
 
                                        7
<PAGE>   9
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
     (a) The Company's Common Shares are traded on the Nasdaq Stock Market tier
of The Nasdaq Stock Market(SM) under the symbol CRLC. The following table shows
the representative high and low prices of the Common Shares for the calendar
quarters indicated. These prices were taken from the Nasdaq Monthly Statistical
Reports.
 
<TABLE>
<CAPTION>
                                    HIGH         LOW         DIVIDENDS
                                  --------     --------     ------------
<S>                               <C>          <C>          <C>
1996
     First Quarter............      $ 103/8      $  81/2       $  .13
     Second Quarter...........         93/8         611/16        .13
     Third Quarter............         91/8         63/4          .13
     Fourth Quarter...........         93/8         65/8          .13
1995
     First Quarter............      $  81/2      $  71/8       $  .12
     Second Quarter...........         81/4         71/8          .12
     Third Quarter............        10            75/8          .12
     Fourth Quarter...........        10            83/4          .12
</TABLE>
 
     (b) As of March 17, 1997, there were 1,641 record holders of the Common
Shares.
 
     (c) The cash dividends paid by the Company in the past two years are
indicated in the table above. The Company's present source of income, other than
a nominal amount of investment income, is dividends and rent from Central.
Central, the Company's main operating subsidiary, is subject to certain
restrictions which are contained in the Insurance Holding Company statute (Ohio
Revised Code 3901.34) which prevent Central from paying the Company, without the
approval of the Ohio Superintendent of Insurance, any dividend from other than
earned surplus (as defined in the statute) or any dividend whose value, together
with the value of other dividends paid or distributions made within the
preceding 12 months, exceeds the greater of (i) 10% of Central's surplus as
regards policyholders as of the December 31 next preceding the dividend payment,
or (ii) the net income of Central for the 12-month period ended the December 31
next preceding the dividend payment. In light of Central's and the Company's
substantial losses during 1996, the Company's Board of Directors announced in
March 1997 that the Company has suspended the quarterly cash dividend. The board
elected to suspend the dividend in order to preserve capital. The dividend will
be reviewed quarterly and the resumption of cash dividend payments will depend
upon Central's and the Company's profitability.
 
     (d) On December 31, 1996, the Company sold 87,642 unregistered common
shares at $6 per share for a total consideration of $525,852. The shares were
sold in a private placement to general agents of Central and several Company
directors. No commission or other fee was paid in connection with these sales.
 
     The common shares were exempt from registration in accordance with Section
4(2) of the Securities Act of 1933, as amended, and exemptions available under
applicable state securities laws.
 
     Fred Lick, Chairman of the Board, President and Chief Executive Officer
exercised 20,000 options; 10,000 on May 8, 1996, and 10,000 on December 16,
1996, at $2.83 per shares. Total consideration received by the Company was
$56,660 for the 20,000 unregistered common shares issued. The Company also
issued 30 unregistered common shares to an employee who exercised 30 options at
$6.75 per share for a total consideration of $202.
 
                                        8
<PAGE>   10
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                  1996             1995             1994             1993             1992
                              ------------     ------------     ------------     ------------     ------------
<S>                           <C>              <C>              <C>              <C>              <C>
FOR THE YEAR:
Premiums....................  $258,175,337     $233,168,529     $223,679,071     $208,730,840     $172,010,014
Net Investment Income.......     6,700,741        6,454,038        6,515,927        5,367,184        4,606,036
Net realized gains
  (losses)..................         9,517          149,527          (23,024)         707,741          514,679
Other Income................            --           37,000           29,237            5,662            1,697
                              ------------     ------------     ------------     ------------     ------------
Total Revenues..............  $264,885,595     $239,809,094     $230,201,211     $214,811,427     $177,132,426
                              ============     ============     ============     ============     ============
Income (Loss) before Federal
  Income Taxes..............  $(12,133,950)    $  5,947,225     $  6,872,989     $  3,104,539     $  3,489,636
Federal Income Tax
  Expense (Benefit).........    (2,845,585)       1,442,618        2,059,228          714,190          (34,581)
                              ------------     ------------     ------------     ------------     ------------
Net Income (Loss)...........  $ (9,288,365)    $  4,504,607     $  4,813,761     $  2,390,349     $  3,524,217
                              ============     ============     ============     ============     ============
Net Income (Loss) Per
  Share.....................        $(2.20)           $1.07            $1.14            $ .57            $ .85
Cash Dividends Per Share....        $  .52            $ .48            $ .44            $ .40            $ .36
AT YEAR END:
Investments.................  $ 90,723,418     $ 91,310,781     $ 83,230,323     $ 79,030,628     $ 59,305,499
Total Assets................  $119,388,697     $117,329,039     $107,944,158     $103,613,338     $ 85,028,970
Mortgage Note Payable.......  $  8,503,776     $  8,599,067     $  8,685,754     $  8,764,615     $  8,836,356
Future Policy Benefits and
  Claims Payable............  $ 76,650,884     $ 65,317,522     $ 62,716,877     $ 56,148,504     $ 38,836,847
Retained Earnings...........  $ 15,637,029     $ 27,030,102     $ 24,463,447     $ 21,422,301     $ 20,640,995
Shareholders' Equity........  $ 21,467,797     $ 33,300,980     $ 24,530,732     $ 26,856,896     $ 26,015,001
Equity Per Share:
  After net unrealized
     holding gain (loss)....        $ 5.18            $8.25            $6.08            $6.67            $6.49
  Before net unrealized
     holding gain (loss)....        $ 5.24            $8.06            $7.42              N/A              N/A
</TABLE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION
 
LIQUIDITY:
 
     Liquidity is the ability of an enterprise to generate adequate amounts of
cash to meet its financial commitments. The major needs for cash are to enable
Central to pay claims and expenses as they come due. Central's primary sources
of cash are premiums and investment income. Central's payments consist of
current claim payments to insureds, managed care expenses, operating expenses
such as salaries, employee benefits, commissions, taxes, etc., and shareholder
dividends payable to the Company. The Company has, in the past, relied on the
dividend from Central to enable it to pay dividends to shareholders. By statute,
the state regulatory authorities set minimum liquidity standards to protect both
policyholders and shareholders and limit the dividends payable by Central to the
Company. See Item 5.
 
     The majority of the Company's assets are in investments which were
$90,723,418, after a net unrealized holding loss of $247,637 (see below), or 76%
of the total assets at December 31, 1996. Fixed maturities are the primary
investment of the Company and were $79,501,862 or 88% of total investments at
December 31, 1996. Other investments consist of short-term securities and policy
loans. The Company is carrying fixed maturities of $11,892,925 at amortized cost
(held to maturity) and fixed maturities of $67,608,937 at estimated fair value
(available for sale) at December 31, 1996. The Company does not hold any
so-called
 
                                        9
<PAGE>   11
 
"junk" bonds or what are generally considered high-yield type securities, and
97.5% of the bonds are of investment grade quality. In accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company recorded a decrease in
investments of $247,637 to reflect the reporting of investments classified as
available for sale at fair value (estimated market value) which was lower than
amortized cost. The amount is reflected in shareholders' equity as a "net
unrealized holding loss". In addition to the fixed maturities, the Company also
had $4.7 million in unrestricted cash and $11 million in short-term investments
at December 31, 1996. Central also has an unused $1 million line of credit with
a major bank. During 1996, total assets increased about $2 million, or 2% to
$119,388,697, mainly due to a positive cash flow from operations during the year
from premiums, and from investment income less the $247,637 net unrealized
holding loss. The Company anticipates that future operating cash flow needs,
including surrenders of annuity policies, can be provided from the current
investment portfolio.
 
     Liabilities accrued for future policy benefits and policy claims payable
increased 17%, or about $11.3 million to $76,650,884 primarily because of
increased reserves and premiums. Shareholders' equity decreased $11,833,183 due
to the 1996 operating loss, dividends of $2,104,708 and a change of $1,022,835
in the net unrealized holding loss, on investments available for sale.
 
CAPITAL RESOURCES:
 
     Central, the major operating subsidiary, suffered a large decrease in its
statutory capital and surplus to $16,595,497 at December 31, 1996 from
$27,477,972 at December 31, 1995. The decrease was primarily due to the
$9,321,633 statutory loss, after tax benefits of $2,810,830, as further
explained in the "results of operations" section. This decrease has caused
Central to fall under the regulatory action level (RAL) imposed by the Ohio
Department of Insurance under the recently adopted Risk-Based Capital (RBC)
requirements on insurance enterprises (see note 4 to the consolidated financial
statements). Central's adjusted capital, under the RBC standards, at December
31, 1996, was $17,137,515 and the RAL was $18,508,044 at December 31, 1996.
Central is required to, and did, submit a RBC financial plan to the Ohio
Department of Insurance reflecting certain projections and steps to be taken to
return the adjusted capital to the required levels. In 1996 Central increased
reserves in excess of $11.5 million and did end the year with a positive cash
flow while continuing to meet all necessary expenditures for claims,
commissions, expenses, etc. for 1996. The Company is also exploring
opportunities to raise capital to contribute to Central.
 
     The only long-term debt the Company had at December 31, 1996, was
$8,503,776, which is the principal amount payable under a loan secured by a
mortgage on the Company's home office building. The Company entered into the
loan agreement in 1990 for $9 million for a term of 10 years bearing interest at
9 1/2% per annum with a 30 year amortization period payment schedule. At the
same time, the Company also entered into a 15 year lease agreement with Central
for 100% of the space. The Company will use the monthly rental payments to pay,
among other expenses, the required mortgage loan payments. In 1995, the Company
started a search for a new computer system for claims and administration which
includes, among other things, billing, rating and commission functions. The
increase in the Company's business, new state mandates and new products have
created the need for this new system. A system of this nature is expected to
cost between $8 million and $9 million, including software, hardware and
implementation, over an estimated four year period. The Company estimates these
costs could be recovered over a 4 to 5 year period, through a combination of
payroll cost savings, expense controls and new production capacity. The Company
has not entered into any contract or commitment for the purchase of such a
computer system, although such an acquisition is planned for 1997. In light of
the Company's growth over the last several years, the Company has considered
expansion of its headquarters building. However, it has determined to take no
actions currently, in light of its financial results in 1996.
 
RESULTS OF OPERATIONS:
 
  1996 compared to 1995
 
     During 1996, premiums increased 11% to $258,175,337 from $233,168,529 in
1995. The increase was primarily in the group life and health segment which
accounted for about 98% of total premiums. Group
 
                                       10
<PAGE>   12
 
certificates in force increased about 2% to 116,304 in 1996 compared to 113,720
at the end of 1995. Certificates issued for new group policies were 36,574 in
1996, down 18% from 44,398 in 1995. A more aggressive pricing in 1996 and
additional competition were the cause for the decrease. Total lapses (net of
additions/decreases) in 1996 were 33,990 up slightly from 33,637 in 1995.
Overall, the lapse ratio was in line with the Company's expectations and
consistent with the industry average for small group business.
 
     Not included in premiums, for generally accepted accounting principles
(GAAP) purposes, were annuity considerations in the amounts of $2,926,416 and
$3,498,442 for 1996 and 1995.
 
     Net investment income increased about 4% to $6,700,741 in 1996 from
$6,454,038 in 1995. The increase was primarily due to an increase in rates. The
Company continued to invest in short-term investments to provide any cash
requirements needed for claims.
 
     Benefits and claims incurred expenses increased 23% in 1996 to $203,677,232
from $165,472,603 in 1995. The incurred loss ratio was 78.9% for 1996 compared
to 71% for 1995. The major reasons for the increase in the claims loss ratio and
the level of claims were (a) the underpricing of a new product (PMO) introduced
in late 1994 and sold heavily in 1995, (b) greater utilization than anticipated
and (c) new state mandates such as guaranteed issue and preventive benefits. By
far the biggest cause was the underpriced PMO product which contributed to an
estimated 80% of the loss before net investment income. Higher premiums and
aggressive rate renewal actions started April 1, 1996. Because the business is
primarily sold on a monthly basis the full renewal action will take 12 months
ending March 31, 1997.
 
     Commissions increased 7% to $35,654,815 in 1996 from $33,411,203 in 1995
primarily due to the increase in premiums. As a percentage of premiums they were
13.8% in 1996 and 14.3% in 1995.
 
     Other operating expenses increased 8% to $37,687,498 or 14.6% of premiums
in 1996, compared to $34,978,063 or 15% of premiums in 1995. Salaries, benefits
and premium taxes remained the largest portions of the other operating expenses.
 
     The net loss for 1996 was $9,288,365 or $2.20 per share, after a net tax
benefit of $2,845,585 compared to a net income of $4,504,607 or $1.07 per share
after a tax expense of $1,442,618 in 1995. Because group accident and health
represents 98% of Central's business, a higher loss ratio from this segment has
a negative effect on the Company's earnings. The statutory loss ratio in the
group accident and health segment increased to 77.9% in 1996 from 69.4% in 1995.
 
     The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992. During
the third quarter of 1994, the IRS issued a proposal for adjustments to the
Company's returns for 1991 and 1992. The proposed deficiencies are approximately
$2.4 million of which $215,303, pertaining to some non-deductible expenses and
certain assets expensed and not capitalized, was agreed to and paid in 1994. The
balance primarily deals with whether or not the Company's primary subsidiary,
Central, qualified as a life company, for tax purposes. The Company is
vigorously protesting the proposed deficiency and management believes existing
law supports the Company's position. Therefore, the Company has not recorded a
liability for the difference. Trial of the matter is scheduled to begin June 2,
1997.
 
     If the IRS were to prevail in its position that Central no longer qualifies
as a life company for tax purposes, the asserted $2.4 million deficiency would
be payable and Federal income taxes would increase in the future. Presently, as
a small life company, Central is permitted, among other things, a deduction from
the first $3 million of income of 60% or $1.8 million. As Central's income
increases above $3 million, the special deduction is reduced proportionately.
Besides relying on favorable existing case law, Central may have, under certain
circumstances, the ability to change and market policies that could insure its
qualifications as a life company for tax purposes in the future, if the need
arises.
 
RESULTS OF OPERATIONS:
 
  1995 compared to 1994
 
     During 1995, premiums increased 4% to $233,168,529 from $223,679,071 in
1994. The increase was primarily in the group life and health division which
accounted for about 98% of total premiums. Group
 
                                       11
<PAGE>   13
 
certificates in force increased about 10% to 113,720 in 1995 from 102,959 in
1994. Certificates issued for new group policies were 44,398 in 1995, up 42%,
from 31,270 in 1994. The increase came primarily from a new product, the
Professional Multi-Option (PMO), which was introduced in late 1994 and targets
small businesses with 2 to 25 lives. Total lapses (net of additions/decreases)
in 1995 were 33,637, down slightly from 33,847 in 1994. Overall, the lapse ratio
was in line with the Company's expectations and was lower than the industry
average for small group business.
 
     Not included in premiums, for generally accepted accounting principles
(GAAP) purposes, were annuity considerations in the amounts of $3,498,442 and
$3,492,402 for 1995 and 1994.
 
     Net investment income decreased about 1% to $6,454,038 in 1995 from
$6,515,927 in 1994. The decrease was primarily due to the overall decrease in
interest rates during 1995. Also, during 1995 the Company reduced its holdings
in mortgage-backed securities and convertible bonds. The proceeds were invested
in short-term government type securities at lower interest rates, but produced a
more liquid and stable position.
 
     Benefits and claims incurred expenses increased 7% in 1995 to $165,472,603
from $155,257,560 in 1994. This compares to a 6% increase in 1994 over 1993. The
incurred loss ratio was 71% for 1995 and 69.4% for 1994. The major increase in
claims was during the last quarter, primarily the last month. The loss ratio
increased to 73.6% for the fourth quarter of 1995 compared to 67.7% in the same
quarter in 1994. During the fourth quarter the Company experienced, as many
small group carriers did, an increase in claims due to utilization, state
mandates and accidents. This trend continued into January 1996. In response, the
Company increased premium rates, did not renew certain blocks of business and
updated several managed care controls.
 
     Commissions decreased slightly to $33,411,203 in 1995 from $33,573,278 in
1994 and were 14.3% of premiums in 1995 compared to 15% in 1994. The decrease is
attributed to a lower commission rate for the new product (PMO) sold in 1995 and
the growth in renewal premiums which carry a lower commission rate. Expenses,
such as salaries, premium taxes, fees, etc., increased, in total, 1% in 1995
over 1994. However, as a percentage of premiums the ratio was lower in 1995,
15.0% compared to 15.4% in 1994.
 
     Net income tax as a percentage of pretax income was 24% in 1995 compared to
30% in 1994. The current portion of the tax decreased to $1,419,026 in 1995 from
$1,535,817 in 1994. The main reason for the decrease was the decrease in pretax
income. The decrease in the deferred tax expense is primarily due to the change
in the valuation allowance due to an unrealized holding gain in 1995 compared to
an unrealized holding loss in 1994.
 
     Net income for 1995 was $4,504,607 or $1.07 per share compared to
$4,813,761 or $1.14 per share in 1994. The decrease is primarily due to the
increase in the benefit loss ratio to 71% from 69.4% and a 1% decrease in
investment income for the year. Because group accident and health represents 98%
of Central's business, a higher loss ratio from this division has a negative
effect on the Company's earnings. The statutory loss ratio in the group accident
and health division increased to 69.4% in 1995 from 67.9% in 1994.
 
IMPACT OF INFLATION:
 
     Inflation rates impact the Company's financial condition and operating
results in several areas. Changes in inflation rates impact the market value of
the investment portfolio and yields on new investments.
 
     Inflation has had an impact on claim costs and overall operating costs and
although it has been lower in the last few years, hospital and medical costs
have still increased at a higher rate than general inflation. While to a certain
extent these increased costs are offset by interest rates (investment income),
hospital charges increased, while the rate of income from investments has not
increased proportionately. The Company will continue to establish premium rates
in accordance with trends in hospital and medical costs along with concentrating
on various cost containment programs.
 
LEGISLATIVE DEVELOPMENTS:
 
     In 1996 Congress passed the Health Portability and Accountability Act of
1996, which provides for changes in the health insurance market and is scheduled
to go into effect in July 1997. It guarantees the availability and renewability
of health insurance coverage for certain employees and individuals, and limits
the
 
                                       12
<PAGE>   14
 
use of preexisting condition restrictions. The Act creates federal standards for
insurers, health maintenance organizations (HMO's), and employer plans,
including those who self-insure. It permits, however, substantial state
flexibility for compliance with the requirements on insurers. The Company cannot
predict the ultimate timing or effect of any legislative efforts, and no
assurance can be given that any such efforts will not have a material adverse
effect on the Company's business and results of operations.
 
NEW ACCOUNTING STANDARDS:
 
     In October 1995, the Financial Accounting Standards Board (FASB) has issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", which was effective for the Company for the year
ended December 31, 1996. The Statement prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock and stock appreciation rights. SFAS No. 123 allows for
either the adoption of the "fair value" method of accounting for stock-based
compensation or the continued use of APB No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to continue to comply with APB No. 25. The
Company has not granted any new stock options subsequent to January 1, 1995,
therefore, the pro forma disclosures required by SFAS No. 123 are not
applicable.
 
     In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and for extinguishments of liabilities
occurring after December 31, 1996. SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125", was issued in December 1996.
The impact of SFAS No. 125 and SFAS No. 127 is not expected to be material to
the consolidated financial statements.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
                        CENTRAL RESERVE LIFE CORPORATION
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                          ---------------------
          <S>                                                             <C>
          Independent Auditors' Report....................................          14
 
          Consolidated Balance Sheets as of December 31, 1996 and 1995....          15
 
          Consolidated Statements of Operations for the years ended
            December 31, 1996, 1995 and 1994..............................          16
 
          Consolidated Statements of Shareholders' Equity for the years
            ended
            December 31, 1996, 1995 and 1994..............................          17
 
          Consolidated Statements of Cash Flows
            for the years ended December 31, 1996, 1995 and 1994..........          18
 
          Notes to Consolidated Financial Statements for the years
            ended December 31, 1996, 1995 and 1994........................          19
 
          Schedule I -- Summary of Investments -- Other than Investments
            in Related Parties............................................          36
 
          Schedule II -- Condensed Financial Information of
            Registrant -- Central Reserve Life Corporation (Parent
            Only).........................................................          37
 
          Schedule III -- Supplementary Insurance Information.............          40
 
          Schedule IV -- Reinsurance......................................          41
</TABLE>
 
                                       13
<PAGE>   15
 
The Board of Directors and Shareholders
Central Reserve Life Corporation:
 
     We have audited the consolidated financial statements of Central Reserve
Life Corporation and subsidiaries as listed on the accompanying index on page
13. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedules as listed in the
accompanying index on page 13. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to report on these consolidated financial
statements and financial statement schedules based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 Central
Reserve Life Corporation and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
4 to the consolidated financial statements, the Ohio Department of Insurance
(the Department) imposes risk-based capital requirements on insurance
enterprises, including the Company. At December 31, 1996, the Company's total
adjusted capital is at the Regulatory Action Level based on the risk-based
capital calculation required by the Department. The Company filed a
comprehensive financial plan with the Department on March 5, 1997, outlining its
plans for attaining the required levels of regulatory capital. The Department
has sixty days to notify the Company if its comprehensive financial plan is
unsatisfactory. Failure to meet the capital requirements and interim capital
targets included in the Company's plan could expose the Company to regulatory
sanctions that may include restrictions on operations and growth, mandatory
asset dispositions, and placing the Company under regulatory control. These
matters raise substantial doubt about the ability of the Company to continue as
a going concern. The ability of the Company to continue as a going concern is
dependent on many factors, one of which is regulatory action, including ultimate
acceptance of the Company's comprehensive plan. Management's plans in regard to
these matters are described in note 4 to the consolidated financial statements.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
                                                  KPMG Peat Marwick LLP
 
Columbus, Ohio
March 7, 1997
 
                                       14
<PAGE>   16
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                           DECEMBER 31, 1996 AND 1995
================================================================================
 
<TABLE>
<CAPTION>
                                                                     1996             1995
                                                                 ------------     ------------
<S>                                                              <C>              <C>
ASSETS
Investments (Note 2):
  Fixed maturities held to maturity, at amortized cost.......    $ 11,892,925     $ 11,995,728
  Fixed maturities available for sale, at estimated fair
     value...................................................      67,608,937       69,831,327
                                                                 ------------     ------------
            Total fixed maturities...........................      79,501,862       81,827,055
  Policy loans...............................................         111,646          106,441
  Short-term investments, at cost which approximates
     market..................................................      11,109,910        9,377,285
                                                                 ------------     ------------
            Total investments................................      90,723,418       91,310,781
Cash (Note 2)................................................       8,472,255        9,102,020
Accrued investment income....................................         988,536          973,380
Premiums receivable..........................................       3,049,026        1,853,105
Property and equipment, at cost, net of accumulated
  depreciation of $6,855,062 and $6,660,708, respectively
  (Note 1)...................................................      11,196,987       11,635,993
Deferred federal income taxes (Note 5).......................         948,363          512,350
Federal income taxes recoverable.............................       2,245,530          326,380
Other assets.................................................       1,764,582        1,615,030
                                                                 ------------     ------------
                                                                 $119,388,697     $117,329,039
                                                                 ============     ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
  Future policy benefits, losses and claims..................    $ 33,741,819     $ 30,192,055
  Other policy claims and benefits payable (Note 3)..........      42,909,065       35,125,467
  Other policyholders' funds.................................       6,510,894        5,222,968
  Other liabilities..........................................       6,255,346        4,888,502
                                                                 ------------     ------------
                                                                   89,417,124       75,428,992
Mortgage note payable (Note 6)...............................       8,503,776        8,599,067
                                                                 ------------     ------------
            Total liabilities................................      97,920,900       84,028,059
                                                                 ------------     ------------
Commitments and contingencies (Notes 5, 7, 8 and 9)
Shareholders' equity (Notes 4 and 10):
  Non-Voting Preferred shares, no par value, authorized
     2,000,000 none issued (Note 11).........................              --               --
  Common shares, no par value, stated value $.50, authorized
     10,000,000, issued and outstanding 4,145,172 in 1996 and
     4,037,500 in 1995 (302,740 are reserved for options)....       2,072,586        2,018,750
  Additional paid-in capital.................................       4,005,819        3,476,940
  Net unrealized holding gain (loss).........................        (247,637)         775,188
  Retained earnings..........................................      15,637,029       27,030,102
                                                                 ------------     ------------
            Total shareholders' equity.......................      21,467,797       33,300,980
                                                                 ------------     ------------
                                                                 $119,388,697     $117,329,039
                                                                 ============     ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       15
<PAGE>   17
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
<TABLE>
<CAPTION>
                                                         1996             1995             1994
                                                     ------------     ------------     ------------
<S>                                                  <C>              <C>              <C>
Revenues:
  Premiums.......................................    $258,175,337     $233,168,529     $223,679,071
  Net investment income (Note 2).................       6,700,741        6,454,038        6,515,927
  Net realized gains (losses) (Note 2)...........           9,517          149,527          (23,024)
  Other income...................................              --           37,000           29,237
                                                     ------------     ------------     ------------
                                                      264,885,595      239,809,094      230,201,211
                                                     ------------     ------------     ------------
Benefits, losses and expenses:
  Benefits, claims, losses and settlement
     expenses....................................     203,677,232      165,472,603      155,257,560
  Commissions....................................      35,654,815       33,411,203       33,573,278
  Salaries and benefits..........................      16,855,141       15,066,432       14,387,949
  Taxes, licenses and fees.......................       6,136,793        5,541,570        5,296,613
  Other operating expenses.......................      13,882,731       13,548,624       13,983,649
  Interest expense...............................         812,833          821,437          829,173
                                                     ------------     ------------     ------------
                                                      277,019,545      233,861,869      223,328,222
                                                     ------------     ------------     ------------
Income (loss) before Federal income taxes........     (12,133,950)       5,947,225        6,872,989
Federal income tax expense (benefit) (Note 5)....      (2,845,585)       1,442,618        2,059,228
                                                     ------------     ------------     ------------
Net income (loss) (Note 4).......................    $ (9,288,365)    $  4,504,607     $  4,813,761
                                                     ============     ============     ============
Net income (loss) per share (Note 1).............          $(2.20)         $  1.07          $  1.14
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       16
<PAGE>   18
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
<TABLE>
<CAPTION>
                                                                                   NET UN-
                                                                                  REALIZED
                                                                 ADDITIONAL         GAIN
                                                   COMMON          PAID-IN        (LOSS) ON       RETAINED
                                                   SHARES          CAPITAL       INVESTMENTS      EARNINGS
                                                 -----------     -----------     -----------     -----------
<S>                                              <C>             <C>             <C>             <C>
Balance, December 31, 1993...................    $ 2,012,191     $ 3,422,404     $        --     $21,422,301
  Cash dividends ($.44 per share)............             --              --              --      (1,772,615)
  Net income.................................             --              --              --       4,813,761
  Exercise of stock options (Note 10)........          6,459          53,286              --              --
  Adjustment for change in accounting for
     fixed maturities at January 1, 1994, net
     of deferred tax of $601,224.............             --              --       1,167,080              --
  Change in net unrealized holding loss, net
     of deferred tax benefit of $601,224.....             --              --      (6,594,135)             --
                                                 -----------     -----------     -----------     -----------
Balance, December 31, 1994...................      2,018,650       3,475,690      (5,427,055)     24,463,447
  Cash dividends ($.48 per share)............             --              --              --      (1,937,952)
  Net income.................................             --              --              --       4,504,607
  Exercise of stock options (Note 10)........            100           1,250              --              --
  Change in net unrealized holding gain, net
     of deferred tax liability of $399,340...             --              --       6,202,243              --
                                                 -----------     -----------     -----------     -----------
Balance, December 31, 1995...................      2,018,750       3,476,940         775,188      27,030,102
  Cash dividends ($.52 per share)............             --              --              --      (2,104,708)
  Net (loss).................................             --              --              --      (9,288,365)
  Exercise of stock options (Note 10)........         10,015          46,848              --              --
  Private placement to agents and
     directors...............................         43,821         482,031              --              --
  Change in net unrealized holding loss......             --              --      (1,022,835)             --
                                                 -----------     -----------     -----------     -----------
Balance, December 31, 1996...................    $ 2,072,586     $ 4,005,819     $  (247,637)    $15,637,029
                                                 ===========     ===========     ===========     ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       17
<PAGE>   19
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
<TABLE>
<CAPTION>
                                                        1996            1995            1994
                                                     -----------     -----------     -----------
<S>                                                  <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)..............................    $(9,288,365)    $ 4,504,607     $ 4,813,761
  Adjustments to reconcile net income to cash
     provided by operating activities:
       Depreciation and amortization.............      1,057,473       1,111,718         974,410
       Net realized (gains) losses...............         (9,517)       (149,527)         23,024
       Deferred federal income taxes.............        (36,673)         23,592         524,411
       Changes in assets and liabilities:
          Premiums receivable....................     (1,195,921)       (196,880)        253,071
          Federal income taxes recoverable.......     (1,919,150)        (80,974)        100,044
          Accrued investment income..............        (15,156)        342,557        (306,827)
          Other assets...........................       (149,552)       (762,269)        (68,187)
          Future policy benefits, claims and
            funds payable........................     10,462,288        (558,269)      3,421,129
          Other liabilities......................      1,366,844      (1,370,327)        385,691
                                                     -----------     -----------     -----------
          Net cash provided by operating
            activities...........................        272,271       2,864,228      10,120,527
                                                     -----------     -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net (additions) deletions to furniture and
     equipment...................................        244,652        (738,537)       (461,773)
  Net proceeds (purchase) of investments --
     short-term..................................     (1,732,625)     (7,126,373)      4,249,097
  Purchase of investments -- fixed maturities
     held to maturity............................             --              --      (1,354,688)
  Purchase of investments -- fixed maturities
     available for sale..........................    (10,977,540)    (15,995,248)    (28,293,915)
  Policy loans...................................         (5,205)         (5,295)         (9,168)
  Proceeds from sale, call or maturity of fixed
     maturities available for sale...............     10,924,163      20,368,903      12,746,906
  Proceeds from calls/maturity of fixed
     maturities held to maturity.................        102,803       1,473,228       3,451,020
                                                     -----------     -----------     -----------
          Net cash used in investing
            activities...........................     (1,443,752)     (2,023,322)     (9,672,521)
                                                     -----------     -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in annuity contract liabilities...      2,159,000       2,629,916       2,929,025
  Principal payments on long-term debt...........        (95,291)        (86,687)        (78,861)
  Proceeds from exercise of stock options........         56,863           1,350          59,745
  Proceeds from private placement to agents,
     directors...................................        525,852              --              --
  Dividends......................................     (2,104,708)     (1,937,952)     (1,772,615)
                                                     -----------     -----------     -----------
          Net cash provided by financing
            activities...........................        541,716         606,627       1,137,294
                                                     -----------     -----------     -----------
          Net increase (decrease) in cash........       (629,765)      1,447,533       1,585,300
Cash at beginning of year........................      9,102,020       7,654,487       6,069,187
                                                     -----------     -----------     -----------
Cash at end of year..............................    $ 8,472,255     $ 9,102,020     $ 7,654,487
                                                     ===========     ===========     ===========
Supplemental disclosures of cash flow
  information:
  Cash paid during the year for interest.........    $   812,833     $   821,437     $   829,173
  Cash paid (received) during the year for income
     taxes.......................................    $  (889,762)    $ 1,500,000     $ 1,434,773
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       18
<PAGE>   20
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
NOTE 1 -- SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 
     The significant accounting policies followed by the Company that materially
affect financial reporting are summarized below. The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles (GAAP) which differ from statutory accounting practices prescribed or
permitted by regulatory authorities (see Note 4).
 
  (A) CONSOLIDATION POLICY
 
     The consolidated financial statements include the accounts of Central
Reserve Life Corporation (Company) and its wholly-owned subsidiaries, Central
Reserve Life Insurance Company (Central), Western Reserve Administrative
Services, Inc. (Western) and CRL Asset Management Corporation (AMC). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
 
  (B) DESCRIPTION OF BUSINESS
 
     Central is a life and accident and health insurer licensed in 35 states.
Central principally sells group insurance, however, it offers a full range of
life, health, and annuity products through general agents and independent
writing agents and is subject to competition from other insurers throughout the
United States. Central is subject to regulation by the insurance department of
states in which it is licensed, and undergoes periodic examinations by those
departments.
 
     The following is a description of certain risks facing life and accident
and health insurers and how Central mitigates those risks:
 
          Legal/Regulatory Risk is the risk that, changes in the legal or
     regulatory environment in which an insurer operates, will create additional
     expenses not anticipated by the insurer in pricing its products. That is,
     regulatory initiatives designed to reduce insurer profits or otherwise
     affecting the industry in which the insurer operates, new legal theories or
     insurance company insolvencies through guaranty fund assessments, may
     create costs for the insurer beyond those recorded in the financial
     statements. Central attempts to mitigate this risk by offering a wide range
     of products and by operating in 35 states, thus reducing its exposure to
     any single product or non-Federal jurisdiction, and also by employing
     underwriting practices which identify and minimize the adverse impact of
     this risk.
 
          The Health Insurance Portability and Accountability Act of 1996, which
     provides for changes in the health insurance market is scheduled to become
     effective in July 1997. It guarantees the availability and renewability of
     health insurance coverage for certain employees and individuals, and limits
     the use of preexisting condition restrictions. The Act creates federal
     standards for insurers, health maintenance organizations (HMOs), and
     employer plans, including those who self-insure. It permits, however,
     substantial state flexibility for compliance with the requirements on
     insurers.
 
          Inadequate Pricing Risk is the risk that the premium charged for
     insurance and insurance related products is insufficient to cover the costs
     associated with the distribution of such products which include: benefits,
     claims and losses, settlement expenses, acquisition expenses and other
     corporate expenses. Central utilizes a variety of actuarial and/or
     qualitative methods to set such pricing levels.
 
          Credit Risk is the risk that issuers of securities owned by Central
     will default or that other parties, including reinsurers that have
     obligations to Central, will not pay or perform. Central attempts to
     minimize this risk by adhering to a conservative investment strategy and by
     maintaining sound reinsurance and credit and collection policies.
 
                                       19
<PAGE>   21
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
          Interest Rate Risk is the risk that interest rates will change and
     cause a decrease in the value of an insurer's investments. This change in
     rates may cause certain interest-sensitive products to become uncompetitive
     or may cause disintermediation. Central attempts to mitigate this risk by
     charging fees for non-conformance with certain policy provisions and/or by
     attempting to match the maturity schedule of its assets with the expected
     payouts of its liabilities. To the extent that liabilities come due more
     quickly than assets mature, an insurer would have to sell assets prior to
     maturity and recognize a gain or loss.
 
     In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and revenues and expenses for the reporting period.
Actual results could differ significantly from those estimates.
 
     The estimates susceptible to significant change are those used in
determining the liability for future policy benefits, losses and claims.
Although some variability is inherent in these estimates, management believes
the amounts provided are adequate.
 
  (C) INVESTMENTS
 
     Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". SFAS 115 requires that investments in all debt
securities and those equity securities with readily determinable market values
be classified into one of three categories: held to maturity, trading or
available for sale. Classification of investments is based upon management's
current intent. Debt securities which management has a positive intent and
ability to hold until maturity are classified as securities held to maturity and
are carried at amortized cost. Unrealized holding gains and losses on securities
held to maturity are not reflected in the consolidated financial statements.
Debt and equity securities that are purchased for short-term resale are
classified as trading securities. Trading securities are carried at estimated
fair value, with unrealized holding gains and losses included in earnings. All
other debt and equity securities not included in the above two categories are
classified as securities available for sale. Securities available for sale are
carried at estimated fair value, with unrealized holding gains and losses
reported as a separate component of shareholders' equity, net of tax. At
December 31, 1996, the Company did not have any investments classified as
trading securities.
 
  (D) DEFERRED POLICY ACQUISITION COSTS
 
     Certain costs, principally commissions, which vary with and are directly
related to the production of ordinary life business, have been deferred. The
deferred costs are being amortized through the use of factors over the benefit
period of the related policies. These factors were developed using assumptions
which are consistent with those used in setting rates. Due to the nature of the
business and its persistency experience, the Company does not defer policy
acquisition costs for Central's group business. Deferred policy acquisition
costs at December 31, 1996 and 1995 were $321,567 and $209,760, respectively.
The net amounts amortized to income were $111,807 in 1996, $59,834 in 1995 and
$60,116 in 1994. The increase in 1996 was due to the increase in sales of
Central's 10-year term policies.
 
  (E) PROPERTY AND EQUIPMENT
 
     Included in the $11.2 million for property and equipment is approximately
$8.1 million (net of depreciation) for the home office building and $1.6 million
for land. Depreciation for the building is primarily over 31.5 years, except for
certain components which will be over 15 years. The straight-line method is
used.
 
     Other property and equipment, primarily furniture, fixtures and data
processing equipment, is carried at cost less allowances for depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful lives of the equipment, principally five and seven years.
 
                                       20
<PAGE>   22
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
  (F) POLICY RESERVES
 
     Liabilities for future policy benefits on ordinary life insurance have
generally been provided on a net-level premium method based upon estimates of
future investment yield, mortality and withdrawals using Central's experience
and actuarial judgment with an allowance for possible unfavorable deviation from
the expected experience. Future policy benefits for annuity policies in the
accumulation phase have been calculated based on the participant's aggregate
account values. The Company amortizes deferred costs of all ordinary life
policies for Central over the benefit period. The liability for future policy
benefit reserves has been computed using the following assumptions:
 
     (1) The guaranteed interest rate on policies currently being issued is
         4.5%.
 
     (2) Estimates of future mortality and withdrawals are based on experience
         and established industry tables.
 
  (G) LIFE AND ACCIDENT AND HEALTH CLAIM RESERVES
 
     The liabilities for unpaid accident and health and death claims are
estimated principally based upon past experience for pending, incurred but not
reported, and reopened claims. The liability includes a provision for the
estimated cost of investigating and settling the claim liability. The estimate
of accident and health claim reserves incurred, but not yet due, are computed
using actuarially determined factors based on a combination of claim completion
and loss ratio methods, utilizing durational experience, seasonal cycle, changes
in health care practice, changes in inflation rates and the claims backlog. The
liability is particularly sensitive to recent claims frequency and severity
experience of Central. Management believes the liabilities for unpaid claims are
adequate.
 
  (H) RECOGNITION OF PREMIUM REVENUES AND BENEFITS
 
     Life premiums are recognized as revenues as they become due. Benefits and
expenses are reported in a manner which results in the recognition of profits
over the life of the policy. Such recognition is accomplished through the
provision of liabilities for future benefits over the life of the contract and
the amortization of acquisition costs over the benefit period.
 
     Accident and health insurance premiums are recognized as revenue over the
terms, principally monthly, of the policies. Policy claims are charged to
expense in the period that the claims are incurred.
 
     Contracts that do not subject Central to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Certain deferred
and flexible annuities are considered investment contracts. Amounts received as
payments for such contracts are accounted for as deposits and included in future
policy benefits, losses and claims.
 
  (I) EARNINGS PER SHARE
 
     Net income per share is computed using the weighted average number of
common shares outstanding. The number of shares was increased to reflect shares
issuable on the exercise of options, reduced by the number of shares assumed to
have been purchased with the proceeds from the exercise of these common stock
equivalents. The number of shares used to calculate the earnings per share was
4,221,416 in 1996, 4,221,636 in 1995 and 4,201,069 in 1994.
 
  (J) STOCK OPTIONS
 
     The Company recognizes expense for stock-based employee compensation
arrangements in accordance with the provisions of APB No. 25, "Accounting for
Stock Issued to Employees."
 
                                       21
<PAGE>   23
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
  (K) FEDERAL INCOME TAXES
 
     The Company follows SFAS No. 109, "Accounting for Income Taxes". Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
 
NOTE 2 -- CASH AND INVESTMENTS
 
     The following is the breakdown of net investment income by category of
investments for the years ending December 31:
 
<TABLE>
<CAPTION>
                                          1996           1995           1994
                                       ----------     ----------     ----------
<S>                                    <C>            <C>            <C>
Fixed maturities...................    $5,826,478     $5,570,307     $5,931,835
Policy loans.......................         5,036          5,517          5,065
Short-term investments.............       688,911        683,170        553,140
Other..............................       180,316        195,044         25,887
                                       ----------     ----------     ----------
                                       $6,700,741     $6,454,038     $6,515,927
                                       ==========     ==========     ==========
</TABLE>
 
     Realized gains and losses are summarized as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                   ---------------------------------------
                                                     1996           1995           1994
                                                   ---------     ----------     ----------
<S>                                                <C>           <C>            <C>
Realized gains:
  Fixed maturities...............................  $  11,390     $  203,502     $  236,385
  Equipment......................................      3,875             --             --
                                                   ---------     ----------     ----------
                                                      15,265        203,502        236,385
                                                   ---------     ----------     ----------
Realized losses:
  Fixed maturities...............................      5,748         52,462        127,601
  Equipment......................................         --          1,513        131,808
                                                   ---------     ----------     ----------
          Total losses...........................      5,748         53,975        259,409
                                                   ---------     ----------     ----------
Net realized gains (losses)......................  $   9,517     $  149,527     $  (23,024)
                                                   =========     ==========     ==========
</TABLE>
 
                                       22
<PAGE>   24
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
     The amortized cost and estimated fair value of securities held to maturity
and available for sale as of December 31, 1996, are as follows. The estimated
fair value is based on quoted market prices, where available, or on values
obtained from independent pricing services.
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1996
                                         -----------------------------------------------------
                                                       UNREALIZED    UNREALIZED
                                          AMORTIZED      HOLDING       HOLDING      ESTIMATED
                                            COST          GAINS        LOSSES      FAIR VALUE
                                         -----------   -----------   -----------   -----------
     <S>                                 <C>           <C>           <C>           <C>
     Held to maturity:
       U.S. Treasury securities........  $ 7,566,238   $    34,126   $  (152,552)  $ 7,447,812
       Mortgage-backed securities:
          Federal Home Loan
            Mortgage...................    2,914,154            --       (47,154)    2,867,000
          Federal National Mortgage....    1,376,577            --       (11,067)    1,365,510
          Other........................       35,956           478            --        36,434
                                         -----------   -----------   -----------   -----------
               Total held to
                 maturity..............  $11,892,925   $    34,604   $  (210,773)  $11,716,756
                                         ===========   ===========   ===========   ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1996
                                         -----------------------------------------------------
                                                       UNREALIZED    UNREALIZED
                                          AMORTIZED      HOLDING       HOLDING      ESTIMATED
                                            COST          GAINS        LOSSES      FAIR VALUE
                                         -----------   -----------   -----------   -----------
     <S>                                 <C>           <C>           <C>           <C>
     Available for sale:
       U.S. Treasury securities........  $ 9,555,383   $   189,079   $   (29,274)  $ 9,715,188
       U.S. Agencies...................    5,885,671        26,571        (5,625)    5,906,617
       Obligations of states,
          municipalities and political
          subdivisions.................      600,000         1,681        (4,435)      597,246
       Corporate bonds.................   26,284,461       290,575      (478,380)   26,096,656
       Foreign bonds...................    1,537,836         1,555       (16,311)    1,523,080
       Mortgage-backed securities:
          Federal Home Loan
            Mortgage...................    8,958,427        86,556       (78,004)    8,966,979
          Federal National Mortgage....    6,238,777        60,861       (61,710)    6,237,928
          Other........................    8,796,019       100,977      (331,753)    8,565,243
                                         -----------   -----------   -----------   -----------
               Total available for
                 sale..................  $67,856,574   $   757,855   $(1,005,492)  $67,608,937
                                         ===========   ===========   ===========   ===========
</TABLE>
 
                                       23
<PAGE>   25
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
     The amortized cost and estimated fair value of securities held to maturity
and available for sale as of December 31, 1995 are as follows. The estimated
fair value is based on quoted market prices, where available, or on values
obtained from independent pricing services.
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1995
                                          ----------------------------------------------------
                                                        UNREALIZED    UNREALIZED
                                           AMORTIZED      HOLDING      HOLDING      ESTIMATED
                                             COST          GAINS        LOSSES     FAIR VALUE
                                          -----------   -----------   ----------   -----------
     <S>                                  <C>           <C>           <C>          <C>
     Held to maturity:
       U.S. Treasury securities.........  $ 7,583,168   $    84,155   $ (29,278)   $ 7,638,045
       Mortgage-backed securities:
          Federal Home Loan
            Mortgage....................    2,900,327        10,939      (3,156)     2,908,110
          Federal National Mortgage.....    1,356,316        13,829          --      1,370,145
          Other.........................      155,917         6,449          --        162,366
                                          -----------   -----------   ---------    -----------
               Total held to maturity...  $11,995,728   $   115,372   $ (32,434)   $12,078,666
                                          ===========   ===========   =========    ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1995
                                          ----------------------------------------------------
                                                        UNREALIZED    UNREALIZED
                                           AMORTIZED      HOLDING      HOLDING      ESTIMATED
                                             COST          GAINS        LOSSES     FAIR VALUE
                                          -----------   -----------   ----------   -----------
     <S>                                  <C>           <C>           <C>          <C>
     Available for sale:
       U.S. Treasury securities.........  $10,412,584   $   456,502   $      --    $10,869,086
       U.S. Agencies....................    2,498,844         7,241          --      2,506,085
       Obligations of states,
          municipalities and political
          subdivisions..................    1,671,612        38,996        (124)     1,710,484
       Corporate bonds..................   25,999,185       942,926    (386,955)    26,555,156
       Convertible bonds................      379,189         1,705     (38,369)       342,525
       Foreign bonds....................      502,781            --     (59,281)       443,500
       Mortgage-backed securities:
          Federal Home Loan
            Mortgage....................   10,690,948       252,974     (10,054)    10,933,868
          Federal National Mortgage.....    6,878,203       153,776     (10,913)     7,021,066
          Other.........................    9,623,453       177,535    (351,431)     9,449,557
                                          -----------   -----------   ---------    -----------
               Total available for
                 sale...................  $68,656,799   $ 2,031,655   $(857,127)   $69,831,327
                                          ===========   ===========   =========    ===========
</TABLE>
 
     The proceeds, gross realized gains and gross realized losses from the sale
(excluding calls, maturities and pay downs) of fixed maturities available for
sale during each year were as follows:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                   ------------------------------------------
                                                      1996            1995            1994
                                                   -----------     -----------     ----------
<S>                                                <C>             <C>             <C>
Proceeds.........................................  $   176,925     $13,537,157     $1,820,867
Gross realized gains.............................           --         179,825        124,067
Gross realized losses............................        5,369          48,854         87,428
                                                   ===========     ===========     ==========
</TABLE>
 
                                       24
<PAGE>   26
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
     The amortized cost and estimated fair value of fixed maturities at December
31, 1996, by contractual maturity, are as follows. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without penalties.
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1996
                                                               ---------------------------
                                                                AMORTIZED       ESTIMATED
                                                                  COST         FAIR VALUE
                                                               -----------     -----------
     <S>                                                       <C>             <C>
     Held to maturity:
       Due after one year through five years.................  $ 6,546,267     $ 6,477,812
       Due after five years through ten years................    1,019,971         970,000
                                                               -----------     -----------
                                                                 7,566,238       7,447,812
       Mortgage-backed securities (4.8 average years)........    4,326,687       4,268,944
                                                               -----------     -----------
               Total held to maturity........................  $11,892,925     $11,716,756
                                                               ===========     ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1996
                                                               ---------------------------
                                                                AMORTIZED       ESTIMATED
                                                                  COST         FAIR VALUE
                                                               -----------     -----------
     <S>                                                       <C>             <C>
     Available for sale:
       Due in one year or less...............................  $ 1,799,616     $ 1,807,438
       Due after one year through five years.................   16,575,938      16,688,644
       Due after five years through ten years................   23,467,614      23,286,780
       Due after ten years...................................    2,020,183       2,055,925
                                                               -----------     -----------
                                                                43,863,351      43,838,787
       Mortgage-backed securities (4.6 average years)........   23,993,223      23,770,150
                                                               -----------     -----------
               Total available for sale......................  $67,856,574     $67,608,937
                                                               ===========     ===========
</TABLE>
 
     At December 31, 1996 cash includes approximately $3.8 million held for
self-funded accident and health accounts, which is restricted as to its use. A
corresponding amount is included in liabilities in the accompanying consolidated
financial statements.
 
     At December 31, 1996 Central had certificates of deposit and fixed
maturities on deposit with various state insurance departments, carried at
$3,394,988, for the protection of policyholders.
 
                                       25
<PAGE>   27
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
NOTE 3 -- LIABILITY FOR OTHER POLICY CLAIMS AND BENEFITS PAYABLE
 
     The following table reflects the activity in the liability for Other Policy
Claims and Benefits Payable, including the claims adjustment expenses (CAE) as
follows:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------
                                                  1996             1995             1994
                                              ------------     ------------     ------------
     <S>                                      <C>              <C>              <C>
     Balance at beginning of year...........  $ 35,125,467     $ 35,219,992     $ 32,003,500
     Incurred claims and CAE for:
          Current year......................   196,260,939      161,454,853      153,942,398
          Prior years.......................     1,134,739          225,632       (2,407,635)
                                              ------------     ------------     ------------
               Total incurred...............   197,395,678      161,680,485      151,534,763
                                              ------------     ------------     ------------
     Paid claims and CAE, net of
       reinsurance, for:
          Current year......................   153,758,124      126,329,386      118,722,406
          Prior years.......................    35,853,956       35,445,624       29,595,865
                                              ------------     ------------     ------------
               Total paid...................   189,612,080      161,775,010      148,318,271
                                              ------------     ------------     ------------
     Balance at end of year.................  $ 42,909,065     $ 35,125,467     $ 35,219,992
                                              ============     ============     ============
</TABLE>
 
NOTE 4 -- DIVIDEND RESTRICTION AND STATUTORY FINANCIAL INFORMATION
 
     At December 31, 1996, $16,595,497 of consolidated shareholders' equity
represents net assets of the Company's insurance subsidiary which is subject to
certain regulatory restrictions on paying dividends and making loans or advances
to the parent company. Generally, the net assets of the Company's insurance
subsidiary available for transfer to the parent company are limited to the
amounts by which the insurance subsidiary's net assets, as determined in
accordance with statutory accounting practices, exceed minimum statutory
requirements. In addition, payments of such amounts as dividends are subject to
approval by regulatory authorities when (i) any such dividend is proposed to be
paid from other than earned surplus (as defined in the applicable statute) or
(ii) the value of any such dividend, together with the value of other dividends
paid or distributions made within the preceding 12 months, exceeds the greater
of (a) ten percent of the insurer's surplus as regards policyholders as of the
31st day of December next preceding the dividend payment, or (b) the net income
of such insurer for the 12-month period ended the December 31st next preceding
the dividend payment.
 
                                       26
<PAGE>   28
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
     Shareholders' capital and surplus and net income (loss) as determined in
accordance with statutory accounting practices for Central differ from GAAP.
Following is a reconciliation showing those differences.
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                               -------------------------------------------
                                                  1996            1995            1994
                                               -----------     -----------     -----------
<S>                                            <C>             <C>             <C>
Statutory capital and surplus of insurance
  subsidiary.................................  $16,595,497     $27,477,972     $25,098,580
Shareholders' equity of non-insurance
  subsidiaries...............................    2,076,203       2,399,919       2,257,634
Add (deduct):
  Net unrealized holding gain (loss).........     (247,637)        775,188      (5,427,055)
  Deferred policy acquisition costs..........      321,567         209,760         149,926
  Policyholder reserve adjustments...........     (144,495)       (333,383)       (429,487)
  Asset valuation and interest maintenance
     reserve.................................    1,212,445       1,220,336       1,129,787
  Non-admitted assets and other adjustments,
     net.....................................    1,027,421       1,038,838         816,065
  Deferred Federal income taxes..............      948,363         512,350         935,282
                                               -----------     -----------     -----------
          Shareholders' equity per
            accompanying consolidated
            financial statements.............  $21,467,797     $33,300,980     $24,530,732
                                               ===========     ===========     ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                               -------------------------------------------
                                                  1996            1995            1994
                                               -----------     -----------     -----------
<S>                                            <C>             <C>             <C>
Statutory net income (loss) of insurance
  subsidiary.................................  $(9,321,633)    $ 4,569,765     $ 4,989,122
Net income (loss) of non-insurance
  subsidiaries...............................     (223,951)       (220,452)        222,831
Add (deduct):
  Policyholder reserves......................      188,888          96,104          73,615
  Deferred Federal income tax expense
     (benefit)...............................       36,673         (23,592)       (524,411)
  Deferred policy acquisition costs..........      111,807          59,834          60,116
  Net change in interest maintenance
     reserve.................................      (80,149)         22,948          (7,512)
                                               -----------     -----------     -----------
     Net income (loss) per accompanying
       consolidated financial statements.....  $(9,288,365)    $ 4,504,607     $ 4,813,761
                                               ===========     ===========     ===========
</TABLE>
 
     Central has filed annual financial statements with the Ohio Department of
Insurance (ODI) prepared on the basis of accounting practices prescribed or
permitted by such regulatory authorities. Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners, as well as state laws, regulations and general and
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not prescribed. Central's statutory accounting practices
are all prescribed by the ODI.
 
     The Ohio Department of Insurance imposes risk-based capital (RBC)
requirements on insurance enterprises, including Central. The RBC Model serves
as a benchmark for the regulation of life insurance companies by state insurance
regulators and provides for targeted surplus levels based on formulas which
specify various weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk, and are set
forth in the RBC requirements. Such formulas focus on four general types of
risk: (a) the risk with respect to the company's assets (asset or default risk);
(b) the risk of adverse insurance experience with respect to the company's
liabilities and obligations (insurance or underwriting risk); (c) the interest
rate risk with respect to the company's business (asset/liability matching);
and, (d) all other
 
                                       27
<PAGE>   29
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
business risks (management, regulatory action, and contingencies). The amount
determined under such formulas is called the Authorized Control Level RBC (ACL).
 
     The RBC guidelines define specific capital levels based on a company's ACL
that are determined by the ratio of the company's total adjusted capital (TAC)
to its ACL. TAC is equal to statutory capital, plus or minus certain other
specified adjustments. The specific capital levels, in declining order, and
applicable ratios are generally as follows: "Company Action Level" where TAC is
less than or equal to 2.0 times ACL; "Regulatory Action Level" where TAC is less
than or equal to 1.5 ACL; "Authorized Control Level" where TAC is less than or
equal to 1.0 times ACL; and, "Mandatory Control Level" where TAC is less than or
equal to 0.7 times ACL. Companies at the Company Action Level must submit a RBC
financial plan to the insurance commissioner of the state of domicile. Companies
at the Regulatory Action Level are subject to a mandatory examination or
analysis by the commissioner and possible required corrective actions. At the
Authorized Control Level, a company is subject to, among other things, the
commissioner placing it under regulatory control. At the Mandatory Control
Level, the insurance commissioner is required to place a company under
regulatory control. At December 31, 1996, Central's TAC was $17,137,515 or 1.4
times its ACL and accordingly, Central was at the Regulatory Action Level.
 
     On March 5, 1997, Central filed its RBC financial plan with the Ohio
Department of Insurance (ODI) outlining plans for attaining the levels of RBC
required to raise the Company's RBC above the Company Action Level. The RBC
financial plan identifies the conditions that contributed to the Regulatory
Action Level, including underpricing of a new product, PMO, sold primarily in
1995, and state mandated benefits and guaranteed issue. The RBC financial plan
also contains corrective actions taken by Central beginning April 1, 1996,
including an increase of PMO premium rates, changes in certain policy benefits
and the renegotiating of certain provider contracts to produce further cost
savings. The PMO plan represented approximately 40% of Central's premiums
collected in 1996. Since the PMO plan is monthly business, the rate action taken
on April 1, 1996 will not be completed until the end of March 1997. In addition
to these corrective actions, the Company has engaged an investment banking firm
to assist the Company in its efforts to raise additional capital for Central.
Raising of additional capital will be necessary to raise Central's RBC above the
Company Action Level within the short term. The ODI has sixty days to notify
Central if the RBC financial plan is unsatisfactory. Failure to meet the capital
requirements and interim capital targets included in Central's RBC financial
plan could expose Central to such actions by the ODI as being placed under
regulatory control. Management believes, that Central will be able to meet the
plan's capital requirements and interim targets. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
 
NOTE 5 -- FEDERAL INCOME TAXES
 
     The Company files a consolidated Federal income tax return with its
subsidiaries. The provision for Federal income tax does not bear the customary
relationship to pretax accounting income because of special tax provisions
available to life insurance companies. Central receives a benefit provided for
"small" life insurance companies.
 
     Under the Life Insurance Company Income Tax Act of 1959, a portion of
insurance companies' net income, prior to 1984, is not subject to Federal income
taxes (within certain limitations) until it is distributed to stockholders, at
which time it is taxed at regular corporate rates. For Federal income tax
purposes, this untaxed income is accumulated in a memorandum account designated
"policyholders' surplus". The accumulated untaxed policyholders' surplus for
Central is $2,869,768.
 
                                       28
<PAGE>   30
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
     Federal income tax expense (benefit) is composed of the following:
 
<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                 -------------------------------------------
                                                    1996             1995            1994
                                                 -----------      ----------      ----------
      <S>                                        <C>              <C>             <C>
      Current.................................   $(2,808,912)     $1,419,026      $1,534,817
      Deferred................................       (36,673)         23,592         524,411
                                                 -----------      ----------      ----------
                                                 $(2,845,585)     $1,442,618      $2,059,228
                                                 ===========      ==========      ==========
</TABLE>
 
     Income tax expense attributable to income from operations differs from the
amounts computed by applying the U.S. Federal income tax rate of 35%. Those
effects are as follows:
 
<TABLE>
<CAPTION>
                                                    1996             1995            1994
                                                 -----------      ----------      ----------
      <S>                                        <C>              <C>             <C>
      Computed "expected" tax expense
        (benefit).............................   $(4,246,883)     $2,081,529      $2,405,546
      Special life insurance deduction........     1,006,747        (486,193)       (458,228)
      Tax exempt interest.....................       (12,206)        (13,206)        (21,589)
      Change in the beginning-of-the-year
        balance of the valuation allowance for
        deferred tax assets allocated to
        income tax expense....................       (21,953)       (187,513)        397,127
      Tax rate differential...................       121,340         (59,472)        (68,730)
      Accrual adjustment......................       (73,382)         46,026          25,636
      IRS audit adjustment....................            --              --         215,303
      Alternative minimum tax.................       365,000              --        (300,060)
      Other...................................        15,752          61,447        (135,777)
                                                 -----------      ----------      ----------
                                                 $(2,845,585)     $1,442,618      $2,059,228
                                                 ===========      ==========      ==========
</TABLE>
 
     The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992. During
the third quarter of 1994, the IRS issued a proposal for adjustments to the
Company's returns for 1991 and 1992. The proposed deficiencies are approximately
$2.4 million of which $215,303, pertaining to some non-deductible expenses and
certain assets expensed and not capitalized, was agreed to and paid in 1994. The
balance primarily deals with whether or not the Company's subsidiary, Central,
qualified as a life company, for tax purposes. The Company intends to vigorously
protest the proposed deficiency and management believes existing law supports
the Company's position. Therefore, the Company has not recorded a liability for
the difference. Trial of the matter is scheduled to begin June 2, 1997.
 
                                       29
<PAGE>   31
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
 
<TABLE>
<CAPTION>
                                                                  1996            1995
                                                               ----------      ----------
      <S>                                                      <C>             <C>
      Deferred tax assets:
        Deferred acquisition costs..........................   $  581,020      $  666,210
        Net unrealized holding loss.........................       84,197              --
        Difference in reserves established for financial
           statement purposes and those for income tax
           purposes.........................................      732,903         722,530
        Other...............................................      174,949          87,035
                                                               ----------      ----------
             Gross deferred tax assets......................    1,573,069       1,475,775
             Less valuation allowance.......................     (376,858)       (314,614)
                                                               ----------      ----------
                Net deferred assets.........................    1,196,211       1,161,161
                                                               ----------      ----------
      Deferred tax liabilities:
        Net unrealized holding gain.........................           --         399,340
        Bond discount accretion.............................       90,660          74,636
        Difference in book and tax depreciation.............       69,905          47,034
        Other...............................................       87,283         127,801
                                                               ----------      ----------
             Gross deferred tax liabilities                       247,848         648,811
                                                               ----------      ----------
             Deferred tax asset.............................   $  948,363      $  512,350
                                                               ==========      ==========
</TABLE>
 
     The Company establishes a valuation allowance based on its analysis
(scheduling) of future deductible amounts. The Company determines a valuation
allowance based on their analysis of amounts recoverable in the statutory
carryback period and does not consider future taxable income. Fluctuation in the
valuation allowance is attributed to changes in the effect of the small life
insurance company deduction and to a 100% valuation allowance on the deferred
tax benefits on the net unrealized holding loss at December 31, 1996 and no
valuation allowance applicable to the deferred tax expense on the net unrealized
holding gain at December 31, 1995.
 
NOTE 6 -- MORTGAGE NOTE PAYABLE
 
     The Company executed a note payable, in December 1990, for $9,000,000
bearing interest at 9 1/2% per annum for 10 years. The Company received
$8,500,000 of the funds in December 1990 and the remaining $500,000 in December
1991. The mortgage note is collateralized by the home office building and by an
assignment of the tenant lease for the building. The Company has been required
to make monthly payments, since January 1991, based on a 30 year amortization
schedule, of $75,677 for 10 years. After five years, the Company has the right
to prepay the loan with a 3% prepayment fee. Principal payments due in the next
five years, assuming no prepayments, are $104,748 in 1997, $115,145 in 1998,
$126,572 in 1999, $139,134 in 2000 and $24,496 in 2001, the year the note is
due.
 
NOTE 7 -- LEASES
 
     Central has operating leases for certain computer processing equipment and
laser printing, publishing equipment which expire at various dates through 2000.
 
                                       30
<PAGE>   32
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
     Charges for the leases were $768,352, $1,069,723 and $854,358 for 1996,
1995 and 1994, respectively. Future net minimum payments for the operating
leases are as follows:
 
<TABLE>
<CAPTION>
                  YEARS ENDING DECEMBER 31,    COMPUTER    LASER       TOTAL
                -----------------------------  --------   --------   ----------
                <S>                            <C>        <C>        <C>
                1997.........................  $249,376   $144,720   $  394,096
                1998.........................   95,990     144,720      240,710
                1999.........................    5,610     144,720      150,330
                2000.........................       --      24,120       24,120
                                               --------   --------   ----------
                                               $350,976   $458,280   $  809,256
                                               ========   ========   ==========
</TABLE>
 
NOTE 8 -- EMPLOYMENT CONTRACT
 
     The Company's employment agreement with its Chief Executive Officer was
entered into in 1982 and amended in 1983. The agreement expires December 31,
2001 and calls for annual increases of 11% per year through 1996. The 1996
compensation under the agreement was $966,994. The agreement has a change of
control provision, which if exercised, upon such a change would require a lump
sum payment for the unexpired term.
 
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
 
     In the ordinary course of business, Central cedes reinsurance to other
insurers. These arrangements limit the maximum net policy benefit potential on
individual risks. Although the ceding of reinsurance does not discharge the
original insurer from its primary liability to its policyholders, the insurance
company that assumes the coverage also assumes the related liability.
 
     The maximum amount of exposure that Central retains on any life is $50,000
on ordinary life and group life. No retention is maintained over age 70. Maximum
retention on impaired risks is $10,000. Central also has reinsurance on group
accident and health claims. Effective January 1, 1995, Central's reinsurance
treaty provides that all individual claims in excess of $500,000 are 100%
reinsured. The overall effect of reinsurance is not material to the Company's
financial position or results of operations. Reinsurance treaties in effect at
December 31, 1996 were with The Cologne Life Reinsurance Company, Life
ReAssurance Corporation of America and Business Men's Assurance Company.
 
     Central has a $1 million line of credit with a major bank, which was unused
as of December 31, 1996 and 1995.
 
     The Company is involved in litigation and may become involved in potential
litigation arising in the ordinary course of business. In the opinion of
management, the effects, if any, of such litigation are not expected to be
material to the Company's consolidated financial condition.
 
                                       31
<PAGE>   33
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
NOTE 10 -- STOCK OPTIONS AND STOCK ISSUED
 
     Outstanding stock options consist of options granted by the Company at
prices equal to or above market price on the date of grant. On March 15, 1983,
an Incentive Stock Option Plan was adopted. The plan, which expired in May 1993,
provided that key full-time employees of the Company and its subsidiaries were
eligible for participation in the Plan. Also 300,000 options were granted to the
CEO in 1984, expiring in 1997, of which 235,000 at $2.83 per share remain
outstanding at December 31, 1996. As of December 31, 1996, 1995 and 1994, all
options were fully vested, subject to employment. The following table summarizes
data regarding all stock options:
 
<TABLE>
<CAPTION>
                                                       1996             1995             1994
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
Number of shares subject to options:
  Outstanding at beginning of year.............         322,770          325,970          355,670
     Granted...................................              --               --               --
     Expired/cancelled.........................              --           (3,000)         (16,782)
     Exercised.................................         (20,030)            (200)         (12,918)
                                                   ------------     ------------     ------------
  Outstanding at end of year...................         302,740          322,770          325,970
                                                   ============     ============     ============
  Price range of options exercised.............    $ 2.83-$6.75     $       6.75     $ 2.83-$6.75
</TABLE>
 
     The exercise price of options outstanding at December 31, 1996, were $2.83
and $6.75 per share and those options expire in 1997 and 1998.
 
NOTE 11 -- PREFERRED SHARES
 
     The Company has authorized 2,000,000 Non-Voting Preferred Shares, without
par value. The Company has never issued any Non-Voting Preferred Shares,
however, the Board of Directors is authorized at any time to provide for the
issuance of, such shares in one or more series, and to determine the
designations, preferences, limitations and other rights of the shares issued.
Holders of Non-Voting Preferred Shares shall have no voting rights except as
required by law. For each series, the Board of Directors shall determine, prior
to the issuance of any shares thereof, the designations, preferences,
limitations and relative or other rights thereof, including but not limited to
the dividend rate, liquidation price, redemption rights and price, sinking fund
requirements, conversion rights and restrictions on the issuance of such shares.
 
NOTE 12 -- PENSION PLAN
 
     The Company adopted a noncontributory pension plan in 1978. The plan is a
defined contribution money purchase pension plan with an outside company,
covering substantially all full-time employees of age 20 1/2 or more who have
completed six months or more of service. Participants in the plan begin vesting
after two years of service and are fully vested after seven years. The
contribution was approximately $1,214,000 for 1996, $1,137,000 for 1995 and
$1,013,000 for 1994.
 
NOTE 13 -- OTHER BENEFIT PLANS
 
     In addition to the Company's defined contribution pension plan, the
Company, beginning in 1995, sponsors a retiree health benefit program for
certain officer-class employees who meet specified age and service criteria. The
Company and, as applicable, eligible retirees, fund the payment of benefits
under the program in amounts and at such times as claims are incurred. Benefits
for under age 65 retirees are based on continuation of prevailing active
employee health coverage, and for over age 65 retirees are based on
reimbursement of expenses for Medicare Part B and a Medicare Supplement
Insurance Policy. The Company
 
                                       32
<PAGE>   34
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
and, as applicable, eligible retirees, fund the payment of benefits under the
program in amounts and at such times as premium payments or reimbursement of
premium payments are incurred.
 
     The program's net periodic postretirement benefit cost for the reported
period is as follows:
 
<TABLE>
<CAPTION>
                                                             1996          1995
                                                           ---------     ---------
            <S>                                            <C>           <C>
            Service Cost.................................  $  40,000     $  44,000
            Interest Cost................................     36,000        38,000
            Amortization of Transition Obligation........     24,000        24,000
                                                           ---------     ---------
                      Total..............................  $ 100,000     $ 106,000
                                                           =========     =========
</TABLE>
 
The program's funded status as of the reported date is as follows:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                           -----------------------
                                                             1996          1995
                                                           ---------     ---------
            <S>                                            <C>           <C>
            Accumulated Postretirement Benefit
            Obligation (APBO):
              Retirees...................................         --            --
              Fully Eligible Actives.....................  $(153,000)    $(156,000)
              Other Actives..............................   (332,000)     (354,000)
                                                           ---------     ---------
                      Total APBO.........................   (485,000)     (510,000)
            Assets.......................................         --            --
            Unrecognized Prior Service Cost..............         --            --
            Unrecognized Net Gain........................   (147,000)      (46,000)
            Transition Obligation........................    426,000       450,000
                                                           ---------     ---------
            Prepaid (Accrued) Cost.......................  $(206,000)    $(106,000)
                                                           =========     =========
</TABLE>
 
     The assumed annual health care cost trend rate used to measure the expected
cost of benefits under the program is initially 8% (10% in 1995), declining by
approximately 1% per annum to an ultimate assumed trend rate of 5% in the year
2003.
 
     The assumed health care cost trend rates have a significant effect on
determining the cost of benefits provided under the program. The effect of a 1%
increase in the health care cost trend rates as noted above would be an increase
of $17,000 or 22% in the service and interest cost components of net periodic
benefit cost for the period reported, and an increase of $89,000 or 18% in the
accumulated postretirement benefit obligation amount as of the date reported.
 
     The discount rate used to measure the program's obligations was 7% in 1996
and 1995.
 
                                       33
<PAGE>   35
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
NOTE 14 -- FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
     Effective December 31, 1995, the Company redefined its reporting segments,
merging the group life and group accident health segments together, as well as
combining the life and annuity segments. These alignments fit the Company's
current operating organization and produce three segments: group life and
health; life insurance and annuities; and corporate and other.
 
     The following table presents the revenues and income (loss), on a GAAP
basis, attributable to the Company's consolidated industry segments. The Company
does not allocate investment assets or identifiable assets by industry segments.
 
<TABLE>
<CAPTION>
                                              1996             1995             1994
                                          ------------     ------------     ------------
<S>                                       <C>              <C>              <C>
Revenues:
     Group Life and Health..............  $262,509,577     $237,257,385     $228,313,768
     Life Insurance and Annuities.......     2,186,184        2,170,138        1,729,842
     Corporate and Other................       189,834          381,571          157,601
                                          ------------     ------------     ------------
                                          $264,885,595     $239,809,094     $230,201,211
                                          ============     ============     ============
Income (loss) before Federal income
  taxes:
     Group Life and Health..............  $(11,735,521)    $  6,180,636     $  7,577,364
     Life Insurance and Annuities.......      (183,995)        (241,685)        (927,206)
     Corporate and Other................      (214,434)           8,274          222,831
                                          ------------     ------------     ------------
                                          $(12,133,950)    $  5,947,225     $  6,872,989
                                          ============     ============     ============
</TABLE>
 
NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Statement of Financial Accounting Standards No. 107 (SFAS 107) "Disclosures
about Fair Value of Financial Instruments" requires disclosure of fair value
information about existing on and off-balance sheet financial instruments. In
cases where quoted market prices are not available, fair value is based on
estimates using present value or other valuation techniques.
 
     These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Although fair
value estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in the immediate settlement of the instruments. SFAS 107 excludes
certain assets and liabilities from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
 
     The tax ramifications of the related unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.
 
     The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
 
     INVESTMENT SECURITIES:  Fair value for fixed maturity securities is based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair value is estimated using values obtained from independent
pricing services.
 
     CASH, SHORT-TERM INVESTMENTS, PREMIUMS RECEIVABLE AND POLICY LOANS:  The
carrying amount reported in the consolidated balance sheets for these
instruments approximate their fair value.
 
     ANNUITY POLICIES:  The fair value for the annuity reserves is the amount
payable on demand.
 
                                       34
<PAGE>   36
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
                        DECEMBER 31, 1996, 1995 AND 1994
================================================================================
 
     OTHER POLICYHOLDERS' FUNDS:  The carrying amount reported in the
consolidated balance sheets for these instruments approximate their fair value.
 
     MORTGAGE NOTE PAYABLE:  The carrying amount reported in the consolidated
balance sheets for the mortgage note payable approximates its fair value.
 
     Carrying amount and estimated fair value of financial instruments subject
to SFAS 107 are as follows as of December 31:
 
<TABLE>
<CAPTION>
                                                        1996                        1995
                                              -------------------------   -------------------------
                                               CARRYING      ESTIMATED     CARRYING      ESTIMATED
                                                AMOUNT      FAIR VALUE      AMOUNT      FAIR VALUE
                                              -----------   -----------   -----------   -----------
<S>                                           <C>           <C>           <C>           <C>
ASSETS
Investments:
  Fixed maturities held to maturity.........  $11,892,925   $11,716,756   $11,995,728   $12,078,666
  Fixed maturities available for sale.......   67,608,937    67,608,937    69,831,327    69,831,327
  Policy loans..............................      111,646       111,646       106,441       106,441
  Short-term investments....................   11,109,910    11,109,910     9,377,285     9,377,285
Cash........................................    8,472,255     8,472,255     9,102,020     9,102,020
Premiums receivable.........................    3,049,026     3,049,026     1,853,105     1,853,105
LIABILITIES
Annuity reserves............................  $23,211,967   $23,143,000   $21,511,411   $20,984,000
Other policyholders' funds..................    6,510,894     6,510,894     5,222,968     5,222,968
Mortgage note payable.......................    8,503,776     8,503,776     8,599,067     8,599,067
</TABLE>
 
NOTE 16 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
     The following is a summary of quarterly results of operations for the years
ended December 31, 1996 and 1995.
 
<TABLE>
<CAPTION>
                                              1ST             2ND             3RD             4TH
                                          -----------     -----------     -----------     -----------
<S>                                       <C>             <C>             <C>             <C>
1996
Revenues................................  $63,086,810     $66,707,618     $67,816,843     $67,274,324
Benefits and expenses...................   67,325,567      70,083,925      70,004,555      69,605,498
Net (loss)..............................   (3,398,757)     (2,669,828)     (1,665,339)     (1,554,441)
(Loss) per share........................         (.80)           (.63)           (.40)           (.37)
                                          ===========     ===========     ===========     ===========
1995
Revenues................................  $58,675,479     $59,458,791     $60,176,963     $61,497,861
Benefits and expenses...................   57,099,579      57,569,824      58,092,593      61,099,873
Net income..............................    1,100,900       1,289,967       1,272,370         841,370
Earnings per share......................          .26             .31             .30             .20
                                          ===========     ===========     ===========     ===========
</TABLE>
 
                                       35
<PAGE>   37
 
                                                                      SCHEDULE I
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
      SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
 
<TABLE>
<CAPTION>
                               DECEMBER 31, 1996
============================================================================================
                  COLUMN A                        COLUMN B        COLUMN C        COLUMN D
<S>                                              <C>             <C>             <C>
--------------------------------------------------------------------------------------------
 
<CAPTION>
                                                                                  AMOUNT ON
                                                                                   BALANCE
             TYPE OF INVESTMENT                     COST            VALUE           SHEET
--------------------------------------------------------------------------------------------
<S>                                              <C>             <C>             <C>
FIXED MATURITIES -- HELD TO MATURITY
U.S. Treasury securities.....................    $ 7,566,238     $ 7,447,812     $ 7,566,238
Mortgage-backed securities...................      4,326,687       4,268,944       4,326,687
FIXED MATURITIES -- AVAILABLE FOR SALE
U.S. Treasury securities.....................      9,555,383       9,715,188       9,715,188
U.S. Agencies................................      5,885,671       5,906,617       5,906,617
Obligations of states, municipalities and
  political subdivisions.....................        600,000         597,246         597,246
Corporate bonds..............................     26,284,461      26,096,656      26,096,656
Foreign bonds................................      1,537,836       1,523,080       1,523,080
Mortgage-backed securities...................     23,993,223      23,770,150      23,770,150
                                                 -----------     -----------     -----------
  Total fixed maturities.....................    $79,749,499     $79,325,693     $79,501,862
                                                                 ===========
                                                 -----------                     -----------
Policy loans.................................        111,646                         111,646
Short-term investments.......................     11,109,910                      11,109,910
                                                 -----------                     -----------
  Total investments..........................    $90,971,055                     $90,723,418
                                                 ===========                     ===========
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       36
<PAGE>   38
 
                                                                     SCHEDULE II
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                 CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
 
                                 BALANCE SHEETS
================================================================================
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                               ---------------------------
                                                                  1996            1995
                                                               -----------     -----------
<S>                                                            <C>             <C>
ASSETS
Investments in subsidiaries*...............................    $19,723,504     $31,430,682
Property and equipment.....................................      9,707,808       9,943,485
Cash.......................................................        138,937         305,011
Other......................................................        460,061         238,108
                                                               -----------     -----------
                                                               $30,030,310     $41,917,286
                                                               ===========     ===========
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Accounts payable.........................................    $    58,737     $    17,239
  Mortgage note payable....................................      8,503,776       8,599,067
                                                               -----------     -----------
                                                                 8,562,513       8,616,306
                                                               -----------     -----------
 
Shareholders' equity:
  Common stock.............................................      2,072,586       2,018,750
  Paid-in capital..........................................      4,005,819       3,476,940
  Net unrealized holding gain (loss).......................       (247,637)        775,188
  Retained earnings........................................     15,637,029      27,030,102
                                                               -----------     -----------
                                                                21,467,797      33,300,980
                                                               -----------     -----------
                                                               $30,030,310     $41,917,286
                                                               ===========     ===========
</TABLE>
 
---------------
 
*Eliminated in consolidation.
 
                 See accompanying independent auditors' report.
 
                                       37
<PAGE>   39
 
                                                                     SCHEDULE II
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                 CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
 
                            STATEMENTS OF OPERATIONS
================================================================================
 
<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                 ------------------------------------------
                                                     1996            1995           1994
                                                 ------------     ----------     ----------
<S>                                              <C>              <C>            <C>
Revenues:
  Dividend from subsidiaries*................    $  1,500,000     $1,900,000     $1,500,000
  Inter-company fees*........................       1,210,000      1,170,000      1,434,000
  Other investment income....................              --         25,000         28,718
                                                 ------------     ----------     ----------
                                                    2,710,000      3,095,000      2,962,718
                                                 ------------     ----------     ----------
Operating expenses...........................       1,314,012      1,443,282      1,290,738
Federal income tax expense...................              --             --          8,790
                                                 ------------     ----------     ----------
Income before equity in earnings of
  subsidiaries...............................       1,395,988      1,651,718      1,663,190
Equity in earnings (losses) of subsidiaries
  (net of dividends).........................     (10,684,353)     2,852,889      3,150,571
                                                 ------------     ----------     ----------
               Net income (loss).............    $ (9,288,365)    $4,504,607     $4,813,761
                                                 ============     ==========     ==========
</TABLE>
 
---------------
 
*Eliminated in consolidation.
 
                 See accompanying independent auditors' report.
 
                                       38
<PAGE>   40
 
                                                                     SCHEDULE II
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                 CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
 
                            STATEMENTS OF CASH FLOWS
================================================================================
 
<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                 -------------------------------------------
                                                    1996            1995            1994
                                                 -----------     -----------     -----------
<S>                                              <C>             <C>             <C>
Cash Flows From Operating Activities:
Net income before equity in subsidiaries*....    $ 1,395,988     $ 1,651,718     $ 1,663,190
  Change in accounts payable.................         41,498          (6,591)          1,538
  Depreciation...............................        444,052         444,052         438,141
  Change in other assets.....................       (221,953)        (20,424)         14,076
                                                 -----------     -----------     -----------
Net cash provided by operating activities....      1,659,585       2,068,756       2,116,945
                                                 -----------     -----------     -----------
Cash Flows From Investing Activities:
  Purchase of property and equipment.........       (208,375)         (2,000)       (177,400)
                                                 -----------     -----------     -----------
Net cash used in investing activities........       (208,375)         (2,000)       (177,400)
                                                 -----------     -----------     -----------
Cash Flows From Financing Activities:
  Dividends Paid.............................     (2,104,708)     (1,937,952)     (1,772,615)
  Issuance of common stock...................        582,715           1,350          59,745
  Decrease in mortgage payable...............        (95,291)        (86,687)        (78,860)
                                                 -----------     -----------     -----------
Net cash used in financing activities........     (1,617,284)     (2,023,289)     (1,791,730)
                                                 -----------     -----------     -----------
Net increase (decrease) in cash..............       (166,074)         43,467         147,815
Cash at beginning of year....................        305,011         261,544         113,729
                                                 -----------     -----------     -----------
Cash at end of year..........................    $   138,937     $   305,011     $   261,544
                                                 ===========     ===========     ===========
</TABLE>
 
---------------
 
*Eliminated in consolidation.
 
                 See accompanying independent auditors' report.
 
                                       39
<PAGE>   41
 
                                                                    SCHEDULE III
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                      SUPPLEMENTARY INSURANCE INFORMATION
 
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
================================================================================
<TABLE>
<CAPTION>
           COLUMN A                  COLUMN B         COLUMN C         COLUMN D         COLUMN E         COLUMN F         COLUMN G
<S>                                <C>              <C>              <C>              <C>              <C>              <C>
------------------------------------------------------------------------------------------------------------------------------------
 
<CAPTION>
                                                       FUTURE           OTHER                                             BENEFITS
                                     DEFERRED          POLICY           POLICY                                             CLAIMS
                                      POLICY         BENEFITS,          CLAIMS                             NET            LOSSES &
                                   ACQUISITION         LOSSES         & BENEFITS        PREMIUM         INVESTMENT       SETTLEMENT
            SEGMENT                    COST          AND CLAIMS        PAYABLE          REVENUE           INCOME          EXPENSES
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>              <C>              <C>              <C>              <C>              <C>
 
Year ended December 31, 1996:
  Group life and health........      $     --       $ 8,025,093      $42,889,233      $257,495,315      $5,014,262      $202,074,527
  Life insurance and
    Annuities..................       321,567        25,388,607           19,832          680,022        1,506,163        1,602,705
  Corporate and other..........            --           328,119               --               --          180,316               --
                                     --------       -----------      -----------      ------------      ----------      ------------
        Total..................      $321,567       $33,741,819      $42,909,065      $258,175,337      $6,700,741      $203,677,232
                                     ========       ===========      ===========      ============      ==========      ============
 
Year ended December 31, 1995:
  Group life and health........      $     --       $ 6,632,320      $35,095,967      $232,637,514      $4,619,871      $163,799,410
  Life insurance and
    Annuities..................       209,760        23,228,579           29,500          531,015        1,639,123        1,673,193
  Corporate and other..........            --           331,156               --               --          195,044               --
                                     --------       -----------      -----------      ------------      ----------      ------------
        Total..................      $209,760       $30,192,055      $35,125,467      $233,168,529      $6,454,038      $165,472,603
                                     ========       ===========      ===========      ============      ==========      ============
 
Year ended December 31, 1994:
  Group life...................      $     --       $   116,112      $   236,500      $ 4,828,115       $   13,576      $ 1,457,160
  Group accident and health....            --         6,511,021       34,837,000      217,731,794        4,925,857      151,715,281
  Annuities....................            --        18,883,495               --               --        1,143,151        1,101,771
  Other........................       149,926         1,986,257          146,492        1,119,162          433,343          983,348
                                     --------       -----------      -----------      ------------      ----------      ------------
        Total..................      $149,926       $27,496,885      $35,219,992      $223,679,071      $6,515,927      $155,257,560
                                     ========       ===========      ===========      ============      ==========      ============
 
<CAPTION>
           COLUMN A                COLUMN H         COLUMN I
<S>                                <C>            <C>
-------------------------------
                                  AMORTIZA-
                                   TION OF
                                   DEFERRED
                                 ACQUISITION       OPERATING
            SEGMENT                 COSTS           EXPENSES
-------------------------------
<S>                                <C>            <C>
Year ended December 31, 1996:
  Group life and health........    $     --       $72,170,571
  Life insurance and
    Annuities..................     111,807           767,475
  Corporate and other..........          --           292,460
                                   --------       -----------
        Total..................    $111,807       $73,230,506
                                   ========       ===========
Year ended December 31, 1995:
  Group life and health........    $     --       $67,333,980
  Life insurance and
    Annuities..................      59,834           542,956
  Corporate and other..........          --           452,496
                                   --------       -----------
        Total..................    $ 59,834       $68,329,432
                                   ========       ===========
Year ended December 31, 1994:
  Group life...................    $     --       $ 2,183,583
  Group accident and health....          --        64,449,683
  Annuities....................          --           798,322
  Other........................      60,116           578,958
                                   --------       -----------
        Total..................    $ 60,116       $68,010,546
                                   ========       ===========
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       40
<PAGE>   42
 
                                                                     SCHEDULE IV
 
               CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
 
                                  REINSURANCE
 
<TABLE>
<CAPTION>
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
===============================================================================================================
           COLUMN A                  COLUMN B         COLUMN C        COLUMN D        COLUMN E       COLUMN F
<S>                               <C>                <C>             <C>            <C>              <C>
---------------------------------------------------------------------------------------------------------------
 
<CAPTION>
                                                                                                     PERCENTAGE
                                                      CEDED TO        ASSUMED                        OF AMOUNT
                                      GROSS             OTHER        FROM OTHER         NET           ASSUMED
                                      AMOUNT          COMPANIES      COMPANIES         AMOUNT         TO NET
---------------------------------------------------------------------------------------------------------------
<S>                               <C>                <C>             <C>            <C>              <C>
 
Year ended December 31, 1996:
  Life insurance in force.....    $1,293,673,000     $80,895,000             --     $1,212,778,000         --
                                  ==============     ===========     ==========     ============   ============
 
  Premiums:
    Life insurance............    $    7,829,103     $   113,910             --     $  7,715,193           --
    Accident and health
      insurance...............       252,246,994       1,786,850             --      250,460,144           --
                                  --------------     -----------     ----------     ------------   ------------
                                  $  260,076,097     $ 1,900,760             --     $258,175,337           --
                                  ==============     ===========     ==========     ============   ============
 
Year ended December 31, 1995:
  Life insurance in force.....    $1,175,823,000     $50,751,000             --     $1,125,072,000         --
                                  ==============     ===========     ==========     ============   ============
 
  Premiums:
    Life insurance............    $    5,845,546     $    78,003             --     $  5,767,543           --
    Accident and health
      insurance...............       228,954,869       1,553,883             --      227,400,986           --
                                  --------------     -----------     ----------     ------------   ------------
                                  $  234,800,415     $ 1,631,886             --     $233,168,529           --
                                  ==============     ===========     ==========     ============   ============
 
Year ended December 31, 1994:
  Life insurance in force.....    $1,012,860,000     $41,424,000             --     $971,436,000           --
                                  ==============     ===========     ==========     ============   ============
 
  Premiums:
    Life insurance............    $    5,283,232     $    65,498             --     $  5,217,734           --
    Accident and health
      insurance...............       220,147,427       1,686,090             --      218,461,337           --
                                  --------------     -----------     ----------     ------------   ------------
                                  $  225,430,659     $ 1,751,588             --     $223,679,071           --
                                  ==============     ===========     ==========     ============   ============
</TABLE>
 
                 See accompanying independent auditors' report.
 
                                       41
<PAGE>   43
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this Item 10 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 6, 1997, as well as Part I
of this Annual Report on Form 10-K.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this Item 11 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 6, 1997.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item 12 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 6, 1997.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item 13 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 6, 1997.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
         REPORTS ON FORM 8-K.
 
     (a) Filed documents. The following documents are filed as part of this
report:
 
     1. Financial Statements.
 
        Central Reserve Life Corporation and Subsidiaries: Audit Report.
 
        Consolidated Balance Sheets -- December 31, 1996 and 1995.
 
        Consolidated Statements of Operations -- Years ended December 31, 1996,
           1995 and 1994.
 
        Consolidated Statements of Shareholders' Equity -- Years ended December
           31, 1996, 1995 and 1994.
 
        Consolidated Statements of Cash Flows -- Years ended December 31, 1996,
           1995 and 1994.
 
        Notes to Consolidated Financial Statements.
 
     2. Financial Statement Schedules.
 
        Central Reserve Life Corporation and Subsidiaries:
 
        I.   Summary of Investments -- Other than Investments in Related
           Parties.
 
        II.  Condensed Financial Information of Registrant.
 
        III. Supplementary Insurance Information.
 
        IV.  Reinsurance.
 
     Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
 
                                       42
<PAGE>   44
 
3. EXHIBITS:
 
         * 3(a) -- Amended Articles of Incorporation
 
         * 3(b) -- Code of Regulations
 
        **10(a) -- Employment Contract
 
         *10(b) -- Incentive Stock Option Plan
 
         *10(c) -- Agreement of Lease
 
         *10(d) -- Mortgage Note
 
         *10(e) -- Mortgage
 
        **16   -- Letter regarding change in certifying accountant.
 
         *22   -- Subsidiaries
 
          27   -- Financial Data Schedule
 
     (b) Reports on Form 8-K. No reports on Form 8-K were filed during the
         quarter ended December 31, 1996.
 
     (c) Financial statements are on pages 15 to 18.
---------------
 *Incorporated by reference from Registrant's Report on Form 10-K filed on March
  12, 1992, file number
  0-8483 and made a part hereof by such reference.
**Incorporated by reference from Registrant's Report on Form 10-K filed on March
  25, 1993, file number
  0-8483 and made a part hereof by such reference.
 
                                       43
<PAGE>   45
 
                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
<TABLE>
<S>                                          <C>
                                             CENTRAL RESERVE LIFE CORPORATION
 
                                                         By:   /s/ FRED LICK, JR.
                                             -------------------------------------------------
                                                         Fred Lick, Jr., President
</TABLE>
 
     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 COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
<TABLE>
<CAPTION>
                    DATE                                  SIGNATURE AND CAPACITY
----------------------------------------------------------------------------------------------
<S>                                          <C>
 
       March 7, 1997                         By:   /s/ FRED LICK, JR.
                                             -------------------------------------------------
                                                 Fred Lick, Jr., Chairman of the Board of
                                                                 Directors
                                                President, and Principal Executive Officer
 
       March 7, 1997                         By:   /s/ FRANK W. GRIMONE
                                                  --------------------------------------------
                                             Frank W. Grimone, Senior Executive Vice President
                                             and Principal Financial and Accounting Officer
 
       March 7, 1997                         By:   /s/ ROBERT E. BRUCE
                                                  --------------------------------------------
                                             Robert E. Bruce, Director
 
       March 7, 1997                         By:   /s/ WILLIAM E. GERSTENSLAGER
                                                  --------------------------------------------
                                             William E. Gerstenslager, Director
 
       March 7, 1997                         By:   /s/ E. LAWRENCE HENDERSHOT
                                                  --------------------------------------------
                                             E. Lawrence Hendershot, Director
 
       March 7, 1997                         By:   /s/ JOHN L. MCKEAN
                                                  --------------------------------------------
                                             John L. McKean, Director
 
       March 7, 1997                         By:   /s/ JOHN F. NOVATNEY, JR.
                                                  --------------------------------------------
                                             John F. Novatney, Jr., Director
 
       March 7, 1997                         By:   /s/ DAVID L. ROSSIO
                                                  --------------------------------------------
                                             David L. Rossio, Director
 
       March 7, 1997                         By:   /s/ THOMAS D. SCHULTE
                                                  --------------------------------------------
                                             Thomas D. Schulte, Director
 
       March 7, 1997                         By:   /s/ ROBERT K. SMITH
                                                  --------------------------------------------
                                             Robert K. Smith, Director
</TABLE>
 
                                       44
<PAGE>   46
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                                SEQUENTIALLY
                                                                                  NUMBERED
    EXHIBIT                                                                         PAGES
---------------                                                                ---------------
<S>             <C>                                                            <C>
 
        3(a)    Amended Articles of Incorporation..............................      *
        3(b)    Code of Regulations............................................      *
       10(a)    Employment Contract............................................     **
       10(b)    Incentive Stock Option Plan....................................      *
       10(c)    Agreement of Lease.............................................      *
       10(d)    Mortgage Note..................................................      *
       10(e)    Mortgage.......................................................      *
       16       Letter regarding change in certifying accountant...............     **
       22       Subsidiaries...................................................      *
       27       Financial Data Schedule........................................
</TABLE>
 
---------------
 
 *Incorporated by reference from Registrant's Report on Form 10-K filed on March
  12, 1992, file number 0-8483 and made a part hereof by such reference.
**Incorporated by reference from Registrant's Report on Form 10-K filed on March
  25, 1993, file number 0-8483 and made a part hereof by such reference.
 
                                       45