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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _________
Commission file number 0-8483
CERES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1017531
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17800 Royalton Road
Cleveland, Ohio 44136-5197
-------------------------------
(Address of principal executive offices)
(Zip Code)
(440) 572-2400
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value - 34,029,244 shares as of August 1, 2002.
CERES GROUP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations - Three and six
months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Stockholders' Equity - Six
months ended June 30, 2002 5
Condensed Consolidated Statements of Cash Flows - Six months
ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements - June 30, 2002 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure of Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 35
EXHIBITS 36
2
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
- ----------------------------------------
CERES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
----------- ----------
(UNAUDITED) (NOTE A)
ASSETS
Investments
Fixed maturities available-for-sale, at fair value $475,504 $471,485
Surplus notes 5,188 5,211
Policy and mortgage loans 5,920 5,926
-------- --------
Total investments 486,612 482,622
Cash and cash equivalents (of which $8,713 and $9,881 is restricted, respectively) 23,343 74,573
Accrued investment income 7,327 7,200
Premiums receivable 4,784 5,230
Reinsurance receivable 205,716 223,330
Property and equipment, net 8,038 8,100
Deferred federal income taxes 311 1,112
Deferred acquisition costs 88,565 77,377
Value of business acquired 32,735 33,470
Goodwill 18,196 24,443
Licenses 6,247 --
Other assets 10,880 8,559
-------- --------
TOTAL ASSETS $892,754 $946,016
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and benefits accrued
Future policy benefits, losses and claims $399,755 $408,918
Unearned premiums 50,398 47,339
Other policy claims and benefits payable 183,051 198,296
-------- --------
633,204 654,553
Deferred reinsurance gain 12,005 13,881
Other policyholders' funds 21,623 28,659
Federal income taxes payable -- 1,259
Debt 27,168 31,000
Other liabilities 39,168 60,089
-------- --------
TOTAL LIABILITIES 733,168 789,441
-------- --------
Stockholders' equity
Non-voting preferred stock, $0.001 par value, 1,900,000 shares authorized, none issued -- --
Common stock, $0.001 par value, 50,000,000 shares authorized, 34,010,390 and
33,857,895 shares issued and outstanding, respectively 34 34
Additional paid-in capital 132,696 132,061
Retained earnings 21,568 23,831
Accumulated other comprehensive income 5,288 649
-------- --------
TOTAL STOCKHOLDERS' EQUITY 159,586 156,575
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $892,754 $946,016
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CERES GROUP, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES
Premiums, net
Medical $ 93,450 $ 99,865 $ 189,657 $ 201,291
Senior and other 65,518 55,688 129,502 107,474
--------- --------- --------- ---------
Total premiums, net 158,968 155,553 319,159 308,765
Net investment income 7,938 8,480 16,150 16,150
Net realized gains (losses) (1,401) 951 (1,290) 1,599
Fee and other income 8,196 9,287 16,163 17,683
Amortization of deferred reinsurance gain 838 1,396 1,876 2,655
--------- --------- --------- ---------
174,539 175,667 352,058 346,852
--------- --------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses
Medical 83,646 83,109 159,268 169,253
Senior and other 46,940 39,953 97,237 83,005
--------- --------- --------- ---------
Total benefits, claims, losses and 130,586 123,062 256,505 252,258
settlement expenses
Selling, general and administrative expenses 53,126 57,250 105,475 111,098
Net (deferral) amortization and change in
acquisition costs and value of business acquired (4,091) (7,525) (10,388) (18,449)
Amortization of goodwill -- 275 -- 550
Interest expense and financing costs 516 1,279 1,046 2,764
Special charges - Note D -- -- 2,668 7,097
--------- --------- --------- ---------
180,137 174,341 355,306 355,318
--------- --------- --------- ---------
Income (loss) before federal income taxes,
minority interest, and preferred stock dividends (5,598) 1,326 (3,248) (8,466)
Federal income tax expense (benefit) (1,794) 623 (958) (2,057)
--------- --------- --------- ---------
Income (loss) after tax, before minority interest
and preferred stock dividends (3,804) 703 (2,290) (6,409)
Minority interest (13) (8) (27) (23)
--------- --------- --------- ---------
NET INCOME (LOSS) (3,791) 711 (2,263) (6,386)
Convertible voting preferred stock dividends -- (187) -- (372)
--------- --------- --------- ---------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (3,791) $ 524 $ (2,263) $ (6,758)
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS
Basic $ (0.11) $ 0.03 $ (0.07) $ (0.39)
Diluted (0.11) 0.03 (0.07) (0.39)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CERES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK
Balance at June 30, 2002 $ 34
============
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $ 132,061
Issuance of stock:
Employee benefit plans 635
------------
Balance at June 30, 2002 $ 132,696
============
RETAINED EARNINGS
Balance at beginning of year $ 23,831
Net loss (2,263)
------------
Balance at June 30, 2002 $ 21,568
============
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year $ 649
Unrealized gain on securities, net of tax expense of $1,804 4,597
Other 42
------------
Balance at June 30, 2002 $ 5,288
============
TOTAL STOCKHOLDERS' EQUITY $ 159,586
============
NUMBER OF SHARES OF COMMON STOCK
Balance at beginning of year 33,857,895
Issuance of stock:
Employee benefit plans 152,495
------------
Balance at June 30, 2002 34,010,390
============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CERES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net loss $ (2,263) $ (6,386)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization 1,700 1,624
Net realized (gains) losses 1,290 (1,599)
Deferred federal income taxes (1,026) (183)
Changes in assets and liabilities:
Accrued investment income (127) 195
Reinsurance and premiums receivable 18,060 12,959
Deferred acquisition costs (11,123) (11,497)
Value of business acquired 735 (1,084)
Goodwill and licenses -- 426
Other assets (2,321) 385
Future policy benefits, claims and funds payable (23,052) 20,849
Unearned premium 3,059 6,705
Deferred reinsurance gain (1,876) (2,655)
Federal income taxes payable/recoverable (1,259) (1,948)
Other liabilities (20,705) (4,522)
--------- ---------
Net cash provided by (used in) operating activities (38,908) 13,269
--------- ---------
INVESTING ACTIVITIES
Net purchases of furniture and equipment (696) (513)
Purchase of fixed maturities available-for-sale (90,384) (116,749)
Decrease in policy and mortgage loans, net 6 13
Proceeds from sales of fixed maturities available-for-sale 56,152 42,184
Proceeds from calls and maturities of fixed maturities available-for sale 34,189 45,447
--------- ---------
Net cash used in investing activities (733) (29,618)
--------- ---------
FINANCING ACTIVITIES
Increase in annuity account balances 4,462 16,459
Decrease in annuity account balances (12,854) (14,595)
Principal payments on mortgage note payable -- (74)
Increase in debt borrowings -- 10,000
Principal payments on debt (3,832) (12,500)
Proceeds from issuance of common stock related to employee benefit plans 635 1,465
--------- ---------
Net cash provided by (used in) financing activities (11,589) 755
--------- ---------
NET DECREASE IN CASH (51,230) (15,594)
Cash and cash equivalents at beginning of year 74,573 59,512
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,343 $ 43,918
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 1,240 $ 2,777
Cash paid during the period for federal income taxes 1,275 500
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Ceres Group, Inc. and subsidiaries, included herein, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002.
The condensed consolidated financial statements for June 30, 2002 include
the accounts of Central Reserve Life Insurance Company, Provident American Life
and Health Insurance Company, Continental General Corporation and its
wholly-owned subsidiary, Continental General Insurance Company, United Benefit
Life Insurance Company, and Pyramid Life Insurance Company.
The balance sheet presented at December 31, 2001 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in Ceres'
Annual Report on Form 10-K for the year ended December 31, 2001.
Unless the context indicates otherwise, "we," "our" and "us" refers to
Ceres Group, Inc. and its subsidiaries on a consolidated basis.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and all liquid securities with
maturities of 90 days or less when purchased. At June 30, 2002 and December 31,
2001, $8.7 million and $9.9 million, respectively, of cash was held related to
fully insured employer shared risk plans, which is restricted from any other
use. We are entitled to the investment income from these funds. A corresponding
liability is included in the accompanying condensed consolidated financial
statements.
INVESTMENTS
Our insurance subsidiaries had certificates of deposit and fixed
maturity securities on deposit with various state insurance departments to
satisfy regulatory requirements.
7
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, which supercedes Emerging
Issues Task Force, or EITF, Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring). The provisions of this Statement are
effective for exit or disposal activities initiated after December 31, 2002 and
early application is encouraged. SFAS No. 146 requires recognition of a
liability for costs associated with an exit or disposal activity when the
liability is incurred rather than when the entity commits to an exit plan under
EITF Issue No. 94-3. This Statement applies to costs associated with an exit
activity that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Additionally, this Statement
does not apply to costs associated with the retirement of a long-lived asset
covered by SFAS No. 143, Accounting for Asset Retirement Obligations. We
anticipate that the adoption of this standard will not have a material effect on
our results of operations, financial position or liquidity.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers, and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions.
The provisions of SFAS No. 145 related to the rescission of SFAS No. 4
requires any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for classification as an
extraordinary item shall be reclassified.
8
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
The adoption of SFAS No. 145 on May 15, 2002 did not have a material effect on
our results of operations, financial position or liquidity.
In August 2001, the FASB issued SFAS, No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Effective January 1, 2002, this
Statement superseded SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, and the accounting and
reporting provisions of Accounting Principles Board Opinion, or APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. This
Statement also amended Accounting Research Bulletin No. 51, Consolidated
Financial Statements.
This Statement requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and broadens the presentation of discontinued operations to include
more disposal transactions. The provisions of this Statement generally are to be
applied prospectively. The adoption of SFAS No. 144 on January 1, 2002 did not
have a material effect on our results of operations, financial position or
liquidity.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addressed financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The adoption
of this standard on June 15, 2002 did not have a material effect on our
results of operations, financial position or liquidity.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which replaces APB Opinion No. 17, Intangible Assets. This Statement
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. Additionally, this
Statement discussed how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial statements.
This Statement:
- specifies that goodwill and intangible assets that have indefinite
useful lives will not be amortized but rather will be tested at
least annually for impairment;
- provides specific guidance for testing goodwill for impairment; and
- requires additional disclosures not previously required.
Effective January 1, 2002, we adopted the provisions of SFAS No. 142 as
required. Application of the nonamortization provisions of this Statement is
expected to reduce annual
9
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
expense by approximately $1.1 million, which is projected to result in an
increase in net income of approximately $0.7 million, or $0.02 per diluted
share, in 2002 and subsequent periods, subject to the impairment test described
herein. SFAS No. 142, as part of its adoption provisions, requires a
transitional impairment test to be applied to all goodwill and other
indefinite-lived intangible assets within the first half of 2002 and any
resulting impairment loss be reported as a change in accounting principle.
Our internal analysis, together with analysis prepared by our independent
consultants, indicates that we are not required to report an impairment loss
against our goodwill.
In general, application of the new provisions for goodwill and other
indefinite-lived intangible assets may result in more income statement
volatility due to the potential for periodic recognition of impairment losses,
which could vary in amount and regularity versus reducing those assets through
systematic amortization over a finite period of time.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
addressed the accounting and reporting for business combinations and expanded
the criteria for recording intangible assets separate from goodwill. On July 1,
2001, we adopted this Statement which requires us to use the purchase method of
accounting for all business combinations initiated after June 30, 2001.
Additionally, in conjunction with our goodwill testing above and following the
guidance of SFAS No. 141, we have reclassed licenses of $6.2 million as a
separate indefinite-lived intangible asset from goodwill.
B. DEBT
JUNE 30, DECEMBER 31,
2002 2001
------- -------
(dollars in thousands)
Bank credit facility $27,168 $28,500
Revolver -- 2,500
------- -------
$27,168 $31,000
======= =======
To provide funds for the acquisition of Continental General, on February
17, 1999, we entered into a credit agreement among Ceres, various lending
institutions, and JPMorgan Chase (formerly the Chase Manhattan Bank) as
Administrative Agent. Under the agreement, Ceres borrowed $40.0 million under a
tranche A term loan and secured a $10.0 million revolver.
Interest on the outstanding balance of the term loan is determined based
on our selection each quarter of either a Base Rate Loan or a Eurodollar Loan.
Under the Base Rate Loan, the interest rate will be 2.5% per annum plus the
higher of (a) the rate which is 0.50% of 1.0% in excess of a federal funds rate
or (b) Chase's prime rate as in effect from time to time. Under the Eurodollar
Loan, the interest rate will be 3.5% per annum plus a Eurodollar rate, which is
the arithmetic average of the offered quotation to first-class banks in the
interbank Eurodollar market by Chase, adjusted for certain reserve requirements.
10
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
The credit agreement was amended on July 25, 2000 to increase the revolver
from $10.0 million to $15.0 million in connection with the acquisition of
Pyramid Life. Any amount outstanding on the revolver had to be repaid on
February 17, 2002. The revolver bore interest at the same rate choices as the
$40.0 million tranche A term loan. On February 17, 2002, the balance of the
revolver was permanently repaid from proceeds of our December 2001 public
offering.
On March 30, 2001, our credit agreement was again amended to enter into a
new $10.0 million term loan with CIT Equipment Financing, Inc. The proceeds of
this term loan, the tranche B term loan, were used to permanently pay down $10.0
million of our then fully-drawn $15.0 million revolver under the credit
agreement. The terms of the amendment provide for CIT Group to participate
equally with the syndicate of banks and Chase under the credit agreement. At
June 30, 2002, the interest rate on our tranche A term loan balance of $17.5
million was 5.4% per annum and on our $9.7 million CIT tranche B term loan was
5.9% per annum. The first principal payment on the CIT tranche B term loan of
$0.3 million was made on June 17, 2002. Quarterly principal payments will be due
thereafter as follows: $0.3 million through March 17, 2004; $0.6 million
thereafter through March 17, 2005; and $1.2 million thereafter through March 17,
2006.
On December 27, 2001, our credit agreement was again amended in connection
with our December 2001 stock offering. The credit agreement, as amended,
contains financial and other covenants that among other things:
- prohibit the payment of cash dividends on our shares of common
stock;
- restrict the creation of liens and sales of assets; and
- require that we, at a minimum, maintain:
- a leverage ratio (consolidated debt to consolidated total
capital) of 0.30 to 1.00;
- an interest coverage ratio (consolidated earnings before
interest, income taxes, depreciation, and amortization to
consolidated interest expense) of 3.00 to 1.00;
- a risk-based capital (RBC) ratio for any of our regulated
insurance company subsidiaries of not less than 125.0% of the
RBC Company Action Level at year-end;
- consolidated net worth, excluding goodwill, of no less than
the sum of (i) $85.0 million plus (ii) 80% of the net proceeds
from the equity offering excluding the $5.0 million repurchase
of our convertible voting preferred stock plus (iii) 50% of
our aggregate consolidated net income calculated quarterly;
and
11
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
- a fixed charge coverage ratio of not less than 1.05 to 1.00
through June 30, 2003, and 1.10 to 1.00 thereafter.
In addition, the amended agreement required us to:
- repay a portion of our tranche A term loan with $10.0 million of the
proceeds from the December 2001 equity offering;
- repay the term loans with 25% of the net cash proceeds from any
future sale or issuance of our equity, excluding warrants and
compensation awards or plans;
- set aside $2.5 million of the proceeds from the equity offering for
the permanent repayment of the balance of our revolver due February
17, 2002; and
- increase the interest rate of the tranche B term loan by 0.5% per
annum.
Finally, the credit agreement, as amended:
- restructured our scheduled tranche A term loan debt payments as
follows: quarterly principal payments of $0.5 million through May
17, 2002, $0.8 million through November 17, 2002, $0.9 million
through November 17, 2004, and a payment of $8.5 million on February
17, 2005;
- allowed repurchase of all of our convertible voting preferred stock
with $5.0 million of the proceeds from the equity offering; and
- allowed capital contributions to our insurance subsidiaries with
proceeds from the equity offering after the repayments to the banks
and repurchase of our convertible voting preferred stock.
In addition, the common stock of Central Reserve, Continental General, and
most of our non-regulated subsidiaries are pledged as security for the credit
agreement. At June 30, 2002, we were in compliance with the covenants in our
credit agreement, as amended.
C. REINSURANCE
We have entered into several quota-share reinsurance treaties, including
treaties with Hannover Life Reassurance Company of America, on various blocks of
business of our subsidiaries. Under the provisions of the treaties, we cede
between 50% and 100% of the premiums for these policies and in return receive
reimbursement, for the same percentage, of the claims. In addition, we receive a
commission and expense allowance. In another reinsurance arrangement, we also
assume certain policies, in which we paid certain commission and expense
allowances, which are classified as reinsurance expenses below.
12
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
The following table summarizes the net impact of our reinsurance arrangements on
premiums and benefits, claims, losses and settlement expenses, commissions, and
other operating expenses:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(dollars in thousands)
Premiums, net
Direct $ 189,836 $ 204,941 $ 383,774 $ 411,404
Assumed 28 2,104 45 4,069
Ceded (30,896) (51,492) (64,660) (106,708)
--------- --------- --------- ---------
Total premiums, net $ 158,968 $ 155,553 $ 319,159 $ 308,765
========= ========= ========= =========
Benefits, claims, losses and settlement expenses $ 150,954 $ 169,531 $ 304,479 $ 347,717
Reinsurance recoveries (20,368) (46,469) (47,974) (95,459)
--------- --------- --------- ---------
Total benefits, claims, losses and
settlement expenses $ 130,586 $ 123,062 $ 256,505 $ 252,258
========= ========= ========= =========
Selling, general and administrative expenses
Commissions $ 29,154 $ 32,279 $ 59,509 $ 65,917
Other operating expenses 29,749 35,648 59,093 68,413
Reinsurance expenses 185 450 440 954
Reinsurance allowances (5,962) (11,127) (13,567) (24,186)
--------- --------- --------- ---------
Total selling, general and
administrative expenses $ 53,126 $ 57,250 $ 105,475 $ 111,098
========= ========= ========= =========
The insurance companies remain obligated for amounts ceded in the event
that the reinsurers do not meet their obligations. Initial ceding allowances
received from reinsurers are accounted for as deferred reinsurance gain and are
amortized into income over the estimated remaining life of the underlying
policies reinsured, except for interest sensitive products, which are amortized
over the expected profit stream of the in force business.
We have reclassified certain prior period amounts in accordance with
current year treatment.
D. SPECIAL CHARGES
2002
On April 15, 2002, Peter W. Nauert announced his retirement from his
position as our Chief Executive Officer effective June 1, 2002. He will remain
as Chairman of the Board of Directors through June 2003. In the first quarter of
2002, we reported a pre-tax non-recurring special charge to operations of
approximately $2.7 million related to the early termination of his employment
agreement and the payment of certain benefits through June 2003.
13
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
2001
We reported special charges of $7.1 million in the first quarter of 2001
related to:
- the elimination of $5.9 million deferred acquisition cost (DAC)
asset on all products of United Benefit Life and Provident American
Life; and
- $1.2 million loss on United Benefit Life.
Over the past four years, we experienced excessive losses at United
Benefit Life and Provident American Life due to high benefit utilization and
higher-than-anticipated claims costs. In July 2001, we implemented a program to
mitigate future losses of United Benefit Life and Provident American Life by
notifying policyholders that their policies would be terminated or replaced with
a different Provident American Life product. The business was substantially
wound down by the early part of 2002.
Therefore, due to the termination of the business in these subsidiaries,
these blocks had a $0.3 million pre-tax loss for the quarter ended June 30, 2002
compared to a $4.5 million pre-tax loss in the second quarter of 2001 including
special charges and legal expenses. Consequently, for the first half of 2002,
these blocks had a $1.9 million pre-tax loss compared to a $15.8 million pre-tax
loss for these blocks for the first half of 2001 including special charges and
legal expenses.
E. COMPREHENSIVE INCOME
Comprehensive income (loss) is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
(dollars in thousands)
Net income (loss) $(3,791) $ 711 $(2,263) $(6,386)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities, net of tax
expense (benefit) of $2,746, $(813), $1,804,
and $0, respectively 9,736 (3,571) 4,597 4,755
Other 98 (69) 42 (600)
------- ------- ------- -------
Comprehensive income (loss) $ 6,043 $(2,929) $ 2,376 $(2,231)
======= ======= ======= =======
F. EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with SFAS
No. 128, Earnings per Share. Basic earnings per common share is computed by
dividing net income (loss) attributable to common stockholders by the weighted
average number of shares outstanding during the period. Diluted earnings per
common share is computed by dividing net
14
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
income by the weighted average number of shares outstanding during the period
including the effect of the assumed exercise of dilutive stock options under the
treasury stock method. Stock options were antidilutive for the three and six
months ended June 30, 2002 and 2001 and therefore, were excluded from the
calculation of diluted earnings per share. Basic and diluted weighted average
shares of common stock are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average shares:
BASIC 33,967,607 17,473,231 33,912,430 17,397,885
Stock awards and incremental shares from
assumed exercise of stock options -- -- -- --
---------- ---------- ---------- ----------
DILUTED 33,967,607 17,473,231 33,912,430 17,397,885
========== ========== ========== ==========
G. CONTINGENT MATTERS
We are involved in 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 our consolidated financial condition.
H. SEGMENT INFORMATION
We have three distinct operating segments based upon product types:
medical, senior and other, and corporate and other. Products in the medical
segment include catastrophic and comprehensive medical plans. Significant
products in the senior and other segment include Medicare supplement, long-term
care, dental, life insurance, and annuities. The corporate and other segment
encompasses all other activities, including interest income, interest expense,
and corporate expenses of the parent company.
15
CERES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2002
UNAUDITED
- -------------------------------------------------------------------------------
Revenues from each segment are primarily generated from premiums charged to
policyholders and interest earned on cash and investments, and are summarized in
the following table:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(dollars in thousands)
MEDICAL
Revenues
Net premiums $ 93,450 $ 99,865 $ 189,657 $ 201,291
Investment income, realized gains (losses) 1,841 3,364 3,892 5,747
Other income 8,219 9,269 16,528 18,470
--------- --------- --------- ---------
103,510 112,498 210,077 225,508
--------- --------- --------- ---------
Expenses
Benefits and claims 83,646 83,109 159,268 169,253
Other operating expenses 32,292 32,201 61,976 61,370
Special charges -- -- -- 7,097
--------- --------- --------- ---------
115,938 115,310 221,244 237,720
--------- --------- --------- ---------
Segment loss before federal income
taxes, minority interest and preferred
stock dividends $ (12,428) $ (2,812) $ (11,167) $ (12,212)
========= ========= ========= =========
SENIOR AND OTHER
Revenues
Net premiums $ 65,518 $ 55,688 $ 129,502 $ 107,474
Investment income, realized gains (losses) 4,588 5,942 10,746 11,702
Other income 815 1,414 1,511 1,868
--------- --------- --------- ---------
70,921 63,044 141,759 121,044
--------- --------- --------- ---------
Expenses
Benefits and claims 46,940 39,953 97,237 83,005
Other operating expenses 16,390 16,645 32,394 29,753
--------- --------- --------- ---------
63,330 56,598 129,631 112,758
--------- --------- --------- ---------
Segment profit before federal income taxes,
minority interest and preferred stock
dividends $ 7,591 $ 6,446 $ 12,128 $ 8,286
========= ========= ========= =========
CORPORATE AND OTHER
Revenues
Investment income, realized gains (losses) $ 108 $ 125 $ 222 $ 300
--------- --------- --------- ---------
Expenses
Interest and financing costs 516 1,279 1,046 2,764
Other operating expenses 353 1,154 717 2,076
Special charges -- -- 2,668 --
--------- --------- --------- ---------
869 2,433 4,431 4,840
--------- --------- --------- ---------
Segment loss before income taxes, minority
interest and preferred stock dividends $ (761) $ (2,308) $ (4,209) $ (4,540)
========= ========= ========= =========
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES,
MINORITY INTEREST AND PREFERRED STOCK
DIVIDENDS $ (5,598) $ 1,326 $ (3,248) $ (8,466)
========= ========= ========= =========
We do not separately allocate investments or other identifiable assets by
industry segment, nor are income tax expenses (benefits) allocated by industry
segment.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
This discussion should be read in conjunction with our condensed
consolidated financial statements, notes and tables included elsewhere in this
report. Management's discussion and analysis may contain forward-looking
statements that are provided to assist in the understanding of anticipated
future financial performance. However, future performance involves risks and
uncertainties which may cause actual results to differ materially from those
expressed in the forward-looking statements. See "Forward-Looking Statements"
for further information.
OVERVIEW
We provide a wide array of health and life insurance products to
approximately 468,000 insureds through two primary business segments. Our
medical segment includes catastrophic and major medical health insurance for
individuals, associations and small businesses. The senior segment includes
senior health, life and annuity products for Americans age 55 and over. To help
control medical costs, we also provide medical cost management services to our
insureds. Our nationwide distribution channels include approximately 40,000
independent and exclusive agents and QQLink.com, Inc., our proprietary, patent
pending electronic distribution system.
RECENT EVENTS
On July 9, 2002, we announced the hiring of Thomas J. Kilian as our
President and Chief Executive Officer, effective immediately. Mr. Kilian
succeeded Peter Nauert, who retired as our CEO, but will remain as Chairman of
the Board until June 2003. In addition, Mr. Kilian was elected to serve as a
director to fill the vacancy created by Rodney Hale's resignation from the
Board.
17
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002 COMPARED TO QUARTER ENDED JUNE 30, 2001
INCREASE
THREE MONTHS THREE MONTHS (DECREASE) FROM
ENDED % OF ENDED % OF PREVIOUS YEAR
JUNE 30, CONSOLIDATED JUNE 30, CONSOLIDATED ------------------------
2002 REVENUES 2001 REVENUES DOLLARS %
--------- ----- --------- ----- --------- --------
(dollars in thousands)
Premiums, net
Medical $ 93,450 53.6% $ 99,865 56.9% $ (6,415) (6.4)%
Senior and other 65,518 37.5 55,688 31.7 9,830 17.7
--------- ----- --------- ----- ---------
Total 158,968 91.1 155,553 88.6 3,415 2.2
Net investment income 7,938 4.5 8,480 4.8 (542) (6.4)
Net realized gains (losses) (1,401) (0.8) 951 0.5 (2,352) N/M
Fee and other income 8,196 4.7 9,287 5.3 (1,091) (11.7)
Amortization of deferred
reinsurance gain 838 0.5 1,396 0.8 (558) (40.0)
--------- ----- --------- ----- ---------
Consolidated revenues 174,539 100.0 175,667 100.0 (1,128) (0.6)
--------- ----- --------- ----- ---------
Benefits, claims, losses and settlement
expenses
Medical 83,646 47.9 83,109 47.3 537 0.6
Senior and other 46,940 26.9 39,953 22.7 6,987 17.5
--------- ----- --------- ----- ---------
Total 130,586 74.8 123,062 70.0 7,524 6.1
Selling, general and administrative
expenses 53,126 30.4 57,250 32.6 (4,124) (7.2)
Net (deferral) amortization and change in
acquisition costs and value of business
acquired (4,091) (2.3) (7,525) (4.3) 3,434 45.6
Amortization of goodwill -- -- 275 0.2 (275) (100.0)
Interest expense and financing costs 516 0.3 1,279 0.7 (763) (59.7)
--------- ----- --------- ----- ---------
Income (loss) before federal income
taxes, minority interest and preferred
stock dividends (5,598) (3.2) 1,326 0.8 (6,924) N/M
Federal income tax expense (benefit) (1,794) (1.0) 623 0.4 (2,417) N/M
Minority interest (13) -- (8) -- (5) (62.5)
--------- ----- --------- ----- ---------
Net income (loss) (3,791) (2.2) 711 0.4 (4,502) N/M
Convertible voting preferred stock
dividends -- -- (187) (0.1) 187 100.0
--------- ----- --------- ----- ---------
Net income (loss) attributable to
common stockholders $ (3,791) (2.2)% $ 524 0.3% $ (4,315) N/M
========= ==== ========= ==== =========
Net income (loss) per share attributable
to common stockholders
Basic $ (0.11) $ 0.03 $ (0.14) N/M
Diluted (0.11) 0.03 (0.14) N/M
- -------------------------------------------
N/M = not meaningful
18
1. NET PREMIUMS (NET OF REINSURANCE CEDED)
For the quarter ended June 30, 2002, total net premiums were $159.0
million, an increase of 2.2%, from $155.6 million for the same quarter in 2001.
MEDICAL
-------
Medical premiums for the quarter ended June 30, 2002 were $93.5 million
compared to $99.9 million for the quarter ended June 30, 2001, a decrease of
6.4%. The decrease in medical premiums was primarily the result of a smaller
volume of business in force due to our decision in July 2001 to terminate or
replace the policies at United Benefit Life and Provident American Life, to
cancel other medical business in certain states and to target market in more
profitable states. The decrease is partially offset by premium rate
increases.
SENIOR AND OTHER
----------------
Senior and other premiums were $65.5 million for the quarter ended June 30,
2002 compared to $55.7 million for the quarter ended June 30, 2001, an increase
of 17.7%. The increase in senior and other premiums was primarily the result of
premium rate increases, as well as an increase in the volume of business in
force.
2. OTHER REVENUES
Net investment income was $7.9 million for the second quarter of 2002
compared to $8.5 million for the second quarter of 2001, a decrease of 6.4%, due
primarily to lower interest rates.
Net realized gains (losses) decreased to a net realized loss of $1.4
million for the second quarter of 2002 compared to a net realized gain of $1.0
million for the second quarter of 2001. This decrease was primarily due to the
permanent write-down of $1.7 million related to our investment in WorldCom bonds
coupled with the loss on the sale of $0.2 million in WorldCom bonds.
Fee and other income decreased to $8.2 million for the quarter ended June
30, 2002 compared to $9.3 million for the same quarter of 2001, a decrease of
11.7%. This decrease was primarily attributable to a smaller volume of business
in force in the medical segment due to the United Benefit Life and Provident
American Life termination or replacement program and the cancellation of other
medical business in certain states.
The amortization of deferred reinsurance gain of $0.8 million for the
quarter ended June 30, 2002 represented the recognition of the ceding commission
allowances received under our reinsurance agreements. The unamortized amount of
$12.0 million at June 30, 2002 was accounted for as a deferred reinsurance gain
on the condensed consolidated balance sheet.
3. BENEFITS, CLAIMS, LOSSES AND SETTLEMENT EXPENSES
Total benefits, claims, losses and settlement expenses increased to $130.6
million for the quarter ended June 30, 2002 compared to $123.1 million for the
same quarter in 2001, an increase of 6.1%.
19
MEDICAL
-------
Medical benefits, claims, losses and settlement expenses were $83.6 million
for the quarter ended June 30, 2002 compared to $83.1 million for the same
quarter in 2001, an increase of 0.6%. The medical loss ratio was 89.5% for the
quarter ended June 30, 2002 compared to 83.2% for the same quarter of 2001. The
increase in medical benefit, claims, losses and settlement expenses and the
medical loss ratio was primarily due to the higher-than-anticipated claims costs
associated with a reduction in the pending claims inventory at Continental
General and an increase in reserves. As is sometimes the case when reducing a
claims backlog, the average amount per claim increased as the inventory was
reduced.
SENIOR AND OTHER
----------------
Senior and other benefits, claims, losses and settlement expenses were
$46.9 million for the quarter ended June 30, 2002 compared to $40.0 million for
the same quarter of 2001, an increase of 17.5%. The increase was a result of
additional claims and benefits paid on a larger volume of business in force. The
senior and other loss ratio was 71.6% for the second quarter of 2002 compared to
71.7% for the second quarter of 2001.
4. OTHER EXPENSES AND NET INCOME
Selling, general and administrative expenses decreased to $53.1 million in
the second quarter of 2002 compared to $57.3 million in the second quarter of
2001, a decrease of 7.2%. Commissions decreased $3.1 million and other operating
expenses decreased $6.9 million as a direct result of our cancelled or replaced
business offset by reduced reinsurance allowances of $5.2 million resulting from
a lower volume of ceded premiums and $0.6 million in severance charges related
to the May 2002 reduction in workforce at our Cleveland facility. As a
percentage of revenues, selling, general and administrative expenses decreased
to 30.4% in the second quarter of 2002 compared to 32.6% in the second quarter
of 2001 due to a reduced workforce at our Cleveland facility, economies of scale
achieved from the conversion of the senior business to our Kansas City facility,
and a decrease in the overall commission rate.
The net (deferral) amortization and change in acquisition costs (DAC) and
value of business acquired resulted in a net deferral of $4.1 million for the
second quarter of 2002 compared to a net deferral of $7.5 million for the second
quarter of 2001. The decrease in the net deferral was primarily attributable to
the lower capitalization of DAC due to decreases in new business sales.
Interest expense and financing costs decreased to $0.5 million in the
second quarter of 2002 compared to $1.3 million in the second quarter of 2001 as
a result of a decrease in outstanding debt and declining interest rates.
A federal income tax benefit of $1.8 million, or 32.0% of the income before
federal taxes, was established for the second quarter of 2002. In the second
quarter of 2001, a federal income tax expense was $0.6 million, or 34.0% of the
loss before federal taxes (excluding losses at United Benefit Life where no
federal income tax benefit was realized). The lower effective tax rate in 2002
was primarily due to permanent tax differences.
As a result of the foregoing, for the second quarter of 2002, the net loss
attributable to common stockholders was $3.8 million, or $0.11 basic and diluted
earnings per share of common stock, compared to a net income attributable to
common stockholders of $0.5 million, or $0.03 basic and diluted earnings per
share of common stock for the second quarter of 2001.
20
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO JUNE 30, 2001
INCREASE
SIX MONTHS SIX MONTHS (DECREASE) FROM
ENDED % OF ENDED % OF PREVIOUS YEAR
JUNE 30, CONSOLIDATED JUNE 30, CONSOLIDATED ---------------------------
2002 REVENUES 2001 REVENUES DOLLARS %
----------- ------------ ---------- ------------ ----------- ------------
(dollars in thousands)
Premiums, net
Medical $ 189,657 53.9% $ 201,291 58.0% $ (11,634) (5.8)%
Senior and other 129,502 36.8 107,474 31.0 22,028 20.5
----------- ----------- ----------- ----------- -----------
Total 319,159 90.7 308,765 89.0 10,394 3.4
Net investment income 16,150 4.6 16,150 4.7 -- --
Net realized gains (losses) (1,290) (0.4) 1,599 0.4 (2,889) N/M
Fee and other income 16,163 4.6 17,683 5.1 (1,520) (8.6)
Amortization of deferred
reinsurance gain 1,876 0.5 2,655 0.8 (779) (29.3)
----------- ----------- ----------- ----------- -----------
Consolidated revenues 352,058 100.0 346,852 100.0 5,206 1.5
----------- ----------- ----------- ----------- -----------
Benefits, claims, losses and settlement
expenses
Medical 159,268 45.3 169,253 48.8 (9,985) (5.9)
Senior and other 97,237 27.6 83,005 23.9 14,232 17.1
----------- ----------- ----------- ----------- -----------
Total 256,505 72.9 252,258 72.7 4,247 1.7
Selling, general and administrative
expenses 105,475 30.0 111,098 32.0 (5,623) (5.1)
Net (deferral) amortization and change in
acquisition costs and value of business
acquired (10,388) (3.0) (18,449) (5.3) 8,061 43.7
Amortization of goodwill -- -- 550 0.2 (550) (100.0)
Interest expense and financing costs 1,046 0.3 2,764 0.8 (1,718) (62.2)
Special charges 2,668 0.7 7,097 2.0 (4,429) (62.4)
----------- ----------- ----------- ----------- -----------
Income (loss) before federal income
taxes, minority interest and preferred
stock dividends (3,248) (0.9) (8,466) (2.4) 5,218 61.6
Federal income tax benefit (958) (0.3) (2,057) (0.6) 1,099 53.4
Minority interest (27) -- (23) -- (4) (17.4)
----------- ----------- ----------- ----------- -----------
Net income (loss) (2,263) (0.6) (6,386) (1.8) 4,123 64.6
Convertible voting preferred stock
dividends -- -- (372) (0.1) 372 100.0
----------- ----------- ----------- ----------- -----------
Net income (loss) attributable to
common stockholders $ (2,263) (0.6)% $ (6,758) (1.9)% $ 4,495 66.5%
=========== =========== =========== =========== ===========
Net income (loss) per share attributable
to common stockholders
Basic $ (0.07) $ (0.39) $ 0.32 82.1
Diluted (0.07) (0.39) 0.32 82.1
- -------------------------------------------
N/M = not meaningful
21
1. PREMIUMS (NET OF REINSURANCE CEDED)
For the six months ended June 30, 2002, total net premiums were $319.2
million, an increase of 3.4%, from $308.8 million for the same period in 2001.
MEDICAL
-------
Medical premiums for the six months ended June 30, 2002 were $189.7 million
compared to $201.3 million for the six months ended June 30, 2001, a decrease of
5.8%. The decrease in medical premiums was primarily the result of a smaller
volume of business in force due to our decision in July 2001 to terminate or
replace the policies at United Benefit Life and Provident American Life, to
cancel other medical business in certain states and to target market in more
profitable states.
SENIOR AND OTHER
----------------
Senior and other premiums were $129.5 million for the six months ended June
30, 2002 compared to $107.5 million for the six months ended June 30, 2001, an
increase of 20.5%. The increase in senior and other premiums was primarily the
result of premium rate increases, as well as an increase in the volume of
business in force.
2. OTHER REVENUES
Net investment income was $16.2 million for the first six months of 2002
compared to $16.2 million for the first six months of 2001.
Net realized gains (losses) decreased to a net realized loss of $1.3
million for the first half of 2002 compared to a net realized gain of $1.6
million for the first half of 2001. This decrease was primarily due to the
permanent write-down of $1.7 million related to our investment in WorldCom bonds
coupled with the loss on the sale of $0.2 million in WorldCom bonds.
Fee and other income decreased to $16.2 million for the six months ended
June 30, 2002 compared to $17.7 million for the same six months of 2001, a
decrease of 8.6%. This decrease was primarily attributable to a smaller volume
of business in force in the medical segment due to the United Benefit Life and
Provident American Life termination or replacement program and the cancellation
of other medical business in certain states.
The amortization of deferred reinsurance gain of $1.9 million for the six
months ended June 30, 2002 represented the recognition of the ceding commission
allowances received under our reinsurance agreements. The unamortized amount of
$12.0 million at June 30, 2002 was accounted for as a deferred reinsurance gain
on the condensed consolidated balance sheet.
3. BENEFITS, CLAIMS, LOSSES AND SETTLEMENT EXPENSES
Total benefits, claims, losses and settlement expenses increased to $256.5
million for the six months ended June 30, 2002 compared to $252.3 million for
the six months ended June 30, 2001, an increase of 1.7%.
22
MEDICAL
-------
Medical benefits, claims, losses and settlement expenses were $159.3
million for the six months ended June 30, 2002 compared to $169.3 million for
the same period in 2001, a decrease of 5.9%. The decrease was primarily the
result of the termination or replacement program and cancellation of other
medical business as mentioned previously. The medical loss ratio was 84.0% for
the six months ended June 30, 2002 compared to 84.1% for the same period of
2001. The ratio decreased due to the termination or replacement program
and the cancellation of business in poor performing markets, as well as pricing
increases and benefit changes to keep pace with medical inflation. However, the
decrease was substantially offset by higher-than-anticipated claims costs
associated with 58% reduction in pending claims inventory at Continental
General and an increase in reserves. As is sometimes the case when reducing
a claims backlog, the average amount per claim increased as the inventory was
reduced.
SENIOR AND OTHER
----------------
Senior and other benefits, claims, losses and settlement expenses were
$97.2 million for the six months ended June 30, 2002 compared to $83.0 million
for the same period of 2001, an increase of 17.1%. The increase was a result of
additional claims and benefits paid on a larger volume of business in force. The
senior and other loss ratio decreased to 75.1% for the first six months of 2002
compared to 77.2% for the first six months of 2001, primarily attributable to
premium rate adjustments in several major states, increased volume of business
in force and lower benefit utilization.
4. OTHER EXPENSES AND NET INCOME
Selling, general and administrative expenses decreased to $105.5 million
for the first six months of 2002 compared to $111.1 million in the first six
months of 2001, a decrease of 5.1%. Commissions decreased $6.4 million and other
operating expenses decreased $10.4 million as a direct result of our cancelled
or replaced business offset by reduced reinsurance allowances of $10.6
million resulting from a lower volume of ceded premiums and $0.6 million in
severance charges related to the May 2002 reduction in workforce at our
Cleveland facility. As a percentage of revenues, selling, general and
administrative expenses decreased to 30.0% in the first six months of 2002
compared to 32.0% in the first six months of 2001 due to a reduced workforce at
our Cleveland facility, economies of scale achieved from the conversion of the
senior business to our Kansas City facility, and a decrease in the overall
commission rate.
The net (deferral) amortization and change in acquisition costs (DAC) and
value of business acquired resulted in a net deferral of $10.4 million for the
first six months of 2002 compared to a net deferral of $18.4 million for the
first six months of 2001. The decrease in the net deferral was primarily
attributable to the lower capitalization of DAC due to decreases in new business
sales and a $1.8 million increase in the amortization of the value of business
acquired (VOBA).
Interest expense and financing costs decreased to $1.0 million in the first
six months of 2002 compared to $2.8 million in the first six months of 2001 as a
result of a decrease in outstanding debt and declining interest rates.
The special charge for the first half of 2002 represented a pre-tax
non-recurring charge of $2.7 million related to the retirement of Peter W.
Nauert, our former CEO (see Note D, Special Charges for further information).
Special charges of $7.1 million in the first quarter of 2001 represented a $5.9
million write-off of the DAC asset for United Benefit Life and Provident
American Life and
23
a $1.2 million write-off of costs associated with United Benefit Life. The DAC
asset was written off due to the planned termination of this business.
A federal income tax benefit of $1.0 million, or 29.5% of the income before
federal taxes, was established for the first six months of 2002. In the first
six months of 2001, a federal income tax benefit was established of $2.1
million, or 34.0% of the loss before federal taxes (excluding losses at United
Benefit Life where no federal income tax benefit was recorded). The lower
effective tax rate in 2002 was primarily due to permanent tax differences.
As a result of the foregoing, for the first six months of 2002, the net
loss attributable to common stockholders was $2.3 million, or $0.07 basic and
diluted earnings per share of common stock, compared to a net loss attributable
to common stockholders of $6.8 million, or $0.39 basic and diluted earnings per
share of common stock for the first six months of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is our ability to generate adequate amounts of cash to meet our
financial commitments. Our major needs for cash are to enable our insurance
subsidiaries to pay claims and expenses as they come due and for Ceres to pay
interest on, and to repay principal of, its indebtedness. The primary sources of
cash are premiums, investment income, fee income, equity and debt financings,
and reimbursements from reinsurers. Payments consist of current claim payments
to insureds, medical cost management expenses, operating expenses such as
salaries, employee benefits, commissions, taxes and interest on debts.
Assets decreased 5.6% to $892.8 million at June 30, 2002 from $946.0
million at December 31, 2001. Assets of $486.6 million, or 54.5% of the total
assets, were in investments at June 30, 2002. Fixed maturities, our primary
investment, were $475.5 million, or 97.7% of total investments, at June 30,
2002. Other investments consist of surplus notes, policy loans and mortgage
loans. We have classified all of our fixed maturities as "available-for-sale"
and accordingly have reported them at estimated fair value at June 30, 2002.
Approximately 93.3% of our bonds were of investment grade quality at June
30, 2002. In addition to the fixed maturities, we also had $23.3 million in cash
and cash equivalents. On February 17, 2002, the revolver balance of $2.5 million
was paid in full with proceeds from our December 2001 public offering.
The total reinsurance receivable was $205.7 million at June 30, 2002. Of
this amount, $197.0 million represents reserves held by our reinsurers under our
various reinsurance treaties. Hannover holds most of these reserves.
The total policy liabilities and benefits accrued (reserves) were 86.4% of
the total liabilities at June 30, 2002 compared to 82.9% at December 31, 2001.
To provide funds for the acquisition of Continental General, on February
17, 1999, we entered into a credit agreement among Ceres, various lending
institutions, and JPMorgan Chase (formerly the Chase Manhattan Bank) as
Administrative Agent. Under the agreement, Ceres borrowed $40.0 million under a
tranche A term loan and secured a $10.0 million revolver.
Interest on the outstanding balance of the term loan is determined based
on our selection each quarter of either a Base Rate Loan or a Eurodollar Loan.
Under the Base Rate Loan, the
24
interest rate will be 2.5% per annum plus the higher of (a) the rate which is
0.50% of 1.0% in excess of a federal funds rate or (b) Chase's prime rate as in
effect from time to time. Under the Eurodollar Loan, the interest rate will be
3.5% per annum plus a Eurodollar rate, which is the arithmetic average of the
offered quotation to first-class banks in the interbank Eurodollar market by
Chase, adjusted for certain reserve requirements.
The credit agreement was amended on July 25, 2000 to increase the revolver
from $10.0 million to $15.0 million in connection with the acquisition of
Pyramid Life. Any amount outstanding on the revolver had to be repaid on
February 17, 2002. The revolver bore interest at the same rate choices as the
$40.0 million tranche A term loan. On February 17, 2002, the balance of the
revolver was permanently repaid from proceeds of our December 2001 public
offering.
On March 30, 2001, our credit agreement was again amended to enter into a
new $10.0 million term loan with CIT Equipment Financing, Inc. The proceeds of
this term loan, the tranche B term loan, were used to permanently pay down $10.0
million of our then fully-drawn $15.0 million revolver under the credit
agreement. The terms of the amendment provided for CIT Group to participate
equally with the syndicate of banks and Chase under the credit agreement. At
June 30, 2002, the interest rate on our tranche A term loan balance of $17.5
million was 5.4% per annum and on our $9.7 million CIT tranche B term loan was
5.9% per annum. The first principal payment on the CIT tranche B term loan of
$0.3 million was made on June 17, 2002. Quarterly principal payments will be due
thereafter as follows: $0.3 million through March 17, 2004; $0.6 million
thereafter through March 17, 2005; and $1.2 million thereafter through March 17,
2006.
On December 27, 2001, our credit agreement again was amended in connection
with our December 2001 stock offering. The credit agreement, as amended,
contains financial and other covenants that among other things:
- prohibit the payment of cash dividends on our shares of common
stock;
- restrict the creation of liens and sales of assets; and
- require that we, at a minimum, maintain:
- a leverage ratio (consolidated debt to consolidated total
capital) of 0.30 to 1.00;
- an interest coverage ratio (consolidated earnings before
interest, income taxes, depreciation, and amortization to
consolidated interest expense) of 3.00 to 1.00;
- a risk-based capital (RBC) ratio for any of our regulated
insurance company subsidiaries of not less than 125.0% of the
RBC Company Action Level at year-end;
- consolidated net worth, excluding goodwill, of no less than
the sum of (i) $85.0 million plus (ii) 80% of the net proceeds
from the equity offering excluding the $5.0 million repurchase
of our convertible voting preferred
25
stock plus (iii) 50% of our aggregate consolidated net income
calculated quarterly; and
- a fixed charge coverage ratio of not less than 1.05 to 1.00
through June 30, 2003, and 1.10 to 1.00 thereafter.
In addition, the amended agreement required us to:
- repay a portion of our tranche A term loan with $10.0 million of the
proceeds from the December 2001 equity offering;
- repay the term loans with 25% of the net cash proceeds from any
future sale or issuance of our equity, excluding warrants and
compensation awards or plans;
- set aside $2.5 million of the proceeds from the equity offering for
the permanent repayment of the balance of our revolver due February
17, 2002; and
- increase the interest rate of the tranche B term loan by 0.5% per
annum.
Finally, the credit agreement, as amended:
- restructured our scheduled tranche A term loan debt payments as
follows: quarterly principal payments of $0.5 million through May
17, 2002, $0.8 million through November 17, 2002, $0.9 million
through November 17, 2004, and a payment of $8.5 million on February
17, 2005;
- allowed repurchase of all of our convertible voting preferred stock
with $5.0 million of the proceeds from the equity offering; and
- allowed capital contributions to our insurance subsidiaries with
proceeds from the equity offering after the repayments to the banks
and repurchase of our convertible voting preferred stock.
In addition, the common stock of Central Reserve, Continental General, and
most of our non-regulated subsidiaries are pledged as security for the credit
agreement. At June 30, 2002, we were in compliance with the covenants in our
credit agreement, as amended.
We lease our corporate headquarters in Cleveland for a term of 15 years
beginning August 1, 2001 with four optional five-year extensions. Rent payments
annually total $1.7 million through July 2003, $1.8 million through July 2006,
$2.0 million through July 2011, and $2.1 million through July 2016.
26
The following schedule summarizes our current and future contractual
obligations as of June 30, 2002:
PAYMENTS DUE BY YEAR
-------------------------------------------------------------------
LESS THAN 1 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
- ----------------------- ------- ------- ------- ------- -------
(in thousands)
Long-Term Debt $27,168 $ 2,165 $11,068 $13,935 $ --
Operating Leases 30,410 1,212 5,500 4,351 19,347
------- ------- ------- ------- -------
Total $57,578 $ 3,377 $16,568 $18,286 $19,347
======= ======= ======= ======= =======
We believe that cash flow from operating activities will be sufficient to
meet our currently anticipated operating and capital expenditure requirements
over the next 12 months. We believe that funds should be sufficient to meet all
our debt obligations over the next 12 months. Funds to meet our debt obligations
are generated from fee income from our non-regulated subsidiaries and from
dividends of our insurance subsidiaries, if available. Our ability to make
scheduled payments of the principal and interest on our indebtedness depends on
our future performance and the future performance of our non-regulated
subsidiaries, which are subject to economic, financial, competitive and other
factors beyond our control. Dividends from our regulated insurance subsidiaries
are subject to, and limited by, state insurance regulations. As of June 30,
2002, none of our insurance subsidiaries (Central Reserve and Continental
General) could pay a dividend to Ceres Group, the parent company, without prior
approval of their respective state regulators as a result of their respective
statutory levels of unassigned surplus. If our non-regulated subsidiaries do not
generate sufficient fee income to service all of our debt obligations, there may
be a material adverse effect on our business, financial condition and results of
operations, and a significant adverse effect on the market value of our common
stock. In addition, if necessary, additional financing may not be available on
terms favorable to us or at all.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We have three segments: medical, which includes catastrophic and
comprehensive medical plans; senior and other, which includes Medicare
supplement, long-term care, dental, life insurance and annuities; and corporate
and other, which includes interest income, interest expense, and corporate
expenses of the parent company. See Note H, Segment Information, to the Notes to
our Condensed Consolidated Financial Statements for further information.
MARKET RISK AND MANAGEMENT POLICIES
The following is a description of certain risks facing health and life
insurers and how we mitigate those risks:
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, including benefits, claims and losses,
settlement expenses, acquisition expenses and other corporate expenses. We
utilize a variety of actuarial and qualitative methods to set such pricing
levels.
27
Any negative fluctuation in our estimates of the effect of continued medical
inflation and high benefit utilization could have a material adverse impact on
our results of operations.
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. For example, 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. We attempt to mitigate this
risk by offering a wide range of products and by operating in many states, thus
reducing our exposure to any single product and by employing underwriting
practices that identify and minimize the adverse impact of this risk.
In addition, insurance companies are subject to extensive federal and
state regulation and compliance with these regulations could increase the
insurance companies' operating costs. In some circumstances, failure to comply
with certain insurance regulations could subject an insurance company to
regulatory actions by such insurance company's state of domicile. For example,
states have statutory risk-based capital, or RBC, requirements for health and
other insurance companies based on the RBC Model Act. These RBC requirements are
intended to assess the capital adequacy of life and health insurers, taking into
account the risk characteristics of an issuer's investments and products. In
general, under these laws, an insurance company must submit a report of its RBC
level to the insurance department of its state of domicile as of the end of the
previous calendar year. These laws provide for four different levels of
regulatory attention depending on the ratio of an insurance company's total
adjusted capital (defined as the total of its statutory capital, surplus and
asset valuation reserve) to its risk-based capital. As of December 31, 2001, our
risk-based capital levels for each of our insurance subsidiaries exceeded the
levels required by regulatory authorities.
Credit Risk is the risk that issuers of securities owned by us will default
or that other parties, including reinsurers that have obligations to us, will
not pay or perform. We attempt to minimize this risk by adhering to a
conservative investment strategy and by maintaining sound reinsurance and credit
and collection policies.
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 if we attempt to mitigate this risk by charging fees for
non-conformance with certain policy provisions and/or by attempting to match the
maturity schedule of our assets with the expected payouts of its liabilities. To
the extent that liabilities come due more quickly than assets mature, we would
have to sell assets prior to maturity and recognize a gain or loss. Assuming an
immediate increase of 100 basis points in interest rates, the net hypothetical
decline in fair value of stockholders' equity is estimated to be $14.4 million
at June 30, 2002. This amount represents approximately 9.0% of our stockholders'
equity at such date.
We also have long-term debt that bears interest at variable rates.
Therefore, our results of operations would be affected by interest rate changes.
We do not expect a significant rate change in the near future that would have a
material effect on our near-term results of operations.
Seasonality is the risk of fluctuations of revenues and operating results.
Historically, our revenues and operating results have varied from quarter to
quarter and are expected to continue
28
to fluctuate in the future. These fluctuations have been due to a number of
factors, including higher benefit utilization by our insureds during the winter
months and the use of deductibles. More specifically, our senior segment's
seasonality is the opposite of our medical segment's, meaning that earnings in
the senior segment are generally lower in the first quarter and higher later in
the year. This is mainly a factor of our Medicare Supplement products that pay
the Medicare deductible for our insureds generally during the early months of
the year.
IMPACT OF INFLATION
Inflation rates impact our 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, especially
prescription drug costs. New, more expensive and wider use of pharmaceuticals is
inflating health care costs. We will continue to establish premium rates in
accordance with trends in hospital and medical costs along with concentrating on
various cost containment programs. However, as evidenced by the year ended
December 31, 2001, there can be no assurance that these efforts by us will fully
offset the impact of inflation or that premiums will equal or exceed increasing
healthcare costs.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are necessarily based on
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which, with
respect to future business decisions, are subject to change. These uncertainties
and contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, us.
In particular, forward-looking statements can be identified by the use of
words such as "may," "will," "should," "expect," "anticipate," "estimate,"
"continue" or similar words. In light of the risks and uncertainties inherent in
all future projections, the inclusion of forward-looking statements in this
report should not be considered as a representation by us or any other person
that our objectives or plans will be achieved. Numerous factors could cause our
actual results to differ materially and adversely from those in the
forward-looking statements, including those risks outlined above in "Market Risk
and Management Policies," and the following:
- unforeseen losses with respect to loss and settlement expense
reserves for unreported and reported claims or adverse changes in
persistency or profitability of insurance contracts that would
accelerate the amortization of our deferred acquisition costs;
- our ability to implement increases in premium rates and to develop,
distribute and administer competitive products and services in a
timely, cost-effective manner;
- rising healthcare costs, especially the rising costs of prescription
drug costs that are rising faster than other medical costs, and
rising utilization rates;
29
- developments in healthcare reform and other regulatory issues,
including the Health Insurance Portability and Accountability Act of
1996 and increased privacy regulation, and changes in laws and
regulations in key states in which we operate;
- our ability to meet risk-based or statutory capital requirements;
- our ability to continue to meet the terms of our debt obligations
under our credit agreement which contains a number of significant
financial and other covenants;
- the adequacy of funds, including fee income, received from our
non-regulated subsidiaries, and the restrictions on our insurance
subsidiaries' ability to pay dividends to Ceres, to meet our debt
obligations;
- the performance of others on whom we rely for reinsurance,
particularly Hannover Life Reassurance Company of America upon whom
we have relied for substantially all of our reinsurance;
- the risk of material adverse outcomes in litigation;
- the risk of selling investments to meet liquidity requirements;
- our ability to obtain additional debt or equity financing on terms
favorable to us to facilitate our long-term growth;
- the risk that issuers of securities owned by Ceres will default or
that other parties will not pay or perform;
- our financial and claims paying ratings, including any potential
downgrades;
- our ability to maintain our current PPO network arrangements;
- dependence on senior management and key personnel;
- the performance of others on whom we rely for administrative and
operations services;
- changes in accounting and reporting practices;
- the failure to successfully manage our expanding operations and
integrate future acquisitions, if any, including the failure to
achieve cost savings;
- payments to state assessment funds;
- business conditions and competition in the healthcare industry;
- changes in tax laws; and
- our ability to fully collect all agent advances.
30
The factors listed above should not be constructed as exhaustive. We
undertake no obligation to release publicly the results of any future revisions
we may make to forward-looking statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
- ---------------------------------------------------------------
The information called for by this item is provided under the caption
"Market Risk and Management Policies" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
31
PART II. FINANCIAL INFORMATION
------------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
We have been sued for compensatory damages and, in some cases, unspecified
punitive damages in a number of actions pertaining to the insureds of United
Benefit Life arising from claims payment issues. While we do not believe that
United Benefit Life has harmed any of the plaintiffs in these lawsuits and we
believe our reserves are adequate, we cannot predict the outcome of the
lawsuits, including the award of punitive damages and, therefore, we cannot
predict the financial impact on us of these lawsuits. We intend to vigorously
contest these actions.
In addition to the above, we are also involved in 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 our consolidated financial
condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
On April 1, 2002, we issued 31,581 shares of our common stock to Peter W.
Nauert, our then President and Chief Executive Officer, pursuant to the stock
award provision of his employment agreement. This issuance was 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
a) The Annual Meeting of Stockholders was held on May 15, 2002.
b) Proxies were solicited for election of directors by Ceres' management
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
No solicitation in opposition to management's nominees as listed in the
proxy statement were made. All of management's nominees were elected to
hold office as set forth in section (c)(2) below.
c) The matters voted upon were the following:
1. With respect to an amendment to our Bylaws to set the number of
directors at nine and to provide for a staggered Board of
Directors which would divide our Board into three classes, each
with three directors, serving staggered terms of office of three
years:
For 16,562,993
Against 7,764,321
Abstain 16,186
32
2. With respect to the election of nine directors to serve until the
next annual election of directors and until their successors are
elected and qualified:
Name For
---- ---
Andrew A. Boemi 29,439,846
Michael A. Cavataio 29,469,946
Bradley E. Cooper 29,473,207
Susan S. Fleming 29,478,330
Rodney L. Hale 26,975,599
Robert J. Lunn 26,966,338
Peter W. Nauert 27,566,843
William J. Ruh 29,467,807
Robert A. Spass 29,467,569
The following classes of directors were established due to the approval
of Proposal 1:
Class I (one-year term expiring in 2003):
Susan S. Fleming
Rodney L. Hale *
Robert J. Lunn
Class II (two-year term expiring in 2004):
Andrew A. Boemi
Michael A. Cavataio
Bradley E. Cooper
Class III (three-year term expiring in 2005):
Peter W. Nauert
William J. Ruh
Robert A. Spass
* On July 8, 2002, Mr. Hale resigned and our Board elected Thomas J.
Kilian to serve as a director for the remainder of Mr. Hale's term.
In addition, in connection with the approval of Proposal 1, we and certain of
our stockholders agreed to terminate the Amended and Restated Voting Agreement,
dated July 25, 2000, between Ceres and certain of its stockholders.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibits.
3.2 Amended and Restated Bylaws.
4.7 Termination Agreement, dated May 15, 2002, between Ceres Group, Inc.
and the Required Holders.
33
10.39 Employment Agreement, dated July 9, 2002, between Ceres Group, Inc.
and Thomas J. Kilian.
b) Reports on Form 8-K: None.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERES GROUP, INC.
Date: August 14, 2002 By: /s/ Charles E. Miller, Jr.
-------------------- --------------------------------------------
Charles E. Miller, Jr.
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Chief Accounting Officer)
35
EXHIBITS
3.2 Amended and Restated Bylaws.
4.7 Termination Agreement, dated May 15, 2002, between Ceres Group, Inc. and
the Required Holders.
10.39 Employment Agreement, dated July 9, 2002, between Ceres Group, Inc. and
Thomas J. Kilian.
36