<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
Current Report
(Amendment No. 1)
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: July 25, 2000
(Date of earliest event reported)
Ceres Group, Inc.
(Exact Name or Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-8483 34-1017531
-------- ------ ----------
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification
Incorporation) Number)
</TABLE>
17800 Royalton Road, Cleveland, Ohio 44136
------------------------------------------
(Address of Principle Executive Offices) (Zip Code)
(440) 572-2400
--------------
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENT, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS.
On August 9, 2000, Ceres Group, Inc. filed a Form 8-K that
reported the acquisition, through Ceres' wholly-owned
subsidiary, Continental General Insurance Company, of The
Pyramid Life Insurance Company from United Insurance Company
of America, a subsidiary of Unitrin, Inc. of Chicago, for
$67.5 million. In Item 7 of the 8-K, Ceres stated that the
audited financial statements of Pyramid and pro forma
financial information of Ceres showing the effect of the
acquisition would be filed within 60 days of the filing of the
Form 8-K. This Form 8-K/A is filed for the purpose of filing
such financial statements.
(a) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
Audited financial statements of Pyramid for the year
ended December 31, 1999 and unaudited financial
statements of Pyramid for the six months ended June
30, 2000.
(b) PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma balance sheet of Ceres as of June
30, 2000 and unaudited pro forma statement of
operations for the six months ended June 30, 2000 and
the year ended December 31, 1999 giving effect to the
pro forma adjustments related to the acquisition of
Pyramid.
(c) EXHIBIT
23 Consent of KPMG LLP
<PAGE> 3
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
The Pyramid Life Insurance Company
We have audited the accompanying balance sheet of The Pyramid Life Insurance
Company as of December 31, 1999 and the related statements of income, cash flows
and stockholder's equity and comprehensive income for the year ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Pyramid Life Insurance
Company as of December 31, 1999 and the results of its operations and its cash
flow for the year ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
March 31, 2000
Chicago, Illinois
<PAGE> 4
THE PYRAMID LIFE INSURANCE COMPANY
BALANCE SHEETS
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturity Securities, at Fair Value
(Amortized Cost: 1999 - $101,435) $ 78,936 $ 98,070
Loans to Policyholders 2,397 2,420
-------- --------
Total Investments 81,333 100,490
Cash 31,035 9,142
Receivables 5,585 6,480
Deferred Policy Acquisition Costs 6,144 5,837
Deferred Income Taxes 7,387 7,146
Goodwill 7,044 7,044
Other Assets 2,422 2,746
-------- --------
Total Assets $140,950 $138,885
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Insurance Reserves:
Life $ 20,989 $ 21,197
Accident and Health 7,751 6,898
Claims 10,772 10,944
-------- --------
Total Insurance Reserves 39,512 39,039
Policyholders' Contract Deposits 30,168 30,342
Unearned Premium Reserves 9,011 7,790
Accrued Income Taxes 154 41
Accrued Expenses and Other Liabilities 2,224 3,078
-------- --------
Total Liabilities 81,069 80,290
-------- --------
Stockholder's Equity:
Common Stock, $4,300 Par Value, 582 and 350 Shares
Authorized, Issued and Outstanding at December 31, 1999 2,503 2,503
Paid-in Capital 436 436
Retained Earnings 59,346 57,840
Accumulated Other Comprehensive Loss (2,404) (2,184)
-------- --------
Total Stockholder's Equity 59,881 58,595
-------- --------
Total Liabilities and Stockholder's Equity $140,950 $138,885
======== ========
</TABLE>
See accompanying notes to the financial statements.
<PAGE> 5
THE PYRAMID LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
------- -------
<S> <C> <C>
REVENUES
Premiums $31,591 $59,767
Net Investment Income 3,844 7,178
Other 1,533 3,810
------- -------
Total Revenues 36,968 70,755
------- -------
EXPENSES
Policyholder Benefits 24,166 44,794
Amortization of Deferred Policy Acquisition Costs 719 1,566
Other Insurance Expenses 9,755 18,725
------- -------
Total Expenses 34,640 65,085
------- -------
Income Before Income Taxes 2,328 5,670
Income Tax Expense 822 1,991
------- -------
NET INCOME $ 1,506 $ 3,679
======= =======
</TABLE>
See accompanying notes to the financial statements.
<PAGE> 6
THE PYRAMID LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,506 $ 3,679
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Deferred Income Tax Expense (122) (641)
Amortization of Investments 243 664
Depreciation 131 322
Change in:
Receivables 895 (1,582)
Deferred Policy Acquisition Costs (307) 142
Other Assets (324) (526)
Insurance Reserves 114 (2,253)
Accrued Income Taxes 113 (413)
Unearned Premiums 1,221 6
Accrued Expenses and Other Liabilities (854) (201)
-------- -------
Net Cash Provided (Used) by Operating Activities 2,616 (803)
-------- -------
INVESTING ACTIVITIES
Sales and Maturities of Fixed Maturity Securities 18,562 28,216
Purchases of Fixed Maturity Securities -- (26,101)
Purchases of Property & Equipment (183) (100)
Net Change in Loans to Policyholders 23 65
-------- -------
Net Cash Provided by Investing Activities 18,402 2,080
-------- -------
FINANCING ACTIVITIES
Universal Life and Annuity Receipts from Policyholders 1,891 4,186
Universal Life and Annuity Payments to Policyholders (1,016) (1,589)
-------- -------
Net Cash Provided by Financing Activities 875 2,597
-------- -------
Increase in Cash 21,893 3,874
Cash, Beginning of the Period 9,142 5,268
-------- -------
Cash, End of the Period $ 31,035 $ 9,142
======== =======
Supplemental Disclosure of Cash Flow Information
Federal Income Taxes Paid $ 833 $ 3,047
</TABLE>
See accompanying notes to the financial statements.
<PAGE> 7
THE PYRAMID LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
PAID - IN RETAINED COMPREHENSIVE SHAREHOLDER'S
COMMON STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY)
------------ --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $1,505 $436 $55,159 $ 1,398 $58,498
Net Income -- -- 3,679 -- 3,679
Other Comprehensive Loss (Note 3) -- -- -- (3,582) (3,582)
-------
Total Comprehensive Income 97
Common Stock Dividend (Note 4) 998 -- (998) -- --
------ ---- ------- ------- -------
BALANCE, DECEMBER 31, 1999 2,503 436 57,840 (2,184) 58,595
Net Income 1,506 1,506
Other Comprehensive Loss (Note 3) (220) (220)
-------
Total Comprehensive Income 1,286
------ ---- ------- ------- -------
BALANCE, JUNE 30, 2000 (Unaudited) $2,503 $436 $59,346 $(2,404) $59,881
====== ==== ======= ======= =======
</TABLE>
See accompanying notes to the financial statements.
<PAGE> 8
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Pyramid Life Insurance Company ("Pyramid" or the "Company"), a life and
health insurance company domiciled in Kansas, is a wholly-owned subsidiary of
United Insurance Company of America ("UICA"), which in turn is wholly-owned by
Unitrin, Inc. ("Unitrin"). The Company provides individual health and life
insurance products marketed through its independent agents and agencies.
The audited Financial Statements as of and for the year ended December 31, 1999
included herein have been prepared on the basis of generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and
assumptions.
The accompanying unaudited Financial Statements as of and for the six months
ended June 30, 2000 have been prepared by Pyramid in accordance with generally
accepted accounting principles for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission and reflect
all adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim period. All adjustments made were
normal recurring accruals.
SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Investments in Fixed Maturity Securities include bonds, notes and redemptive
preferred stocks at fair value and are classified as available-for-sale.
Unrealized appreciation or depreciation, net of applicable deferred income
taxes, on Fixed Maturity Securities is included in Stockholder's Equity and
classified as Accumulated Other Comprehensive Income (Loss). The Company has no
investments in derivative financial instruments. Gains and losses on sales of
investments are computed on the specific identification method and are included
in Net Income. The estimated fair value of investments is based upon quoted
market price, where available, or on values obtained from independent pricing
services.
DEFERRED POLICY ACQUISITION COSTS
Certain costs directly associated with the acquiring of new business,
principally commissions, are deferred.
Costs deferred on traditional life products are amortized over the anticipated
premium-paying period of related policies in proportion to the ratio of the
annual premiums to the total premiums anticipated, which is estimated using the
same assumptions in calculating policy reserves. Costs of acquiring accident and
health policies are amortized over the term of the related policy. Costs of
acquiring universal life products are amortized in proportion to the present
value of estimated gross profits over the product's assumed duration. To the
extent that unrealized gains or losses on available-for-sale securities would
result in an adjustment of deferred policy acquisition costs had those gains or
losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded as an adjustment of the unrealized gains or
losses included in stockholder's equity.
<PAGE> 9
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INSURANCE RESERVES
Reserves for claim and claim adjustment expenses on accident and health claims
represent the estimated amounts necessary to cover the ultimate costs of
investigating and settling all losses incurred. Such estimates are based upon
individual case estimates for reported claims and estimates for incurred but not
reported losses.
For traditional life insurance products, the reserve for future policy benefits
are primarily estimated on the net level premium method based on expected
mortality, interest and withdrawal rates, including provisions for adverse
mortality. These assumptions vary by such characteristics as plan, age at issue
and policy duration. Mortality assumptions reflect the Company's historical and
industry standards. Interest rate assumptions principally range from 3.00% to
6.00%. Withdrawal assumptions are based on actual and industry experience.
Reserves for universal life contracts are equal to the account balances that
accrue to the policyholders. Interest crediting rates ranged from 5.75% to 6.00%
for the periods ended December 31, 1999 and June 30, 2000.
REVENUE
Accident and health insurance premiums are recognized ratably over the periods
to which the premiums relate. Traditional life insurance premiums are recognized
as revenue when due. Revenues on universal life contracts are comprised of
contract charges and fees, which are recognized over the coverage period.
REINSURANCE
In the normal course of business, the Company reinsures certain risks above
certain retention levels with other insurance enterprises. Amounts recoverable
from reinsurers for benefits for which the Company has not been relieved of its
legal obligation to the policyholder are included in Receivables. Gains related
to long-duration reinsurance contracts are deferred and amortized over the life
of the underlying reinsured policies. Losses related to long-duration
reinsurance contracts are recognized immediately.
GOODWILL
Goodwill relating to the acquisition of the Company by UICA prior to 1970 is not
being amortized. UICA has elected to pushdown the costs in excess of net assets
of purchased business to the Company.
<PAGE> 10
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated 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
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which the change is
enacted.
RELATED PARTY TRANSACTIONS
The Company and Unitrin Services Company ("USC"), a wholly-owned subsidiary of
Unitrin, are parties to a general services agreement whereby USC provides
certain management services, group medical insurance and other insurance to the
Company. Amounts allocated to the Company were $1,317,000 in 1999 and $559,000
for the six months ended June 30, 2000. Additionally, the Company and USC are
parties to a data processing agreement whereby USC provides certain data
processing services to the Company. Amounts allocated to the Company were
$645,000 in 1999, and $284,000 for the six months ended June 30, 2000.
The Company and UICA are parties to certain agreements whereby the Company
provides claims administration, accounting and payroll services to UICA's
Worksite Products Division. Other Income includes $779,000 of service fees
related to the agreement with UICA in 1999, and $160,000 for the six months
ended June 30, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" which deferred the effective date of
SFAS No. 133, "Accounting for Derivatives Instruments and for Hedging
Activities." SFAS No. 133 requires all derivatives to be recorded on the balance
sheet at fair value and establishes "special accounting" for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments; hedges of the variable cash flows of forecasted
transactions; and hedges of foreign currency exposures of net investments in
foreign operations. Accordingly, SFAS No. 133 is effective for years beginning
after June 15, 2000, with earlier adoption permitted. The Company believes that
the effect of adoption of SFAS No. 133 will not be material.
<PAGE> 11
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 2. INVESTMENTS AND INVESTMENT INCOME
The amortized cost and estimated fair value of the Company's investments in
Fixed Maturity Securities at December 31, 1999 were:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAINS LOSSES VALUE
-------- ----- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and Government
Agencies and Authorities $ 88,088 $202 $(2,029) $86,261
Corporate Bonds and Notes 11,597 -- (1,190) 10,407
Redemptive Preferred Stock 1,750 -- (348) 1,402
-------- ---- ------- -------
Total $101,435 $202 $(3,567) $98,070
======== ==== ======= =======
</TABLE>
Net Investment Income for the year ended December 31, 1999 was:
1999
------
(dollars in thousands)
Interest and Dividends on Fixed Maturity Securities $6,573
Other 624
------
Total 7,197
Investment Expenses 19
------
Net Investment Income $7,178
======
<PAGE> 12
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 2. INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
The components of sales and maturities of fixed maturity securities for the year
ended December 31, 1999 were:
1999
-------
(dollars in thousands)
Proceeds from Sales and Maturities $28,216
=======
Gross Realized Gains 1
Gross Realized Losses (2)
-------
Net Realized Gains (Losses) $ (1)
=======
The amortized cost and estimated fair value of the Company's investments in
Fixed Maturity Securities at December 31, 1999 by contractual maturity were:
AMORTIZED COST FAIR VALUE
-------------- ----------
(dollars in thousands)
Due in One Year or Less $ 35,325 $35,478
Due After One Year to Five Years 22,890 22,610
Due After Five Years to Fifteen Years 29,582 27,940
Due After Fifteen Years 11,887 10,640
Redemptive Preferred Stock
with no single maturity date 1,751 1,402
-------- -------
Total Fixed Maturity Securities $101,435 $98,070
======== =======
The expected maturities may differ from the contractual maturities because
debtors may have the right to call or prepay obligations with or without call or
prepayment penalties.
<PAGE> 13
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 3. OTHER COMPREHENSIVE LOSS
Comprehensive income is comprised of all changes to stockholder's equity,
including net income, except those changes resulting from investments by and
distributions to stockholders. The changes in the components of accumulated
other comprehensive loss are shown below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
----- -------
(dollars in thousands)
<S> <C> <C>
Gross Unrealized Investment Gains (Losses) Arising
During the Period:
Fixed Maturity Securities $(339) $(5,518)
Income Tax Benefit (Expense) 119 1,936
----- -------
Unrealized Investment Losses, Net (220) (3,582)
Reclassification Adjustment for Gross Gains
Realized in Net Income -- --
----- -------
Other Comprehensive Loss $(220) $(3,582)
===== =======
</TABLE>
NOTE 4. STATUTORY FINANCIAL INFORMATION
The Company is domiciled in the State of Kansas and prepares statutory financial
statements on the basis of accounting practices prescribed by the Department of
Insurance of the State of Kansas, which is a comprehensive basis of accounting
other than Generally Accepted Accounting Principles.
Statutory capital and surplus and net income, determined in accordance with
accounting practices prescribed by regulation and statute of the Department of
Insurance of the State of Kansas were:
1999
-----
(dollars in thousands)
Statutory Capital and Surplus $43,334
Statutory Net Income $ 2,951
<PAGE> 14
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 4. STATUTORY FINANCIAL INFORMATION (CONTINUED)
Various state insurance laws restrict the amount that insurance companies may
transfer in the form of dividends, loans, or advances without prior approval of
regulatory authorities.
In 2000, the Company would be able to pay $4,333,000 to its shareholder without
prior written approval of regulatory authorities. The statutory statement value
of bonds on deposit with various insurance regulatory agencies, as required by
laws, was $31,380,000 at December 31, 1999.
In 1999 the Company issued an additional 232 shares of stock in the form of a
stock dividend to its stockholders.
NOTE 5. ACCIDENT AND HEALTH INSURANCE CLAIM RESERVE ACTIVITY
Accident and Health Claim Reserve Activity for the year ended December 31, 1999
and the six months ended June 30, 2000 was:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(dollars in thousands)
<S> <C> <C>
Reserves Beginning of the Period
Gross $ 10,652 $ 11,204
Ceded 577 267
-------- --------
Net Reserves Beginning of the Period 10,075 10,937
-------- --------
Incurred related to:
Current Year 22,241 39,976
Prior Years (1,095) (961)
-------- --------
Total Incurred 21,146 39,015
-------- --------
Paid related to:
Current Year 14,441 30,692
Prior Years 6,676 9,185
-------- --------
Total Paid 21,117 39,877
-------- --------
Net Reserves at the End of the Period 10,104 10,075
Ceded 554 577
-------- --------
Reserves at the End of the Period $ 10,658 $ 10,652
======== ========
</TABLE>
<PAGE> 15
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 5. ACCIDENT AND HEALTH INSURANCE CLAIM RESERVE ACTIVITY (CONTINUED)
The following is a reconciliation of the Accident and Health Claim Reserve
balances to the amounts reported in the Balance Sheets at December 31, 1999 and
at June 30, 2000:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
-------- --------
(dollars in thousands)
<S> <C> <C>
Reserves as Reported:
Accident and Health Future Policy Benefits $ 7,751 $ 6,898
Claims 10,772 10,944
-------- --------
Total Reserves as Reported
18,523 17,842
Less Active Life Reserve (6,597) (5,963)
Less Life Claims (1,268) (1,227)
-------- --------
Accident and Health Claim Reserves $ 10,658 $ 10,652
======== ========
</TABLE>
NOTE 6. REINSURANCE
The Company utilizes reinsurance arrangements to limit its maximum loss, provide
greater diversification of risk, and minimize exposure on larger risks. The
ceding of insurance does not discharge the primary liability of the original
insurer, and accordingly the original insurer remains contingently liable.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the reserve for losses liability.
The effects of reinsurance on written premiums are as follows:
<TABLE>
<CAPTION>
DIRECT ASSUMED CEDED NET
------- ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1999
Accident and Health $58,639 $-- $1,349 $57,290
Life 6,678 -- 524 6,154
------- --- ------ -------
Total Written Premiums $65,317 $-- $1,873 $63,444
======= === ====== =======
Six Months Ended June 30, 2000
Accident and Health $31,718 $-- $ 893 $30,825
Life 3,237 -- 267 2,970
------- --- ------ -------
Total Written Premiums $34,955 $-- $1,160 $33,795
======= === ====== =======
</TABLE>
<PAGE> 16
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 7. FEDERAL INCOME TAXES
The Company is subject to Federal income taxation as a life insurance company.
For the year ended December 31, 1999, Unitrin will file a consolidated Federal
income tax return with all of its subsidiaries including the Company, except for
The Reliable Life Insurance Company and its subsidiaries ("Reliable") and
NationalCare Insurance Company and its subsidiaries ("NationalCare"). The method
of tax allocation between companies is subject to a written agreement. In
accordance with this agreement, the Company pays Federal income tax on a
separate company basis.
Prior to 1984, certain life insurance company income was not subject to current
taxation. This accumulated amount of income was set aside in a special
memorandum tax account. Federal income taxes would be paid on the amount of such
income, approximately $10,811,000 if distributions to stockholders in the future
exceeded previously taxed income or if the Company does not continue to meet
certain limitations.
Federal income tax expense is composed of the following for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
1999
----------------------
(dollars in thousands)
<S> <C>
Current 2,633
Deferred (642)
------
Total 1,991
======
</TABLE>
The components of the effective income tax rate on Income before Income Taxes
for the year ended December 31, 1999 were:
<TABLE>
<CAPTION>
1999
------
<S> <C>
Statutory Federal Income Tax Rate 35.0 %
Meals and Entertainment 0.2
------
Effective Income Tax Rate 35.2 %
======
</TABLE>
<PAGE> 17
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 7. FEDERAL INCOME TAXES (CONTINUED)
The effects of temporary differences that give rise to significant portions of
the Company's Net Deferred Tax Asset at December 31, 1999 were:
<TABLE>
<CAPTION>
1999
----------------------
(dollars in thousands)
<S> <C>
Deferred Tax Assets:
Insurance Reserves $4,155
Deferred Policy Acquisition Costs 3,196
Unrealized Investment Losses 1,175
------
Total Deferred Tax Assets 8,526
------
Deferred Tax Liabilities:
Deferred and Uncollected Premium 736
Other 644
------
Total Deferred Tax Liabilities 1,380
------
Net Deferred Tax Asset $7,146
======
</TABLE>
Management believes that the Company will generate sufficient future taxable
income to realize the net deferred tax asset. Accordingly, the Company has not
recorded a valuation allowance.
NOTE 8. RETIREMENT PLANS
Unitrin sponsors a defined benefit pension plan covering substantially all of
the Company's employees. Benefits are based on the employee's years of service
and compensation during employment. Unitrin's annual contributions are made at
an amount necessary to meet the funding requirements of the Employee Retirement
Income Security Act of 1974, as amended. Pension expense of $181,000 was
recognized by the Company in accordance with SFAS No. 87, "Employer's Accounting
for Pensions" in 1999.
The accumulated benefit obligation of the Unitrin pension plan determined in
accordance with SFAS No. 87 based on an assumed interest rate of 7.25 percent
and a rate of increase in future compensation levels of 4.0 percent and
long-term rate on the plan assets of 6.5% was $103,420,000 including vested
benefits of $101,326,000 at December 31, 1999. The fair value of plan assets was
$168,785,000 at December 31, 1999.
NOTE 9. CONTINGENCIES
The Company is party to various legal actions incidental to their businesses.
The Company believes that resolution of these matters will not have a material
adverse effect on the Company's financial position.
NOTE 10. SUBSEQUENT EVENTS (UNAUDITED)
On July 26, 2000, UICA, the Company's parent, completed the sale of the Company
to Ceres Group, Inc. for $67,500,000 in cash, subject to an adjustment for a
dividend paid by the Company to UICA of $25,000,000 immediately prior to
closing.
<PAGE> 18
THE PYRAMID LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000 (Unaudited)
NOTE 11. BUSINESS SEGMENTS
The Company is engaged in the Individual Life and Health insurance business
providing Traditional Life coverages as well as Accident and Health coverages,
principally Major Medical Insurance and Medicare Supplement Insurance. The
accounting policies of the segments are the same as those described in Note 1.
The Company manages its assets on a legal entity basis, as such assets are not
readily identifiable by individual segment; distinct investment portfolios are
not maintained for each segment, and accordingly, allocation of assets to each
segment is not performed. Therefore, investment income and realized investment
gains/losses are allocated based on each segment's carried insurance reserves,
as adjusted. The Operating Profit for each business segment is derived after all
operating expenses have been allocated, which are primarily allocated based on
premium. All significant intercompany income and expenses have been eliminated.
Segment Revenues and Operating Profits for the year ended December 31, 1999 and
the six months ended June 30, 2000 were:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(dollars in thousands)
<S> <C> <C>
Revenues:
Individual Life Insurance $ 5,291 $10,507
Accident and Health
Major Medical 4,371 11,098
Medicare Supplement 25,203 44,958
Other 2,103 4,192
------- -------
Total Revenues $36,968 $70,755
======= =======
Operating Profits:
Individual Life Insurance $ 1,687 $ 1,911
Accident and Health
Major Medical 182 1,396
Medicare Supplement 545 1,851
Other (86) 512
------- -------
Total Operating Profits $ 2,328 $ 5,670
======= =======
</TABLE>
<PAGE> 19
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma statements of operations of Ceres Group, Inc.
("Ceres") for six months ended June 30, 2000 and the year ended December 31,
1999 present the results for Ceres as if the acquisition of The Pyramid Life
Insurance Company (Pyramid) and the private placement offering and bank
financing consummated by Ceres in connection with the acquisition had occurred
as of January 1, 2000 and 1999, respectively. The accompanying unaudited pro
forma balance sheet as of June 30, 2000 gives effect to the acquisition,
private placement offering and bank financing as if they had occurred as of
June 30, 2000. The unaudited pro forma financial statements do not purport to
represent Ceres' financial position or the operating results that would have
been achieved had the acquisition been consummated as of the dates indicated
and should not be construed as projecting Ceres' future financial position or
operating results. The unaudited pro forma financial statements do not reflect
any projected revenue increases or cost savings. The pro forma adjustments are
based on available information and certain assumptions that Ceres currently
believes are reasonable under the circumstances. The unaudited pro forma
financial statements should be read in conjunction with the accompanying notes
thereto, the historical financial statements of Ceres and Pyramid as of and for
the six months ended June 30, 2000, and for the year ended December 31, 1999.
The pro forma adjustments are applied to the historical financial statements to
account for, among other things, the acquisition using the purchase method of
accounting. Under purchase accounting, the total purchase cost for the
acquisition has been allocated to the assets and liabilities of Pyramid based
on their fair values. Allocations are subject to valuations as of the date of
the acquisition based on appraisals and other studies which are not yet fully
completed. Accordingly, the final allocations may be different from the amounts
reflected herein. Although the final allocations may differ, the unaudited pro
forma financial statement reflect management's best estimates based on
currently available information as of the date of this filing.
<PAGE> 20
PRO FORMA BALANCE SHEET
AS OF JUNE 30, 2000 (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------
PYRAMID PRO FORMA NOTE
CERES GROUP, INC. LIFE ADJUSTMENTS REFERENCE PRO FORMA
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value $322,352 $ 78,936 $ (65) (2a) $ 401,223
Surplus notes 4,818 0 0 4,818
Policy and mortgage loans 3,764 2,397 0 6,161
------------------------------------- ----------
Total investments 330,934 81,333 (65) 412,202
Cash and cash equivalents 32,974 31,035 (25,000) (1c) 29,136
(9,873) (1d)
Accrued investment income 5,735 2,029 0 7,764
Premiums receivable 6,696 386 0 7,082
Note receivable 0 0 0 0
Reinsurance receivable 254,828 3,170 0 257,998
Property held for sale 0 0
Property and equipment, net 15,094 840 1,225 (2b) 17,159
Deferred federal income taxes 0 7,387 (2,119) (6) 5,268
Deferred acquisition costs 40,550 5,017 (5,017) (3a) 40,550
Value of business acquired 17,318 0 12,683 (3b) 30,001
Goodwill 22,339 7,044 (7,044) (4a) 33,027
10,688 (4b)
Other assets 13,902 2,709 517 (1a) 17,128
------------------------------------- ----------
Total assets $740,370 $140,950 $(24,005) $ 857,315
===================================== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims $354,656 $ 58,908 $ 573 (5a) $ 414,137
Unearned premiums 34,058 9,011 0 43,069
Other policy claims and benefits payable 161,164 10,772 434 (5b) 172,370
------------------------------------- ----------
549,878 78,691 1,007 629,576
Deferred reinsurance gain 17,736 0 0 17,736
Other policyholders' funds 23,605 0 0 23,605
Federal and state income taxes payable 1,163 154 0 1,317
Mortgage notes payable 8,089 0 0 8,089
Long-term debt 38,000 0 7,244 (1a) 45,244
Deferred federal income tax liability 2,811 0 0 2,811
Other liabilities 47,156 2,224 1,725 (7) 51,105
------------------------------------- ----------
Total liabilities 688,438 81,069 9,976 779,483
------------------------------------- ----------
Stockholders' equity:
Convertible voting preferred stock 0 0 7,500 (1e) 7,500
Non-voting preferred stock 0 0 0 0
Common stock 14 2,503 (2,503) (8) 17
3 (1b)
Additional paid-in capital 60,797 436 (436) (8) 79,194
18,397 (1b)
Retained earnings 10,905 59,346 (59,346) (8) 10,905
Accumulated other comprehensive income (loss) (19,784) (2,404) 2,404 (8) (19,784)
------------------------------------- ----------
Total stockholders' equity 51,932 59,881 (33,981) 77,832
------------------------------------- ----------
Total liabilities and stockholders' equity $740,370 $140,950 $(24,005) $ 857,315
===================================== ==========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 21
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------
PYRAMID PRO FORMA NOTE
CERES GROUP, INC. LIFE ADJUSTMENTS REFERENCE PRO FORMA
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums, net
Medical $ 173,489 $ 4,147 $ 0 $ 177,636
Senior and other 50,175 28,817 0 78,992
-------------------------------------- ------------
Total premiums, net 223,664 32,964 0 256,628
Net investment income 11,986 3,844 (1,221) (9a) 14,742
133 (9b)
Net realized gains (64) 0 0 (64)
Fee and other income 14,496 160 0 14,656
Amortization of deferred reinsurance gain 3,197 0 0 3,197
-------------------------------------- ------------
253,279 36,968 (1,088) 289,159
-------------------------------------- ------------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses
Medical 132,017 3,189 0 135,206
Senior and other 39,564 20,977 0 60,541
-------------------------------------- ------------
Total benefits, claims, losses and settlement expenses 171,581 24,166 0 195,747
Selling, general and administrative expenses 80,925 10,781 0 91,706
Net amortization and change in deferral of acquisition (14,937) (307) (1,366) (10a) (17,802)
costs and value of business acquired (1,192) (10b)
Amortization of goodwill 517 0 214 (11) 731
Interest expense and financing costs 2,337 0 362 (12a) 2,757
0 0 58 (12b)
-------------------------------------- ------------
240,423 34,640 (1,924) 273,139
Income before federal income taxes 12,856 2,328 836 16,020
Federal income tax expense 4,500 822 368 (13) 5,690
-------------------------------------- ------------
NET INCOME (LOSS) $ 8,356 $ 1,506 $ 468 $ 10,330
====================================== ============
EARNINGS (LOSS) PER COMMON SHARE
Basic $ 0.61 $ 0.56
Diluted $ 0.58 $ 0.54
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 13,732,688 4,553,839 (1b)(1e) 18,286,527
Diluted 14,409,676 4,611,582 (1b)(1e)(1f) 19,021,258
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 22
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------
PYRAMID PRO FORMA NOTE
CERES GROUP, INC. LIFE ADJUSTMENTS REFERENCE PRO FORMA
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums, net
Medical $ 251,876 $10,571 $ 0 $ 262,447
Senior and other 75,870 52,227 0 128,097
-------------------------------------- -----------
Total premiums, net 327,746 62,798 0 390,544
Net investment income 21,362 7,179 (2,441) (9a) 26,365
265 (9b)
Net realized gains 107 (1) 0 106
Fee and other income 17,410 779 0 18,189
Amortization of deferred reinsurance gain 5,468 0 0 5,468
-------------------------------------- -----------
372,093 70,755 (2,176) 440,672
-------------------------------------- -----------
BENEFITS, CLAIMS, LOSSES AND SETTLEMENT EXPENSES
Benefits, claims, losses and settlement expenses
Medical 176,531 7,831 0 184,362
Senior and other 56,572 36,963 0 93,535
-------------------------------------- -----------
Total benefits, claims, losses and settlement expenses 233,103 44,794 0 277,897
Selling, general and administrative expenses 137,932 20,149 0 158,081
Net amortization and change in deferral of acquisition (21,892) 142 (3,487) (10a) (27,621)
costs and value of business acquired (2,384) (10b)
Amortization of goodwill 1,042 0 428 (11) 1,470
Interest expense and financing costs 3,902 0 724 (12a) 4,741
115 (12b)
-------------------------------------- -----------
354,087 65,085 (4,604) 414,568
Income before federal income taxes 18,006 5,670 2,428 26,104
Federal income tax expense 6,302 1,991 1,000 (13) $ 9,293
-------------------------------------- -----------
NET INCOME (LOSS) $ 11,704 $ 3,679 $ 1,428 $ 16,811
====================================== ===========
EARNINGS (LOSS) PER COMMON SHARE
Basic $ 0.88 $ 0.94
Diluted $ 0.77 $ 0.85
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 13,328,339 4,553,839 (1b)(1e) 17,882,178
Diluted 15,233,899 4,611,582 (1b)(1e)(1f) 19,845,481
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
(1) The following adjustments reflect the funding of the acquisition purchase
price of $67,500,000:
(a) Proceeds from Chase Securities arranged credit agreement of $7,244,000
less $517,000 in deferred loan fees paid.
(b) Proceeds from private placement of 3,333,334 shares of common stock of
$20,000,000 less placement fees of $1,600,000.
(c) Extraordinary dividend paid by Pyramid to UICA of $25,000,000 prior to
purchase.
(d) Cash of $9,873,000 from Continental General Life Insurance Company a
subsidiary of Ceres.
(e) Issuance of 75,000 shares of Ceres Convertible Preferred Voting
Stock, initially convertible into 1,220,505 of Ceres Common Stock, to
UICA of $7,500,000.
(f) Reflects 57,743 additional warrants issued pursuant to antidilution
adjustment provision contained in the existing warrants.
(2) (a) Records the fair market value adjustment of the investment portfolio
as of the purchase date.
(b) Reflects the increase in the fair value of the Pyramid home office
building, from $375,000 to $1,600,000.
(3) In accordance with the purchase method of accounting, the purchase cost is
allocated to the assets and liabilities of Pyramid based upon their fair
values. The existing balance of former capitalized expenses (deferred
acquisition costs) is eliminated. A new value of the business in force is
calculated using current assumptions and is categorized as value of
business acquired. These assumptions (i.e. mortality and morbidity
projections, interest rates, and expenses, etc.) varied from those used
when the Company originally placed the existing business in force.
(a) Eliminates the existing deferred acquisition costs.
(b) Establishes a new value of business acquired on existing business as
of the purchase date.
(4) (a) Eliminates historical Goodwill.
(b) Records cost in excess of fair value of Pyramid net assets acquired
(Goodwill).
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
(5) In addition to a review and a new calculation of the value of the existing
business in force, a review was also made of the various active life and
claim reserves that were established on a historical basis.
(a) Increases reserves of certain life and long term care products offset
by elimination of unnecessary loss reserves on major medical business
to adopt Ceres' standards and practices of determining reserve
liabilities.
(b) Adjusts claim reserves of certain health products based upon emerging
experience.
(6) Adjusts deferred tax asset for purchase accounting adjustments.
(7) Records costs directly associated with acquisition.
(8) Adjustment to eliminate Pyramid's historical equity.
(9) (a) Decrease in investment income due to net cash decrease of $9,873,000
at Ceres and $25,000,000 extraordinary dividend paid by Pyramid to
Unitrin (34,873,000 x 7%).
(b) Record accrual of discount of $265,000 based upon revaluation of
investment portfolio to current market value for the 12 months ended
December 31, 1999 and $133,000 for the six months ended June 30, 2000.
(10) (a) Eliminates prior amortization of deferred acquisition costs of
$142,000 for the 12 months ended December 31, 1999 and net
capitalization of $307,000 for the six months ended June 30, 2000.
Record net capitalization of expenses for new business of 1999 and for
the first six months of 2000 only, of $3,345,000 and $1,673,000
respectively.
(b) Records net capitalization of adjusted value of business acquired, of
$2,384,000 for the 12 months ended December 31, 1999 and $1,192,000
for the six months ended June 30, 2000.
(11) Record the amortization of Goodwill over 25 years of $428,000 for the 12
months ended December 31, 1999 and $214,000 for the six months ended June
30, 2000.
(12) (a) Record interest expense of $724,000 on bank financing used to fund the
acquisition ($7,244,000 x 10%) for the 12 months ended December 31,
1999 and $362,000 for the six months ended June 30, 2000.
(b) Record the amortization of deferred loan fees of $115,000 for the 12
months ended December 31, 1999 and $58,000 for the six months ended
June 30, 2000.
(13) Records income tax expense (benefit) of the pro forma adjustments.
<PAGE> 25
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 hereunto duly authorized.
Date: October 6, 2000 CERES GROUP, INC.
By: /s/ Charles E. Miller, Jr.
--------------------------------
Chief Financial Officer
