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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
Current Report
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)
Delaware 0-8483 34-1017531
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(State or other jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification Number)
17800 Royalton Road, Cleveland, Ohio 44136
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(Address of Principle Executive Offices) (Zip Code)
(440) 572-2400
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(Registrant's telephone number, including area code)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective July 26, 2000, Ceres Group, Inc. ("Ceres"), through
Continental General Insurance Company, its wholly-owned subsidiary ("Continental
General"), acquired The Pyramid Life Insurance Company ("Pyramid") from United
Insurance Company of America ("United Insurance"), a subsidiary of Unitrin, Inc.
of Chicago, for $67.5 million. Pyramid, based in Mission, Kansas, provides
health and life insurance primarily for the senior market, including long-term
care, home health care, Medicare supplement, and senior life insurance products.
Funds for the acquisition were provided as follows:
- $20.0 million from the sale of 3,333,334 newly-issued shares of common
stock, par value $0.001 per share, of Ceres (the "Common Shares") in a
private placement offering (the "Pyramid Offering");
- $7.5 million from the sale to United Insurance of 75,000 newly-issued
shares of convertible voting preferred stock, par value $0.001 per
share, of Ceres, which shares are convertible into Common Shares of
Ceres (the "Voting Preferred Shares");
- $25.0 million from a special pre-closing dividend paid by Pyramid to
United Insurance in connection with the acquisition; and
- $15.0 million from a combination of funds from Continental General and
financing provided by The Chase Manhattan Bank and associated banks.
At June 30, 2000, Pyramid had assets of $140.9 million (prior to
payment of the $25.0 million pre-closing dividend) and total revenues of $37.0
million. Pyramid markets senior insurance products through approximately 2,500
independent agents in 40 states.
In conjunction with the acquisition of Pyramid, Ceres, along with The
Chase Manhattan Bank and associated banks, amended the Credit Agreement, dated
February 17, 1999, among Ceres, the lending institutions listed from time to
time on Annex I thereto and The Chase Manhattan Bank, as Administrative Agent
(the Credit Agreement is included in Ceres' Form 8-K, dated March 4, 1999, as
Exhibit 10.1 and is incorporated herein by reference, and as amended by the
First Amendment to the Credit Agreement, dated May 3, 1999, attached hereto as
Exhibit 10.2 and incorporated herein by reference), to increase the revolver
from $10.0 million to $15.0 million (the "Amendment"). The Amendment included
provisions to allow for the Pyramid acquisition along with certain revisions in
the financial covenants to be maintained by Ceres as follows:
- the leverage ratio (consolidated debt to consolidated total capital) of
0.40 to 1.00 through December 31, 2000, 0.35 to 1.00 thereafter through
December 31, 2001, and 0.30 to 1.00 thereafter;
- minimum consolidated net worth of $80.0 million through December 31,
2000, $110.0
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million thereafter through December 31, 2001, $160.0 million thereafter
through December 31, 2002, and $200.0 million thereafter; and
- a fixed charge coverage ratio (borrower cash flow to the sum of
consolidated interest expense and scheduled repayments) of not less
than 1.05 to 1.00 for the period of June 30, 2000 through June 30,
2001, 1.10 to 1.00 thereafter through June 30, 2002, 1.20 to 1.00
thereafter through June 30, 2003, and 1.30 to 1.00 thereafter.
This description of the Amendment is not and does not purport to be
complete and is qualified in its entirety by reference to the Amendment. The
Amendment is attached to this Form 8-K as Exhibit 10.3 and is incorporated
herein by reference.
The 3,333,334 Common Shares were sold by Ceres for $20.0 million, or
$6.00 per Common Share. The Common Shares were issued in a transaction exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Act") pursuant to Section 4(2) of the Act, and therefore, were not
registered under the Act. The certificates representing the Common Shares
contain a legend restricting transfer without compliance with the Act.
Purchasers of the Common Shares in the Pyramid Offering were Castle Creek
Capital Partners Fund IIa, LP and Castle Creek Capital Partners Fund IIb, LP,
two California-based investment funds (together "Castle Creek"), Lunn-Ceres II,
LLC, a private investment fund based in Chicago, and several individual
investors.
All of the Common Shares purchased in the Pyramid Offering are subject
to the Amended and Restated Registration Rights Agreement, dated as of July 25,
2000, between Ceres and the persons and entities set forth on the signature
pages attached thereto (the "Amended and Restated Registration Rights
Agreement"). The Common Shares purchased by Castle Creek are subject to the
Amended and Restated Voting Agreement, dated as of July 25, 2000, by and among
Ceres and the security holders listed on the signature pages thereof (the
"Amended and Restated Voting Agreement"). The Common Shares purchased by
Lunn-Ceres II, LLC and the individual investors are subject to the Stockholders
Agreement, as amended, dated as of July 1, 1998, by and among Ceres (as
successor-in-interest to Central Reserve Life Corporation) and the security
holders listed on the signature pages thereof (the "Stockholders Agreement").
The security holders, persons and entities that are parties to each of the
Amended and Restated Voting Agreement, Stockholders Agreement and Amended and
Restated Registration Rights Agreement are referred to in this Form 8-K as the
"Stockholders."
The Amended and Restated Registration Rights Agreement provides the
Stockholders with certain rights to have their Common Shares registered pursuant
to the Act. The Amended and Restated Registration Rights Agreement provides for
(1) "Demand Registration" - if requested by at least $5.0 million of the then
market value of outstanding Registrable Shares, as defined in the Amended and
Restated Registration Rights Agreement, Ceres is obligated to use its best
efforts to cause such shares to be registered, subject to certain restrictions;
and (2) "Piggyback Registration" - if Ceres proposes to register any of its
Common Shares in connection with a public distribution, Ceres will use its best
effort to register any holder's "Registrable Shares," if so requested. In
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addition, the Amended and Restated Registration Rights Agreement provides that,
beginning July 25, 2001, the purchasers in the Pyramid Offering will be entitled
to "Piggyback Registration" as well as one "Demand Registration" if requested by
the holders of at least $10.0 million of the then market value of the Common
Shares sold in the Pyramid Offering.
This description of the Amended and Restated Registration Rights
Agreement is not and does not purport to be complete and is qualified in its
entirety by reference to the Amended and Restated Registration Rights Agreement.
The Amended and Restated Registration Rights Agreement is attached to this Form
8-K as Exhibit 4.1 and is incorporated herein by reference.
Pursuant to the Amended and Restated Voting Agreement, the Stockholders
have agreed to cause the Board of Directors of Ceres to consist of nine
directors designated by the Stockholders, some or all of whom will be the
following individuals, subject to certain conditions: four individuals
designated by International Managed Care, LLC and International Managed Care
(Bermuda), L.P. (together "International Managed Care"), two individuals
designated by Strategic Acquisition Partners, LLC, one individual designated by
Turkey Vulture Fund XIII, Ltd., and one individual designated by Castle Creek.
The Amended and Restated Voting Agreement further provides that no Stockholder
may effect, cause to be effected, or permit any voluntary or involuntary sale,
assignment, or transfer ("Transfer") of any Common Shares or any interest
therein, except for Transfers pursuant to an effective registration statement or
pursuant to Rule 144 under the Act, unless the transferee agrees to be bound by
the provisions of the Amended and Restated Voting Agreement and the Stockholders
Agreement and such Transfer is, where applicable, made in compliance with the
terms of the Stockholders Agreement. This description of the Amended and
Restated Voting Agreement is not and does not purport to be complete and is
qualified in its entirety by reference to the Amended and Restated Voting
Agreement. The Amended and Restated Voting Agreement is attached to this Form
8-K as Exhibit 4.2 and is incorporated herein by reference.
Pursuant to the Stockholders Agreement, each of the Stockholders is
provided certain rights in respect of its outstanding Common Shares in the event
of certain sales of Common Shares by other Stockholders. Specifically, if
International Managed Care disposes of Common Shares representing more than 20%
of the outstanding Common Shares, International Managed Care, its affiliates,
officers, directors and employees (the "International Managed Care Group") have
the right to require each non-selling Stockholder (each, a "Co-Seller") to
transfer a portion of its Common Shares which represents the same percentage of
the fully diluted Common Shares held by such Co-Seller as the Common Shares
being disposed of by the International Managed Care Group represent of the fully
diluted Common Shares held by the International Managed Care Group. All Common
Shares transferred pursuant to this provision of the Stockholders Agreement will
be sold at the same price and time and otherwise be treated identically with the
Common Shares being sold by the International Managed Care Group.
The Stockholders Agreement further provides that if any Stockholder
desires to effect a transfer of Common Shares (other than a transfer in an
underwritten public offering pursuant to an effective registration statement
under the Act) representing more than 20% of the outstanding
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Common Shares, then the selling Stockholder must make an offer to each Co-Seller
to include in the proposed sale a portion of such Co-Seller's Common Shares
which represents the same percentage of such Co-Seller's fully diluted Common
Shares as the Common Shares being sold by the selling Stockholder represent of
its fully diluted Common Shares. This description of the Stockholders Agreement
is not and does not purport to be complete and is qualified in its entirety by
reference to the Stockholders Agreement. The Stockholders Agreement is included
in Ceres' Proxy Statement dated May 28, 1998 as Exhibit D and is incorporated
herein by reference.
The 75,000 Voting Preferred Shares were sold to United Insurance by
Ceres for $7.5 million, or $100.00 per share. The holders of the Voting
Preferred Shares will have the right to convert each share into Common Shares at
any time and will be obligated to convert all shares by the end of the third
year from the date of issuance. The number of Common Shares into which each
Voting Preferred Share will be convertible will be determined by dividing the
$100 per share purchase price, plus any accrued and unpaid dividends, by the
average market price of the Common Shares on July 26, 2000, subject to
adjustment. Each holder of the Voting Preferred Shares will be entitled to vote
on all matters presented for a vote of Ceres' stockholders, voting together with
the Common Shareholders as one class, and will have the number of votes equal to
the largest number of whole Common Shares into which the holders' Voting
Preferred Shares can then be converted. The holders of the Voting Preferred
Shares will also be entitled to receive dividends prior and in preference to any
declaration or payment of any dividend on the Common Shares at the rate of 10%
per year and such dividends will be payable annually in additional Voting
Preferred Shares. All dividends payable on the Voting Preferred Shares must be
paid in order for Ceres to declare or pay any dividend on the Common Shares or
for Ceres to repurchase or redeem any Common Shares. If at any time Ceres issues
or sells any of its equity securities in a single or continuous offering for
more than $20 million, then Ceres must repurchase all of the outstanding Voting
Preferred Shares for $100 per share, plus any accrued and unpaid dividends.
Ceres may redeem all or any part of the Voting Preferred Shares equal to the
following percentage sum of the aggregate amount of shares multiplied by $100,
plus any accrued and unpaid dividends: July 26, 2001 - 120%; July 26, 2002 -
115%; and July 26, 2003 - 110%. However, the holders of the Voting Preferred
Shares have the right to convert at any time up to 20 days prior to the date of
repurchase or redemption. This description of the Voting Preferred Shares is not
and does not purport to be complete and is qualified in its entirety by
reference to the terms of the Voting Preferred Shares as described in the
Certificate of Amendment to Ceres' Certificate of Incorporation. The Certificate
of Amendment is attached to this Form 8-K as Exhibit 3.1 and is incorporated
herein by reference.
All of the Voting Preferred Shares purchased by United Insurance are
subject to the United Registration Rights Agreement, dated as of July 26, 2000,
between Ceres and United Insurance (the "United Registration Rights Agreement").
Pursuant to the United Registration Rights Agreement, beginning three years from
the date of the agreement, the holders of all, but not less than all, of the
Common Shares issued upon conversion of the Voting Preferred Shares may request
"Demand Registration" whereby Ceres is obligated to use its best efforts to
cause all, but not less than all, of the Common Shares issued upon conversion of
the Voting Preferred Shares to be registered. Beginning one year from the date
of the United Registration Rights Agreement, United Insurance will also
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have "Piggyback Registration" rights, whereby if Ceres proposes to register any
of its Common Shares in a public offering, it will use its best efforts to
register any shares subject to the United Registration Rights Agreement. The
holders of the Voting Preferred Shares will rank the same as the holders of the
Common Shares subject to the Amended and Restated Registration Rights Agreement.
This description of the United Registration Rights Agreement is not and does not
purport to be complete and is qualified in its entirety by reference to the
United Registration Rights Agreement. The United Registration Rights Agreement
is attached to this Form 8-K as Exhibit 4.4 and is incorporated herein by
reference.
ITEM 5. OTHER EVENTS.
On July 25, 2000, Ceres filed a Certificate of Amendment of its
Certificate of Incorporation with the Delaware Secretary of State, increasing
the number of authorized Common Shares from 30.0 million to 50.0 million and
authorizing the issuance of up to 100,000 Voting Preferred Shares. Ceres'
stockholders approved these amendments on June 27, 2000 and April 14, 2000,
respectively. Terms of the Voting Preferred Shares are described under Item 2
above. The Certificate of Amendment to the Certificate of Incorporation is
attached to this Form 8-K as Exhibit 3.1 and is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED.
Audited financial statements of Pyramid for the year ended December 31,
1999 will be filed not later than 60 days following the filing of this
Form 8-K.
(b) PRO FORMA FINANCIAL INFORMATION.
Pro forma financial statements of Ceres showing the effect of the
acquisition of Pyramid will be filed not later than 60 days following
the filing of this Form 8-K.
(c) EXHIBITS.
2.1 Purchase Agreement dated October 7, 1999, by and between
United Insurance Company of America and Ceres Group, Inc.
2.2 Amendment to Purchase Agreement by and between United
Insurance Company of America and Ceres Group, Inc. dated as of
April 17, 2000
2.3 Amendment No. 2 to Purchase Agreement by and between United
Insurance Company of America and Ceres Group, Inc. dated as of
July 5, 2000
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3.1 Certificate of Amendment of the Certificate of Incorporation
of Ceres Group, Inc. dated July 25, 2000
4.1 Amended and Restated Registration Rights Agreement dated as of
July 25, 2000 between Ceres Group, Inc. (as
successor-in-interest to Central Reserve Life Corporation) and
the persons and entities set forth on the signature pages
attached thereto
4.2 Amended and Restated Voting Agreement dated as of July 25,
2000 by and among Ceres Group, Inc. (as successor-in-interest
to Central Reserve Life Corporation) and the security holders
listed on the signature pages thereof
4.3 Form of Stockholders Agreement by and among Ceres Group, Inc.
(as successor-in- interest to Central Reserve Life
Corporation) and the security holders listed on the signature
pages thereof (Incorporated by reference to Exhibit D to
Ceres' Proxy Statement on Schedule 14A as filed with the
Securities and Exchange Commission on May 26, 1998 (Reg. No.
000-08483))
4.4 United Registration Rights Agreement dated as of July 26, 2000
between Ceres Group, Inc. and United Insurance Company of
America
10.1 Credit Agreement, dated as of February 17, 1999, among Ceres
Group, Inc., the lending institutions listed from time to time
on Annex I thereto and The Chase Manhattan Bank, as
Administrative Agent (Incorporated by reference to Exhibit
10.1 to Ceres' Form 8-K as filed with the Securities and
Exchange Commission on March 4, 1999 (Reg. No. 000-08483))
10.2 First Amendment to the Credit Agreement, dated as of May 3,
1999, among Ceres Group, Inc., the lending institutions party
to the Credit Agreement and The Chase Manhattan Bank, as
Administrative Agent
10.3 Second Amendment to Credit Agreement, dated as of July 25,
2000, among Ceres Group, Inc., the lending institutions party
to the Credit Agreement and The Chase Manhattan Bank, as
Administrative Agent
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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: August 9, 2000 CERES GROUP, INC.
By: /s/ Charles E. Miller, Jr.
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Chief Financial Officer
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EXHIBITS
Exhibit No. Exhibit
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2.1 Purchase Agreement dated October 7, 1999, by and
between United Insurance Company of America and Ceres
Group, Inc.
2.2 Amendment to Purchase Agreement by and between United
Insurance Company of America and Ceres Group, Inc. as
of dated April 17, 2000
2.3 Amendment No. 2 to Purchase Agreement by and between
United Insurance Company of America and Ceres Group,
Inc. dated as of July 5, 2000
3.1 Certificate of Amendment of the Certificate of
Incorporation of Ceres Group, Inc. dated July 25,
2000
4.1 Amended and Restated Registration Rights Agreement
dated as of July 25, 2000 between Ceres Group, Inc.
(as successor-in-interest to Central Reserve Life
Corporation) and the persons and entities set forth
on the signature pages attached thereto
4.2 Amended and Restated Voting Agreement dated as of
July 25, 2000 by and among Ceres Group, Inc. (as
successor-in-interest to Central Reserve Life
Corporation) and the security holders listed on the
signature pages thereof
4.3 Form of Stockholders Agreement by and among Ceres
Group, Inc. (as successor-in-interest to Central
Reserve Life Corporation) and the security holders
listed on the signature pages thereof (Incorporated
by reference to Exhibit D to Ceres' Proxy Statement
on Schedule 14A as filed with the Securities and
Exchange Commission on May 26, 1998 (Reg. No. 000-
08483))
4.4 United Registration Rights Agreement dated as of July
26, 2000 between Ceres Group, Inc. and United
Insurance Company of America
10.1 Credit Agreement, dated as of February 17, 1999,
among Ceres Group, Inc., the lending institutions
listed from time to time on Annex I thereto and The
Chase Manhattan Bank, as Administrative Agent
(Incorporated by reference to Exhibit 10.1 to Ceres'
Form 8-K as filed with the Securities and Exchange
Commission on March 4, 1999 (Reg. No. 000-08483))
10.2 First Amendment to the Credit Agreement, dated as of
May 3, 1999, among
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Ceres Group, Inc., the lending institutions party to
the Credit Agreement and The Chase Manhattan Bank, as
Administrative Agent
10.3 Second Amendment to Credit Agreement, dated as of
July 25, 2000, among Ceres Group, Inc., the lending
institutions party to the Credit Agreement and The
Chase Manhattan Bank, as Administrative Agent
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