UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File Number: 0-8483
A. Full title of the plan and the address of the plan, if
different from that of the issuer named below:
CERES GROUP, INC. 401(k) PLAN
B. Name of issuer of the securities held pursuant to the plan and
the address of its principal executive office:
CERES GROUP, INC.
17800 Royalton Road
Cleveland, Ohio 44136-5197
CERES GROUP, INC. 401(k) PLAN
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
(MODIFIED CASH BASIS)
DECEMBER 31, 2002 AND 2001 AND
YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Report of Independent Auditors......................................... 1
FINANCIAL STATEMENTS
Statements of Net Assets Available for Benefits
(Modified Cash Basis)............................................... 2
Statement of Changes in Net Assets Available for Benefits
(Modified Cash Basis)............................................... 3
Notes to Financial Statements (Modified Cash Basis).................... 4
SUPPLEMENTAL SCHEDULE
Schedule H, Line 4i--Schedule of Assets (Held at End of Year).......... 10
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Ceres Group, Inc. 401(k) Plan
We have audited the accompanying statements of net assets available for benefits
(modified cash basis) of the Ceres Group, Inc. 401(k) Plan as of December 31,
2002 and 2001, and the related statement of changes in net assets available for
benefits (modified cash basis) for the year ended December 31, 2002. These
financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note B, the financial statements and supplemental schedule were
prepared on a modified cash basis of accounting, which is a comprehensive basis
of accounting other than accounting principles generally accepted in the United
States.
In our opinion, the financial statements referred to above present fairly, in
all material respects, information regarding the Plan's net assets available for
benefits (modified cash basis) as of December 31, 2002 and 2001, and changes
therein (modified cash basis) for the year ended December 31, 2002, on the basis
of accounting described in Note B.
Our audits were performed for the purposes of forming an opinion on the
financial statements taken as a whole. The accompanying supplemental schedule of
assets (held at end of year) as of December 31, 2002 is presented for purposes
of additional analysis and is not a required part of the financial statements
but is supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. This supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the auditing
procedures applied in our audits of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.
/s/ Ernst & Young LLP
Cleveland, Ohio
June 5, 2003
1
CERES GROUP, INC. 401(k) PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
(MODIFIED CASH BASIS)
DECEMBER 31,
-------------------------
2002 2001
----------- -----------
ASSETS
Investments held by Massachusetts Mutual
Life Insurance Company:
Deposit Administration Group Annuity
Contract #FL-2372 (variable interest rate),
at contract value $ 8,118,405 $ 8,029,421
Ceres Group, Inc. Common Stock, at fair value 570,511 813,774
Pooled Separate Investment Accounts, at fair value 8,527,827 10,503,924
Participant loans 562,288 543,058
----------- -----------
NET ASSETS AVAILABLE FOR BENEFITS $17,779,031 $19,890,177
=========== ===========
See notes to financial statements.
2
CERES GROUP, INC. 401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
(MODIFIED CASH BASIS)
YEAR ENDED DECEMBER 31, 2002
ADDITIONS
Net investment income (loss)
Net depreciation in fair value of investments $ (1,877,456)
Interest and dividends 424,787
------------
Net investment loss (1,452,669)
Contributions
Employer 649,037
Employee 1,557,476
Rollovers 44,562
------------
Total contributions 2,251,075
------------
Total additions 798,406
DEDUCTIONS
Benefits paid to participants or beneficiaries 2,843,230
Administrative expenses 66,322
------------
Total deductions 2,909,552
------------
NET DECREASE (2,111,146)
Net assets available for benefits at beginning of year 19,890,177
------------
NET ASSETS AVAILABLE FOR BENEFITS AT END OF YEAR $ 17,779,031
============
See notes to financial statements.
3
CERES GROUP, INC. 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS (MODIFIED CASH BASIS)
DECEMBER 31, 2002 AND 2001 AND
YEAR ENDED DECEMBER 31, 2002
A. DESCRIPTION OF THE PLAN
The following description provides only general information regarding the Ceres
Group, Inc. 401(k) Plan (the "Plan"). Participants should refer to the plan
document for a more complete description of the Plan's provisions.
GENERAL
The Plan is subject to the provisions of the Employee Retirement Income Security
Act of 1974 (ERISA). All employees of Ceres Group, Inc. and subsidiaries, or
Ceres, a public registrant, that are 18 years of age or older are eligible to
participate in the Plan commencing the first day of the month following an
individual's month of hire.
CONTRIBUTIONS
Participants may make contributions to the Plan through payroll deferrals.
Participants can elect to make pre-tax contributions from 1% to 25% (15% prior
to June 1, 2002) of their compensation. After-tax contributions were prohibited
subsequent to the June 1, 2002 amendment. Ceres will match 50% of the first 6%
of each participant's salary deferrals, which is known as the Company Match
Contribution. In addition to the Company Match Contribution, Ceres will match
100% of each participant's contributions, known as the Stock Match Contribution,
to the Ceres Group, Inc. Stock Fund or Company Stock Fund, up to a maximum of
$1,000 per year provided that the participant agrees that the pre-tax
contributions cannot be transferred out of the Company Stock Fund for a minimum
of one year (minimum of two years prior to June 1, 2002).
Additionally, Ceres may contribute a Profit Sharing Contribution to the Plan, as
determined by the Board of Directors. All eligible, active employees who have
worked over 1,000 hours during the plan year and who are employed on the last
day of the plan year share in this contribution. Participants who leave
employment during the plan year due to retirement, disability or death will also
share in the contribution. There was no Profit Sharing Contribution made for the
2002 plan year.
Employees may roll over funds into the Plan from other qualified plans.
4
CERES GROUP, INC. 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS (MODIFIED CASH BASIS) - CONTINUED
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contributions and
allocations of the following:
- Ceres' contributions; and
- Plan earnings, and is charged with an allocation of
administrative expenses. Allocations are based on participant
earnings or account balances, as defined. The benefit to which
a participant is entitled is the benefit that can be provided
from the participant's account.
VESTING
A participant's interest in the Company Match Contribution, Stock Match
Contribution, and Profit Sharing Contribution allocated to the participant's
account becomes vested based upon years of service as follows: 0% vested up to
two years, 25% vested after two years, 50% vested after three years, 75% vested
after four years, and 100% vested after five years.
PARTICIPANT LOANS
Participants may borrow up to half of their vested account balance. The smallest
amount that may be borrowed is $1,000; the largest amount that may be borrowed
is the lesser of half of the participant's vested account balance or $50,000.
Loan terms exceeding five years are permitted under the Plan. Participants may
only have one outstanding loan at a time. A loan is secured by the balance in
the participant's account and bears interest at the prime lending rate plus 1%.
PAYMENT OF BENEFITS
Upon termination of service, a participant may elect to receive any of the
following individual benefit options or in combination with a partial one-sum
cash payment:
- a one-sum cash payment;
- a deferred annuity;
- to continue their account until age 70 1/2; or
- installment payments.
5
CERES GROUP, INC. 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS (MODIFIED CASH BASIS) - CONTINUED
Upon retirement or disability, a participant may elect to receive various
benefit options or in combination with a partial one-sum cash payment:
- a one-sum cash payment;
- installment payments;
- joint and survivor annuity;
- full cash refund annuity;
- life annuity with 120 stipulated payments;
- life annuity; or
- continued account.
Upon death, the participant's account will be paid in the form of an annuity,
installments or a one-sum cash payment.
Under any of the above circumstances, a participant will receive a one-sum cash
payment if the account balance is $5,000 or less.
INVESTMENT OPTIONS
Upon enrollment in the Plan, participants may direct their participant
contributions and any Profit-Sharing Contributions and Company Match
Contributions for investment in any of the investment options offered by the
Plan. However, there are two exceptions to a participant's right to exercise
investment control as follows:
- the first $1,000 of before-tax contributions that participants
direct for investment in the Company Stock Fund for any
particular plan year must remain in the Company Stock Fund for
a minimum of one year (two years prior to June 1, 2002) to the
extent they continue to be held under the Plan, commencing
with the month those before-tax contributions actually are
contributed and invested. This restriction does not apply to
any investment in the Company Stock Fund, made with before-tax
contributions that do not trigger Stock Match Contributions or
before-tax contributions in excess of $1,000 that do not
trigger a stock match; and
6
CERES GROUP, INC. 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS (MODIFIED CASH BASIS) - CONTINUED
- all Stock Match Contributions, made by the Company because the
participant agreed to invest all or a portion of their
before-tax contributions in the Company Stock Fund, must
remain invested in the Company Stock Fund while held under the
Plan.
PLAN TERMINATION
Ceres has the right under the Plan to discontinue contributions at any time and
terminate the Plan, subject to the provisions of ERISA. In the event of
termination of the Plan, participants will become 100% vested in their accounts
and the assets of the Plan will be distributed to the participants based on the
amounts in their respective accounts.
B. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements are presented on a cash basis modified to
the extent that net appreciation (depreciation) in the fair value of investments
is recorded currently, certain other income, contributions and related assets
are recognized when received rather than when earned, and certain expenses and
related liabilities are recognized when paid rather than when incurred.
VALUATION OF INVESTMENTS AND RELATED INCOME
Ceres Group, Inc. Common Stock is valued at the last reported sales price of the
stock on the last business day of the plan year. The Massachusetts Mutual Pooled
Separate Investment Accounts are valued at the fair value of the underlying
investments, as determined by Massachusetts Mutual Life Insurance Company, or
Massachusetts Mutual. The Massachusetts Mutual Deposit Administration Group
Annuity Contract, or DAC, is valued at contract value. Contract value
approximates fair value. DAC funds deposited during 2002 were guaranteed to earn
4.00%. DAC funds deposited as of December 31, 2001 were guaranteed to earn
5.00%. The average yield for 2002 was 4.7%. Guaranteed interest rates are
determined annually by Massachusetts Mutual.
The aggregate cost of investment sales is the average cost per share or per unit
at the time of the sale. Interest income is recorded when credited by
Massachusetts Mutual.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
7
CERES GROUP, INC. 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS (MODIFIED CASH BASIS) - CONTINUED
C. INVESTMENTS
Massachusetts Mutual serves as the trustee for certain assets of the Plan with
the balance held in trust by Investors Bank & Trust Company of Boston,
Massachusetts. During 2002, the Plan's investments (including investments
purchased, sold, as well as held during the year) depreciated in fair value as
determined by quoted market prices as follows:
NET
DEPRECIATION
IN FAIR VALUE
OF INVESTMENTS
-----------
Ceres Group, Inc. Common Stock $ (416,010)
Pooled Separate Accounts (1,461,446)
-----------
Total $(1,877,456)
===========
Individual investments that represent 5% or more of the Plan's net assets are as
follows:
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Deposit Administration Group Annuity
Contract #FL-2372, variable interest
rate--Guarantee Interest Fund $8,118,405 $8,029,421
Pooled Separate Investment Accounts:
Massachusetts Mutual Separate Investment Account BP,
Destiny Moderate Fund 2,938,806 4,469,452
Massachusetts Mutual Separate Investment Account A,
Core Value Equity Fund (DLB/Berstein) 1,271,270 1,677,963
Massachusetts Mutual Separate Investment Account E,
Core Bond Fund (Babson) (1) 1,257,930 796,571
(1) Below 5% at December 31, 2001.
8
CERES GROUP, INC. 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS (MODIFIED CASH BASIS) - CONTINUED
D. INCOME TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service
dated January 7, 2000, stating the Plan is qualified under Section 401(a) of the
Internal Revenue Code, or the Code, and therefore, the related trust is exempt
from taxation. Subsequent to this issuance of the determination letter, the Plan
was amended. Once qualified, the Plan is required to operate in conformity with
the Code to maintain its qualification. The Plan Administrator believes the Plan
is being operated in compliance with the applicable requirements of the Code
and, therefore, believes that the Plan, as amended, is qualified and the related
trust is tax exempt.
9
CERES GROUP, INC. 401(k) PLAN
EIN: 34-0970995 PLAN NUMBER: 001
SCHEDULE H, LINE 4i--SCHEDULE OF ASSETS
(HELD AT END OF YEAR)
DECEMBER 31, 2002
DESCRIPTION OF INVESTMENT
IDENTITY OF ISSUE, INCLUDING MATURITY DATE, RATE UNITS/SHARES/
BORROWER, OF INTEREST, COLLATERAL, INTEREST CURRENT
LESSOR, OR SIMILAR PARTY PAR OR MATURITY VALUE RATE VALUE
- ------------------------------------------------------------------------------------------------------
* Massachusetts Mutual Life Deposit Administration Group Annuity
Insurance Company Contract #FL-2372, variable interest
rate, Guarantee Interest Fund 4.00-5.00% $ 8,118,405
* Massachusetts Mutual Life Separate Investment Account M, Balanced
Insurance Company Fund (Babson) 2,467 747,004
* Massachusetts Mutual Life Separate Investment Account A, Core
Insurance Company Value Equity Fund (DLB/Berstein) 351 1,271,270
* Massachusetts Mutual Life Separate Investment Account E, Core
Insurance Company Bond Fund (Babson) 1,014 1,257,930
* Massachusetts Mutual Life Separate Investment Account BC, Destiny
Insurance Company Conservative Fund 1,916 343,192
* Massachusetts Mutual Life Separate Investment Account I,
Insurance Company International Equity Fund (Oppenheimer) 1,348 243,824
* Massachusetts Mutual Life Separate Investment Account BP, Destiny
Insurance Company Moderate Fund 19,125 2,938,806
* Massachusetts Mutual Life Separate Investment Account BA, Destiny
Insurance Company Aggressive Fund 3,741 511,585
* Massachusetts Mutual Life Separate Investment Account BE, Destiny
Insurance Company Ultra Aggressive Fund 2,732 380,408
* Massachusetts Mutual Life Separate Investment Account W8, Equity
Insurance Company Growth (Am. Century) 3,470 293,292
* Massachusetts Mutual Life Separate Investment Account S, Small
Insurance Company Cap Equity (Babson) 340 216,939
* Massachusetts Mutual Life Separate Investment Account L, Growth
Insurance Company Equity (MFS) 4,586 304,227
* Massachusetts Mutual Life Separate Investment Account SZ,
Insurance Company Small Co. Growth (Mazama/Allied) 275 19,350
* Ceres Group, Inc. Ceres Group, Inc. Common Stock 228,393 570,511
* Participant loans Various maturities 5.25-10.50% 562,288
------------
$ 17,779,031
============
* Denotes party in interest.
10
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934,
the Plan Administrator has duly caused this annual report to be signed on its
behalf by the undersigned hereunto duly authorized.
CERES GROUP, INC. 401(k) PLAN
By: /s/ David I. Vickers
-----------------------------------------
David I. Vickers
Plan Administrator
Dated: June 24, 2003