1 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 [ X ] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD FROM _______________ TO __________________ COMMISSION FILE NUMBER: 0-8483 A. Full title of the plan and address of the plan, if different from that of the issuer named below: THE RETIREMENT PLAN FOR EMPLOYEES OF THE CENTRAL RESERVE LIFE INSURANCE COMPANY B. Name of issuer of the securities held pursuant to the plan and address of its principal executive office: CERES GROUP, INC. 17800 ROYALTON ROAD STRONGSVILLE, OHIO 44136 2 THE RETIREMENT PLAN FOR EMPLOYEES OF THE CENTRAL RESERVE LIFE INSURANCE COMPANY INDEX a) Financial Statements Report of Independent Auditors .................................................................. 3 Statement of Net Assets Available for Benefits, with Fund Information (Modified Cash Basis) - December 31, 1998 and 1997 ........................................... 5 Statement of Changes in Net Assets Available for Benefits, with Fund Information (Modified Cash Basis) - December 31, 1998........................................ 7 Notes to Financial Statements ................................................................... 8 Schedule of Assets Held for Investment Purposes (Modified Cash Basis)............................ 13 Schedule of Reportable Transactions (Modified Cash Basis) ....................................... 14 b) Exhibit Consent of Independent Auditors 2 3 Report of Independent Auditors Board of Trustees The Retirement Plan for Employees of Central Reserve Life Insurance Company We have audited the accompanying statements of net assets available for benefits (modified cash basis) of the Retirement Plan for Employees of Central Reserve Life Insurance Company as of December 31, 1998 and 1997, and the related statement of changes in net assets available for benefits (modified cash basis) for the year ended December 31, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note B, the financial statements and supplemental schedules were prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles. 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, 1998 and 1997, and changes therein (modified cash basis) for the year ended December 31, 1998, on a basis of accounting described in Note B. 3 4 Our audits were performed for the purposes of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedules of assets held for investment purposes (modified cash basis) as of December 31, 1998, and reportable transactions (modified cash basis) for the year then ended, are presented for purpose of additional analysis and are not a required part of the financial statements but are 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. These supplemental schedules are the responsibility of the Plan's management. The Fund Information in the statements of net assets available for benefits (modified cash basis) and the statement of changes in net assets available for benefits (modified cash basis) is presented for purposes of additional analysis rather than to present the net assets available for benefits and the changes in net assets available for benefits of each fund. The supplemental schedules and Fund Information have been subjected to auditing procedures applied in our audits of the financial statements and, in our opinion, are fairly stated in all material respects in relation to the financial statements taken as a whole. /s/ Ernst & Young LLP Cleveland, Ohio June 16, 1999 4 5 The Retirement Plan for Employees of Central Reserve Life Insurance Company Statement of Net Assets Available for Benefits, with Fund Information (Modified Cash Basis) December 31, 1998 Guaranteed Core Core Money Ceres Interest Balanced Equity Bond Market Group, Inc. Fund Fund Fund Fund Fund Stock Fund --------------------------------------------------------------------------- ASSETS Investments held by Massachusetts Mutual Life Insurance Company: Deposit Administration Group Annuity Contract #FL-2372 (variable interest rate), at contract value $5,410,799 Ceres Group, Inc. Common Stock, at fair value $65,817 Pooled Separate Investment Accounts, at fair value $3,900,279 $3,160,970 $379,600 --------------------------------------------------------------------------- NET ASSETS AVAILABLE FOR BENEFITS $5,410,799 $3,900,279 $3,160,970 $379,600 $ -- $65,817 =========================================================================== Destiny Destiny Destiny Destiny International Conservative Moderate Aggressive All Equity Fund Fund Fund Fund Fund Total --------------------------------------------------------------------------- ASSETS Investments held by Massachusetts Mutual Life Insurance Company: Deposit Administration Group Annuity Contract #FL-2372 (variable interest rate), at contract value $5,410,799 Ceres Group, Inc. Common Stock, at fair value 65,817 Pooled Separate Investment Accounts, at fair value $4,708 $280,958 $261,509 $260,096 $257,175 8,505,295 --------------------------------------------------------------------------- NET ASSETS AVAILABLE FOR BENEFITS $4,708 $280,958 $261,509 $260,096 $257,175 $13,981,911 =========================================================================== See notes to financial statements. 5 6 The Retirement Plan for Employees of Central Reserve Life Insurance Company Statement of Net Assets Available for Benefits, with Fund Information (Modified Cash Basis) December 31, 1997 Guaranteed Core Intermediate Money Interest Balanced Equity Bond Market Fund Fund Fund Fund Fund Total ----------------------------------------------------------------------------------- ASSETS Investments held by Massachusetts Mutual Life Insurance Company: Deposit Administration Group Annuity Contract #FL-2372 (variable interest rate), at contract value $8,176,352 $ 8,176,352 Pooled Separate Investment Accounts, at fair value $3,472,863 $2,984,035 $492,601 6,949,499 ----------------------------------------------------------------------------------- NET ASSETS AVAILABLE FOR BENEFITS $8,176,352 $3,472,863 $2,984,035 $492,601 $ -- $15,125,851 =================================================================================== See notes to financial statements. 6 7 The Retirement Plan for Employees of Central Reserve Life Insurance Company Statement of Changes in Net Assets Available for Benefits, with Fund Information (Modified Cash Basis) Year Ended December 31, 1998 Guaranteed Core Core Money Ceres Interest Balanced Equity Bond Market Group, Inc. Fund Fund Fund Fund Fund Stock Fund ---------------------------------------------------------------------------- Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments $ 473,010 $ 471,610 $ 35,653 $ 12,107 Interest $ 388,223 ---------------------------------------------------------------------------- Total investment income 388,223 473,010 471,610 35,653 12,107 Contributions: Employer (550,853) 225,016 388,804 79,955 Employee 88,129 38,765 87,234 24,331 5,958 ---------------------------------------------------------------------------- Total contributions (462,724) 263,781 476,038 104,286 5,958 ---------------------------------------------------------------------------- Total additions (74,501) 736,791 947,648 139,939 18,065 Deductions from net assets attributed to: Benefits paid to participants or beneficiaries 1,318,487 560,330 959,224 155,684 Administrative and other expense 3,068 1,562 1,817 353 ---------------------------------------------------------------------------- Total deductions 1,321,555 561,892 961,041 156,037 Interfund transfers (out) in (1,369,497) 252,517 190,328 (96,903) 47,752 ---------------------------------------------------------------------------- Net (decrease) increase (2,765,553) 427,416 176,935 (113,001) 65,817 Net assets available for benefits beginning of year 8,176,352 3,472,863 2,984,035 492,601 ============================================================================ NET ASSETS AVAILABLE FOR BENEFITS END OF YEAR $5,410,799 $3,900,279 $3,160,970 $ 379,600 $ -- $ 65,817 ============================================================================ Destiny Destiny Destiny Destiny International Conservative Moderate Aggressive All Equity Fund Fund Fund Fund Fund Total ------------------------------------------------------------------------------ Additions to net assets attributed to: Investment income: Net appreciation in fair value of investments $ 491 $ 21,431 $ 15,903 $ 11,263 $ 5,810 $ 1,047,278 Interest 388,223 ------------------------------------------------------------------------------ Total investment income 491 21,431 15,903 11,263 5,810 1,435,501 Contributions: Employer 12,893 12,984 21,633 29,996 220,428 Employee 86 13,886 13,813 27,078 34,876 334,156 ------------------------------------------------------------------------------ Total contributions 86 26,779 26,797 48,711 64,872 554,584 ------------------------------------------------------------------------------ Total additions 577 48,210 42,700 59,974 70,682 1,990,085 Deductions from net assets attributed to: Benefits paid to participants or beneficiaries 5,646 1,917 9,341 115,964 3,126,593 Administrative and other expense 109 126 161 236 7,432 ------------------------------------------------------------------------------ Total deductions 5,755 2,043 9,502 116,200 3,134,025 Interfund transfers (out) in 4,131 238,503 220,852 209,624 302,693 -- ------------------------------------------------------------------------------ Net (decrease) increase 4,708 280,958 261,509 260,096 257,175 (1,143,940) Net assets available for benefits beginning of year 15,125,851 ============================================================================== NET ASSETS AVAILABLE FOR BENEFITS END OF YEAR $ 4,708 $ 280,958 $ 261,509 $ 260,096 $ 257,175 $ 13,981,911 ============================================================================== See notes to financial statements. 7 8 The Retirement Plan for Employees of Central Reserve Life Insurance Company Notes to Financial Statements (Modified Cash Basis) December 31, 1998 and 1997 A. DESCRIPTION OF THE PLAN The following provides only general information regarding the Retirement Plan for Employees of Central Reserve Life Insurance Company (the "Plan"). Participants should refer to the Plan document for a more complete description of the Plan's provisions. GENERAL Effective January 1, 1998, the Plan was amended to allow for participant contributions. Previously, the Plan was a non-contributing money purchase plan. As a result of the amendment, the participant's interest in employer contributions and subsequent earnings allocated to the participant's account prior to January 1, 1998 became 100% vested. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). All employees of Central Reserve Life Insurance Company ("Central") that have 6 months of service with Central and have attained 20 1/2 years of age are eligible to participate in the Plan. Central is a wholly-owned subsidiary of Ceres Group, Inc., ("Ceres") a public registrant, formerly known as Central Reserve Life Corporation. CONTRIBUTIONS Participants may make contributions to the Plan through payroll deferrals. Participants can elect to make pre-tax contributions from 1% to 10% of their compensation. Additionally, participants can elect to make after-tax contributions up to 10% of their compensation. Central will match 100% of the participants contributions that are contributed to the Ceres Group, Inc. Stock Fund, up to a maximum $1,000 per year ("Matching Contribution"). In addition, Central may contribute to the Plan a profit sharing contribution, as determined by the Board of Directors ("Profit Sharing Contribution"). All eligible, active employees who have worked at least 1,000 hours during the plan year and are employed on the last day of the plan year and participants who die, or leave employment during the plan year due to retirement or disability, will share in this contribution. Employees may roll over funds into the Plan from other qualified plans. 8 9 The Retirement Plan for Employees of Central Reserve Life Insurance Company Notes to Financial Statements (Modified Cash Basis)--Continued A. DESCRIPTION OF THE PLAN--CONTINUED VESTING A participant's interest in Matching Contributions and Profit-Sharing Contributions allocated to the participant's account becomes vested based upon years of service as follows: 0% vested up to three years; 33% vested after three years; 67% vested after 4 years; and 100% vested after five years. Forfeitures of nonvested accounts are used to reduce future Central's contributions. During 1998, Central's contributions were reduced by $1,088,000 from forfeited nonvested accounts. PARTICIPANT ACCOUNTS Each participant's account is credited with the participant's contributions and allocations of (a) Central's contributions and (b) 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. PAYMENT OF BENEFITS On termination of service, a participant may receive a lump-sum amount equal to the vested value of his or her account, or upon death, disability or retirement, elect to receive annual installments over a stated period of time, or over his or her lifetime. INVESTMENT OPTIONS Upon enrollment in the Plan, participants may direct their participant contributions for investment in the following investment mediums: the Massachusetts Mutual Deposit Administration Group Annuity Contract ("Guaranteed Interest Fund"), the Balanced Fund, the Core Equity Fund, the Core Bond Fund (formerly know as the Intermediate Bond Fund) and the Money Market Fund. In 1998 the following investment options were added to the plan: Ceres Group, Inc. Stock Fund, the International Fund, the Destiny Conservative Fund, the Destiny Moderate Fund, the Destiny Aggressive Fund and the Destiny All Equity Fund. 9 10 The Retirement Plan for Employees of Central Reserve Life Insurance Company Notes to Financial Statements (Modified Cash Basis)--Continued 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) of 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. Stock Fund 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 values (as determined by Massachusetts Mutual Life Insurance Company) of the underlying investments. The Massachusetts Mutual Deposit Administration Group Annuity Contract ("DAC") is valued at contract value. DAC funds deposited during 1998 and 1997 were guaranteed to earn 6.00% and 6.70%, respectively. Guaranteed interest rates are determined annually by Massachusetts Mutual. The aggregate cost of investment sales is the average cost pre share or per unit at the time of the sale. Interest income is recorded when credited by Massachusetts Mutual Life Insurance Company ("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. 10 11 The Retirement Plan for Employees of Central Reserve Life Insurance Company 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. The fair value of investments that represent 5% or more of the Plan's net assets available for benefits at December 31 are as follows: 1998 1997 ------------------------ Deposit Administration Group Annuity Contract #FL-2372, variable interest rate--Guarantee Interest Fund $5,410,799 $8,176,352 Separate Investment Accounts: MassMutual Balanced Fund 3,900,279 3,472,863 MassMutual Core Equity Fund 3,160,970 2,984,035 D. PLAN TERMINATION Central 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 percent vested in their accounts and the assets of the Plan will be distributed to the participants based on the amounts in their respective accounts. E. INCOME TAX STATUS The Plan has received a determination letter from the Internal Revenue Service dated December 2, 1996, stating the Plan is qualified under Section 401(a) of the Internal Revenue Code (the "Code") and therefore, the related trust is exempt from taxation. 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 is qualified and the related trust is tax exempt. F. TRANSACTIONS WITH PARTIES-IN-INTEREST Certain plan assets are invested in funds that are administered and managed by Massachusetts Mutual. Since Massachusetts Mutual is the trustee to the Plan, these transactions qualify as party-in-interest. 11 12 The Retirement Plan for Employees of Central Reserve Life Insurance Company Notes to Financial Statements (Modified Cash Basis)--Continued G. YEAR 2000 (UNAUDITED) The Year 2000 issue refers to computer systems that were originally programmed using two digits rather than four digits to identify the applicable year. When the Year 2000 occurs, these systems could interpret the Year as 1900 rather than 2000. Unless hardware, system software and applications are Year 2000 compliant, computers and the devices they control could generate miscalculations and create operational problems. To address this issue, Ceres, on behalf of the Plan, developed an extensive plan, including the formation of a team consisting of internal resources and third-party experts. The plan, originally developed in 1997, has been in implementation since that time and consists of four major phases: assessment-identifying and prioritizing the systems and third parties which have exposure to Year 2000 issues; strategy-enhancing, replacing or retiring hardware, software and systems applications; implementation-creating detailed project plans, marshaling necessary resources and executing the strategies chosen; and testing and certification-testing of systems and certifying Year 2000 compliance. The assessment and strategy phases have been completed. The remaining phases are substantially complete and final testing and refinement will be addressed in 1999. None of the costs associated with compliance efforts will be borne by the Plan. Ceres believes the efforts described above will ensure the Plan's systems are adequately prepared for the Year 2000. The timing of the project and its completion are based on Ceres management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant codes, and similar uncertainties. 12 13 The Retirement Plan for Employees of Central Reserve Life Insurance Company EIN: 34-0970995 Plan Number: 001 Line 27(a)--Schedule of Assets Held for Investment Purposes (Modified Cash Basis) December 31, 1998 Description of Investment Including Maturity Date, Rate Units/ Identity of Issue, Borrower, of Interest, Collateral, Interest Current Lessor, or Similar Party Par or Maturity Value Rate Cost Value - ----------------------------------------------------------------------------------------------------------------------------------- * Massachusetts Mutual Life Deposit Administration Group Annuity Insurance Company Contract #FL-2372, variable interest rate 92,709 $ 5,410,799 $ 5,410,799 * Massachusetts Mutual Life Separate Investment Account M, Balanced Insurance Company Fund 10,543 2,383,544 3,900,279 * Massachusetts Mutual Life Separate Investment Account A, Core Insurance Company Equity Fund 611 2,233,624 3,160,970 * Massachusetts Mutual Life Separate Investment Account E, Core Bond Insurance Company Fund 390 306,673 379,600 * Massachusetts Mutual Life Separate Investment Account BC Destiny Insurance Company Conservative Fund 1,712 260,118 280,958 * Massachusetts Mutual Life Separate Investment Account, I Insurance Company International Fund 20 4,216 4,708 * Massachusetts Mutual Life Separate Investment Account BP, Destiny Insurance Company Moderate Fund 1,546 246,066 261,509 * Massachusetts Mutual Life Separate Investment Account BA, Destiny Insurance Company Aggressive Fund 1,492 249,973 260,096 * Massachusetts Mutual Life Separate Investment Account BE, Destiny Insurance Company All Equity Fund 1,344 257,109 257,175 * Massachusetts Mutual Life Insurance Company Ceres Group Inc. Stock Fund 4,910 57,283 65,817 ------------------------------- $11,409,405 $13,981,911 =============================== * Denotes party in interest. 13 14 The Retirement Plan for Employees of Central Reserve Life Insurance Company EIN: 34-0970995 Plan Number: 001 Line 27(d)--Schedule of Reportable Transactions (Modified Cash Basis) Year Ended December 31, 1998 Expense Incurred Purchase Selling with Identity of Party Involved Description of Asset Price Price Transaction - ----------------------------------------------------------------------------------------------------------------------------- CATEGORY (III)--SERIES OF TRANSACTIONS IN EXCESS OF 5 PERCENT OF PLAN ASSETS * Massachusetts Mutual Life Deposit Administration Group Annuity Insurance Company Contract #FL-2372, variable interest rate 42 purchases $ 1,563,436 142 sales $3,640,971 $341 * Massachusetts Mutual Life Separate Investment Account A, Insurance Company Core Equity Fund 70 purchases 1,311,167 102 sales 1,603,341 426 * Massachusetts Mutual Life Separate Investment Account M, Insurance Company Balanced Fund 37 purchases 678,057 87 sales 722,395 111 * Massachusetts Mutual Life Separate Investment Account BE, Insurance Company Destiny All Equity Fund 49 purchases 516,959 47 sales 264,980 87 Current Value of Asset on Cost of Transaction Net Identity of Party Involved Description of Asset Asset Date Gain - ----------------------------------------------------------------------------------------------------------------------- CATEGORY (III)--SERIES OF TRANSACTIONS IN EXCESS OF 5 PERCENT OF PLAN ASSETS * Massachusetts Mutual Life Deposit Administration Group Annuity Insurance Company Contract #FL-2372, variable interest rate 42 purchases $1,563,436 $1,563,436 142 sales 3,640,971 3,640,971 $ 0 * Massachusetts Mutual Life Separate Investment Account A, Insurance Company Core Equity Fund 70 purchases 1,311,167 1,311,167 102 sales 1,195,073 1,603,341 408,268 * Massachusetts Mutual Life Separate Investment Account M, Insurance Company Balanced Fund 37 purchases 678,057 678,057 87 sales 463,979 722,395 258,416 * Massachusetts Mutual Life Separate Investment Account BE, Insurance Company Destiny All Equity Fund 49 purchases 516,959 516,959 47 sales 259,850 264,980 5,130 * Denotes party in interest. There were no category (i), (ii) or (iv) reportable transactions during 1998. 14 15 THE RETIREMENT PLAN FOR EMPLOYEES OF CENTRAL RESERVE LIFE INSURANCE COMPANY Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Administrator have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. THE RETIREMENT PLAN FOR EMPLOYEES OF CENTRAL RESERVE LIFE INSURANCE COMPANY By: /s/ Charles E. Miller, Jr. --------------------------------- Charles E. Miller, Jr. Plan Administrator Dated: June 29, 1999 15 16 EXHIBIT INDEX 23 Consent of Ernst & Young LLP 16