<PAGE>
FORM 10-K
AMENDMENT NO. 2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended ..........December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to ________________________________.
Commission File Number 0-16520
----------------------------------------------------------
ARISTA INVESTORS CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2957684
- ------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
116 John Street, New York, New York 10038
- ------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 964-2150
----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes: X No:
--- ---
The aggregate market value of the voting stock (Class A Common
Stock, par value $ .01 per share) held by non-affiliates of the registrant,
computed by reference to the average of the closing bid and asked price, as
of April 8, 1997 was $4,767,340.62.
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate number of registrant's outstanding shares on April
8, 1997, was 2,570,100 shares of Class A Common Stock, $0.01 par value
(excluding 10,000 shares of treasury stock), and 47,400 shares of Class B
Common Stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Arista Investors Corp. (the "Registrant") through its wholly-owned
subsidiary, Arista Insurance Company ("Arista"), a New York corporation
(Registrant and Arista are sometimes hereinafter individually or
collectively referred to as the "Company"), has been engaged in the sale and
underwriting of statutory, super statutory and voluntary disability
benefits insurance (collectively, the "Insurance") in the State of New York
since 1979. The Registrant is a Delaware corporation incorporated on
August 19, 1986, which suceeded to the business of its predecessor, Arista
Investors Corp., a New York corporation organized in 1978. The Company's
principal executive offices are located at 116 John Street, New York, New
York 10038. Its telephone number is (212) 964-2150.
Arista was licensed to write accident and health insurance by
the New York State Insurance Department in October 1979, and sells and
underwrites the Insurance. During the year ended December 31, 1993,
Arista amended its charter and became licensed to write a line of property
and casualty insurance in New York as well. To date, Arista has not
written any property and casualty insurance business. Such licenses may
continue in perpetuity unless suspended or terminated by an act of the
regulator.
The following table sets forth the gross, ceded and net premiums
earned by Arista, together with the Company's investment income and realized
investment gains (losses) for each of the three years of the period ended
December 31, 1996.
1994 1995 1996
---- ---- ----
Gross premiums earned $26,188,858 $26,091,714 $23,160,258
Ceded premiums earned 13,094,429 13,045,857 11,580,129
----------- ----------- -----------
Net premiums earned $13,094,429 $13,045,857 $11,580,129
----------- ----------- -----------
----------- ----------- -----------
Investment income $ 215,480 $ 252,134 $ 440,540
----------- ----------- -----------
----------- ----------- -----------
Realized investment gains
(losses) $ (2,603) $ (137) $ (208)
----------- ----------- -----------
----------- ----------- -----------
Under New York State law, all eligible employees, including
full-time and part-time employees in New York State, are required to be
provided with disability insurance coverage unless excluded by statute,
e.g., government, railroad, maritime or farm workers. Statutory
disability
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benefits insurance presently provides for a payment to totally disabled
employees in the amount of 50% of weekly salary to a maximum payment of $170
per week, for a maximum of 26 weeks beginning with the eighth day of
disability due to off-the-job accident or sickness. On-the-job accident or
sickness is covered by worker's compensation insurance, not statutory
disability benefits insurance. Arista charges a premium for the Insurance
coverage based upon a rate structure approved by the New York State
Insurance Department. In order for an insurer to alter its rate structure it
must obtain prior written approval from the New York State Insurance
Department. Under New York law, an employer may require an employee to
contribute 1/2 of 1% of covered payroll up to a maximum of $.60 per week
towards the premium charge for statutory disability benefits insurance.
In addition to standard statutory disability benefits insurance
coverage, Arista offers certain augmented benefits which include the
payment of the disability benefit from the first day of disability as
opposed to the eighth day of disability, increased duration of benefits
from 26 weeks up to 52 weeks, benefits increased over the maximum of $170
weekly benefit and an additional multiple if related to hospitalization
(e.g., 150% of the benefit if an employee is hospitalized). Arista also
offers coverage for association groups on a competitive basis. The
underwriting of these augmented benefits and specialized coverages
currently does not represent a significant percentage of Arista's earned
premiums.
Pursuant to agreements effective July 1, 1993 and January 1, 1995,
Arista has acted as a third party administrator for the statutory
disability benefits books of business of The Guardian Life Insurance
Company of America and the United States Life Insurance Company in the City
of New York, respectively. The administrative services fees collected
by Arista during the years ended December 31, 1994, 1995 and 1996 were
$50,976, $165,801 and $234,176, respectively.
During the three-year period ended December 31, 1996, Arista
has entered into the following arrangements to acquire books of New York
State disability insurance:
1. Arista acquired the right, effective January 1, 1994, to
offer the Insurance coverage to policyholders previously insured by The
North Atlantic Life Insurance Company of America ("NALIC"). For the period
October 1, 1991 through December 31, 1993, Arista had a third party
administrative agreement with NALIC.
2. Pursuant to an agreement with Aetna Life Insurance
Company ("Aetna"), effective April 1, 1994, Arista acquired Aetna's
entire book of New York State statutory non-experience rated state cash
sickness disability insurance through an assumption reinsurance
treaty, and issued assumption certificates to those policyholders
previously insured with Aetna.
3. Effective October 1, 1994, Arista entered into an
Indemnity Reinsurance Agreement with American Medical and Life Insurance
Company ("American Med") wherein Arista assumed a book of the Insurance
that was ceded by American Med.
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4. Effective January 1, 1995, Arista, through an assumption
reinsurance treaty, acquired the book of the Insurance that had been
previously ceded by American Med. Arista issued assumption certificates to
all such American Med policyholders.
5. Effective April 1, 1996, Arista entered into assumption
reinsurance treaties with Greater New York Mutual Insurance Company
("GNYMIC") and with Insurance Company of Greater New York ("ICGNY")
which authorized Arista to assume all of GNYMIC's and ICGNY's Insurance
and issue assumption certificates to the policyholders then currently
insured with GNYMIC and ICGNY.
For the year ended December 31, 1996, one group, the Federation of
Jewish Philanthropies, accounted for approximately 11% of Arista's revenue.
No other customer accounted for 10% or more of the Company's consolidated
revenues in the year ended December 31, 1996. For the years ended December
31, 1994 and 1995, no one group accounted for 10% or more of Arista's
revenue, however, Arista underwrites the Insurance for two large groups with
combined earned premiums of approximately $4,496,000 in 1994, $3,692,000 in
1995, and $3,810,000 in 1996.
Effective December 29, 1995, Arista issued a $3,000,000 surplus
note to Cologne Life Underwriting Management Company ("CLUMCO"). The
surplus note bears interest at the rate of 10.5% per annum, and provides
for the principal to be repaid in eight equal installments in years three
through ten, together with any accrued interest. These repayments of
principal and accrued interest shall only be made out of the free and
divisible surplus of Arista, and are subject to the prior approval of
the Superintendent of Insurance of the State of New York. If the
principal and interest are not repaid in full at the end of the ten years,
the surplus note renews annually for additional one-year terms until the
balance is repaid. The surplus note permits prepayment subject to the
prior approval of the New York State Insurance Department. In addition,
the Registrant issued a ten year warrant to CLUMCO to purchase up to
150,000 shares of the Company's Class A Common Stock, subject to certain
conditions, at an exercise price of $3.50 per share. See "Reinsurance
Ceded."
Arista submitted an application for admission as a reinsurer to
the Office of the Commissioner of Insurance of the Commonwealth of Puerto
Rico during 1989. In 1991, Arista requested that the Commissioner hold
its application in abeyance pending the conclusion of certain
negotiations regarding a reinsurance arrangement in the Commonwealth.
Negotiations regarding this arrangement are still ongoing.
In 1994, Arista submitted an application to the Commissioner of
Insurance in Hawaii (the "Commissioner") to become licensed in the State of
Hawaii to write Temporary Disability Insurance. In 1995, Arista completed
all of the license requirements and its submissions were in the process of
being reviewed by the Commissioner. In February, 1996, Arista concluded
that it would withdraw its application in Hawaii.
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MARKETING
Arista believes that, particularly with respect to the small
and medium-sized businesses on which it focuses its marketing efforts,
business owners generally rely upon agents in selecting an insurance
company. Consequently, Arista considers the general agent to be its
customer and stresses prompt and personal service to its general agents
in all phases of underwriting, product delivery and claims processing
functions.
Arista currently has under contract 390 general agents. These
general agents place the Insurance with other insurance companies in
addition to Arista. These general agents submit to Arista insurance
written through more than 6,900 insurance brokers and soliciting agents.
Arista enters into written contracts with general agents who in turn
engage brokers and soliciting agents. Arista's contract with each
general agent may be canceled by either party on 30 days' prior written
notice. The commissions paid by Arista are competitive with the
commissions paid by other insurers in the insurance industry. Each
general agent is responsible for payment of any commissions due brokers
or soliciting agents engaged by the general agent.
In 1996, based upon results as of December 31, 1995, Arista
received a rating of B (good) from A.M. Best Company, Inc. ("Best"), the
principal organization rating insurance companies. Best's ratings are
based upon factors of concern to policyholders.
CLAIMS
Gross claims incurred by Arista amounted to $17,752,698 in 1994,
$16,588,801 in 1995 and $15,288,310 in 1996.
The factors generally affecting gross claims incurred are a
function of the number of risks covered with either part-time or
full-time workers, the wage level of each covered employee to a maximum
of $170 per week and the duration of disability to a maximum of 26
weeks. The gross amount of claims incurred at any point in time is also
affected by the number of females covered since maternity is treated
statutorily as any other disability.
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The Company's estimated-to-actual claims experience is as follows:
Calendar Year Estimated Loss Ratio Actual Loss Ratio
- ------------- -------------------- -----------------
1992 65.7% 67.6%
1993 65.5% 64.9%
1994 66.5% 65.0%
1995 62.2% 61.8%
1996 62.4%* **
* Experience is based on estimated claim reserves including reinsurance
assumed at December 31, 1996.
** Fully developed loss information for 1996 will not be available until
after September 30, 1997.
The estimated loss ratio is calculated for each year based
upon an historical estimate of the claims development divided by the
premiums earned for a calendar year. It differs from the actual loss
ratio which represents the fully developed claims for that calendar year
divided by the actual premiums earned for that calendar year.
REINSURANCE CEDED
Arista utilizes reinsurance to reduce its net liability on
business in force through risk sharing. The ceding of insurance does not
discharge the original insurer from its primary liability to the
policyholder. The ceding company is required to pay losses to the extent
the assuming company fails to meet its obligations under the reinsurance
agreement. The practice of insurers, however, subject to certain statutory
limitations and as permitted by regulatory authorities, is to account for
reinsured risks to the extent of reinsurance ceded as though they are not
risks for which the original insurer remains liable.
From October 1, 1992 to September 30, 1993, Arista had a
stop-loss reinsurance agreement with its reinsurer. The reinsurance
agreement provided for Arista to cede 50% of its disability policies
written to the reinsurer when Arista's loss ratio was equal to or greater
than 75%, up to but not to exceed 100% of earned premiums. The reinsurer
was paid a fee based on Arista's earned premiums. The reinsurance
agreement was subject to cancellation by either party on 90 days prior
written notice.
From October 1, 1993 to September 30, 1995, Arista had a
quota-share reinsurance agreement with its reinsurer, Harbourton
Reinsurance, Inc. (formerly, NRG America Reassurance Corporation). Under
this agreement, Arista ceded by way of reinsurance a 50% quota share of
its liability with respect to the Insurance issued to various
policyholders. This agreement was subject to cancellation by either party on
90 days prior written notice.
6
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Effective October 1, 1995, Arista entered into an agreement
with Cologne Life Reinsurance Company ("Cologne") whereby Arista cedes
by way of reinsurance a 50% quota share participation in the Insurance,
both for business in force as of October 1, 1995 and for new business
written or acquired after October 1, 1995. This agreement is
subject to cancellation by either party on 90 days prior written notice.
Cologne had total assets of approximately $657,377,000 at
December 31, 1996, and a Best's rating of A+ as of December 31, 1996.
Unlike other segments of the accident and health and property and
casualty industries, there is no need to facilitate a spread of risk
pursuant to any one occurrence as the maximum liability for Arista on
any one life cannot exceed $4,420. The cost to Arista of obtaining
reinsurance has never exceeded approximately 1.2% of its gross premiums
received. (See Note 12 of the Consolidated Financial Statements.)
Effective April 1, 1994 Arista entered into a reinsurance agreement
with Allianz Life Insurance Company of North America ("Allianz") wherein
Arista assumed Hawaii Temporary Disability Insurance business that was
ceded by Allianz since 1994. This agreement was terminated February 29,
1996.
RESERVES
Insurance companies are required to maintain reserves for
unearned premiums, and claim reserves for unpaid losses, unpaid loss
adjustment expenses and New York State assessments for this line of
business. These claim reserves are intended to cover the probable
ultimate cost of settling all losses incurred and unpaid, including those
incurred but not yet reported. Arista establishes these claim
reserves based upon its prior experience. Gross claims liabilities were
$4,912,446, $4,526,315, and $4,351,500 at December 31, 1994, 1995, and
1996, respectively.
Loss reserves are only estimates of what the insurer expects to pay
on claims, based on facts and circumstances then known. Although a degree
of variability is inherent in such estimates, management believes that the
liabilities for unpaid claims and related adjustment expenses are adequate.
The estimates are continually reviewed and adjusted as necessary, and such
adjustments are reflected in current operations.
The following table compares Arista's gross reserves (estimated)
at the end of each of the last five calendar years compared to the gross
amounts actually paid against these estimated reserves.
7
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<TABLE>
<CAPTION>
Reserve
at the End
of the
Calendar Calendar Amounts Paid During the Year and Incurred Prior Thereto
Year Year ------------------------------------------------------------------------------------------
-------- ---------- 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1992 $4,040,000 $4,578,312
1993 $3,870,000 $4,420,104
1994 $4,628,600 $4,667,005
1995 $4,280,000 $4,384,003
1996 $4,000,000 (1)
(1) Development is not yet complete.
</TABLE>
COMPETITION
The writing of the Insurance is highly competitive and many insurers
write this line of insurance in New York. These insurers vary in size and
generally have longer operating histories, offer a broader range of coverages
other than the Insurance and generally have greater financial, marketing
and management resources, than Arista. In addition, the New York State
Insurance Fund also offers statutory disability benefits. Competition is
primarily based upon service and, in certain classes of business, rate
structure. Arista strives to keep its rates at the median of its
competitors for groups of less than 50 lives. For groups of 50 or more
lives, rates are a function of the prior experience for each risk. Arista's
management believes that the services offered by Arista compare favorably
with those offered by its competitors.
EMPLOYEES
As of December 31, 1996, the Company had forty-one (41)
full-time and two (2) part-time employees. Nine (9) of these employees
are executive officers, (two (2) of whom serve part-time), seven (7)
provide claims services as examiners, one (1) provides general and
administrative services and twenty-six (26) provide all other services.
The Company believes its relations with its employees are satisfactory.
INVESTMENT POLICY
Arista must comply with the insurance laws of New York State
with regard to investments. These laws prescribe the kind, quality and
concentration of investments which may be made by insurance companies.
The investment of Arista's funds generally is subject to the direction and
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control of its Board of Directors; investments are reviewed on a quarterly
basis. Arista's funds generally are invested in federal, state and
municipal obligations, corporate debt, preferred and common stocks and
such other investments which are specifically prescribed by the New York
State Insurance Law.
The following table contains information concerning the
Company's investment portfolio as at December 31, 1996:
Amount at
which is
Cost or shown in
amortized Market the balance
Type of Investment cost value sheet
------------------ --------- ------ -----------
Investment Securities:
United States Treasuries $2,642,618 $2,601,210 $2,642,618
Corporate Debt Securities 53,602 49,000 53,602
---------- ---------- ----------
$2,696,220 $2,650,210 $2,696,220
---------- ---------- ----------
---------- ---------- ----------
The following table summarizes the Company's investment results
before income taxes for the five years ended December 31, 1996:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net investment income $234,811 $188,200 $215,480 $252,134 $440,540
Average annual yield on
total investments (1) 5.29% 4.47% 5.54% 5.90% 5.69%
Net realized investment
gains (losses) $(107,530) $ 47,142 $(2,603) $(137) $(208)
</TABLE>
REGULATION
The State of New York has statutory authorization to enforce its
laws and regulations through various administrative orders and enforcement
proceedings.
Arista and, under certain circumstances, the Registrant, are
subject to regulation by the New York State Insurance Department. Such
regulation is principally for the benefit and protection of policyholders
and not stockholders. Regulation extends to, among other things, the
setting of rates to be charged, the granting and revocation of
licenses to transact business, the licensing of general agents, the
approval of policy forms and the form and content of statutorily mandated
financial statements.
The Company is also regulated under New York State Insurance
Law, Article 15, the "Holding Companies" statute. The regulations
promulgated under the "Holding Companies" statute
- ---------------------------------------
(1) Calculated on the mean of total investments on the first day and last
day of each quarter.
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require prior regulatory agency approval of changes in control of an
insurer and of transactions within the holding company structure.
Arista was examined during calendar years 1990-1991 for the three year
period ended December 31, 1989. In accordance with applicable
regulations promulgated by the New York State Insurance Department, a
report for the three-year period ended December 31, 1989 was issued.
Arista's Board of Directors reviewed and approved the recommendations
contained therein, and the report was filed by the New York State
Insurance Department on December 17, 1992. In 1996, the New York
State Insurance Department examined Arista for the five-year period ended
December 31, 1994. The examination has been completed and Arista is
currently awaiting a report.
The New York State Insurance Law provides that no corporation
or other person may acquire control of the Registrant and thus indirect
control of Arista, unless it has given notice to Arista and obtained prior
written approval of the Superintendent of Insurance for such acquisition.
Under said law, any purchaser of ten percent or more of the outstanding
Common Stock of the Registrant would be presumed to have acquired control
of Arista, unless such presumption is rebutted.
The declaration and payment of dividends by the Registrant
is subject to the discretion of its Board of Directors and is dependent
upon any dividends the Registrant may receive as the sole shareholder of
Arista. Under New York State Insurance Law, Arista may pay dividends
only out of its statutory earned surplus. Generally, the maximum amount
of dividends that Arista may pay without regulatory approval in any
twelve-month period is the lesser of adjusted net investment income or ten
percent (10%) of statutory surplus. In 1996 and 1994, Arista's Board of
Directors authorized the payment of a dividend to the Registrant in the
amount of $111,654 and $224,799, respectively. The dividends were paid
on April 11, 1996 and May 21, 1994.
Arista is not aware of any current proposed changes in either
federal or state regulations with respect to the Insurance.
THE COLLECTION GROUP
The Collection Group, Inc., a wholly-owned subsidiary of the
Registrant, commenced operations during July 1991. The Collection Group,
Inc., provides collection services to Arista.
AMERICAN ACCIDENT AND HEALTH INSURANCE COMPANY
On December 20, 1995, Arista sold all of the outstanding shares
of capital stock of its wholly-owned subsidiary, American Accident and
Health Insurance Company ("American"), to American Travellers Life
Insurance Company for $764,675, resulting in a pretax gain of $320,192.
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PART II
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ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with, and
is qualified in its entirety by reference to, the Consolidated Financial
Statements of the Company and the notes thereto appearing elsewhere in this
Form 10-K.
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles, which differ
in certain respects from those followed in financial statements
prepared for regulatory authorities. (See Note 14 to the accompanying
Consolidated Financial Statements.)
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ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Revenue:
Gross premiums earned........................ $ 23,160 $ 26,092 $ 26,189 $ 24,219 $ 25,274
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net premiums earned.......................... $ 11,580 $ 13,046 $ 13,094 $ 21,329 $ 15,789
Investment income............................ 440 252 209 182 227
Realized investment gains (losses)........... -- -- (3) 47 (108)
Other income................................. 299 333 280 130 204
Expenses:
Net underwriting expenses.................... (8,291) (8,464) (9,114) (16,979) (10,928)
General and administrative expenses.......... (5,678) (5,016) (4,788) (3,728) (3,796)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before provision for income taxes........ (1,650) 151 (322) 981 1,388
----------- ----------- ----------- ----------- -----------
Provision for income taxes and tax benefit of
net operating loss carryforward:
Provision for income taxes................... 81 92 126 541 698
Tax benefit of net operating loss
carryforward............................... (555) -- (207) -- --
----------- ----------- ----------- ----------- -----------
Net provision (benefit)...................... (474) 92 (79) 541 698
----------- ----------- ----------- ----------- -----------
Net income (loss) from continuing operations... (1,176) 59 (241) 440 690
----------- ----------- ----------- ----------- -----------
Discontinued operations:
Income from operations of disposed segment
(net of taxes of $3)....................... -- 6 -- 2 7
Gain on disposal of segment (net of income
taxes of $128)............................. -- 192 -- -- --
----------- ----------- ----------- ----------- -----------
Net income from discontinued operations.... -- 198 -- 2 7
----------- ----------- ----------- ----------- -----------
Net income (loss).......................... $ (1,176) $ 257 $ (241) $ 442 $ 697
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Per common share:
Primary:
Income (loss) from continuing operations... $ (.45) $ 0.02 $ (0.11) $ 0.20 $ 0.31
Income from discontinued operations........ $ -- $ 0.09 $ -- $ -- $ 0.01
Fully diluted:
Income (loss) from continuing operations... $ (.45) $ 0.02 $ (0.11) $ 0.20 $ 0.31
Income from discontinued operations........ $ -- $ 0.08 $ -- $ -- $ 0.01
Weighted average number of common shares:
Primary...................................... 2,617,500 2,251,400 2,229,900 2,254,147 2,221,900
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Fully diluted................................ 2,617,500 2,374,660 2,299,900 2,254,147 2,221,900
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Balance sheet data:
Short-term investments......................... $ -- $ -- $ 208 $ 726 $ 492
Cash and equivalents........................... 7,077 6,777 2,725 2,355 2,870
Premiums receivable............................ 4,304 5,131 6,328 3,326* 6,400*
Total assets................................... 17,110 17,640 15,083 10,457 13,495
Payable to reinsurer........................... 93 161 80 62 97
Claims liabilities............................. 4,351 4,526 4,921 2,084* 4,322*
Unearned premiums.............................. 1,397 1,328 1,358 480* 937*
Commissions payable............................ 766 942 1,343 440* 1,219*
Total stockholders' equity..................... 6,397 6,436 6,011 6,268 5,709
</TABLE>
- ------------------------
* Reported on a net basis only.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
-----------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of the Company and the notes thereto
appearing elsewhere in this Form 10-K. Except for the historical information
contained herein, the following discussion contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those projected in the forward-looking statements discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in this section, as well as in other
sections herein.
RESULTS OF OPERATIONS
YEAR-ENDED DECEMBER 31, 1996 VS. DECEMBER 31, 1995
The Company's net loss for the year 1996 was approximately
$1,176,000 (approximately $0.45 per share) compared with a net income
of approximately $59,000 from continuing operations (approximately
$0.02 per share) for 1995. The loss, before provision (benefit) for
income taxes for 1996, was approximately $1,650,000 compared with a gain
before provision for income taxes and tax benefit, of approximately
$151,000 for 1995. The Company's loss for 1996 included approximately
$757,000 (approximately $0.29 per share) attributable to additional
compensation expenses incurred from the exercise of warrants and options.
Arista's gross premiums earned for the year 1996 were approximately
$23.2 million as compared with approximately $26.1 million for 1995. The
reduction in gross premiums earned was the result of Arista's termination
of its assumption reinsurance agreement during the first quarter of 1996
wherein Arista had assumed Hawaii Temporary Disability Insurance
Business that had been ceded by Allianz Life Insurance Company of North
America together with a continuation of the net loss of covered lives and
of policyholders. The continued net loss of covered lives is a function of
increased competition for experience rated groups and a lower
competitive rate structure for non-experience rated groups. The Company
expects this trend to continue.
Arista's gross claims incurred for 1996 were approximately $15.3
million or 66.0% of gross premiums earned. For the year 1995, gross claims
incurred were $16.6 million or 63.6% of gross premiums earned.
Consolidated investment income for 1996 was approximately
$441,000 representing an increase of $189,000 over 1995. The increase was
due mainly to income earned on the proceeds received by Arista upon the
issuance of the surplus note. In addition Arista had insignificant
net realized and net unrealized investment losses for 1996 and 1995.
Other income, including income from Third Party Administrative
operations, was approximately $299,000 as compared to approximately
$333,000 for 1995.
Arista's gross commissions incurred for 1996 were approximately
$4.2 million or 18.2% of gross premiums earned. For the year 1995, gross
commission incurred were approximately
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$4.6 million or 17.7% of gross premiums earned. This increase was due
in part to a larger portion of more recently issued policies acquired from
other insurers, requiring the payment of slightly higher average commissions.
The consolidated general and administrative expenses increased
from approximately $5.0 million for the year 1995 to $5.7 million for the
year 1996. This change was mainly attributable to an aggregate increase
in compensation expense of $757,000 resulting from the exercise of
options and warrants, as well as decreases in payroll and benefits
of approximately $266,000, amortization of intangible expenses of
approximately $249,000 and reinsurance costs of approximately $116,000
related to assumed business; offset by an increase in professional
fees of approximately $220,000 and interest on the surplus note of $330,000.
YEAR-ENDED DECEMBER 31, 1995 VS. DECEMBER 31, 1994
The Company's net income for the year 1995 was approximately
$257,000, compared with a net loss of approximately $241,000 for 1994.
The Company's net income of approximately $257,000 consisted of
approximately $59,000 from continuing operations and approximately
$198,000 from discontinued operations. Net income from discontinued
operations represented the gain from Arista's sale of its
wholly-owned subsidiary, American, together with American's net income
from operations incurred prior to the sale. Income from continuing
operations before provision for income taxes for 1995 was approximately
$151,000 as compared with a loss, before provision for income taxes and tax
benefit, of approximately $321,000 for 1994.
Arista's gross premiums earned for the year 1995 were approximately
$26.1 million as compared with approximately $26.2 million for 1994. This
decrease reflects a continuation of the net loss of covered lives and
policyholders.
Arista's gross claims incurred for 1995 were approximately $16.6
million or 63.6% of gross premiums earned. For the year 1994, gross claims
incurred were $17.8 million or 67.8% of gross premiums earned. This
reduction in claims incurred and in the loss ratio emanated substantially
from improved claims management and underwriting techniques.
Consolidated investment income for 1995 was approximately
$252,000, representing an increase of $37,000 over 1994. The increase was
due mainly to slightly higher interest rates credited during 1995. In
addition, Arista had insignificant net realized and net unrealized
investment losses for 1995 as compared to a net realized investment
loss for 1994 of approximately $3,000.
Other income, including income from TPA operations, was
approximately $333,000 as compared to approximately $279,000 for 1994.
The principal reason for this increase was the continuing income derived
from Arista's agreement to act as a TPA for another insurer's statutory
disability benefits book of business.
14
<PAGE>
Arista's gross commissions incurred for 1995 were approximately
$4.6 million or 17.7% of gross premiums earned. For the year 1994, gross
commissions incurred were approximately $4.2 million or 16.0% of gross
premiums earned. This increase was due in part to a larger portion of
more recently issued policies acquired from other insurers, requiring the
payment of slightly higher average commissions.
Consolidated general and administrative expenses increased from
approximately $4.8 million for the year 1994 to $5.0 million for the
year 1995. This change was mainly attributable to the amortization of
the balance of the intangible assets of American at the time of sale that
had been incurred in connection with the acquisition of American and to
increases in salaries and employee benefits, rent and reinsurance
costs, offset by a reduction in professional fees.
LIQUIDITY AND CAPITAL RESOURCES
Retained earnings decreased from $2,111,528 at December 31, 1995 to
$935,665 at December 31, 1996 as a result of the Company's operating loss.
At present, management considers Arista's statutory capital and
surplus of approximately $6.2 million at December 31, 1996 sufficient to
support its current annual premium level, as well as providing capacity for
additional premiums.
Arista may pay dividends to the Registrant from its statutory
earned surplus pursuant to statutory restrictions imposed under the New
York State Insurance Law. The maximum amount of dividends that may be paid
in any twelve-month period without the prior approval of the New York
State Insurance Department is the lesser of adjusted net investment income
or 10% of statutory surplus as defined in the New York State Insurance Law.
In 1996 and 1994, Arista's Board of Directors authorized the payment of a
dividend to the Registrant in the amount of $111,654 and $224,799,
respectively. The dividends were paid on April 11, 1996 and May 16, 1994.
See "Business-Regulation."
Management believes that neither Arista's premium rates nor
claim costs have materially changed due to inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in Part IV of this Form
10-K on page F-1 to S-6.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the directors, executive officers, their ages,
positions with the Company, Arista, and The Collection Group, Inc
("Collection"), and tenure as directors of the Company, are set forth below:
<TABLE>
<CAPTION>
Director of
the Company
Name Age Position Since
- ---- ----- -------- -----------
<S> <C> <C> <C>
Bernard Kooper* 71 Chairman of the Boards of Directors 1978
of the Company, Arista, and Collection,
and President of the Company
Stanley S. Mandel** 62 Executive Vice President and 1983
Director of the Company, President
and Director of Arista, and Director
of Collection
Susan J. Hall 53 Senior Vice President and Treasurer --
of the Company and Arista, and Controller
and Director of Arista
Louis H. Saltzman* 46 Secretary and Director of the 1981
Company and Arista, and Director
of Collection
Richard P. Farkas** 72 Director of the Company and Arista 1991
J. Martin Feinman** 72 Director of the Company, Arista, and 1978
Collection, and Secretary of Collection
Noah Fischman* 65 Director of the Company, Arista, and 1978
Collection
Daniel Glassman* 68 Director of the Company and Arista 1994
</TABLE>
* Elected by the Class B Stockholder
** Elected by the Class A Stockholders
16
<PAGE>
BERNARD KOOPER has served as Chairman of the Board of
Directors and President of the Company since its inception, Chairman of
the Board of Directors of Arista since June 1986, and Chairman of the Board
of Directors of Collection since June 1991. Since 1971, he has served as
President and sole stockholder of Bernard Kooper Life Agency, Inc. and
Bernard Kooper Associates, Inc., life and accident and health general
agents in New York, New York. Since 1968, he has also served as Vice
President and a principal stockholder of Fischman-Kooper, Inc., a
multi-line insurance agency located in Roslyn Heights, New York. Mr.
Kooper is the father-in-law of Louis H. Saltzman.
STANLEY S. MANDEL has served as Executive Vice President and
a Director of the Company, and President and a Director of Arista since
August 1983. Since June 1991, he has served as a Director of
Collection. He is also a director of Micro-Medical Industries, Inc.
SUSAN J. HALL has served as Senior Vice President and
Treasurer of the Company and Arista since March 1988, and a Director of
Arista since June 1987. Since October 1986, she has served as Controller of
Arista.
LOUIS H. SALTZMAN has served as Secretary and a Director of
the Company and Arista since May 1981. Since June 1991, he has
served as a Director of Collection. Since March 31, 1997, Mr.
Saltzman has served as Vice President, a Director and a principal
stockholder of the Saltzman-American Business Agency, Inc., a life and
health general agency in Manhassett, New York. Since January 1989, he
served as President and sole stockholder of The Saltzman/Kooper Agency,
Inc., a life and accident and health general agency in New York, New
York. From May 1975 to December 1988, he served as an insurance broker and
brokerage manager for Bernard Kooper Life Agency, Inc., and Bernard Kooper
Associates, Inc., life and health general agents in New York, New York.
Mr. Saltzman is the son-in-law of Bernard Kooper.
RICHARD P. FARKAS has served as a Director of the
Company since September 1991 and as a Director of Arista since June
1988. From June 1988 to June 1990, he also served as a Director of the
Company. He is also Chairman and Chief Executive Officer of IMC
International Management Consultants, Inc., a provider of business and
management consulting services. Mr. Farkas is also a director of
Integrated Food Technologies Corporation, Chairman of the Board of The
BankHouse, and the Chairman of the Board and Chief Executive Officer of
Zemid Corp.
J. MARTIN FEINMAN has served as a Director of the Company
since its inception, and has served as a Director of Arista since May 1981.
Since June 1991, he has served as a Director and Secretary of Collection.
From 1950 until November 1992, he has served as President of Olde England
Paint and Varnish Corporation, a distributor of paint products, located in
Brooklyn, New York.
17
<PAGE>
NOAH FISCHMAN has served as a Director of the Company
since its inception, and served as Vice President of the Company from its
inception to June 1987. He has served as a Director of Arista since June
1982. Since June 1991, he has served as a Director of Collection. Since
1968, he has served as President and a principal stockholder of
Fischman-Kooper, Inc., a multi-line insurance agency located in Roslyn
Heights, New York.
DANIEL GLASSMAN has served as a Director of the Company
since October 1994 and has served as a Director of Arista since June
1982. From 1971 to 1991 he served as Vice President-Finance and Director of
Lea Ronal, Inc, a chemical specialties manufacturer. He is the President
and sole stockholder of CSA, Inc., a clothing manufacturer, and a
principal stockholder of JLT Corp., a clothing manufacturer.
The terms of office of all officers and directors expire at
the time of the Annual Meeting of Stockholders.
The holder of the Class B Common Stock has the right to elect
a majority of the Registrant's Board of Directors. In addition, the holder
of the Class B Common Stock has the right to vote as a separate class
upon any merger, reorganization, recapitalization, liquidation,
dissolution, or winding-up, sale, transfer or hypothecation of all
or a substantial portion of the assets of the Company, and with regard to
any amendment to the certificate of incorporation which affects the
number or par value, or adversely alters or changes powers, preferences,
voting power or special rights of the shares of the Class B Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the three most recently
ended fiscal years ended December 31, the cash compensation paid or
accrued for those years to the President of the Company and to each of the
four most highly compensated executive officers of the Company and/or
Arista other than the President whose aggregate annual salary and bonus
paid in compensation for services rendered in all the capacities in which
they served exceeded $100,000 for the Company's last fiscal year (the
"Named Executives"):
18
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------------------
Annual Compensation Awards Payouts
---------------------------------- ---------------------- --------------------------
Name and Other Restricted
Principal Annual Stock Options/ LTIP All Other
Position Year Salary($) Bonus($) Compensation($) Awards($) SARs (#) Payouts($) Compensation
- -------- ---- -------- -------- -------------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bernard Kooper -
Chairman of the Boards of
Directors of the Company,
Arista and Collection and 1994 150,000 35,000 -0- -0- -0- -0- 35,950
President of the Company 1995 150,000 35,000 -0- -0- -0- -0- 35,950
(1)(3)(4) 1996 150,000 10,000 492,750(6) -0- -0- -0- 35,950(5)
Stanley S. Mandel - Executive
Vice President and a Director
of the Company, President
and a Director of Arista 1994 208,750 35,000 -0- -0- -0- -0- 27,196
and a Director of Collection 1995 208,750 35,000 -0- -0- -0- -0- 28,363
(2)(3)(4) 1996 208,750 26,000 264,600(6) -0- -0- -0- 27,196(5)
</TABLE>
(1) Effective February 1993, the Company entered into an employment
agreement with Mr. Kooper which provides Mr. Kooper a base salary of
$150,000 per annum. The agreement obliges Mr. Kooper to devote such time
as he deems necessary to perform his duties on behalf of the Company (but
in no event less than 120 days per year). Mr. Kooper continues to devote a
substantial amount of his time to the activities of Bernard Kooper Life
Agency Inc., Bernard Kooper Associates, Inc., Fischman-Kooper, Inc. and
other business activities during the year. In July 1994, the parties amended
the employment agreement, which amendment, among other things, extended
Mr. Kooper's term of employment an additional three years. Mr. Kooper's
employment agreement will now expire in February 2001.
(2) Effective February 1993, Arista entered into an employment
agreement with Mr. Mandel which provides Mr. Mandel a base salary of $208,750
per annum. In July 1994, the parties amended the employment agreement,
which amendment, among other things, extended Mr. Mandel's term of
employment an additional three years. Mr. Mandel's employment
agreement will now expire in February 2001. Mr. Mandel also is
entitled to annual reimbursements for automobile expenses of up to $9,000
and a non-accountable expense allowance of up to $5,000 per annum. Mr.
Mandel's employment agreement also provides that Arista shall obtain a
long-term disability benefits policy with benefits of $5,000 per month for
Mr. Mandel.
(3) Each of Mr. Kooper's and Mr. Mandel's employment agreements were
amended in July 1994 to provide for a split-dollar insurance policy in the
amount of $1,000,000 and $205,000, respectively. Under these agreements,
the Company and Arista will pay the premiums on these policies on behalf
of Mr. Kooper and Mr. Mandel for a period of time specified in each
agreement. The premium payments are treated as loans to both Mr. Kooper
and Mr. Mandel and are collateralized by the underlying policy cash
values. At December 31, 1996, loans aggregating $125,424 have been made
to Mr. Kooper and loans aggregating $42,948 have been made to Mr. Mandel.
At December 31, 1996, the cash surrender value of the insurance policy
owned by Mr. Kooper was approximately $108,158 and the cash surrender value
of the insurance policy owned by Mr. Mandel was approximately $39,779. In
the event that Mr. Kooper or Mr. Mandel shall be living on February 16,
2001, each of them will be entitled to a lump sum retirement benefit
equal to the amount of premiums paid by the Company or Arista, attributable
to the cumulative increase in the cash surrender value of the policies
during the period ending February 2001. The Company or Arista is required to
make a lump sum payment on behalf of Mr. Kooper or Mr. Mandel sufficient
to render their respective policy "paid up" upon (i) their death (if they
predecease their spouse), (ii) one year from a physical or mental
disability or (iii) a merger, consolidation, or sale of all or
substantially all of the assets of the
19
<PAGE>
Company or Arista, unless their employment has been terminated for "cause"
(as defined in the employment agreements).
(4) Each of Mr. Kooper's and Mr. Mandel's employment agreements provide
that in the event of a consolidation, merger, or sale of all or
substantially all of the assets of the Company or Arista, the employment
agreements may be terminated, and upon such termination, Mr. Kooper and/or
Mr. Mandel, respectively, would be entitled to receive a lump sum payout.
The payout will be the maximum amount that will not trigger the excise tax
payable in the event of an "excess parachute payment" as such term is
defined in the Internal Revenue Code of 1986, as amended. Based upon their
prior remuneration, it is estimated that the payout amounts which would
be due to each of Messrs. Kooper and Mandel upon termination of their
respective agreements would be approximately $845,000 and $945,000, as at
December 31, 1996, respectively.
(5) Other compensation includes: (a) insurance premiums paid in fiscal
1996 by, or on behalf of, the Company with respect to certain split dollar
life insurance policies as follows: (i) Bernard Kooper, $35,950 (Mr.
Kooper had taxable income in 1996 of $2,018 with regard to these premiums),
and (ii) Stanley S. Mandel, $11,313 (Mr. Mandel had taxable income in
1996 of $679 with regard to these premiums); (b) Stanley S. Mandel also
received automobile expenses of $8,250 and a non-accountable expenses of
$4,583 and (c) long-term disability premium payment of $3,050.
(6) Value realized upon the exercise of warrants (market value on the date
of exercise less exercise price).
STOCK OPTIONS
There were no options granted in fiscal 1996 and warrants and options
were exercised by Named Executive Officers in fiscal 1996. The following
table sets forth information concerning each exercise of warrants and
options during fiscal 1996 by each of the Named Executives at the fiscal
year-end and the value of unexercised options at the fiscal year-end:
20
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE OPTIONS/SAR EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Value of Unexercised
Shares Number of Unexercised In-the-Money
Acquired Option/SARs at Option/SARs at
on Value FY-End (#) FY-End($)
Exercise(#) Realized($)* Exercisable Unexercisable Exercisable Unexercisable
----------- ----------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Bernard Kooper 365,000 $492,750 -0- -0- -0- -0-
Stanley S. Mandel 196,000 $264,600 -0- -0- -0- -0-
</TABLE>
- -------------------------------------
*Based on the fair market value per share of the Company's Class A Common
Shares of $2.719 (the average of the "low ask" and "high bid" of the
Company's Class A Common Shares on the Nasdaq on December 31, 1996).
21
<PAGE>
COMPENSATION OF DIRECTORS
Directors of the Company are usually elected annually. Directors
of the Company and Arista who are not full-time employees of the Company or
Arista, were paid $1,125 per quarter for each Board on which the member
served. Directors of the Company and Arista who are not full-time
employees of the Company or Arista received $250 for each meeting actually
attended and $250 for each committee meeting actually attended.
Directors of Collection are not separately compensated. No attendance
fee for a committee meeting is paid if a Directors' meeting is held on the
same day.
In 1994, 1995 and 1996 the Company engaged a company owned by
Richard Farkas, a director of Arista and the Company, to perform certain
consulting services. Such consulting services were performed throughout
a two month period ended on May 23, 1994, a two month period ended on May
23, 1995 and a five month period ended on July 31, 1996. For such
consulting services, The Company paid this company $12,000 in 1994,
$12,000 in 1995 and $30,000 in 1996. See "Item 13 - Certain Transactions."
In July 1993, Arista entered into an agreement with Richard
Greenwald for specified services to be performed for a fee of $500 per
week. Mr. Greenwald became a director of Arista in October 1994.
Arista paid $26,000 under this Agreement in 1996. See "Item 13 -Certain
Transactions."
EMPLOYMENT CONTRACTS AND TERMINATIONS OF
EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
The Company's employment agreements with Mr. Bernard Kooper and Mr.
Stanley S. Mandel are described in the footnotes to the Summary
Compensation Table on pages 3 and 4 of this Part III.
22
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the twelve month period ended December 31, 1996, the
Compensation Committee consisted of Noah Fischman and J. Martin Feinman.
Effective March 28, 1996, Mr. Kooper resigned from the Compensation
Committee.
Mr. Fischman, a former Vice President of the Company, is a
Director of the Company, Arista, and Collection, is also a principal
shareholder of Fischman-Kooper, Inc. Mr. Kooper, President of the Company
and Chairman of the Boards of Directors of the Company, Arista, and
Collection, owns Bernard Kooper Life Agency, Inc., a general agent of
Arista. Mr. Kooper is also a principal shareholder of Fischman-Kooper,
Inc., an insurance broker. During the calendar years 1994, 1995 and
1996, Arista paid approximately $244,000, $224,000 and $223,000,
respectively, in gross commissions to Bernard Kooper Life Agency,
Inc. Such commissions relate to approximately 5.5%, 5.0% and 5.4% of
gross premiums earned by Arista during the years ended December 31, 1994,
1995, and 1996, respectively. Of these amounts, Bernard Kooper Life
Agency, Inc. paid approximately $177,000 in 1994, $143,000 in 1995, and
$159,000 in 1996 to brokers, including approximately $22,000 in 1994,
$23,000 in 1995 and $26,000 in 1996 to members of the Board of Directors
of Arista who are licensed insurance brokers. Furthermore, the
commissions paid to director/brokers include payments to
Fischman-Kooper, Inc. of approximately $17,000 in 1994, $18,000 in 1995
and $22,000 in 1996, and payments to Louis D. Krasner, Inc. of
approximately $5,000 in 1994, $4,000 in 1995, and $4,000 in 1996. Michael
B. Krasner, a Director of Arista, is the President of Louis D.
Krasner, Inc. Bernard Kooper Life Agency, Inc., Fischman-Kooper, Inc. and
Louis D. Krasner, Inc. are compensated on the same basis as Arista's other
general agents and brokers.
In addition, members of the Board of Directors of the Company
and Arista received commissions paid by third parties of approximately
$15,000 in 1994, $19,000 in 1995, and $25,000 in 1996, for the placement
of the Company's or Arista's life and health insurance coverage,
directors' and officers' liability insurance and fidelity bond and
casualty insurance coverage with other insurers. Furthermore,
such commissions paid to director/brokers include approximately
$11,000 in 1994, $11,000 in 1995 and $14,000 in 1996, paid to Noah Fischman
for the placement of the Company's or Arista's life, health and
long-term disability insurance coverages with other insurers;
approximately $4,000 in 1994, $6,000 in 1995 and $10,000 in 1996, paid
to Louis D. Krasner, Inc. for directors' and officers' liability
insurance, fidelity bond and casualty insurance coverages and
approximately $1,000 in 1995 and $1,000 in 1996 paid to Louis H. Saltzman
for life insurance coverages.
In June, 1996, the Company issued 365,000 shares of Class A
Common Stock ("Kooper Warrant Shares"), upon the exercise of a previously
granted warrant to purchase shares of Class A Common Stock at an exercise
price of $1.40 per share, to Bernard Kooper. The warrant was granted
to Mr. Kooper in June, 1986. As consideration for the issuance of the
Kooper Warrant Shares, Mr. Kooper delivered $11,000 in cash and a $500,000
principal amount interest-bearing promissory note (the "Kooper Note") to
the Company and granted the Company an option (the "Class B Repurchase
23
<PAGE>
Option") to acquire the 47,400 shares of Class B Common Stock owned by Mr.
Kooper. The Kooper Note bears interest at the rate of LIBOR plus 1 1/4% per
annum and matures on June 14, 2001. Interest payments are payable
quarterly on the last day of September, December, March and June.
Additionally, to secure the performance of his obligations under the
Kooper Note, Mr. Kooper pledged 365,000 shares of Class A Common Stock
owned by him to the Company. The Class B Repurchase Option, which expires
on June 14, 2001, has an exercise price equal to the cancellation of the
$500,000 outstanding under the Kooper Note plus delivery by the Company,
at its option, of either 47,400 shares of Class A Common Stock or the fair
market value of such shares to Mr. Kooper.
24
<PAGE>
ITEM 12. PRINCIPAL STOCKHOLDERS; SHARES HELD BY MANAGEMENT
On March 31, 1997, the Company had 2,570,100 Class A Common Shares
(excluding 10,000 shares of treasury stock) and 47,400 Class B Common
Shares issued and outstanding. The following table sets forth the
number of shares of the Company's common stock owned as of April 17, 1997
by (i) owners of more than 5% of the Company's outstanding common stock,
(ii) each director of the Company, (iii) each of the Named Executives,
and (iv) all executive officers and directors of the Company as a group.
Except as otherwise indicated, each person or entity named in the table
has sole investment power and sole voting power with respect to the shares
of the Company's common stock set forth opposite his name.
<TABLE>
<CAPTION>
Number of Shares of
Class A and Class B Percentage of Ownership (1)
Name and Address of Common Stock ---------------------------
Beneficial Owner Beneficially Owned Class A Class B Class A and Class B
- ------------------- ------------------- ------- ------- -------------------
<S> <C> <C> <C> <C>
Bernard Kooper (2)(4) 572,600 20.4% 100% 21.9%
116 John Street
New York, New York 10038
Stanley S. Mandel(3)(7) 105,400 4.1% -- 4.0%
116 John Street
New York, New York 10038
Louis H. Saltzman(4) 70,000 2.7% -- 2.7%
116 John Street
New York, New York 10038
Richard P. Farkas -- -- -- --
500 Route 36
Navesink, New Jersey 07752
Noah Fischman(5) 71,600 2.8% -- 2.7%
99 Powerhouse Road
Roslyn Heights, New York 11577
J. Martin Feinman(6) 51,200 2.0% -- 2.0%
270-07 E Grand Central Parkway
Floral Park, New York 11005
Daniel Glassman 38,600 1.5% -- 1.5%
4 Magnolia Lane
Woodbury, New York 11797
Dr. Keith E. Mandel(7) 178,400 6.9% -- 6.8%
3135 Katewood Court
Baltimore, MD 21209
Old Lyme Holding Corporation(8) 205,000 8.0% -- 7.8%
122 East 42nd Street
New York, NY 10168
All officers and directors 920,600 33.8% 100% 35.0%
as a group (8 persons)
(2)(3)(5)(6)
</TABLE>
________________________________________
Footnotes follow on next page.
25
<PAGE>
(1) Based upon 2,570,100 shares of Class A Common Stock outstanding
and 47,400 shares of Class B Common Stock outstanding. Includes
shares which said persons have the right to obtain beneficial
ownership of within sixty (60) days from the date hereof through the
exercise of outstanding options. Does not reflect 3,100 shares of
Class A Common Stock reserved for issuance pursuant to the 1986
Incentive Stock Option Plan ("1986 Plan").
(2) Includes 47,400 shares of Class B Common Stock owned by Bernard
Kooper, representing all of the issued and outstanding shares of
Class B Common Stock of the Company, and 30,400 shares of Class A
Common Stock owned by Arlyne Kooper, wife of Bernard Kooper.
Mr. Kooper has pledged 365,000 shares of Class A Common Stock to
secure his performance on an interest-bearing promissory note made
to the Company. See "Item 13 - Certain Transactions."
(3) Includes shares of Class A Common Stock held individually by
Stanley S. Mandel and in the various retirement accounts of Stanley
S. Mandel and Joy Mandel, wife of Stanley S. Mandel. Mr. Mandel
has pledged 17,600 shares of Class A Common Stock with a bank to
secure a loan made to his son, Dr. Keith E. Mandel.
(4) Bernard Kooper is the father-in-law of Louis Saltzman. Each
disclaims beneficial ownership of the securities of the Company
owned by the other.
(5) Includes 23,200 shares of Class A Common Stock owned by Barbara
Fischman, the wife of Noah Fischman.
(6) Includes 2,400 shares of Class A Common Stock owned by Carl
Feinman, the son of J. Martin Feinman, 2,400 shares of Class A
Common Stock owned by Lisa Feinman Baum, the daughter of J. Martin
Feinman, and 2,400 shares of Class A Common Stock owned by Jane
Feinman Kendes, the daughter of J. Martin Feinman. Mr. Feinman
disclaims beneficial ownership of the shares of Class A Common
Stock owned by his children.
(7) Dr. Keith E. Mandel is the son of Stanley S. Mandel. Each
disclaims beneficial ownership of the securities of the Company
owned by the other.
(8) According to the Schedule 13D, Amendment No. 1, dated April 4,
1995, filed by Old Lyme Holding Corporation on behalf of itself and
certain reporting persons.
26
<PAGE>
ITEM 13. CERTAIN TRANSACTIONS
Effective January 1, 1993, The Saltzman/Kooper Agency, Inc., a
life and health insurance agency controlled by Louis H. Saltzman, a
Director and the Secretary of the Company and Arista, and a Director of
Collection, orally entered into an arrangement with the Company to sublease
the space which was previously rented to Bernard Kooper Associates, Inc.
The sublease between the Company and The Saltzman/Kooper Agency, Inc. was
on similar terms as the Company's lease with its landlord, and The
Saltzman/Kooper Agency, Inc. was responsible for its proportionate share of
all rental charges. The arrangement terminated on May 31, 1995.
In 1994, 1995 and 1996 the Company engaged a company owned by
Richard Farkas, a director of Arista and the Company, to perform
consulting services with respect to proposed transactions and related
activities of the Company, including, but not limited to, evaluating
various business strategies. Such consulting services were performed
throughout a two month period ended on May 23, 1994, a two month period ended
on May 23, 1995 and a five month period ended on July 31, 1996. For such
consulting services, the Company paid this company $12,000 in 1994, $12,000
in 1995 and $30,000 in 1996.
In July 1993, Arista entered into an agreement with Richard
Greenwald for consulting services to be performed for a fee of $500 per
week. Mr. Greenwald has provided consulting services with respect to
proposed transactions and related activities of Arista, including, but
not limited to, identifying available books of business and negotiating the
terms of such acquisitions. Mr. Greenwald became a director of Arista in
October 1994. Arista paid $26,000 under this Agreement in 1995 and in 1996.
See "Compensation Committee Interlocks and Insider
Participation" for related transactions involving Bernard Kooper, Noah
Fischman, Louis Saltzman and Michael Krasner.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
-------------------------------------------------------
<TABLE>
<CAPTION>
(a)(1) and (2) Financial Statements and Financial Statement Schedules.
Page
----
I. Financial Statements of the Registrant F-1
II. Financial Statement Schedules
A. Schedule I - Summary of Investments-
Other Than Investments in Related
Parties S-1
B. Schedule II - Condensed Financial
Information of Registrant S-2
C. Schedule III - Supplemental Segment S-5
Information
D. Schedule IV - Reinsurance S-6
<S> <C>
Exhibit No. (a)(3) Exhibits.
----------- ----------------
3.1 -- Certificate of Incorporation of the Company (1)
3.2 -- By-Laws of the Company (1)
4.2 -- Form of Class A Common Stock Certificate (1)
4.5 -- Form of Class B Common Stock Certificate (1)
10.4 -- Incentive Stock Option Plan 1985, as supplemented (1)
10.5 -- Incentive Stock Option Plan 1986 (1)
10.6 -- Non-qualified Stock Option issued to Stanley S. Mandel (1)
10.7 -- Warrant issued to Bernard Kooper (1)
10.8 -- Lease between the Company and Hacienda Intercontinental
Realty, N.V. (1)
10.8.1 -- Lease dated November 29, 1990 between the Company
and Hacienda Intercontinental Realty, N.V. (2)
10.8.2 -- Letter dated December 7, 1992 from Williamson,
Picket & Gross, Inc. addressed to the Company,
incorporated by reference to Exhibit 10.8.2 to
the Company's Form 10-K for the year ended
December 31, 1992
10.9 -- Sublease between the Company and Arista (1)
10.9.1 -- Sublease dated January 1, 1991, between the Company and Arista (2)
10.11 -- Reinsurance Agreement with NRG Reinsurance
Company, as amended (1)
10.11.1 -- Amendment to Reinsurance Agreement with NRG Reinsurance Company,
dated July 16, 1990 (2)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
10.11.2 -- Reinsurance Agreement with NRG Reinsurance Company, dated January
29, 1993, incorporated by reference to Exhibit 10.11.2 to the
Company's Form 10-K for the year ended December 31, 1992
10.11.3 -- Reinsurance Agreement with NRG America Life Reassurance Corporation,
effective October 1, 1993, incorporated by reference to Exhibit
10.11.3 to the Company's 10-K for the year ended December 31, 1993
10.12 -- Agreement for Statutory Disability Benefits General Agents (1)
10.12(a) -- Rider to Statutory Disability Benefits General Agents Agreement (1)
10.14 -- Lease of Additional Space (Room 1101) between the Company and
Hacienda Intercontinental Realty, N.V.(1)
10.15 -- Agreement between Arista Insurance Company and American
International Life Assurance Company of New York (1)
10.16 -- Sublease (Room 1101) between the Company and Arista (1)
10.17 -- Lease of Additional Space (Room 1201) between the Company and
Hacienda Intercontinental Realty, N.V. (1)
10.18 -- Sublease (Room 1201) between the Company and Arista, incorporated by
reference to Exhibit No. 1 to the Company's 10-K for the year
ended December 31, 1988
10.19 -- Agreement between Arista and First International Life Insurance
Company, incorporated by reference to Exhibit No. 2 to the
Company's 10-K for the year ended December 31, 1988.
10.21 -- Statutory Disability Benefits Administration Agreement Effective as
of October 1, 1991, between Arista and The North Atlantic Life
Insurance Company, incorporated by reference to Exhibit 10.21 to
the Company's Form 10-K for the year ended December 31, 1992
10.22 -- Employment Agreement between the Company and Bernard Kooper, dated
February 17, 1993, incorporated by reference to Exhibit 10.22 to
the Company's 10-K for the year ended December 31, 1993
10.22.1 -- Amendment No. 1 to the Employment Agreement between Arista and
Bernard Kooper dated July 20, 1994 (3)
10.23 -- Employment Agreement between Arista and Stanley Mandel, dated
February 17, 1993, incorporated by reference to Exhibit 10.23 to
the Company's 10-K for the year ended December 31, 1993
10.23.1 -- Amendment No. 1 to the Employment Agreement between Arista and
Stanley Mandel, dated July 20, 1994 (3)
10.24 -- Consulting Agreement between Arista and International Management
Consultants, dated May 1, 1993,
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
incorporated by reference to Exhibit 10.24 to the Company's 10-K
for the year ended December 31, 1993
10.25 -- Split-Dollar Insurance Agreement between Arista Investors Corp.,
Arlyne Kooper and Bernard Kooper, dated July 20, 1994 (3)
10.26 -- Split-Dollar Insurance Agreement between Arista, Stanley Mandel and
Joy Mandel, dated July 20, 1994 (3)
10.28 -- Collateral Assignment, dated July 20, 1994 (Joy Mandel) (3)
10.29 -- Collateral Assignment, dated July 20, 1994 (Bernard Kooper and
Arlyne Kooper) (3)
10.30 -- Lease Agreement, dated January 9, 1995 between the Company and
Hacienda Intercontinental Realty, N.V. (3)
10.30.1 -- Letter dated March 12, 1996 from the Company addressed to
Williamson, Picket & Gross, Inc. (4)
10.30.2 -- Letter dated March 13, 1996 from Williamson, Picket & Gross, Inc.
addressed to the Company (4)
10.31 -- Assumption Reinsurance Treaty, dated April 1, 1994 between the
Company and Aetna Life Insurance Company (3)
10.32 -- Reinsurance Treaty, dated October 1, 1995, between Arista and
Cologne Life Reinsurance Company (4)
10.32.1 -- Surplus Note Agreement, dated December 29, 1995, between Arista and
Cologne Life Underwriting Management Company (4)
10.32.2 -- Warrant issued to Cologne Life Underwriting Management Company (4)
10.33 -- Lease (Storage space #7) effective January 1, 1996 between the
Company and Hacienda Intercontinental Realty, N.V. (4)
10.34 -- Sublease (Storage space #7) effective January 1, 1996 between the
Company and Arista (4)
10.35 -- Sublease effective June 1, 1995 between the Company and Arista (4)
10.36 -- Stock Purchase Agreement dated as of July 13, 1995 between Arista
and American Travellers Life Insurance Company (4)
10.37 -- Secured Promissory note, dated June 14, 1996, issued by Bernard
Kooper to Arista Investors Corp. in the aggregate principal amount
of $500,000 (5)
10.38 -- Pledge and Escrow Agreement, dated June 14, 1996, by and among
Bernard Kooper, as pledgor, Arista Investors Corp., as pledgee and
Morrison Cohen Singer & Weinstein, LLP, as escrow agent (5)
10.39 -- Letter Agreement, dated June 14, 1995, between Bernard Kooper and
Arista Investors Corp., granting Arista Investors Corp. an option
to acquire 47,000 shares of its Class B common stock, par value
$.01 per share (5)
10.40 -- Letter dated October 31, 1996, addressed to Williamson, Picket &
Gross, Inc. (6)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
10.41 -- Letter Agreement, dated December 11, 1996, terminating sublease
between the Company and Arista (Storage Space #5) (6)
21.1 -- List of Subsidiaries, incorporated by reference to Exhibit 21.1 to
the Company's 10-K for the year ended December 31, 1993
24.1 -- Powers of Attorney, incorporated by reference to Exhibit 25.1 to the
Company's Registration Statement on Form S-1 (File No. 33-20101),
dated February 11, 1988, as amended on May 6, 1988, declared
effective on May 16, 1988, and amended by Post-Effective Amendment
No. 1 dated April 27, 1989.
27 -- Financial Data Schedule
</TABLE>
31
<PAGE>
(1) Filed as same numbered Exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-20101) on February 11, 1988, as
amended on May 6, 1988, declared effective on May 16, 1988, and
amended by Post-Effective Amendment No. 1 dated April 27, 1989, and
incorporated herein by reference.
(2) Filed as same numbered Exhibit to the Company's Form 10-K for
the year ended December 31, 1990, and incorporated herein by
reference.
(3) Filed as same numbered Exhibit to the Company's Form 10-K for
the year ended December 31, 1994, and incorporated herein by
reference.
(4) Filed as same numbered Exhibit to the Company's Form 10-K for
the year ended December 31, 1995, and incorporated herein by
reference.
(5) Filed as the same numbered Exhibit to the Company's Form 10-Q
for the fiscal quarter ended June 30, 1996.
(6) Filed herewith.
(b) Reports on Form 8-K
None
32
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARISTA INVESTORS CORP.
By: /s/ Susan J. Hall
----------------------------------------
Dated: July 9 , 1997 Name: Susan J. Hall
Title: Senior Vice President and Treasurer
33
<PAGE>
ARISTA INVESTORS CORP.
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
PAGE
Independent Auditors' Reports F-2
Financial Statements of the Registrant:
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5 - F-6
Consolidated Statements of Changes in
Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-35
Financial Statement Schedules of the Registrant:
Schedule I - Summary of Investments - Other
Than Investments in Related Parties S-1
Schedule II - Condensed Financial Information of Registrant S-2-4
Schedule III - Supplemental Segment Information S-5
Schedule IV - Reinsurance S-6
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
Consolidated Financial Statements and notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Arista Investors Corp.:
We have audited the accompanying consolidated balance sheets of Arista
Investors Corp. as of December 31, 1996 and 1995 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arista Investors
Corp. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years ended December 31,
1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules on
pages S-1 to S-6 of this Form 10-K are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not a required part of
the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein.
Rosen Seymour Shapss Martin & Company
New York, New York
March 12, 1997
F-2
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
A S S E T S
1996 1995
---------- ----------
INVESTMENTS (Notes 2 and 13):
<S> <C> <C>
Held-to-maturity securities:
Bonds and long-term U.S. Treasury obligations,
at amortized cost (market value $2,650,210
in 1996 and $2,692,276 in 1995) $ 2,696,220 $ 2,654,939
Available-for-sale securities:
Redeemable preferred stocks, at market value
(amortized cost of $84,149 in 1996 and
$141,344 in 1995) 56,920 129,502
Trading securities, at market value (cost
of $1,279 in 1996) 319 660
---------- ---------
Total investments 2,753,459 2,785,101
CASH AND EQUIVALENTS (Note 13) 7,076,659 6,777,328
PREMIUMS RECEIVABLE, net (Notes 2 and 12) 4,304,200 5,131,705
DEFERRED POLICY ACQUISITION COSTS, net (Notes 2 and 8) 790,137 1,060,381
RECEIVABLES FROM RELATED PARTIES (Notes 4 and 8) 182,787 129,060
FURNITURE AND EQUIPMENT, at cost, net of accumulated
depreciation of $726,193 in 1996 and $661,552 in
1995 (Note 2) 138,552 193,549
PREPAID AND REFUNDABLE INCOME TAXES 757,548 765,877
OTHER ASSETS 1,106,908 797,054
---------- ---------
Total assets $17,110,250 $17,640,055
----------- -----------
----------- -----------
</TABLE>
(Continued)
F-3
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
---------- ----------
LIABILITIES:
<S> <C> <C>
Payable to reinsurer (Note 12) $ 93,121 $ 161,476
Unpaid claims liabilities (Notes 2, 5 and 12) 4,351,500 4,526,315
Unearned premiums (Notes 2 and 12) 1,397,380 1,328,210
Commissions payable (Notes 4 and 12) 766,575 942,478
Accounts payable and accrued expenses 1,160,765 772,969
Deferred income taxes, net (Notes 2 and 11) 78,329 622,427
Surplus note payable, net (Note 6) 2,865,000 2,850,000
--------- ---------
Total liabilities 10,712,670 11,203,875
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 8 and 12)
STOCKHOLDERS' EQUITY (Notes 6, 9 and 10):
Class A common stock, $.01 par value; 9,950,000 shares
authorized, 2,580,100 shares issued in 1996 and
1,940,600 in 1995 25,801 19,406
Class B convertible common stock, $.01 par value; 50,000
shares authorized, 47,400 shares issued and outstanding 474 474
Additional paid-in capital 5,839,609 4,193,354
Paid-in capital attributed to detachable warrant (Note 6) 150,000 150,000
Retained earnings 935,665 2,111,528
Net unrealized loss on investment securities (27,229) (11,842)
---------- ---------
6,924,320 6,462,920
Secured promissory note from shareholder (Note 4) (500,000) -
Cost of 10,000 shares Class A common stock
held in treasury (26,740) (26,740)
---------- ---------
Total stockholders' equity 6,397,580 6,436,180
---------- ---------
Total liabilities and stockholders' equity $17,110,250 $17,640,055
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE (Notes 2, 4, and 16):
Gross premiums earned $23,160,259 $26,091,714 $26,188,858
Ceded premiums earned (Note 12) 11,580,129 13,045,857 13,094,429
----------- ----------- -----------
Net premiums earned 11,580,130 13,045,857 13,094,429
Net realized investment losses (208) (137) (2,603)
Net unrealized investment loss (159) (358) (269)
Net Investment income (Note 13) 440,539 252,134 215,480
Other income 299,324 333,205 279,805
----------- ----------- -----------
Total revenue 12,319,626 13,630,701 13,586,842
----------- ----------- -----------
EXPENSES:
Underwriting:
Gross claims incurred (Note 2) 15,288,310 16,588,801 17,752,700
Ceded claims incurred (Note 12) 7,644,155 8,294,400 8,876,350
----------- ----------- -----------
Net claims incurred 7,644,155 8,294,401 8,876,350
----------- ----------- -----------
Gross commissions incurred (Note 4) 4,206,730 4,616,807 4,193,570
Ceded commissions incurred (Note 12) 3,559,620 4,447,545 3,956,192
----------- ----------- -----------
Net commissions incurred 647,110 169,262 237,378
----------- ----------- -----------
Total underwriting expenses 8,291,265 8,463,663 9,113,728
General and administrative expenses 4,920,536 5,015,558 4,794,201
----------- ----------- -----------
Total expenses before charge for
compensation expense resulting
from the exercise of options and
warrants 13,211,801 13,479,221 13,907,929
Compensation expense resulting from the
exercise of options and warrants (Note 18) 757,350 - -
----------- ----------- -----------
Total expenses 13,969,151 13,479,221 13,907,929
----------- ----------- -----------
Income (loss) from continuing
operations before income tax
provision (benefit) (1,649,525) 151,480 (321,087)
</TABLE>
(Continued)
F-5
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
PROVISION (BENEFIT) FOR INCOME TAXES (Note 11):
Provision for income taxes $ 81,176 $ 92,900 $ 126,900
Net operating loss benefit (554,838) - (206,858)
----------- ----------- -----------
Net provision (benefit) (473,662) 92,900 (79,958)
----------- ----------- -----------
Net income (loss) from
continuing operations (1,175,863) 58,580 (241,129)
----------- ----------- -----------
DISCONTINUED OPERATIONS:
Income from operations of disposed segment
(net of income taxes of $3,887) (Note 3) - 5,643 -
Gain on disposal of segment (net of income
taxes of $127,891) (Note 3) - 192,300 -
----------- ----------- -----------
- 197,943 -
----------- ----------- -----------
Net income (loss) $(1,175,863) $ 256,523 $ (241,129)
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) PER COMMON SHARE:
Primary:
Continuing operations (Note 18) $ (.45) $ 0.02 $ (0.11)
Discontinued operations - 0.09 -
----------- ----------- -----------
$ (.45) $ 0.11 $ (0.11)
----------- ----------- -----------
----------- ----------- -----------
Fully diluted:
Continuing operations (Note 18) $ (.45) $ 0.02 $ (0.11)
Discontinued operations - 0.08 -
----------- ----------- -----------
$ (.45) $ 0.10 $ (0.11)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Primary 2,617,500 2,251,400 2,229,900
--------- --------- ---------
--------- --------- ---------
Fully diluted 2,617,500 2,374,660 2,229,900
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK
-----------------------------------------------
CLASS A CONVERTIBLE CLASS B
---------------------- ------------------- SECURED
NUMBER PAR NUMBER PAR ADDITIONAL PROMISSORY
OF VALUE OF VALUE PAID-IN RETAINED NOTE
SHARES $.01 SHARES $.01 CAPITAL EARNINGS RECEIVABLE
--------- ------- ------- ------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1994 1,940,600 $19,406 47,400 $474 $4,193,354 $2,096,134 $
Net loss (241,129)
Net investment loss
--------- -------- ------- ----- ---------- ---------- ----------
Balance - December 31, 1994 1,940,600 19,406 47,400 474 4,193,354 1,855,005
Net income 256,523
Net investment gains
Issuance of surplus note
(Note 4)
--------- -------- ------- ----- ---------- ---------- ----------
Balance - December 31, 1995 1,940,600 19,406 47,400 474 4,193,354 2,111,528
Net loss (1,175,863)
Net investment loss
Issuance of shares of Class A
common stock under the
Incentive Stock Option Plan,
from a Warrant, and from a
Non-qualified Stock Option
(Notes 4 and 9) 639,500 6,395 1,646,255 (500,000)
--------- -------- ------- ----- ---------- ---------- ----------
Balance - December 31, 1996 2,580,100 $25,801 47,400 $474 $ 5,839,609 $ 935,665 $(500,000)
--------- -------- ------- ----- ---------- ---------- ----------
--------- -------- ------- ----- ---------- ---------- ----------
<CAPTION>
PAID-IN
CAPITAL CLASS A
ATTRIBUTED NET COMMON
TO UNREALIZED STOCK
DETACHABLE GAIN (LOSS) ON HELD IN
WARRANTS INVESTMENTS TREASURY TOTAL
------------- ----------- ---------- ---------
<C> <C> <C> <C>
Balance - January 1, 1994 $ $(14,863) $(26,740) $6,267,765
Net loss (241,129)
Net investment loss (15,415) (15,415)
----------- -------- -------- ----------
Balance - December 31, 1994 (30,278) (26,740) 6,011,221
Net income 256,523
Net investment gains 18,436 18,436
Issuance of surplus note
(Note 4) 150,000 150,000
----------- -------- -------- ----------
Balance - December 31, 1995 150,000 (11,842) (26,740) 6,436,180
Net loss (1,175,863)
Net investment loss (15,387) (15,387)
Issuance of shares of Class A
common stock under the
Incentive Stock Option Plan,
from a Warrant, and from a
Non-qualified Stock Option
(Notes 4 and 9) 1,152,650
----------- -------- -------- ----------
Balance - December 31, 1996 $150,000 $(27,229) $(26,740) $6,397,580
----------- -------- -------- ----------
----------- -------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,175,863) $ 256,523 $ (241,129)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 64,641 57,321 66,533
Amortization of deferred acquisition costs 332,633 323,202 266,833
Amortization of discount on surplus note 15,000 - -
Loss on sale of investments 208 137 -
Amortization of intangible assets - 248,957 189,865
Gain on sale of subsidiary - (320,192) -
Deferred income taxes (544,098) 343,385 (206,858)
Unrealized loss on trading securities 341 358 -
Compensation arising from exercise of
options and warrants 757,350 - -
(Increase) decrease in operating assets
excluding effects of divestiture:
Premiums receivable, net 827,505 1,196,795 161,250
Prepaid and refundable income taxes 8,329 51,412 (554,442)
Other assets (363,581) 9,026 (194,243)
Increase (decrease) in operating liabilities
excluding effects of divestiture:
Payable to reinsurer (68,355) 81,083 18,122
Unpaid claims liabilities (174,815) (395,131) 376,723
Unearned premiums 69,170 (30,155) 198,798
Commissions payable (175,903) (401,078) 878,907
Accounts payable and accrued expenses 387,796 (316,273) 453,072
---------- ---------- ----------
Net cash provided by (used in)
operating activities (39,642) 1,105,370 1,413,431
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Furniture and equipment acquired (9,644) (130,228) (29,801)
Proceeds from sale of securities 56,987 222,239 1,003,885
Purchases of securities (41,281) - (1,189,774)
Proceeds from sale of subsidiary - 764,675 -
Payments and costs associated with
acquired business (62,389) (588,595) (827,774)
Divestiture of subsidiary - (320,997) -
---------- ---------- ----------
Net cash used in investing activities (56,327) (52,906) (1,043,464)
---------- ---------- ----------
</TABLE>
(Continued)
F-8
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in surplus note payable (Note 6) $ - $ 3,000,000 $ -
Increase in note discount (Note 6) - (150,000) -
Proceeds attributed to stock warrants (Note 6) - 150,000 -
Issuance of Class A common stock 395,300 - -
---------- ----------- ----------
Net cash provided by financing
activities 395,300 3,000,000 -
---------- ----------- ----------
Net increase in cash and equivalents 299,331 4,052,464 369,967
---------- ----------- ----------
CASH AND EQUIVALENTS:
Beginning of year 6,777,328 2,724,864 2,354,897
---------- ----------- ----------
End of year $7,076,659 $ 6,777,328 $2,724,864
---------- ----------- ----------
---------- ----------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the year for:
Income taxes $ 296,847 $ 327,231 $ 495,366
---------- ----------- ----------
---------- ----------- ----------
Interest $ - $ - $ -
---------- ----------- ----------
---------- ----------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
The Company received a note and issued
Class A common stock as follows:
Secured promissory note from shareholder
(Note 4) $ (500,000) $ - $ -
Compensation expense (757,350) - -
Issuance of Class A common stock 1,652,650 - -
---------- ----------- ----------
Cash received $ 395,300 $ - $ -
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND NATURE OF BUSINESS
ORGANIZATION
Arista Investors Corp. (the "Company") was incorporated in the State
of New York on September 28, 1978 and reincorporated in the State of Delaware in
October 1986. The Company is principally a holding company with respect to its
wholly-owned subsidiaries, Arista Insurance Company ("Arista"), The Collection
Group, Inc. ("Collection") and Arista Administrative Services, Inc.
("Administrative"). Arista was incorporated in the State of New York on May 21,
1979, and was licensed on October 11, 1979 by the New York State Insurance
Department ("NYSID"). Arista's principal line of business is the writing of
disability insurance policies including super statutory and voluntary disability
benefits insurance, in New York State. Effective September 1, 1993 Arista
amended its charter and license and now has the authority to write glass
insurance as well as disability insurance. To date, Arista has not written any
glass insurance. Collection was incorporated in August 1989 and commenced
operations in July 1991. Collection's principal line of business is to provide
accounts receivable collection services to companies including Arista.
Effective December 31, 1991 Arista purchased all of the outstanding shares of
capital stock of American Accident and Health Insurance Company ("American")
(see Note 15). American was organized in April 1987 and licensed by the NYSID
on June 24, 1987, and is also authorized to write disability insurance. Arista
sold all of the outstanding shares of capital stock of American in December
1995, which had been inactive since its acquisition in 1991 (see Note 3).
Administrative is an inactive company.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles ("GAAP"). GAAP differs
from Statutory Accounting Principles ("SAP") used by insurance companies in
reporting to state regulatory and industry agencies as explained in Note 14.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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.
(Continued)
F-10
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Arista, Collection,
and Administrative. All significant intercompany balances and transactions have
been eliminated. Revenues and expenses for the year ended December 31, 1994
have been restated to exclude American which was disposed of during 1995 (see
Note 3).
REVENUE RECOGNITION, PREMIUMS RECEIVABLE AND CLAIMS LIABILITIES
Premium revenue is recognized evenly over the term of the policy.
Estimates of premiums which have been earned but not collected are accrued since
customers generally report and pay such premiums after the earning period based
on the number of employees on their payroll during the period of coverage.
Customer payrolls are sensitive to the general business cycle, and sudden
business upturns or downturns could have a significant impact on the revenues
the Company receives. Such estimates are continually reviewed and updated by
management, and any resulting adjustments are reflected in current operating
results.
Unearned premiums represent that portion of premiums applicable to the
unexpired terms of policies in force.
Third party administrative fees are recognized in the period in which
the subject premiums are collected and earned. Such fees are determined in
accordance with prescribed schedules based on the service performed.
Claims liabilities and claims adjustment expense accruals, which are
based on the estimated ultimate cost of settling claims, include estimates for
unreported claims and claims adjustment expenses based upon past experience,
modified for current trends. Such estimates are continually reviewed and
updated by management and any resulting adjustments are reflected in current
operating results.
REINSURANCE
In the normal course of business, the Company seeks to reduce the loss
that may arise from events that cause unfavorable underwriting results by
reinsuring risk with reinsurers. Amounts recoverable from reinsurer(s) for
commissions, losses or any other amount(s) due are deducted from ceded premiums
earned. Settlements are made quarterly by net cash payments to the
reinsurer(s).
(Continued)
F-11
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Depreciation expense for each of the years in the three-year period ended
December 31, 1996, was $64,641, $57,321 and $66,533, respectively.
INVESTMENTS
In 1993, the Company adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Investments" (see Note 13). Pursuant to the
requirements of SFAS 115, the Company determines the appropriate classification
of its investments in debt and equity securities at the time of purchase and
reevaluates such determination at each balance sheet date. Debt securities that
the Company has the positive intent and ability to hold to maturity are
classified as "held-to-maturity securities" and reported at amortized cost; debt
and equity securities that are bought and held principally for the purpose of
selling them in the near future are classified as "trading securities," and
reported at fair value, with unrealized gains and losses included in earnings;
debt and equity securities not classified as either held-to-maturity securities
or trading securities are classified as "available-for-sale securities" and
reported at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs include fees paid and certain other costs in
connection with acquiring new business. These costs are deferred and charged to
income over the future periods in which the related premiums are earned.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit
risk consist principally of premiums receivable and reinsurance contracts. The
Company grants credit terms to its customers in the normal course of business.
Credit risk with respect to these receivables is considered minimal due to the
Company's diverse customer base throughout the New York area. As part of its
ongoing control procedures, the Company monitors the creditworthiness of its
customers. Bad debts have been minimal.
(Continued)
F-12
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
Reinsurance contracts do not relieve the Company from its obligations
to policyholders. Failure of the reinsurer to honor its obligations could
result in losses to the Company. The Company evaluates the financial condition
of its reinsurer and monitors concentrations of credit risk arising from
activities to minimize its exposure to significant losses from reinsurer
default.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related fair values of financial instruments
at December 31, 1996 and 1995 are summarized as follows:
1996 1995
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Cash and equivalents $7,076,659 $7,076,659 $6,777,328 $6,777,328
Investments:
Held-to-maturity
securities 2,696,220 2,650,210 2,654,939 2,692,276
Available for sale
securities 56,920 56,920 129,502 129,502
Trading securities 319 319 660 660
Premiums receivable 4,304,200 4,304,200 5,131,705 5,131,705
Payable to reinsurer (93,121) (93,121) (161,476) (161,476)
Unpaid claims liabilities 4,351,500 4,351,500 4,526,315 4,526,315
Unearned premiums 1,397,380 1,397,380 1,328,210 1,328,210
Surplus note payable,
net (2,865,000) (3,000,000) (2,850,000) (3,000,000)
The methods and assumptions used to estimate the fair value of
financial instruments are as follows:
(i) The carrying amounts of cash and equivalents approximate their
fair value. Investments in available-for-sale securities and trading securities
are carried at their fair values based on quoted market prices. The fair values
of held-to-maturity securities are based on quoted market prices.
(ii) The carrying values of premiums receivable, amounts payable
to the reinsurer, unpaid claims liabilities and unearned premiums approximate
fair value because of their short-term maturities.
(Continued)
F-13
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(iii) The fair value of the surplus note payable is estimated
assuming the note will be repaid from free and divisible surplus of Arista in
the near term with the prior approval of the Superintendent of Insurance of the
State of New York.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income
tax return. Tax returns are prepared using Statutory Accounting Principles
("SAP") (see Note 14). Deferred income taxes reflect the future tax
consequences of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year-end (see Note 11).
NET INCOME PER SHARE OF COMMON STOCK
Primary and fully diluted income per share of common stock (Class A
and Class B) are computed on the weighted average number of shares of common
stock and common stock equivalents outstanding during each year. However,
common stock equivalents (incentive stock options and stock warrants) are not
included in the computation if their inclusion would have an anti-dilutive
effect on earnings per share.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of this statement, cash equivalents represent highly
liquid financial instruments with a maturity date of three months or less. At
December 31, 1996 cash equivalents represent certificates of deposits,
commercial paper, and money market accounts.
3. SALE OF SUBSIDIARY AND INSURANCE BUSINESS
SALE OF SUBSIDIARY
In December 1995, Arista sold its investment in its wholly-owned
subsidiary, American, excluding its book of insurance, for $764,675 in cash.
The sale resulted in a pretax gain of $320,192. American was an inactive
company (see Note 15). Except for the effects of the gain, the sale did not
have a significant impact on the Company's operating results.
(Continued)
F-14
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
4. TRANSACTIONS WITH RELATED PARTIES
AGENTS
Bernard Kooper ("Kooper"), Chairman of the Board of the Company and
Arista, and owner of 19.1% (1996) and 10.4% (1995) of the Company's outstanding
Class A and 100% of the Company's Class B common stock, is one of the general
agents under contract with Arista. Kooper's agency, Bernard Kooper Life Agency,
Inc. (the "Agency"), received approximately $223,000, $224,000 and $244,000, in
commissions from Arista during 1996, 1995 and 1994, respectively, for premiums
on policies placed by the Agency. Such premiums represented approximately 5.4%,
5.0% and 5.5% of the consolidated gross premiums earned during the years ended
December 31, 1996, 1995, and 1994, respectively. The Agency, in turn, paid
approximately $159,000, $143,000 and $177,000 during 1996, 1995 and 1994,
respectively, to other brokers, including approximately $26,000, $23,000 and
$22,000, respectively, to brokers who are members of the Board of Directors of
Arista. Commissions payable to the related agencies at December 31, 1996 and
1995 were $13,268 and $11,271, respectively.
EMPLOYMENT AGREEMENT
The Company has an employment agreement with Kooper which expires in
February 2001 and provides for annual compensation of $150,000 (see Notes 3 and
8a).
CONSULTING AGREEMENTS
Arista had a consulting agreement from May 1993 through September 1993
with an entity principally owned by a director of both Arista and the Company.
Arista paid $5,000 under this agreement in 1993 and the Company paid $30,000 in
1996, $12,000 in 1995, and $12,000 in 1994 to this entity. In July 1993 Arista
entered into an agreement with a consultant for specified services to be
performed for a fee of $500 per week. The consultant became a director of
Arista in October 1994. Arista paid $26,000 per year under this agreement in
1996 and 1995.
SECURED PROMISSORY NOTE
In June 1996 Kooper exercised a warrant granted in 1986 to acquire
365,000 shares of the Company's Class A common stock. In partial payment for
the shares, Kooper issued his secured promissory note (the "Note") to the
Company for $500,000. The Note bears interest at the one-year London Interbank
Offered Rate (LIBOR) plus 1.25% and is adjusted on the first day of every
October,
(Continued)
F-15
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
4. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
SECURED PROMISSORY NOTE (CONTINUED)
January, April and July commencing October 1, 1996. The terms of the Note
provide for quarterly payments of interest only at the above determined rate.
The principal balance outstanding and accrued but unpaid interest is due and
payable on June 14, 2001. The Note will be canceled and extinguished if the
Company exercises the option to obtain Kooper's 47,400 shares of Class B common
stock (Note 9). The Note is secured by the 365,000 shares of Class A common
stock.
5. UNPAID CLAIMS LIABILITIES
Unpaid claims liabilities include insured claims and claim adjustment
expenses. Changes in unpaid claims liabilities for the years ended December 31,
1996 and 1995 are summarized as follows:
1996 1995
----------- -----------
Balance at January 1 $ 4,526,316 $ 4,921,446
Less reinsurance recoverables 2,263,158 2,460,723
----------- -----------
Net claims liabilities 2,263,158 2,460,723
----------- -----------
Claims incurred:
Current year 15,007,646 16,565,377
Prior years 280,664 23,424
----------- -----------
Total claims incurred 15,288,310 16,588,801
----------- -----------
Claims paid:
Current year 10,656,146 12,039,061
Prior years 4,806,980 4,944,870
----------- -----------
Total claims paid 15,463,126 16,983,931
----------- -----------
Balance at December 31:
Net claims liabilities 2,175,750 2,263,158
Plus reinsurance recoverables 2,175,750 2,263,158
----------- -----------
Total liability $ 4,351,500 $ 4,526,316
----------- -----------
----------- -----------
(Continued)
F-16
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
6. SURPLUS NOTE AND WARRANT
On December 29, 1995 Arista issued a $3,000,000 surplus note (the
"Note") to The Cologne Life Underwriting Management Company ("CLUMCO") in
conjunction with an assumption reinsurance agreement which became effective
retroactive to October 1, 1995 (see Note 12). The Note bears interest at 10.5%
per annum and provides for interest only payable for the first and second year
with the principal to be repaid one-eighth each year from the third to the tenth
year, from the date of closing. Repayments of principal and interest can only
be made out of any free and divisible surplus of Arista, and are each subject to
the prior approval of the Superintendent of Insurance of the State of New York,
if in his judgment, the financial condition of Arista warrants such payments.
If the principal and interest are not repaid in full at the end of ten years,
the Note renews annually for additional one-year terms until the principal and
interest are repaid. Interest expense for the year ended December 31, 1996
totaled $315,000.
In connection with the issuance of the Note, and as an inducement to
enter into the transaction with Arista, the Company issued a warrant certificate
to purchase 150,000 shares (subject to adjustment for stock dividends or stock
splits and prepayment of the Note) of its Class A common stock to CLUMCO. The
certificate is exercisable after October 1996 at an exercise price of $3.50 per
share and expires in December 2005. The aggregate value of the warrant of
$150,000, based on an independent appraisal of $1.00 per underlying share, has
been reflected in stockholders' equity with the corresponding discount charged
to surplus note discount. The discount is being amortized to operations over
the option period of 10 years using the interest method. Amortization for the
year ended December 31, 1996 was $15,000.
In the event of liquidation of Arista, repayment of the balance of the
Note and accrued interest thereon shall be paid out of any assets remaining
after the payment of all policy obligations and all other liabilities, but
before distribution of assets to stockholders. In the event of a Corporate
Event (see Note 8), the balance of the Note and accrued interest thereon is to
be paid on demand prior to closing of such sale provided, however, that any such
payment or repayment shall be paid out of the free and divisible surplus of
Arista, and with the prior approval of the Superintendent of Insurance of the
State of New York, if in his judgment, the financial condition of such insurer
merits it.
(Continued)
F-17
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
7. LEASE COMMITMENTS
Pursuant to a sublease agreement between the Company and Arista, Arista
reimbursed the Company for 80.26% of the Company's lease obligations through May
31, 1995, and 97.90% thereafter. Under an agreement effective January 1, 1993,
the Company paid monthly rent at an annual base rate of $141,696 until a new
lease was executed. On January 9, 1995, the Company entered into a five-year
lease for its new principal executive office space, effective June 1, 1995. The
lease requires monthly base rental payments of $16,925 plus utilities and a
proportionate share of various operating expenses. The Company rents additional
storage space on a month-to-month basis.
The minimum rental commitments under the operating leases for office
space for the four-year period ending May 31, 2000 are as follows:
1997 $208,821
1998 218,635
1999 228,450
2000 96,892
-------
$752,798
--------
--------
The Company has the option to terminate the lease provided it notifies
the landlord ninety (90) days prior to the termination date, and reimburses the
landlord for the unamortized portion of the landlord's contribution of
approximately $200,000 for leasehold improvements in June 1995.
Under a separate sublease, the Company was reimbursed by The
Saltzman/Kooper Agency, Inc., an affiliate controlled by a director of the
Company, for a percentage (16.45%) of the lease costs. The sublease arrangement
expired May 31, 1995.
Consolidated rent expense, net of sublease income of approximately
$11,000 in 1995, was $252,171 in 1996, $205,080 in 1995 and $137,550 in 1994.
In December 1990 American entered into a five-year noncancellable lease
agreement which called for an effective annual base rent of $44,866 plus
utilities and cost of living adjustments. In December 1991 American abandoned
this space and entered into an agreement which would release it from future
obligations under the lease, if certain conditions specified in the agreement
were met. These conditions were not met. The financial statements have not
been adjusted for the effect of these events.
(Continued)
F-18
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES
(a) EMPLOYMENT AGREEMENTS
In July 1994, Arista entered into a five-year employment agreement
with a vice president which provides for annual compensation of $125,000, annual
reimbursement of automobile expenses up to $6,000 and a nonaccountable expense
allowance of up to $3,600 per annum. In addition, Arista may, but is not
obligated to, pay a year-end bonus as may be determined by the Board of
Directors of Arista. The agreement provides that in the event of termination of
the agreement by Arista, Arista would provide severance pay in an amount ranging
from 100% to 60% of annual compensation of the vice president. The agreement
also provides for a one-year covenant not to compete predicated upon the payment
of $75,000 by Arista.
Kooper and the Company have entered into an employment contract
(the "Kooper Agreement") which expires in February, 2001 and provides for an
annual base salary of $150,000.
Arista and Stanley Mandel have entered into an employment contract
(the "Mandel Agreement") which expires in February, 2001 and provides for an
annual base salary of $208,750 in each of the eight years plus annual
reimbursement of automobile expenses up to $9,000 and a nonaccountable expense
allowance of up to $5,000 per annum.
The Kooper and Mandel agreements provide that, in the event of a
consolidation, merger or sale of all or substantially all of the assets of the
Company or Arista (a "Corporate Event") the employment agreements will
terminate, and upon such termination, Kooper and Mandel shall each be entitled
to receive a lump sum payout. The payout would be the maximum amount that would
not trigger the excise tax payable in the event of an "excess parachute
payment," as such term is defined in the Internal Revenue Code of 1986, as
amended for the purpose of calculating the maximum parachute payment. In
addition, Arista and the Company have also provided split-dollar life insurance
policies in which both Kooper and Mandel participate. Under these agreements,
the Company and Arista will pay the premiums on these policies for a period of
time specified in each agreement, on behalf of Kooper and Mandel. The premium
payments are to be treated as loans to both Kooper and Mandel and are
collateralized by the underlying policy. Insurance loans to Kooper and Mandel
aggregated $168,372 and $123,806 at December 31, 1996 and 1995, respectively,
and are included in receivables from related parties in the accompanying balance
sheet. Additionally, Kooper and Mandel have the right to receive a lump sum
retirement benefit equal to the amount of premiums paid by Arista and the
Company attributable to the cumulative increase in cash value of the policies
during
(Continued)
F-19
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(a) EMPLOYMENT AGREEMENTS (CONTINUED)
the specified period of the policies. Each of Kooper's and Mandel's employment
agreements provides that, upon the occurrence of a Corporate Event, the Company
and Arista must pay to the insurance carrier such sums so as to render as "paid
up" the premiums for the split-dollar life insurance provided to each of Kooper
and Mandel under their respective employment agreements. At December 31, 1996
the estimated amount needed to render as paid up the premium is approximately
$165,000.
(b) UNINSURED RISK
At December 31, 1996 and 1995 cash and equivalents on deposit with
financial institutions exceeded federal deposit insurance coverage by
approximately $2,108,613 and $2,551,107, respectively.
(c) POLICY ACQUISITIONS
Arista incurred costs under various agreements it entered into to
acquire the right to offer New York State statutory disability benefits coverage
to former policyholders of other disability carriers. The costs included
professional fees and finder's fees as well as fees paid directly to the former
disability carriers for such rights which have been capitalized and are being
amortized on the straight-line basis over five to seven years. Such costs
amounted to $62,389 and $588,595 for the years ended December 31, 1996 and 1995,
respectively. Amortization of deferred acquisition costs charged to operations
for all acquisitions were $332,633, $323,202 and $266,833 for the years ended
December 31, 1996, 1995 and 1994, respectively. Accumulated amortization was
$1,540,746 and $1,205,751 at December 31, 1996 and 1995, respectively.
AMERICAN LIFE INSURANCE COMPANY OF NEW YORK. Effective July 1,
1993, Arista acquired the right to offer New York State statutory disability
benefits coverage to policyholders previously covered by The American Life
Insurance Company of New York under the terms of an assumption reinsurance
treaty dated August 30, 1993. In consideration for this right, Arista paid a
fee based on premiums earned and collected during the two-year period ended June
30, 1994. During 1995, Arista paid $14,383, and at December 31, 1995, $28 was
accrued under this arrangement.
(Continued)
F-20
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(c) POLICY ACQUISITIONS (CONTINUED)
NALIC AND AETNA. Effective January 1, 1994 Arista acquired the
entire book of New York State statutory disability benefit insurance previously
written by The North Atlantic Life Insurance Company of America ("NALIC") and on
April 1, 1994, acquired under the terms of an assumption reinsurance treaty
dated February 10, 1994, the entire book of New York State statutory
nonexperience-rated state cash sickness disability insurance previously written
by Aetna Life Insurance Company ("Aetna"). NALIC, with whom Arista, through
December 31, 1993, had a third party administrative agreement, received a fee
based on premiums paid and earned for the period January 1, 1994 through
December 31, 1994. During 1995 and 1994 Arista paid $23,712 and $32,826,
respectively, and at December 31, 1995, $924 was accrued under this arrangement.
Aetna received a fee based on annualized premiums in force at March 31, 1994 and
on premiums paid and earned for the period April 1, 1994 through March 31, 1995.
During 1996, 1995 and 1994 Arista paid $7,102, $241,951 and $527,425,
respectively, and at December 31, 1995, $7,102 was accrued under this
arrangement.
AMERICAN MEDICAL AND LIFE. Effective October 1, 1994, Arista
entered into an indemnity reinsurance agreement with American Medical and Life
Insurance Company ("American Med") dated December 29, 1994 wherein Arista
assumed the book of New York State statutory disability insurance that was
ceded by American Med. In addition, effective January 1, 1995, Arista, through
an assumption reinsurance treaty, acquired the book of New York State statutory
disability insurance that had been previously ceded by American Med. American
Med received a fee based on premiums paid which were earned during the year
ended September 30, 1994 and is receiving a fee based on premiums paid which
will be earned for the period January 1, 1995 through June 30, 1996. During
1996 and 1995 Arista paid acquisition costs of $170,831 and $121,850,
respectively, and at December 31, 1996 and 1995 $5,000 and $124,492,
respectively, was accrued under this arrangement.
COLOGNE LIFE REINSURANCE COMPANY. Effective October 1, 1995, in
conjunction with a Surplus Note Agreement between Arista and CLUMCO (see Note
6), Arista and Cologne Life Reinsurance Company ("The Cologne") entered into a
quota-share assumption reinsurance agreement under which Arista will cede to The
Cologne 50% of its New York State statutory disability insurance in force as of
October 1, 1995 as well as any new business written or acquired after October 1,
1995.
(Continued)
F-21
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(c) POLICY ACQUISITIONS (CONTINUED)
INSURANCE COMPANY OF GREATER NEW YORK AND GREATER NEW YORK MUTUAL
INSURANCE COMPANY. In April 1996 Arista entered into an agreement with the
Insurance Company of Greater New York and Greater New York Mutual Insurance
Company (the "Ceding Group") which provided that effective April 1, 1996, Arista
assumed the Ceding Group's New York State statutory disability business and
issued assumption certificates to the policyholders of the Ceding Group. The
agreement calls for Arista to pay a fee based on premiums received which will be
earned during the year ending March 31, 1997. The acquisition has been
accounted for under the purchase method of accounting. During 1996 Arista paid
acquisition costs of $62,325, and at December 31, 1996 $23,132 was receivable
from the Ceding Group under this arrangement.
(d) OTHER MATTERS
(1) Effective July 1, 1993, Arista entered into an agreement to
perform certain administrative services for The Guardian. Fees
for these services are determined in accordance with a prescribed
schedule based on the type of service provided. The agreement
will remain in effect until terminated by either party upon 180
days prior written notice.
(2) Effective January 1, 1995, Arista entered into an agreement to
perform certain administrative services for the United States
Life Insurance Company in the City of New York, a competitor in
the business of writing statutory disability benefits insurance.
Fees for these services are determined in accordance with a
prescribed schedule based on the type of service provided. The
agreement will remain in effect until terminated by either party
upon 180 days prior written notice.
(3) Effective April 1, 1995, the Company entered into an agreement to
perform certain administrative services for the American Bankers
Insurance Company of Florida. Fees for these services are
determined in accordance with a prescribed schedule based on the
type of service provided. The agreement will remain in effect
until terminated by either party upon 180 days prior written
notice.
(Continued)
F-22
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(d) OTHER MATTERS (CONTINUED)
(4) Effective March 1, 1996, Arista entered into an agreement to
perform certain administrative services for Hartford Life and
Accident Insurance Company's ("Hartford") Temporary Disability
Insurance ("TDI") policies. Fees for these services are
determined in accordance with a prescribed schedule based on the
type of service provided. The agreement will remain in effect
until terminated by either party upon 180 days prior written
notice.
(e) REINSURANCE
As discussed in Note 12, the Company is contingently liable with
respect to reinsurance ceded to The Cologne which would become a liability to
Arista in the event of default of The Cologne under the reinsurance agreements.
Effective April 1, 1994 Arista entered into a reinsurance agreement
with Allianz Life Insurance Company of North America ("Allianz") wherein Arista
assumed Hawaii's TDI group policies ceded by Allianz during 1994. This
agreement was terminated by Allianz on February 29, 1996. Reinsurance
transactions for the years ended December 31, 1996, 1995 and 1994 were as
follows:
GROSS CEDED NET
AMOUNT AMOUNT AMOUNT
------ ------ ------
1996
----
Premium receivable $ - $ - $ -
Claims liabilities $ - $ - $ -
Unearned premiums $ - $ - $ -
1995
----
Premium receivable $ 345,000 $ 172,500 $ 172,500
Claims liabilities $ 160,000 $ 80,000 $ 80,000
Unearned premiums $ 27,360 $ 13,680 $ 13,680
1994
----
Premium receivable $ 324,000 $ 162,000 $ 162,000
Claims liabilities $ 111,200 $ 55,600 $ 55,600
Unearned premiums $ - $ - $ -
(Continued)
F-23
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(e) REINSURANCE (CONTINUED)
Effective March 1, 1996 Arista ceded its entire assumption
reinsurance book of TDI to Hartford. Arista will receive a fee based on
collected and earned premiums generated by this book of business for each of the
next four years.
9. STOCK OPTIONS AND WARRANTS
Transactions involving stock options and warrants in each of the years
ended December 31, 1996, 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
INCENTIVE NON-QUALIFIED
STOCK OPTIONS STOCK OPTIONS WARRANTS
--------------------- ---------------------- ------------------------
AGGREGATE AGGREGATE AGGREGATE
SHARES AMOUNT SHARES AMOUNT SHARES(1) AMOUNT
-------- ---------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options and warrants
outstanding:
January 1, 1992 296,400 $467,098 17,600 $24,640 450,000 $919,000
1992 Expired - - - - (85,000) (408,000)
1992 Surrendered (1,000) (2,625) - - - -
------- -------- ------ ------- ------- --------
December 31, 1992, 1993
and 1994 295,400 464,473 17,600 24,640 365,000 511,000
1995 Issued (Note 6) - - - - 150,000 525,000
1995 Expired (10,000) (21,250) - - - -
------- -------- ------ ------- ------- --------
December 31, 1995 285,400 443,223 17,600 24,640 515,000 1,036,000
1996 Exercised (256,900) (359,660) (17,600) (24,640) (365,000) (511,000)
------- -------- ------ ------- ------- --------
December 31, 1996 28,500 $83,563 - $ - 150,000 $ 525,000
------- -------- ------ ------- ------- --------
------- -------- ------ ------- ------- --------
</TABLE>
(1) Warrants to purchase 365,000 shares of Class A common stock at an
exercise price of $1.40 per share were granted to Kooper in 1986.
Warrants to purchase 85,000 shares of Class A common stock at an
exercise price of $4.80 per share were granted to the underwriter
in connection with the IPO. Warrants to purchase 150,000 shares of
Class A common stock at an exercise price of $3.50 per share were
granted to CLUMCO in December 1995, in connection with the issuance
of a Surplus Note (see Note 6) and a new reinsurance agreement with
Arista (see Notes 8 and 12), October 1995. In June 1996 warrants
to purchase 365,000 shares and options to purchase 274,500 shares
of Class A common stock at $1.40 per share were exercised by
Kooper, Mandel, an officer of the Company, and two officers of
Arista.
There were no transactions during 1994 and 1993 with respect to
outstanding options and warrants.
(Continued)
F-24
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
1985 PLAN
The 1985 Incentive Stock Option Plan (the "1985 Plan") provides for
the grant of options, until May 14, 1995 (as amended), to purchase up to 200,000
shares of the Company's Class A common stock by key employees of the Company
upon terms and conditions determined by the Board of Directors of the Company
(the "Board"). Such options are exercisable over a five-year period, beginning
two years from the date of grant, subject to certain limited exceptions, at a
price not less than 100% of the fair market value at the time the option is
granted or, in the case of an incentive stock option granted to a stockholder
owning more than 10% of the shares of the Company's common stock at a price not
less than 110% of the fair market value at the date of grant. In June 1986, the
1985 Plan was amended to increase the exercise period to ten years in the case
of an incentive stock option granted to a stockholder owning less than 10% of
the Company's common stock, and to permit the exercise of options at the date of
grant. In June 1996 options to purchase 198,500 shares were exercised at $1.40
per share, resulting in additional compensation expense of $240,840 for the year
ended December 31, 1996.
1986 PLAN
The 1986 Incentive Stock Option Plan (the "1986 Plan") provides for
the grant of options, until November 15, 1997, to purchase up to 86,900 shares
of the Company's Class A common stock. In June 1996 options to purchase 58,400
shares were exercised at $1.40 per share. Ten thousand options granted on June
24, 1987 will expire on June 23, 1997, and 18,500 options granted on November
16, 1987 will expire on November 15, 1997. The 1986 Plan is similar in all
other respects to the 1985 Plan, as amended.
OTHER
During June 1986, the Board granted to Kooper a warrant to purchase
365,000 shares of Class A common stock at an exercise price of $1.40 per share,
exercisable over a ten-year period ending June 15, 1996. In connection
therewith, a non-qualified stock option previously granted to Kooper in 1978 was
surrendered. Also in June 1986, the Board granted to Mandel non-qualified
options to purchase 17,600 shares of Class A common stock at an exercise price
of $1.40 per share, exercisable within the ten-year period following the date of
grant. Such warrants and options were exercised in June. In December 1996,
certain qualified options were sold, which triggered income to seller and
additional compensation expense to the Company. Compensation expense aggregated
$757,350 in the year ended December 31, 1996.
(Continued)
F-25
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
OTHER (CONTINUED)
The Company granted CLUMCO a warrant exercisable commencing in October
1996, for the purchase of up to 150,000 shares of the Company's Class A common
stock at an exercise price of $3.50 per share, exercisable over a ten-year
period ending in December 2005, subject to certain conditions (see Note 6).
10. STOCKHOLDERS' EQUITY
All shares of Class A and Class B common stock issued have equal rights
and privileges except that the holder of Class B shares has the added right to
elect a majority of the Board. Additionally, the Class B common stock is
convertible at the option of the holder at any time, into an equal number of
shares of Class A common stock. All shares of Class B common stock
automatically convert into an equal number of shares of Class A common stock if
Kooper sells, transfers, or in any manner conveys, one or more shares of Class B
common stock, or upon his death, whichever is earlier.
In June 1996, Kooper and the Company entered into a letter agreement
under which the Company obtained an option to acquire the 47,400 issued and
outstanding shares of Class B common stock held by Kooper. The option is
exercisable by a vote of the majority of Class A directors and by delivering to
Kooper, at the Company's option, either 47,400 shares of Class A common stock,
or cash equal to the fair market value of 47,400 shares of Class A common stock
at the date of exercise plus the cancellation and extinguishment of his Note
(see Note 4) upon payment of all accrued but unpaid interest. The option
expires June 14, 2001 or terminates upon Kooper's death.
In November 1987, the Company purchased 10,000 shares of Class A common
stock at a cost of $26,740, which are being held in treasury.
At December 31, 1996 and 1995, 225,900 and 865,400 shares, respectively,
of Class A common stock were reserved for conversion of Class B common stock and
for the exercise of the options and warrants.
On March 9, 1994 Arista's Board authorized the payment of a dividend to
the Company in the amount of $215,945 and rescinded such authorization on June
14, 1994. In May 1994, as subsequently authorized by Arista's Board, Arista
paid a dividend of $224,799 to the Company. In April 1996, as authorized by
Arista's Board, Arista paid a dividend of $111,684 to the Company.
(Continued)
F-26
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
11. INCOME TAXES
At December 31, 1996 and 1995 deferred tax assets aggregated $1,334,331
and $1,025,739, respectively, and deferred tax liability aggregated $1,401,922
and $1,648,166, respectively, as follows:
1996 1995
---------- ----------
Deferred tax asset:
Commissions payable $281,713 $122,879
Investment in securities 9,832 59,933
Reinsurance 679,876 834,062
Other 3,499 8,865
NOL carryforward 554,838 -
---------- ----------
Total deferred tax asset 1,529,758 1,025,739
---------- ----------
Deferred tax liability:
Investment in securities - 4,026
Deferred acquisition costs 308,153 360,529
Claims liabilities 156,488 155,023
Reinsurance due 1,118,078 1,111,962
Other 25,368 16,626
---------- ----------
Total deferred tax liability 1,608,087 1,648,166
---------- ----------
Net deferred tax liability $ 78,329 $ 622,427
---------- ----------
---------- ----------
The following is a reconciliation of the statutory U.S. Federal income
tax rate to the effective tax rate as reflected in the accompanying consolidated
statements of operations:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ----------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
----------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes from
continuing operations $(1,649,525) $ 151,480 $(321,087)
----------- ---------- ---------
----------- ---------- ---------
Tax provision (benefit) at statutory rates $ (560,839) (34.0) $ 51,503 34.0 $(109,140) (34.0)
Increase (decrease) in income taxes
resulting from:
Discontinued operations - 131,778 87.0 - -
State franchise and local taxes, net
of federal benefit 46,615 2.8 41,397 27.3 43,175 13.4
Other 40,562 2.5 - - (13,995) (4.3)
----------- ------ --------- ---- --------- -----
Income tax provision (benefit) $ (473,662) (28.7) $ 224,678 148.3 $ (79,960) (24.9)
----------- ------ ---------- ----- --------- -----
----------- ------ ---------- ----- --------- -----
</TABLE>
(Continued)
F-27
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
11. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following at
December 31, 1996, 1995, and 1994:
1996 1995 1994
---------- ----------- ---------
Currently payable (benefit):
Federal $ - $ (208,709) $ -
State and local 70,436 90,000 126,900
---------- ----------- ---------
70,436 (118,709) 126,900
---------- ----------- ---------
Deferred tax asset:
January 1, (1,025,739) (11,476) (11,102)
December 31, (974,920) (1,025,739) (11,476)
---------- ----------- ---------
50,819 (1,014,263) (374)
---------- ----------- ---------
Deferred tax liability:
January 1, 1,648,166 290,516 290,142
December 31, 1,608,087 1,648,166 290,516
---------- ----------- ---------
(40,079) 1,357,650 374
---------- ----------- ---------
Net deferred tax 10,740 343,387 -
---------- ----------- ---------
81,176 224,678 126,900
Net operating loss benefit (554,838) - (206,858)
---------- ----------- ---------
Net income tax
provision (benefit) $ (473,662) $ 224,678 $ (79,958)
---------- ----------- ---------
---------- ----------- ---------
12. REINSURANCE
Effective October 1, 1993, Arista entered into a new agreement
("Agreement # 3") with Harbourton whereby Arista agreed to cede by way of
reinsurance, a 50% quota share of Arista's liability with respect to the
insurance business written to policyholders. In 1994 and 1995 Harbourton
received a fee based on premiums ceded. The agreement was terminated on
September 30, 1995.
(Continued)
F-28
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
12. REINSURANCE (CONTINUED)
Effective October 1, 1995, Arista entered into a reinsurance agreement
with The Cologne (see Notes 6 and 8) whereby Arista ceded by way of reinsurance,
a 50% quota share participation in Arista's insurance business, both for
policies in force as of October 1, 1995 and for all new insurance business
written or acquired on or after October 1, 1995. The agreement calls for Arista
to pay to The Cologne its proportionate share of the gross premium written less
a provisional ceding commission of 25%, which includes premium tax, less The
Cologne's proportionate share of the gross losses applicable to this business.
The provisional ceding commission will be adjusted quarterly. At December 31,
1996 and 1995, $88,260 and $111,783, respectively, was accrued by Arista under
this agreement. The Cologne will also allow Arista an annual profit commission
of 2% of annual gross earned premiums ceded to The Cologne if a certain loss
ratio is achieved. The agreement shall remain in force indefinitely, subject to
cancellation by The Cologne upon 90 days notice and subject to cancellation by
Arista five years after full repayment of the Surplus Note (Note 6) and upon 90
days prior notice.
Ceded transactions for the years ended December 31, 1996, 1995 and 1994
were as follows:
GROSS CEDED NET
AMOUNT AMOUNT AMOUNT
---------- ---------- ----------
1996
----
Premium receivable $4,304,200 $2,152,100 $2,152,100
Claims liabilities $4,351,500 $2,175,750 $2,175,750
Unearned premiums $1,397,380 $ 698,690 $ 698,690
Commissions payable $ 766,575 $ 722,340 $1,488,915
1995
----
Premium receivable $5,131,705 $2,565,852 $2,565,853
Claims liabilities $4,526,315 $2,263,157 $2,263,158
Unearned premiums $1,328,210 $ 664,105 $ 664,105
Commissions payable $ 942,478 $ 361,410 $1,303,888
1994
----
Premium receivable $6,328,500 $3,164,250 $3,164,250
Claims liabilities $4,921,446 $2,460,723 $2,460,723
Unearned premiums $1,358,365 $ 679,182 $ 679,183
Commissions payable $1,294,866 $ 24,345 $1,319,211
(Continued)
F-29
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
12. REINSURANCE (CONTINUED)
A contingent liability exists with respect to reinsurance ceded which
would become a liability of Arista and the Company in the event that The Cologne
is unable to meet the obligations assumed under the reinsurance agreement.
13. INVESTMENTS
Investments at December 31, 1996 and 1995 consisted of the following
types:
1996 1995
----------- -----------
Held-to-maturity securities $ 2,696,220 $ 2,654,939
Available-for-sale securities 56,920 129,502
Trading securities 319 660
----------- -----------
$ 2,753,459 $ 2,785,101
----------- -----------
----------- -----------
Trading securities are adjusted to fair value and carried in the
accompanying financial statements. The aggregate fair value, gross unrealized
holding gains, gross unrealized holding losses, and amortized cost for
available-for-sale and held-to-maturity securities by major security type at
December 31, 1996 and 1995 are as follows:
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
DECEMBER 31, 1996:
- -----------------
Redeemable preferred
securities $ 84,149 $ - $ 27,229 $ 56,920
-------- ---------- --------- --------
$ 84,149 $ - $ 27,229 $ 56,920
-------- ---------- --------- --------
-------- ---------- --------- --------
DECEMBER 31, 1995:
- -----------------
Redeemable preferred
securities $141,344 $ - $ 11,842 $129,502
-------- ---------- --------- --------
$141,344 $ - $ 11,842 $129,502
-------- ---------- --------- --------
-------- ---------- --------- --------
(Continued)
F-30
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
13. INVESTMENTS (CONTINUED)
HELD-TO-MATURITY SECURITIES
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
DECEMBER 31, 1996:
- -----------------
Corporate debt
securities $ 53,601 $ - $ 4,601 $ 49,000
U.S. Treasury
securities 2,642,619 9,959 51,368 2,601,210
---------- --------- -------- ----------
$2,696,220 $ 9,959 $ 55,969 $2,650,210
---------- --------- -------- ----------
---------- --------- -------- ----------
DECEMBER 31, 1995:
- -----------------
U.S. Treasury
securities $2,654,939 $ 37,337 $ - $2,692,276
---------- --------- -------- ----------
$2,654,939 $ 37,337 $ - $2,692,276
---------- --------- -------- ----------
---------- --------- -------- ----------
Securities with amortized costs (which approximate their fair value) of
$3,087,000 and $3,000,000 were reported as cash equivalents in 1996 and 1995,
respectively.
Arista maintains a custodial investment account pursuant to the
requirements of the NYSID. Net investment income for the years ended 1996,
1995 and 1994 consisted of the following:
1996 1995 1994
-------- -------- --------
Interest and dividends:
Bonds and long-term
investments $161,812 $174,156 $174,707
Short-term investments 258,391 77,978 40,773
-------- -------- --------
Total interest and
dividends 420,203 252,134 215,480
Interest on note receivable
from related party 20,336 - -
-------- -------- --------
Total investment
income $440,539 $252,134 $215,480
-------- -------- --------
-------- -------- --------
(Continued)
F-31
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
13. INVESTMENTS (CONTINUED)
Details of realized and unrealized gains and losses on investments for
the years ended December 31, 1996 and 1995 were as follows:
1996 1995
---- ----
REALIZED LOSSES
---------------
Redeemable preferred securities $(208) $ 137
----- ----
(208) 137
----- ----
UNREALIZED LOSSES
-----------------
Equity securities (159) (358)
----- ----
(159) (358)
----- ----
Net losses $(367) $(221)
----- -----
----- -----
The following schedule sets forth the respective maturity dates as at
December 31, 1996:
AVAILABLE-FOR-SALE SECURITIES
-----------------------------
AMORTIZED FAIR
COST VALUE
Due after one year through five years $84,149 $56,920
-------- -------
Total $84,149 $56,920
-------- -------
-------- -------
HELD-TO-MATURITY SECURITIES
---------------------------
AMORTIZED FAIR
COST VALUE
--------- ---------
Due in one year or less $ 125,018 $ 125,039
Due after one year through five years 1,576,407 1,551,827
Due after five years through ten years 941,194 924,344
Due after ten years 53,601 49,000
--------- -----------
Total $2,696,220 $ 2,650,210
---------- -----------
---------- -----------
(Continued)
F-32
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
14. STATUTORY MATTERS
The following summaries reconcile net stockholder's equity and net
income (loss) of Arista on the statutory basis of accounting ("SAP") with the
amount of such equity and net income (loss) included in the financial statements
of Arista prepared on the basis of generally accepted accounting principles for
each of the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Capital and surplus reported for SAP purposes $6,175,568 $6,432,629 $3,651,842
Add (deduct):
Inclusion of nonadmitted assets 1,956,065 1,872,086 1,430,554
Surplus notes payable (3,000,000) (3,000,000) -
Deferred costs, net of tax 205,689 441,221 194,776
Claims reserves, net of tax 509,495 559,193 433,848
Intangible assets, net - - 616,168
Unrealized depreciation on marketable securities (31,425) (16,038) (30,278)
Other, net of tax 18,427 70,330 209,094
Adjustment to premiums receivable, net of tax 533,443 533,443 (110,841)
Prior period tax over accrual (359,082) (360,883) (279,000)
Realized gain on investments, net of tax (27,720) (33,853) (24,998)
NOL carryforward 34,500 - -
---------- ---------- -----------
Stockholder's equity reported in
Arista's financial statements $6,014,960 $6,498,128 $6,091,165
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) reported for SAP purposes $ (61,398) $ 231,349 $ 159,502
Add (deduct):
Deferred costs, net of tax (235,532) 131,036 45,436
Other (51,902) (48,427) (8,098)
Claims reserves, net of tax (49,698) (20,922) 12,029
Adjustment to premiums receivable, net of tax - 504,752 (64,349)
Realized loss on investments, net of tax 6,133 - 4,055
Amortization of intangible asset, net of tax - (122,705) (7,318)
Gain on sale of subsidiary, net of tax - (76,404) -
Income tax expense differences 1,800 (210,152) 137,660
---------- ----------- ---------
Net income (loss) reported in Arista's
financial statements $ (390,597) $ 388,527 $ 278,917
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
(Continued)
F-33
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
14. STATUTORY MATTERS (CONTINUED)
Arista was in compliance with the NYSID minimum statutory capital and
surplus requirement of $300,000 at December 31, 1996, 1995 and 1994.
Under the New York State Insurance Law, Arista may pay dividends to the
Company only out of its statutory earned surplus. In addition, the maximum
amount of dividends that may be paid in any twelve-month period without
regulatory approval is the lesser of the adjusted net investment income or 10%
of its surplus. During 1996 Arista paid a dividend of $111,684. During 1994
Arista paid a dividend to the Company of $224,799.
15. BUSINESS ACQUISITION
STOCK PURCHASE AGREEMENT
On December 31, 1991, Arista entered into an agreement to acquire all
the outstanding shares of American. In December 1991 the NYSID approved the
assumption of American's disability business by Arista and approved the
acquisition of American in April 1992. The acquisition was accounted for as a
purchase. The purchase price was originally to consist of: (1) a $175,000 cash
payment; (2) a credit against the purchase price of $898,973, which represented
American's statutory negative capital and surplus balance as of December 31,
1991; and (3) an amount equal to 7-1/2% of earned premiums, as defined, on
American policies renewed or rewritten during the period commencing January 1,
1992 and ending December 31, 1993.
Arista had the right to make certain adjustments to the purchase price
for various income and expense items as mutually agreed upon. All payments due
under the agreement were to be held in escrow until the final purchase price was
determined, prior to October 15, 1994. Due to a shortfall in earned premiums
and certain agreed-upon adjustments to the purchase price no payments were due
to American. Expenses incurred by the Company in connection therewith were
capitalized as part of the purchase price, and were written off in connection
with the sale of American as discussed in Note 3.
Under the purchase method of accounting, the allocation of the
purchase price to the fair value of American's assets and liabilities is
required. Such allocation was finalized in 1994 when the purchase price was
finally determined. The excess of fair value of net assets acquired over the
purchase price of $216,740 was allocated to reduce the intangible asset. The
intangible asset was written off in 1995 in connection with the sale of American
(see Note 3). Amortization expense was $248,957 and $189,865, respectively, for
the years ended December 31, 1995 and 1994.
(Continued)
F-34
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
16. INDUSTRY SEGMENTS
The Company is engaged principally in the business of writing disability
insurance policies in New York State. In 1993 the Company amended the charter
and license of Arista to write glass insurance which is part of the property and
casualty line of business. The Company also provides third party administrative
services for other insurance companies, including competitor entities. Except
for disability insurance segment, all other segments of the Company are
insignificant. Revenues by segment for the years ended December 31, 1996, 1995
and 1994 was as follows:
1996 1995 1994
----------- ----------- -----------
Disability insurance $23,160,259 $26,091,714 $26,188,858
Property and casualty - - -
Third party administrative 260,664 204,367 160,248
----------- ----------- -----------
Total revenues $23,420,923 $26,296,081 $26,349,106
----------- ----------- -----------
----------- ----------- -----------
17. MAJOR CUSTOMER
For the year ended December 31, 1996, one group, the Federation of
Jewish Philanthropies, accounted for approximately 11% of Arista's revenue. No
other customer accounted for 10% or more of the Company's consolidated revenues
or Arista's revenues in the year ended December 31, 1996. For the years ended
December 31, 1994 and 1995, no one group accounted for 10% or more of Arista's
revenues, however, Arista underwrites the Insurance for two large groups with
combined earned premiums of approximately $4,496,000 in 1994 and $3,692,000 in
1995.
18. FOURTH QUARTER ADJUSTMENT
During the fourth quarter of 1996, the Company recorded a charge to
operations of $757,350 ($0.29 per share), representing compensation resulting
from the exercise of stock warrants and options by certain officers of the
Company and Arista.
F-35
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
AMOUNT
COST OR SHOWN IN
AMORTIZED MARKET THE BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ---------------------------------- ---------- ---------- ----------
HELD-TO-MATURITY SECURITIES:
- ---------------------------
United States Government and
government
agencies and authorities $2,642,618 $2,601,210 $2,642,618
Corporate debt securities 53,602 49,000 53,602
--------- ---------- ----------
Total 2,696,220 2,650,210 2,696,220
AVAILABLE FOR SALE:
- ------------------
Redeemable preferred stocks 84,149 56,920 56,920
TRADING SECURITY:
- ----------------
Common stock 1,279 319 319
---------- --------- ----------
$2,781,648 $2,707,449 $2,753,459
---------- ---------- ----------
---------- ---------- ----------
See independent auditors' report.
S-1
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31,
-----------------------------
1996 1995
------------ ----------
A S S E T S
Investment in subsidiaries $6,496,979 $7,051,662
Cash and equivalents 465,316 305,657
Prepaid expenses and other assets 119,258 128,015
Deferred tax asset 447,597 -
---------- ---------
Total assets $7,529,150 $7,485,334
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 310,593 $ 156,789
Due to subsidiaries, net 948,063 1,045,386
--------- ----------
Total liabilities 1,258,656 1,202,175
Stockholders' equity 6,270,494 6,283,159
--------- ----------
Total liabilities and stockholders'
equity $7,529,150 $7,485,334
---------- ----------
---------- ----------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Investment income $ 33,158 $ 17,883 $ 12,814
Corporate and administrative expenses 1,337,158 464,340 737,580
----------- ---------- ---------
Loss from operations before income tax
benefits and equity in net income (loss)
of subsidiaries (1,304,000) (446,457) (724,766)
Income tax expense (benefits) (693,367) 256,411 (204,720)
----------- ---------- ---------
Loss from operations before equity in
net income (loss) of subsidiaries (610,633) (702,868) (520,046)
Equity in net income (loss) of subsidiaries (565,230) 959,391 278,917
---------- ---------- ---------
Net income (loss) $(1,175,863) $ 256,523 $(241,129)
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes thereto of Arista Investors
Corp. at December 31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996.
(Continued)
S-2
<PAGE>
<TABLE>
<CAPTION>
ARISTA INVESTORS CORP.
SCHEDULE II - CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
----- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(1,175,863) $256,523 $(241,129)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation 1,629 1,039 450
Equity in net (income) loss of subsidiaries 565,230 (959,391) (278,917)
Compensation arising from exercise of options
and warrants 757,350 - -
Increase (decrease) in assets and liabilities:
Due to subsidiaries (97,323) 481,502 293,547
Prepaid expenses and other assets 7,128 215,838 (185,845)
Deferred tax asset (447,597) - -
Accounts payable and accrued expenses 153,804 (158,417) 284,578
---------- -------- ---------
Net cash used in operating activities (235,641) (162,906) (127,316)
---------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments, net - - (207,818)
Proceeds from sale of investments - 207,818 12,604
Dividend from subsidiary - - 224,799
---------- -------- ---------
Net cash provided by investing activities - 207,818 29,585
---------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class A common stock 395,300 - -
---------- -------- ---------
Net cash provided by financing activities 395,300 - -
---------- -------- ---------
Increase in cash and equivalents 159,659 44,912 (97,731)
CASH AND EQUIVALENTS:
Beginning of year 305,657 260,745 358,476
----------- -------- ---------
End of year $ 465,316 $305,657 $ 260,745
----------- -------- ---------
----------- -------- ---------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES:
The Company received a note and issued Class A
common stock as follows:
Secured promissory note receivable $ (500,000) $ - $ -
Compensation expense (757,350) - -
Issuance of Class A common stock 1,652,650 - -
----------- -------- ---------
Cash received $ 395,300 $ - $ -
----------- -------- ---------
----------- -------- ---------
</TABLE>
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes thereto of Arista Investors
Corp. at December 31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996.
(Continued)
S-3
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II - CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1996, 1995 AND 1994
1. BASIS OF PRESENTATION
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Condensed Financial Information of the Registrant does not
include all of the information and notes normally included with financial
statements prepared in accordance with generally accepted accounting
principles. It is therefore suggested that these condensed financial
statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report as
referenced in Form 10-K, Part II, Item 8, pages F-1 to F-35.
2. CASH DIVIDENDS FROM SUBSIDIARY
The following dividends were paid to the Company by its subsidiary, Arista
Insurance Company:
April 1996 $ 111,684
---------
---------
May 1994 $ 224,799
---------
---------
See independent auditors' report.
S-4
<PAGE>
<TABLE>
<CAPTION>
ARISTA INVESTORS CORP.
SCHEDULE III
SUPPLEMENTAL SEGMENT INFORMATION
DECEMBER 31, 1996
FUTURE
POLICY
BENEFITS, OTHER BENEFIT,
LOSSES, POLICY CLAIMS,
DEFERRED CLAIMS CLAIMS AND NET LOSSES AND
POLICY AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT
SEGMENT ACQUISITION EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- --------------------- ------------ ---------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Disability insurance $790,137 $4,351,500 $1,397,380 $ - $11,580,130 $440,539 $7,644,155
Property and casualty - - - - - - -
Third party administrative
service - - - - 260,664 - -
-------- ---------- ---------- ----------- ----------- -------- ----------
$790,137 $4,351,500 $1,397,380 $ - $11,840,794 $440,539 $7,644,155
-------- ---------- ---------- ----------- ----------- -------- ----------
-------- ---------- ---------- ----------- ----------- -------- ----------
<CAPTION>
AMORTIZATION
OF DEFERRED
POLICY OTHER
ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
COLUMN A COLUMN I COLUMN J COLUMN K
- --------------------- ----------- ---------- -----------
<S> <C> <C> <C>
Disability insurance $332,633 $ 5,992,363 $ 23,229,429
Property and casualty - - -
Third party administrative
service - - -
-------- ----------- ------------
$332,633 $ 5,992,363 $ 23,229,429
-------- ----------- ------------
-------- ----------- ------------
</TABLE>
See independent auditors' report.
S-5
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE IV
REINSURANCE
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES(1) COMPANIES AMOUNT TO NET
----------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Life insurance
in force $ - $ - $ - $ - -%
----------- ----------- --------- ----------- --------
----------- ----------- --------- ----------- --------
Premiums:
Life insurance $ - $ - $ - $ - -%
Accident and
health 23,160,259 11,580,129 - 11,580,130 -
Property and
liability - - - - -
Title insurance - - - - -
----------- ----------- --------- ----------- --------
$23,160,259 $11,580,129 $ - $11,580,130 -%
----------- ----------- --------- ----------- --------
----------- ----------- --------- ----------- --------
</TABLE>
(1) No amounts of reinsurance or coinsurance income have been netted against
premium ceded.
See independent auditors' report.
S-6
