<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended ............December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of 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 March 26,
1998 was $3,990,425.
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 March 26, 1998,
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
succeeded 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,
1997.
1995 1996 1997
---- ---- ----
Gross premiums earned $26,091,714 $23,160,258 $20,763,439
Ceded premiums earned 13,045,857 11,580,129 10,381,719
----------- ----------- -----------
Net premiums earned $13,045,857 $11,580,129 $10,381,720
----------- ----------- -----------
----------- ----------- -----------
Investment income $ 252,134 $440,540 $ 513,913
----------- ----------- -----------
----------- ----------- -----------
Realized investment gains
(losses) $ (137) $ (208) $ (2,519)
----------- ----------- -----------
----------- ----------- -----------
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, 1995, 1996 and 1997 were $165,801, $234,176 and $312,378 respectively.
During the three-year period ended December 31, 1997, Arista has entered
into the following arrangements to acquire books of New York State disability
insurance:
1. Effective January 1, 1995, Arista, through an assumption reinsurance
treaty, acquired the book of the Insurance that had been previously ceded by
American Medical and Life Insurance Company. Arista issued assumption
certificates to all such American Medical and Life Insurance Company
policyholders.
2. 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, 1997, no customer accounted for 10% or more
of the Company's consolidated gross revenues. For the year ended December 31,
1996, one group, the Federation of Jewish Philanthropies, accounted for
approximately 11% of Arista's consolidated
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revenue. Arista's relationship with the Federation of Jewish Philanthropies
terminated effective February 1998. For the year ended December 31, 1995, no
individual customer or group of related customers accounted for 10% or more of
Arista's consolidated revenue, however, during that year, Arista was the
underwriter for the Insurance for two large groups with combined earned premiums
of approximately $3,692,000 in 1995.
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
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. Effective as of January 1, 1998, in connection with Arista's
entering into a new reinsurance arrangement with The Guardian Life Insurance
Company, Arista terminated its reinsurance agreement with Cologne Life
Reinsurance Company. Pursuant to such termination, the existing $3,000,000
surplus note plus accrued interest will be repaid as soon as practicable,
subject to regulatory approval. 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. During 1997, the Company decided to
discontinue negotiations regarding this arrangement.
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 more than 350 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
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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 1997, based upon results as of December 31, 1996, Arista received a
rating of B (fair) 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 $16,588,801 in 1995,
$15,288,310 in 1996 and $12,212,694 in 1997.
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.
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% 60.6%
1997 58.8%* **
* Experience is based on estimated claim reserves including reinsurance assumed
at December 31, 1997.
** Fully developed loss information for 1997 will not be available until after
September 30, 1998.
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 a calendar year divided by the actual premiums earned
for that year.
REINSURANCE CEDED
Arista utilizes reinsurance principally 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
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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, 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 Harbourton Reinsurance, Inc. on 90 days prior written notice.
Effective October 1, 1995, Arista entered into an agreement with Cologne
Life Reinsurance Company ("Cologne") whereby Arista ceded 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 was cancelled by mutual consent of the parties effective
as of January 1, 1998.
Cologne had total assets of approximately $657,400,000 at December 31, 1997
and a Best's rating of A+ as of December 31, 1997. 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 had never exceeded approximately 1.2% of its gross
premiums received. (See Note 13 of the Consolidated Financial Statements.)
Arista entered into a quota share reinsurance treaty with The Guardian Life
Insurance Company of America ("The Guardian") effective as of January 1, 1998 ,
whereby Arista cedes by way of reinsurance a 50% participation in the Insurance,
both for business in force as of January 1, 1998 and for business written or
acquired after January 1, 1998. This agreement is subject to cancellation by
either party on ninety (90) days prior written notice. The Guardian had total
assets of approximately $12,102,000,000 at December 31, 1997, and a Best's
rating of A+ as of December 31, 1997.
REINSURANCE ASSUMED
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.
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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 reported. Arista establishes these
claim reserves based upon its prior experience. Gross claims liabilities were
$4,526,315, $4,351,500, and $3,391,950 at December 31, 1995, 1996, and 1997,
respectively.
Loss reserves are only estimates of what the insurer expects to pay on
claims, based on facts and circumstances then known. Although a degree of
variability is inherent in such estimates, management believes that the
liabilities for unpaid claims and related adjustment expenses are adequate. The
estimates are continually reviewed and adjusted as necessary, and such
adjustments are reflected in current operations.
The following table compares Arista's gross liability for unpaid losses,
LAE, and DBL assessments, at the end of each of the last five calendar years
compared to the gross amounts actually paid against these reserves for the last
five years (excluding 1997, for which the development is not yet completed).
Year Ended December 31,
------------------------------------------------
($ ,000)
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Estimated gross liability
for unpaid losses, LAE
reserves and DBL assessments $ 4,168 $ 4,921 $ 4,526 $ 4,351 $ 3,392
-------- -------- -------- -------- --------
--------
Gross amounts actually paid
against reserves:
One year later 4,587 4,807 4,561 3,277 (1)
Two years later - - - -
Three years later - - - -
Four years later - - - -
-------- -------- -------- --------
Redundancy (deficiency) (419) 114 (35) 1,074
-------- -------- -------- --------
Cumulative redundancy
(deficiency) $ (419) $ (305) $ (340) $ 734
-------- -------- -------- --------
-------- -------- -------- --------
(1) Development is not yet complete.
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COMPETITION
The writing of 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 insurance 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 the Insurance. 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 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, 1997, the Company had forty-three (43) employees, three
(3) of whom are part-time. 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, one (1) of whom works part time. 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 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, 1997:
Amount at
which is
Cost or shown in
amortized Market the balance
Type of Investment Cost Value Sheet
------------------ ---------- ---------- ----------
Investment Securities:
United States Treasuries $2,630,453 $2,632,904 $2,630,453
Equity Securities 31,803 9,335 9,335
---------- ---------- ----------
$2,662,256 $2,695,725 $2,639,788
---------- ---------- ----------
---------- ---------- ----------
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The following table summarizes the Company's investment results before
income taxes for the five years ended December 31, 1997:
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Net investment income $188,200 $215,480 $252,134 $440,540 $513,913
Net realized investment
gain (loss) $ 47,142 $ (2,603) $ (137) $ (208) $ (2,519)
Average annual yield on
total investments(1) 4.47% 5.54% 5.90% 5.69% 5.83%
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 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 and the examination was completed. A
preliminary report was issued on March 31, 1998.
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.
- -------------------------
(1) Calculated on the mean of total investments on the first and last day of
each quarter.
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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, Arista's
Board of Directors authorized the payment of a dividend to the Registrant in the
amount of $111,654. The dividend was paid on April 11, 1996. No dividends were
paid by Arista in 1995 and 1997.
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 Travelers Life Insurance Company for $764,675,
resulting in a pretax gain of $320,192.
ITEM 2. PROPERTY
The Registrant's, Arista's and The Collection Group, Inc.'s principal
executive offices are located at 116 John Street, New York, New York 10038. The
offices contain approximately 16,100 square feet. On January 9, 1995, effective
on or about June 1, 1995, the Company entered into a five year lease for its new
principal executive office space at an average rent over the term of the lease
of approximately $210,000 per year, exclusive of electricity.
The Company has the option to terminate the lease provided it notifies the
landlord ninety days prior to the termination date, and reimburses the landlord
for the unamortized portion of the landlord's contribution for leasehold
improvements which was approximately $100,000 at December 31, 1997.
The Saltzman/Kooper Agency, Inc., a life and health insurance agency owned
by Louis H. Saltzman, a director and the Secretary of the Registrant and Arista,
and a director of The Collection Group, Inc., occupied adjacent premises
pursuant to a sublease with the Company whereby The Saltzman/Kooper Agency, Inc.
was responsible for 16.45% of all rental charges. The sublease between the
Company and The Saltzman/Kooper Agency, Inc. was on similar terms as the
Company's lease with its landlord. The arrangement terminated on May 31, 1995.
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ITEM 3. LEGAL PROCEEDINGS
Although the Company is involved in some routine litigation incidental to
the business of the Company, the Company is not a party to any litigation which
it considers will have a material adverse effect on its business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) The Company's Class A Common Stock is traded in the over-the-counter
market. Since 1987, the Company's Class A Common Stock has been quoted on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
under the symbol "ARINA". The following table sets forth the range of bid
prices for the Class A Common Stock during the periods indicated, and represents
inter-dealer prices, which do not include retail mark-ups and mark-downs, or any
commission to the broker-dealer, and may not necessarily represent actual
transactions.
For the Period Ended December 31, 1996
--------------------------------------
Class A
Quarter Range Common Stock
------- ----- ------------
First High $2 1/8
Low $2 1/8
Second High $2 1/2
Low $2 1/8
Third High $2 1/2
Low $2 1/2
Fourth High $2 1/2
Low $2
For the Period Ended December 31, 1997
--------------------------------------
Class A
Quarter Range Common Stock
------- ----- ------------
First High $2 9/16
Low $2 1/2
Second High $2 7/16
Low $2 3/8
Third High $2 3/8
Low $2 1/8
Fourth High $2 5/32
Low $1 7/8
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(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS:
The number of holders, including individual participants in security
position listings of registered clearing agencies, as of December 1997, was
approximately 360.
Approximate Number of
Title of Class Record Holders (1)
-------------- ---------------------
Class A Common Stock, $.01 par value 54
Class B Common Stock, $.01 par value 1
- ----------------------------
(1) Information is as of March 26 , 1998.
(c) The Registrant has paid no dividends since its inception and does not
plan to pay dividends in the foreseeable future. See "Regulation".
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 15 to the accompanying Consolidated Financial Statements.)
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ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------
Statement of operations data:
Revenue:
<S> <C> <C> <C> <C> <C>
Gross earned premiums $ 20,763 $ 23,160 $ 26,092 $ 26,189 $ 24,219
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Net earned premiums $ 10,382 $ 11,580 $ 13,046 $ 13,094 $ 21,329
Investment income 514 440 252 215 182
Realized and unrealized investment
gains (losses) (3) - - (3) 47
Other income 358 299 333 280 130
Expenses:
Net underwriting expenses (6,075) (8,291) (8,464) (9,113) (16,979)
General and administrative expenses (4,683) (5,678) (5,016) (4,794) (3,728)
------ ------ ------ ------ ------
Income (loss) from continuing operations
before provision for income taxes 493 (1,650) 151 (321) 981
--- ------ --- ---- ---
Provision for income taxes and tax benefit
of net operating loss carryforward:
Provision for income taxes 393 81 92 127 541
Tax benefit of net operating
loss carryforward - (555) - (207) -
--- ---- -- ---- ---
Net provision (benefit) 393 (474) 92 (80) 541
--- ---- -- --- ---
Net income (loss) from continuing
operations 100 (1,176) 59 (241) 440
--- ------ -- ---- ---
Discontinued operations:
Income from operations of disposed
segment (net of taxes of $3) - - 6 - 2
Gain on disposal of segment (net of
income taxes of $128) - - 192 - -
- - --- - -
Net income from discontinued operations - - 198 - 2
- - --- - -
Net income (loss) $ 100 $ (1,176) $ 257 $ (241) $ 442
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Per common share:
Basic:
Income (loss) from continuing operations $ .04 $ (.51) $ 0.03 $ (0.12) $ 0.22
Income from discontinued operations $ - $ - $ 0.10 $ - $ -
Diluted:
Income (loss) from continuing operations $ .04 $ (.51) $ 0.02 $ (0.12) $ 0.20
Income from discontinued operations $ - $ - $ 0.09 $ - $ -
Weighted average number of common shares:
Basic 2,617,500 2,297,750 1,978,000 1,978,000 1,978,000
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Diluted 2,617,500 2,297,750 2,279,287 1,978,000 2,254,147
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Balance sheet data:
Short-term investments $ - $ - $ - $ 208 $ 726
Cash and equivalents 8,297 7,077 6,777 2,725 2,355
Premiums receivable 2,979 4,304 5,131 6,328 6,652
Total assets 17,033 17,110 17,640 15,083 10,457
Payable to reinsurer 159 93 161 80 62
Claims liabilities 3,392 4,351 4,526 4,921 4,168
Unearned premiums 1,465 1,397 1,328 1,358 960
Commissions payable 730 766 942 1,343 880
Total stockholders' equity 6,503 6,397 6,436 6,011 6,268
</TABLE>
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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, 1997 VS. DECEMBER 31, 1996
The Company's net income for the year 1997 was approximately $100,000
($0.04 per share), as compared with a net loss of approximately $1,176,000
(approximately $0.51 per share) for 1996. The profit, before provision for
income taxes, was approximately $493,000 in 1997, as compared with a loss before
provision for income taxes of approximately $1,650,000 for 1996. The Company's
loss in 1996 included approximately $757,000 attributable to additional
compensation expenses incurred from the exercise of warrants and options during
that year. The current operations for the year 1997 included a reduction in
gross claims liabilities of approximately $960,000, or 4.6% of gross premiums
earned.
Arista's gross premiums earned for the year 1997 were approximately $20.8
million as compared with approximately $23.2 million for 1996. This decrease
was due to Arista's continued net loss of covered lives and policyholders. The
continuing net loss in covered lives is a function of increased competition for
experience-rated groups and a lower competitive rate structure for
non-experience-rated groups. Arista expects this trend to continue.
Arista's gross claims incurred for 1997 were approximately $12.2 million or
58.8% of gross premiums earned. For the year 1996, gross claims incurred were
approximately $15.3 million, representing 66.0% of gross premiums earned. Gross
claims incurred includes claim reserves for unpaid losses, unpaid loss
adjustment expenses and required assessments. Unpaid loss reserves are only
estimates of what the insurer expects to pay on claims, based on facts and
circumstances then known. A degree of variability is inherent in such
estimates. The estimates are continually reviewed and adjusted as necessary,
and such adjustments are reflected in current operations.
Consolidated investment income for 1997 was approximately $514,000,
representing an increase of approximately $73,000, due mainly to a small
increase in the Company's average annual yield on total investments. In
addition, Arista had insignificant net realized and unrealized investment losses
for 1997 and 1996.
15
<PAGE>
Income from Third Party Administration services was approximately $351,000
in 1997, as compared to approximately $260,000 for 1996. Other income was
approximately $7,000 in 1997, as compared to approximately $39,000 for 1996.
Arista's gross commissions incurred for 1997 were approximately $3.9
million as compared with approximately $4.2 million for 1996.
The consolidated general and administrative expenses for the years 1997 and
1996 were approximately $4.7 million and $5.7 million, respectively. This
decrease was due principally to the additional compensation expenses incurred in
1996 from the exercise of warrants and options of approximately $757,000.
YEAR-ENDED DECEMBER 31, 1996 VS. DECEMBER 31, 1995
The Company's net loss for the year 1996 was approximately $1,176,000
(approximately $0.51 per share, as restated) compared with a net income of
approximately $59,000 from continuing operations (approximately $0.02 per share,
diluted) in 1995. The loss, before income tax (benefit) for 1996, was
approximately $1,650,000 compared with a profit before provision for income
taxes and tax benefit, of approximately $151,000 in 1995. The Company's
operating loss in 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 was 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 unrealized
investment losses in 1996 and 1995.
Income from Third Party Administrative services was approximately $260,000
in 1996, as compared to approximately $204,000 in 1995. Other income was
approximately $39,000 in 1996, as compared to approximately $129,000 in 1995.
16
<PAGE>
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 $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 increases and
professional fees of approximately $220,000 and interest on the surplus note of
$330,000.
LIQUIDITY AND CAPITAL RESOURCES
Retained earnings increased from $935,665 at December 31, 1996 to
$1,035,985 at December 31, 1997 as a result of the Company's increase in
operating profits.
At present, management considers Arista's statutory capital and surplus of
approximately $6.2 million at December 31, 1997 sufficient to support its
current annual premium level, as well as providing capacity for additional
annual premiums. Pursuant to the termination of Arista's reinsurance agreement
with Cologne Life Reinsurance Company, the existing $3,000,000 surplus note,
plus accrued interest, will be repaid as soon as practicable, subject to
regulatory approval.
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, Arista's Board
of Directors authorized the payment of a dividend to the Registrant in the
amount of $111,654. The dividend was paid on April 11, 1996. No dividends were
paid by Arista in 1997 and 1995. 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-7.
17
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
18
<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:
Director of
the Company
Name Age Position Since
- ---- --- -------- -----------
Bernard Kooper* 72 Chairman of the Boards of Directors 1978
of the Company, Arista, and Collection,
and President of the Company
Stanley S. Mandel** 63 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* 47 Secretary and Director of the 1981
Company and Arista, and Director
of Collection
Richard P. Farkas** 73 Director of the Company and Arista 1991
J. Martin Feinman** 73 Director of the Company, Arista, and 1978
Collection, and Secretary of Collection
Noah Fischman* 66 Director of the Company, Arista, and 1978
Collection
Daniel Glassman* 69 Director of the Company and Arista 1994
* Elected by the Class B Stockholder
** Elected by the Class A Stockholders
19
<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. and Chairman of the Board of Directors of
Kingsbrook Jewish Medical Center.
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 Manhasset, New York. Since January
1989, he served as President and sole stockholder of The Saltzman/Kooper Agency,
Inc., a life, 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, Waterchef, Inc. and Ta Lenman, Inc.
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, Mr. Feinman served as President of Olde England Paint and Varnish
Corporation, a distributor of paint products, located in Brooklyn, New York.
20
<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, Mr. Fischman 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 $100,000 for the Company's last
fiscal year (the "Named Executives"):
21
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
------------------------------
Annual Compensation Awards Payouts
-------------------------------------------- -------------------- ------------------------
Name and Other Restricted All Other
Principal Annual Stock Options/ LTIP Compensation
Position Year Salary($) Bonus($) Compensation($) Awards($) SARS(#) Payouts($) ($)(3)(4)
- -------- ---- --------- -------- --------------- --------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bernard Kooper -
Chairman of the Boards of
Directors of the Company, 1995 150,000 35,000 -0- -0- -0- -0- 35,950
Arista and Collection and 1996 150,000 10,000 492,750(6) -0- -0- -0- 35,950
President of the Company 1997 150,000 35,000 -0- -0- -0- -0- 35,950(5)
(1)(3)(4)
Stanley S. Mandel - Executive 1995 208,750 35,000 -0- -0- -0- -0- 28,363
Vice President and a Director 1996 208,750 26,000 264,600(6) -0- -0- -0- 27,196
of the Company, President 1997 208,750 61,000 63,428(7) -0- -0- -0- 28,363(5)
and a Director of Arista and a
Director of Collection(2)(3)(4)
</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, Mr. Kooper's employment agreement was amended, 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, Mr. Mandel's employment agreement was amended, 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, 1997, loans aggregating
$159,077 have been made to Mr. Kooper and loans aggregating $53,486 have been
made to Mr. Mandel. At December 31, 1997, the cash surrender value of the
insurance policy owned by Mr. Kooper was approximately $147,104 and the cash
surrender value of the insurance policy owned by Mr. Mandel was approximately
$53,400.
22
<PAGE>
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 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 $862,000 and
$995,000, as at December 31, 1997, respectively.
(5) Other compensation includes: (a) insurance premiums paid in fiscal 1997 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 1997 of $2,297 with regard to these premiums), and (ii) Stanley S. Mandel,
$11,313 (Mr. Mandel had taxable income in 1997 of $775 with regard to these
premiums); (b) Stanley S. Mandel also received automobile expenses of $9,000 and
a non-accountable expenses of $5,000 and (c) long-term disability premium
payment of $3,050.
(6) Amount realized upon the exercise of warrants (market value on the date of
exercise less exercise price).
(7) Amount realized upon sale of unused vacation time.
STOCK OPTIONS
There were no options granted in fiscal 1997 and there were no warrants and
options exercised by Named Executive Officers in fiscal 1997.
23
<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 Directors' 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 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, 1995 and, a five month period ended on July 31, 1996. For such
consulting services, the Company paid Mr. Farkas' company $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 and 1997. 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 21 and 22 of this Part III.
24
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the twelve month period ended December 31, 1997, the Compensation
Committee consisted of Noah Fischman and J. Martin Feinman.
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 1995, 1996 and 1997, Arista paid approximately $224,000, $223,000 and
$227,000, respectively, in gross commissions to Bernard Kooper Life Agency, Inc.
Such commissions relate to premiums which were approximately 5.0%, 5.4% and 6.1%
of gross premiums earned by Arista during the years ended December 31, 1995,
1996, and 1997, respectively. Of these amounts, Bernard Kooper Life Agency,
Inc. paid approximately $143,000 in 1995, $159,000 in 1996 and $131,000 in 1997
to brokers, including approximately $23,000 in 1995, $26,000 in 1996 and $26,000
in 1997 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$18,000 in 1995,
$22,000 in 1996, and $21,000 in 1997 and payments to Louis D. Krasner, Inc. of
approximately $4,000 in 1995, $4,000 in 1996 and $5,000 in 1997. 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 to the commissions described in the preceding paragraph,
members of the Board of Directors of the Company and Arista received commissions
paid by third parties of approximately $19,000 in 1995, $25,000 in 1996 and
$24,000 in 1997 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 1995,
$14,000 in 1996 and $14,000 in 1997, 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 $6,000 in 1995, $10,000 in 1996 and
$9,000 in 1997, paid to Louis D. Krasner, Inc. for directors' and officers'
liability insurance, fidelity bond and casualty insurance coverages and
approximately $1,000 in 1995, $1,000 in 1996 and $1,000 in 1997 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 Option") to acquire the 47,400 shares of Class
B Common Stock owned by Mr. Kooper. The
25
<PAGE>
Kooper Note bears interest at the rate of LIBOR plus 11/4% per annum and matures
on June 14, 2001. Interest payments are payable quarterly on the last day of
September, December, March and June. As of December 31, 1997, $9,137, interest
was due for the fourth quarter of 1997, which amount was paid in January 1998.
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.
26
<PAGE>
ITEM 12. PRINCIPAL STOCKHOLDERS; SHARES HELD BY MANAGEMENT
On March 26, 1998, 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 March 20, 1998 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
Keith E. Mandel, M.D.(7) 178,400 6.9% -- 6.8%
401 East Ontario St.
Apt. 1903
Chicago, Ill 60611
Old Lyme Holding Corporation(8) 205,000 8.0% -- 7.8%
122 East 42nd Street
New York, NY 10168
All officers and directors 910,500 33.6% 100% 34.8%
as a group (8 persons)
(2)(3)(5)(6)
- -----------------------------------
Footnotes follow on next page.
</TABLE>
27
<PAGE>
(1) Based upon 2,570,100 shares of Class A Common Stock outstanding and 47,400
shares of Class B Common Stock outstanding.
(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.
28
<PAGE>
ITEM 13. CERTAIN TRANSACTIONS
In 1995, 1996 and 1997 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, 1995 and a five month period ended on July 31, 1996. For such consulting
services, the Company paid this company $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 1996 and 1997.
In 1997, Arista made salary advances to Stanley Mandel, Executive Vice
President and a Director of the Company and President and a Director of Arista.
The largest aggregate amount of these advances during the fiscal year ended
December 31, 1997 was $222,750 at December 29, 1997. The aggregate balance of
these salary advances was $216,750 at March 31, 1998. These salary advances
are non-interest bearing.
See "Compensation Committee Interlocks and Insider Participation" for
related transactions involving Bernard Kooper, Noah Fischman, Louis Saltzman
and Michael Krasner.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
PAGE
I. Financial Statements of the Registrant F-1
II. Financial Statement Schedules F-37
A. Schedule I - Summary of Investments-
Other Than Investments in Related
Parties S-1
B. Schedule II - Condensed Financial
Information of Registrant S-2-5
C. Schedule III - Supplemental Segment S-6
Information
D. Schedule IV - Reinsurance S-7
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)
30
<PAGE>
Exhibit No.
-----------
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, incorporated
31
<PAGE>
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 Travelers 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)
32
<PAGE>
10.41 -- Letter Agreement, dated December 11, 1996, terminating sublease
between the Company and Arista (Storage Space #5) (6)
10.42 -- Quota Share Reinsurance Treaty between the Company and The
Guardian Life Insurance Company of America, effective as of
January 1, 1998.
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
33
<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 as same numbered Exhibit to the Company's Form 10-K for the year
ended December 31, 1996, and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None
34
<PAGE>
ARISTA INVESTORS CORP.
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
Page
----
Independent Auditors' Report F-2
Financial Statements of the Registrant:
Consolidated Balance Sheets F-3-4
Consolidated Statements of Operations F-5-6
Consolidated Statements of Changes in
Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8-9
Notes to Consolidated Financial Statements F-10-37
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-2-5
Schedule III - Supplemental Segment Information S-6
Schedule IV - Reinsurance S-7
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>
[LETTERHEAD OF ROSEN SEYMOUR SHAPSS MARTIN & COMPANY LLP]
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, 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-7 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.
/s/ Rosen Seymour Shapss Martin & Company LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 13, 1998
F-2
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
A S S E T S
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
INVESTMENTS (Notes 2 and 14):
Held-to-maturity securities:
Bonds and long-term U.S. Treasury obligations,
at amortized cost (market value $2,632,904
in 1997 and $2,650,210 in 1996) $ 2,630,453 $ 2,696,220
Available-for-sale securities:
Redeemable preferred stocks, at market value
(amortized cost of $31,524 in 1997 and
$84,149 in 1996) 9,250 56,920
Trading securities, at market value (cost of $279, in 1997
and $1,279 in 1996) 85 319
----------- -----------
Total investments 2,639,788 2,753,459
CASH AND EQUIVALENTS (Notes 2 and 14) 8,296,943 7,076,659
PREMIUMS RECEIVABLE (Notes 2 and 13) 2,978,600 4,304,200
DEFERRED POLICY ACQUISITION COSTS, net (Notes 2 and 8) 484,398 790,137
RECEIVABLES FROM RELATED PARTIES (Notes 4 and 8) 443,182 182,787
FURNITURE AND EQUIPMENT, at cost, net of accumulated
depreciation of $783,799 in 1997 and $726,193 in
1996 (Note 2) 113,663 138,552
PREPAID AND REFUNDABLE INCOME TAXES 710,050 757,548
OTHER ASSETS 1,366,572 1,106,908
----------- -----------
Total assets $17,033,196 $17,110,250
----------- -----------
----------- -----------
</TABLE>
(Continued)
F-3
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES:
Payable to reinsurer (Note 13) $ 158,721 $ 93,121
Claims liabilities (Notes 2, 5 and 13) 3,391,950 4,351,500
Unearned premiums (Notes 2 and 13) 1,464,800 1,397,380
Commissions payable (Notes 4 and 13) 729,912 766,575
Accounts payable and accrued expenses 1,627,187 1,160,765
Deferred income taxes, net (Notes 2 and 11) 277,771 78,329
Surplus note payable, net (Note 6) 2,880,000 2,865,000
----------- -----------
Total liabilities 10,530,341 10,712,670
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 8 and 13)
STOCKHOLDERS' EQUITY (Notes 6, 9 and 10):
Class A common stock, $.01 par value; 9,950,000 shares
authorized, 2,580,100 shares issued 25,801 25,801
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 5,839,609
Paid-in capital attributed to detachable warrant (Note 6) 150,000 150,000
Retained earnings 1,035,985 935,665
Net unrealized investment loss (22,274) (27,229)
----------- -----------
7,029,595 6,924,320
Secured promissory note from shareholder (Note 4) (500,000) (500,000)
Cost of 10,000 shares Class A common stock
held in treasury (26,740) (26,740)
----------- -----------
Total stockholders' equity 6,502,855 6,397,580
----------- -----------
Total liabilities and stockholders' equity $17,033,196 $17,110,250
----------- -----------
----------- -----------
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE (Notes 2, 4, and 17):
Gross earned premiums $ 20,763,439 $ 23,160,259 $ 26,091,714
Ceded earned premiums (Notes 13 and 20) 10,381,719 11,580,129 13,045,857
------------ ------------ ------------
Net earned premiums 10,381,720 11,580,130 13,045,857
Third party administrative services (Note 8d) 351,346 260,664 204,367
Net realized and unrealized investment
losses (Note 14) (2,713) (367) (495)
Net investment income (Note 14) 513,913 440,539 252,134
Other income 7,087 38,660 128,838
------------ ------------ ------------
Total revenue 11,251,353 12,319,626 13,630,701
------------ ------------ ------------
EXPENSES:
Underwriting:
Gross claims incurred (Note 2) 12,212,694 15,288,310 16,588,801
Ceded claims incurred (Note 13) 6,106,347 7,644,155 8,294,400
------------ ------------ ------------
Net claims incurred 6,106,347 7,644,155 8,294,401
------------ ------------ ------------
Gross commissions incurred (Note 4) 3,907,264 4,206,730 4,616,807
Ceded commissions incurred (Note 13) 3,937,966 3,559,620 4,447,545
------------ ------------ ------------
Net commissions incurred (earned) (30,702) 647,110 169,262
------------ ------------ ------------
Total underwriting expenses 6,075,645 8,291,265 8,463,663
General and administrative expenses 4,682,640 4,920,536 5,015,558
------------ ------------ ------------
Total expenses before charge for
compensation expense resulting
from the exercise of options and
warrants 10,758,285 13,211,801 13,479,221
Compensation expense resulting from the
exercise of options and warrants (Note 19) - 757,350 -
------------ ------------ ------------
Total expenses 10,758,285 13,969,151 13,479,221
------------ ------------ ------------
Income (loss) from continuing
operations before income tax
provision (benefit) 493,068 (1,649,525) 151,480
(Continued)
F-5
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
PROVISION (BENEFIT) FOR INCOME TAXES (Note 11):
Provision for income taxes $ 392,748 $ 81,176 $ 92,900
Net operating loss benefit - (554,838) -
------------ ------------ ------------
Net provision (benefit) 392,748 (473,662) 92,900
------------ ------------ ------------
Income (loss) from continuing
operations 100,320 (1,175,863) 58,580
------------ ------------ ------------
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) $ 100,320 $ (1,175,863) $ 256,523
------------ ------------ ------------
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Continuing operations (Notes 12 and 19) $ .04 $ (.51) $ 0.03
Discontinued operations - - 0.10
------------ ------------ ------------
Net income (loss) $ .04 $ (.51) $ 0.13
------------ ------------ ------------
------------ ------------ ------------
Diluted:
Continuing operations (Notes 12 and 19) $ .04 $ (.51) $ 0.02
Discontinued operations - - 0.09
------------ ------------ ------------
Net income (loss) $ .04 $ (.51) $ 0.11
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic (Note 14) 2,617,500 2,297,750 1,978,000
------------ ------------ ------------
------------ ------------ ------------
Diluted (Note 14) 2,617,500 2,297,750 2,279,287
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------- Paid-in
Class A Convertible Class B capital
--------------------- ------------------- attributed
Number Par Number Par Additional to
of value of value paid-in detachable
shares $.01 shares $.01 capital warrants
------ ---- ------ ---- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1995 1,940,600 $ 19,406 47,400 $ 474 $ 4,193,354 $ -
Net income - - - - - -
Net investment gains - - - - - -
Issuance of surplus note (Note 6) - - - - - 150,000
--------- -------- ------ ----- ----------- ---------
Balance - December 31, 1995 1,940,600 19,406 47,400 474 4,193,354 150,000
Net loss - - - - - -
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 -
--------- -------- ------ ----- ----------- ---------
Balance - December 31, 1996 2,580,100 25,801 47,400 474 5,839,609 150,000
Net income - - - - - -
Net investment gain - - - - - -
--------- -------- ------ ----- ----------- ---------
Balance - December 31, 1997 2,580,100 $ 25,801 47,400 $ 474 $ 5,839,609 $ 150,000
--------- -------- ------ ----- ----------- ---------
--------- -------- ------ ----- ----------- ---------
<CAPTION>
Net Class A
unrealized Secured common
gain (loss) promissory stock
Retained on note held in
earnings investments receivable treasury Total
-------- ----------- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance B January 1, 1995 $ 1,855,005 $ (30,278) $ - $ (26,740) $ 6,011,221
Net income 256,523 - - - 256,523
Net investment gains - 18,436 - - 18,436
Issuance of surplus note (Note 6) - - - - 150,000
------------- --------- ---------- --------- ------------
Balance B December 31, 1995 2,111,528 (11,842) - (26,740) 6,436,180
Net loss (1,175,863) - - - (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) - - (500,000) - 1,152,650
------------- --------- ---------- --------- ------------
Balance - December 31, 1996 935,665 (27,229) (500,000) (26,740) 6,397,580
Net income 100,320 - - - 100,320
Net investment gain - 4,955 - - 4,955
------------- --------- ---------- --------- ------------
Balance - December 31, 1997 $ 1,035,985 $ (22,274) $ (500,000) $ (26,740) $ 6,502,855
------------- --------- ---------- --------- ------------
------------- --------- ---------- --------- ------------
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 100,320 $(1,175,863) $ 256,523
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 57,606 64,641 57,321
Amortization of deferred acquisition costs 319,775 332,633 323,202
Amortization of discount on surplus note 15,000 15,000 -
Loss on sale of investments 2,519 208 137
Amortization of intangible assets - - 248,957
Gain on sale of subsidiary - - (320,192)
Deferred income taxes 199,442 (544,098) 343,385
Unrealized loss on trading securities 194 341 358
Compensation arising from exercise of
options and warrants - 757,350 -
(Increase) decrease in operating assets
excluding effects of divestiture:
Premiums receivable 1,325,600 827,505 1,196,795
Prepaid and refundable income taxes 47,498 8,329 51,412
Receivable from related parties (260,395) (53,727) (50,145)
Other assets (259,664) (309,854) 59,171
Increase (decrease) in operating liabilities
excluding effects of divestiture:
Payable to reinsurer 65,600 (68,355) 81,083
Claims liabilities (959,550) (174,815) (395,131)
Unearned premiums 67,420 69,170 (30,155)
Commissions payable (36,663) (175,903) (401,078)
Accounts payable and accrued expenses 466,422 387,796 (316,273)
------------ ----------- -----------
Net cash provided by (used in)
operating activities 1,151,124 (39,642) 1,105,370
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Furniture and equipment acquired (32,717) (9,644) (130,228)
Proceeds from sale of investments 225,146 56,987 222,239
Purchases of investments (109,233) (41,281) -
Proceeds from sale of subsidiary - - 764,675
Payments and costs associated with
acquired business (14,036) (62,389) (588,595)
Divestiture of subsidiary - - (320,997)
------------ ----------- -----------
Net cash provided by (used in)
investing activities 69,160 (56,327) (52,906)
------------ ----------- -----------
(Continued)
F-8
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ----------- -----------
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 1,220,284 299,331 4,052,464
------------ ----------- -----------
CASH AND EQUIVALENTS:
Beginning of year 7,076,659 6,777,328 2,724,864
------------ ----------- -----------
End of year $ 8,296,943 $ 7,076,659 $ 6,777,328
------------ ----------- -----------
------------ ----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the year for:
Income taxes $ 305,725 $ 296,847 $ 327,231
------------ ----------- -----------
------------ ----------- -----------
Interest $ 36,009 $ - $ -
------------ ----------- -----------
------------ ----------- -----------
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, 1997, 1996 AND 1995
1. ORGANIZATION AND NATURE OF BUSINESS
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 16).
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 15.
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, 1997, 1996 AND 1995
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.
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 or from the reinsurer (see Notes 13 and 20).
(Continued)
F-11
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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, 1997, was $57,606, $64,641 and $57,321,
respectively.
INVESTMENTS
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. Amortization periods range from five to seven years.
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, 1997, 1996 AND 1995
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, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Cash and equivalents $ 8,296,943 $ 8,296,943 $ 7,076,659 $ 7,076,659
Investments:
Held-to-maturity securities 2,630,453 2,632,904 2,696,220 2,650,210
Available for sale securities 9,250 9,250 56,920 56,920
Trading securities 85 85 319 319
Premiums receivable 2,978,600 2,978,600 4,304,200 4,304,200
Payable to reinsurer 158,721 158,721 93,121 93,121
Unpaid claims liabilities 3,391,950 3,391,950 4,351,500 4,351,500
Unearned premiums 1,464,800 1,464,800 1,397,380 1,397,380
Surplus note payable, net 2,880,000 3,000,000 2,865,000 3,000,000
Receivable from related party 443,182 443,182 182,787 182,787
</TABLE>
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, 1997, 1996 AND 1995
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 15). 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 (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per common share (Class A
and B) have been computed in accordance with FASB Statement No. 128 (SFAS 128),
"Earnings Per Share." Basic earnings per share (basic EPS) is computed by
dividing net income (loss) by the weighted-average number of common shares
outstanding during the year. Diluted earnings per share (diluted EPS) is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the year plus the incremental shares that would have
been outstanding upon the assumed exercise of dilutive stock options and
warrants.
Pursuant to the requirements of SFAS 128, basic EPS and
diluted EPS for the years ended December 31, 1996 and 1995 have been restated
to conform to the method used in 1997 (see Note 12).
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash equivalents
represent highly liquid financial instruments with a maturity date of three
months or less. At December 31, 1997 and 1996 cash and cash equivalents
include certificates of deposits, commercial paper, and money market accounts
as follows:
1997 1996
---------------- ----------------
Cash in bank $ 2,683,620 $ 2,230,519
Money market accounts 1,396,236 1,446,499
Commercial paper 3,992,528 3,087,829
Certificates of deposit 224,559 311,812
---------------- ----------------
$ 8,296,943 $ 7,076,659
---------------- ----------------
---------------- ----------------
(Continued)
F-14
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
3. 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 16). Except for the effects of the gain,
the sale did not have a significant impact on the Company's operating results.
4. TRANSACTIONS WITH RELATED PARTIES
AGENTS
Bernard Kooper ("Kooper"), Chairman of the Board of the
Company and Arista, and owner of 20.4% in 1997 and 19.1% in 1996 and 10.4% in
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. Gross
earned premiums from policies placed by Kooper's agency, Bernard Kooper Life
Agency, Inc. (the "Agency") aggregated $1,258,156, $1,254,143, and $1,297,784
for the years ended December 31, 1997, 1996 and 1995, respectively. The
Agency received approximately $227,000, $223,000 and $224,000, in commissions
from Arista during 1997, 1996 and 1995, respectively, for premiums on
policies placed with Arista. Such premiums represented approximately 6.1%,
5.4% and 5.0%, respectively, of the consolidated gross premiums earned during
the years ended December 31, 1997, 1996 and 1995, respectively. The Agency,
in turn, paid approximately $131,000, $159,000 and $143,000 during 1997, 1996
and 1995, respectively, to other brokers, including approximately $26,000,
$26,000 and $23,000, respectively, to brokers who are members of the Board of
Directors of Arista. Commissions payable to the related agencies at December
31, 1997, 1996 and 1995 were $13,960, $13,268 and $11,271, respectively.
EMPLOYMENT AGREEMENTS
The Company and Arista have employment agreements with Kooper
and Stanley Mandel ("Mandel") which expire in February 2001 as described in
Note 8(a).
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. The Company paid $30,000 in 1996 and $12,000 in 1995, 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 1997, 1996 and 1995.
(Continued)
F-15
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
4. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
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, 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.
SALARY ADVANCES
At December 31, 1997 and 1996, salary advances to an officer
and director of Arista aggregated $222,750 and $81,000, respectively. Salary
advances are limited to one year's compensation and are non-interest bearing.
5. CLAIMS LIABILITIES
Unpaid claims liabilities include insured claims and claim
adjustment expenses. Changes in unpaid claims liabilities for the years
ended December 31, 1997 and 1996 were as follows:
1997 1996
----------- -----------
Balance at January 1 $ 4,351,500 $ 4,526,316
Less reinsurance recoverables 2,175,750 2,263,158
----------- -----------
Net claims liabilities 2,175,750 2,263,158
----------- -----------
Claims incurred:
Current year 12,939,875 15,007,646
Prior years (net of $960,000
write-down in 1997) (727,181) 280,664
----------- -----------
Total claims incurred 12,212,694 15,288,310
----------- -----------
(Continued)
F-16
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
5. CLAIMS LIABILITIES (CONTINUED)
1997 1996
----------- -----------
Claims paid:
Current year $ 9,875,609 $10,656,146
Prior years 3,296,635 4,806,980
----------- -----------
Total claims paid 13,172,244 15,463,126
----------- -----------
Balance at December 31:
Net claims liabilities 1,695,975 2,175,750
Plus reinsurance recoverables 1,695,975 2,175,750
----------- -----------
Total liability $ 3,391,950 $ 4,351,500
----------- -----------
----------- -----------
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 13). 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 years ended December 31, 1997 and 1996 totaled
$348,075 and $315,000, respectively.
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 straight-line method. Amortization was
$15,000 for each of the years ended December 31, 1997 and 1996.
(Continued)
F-17
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
6. SURPLUS NOTE AND WARRANT (CONTINUED)
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 8a), 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 Arista merits
it.
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 remaining three-year period ending May 31, 2000 are as
follows:
1998 $ 218,636
1999 228,450
2000 96,892
----------
$ 543,978
----------
----------
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.
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 $249,973 in 1997, $252,171 in 1996 and
$205,080 in 1995.
(Continued)
F-18
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
7. LEASE COMMITMENTS (CONTINUED)
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.
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 60% to 100% 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 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. In addition, Arista and the Company have
also provided split-dollar life insurance policies in which both Kooper and
Mandel participate. Under these
(Continued)
F-19
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(a) EMPLOYMENT AGREEMENTS (CONTINUED)
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 $212,563 and $168,372 at December 31, 1997 and
1996, respectively, and are included in receivables from related parties in
the accompanying balance sheets. 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 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 split-dollar
life insurance policies provided to each of Kooper and Mandel under their
respective employment agreements. At December 31, 1997 and 1996 the estimated
amounts needed to render these policies as paid up are approximately $128,500
and $176,000, respectively.
(b) UNINSURED RISK
At December 31, 1997 and 1996 cash and equivalents on
deposit with financial institutions exceeded federal deposit insurance
coverage by approximately $4,045,970 and $2,108,613, 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 $14,036 and $62,389 for the years ended
December 31, 1997 and 1996, respectively. Amortization of deferred
acquisition costs charged to operations for all acquisitions were $319,775,
$332,633 and $323,202 for the years ended December 31, 1997, 1996 and 1995,
respectively. Accumulated amortization was $1,860,521 and $1,540,746 at
December 31, 1997 and 1996, 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, 1997, 1996 AND 1995
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 received a fee based on premiums
paid which were 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, 1997 and 1996, $4,411 and $5,000,
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 (see Note 8(e)).
(Continued)
F-21
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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,
1997 and 1996, $9,096 and $23,132, respectively, 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 Life Insurance Company of America ("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, 1997, 1996 AND 1995
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 13, 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, 1997, 1996 and 1995
were as follows:
Gross Ceded Net
Amount Amount Amount
------ ------ ------
1997
Premium receivable $ - $ - $ -
Claims liabilities $ - $ - $ -
Unearned premiums $ - $ - $ -
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
(Continued)
F-23
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 four percent (4%) of earned and collected premiums generated by this
book of business for each of the next four years. At December 31, 1997 Arista
estimates that it will receive approximately $49,400 under the agreement. To
date Arista has collected $35,000 under the agreement.
9. STOCK OPTIONS AND WARRANTS
Transactions involving stock options and warrants in each of the
years ended December 31, 1997, 1996 and 1995 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
1997 Expired (28,500) (83,563) - - - -
---------- ---------- ---------- ---------- ---------- -----------
December 31, 1997 - $ - - $ - 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 13), in 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.
(Continued)
F-24
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 which resulted in additional compensation
expense to the Company 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 expired on June 23, 1997, and 18,500 options
granted on November 16, 1987 expired 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 an option under the Company's non-qualified plan to purchase 17,600
shares of Class A common stock at an exercise price of $1.40 per share,
exercisable within a ten-year period following the date of grant. In June
1996, warrants to purchase 365,000 shares of Class A common stock were
exercised at $1.40 per share, which resulted in additional compensation
expense to the Company for the year ended December 31, 1996.
(Continued)
F-25
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 a holder of Class B shares has the
additional 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 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.
In June 1996, Kooper and the Company entered into an 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 secured promissory note (see Note 4) upon payment of all accrued but
unpaid interest. The option expires on June 14, 2001 or terminates upon
Kooper's death.
At December 31, 1997 and 1996, 197,400 and 225,900 shares,
respectively, of Class A common stock were reserved for conversion of Class B
common stock and for the exercise of stock warrants outstanding.
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, 1997, 1996 AND 1995
11. INCOME TAXES
At December 31, 1997 and 1996 deferred tax assets aggregated
$1,460,170 (including NOL carryforward of $405,089) and $1,529,758 (including
NOL carryforward of $554,838), respectively, and deferred tax liability
aggregated $1,737,941 and $1,608,087, respectively, as follows:
1997 1996
---------- ----------
Deferred tax asset:
Commissions payable $ 366,239 $ 281,713
Investment in securities 22,588 9,832
Reinsurance 656,974 679,876
Other assets 9,280 3,499
Loss carryforward 405,089 554,838
---------- ----------
Total deferred tax asset 1,460,170 1,529,758
---------- ----------
Deferred tax liability:
Deferred acquisition costs 188,915 308,153
Other assets 153,785 -
Claims liabilities 172,965 156,488
Reinsurance due 1,161,478 1,118,078
Accounts payable and accrued expenses 60,798 25,368
---------- ----------
Total deferred tax liability 1,737,941 1,608,087
---------- ----------
Net deferred tax liability $ 277,771 $ 78,329
---------- ----------
---------- ----------
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>
1997 1996 1995
------------------------ ---------------------------- ---------------------------
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 $ 493,068 $ (1,649,525) $ 151,480
--------- ---- ------------ ----- --------- -----
--------- ---- ------------ ----- --------- -----
Tax provision (benefit) at statutory rates $ 167,643 34.0 $ (560,839) (34.0) $ 51,503 34.0
Increase in income taxes resulting from:
Discontinued operations - - - - 131,778 87.0
State franchise and local taxes, net
of federal benefit 218,976 44.4 46,615 2.8 41,397 27.3
Other 6,129 1.2 40,562 2.5 - -
--------- ---- ------------ ----- --------- -----
Income tax provision (benefit) $ 392,748 79.6 $ (473,662) (28.7) $ 224,678 148.3
--------- ---- ------------ ----- --------- -----
--------- ---- ------------ ----- --------- -----
</TABLE>
(Continued)
F-27
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
11. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the
following at December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Currently payable (benefit):
Federal $ 130,550 $ - $ (208,709)
State and local 212,505 70,436 90,000
------------ ------------ ------------
343,055 70,436 (118,709)
------------ ------------ ------------
Deferred tax asset:
January 1, (974,920) (1,025,739) (11,476)
December 31, (1,055,081) (974,920) (1,025,739)
------------ ------------ ------------
Net change (80,161) 50,819 (1,014,263)
------------ ------------ ------------
Deferred tax liability:
January 1, 1,608,087 1,648,166 290,516
December 31, 1,737,941 1,608,087 1,648,166
------------ ------------ ------------
Net change 129,854 (40,079) 1,357,650
------------ ------------ ------------
Net deferred tax effect 49,693 10,740 343,387
------------ ------------ ------------
Income tax provision
before NOL benefit 392,748 81,176 224,678
Net operating loss benefit - (554,838) -
------------ ------------ ------------
Net income tax provision (benefit) $ 392,748 $ (473,662) $ 224,678
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
12. NET INCOME (LOSS) PER COMMON SHARE
The following table reconciles the income (loss) and the weighted
average shares used in the net income (loss) per common share calculation for
the years ended December 31, 1997, 1996 and 1995, respectively.
(Continued)
F-28
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
12. NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
Income Per Share
(Loss) Shares Amount
------------ ------------ ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Basic EPS $ 100,320 2,617,500 $ .04
Effects of dilutive securities: None(1) - - -
------------ ------------ ------------
Diluted EPS $ 100,320 2,617,500 $ .04
------------ ------------ ------------
------------ ------------ ------------
YEAR ENDED DECEMBER 31, 1996:
Basic EPS - previously reported $ (1,175,863) 2,617,500 $ (.45)
Effects of restatement to comply with
FASB Statement No. 128 - (319,750) (.06)
------------ ------------ ------------
Basic EPS - as restated (1,175,863) 2,297,750 (.51)
Effects of dilutive securities: None(2) - - -
------------ ------------ ------------
Diluted EPS $ (1,175,863) 2,297,750 $ (.51)
------------ ------------ ------------
------------ ------------ ------------
YEAR ENDED DECEMBER 31, 1995:
Basic EPS - previously reported $ 256,523 2,251,400 $ .11
Effects of restatement to comply
with FASB Statement No. 128 - (273,400) .02
------------ ------------ ------------
Basic EPS - as restated 256,523 1,978,000 .13
Effects of dilutive securities(3):
Options outstanding - 129,409 (.01)
Warrants outstanding - 171,878 (.01)
------------ ------------ ------------
Diluted EPS $ 256,523 2,279,287 $ .11
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(1) Warrants to purchase 150,000 shares of Class A common stock
were not included in computing diluted EPS, because their exercise price
exceeded the average market price during 1997.
(2) Options to purchase 28,500 shares of Class A common stock and
warrants to purchase 150,000 shares of Class A common stock were not included
in diluted EPS, because their exercise price exceeded the average market
price during 1996.
(3) Options to purchase 10,000 shares of Class A common stocks
and warrants to purchase 150,000 shares of Class A common stock were not
included in computing diluted EPS, because their exercise price exceeded the
average market price during 1995.
(Continued)
F-29
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
13. REINSURANCE
Effective October 1, 1993, Arista entered into a new agreement
(the "Agreement") with Harbourton Reinsurance, Inc. ("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.
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, 1997 and 1996, $158,721 and $93,121, respectively, were
accrued by Arista under this agreement. The agreement allows Arista an annual
profit commission of 2% of 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. (Also see Note 20.)
Ceded transactions for the years ended December 31, 1997, 1996
and 1995 were as follows:
Gross Ceded Net
Amount Amount Amount
----------- ----------- -----------
1997
Premium receivable $ 2,978,600 $ 1,489,300 $ 1,489,300
Claims liabilities $ 3,391,950 $ 1,695,975 $ 1,695,975
Unearned premiums $ 1,464,800 $ 732,400 $ 732,400
Commissions payable $ 729,912 $ 939,075 $ 1,668,978
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
(Continued)
F-30
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
13. 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.
14. INVESTMENTS
Investments at December 31, 1997 and 1996 consisted of the
following types:
1997 1996
----------- -----------
Held-to-maturity securities $ 2,630,453 $ 2,696,220
Available-for-sale securities 9,250 56,920
Trading securities 85 319
----------- -----------
$ 2,639,788 $ 2,753,459
----------- -----------
----------- -----------
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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Available-for-sale securities
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Redeemable preferred securities $ 31,524 $ - $ 22,274 $ 9,250
----------- --------- --------- -----------
$ 31,524 $ - $ 22,274 $ 9,250
----------- --------- --------- -----------
----------- --------- --------- -----------
DECEMBER 31, 1996:
Redeemable preferred securities $ 84,149 $ - $ 27,229 $ 56,920
----------- --------- --------- -----------
$ 84,149 $ - $ 27,229 $ 56,920
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
(Continued)
F-31
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
14. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Held-to-maturity securities
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
U.S. Treasury securities $ 2,630,453 $ 8,373 $ 5,922 $ 2,632,904
----------- --------- --------- -----------
$ 2,630,453 $ 8,373 $ 5,922 $ 2,632,904
----------- --------- --------- -----------
----------- --------- --------- -----------
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
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
Pursuant to New York State insurance regulations, Arista maintains a
mandatory trust fund with the Bank of New York containing U.S. Treasury
securities with a carrying value of approximately $1,817,254 at December 31,
1997 and 1996.
INVESTMENT INCOME
Net investment income for the years ended 1997, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Interest and dividends:
Bonds and long-term investments $ 148,582 $ 161,812 $ 174,156
Short-term investments 328,765 258,391 77,978
------------- -------------- -------------
Total interest and dividends 477,347 420,203 252,134
Interest on note receivable from related party 36,566 20,336 -
------------- -------------- -------------
Total investment income $ 513,913 $ 440,539 $ 252,134
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
(Continued)
F-32
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
14. INVESTMENTS (CONTINUED)
Realized and unrealized gains and losses on investments for the
years ended December 31, 1997, 1996 and 1995 consisted of the following:
1997 1996 1995
-------- ------- -------
REALIZED GAINS (LOSSES)
Redeemable preferred securities $ (2,625) $ (208) $ (137)
Equity securities 106 - -
-------- ------- -------
Total realized losses (2,519) (208) (137)
-------- ------- -------
UNREALIZED LOSSES
Equity securities (194) (159) (358)
-------- ------- -------
Total unrealized losses (194) (159) (358)
-------- ------- -------
Net investment losses $ (2,713) $ (367) $ (495)
-------- ------- -------
-------- ------- -------
INVESTMENT MATURITY
The following schedule sets forth the respective maturity dates
as at December 31, 1997:
Available-for-sale securities
-----------------------------
Fair
Cost Value
---------- ----------
Due after one year through five years $ 31,524 $ 9,250
---------- ----------
---------- ----------
Held-to-maturity securities
---------------------------
Fair
Cost Value
---------- ----------
Due after one year through five years $2,099,103 $2,101,809
Due after five years through ten years 531,350 531,095
---------- ----------
Total $2,630,453 $2,632,904
---------- ----------
---------- ----------
(Continued)
F-33
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
15. STATUTORY MATTERS
The following is a reconciliation of Arista's net stockholder's
equity and net income (loss) determined on the statutory basis of accounting
required by insurance regulation to amounts of 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, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Capital and surplus reported for SAP purposes $ 6,206,020 $ 6,175,568 $ 6,432,629
Add (deduct):
Inclusion of nonadmitted assets 2,624,539 1,956,065 1,872,086
Surplus notes payable (3,000,000) (3,000,000) (3,000,000)
Deferred costs, net of tax 66,158 205,689 441,221
Claims reserves, net of tax 548,059 509,495 559,193
Unrealized depreciation on marketable
securities, net (26,471) (31,425) (16,038)
Other, net of tax 217,267 18,427 70,330
Adjustment to premiums receivable, net of tax 533,443 533,443 533,443
Prior period tax over accrual (330,248) (359,082) (360,883)
Realized gain on investments, net of tax (27,370) (27,720) (33,853)
NOL carryforward - 34,500 -
------------ ------------ ------------
Stockholder's equity reported in
Arista's financial statements $ 6,811,397 $ 6,014,960 $ 6,498,128
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) reported for SAP purposes $ 698,926 $ (61,398) $ 231,349
Add (deduct):
Deferred costs, net of tax (139,531) (235,532) 131,036
Other, net of tax 164,339 (51,902) (48,427)
Claims reserves, net of tax 38,564 (49,698) (20,922)
Adjustment to premiums receivable, net of tax - - 504,752
Realized gain on investments, net of tax 350 6,133 -
Amortization of intangible asset, net of tax - - (122,705)
Gain on sale of subsidiary, net of tax - - (76,404)
Income tax expense differences 28,834 1,800 (210,152)
------------ ------------ ------------
Net income (loss) reported in Arista's
financial statements $ 791,482 $ (390,597) $ 388,527
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(Continued)
F-34
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
15. STATUTORY MATTERS (CONTINUED)
Arista was in compliance with the NYSID minimum statutory capital
and surplus requirement at December 31, 1997, 1996 and 1995.
Under the New York State Insurance Law, Arista may pay dividends
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.
16. BUSINESS ACQUISITION
STOCK PURCHASE AGREEMENT
On December 31, 1991, Arista entered into an agreement to
acquire all the outstanding shares of American (See Note 1). 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
unamortized intangible asset was written off in 1995 in connection with the
sale of American (see Note 3). Amortization expense was $248,957 for the year
ended December 31, 1995.
(Continued)
F-35
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
17. 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, 1997, 1996 and 1995 were as follows:
1997 1996 1995
------------ ------------ ------------
Disability insurance $ 20,763,439 $ 23,160,259 $ 26,091,714
Property and casualty - - -
Third party administrative 351,346 260,664 204,367
------------ ------------ ------------
Total revenues $ 21,114,785 $ 23,420,923 $ 26,296,081
------------ ------------ ------------
------------ ------------ ------------
18. MAJOR CUSTOMER
For the year ended December 31, 1996, one group, the Federation
of Jewish Philanthropies ("FOJP"), 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, 1997 and 1995, no one
group accounted for 10% or more of Arista's revenues. However, Arista
underwrites disability insurance for two large groups with combined earned
premiums of approximately $2,506,000 in 1997 and $3,692,000 in 1995.
In January 1998, Arista was notified by the FOJP that effective
February 1, 1998, the group would no longer carry its disability insurance
policies with Arista. Arista and FOJP are negotiating a settlement of all
unpaid premiums and claims under the agreement. Although Arista expects that
the outcome of the negotiations may involve substantial additional earned
premiums to be collected, no amounts have been accrued in the accompanying
financial statements as negotiations are continuing. Earned premiums
recognized from FOJP for the years ended December 31, 1997, 1996 and 1995
aggregated $1,266,499, $2,468,331, and $2,034,000, respectively.
(Continued)
F-36
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
19. 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.
20. SUBSEQUENT EVENT
In March 1998, effective January 1, 1998, Arista terminated its
50% quota share reinsurance agreement with The Cologne and entered into a new
50% quota share agreement with The Guardian.
F-37
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Amount
Cost or shown in
amortized Market the balance
Type of Investment cost value sheet
- -------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
United States Government and government
agencies and authorities $2,630,453 $2,632,904 $2,630,453
AVAILABLE FOR SALE:
Redeemable preferred stocks 31,524 9,250 9,250
TRADING SECURITY:
Common stock 279 85 85
---------- ---------- ----------
$2,662,256 $2,642,239 $2,639,788
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See independent auditors' report.
S-1
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
A S S E T S
Investment in subsidiaries $ 7,181,474 $ 6,496,979
Cash and equivalents 248,256 465,316
Prepaid expenses and other assets 187,092 119,258
Deferred tax asset 738,049 447,597
----------- -----------
Total assets $ 8,354,871 $ 7,529,150
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 495,162 $ 310,593
Payable to subsidiaries, net 1,488,895 948,063
----------- -----------
Total liabilities 1,984,057 1,258,656
Stockholders' equity 6,370,814 6,270,494
----------- -----------
Total liabilities and
stockholders' equity $ 8,354,871 $ 7,529,150
----------- -----------
----------- -----------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Investment income $ 48,061 $ 33,158 $ 17,883
Corporate and administrative expenses 897,520 1,337,158 464,340
----------- ------------ -----------
Loss from operations before income tax
benefits and equity in net income (loss)
of subsidiaries (849,459) (1,304,000) (446,457)
Income tax expense (benefits) (265,284) (693,367) 256,411
----------- ------------ -----------
Loss from operations before equity in
net income (loss) of subsidiaries (584,175) (610,633) (702,868)
Equity in net income (loss) of subsidiaries 684,495 (565,230) 959,391
----------- ------------ -----------
Net income (loss) $ 100,320 $ (1,175,863) $ 256,523
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements and notes thereto of
Arista Investors Corp. as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997.
(Continued)
S-2
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II - CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 100,320 $(1,175,863) $ 256,523
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation 1,404 1,629 1,039
Equity in net (income) loss of subsidiaries (684,495) 565,230 (959,391)
Compensation arising from exercise of options
and warrants - 757,350 -
Increase (decrease) in assets and liabilities:
Payable to subsidiaries 540,832 (97,323) 481,502
Prepaid expenses and other assets (69,238) 7,128 215,838
Deferred tax asset (290,452) (447,597) -
Accounts payable and accrued expenses 184,569 153,805 (158,417)
---------- ----------- ----------
Net cash used in operating activities (217,060) (235,641) (162,906)
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments, net - - -
Proceeds from sale of investments - - 207,818
---------- ----------- ----------
Net cash provided by investing activities - - 207,818
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class A common stock - 395,300 -
Net cash provided by financing activities - 395,300 -
---------- ----------- ----------
Increase (decrease) in cash and equivalents (217,060) 159,659 44,912
CASH AND EQUIVALENTS:
Beginning of year 465,316 305,657 260,745
---------- ----------- ----------
End of year $ 248,256 $ 465,316 $ 305,657
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
(Continued)
S-3
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II - CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the year for:
Income taxes $ 27,720 $ 21,510 $ 17,713
---------- ----------- ----------
---------- ----------- ----------
Interest $ - $ - $ -
---------- ----------- ----------
---------- ----------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES:
The Company issued Class A common stock in connection
with the exercise of stock options and warrants 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. as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997.
(Continued)
S-4
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II - CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1997, 1996 AND 1995
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-37.
2. CASH DIVIDENDS FROM SUBSIDIARY
In April 1996, Arista paid dividends to the Company in the amount of
$111,684.
See independent auditors' report.
S-5
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE III
SUPPLEMENTAL SEGMENT INFORMATION
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
FUTURE
POLICY
BENEFITS, OTHER
LOSSES, POLICY
DEFERRED CLAIMS CLAIMS AND
POLICY AND LOSS UNEARNED BENEFITS PREMIUM
SEGMENT ACQUISITION EXPENSES PREMIUMS PAYABLE REVENUE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
1997
<S> <C> <C> <C> <C> <C>
Disability insurance $ 484,398 $ 3,391,950 $ 1,464,800 $ - $ 10,381,720
Property and casualty - - - - -
Third party administrative
service - - - - 351,346
- - - - -------
---------- ------------ ------------ ------------ --------------
$ 484,398 $ 3,391,950 $ 1,464,800 $ - $ 10,733,066
---------- ------------ ------------ ------------ --------------
---------- ------------ ------------ ------------ --------------
1996
Disability insurance $ 790,137 $ 4,351,500 $ 1,397,380 $ - $ 11,580,130
Property and casualty - - - - -
Third party administrative
service - - - - 260,664
- - - - -------
---------- ------------ ------------ ------------ --------------
$ 790,137 $ 4,351,500 $ 1,397,380 $ - $ 11,840,794
---------- ------------ ------------ ------------ --------------
---------- ------------ ------------ ------------ --------------
<CAPTION>
BENEFIT, AMORTIZATION
CLAIMS, OF DEFERRED
NET LOSSES AND POLICY OTHER
INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT INCOME EXPENSES COSTS EXPENSES WRITTEN
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
-------- -------- -------- -------- -------- --------
1997
<S> <C> <C> <C> <C> <C>
Disability insurance $ 513,913 $ 6,106,347 $ 319,775 $ 4,332,163 $ 20,830,859
Property and casualty - - - - -
Third party administrative
service - - - - -
- - - - -
---------- ------------ ----------- ------------ --------------
$ 513,913 $ 6,106,347 $ 319,775 $ 4,332,163 $ 20,830,859
---------- ------------ ----------- ------------ --------------
---------- ------------ ----------- ------------ --------------
1996
Disability insurance $ 440,539 $ 7,644,155 $ 332,633 $ 5,992,363 $ 23,229,429
Property and casualty - - - - -
Third party administrative
service - - - - -
- - - - -
---------- ------------ ----------- ------------ --------------
$ 440,539 $ 7,644,155 $ 332,633 $ 5,992,363 $ 23,229,429
---------- ------------ ----------- ------------ --------------
---------- ------------ ----------- ------------ --------------
</TABLE>
See independent auditors' report.
S-6
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE IV
REINSURANCE
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES(1) COMPANIES AMOUNT NET AMOUNT
------ ------------ --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Life insurance
in force $ - $ - $ - $ - 0%
------------ ------------ ------------ ------------ -----
------------ ------------ ------------ ------------ -----
Premiums:
Life insurance $ - $ - $ - $ - 0%
Accident and
health 20,763,439 10,381,719 - 10,381,720 0
Property and
liability - - - - 0
Title insurance - - - - 0
------------ ------------ ------------ ------------ -----
$ 20,763,439 $ 10,381,719 $ - $ 10,381,720 0%
------------ ------------ ------------ ------------ -----
------------ ------------ ------------ ------------ -----
</TABLE>
(1) No amounts of reinsurance or coinsurance income have been netted against
premium ceded.
See independent auditors' report.
S-7
<PAGE>
SIGNATURES
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.
Dated: April 7, 1998 By: /s/ Bernard Kooper
------------------------------------
Bernard Kooper, President and
Chairman of the Board
(principal executive officer)
Dated: April 7, 1998 By: /s/ Susan J. Hall
------------------------------------
Susan J. Hall, Senior Vice President
and Treasurer (principal financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Stanley S. Mandel
- ------------------------ Executive Vice President April 7, 1998
Stanley S. Mandel and Director
/s/ Louis H. Saltzman
- ------------------------ Secretary and Director April 7, 1998
Louis H. Saltzman
/s/ Richard P. Farkas
- ------------------------ Director April 7, 1998
Richard P. Farkas
/s/ J. Martin Feinman
- ------------------------ Director April 7, 1998
J. Martin Feinman
/s/ Noah Fischman
- ------------------------ Director April 7, 1998
Noah Fischman
- ------------------------ Director --
Daniel Glassman
<PAGE>
EXHIBIT 10.42
THE GUARDIAN
REINSURANCE AGREEMENT
between
ARISTA INSURANCE COMPANY
New York, New York
(hereinafter referred to as the "Company")
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
New York, New York
(hereinafter referred to as "The Guardian")
QUOTA SHARE
1
<PAGE>
CONTENTS
PREAMBLE
ARTICLE I BASIS OF REINSURANCE
ARTICLE II TERM AND CANCELLATION
ARTICLE III REINSURANCE'S LIABILITY
ARTICLE IV SPECIAL ACCEPTANCES
ARTICLE V SPECIAL ACCEPTANCES
ARTICLE VI OFFSET
ARTICLE VII PREMIUMS AND ACCOUNTS
ARTICLE VIII TAXES
ARTICLE IX ACCESS TO COMPANY'S RECORDS
ARTICLE X ARBITRATION
ARTICLE XI INSOLVENCY
ARTICLE XII CONTROL
ARTICLE XIII MISCELLANEOUS
ARTICLE XIV EXECUTION
2
<PAGE>
PREAMBLE
The Company and The Guardian mutually agree to reinsure New York State
Statutory, Super Statutory and Voluntary Disability Benefits Law policies on the
terms and conditions set out below. The Agreement is solely between the Company
and The Guardian, and performance of the obligations of each party under this
Agreement shall be rendered solely to the other party. In no instance shall
anyone other than Company or The Guardian have any rights under this Agreement.
Any change or modification to this Agreement shall be null and void unless made
by amendment to this Agreement and signed by both parties.
3
<PAGE>
ARTICLE I
BASIS OF REINSURANCE
The Company agrees to cede and The Guardian agrees to accept by way of
reinsurance, on the terms and conditions hereinafter appearing, a 50% quota
share participation in claim liabilities and producer commissions arising from
the Company's New York State Statutory, Super Statutory and Voluntary Disability
Benefits Law policies, both for business in force as of the effective date of
this Agreement as well as for new business issued and or acquired after the
effective date of this Agreement. The Guardian is liable only for claim
liabilities incurred and producer commissions earned on or after the effective
date of this treaty (regardless of the policy anniversary dates of the
underlying business).
4
<PAGE>
ARTICLE II
TERM AND CANCELLATION
This Agreement shall take effect at 12:01 A.M. Eastern Standard Time on January
1, 1998 and shall remain in force and effect for an indefinite period but may be
canceled, for in force business as well as new business, at any time by The
Guardian giving to the Company ninety (90) days prior written notice. This
Agreement may be canceled, for in force business as well as new business, by
the Company giving to The Guardian ninety (90) days prior written notice. In
the event that the Company is sold the Company will exert its best effort to
ensure that the reinsurance relationship with The Guardian continues.
Notwithstanding the foregoing, cancellation of this Agreement may be as of an
agreed date on any basis mutually acceptable to the parties hereto.
Unless otherwise agreed to by the parties hereto, The Guardian shall continue
to participate in all reinsurance coming within the terms of this Agreement
prior to the of cancellation of this Agreement.
It is agreed, however, that the reinsurance with respect to all policies in
force on the date of cancellation of this Agreement shall terminate as to each
such policy as of the date of cancellation of this Agreement. The Guardian
shall remain liable for its share of claim liabilities which are incurred and
producer commissions earned prior to the termination of this Agreement.
5
<PAGE>
ARTICLE III
REINSURANCE LIABILITY
All reinsurance provided hereunder shall be subject to the same clauses,
rates, terms, conditions and endorsements as the Company's original policies
insofar as they relate to the business covered pursuant to Article I
hereunder. This Agreement and the reinsurance coverage provided
hereunder is subject to the Company's maintaining its existing
underwriting and pricing criteria. Changes or revisions in the Company's
policies or rates shall not be made without the prior written approval of The
Guardian.
The maximum issue limit per person under each policy shall be as mandated by
New York State, unless the Company has issued superstatutory coverage under
its regular rate manual underwriting guidelines.
6
<PAGE>
ARTICLE IV
SPECIAL ACCEPTANCES
Any insurance coverage that is specially accepted by The Guardian from the
Company in writing shall be covered under this Agreement and subject to the
terms hereof, except as such terms shall be modified by such acceptance.
7
<PAGE>
ARTICLE V
LOSSES
Prompt written notice shall be given to The Guardian of all losses which, in the
opinion of the Company, will result in a claim hereunder.
The Company agrees that it will investigate and settle, or defend all losses
arising under policies reinsured hereunder, provided they are within the terms
of this Agreement.
The Company's original policies shall be binding on The Guardian, who agrees to
pay all amounts for which it may be liable upon being furnished by the Company
with reasonable evidence of the amount due, including its proportionate share of
legal expenses directly allocated according to the usual practice of the Company
and paid in connection with the losses within the scope of this Agreement, with
the exclusion of loss adjustment expenses and office expenses of the Company
and salaries of its employees.
If The Guardian so chooses, it will discharge its liability by
payment of the full amount of reinsurance to the Company. In no event
shall The Guardian be liable for punitive damages, statutory penalties or
compensatory damages which are awarded against the Company as a result
of an act, omission or course of conduct committed by or on behalf of the
Company in connection with the insurance reinsured under this Agreement.
For purposes of this provision, the following definitions shall apply:
1. "Punitive damages" are those damages awarded as a penalty, the amount
of which is not governed or fixed by statute.
2. "Statutory penalties" are those amounts which are awarded to as a
penalty but fixed in amount by statute.
3. "Compensatory damages" are those amounts awarded to compensate for
actual damages sustained, and are not awarded as penalty or fixed in
amount by statute.
8
<PAGE>
ARTICLE VI
OFFSET
The Company or The Guardian may offset any balance(s), from premiums,
commissions, losses or any other amount(s) due from one party to the other under
this Agreement or under any other reinsurance agreement heretofore or hereafter
entered into between the Company and The Guardian, whether acting as assuming
reinsurer or as ceding Company.
9
<PAGE>
ARTICLE VII
PREMIUM AND ACCOUNTS
The Company shall pay to The Guardian Reinsurance Premium for the business ceded
hereunder as follows:
For purposes of this treaty, Reinsurance Premium shall equal 50% of {the
Company's gross earned premium less an Expense Allowance}. The Company's
Expense Allowance will be calculated as follows:
8.0% of the Company's Gross Earned Premium; plus
Gross premium taxes, licenses & fees incurred by the Company; plus
DBL assessments incurred by the Company; plus
Experience Incentive = the Company's Gross Earned Premium x 0.50 x [0.88 -
Cost Percentage], where
- The Experience Incentive will have a minimum value of 0% and a
maximum value of +5%;
- The Cost Percentage = [Gross Incurred Claims + Gross Producer
Commissions Earned + Gross Premium Taxes Incurred + Gross DBL
Assessments Earned]/ Gross Earned Premium; and
- The Experience Incentive will be calculated by the Company
annually, within four months following the close of this
Agreement's anniversary; in addition, the Experience Incentive
will be estimated by the Company and paid quarterly, with an
annual payment reflecting the difference between the four
quarterly estimates and the annual calculation. In the event of
cancellation of this Agreement, the final Experience Incentive
will be calculated by the Company and paid no later than four
months after cancellation. Such payment shall reflect any
differences between the final calculation and the prior quarterly
estimated payments.
10
<PAGE>
Within five days (5) after each calendar quarter, the Company shall submit to
The Guardian estimates of the following, including any and all supporting
detail:
a. Reinsured earned premium.
b. Reinsured Commission Earned, Premium Taxes and DBL Assessments Earned.
c. Reinsured Losses Incurred.
d. Experience Incentive.
e. Net Amount due the Company/The Guardian.
Within thirty days (30) days after each calendar quarter, the Company shall
submit to The Guardian a final report on the following, including and all
supporting detail:
a. Reinsured earned premium.
b. Reinsured Commission Earned, Premium Taxes and DBL Assessments Earned.
c. Reinsured Losses Incurred.
d. Net Amount due the Company/The Guardian.
The balance due either The Guardian or the Company shall be payable promptly
within 15 days of the final quarterly report due date.
Following each calendar year, the Company shall submit to The Guardian the
following:
a. Audited statutory and GAAP financial statements deliverable within 120
days after the end of the calendar year
b. Certified Actuarial Opinion deliverable within 45 days after the end
of the calendar year.
11
<PAGE>
ARTICLE VIII
TAXES
The Guardian shall not be liable for the payment of any premium taxes in
connection with the business being reinsured under this Agreement.
12
<PAGE>
ARTICLE IX
ACCESS TO COMPANY'S RECORDS
The Company shall make available to The Guardian, and The Guardian or its
authorized representative, shall have the right to inspect, at all reasonable
times during the term of this Agreement and thereafter as may become necessary,
all books records, and papers of the Company pertaining to the reinsurance
provided hereunder.
13
<PAGE>
ARTICLE X
ARBITRATION
All disputes and differences between the Company and The Guardian on which an
amicable understanding cannot be reached shall be decided by arbitration at the
home office of the Company. The following procedures shall apply:
Upon written request of either party, each party shall choose an arbitrator and
the two chosen arbitrators shall select a third arbitrator. If either party
refuses or neglects to appoint an arbitrator within thirty (30) days after
receipt of the written request for arbitration, the requesting party may appoint
a second arbitrator. Such notice of arbitration shall be sent certified or
registered mail. If the two arbitrators fail to agree on the selection of the
third arbitrator within (30) days of their appointment, each of them shall name
three individuals, of whom the other shall decline two, and the decision as to
the third arbitrator shall be determined by drawing lots.
All arbitrators shall be active or retired officers of life or reinsurance
companies and disinterested in the outcome of the arbitration. Each party shall
submit its case to the arbitrators within thirty (30) days of the appointment of
the third arbitrator.
The parties hereby waive all objections to the method of choosing the
arbitrators, it being the intention of both parties that all the arbitrators be
chosen from those submitted by the parties.
The arbitrators shall have the power to determine all procedural rules for the
holding of the arbitration including, but not limited to inspecting documents,
examination of witnesses and any other matter relating to the conduct of the
arbitration.
14
<PAGE>
The arbitrators shall interpret this Agreement as an honorable engagement and
not merely as a legal obligation. The arbitrators shall consider customary and
standard practices of the life and health reinsurance business. Each party
shall bear the expense of its own arbitrator and related outside attorneys'
fees, and shall equally bear the expense of the third arbitrator and of the
arbitration.
This Agreement shall be construed in accordance with the laws of the State of
New York. The decision, in writing, of the majority of the arbitrators, shall
be final and binding upon both parties. Judgment may be entered upon the final
decision of the arbitrators in any court having jurisdiction.
15
<PAGE>
ARTICLE XI
INSOLVENCY
All claim liabilities and producer commissions reinsured under this Agreement
will be paid by The Guardian directly to the Company, its liquidator, receiver
or statutory successor, on the basis of the liability of the Company under the
policy or policies reinsured without diminution because of the insolvency of the
Company.
In the event of the insolvency of the Company, the liquidator, receiver or
statutory successor of the Company will give The Guardian written notice of a
pending claim against the Company on any reinsured policy within a reasonable
time after the claim is filed in the insolvency proceedings. While the claim is
pending, The Guardian may investigate the claim and interpose, at its own
expense, in the proceedings where the claim is to be adjudicated, any defense
which it may deem available to the Company or its liquidator, receiver or
statutory successor. Any expense incurred by The Guardian will be charged,
subject to court approval, against the Company as an expense of liquidation to
the extent of a proportionate share of the benefit that accrues to the Company
as a result of the defenses by The Guardian. Where two or more reinsurers are
involved and majority in interest elect to defend the claim, the expense will be
apportioned in accordance with the terms of the reinsurance agreement as if the
expense had been incurred by the Company.
16
<PAGE>
ARTICLE XII
CONTROL
It is understood and agreed that if at any time during the continuance of this
Agreement, the Company shall be acquired or controlled by, or merged with any
other company, then acting upon actual or constructive notice thereof, either
party shall have the right forthwith to terminate this Agreement by giving
thirty (30) days written notice by certified or registered mail.
In the event of such termination, this Agreement shall remain in full force and
effect only with respect to all claim liabilities and producer commissions
reinsured hereunder between the Agreement's effective date and time of
termination.
17
<PAGE>
ARTICLE XIII
MISCELLANEOUS
ASSIGNMENT: Neither the Company nor The Guardian may assign this
Agreement to another entity without the written consent of the other party.
APPLICABLE LAW: This Agreement shall be deemed to have been made and
shall be interpreted and construed pursuant to the laws of the State of New
York. The parties agree to submit to the jurisdiction of any court of competent
jurisdiction in the State of New York, to comply with all requirements necessary
to give such court jurisdiction, and to abide by the final decision of such
court or any Appellate Court in the event of appeal. The parties hereby
designate the State of New York Department of Insurance as its true and lawful
attorney upon whom may be served any lawful process and any action, suit, or
proceeding instituted by or on behalf of either party. This provision, however,
is not intended to conflict with or override the obligation of the parties to
arbitrate in accordance with Article XII.
NOTICES: All notices required or permitted to be given by any party
to this Agreement shall be in writing and sent to the other party addressed as
follows (or to such other addresses as the parties may hereafter designate by
notices given):
If to the Company: Arista Insurance Company
116 John Street
New York, New York 10038
Attention: Stanley S. Mandel
If to the Reinsurer: The Guardian Life Insurance Company of America
3900 Burgess Place
Bethlehem, PA 18017
Attention: Stuart J. Shaw - Suite 2E
18
<PAGE>
MULTIPLE COUNTERPARTS: This Agreement may be executed in multiple
counterparts.
DRAFTING: The terms of this Agreement shall not be construed in favor of or
against any party on account of that party's participation or lack of
participation in the drafting of this Agreement.
ENTIRE AGREEMENT: This Agreement constitutes the entire agreement and
supersedes prior agreements, understandings and negotiations, oral and written,
between the parties with respect to the contents of this Agreement. No waiver,
amendment, modification hereof shall be of any force or effect unless it is in
writing and signed by the parties and making specific reference to this
Agreement.
SEPARABILITY OF PROVISIONS: If any provision of this Agreement is held to be
unenforceable by a tribunal having jurisdiction in the matter, then such
provision shall be enforced to the maximum extent possible and the remaining
provisions shall remain in full force and effect. Furthermore, in lieu of such
unenforceable provision, there shall be added automatically as part of this
Agreement a provision as similar in terms as may be possible and enforceable.
19
<PAGE>
ARTICLE XIV
EXECUTION
In witness of the above, this Agreement is signed in duplicate on the dates and
at the places indicated below with an effective date of January 1, 1998.
Date: March 19, 1998 ARISTA INSURANCE COMPANY
Place: NEW YORK, NEW YORK By: /s/ Illegible
----------------------
Witness: /s/ Suzette DeBenedictis Title: President
-------------------------
Date: March 19, 1998 THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
Place: NEW YORK, NEW YORK By: /s/ D.J. Shaw
-----------------------
Witness: /s/ Linda Petroslilo Title: /s/ Stuart J. Shaw
------------------------ ---------------------
Second Vice President
20
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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0
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