<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
F O R M 8 - K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 12, 1998
--------------------------------
Arista Investors Corp.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in Charter)
Delaware 13-2957684
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission) (IRS Employer
of Incorporation) File Number) 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
------------------------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On November 12, 1998, Arista Investors Corp., a Delaware corporation
(the "Company"), consummated the sale of Arista Insurance Company's (a New York
insurance company and a wholly-owned subsidiary of the Company ("Arista
Insurance")) book of New York State statutory, super statutory and voluntary
disability benefits insurance business ("DBL Business") to The Guardian Life
Insurance Company of America, a New York life insurance company ("The
Guardian"), pursuant to an Assumption Reinsurance Agreement, dated as of
September 23, 1998 (the "Treaty"), between the Company, Arista Insurance and The
Guardian (the "Transaction"). The assets sold included Arista Insurance's DBL
Business for (i) policies issued by Arista Insurance which were in force on July
1, 1998, the effective date of the Treaty (the "Effective Date"), and which were
being serviced by Arista Insurance as of September 23, 1998 (the "Existing
Policies") and (ii) policies with inception dates on or after the Effective Date
(the "New Policies" and together with the "Existing Policies," the "Assets"). In
connection with the Transaction, the Company also consummated an Administrative
Services Agreement, dated as of September 23, 1998, with The Guardian whereby
the Company will provide The Guardian with administrative and other services
with respect to the Assets. The consideration received for the DBL Business was
approximately $3,421,486, representing 18% of the last twelve months adjusted
earned premium. Prior to the consummation of the Transaction, the New York State
Superintendent of Insurance (the "Department") approved the Treaty on May 18,
1998 (the Department had approved an earlier version of the Treaty on May 8,
1997), and the Company's stockholders approved the Transaction at a Special
Meeting of Stockholders held on October 19, 1998.
2
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements.
1. Consolidated financial statements as of December 31, 1995, 1996
and 1997 (audited).
2. Consolidated financial statements as of September 30, 1998
(unaudited).
(b) Pro forma Financial Information.
1. Pro forma condensed consolidated balance sheet as of
September 30, 1998 (unaudited).
2. Pro forma condensed consolidated statement of operations for the
year ended December 31, 1997 and the nine months ended
September 30, 1998 (unaudited).
(c) List of Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Assumption Reinsurance Agreement, dated as of September 23, 1998, by and
among Arista Insurance Company, Arista Investors Corp. and The Guardian
Life Insurance Company of America.*
10.1 Administration Services Agreement, dated as of September 23, 1998,
between The Guardian Life Insurance Company of America and Arista
Insurance Company.*
99.1 Press Release, dated September 28, 1998.
99.2 Press Release, dated October 21, 1998.
99.3 Press Release, dated November 13, 1998.
</TABLE>
- ------------------------------
* Incorporated by reference to the Company's definitive proxy statement,
filed with the Securities and Exchange Commission on September 28, 1998
(File No. 000-16520).
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARISTA INVESTORS CORP.
Date: November 25, 1998 By: Stanley S. Mandel
-----------------------------
Stanley S. Mandel
President
4
<PAGE>
ARISTA INVESTORS CORP.
INDEX TO FINANCIAL STATEMENTS
Historical Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants...........................................................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
Unaudited as of September 30, 1998........................................................................................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 and Unaudited for
the Nine Months Ended September 30, 1997 and 1998.........................................................................F-5
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1995, 1996 and 1997 and
Unaudited for the Nine Months Ended September 30, 1998....................................................................F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 and Unaudited for
the Nine Months Ended September 30, 1997 and 1998.........................................................................F-8
Notes to Consolidated Financial Statements..................................................................................F-10
Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
Introduction ...............................................................................................................F-34
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1998.....................................................F-35
Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1997 and the Nine Months Ended
September 30, 1998.......................................................................................................F-37
Notes to Pro Forma Condensed Consolidated Financial Statements..............................................................F-38
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Arista Investors Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Arista Investors
Corp. as of December 31, 1996 and 1997 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arista Investors
Corp. at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years ended December 31,
1997, in conformity with generally accepted accounting principles.
ROSEN SEYMOUR SHAPSS
MARTIN & COMPANY LLP
New York, New York
March 13, 1998
F-2
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS
A S S E T S
-----------
<TABLE>
<CAPTION>
December 31,
------------------------- September 30,
1996 1997 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Investments (Notes 2 and 14):
Held-to-maturity securities:
Bonds and long-term U.S. Treasury obligations, at
amortized cost (market value $2,650,210 in 1996,
$2,632,904 in 1997 and $2,747,893 in 1998) $ 2,696,220 $ 2,630,453 $ 2,621,165
Available-for-sale securities:
Redeemable preferred stocks, at market value
(amortized cost of $84,149 in 1996 and
$31,524 in 1997 and 1998) 56,920 9,250 7,104
Trading securities, at market value (cost of $1,279 in 1996
and $279 in 1997) 319 85 366
----------- ----------- -----------
Total investments 2,753,459 2,639,788 2,628,635
Cash and equivalents (Notes 2 and 14) 7,076,659 8,296,943 8,276,388
Premiums receivable (Notes 2 and 13) 4,304,200 2,978,600 --
Deferred policy acquisition costs, net (Notes 2 and 8) 790,137 484,398 --
Receivables from related parties (Notes 4 and 8) 182,787 443,182 562,394
Receivable from reinsurer -- -- 1,461,360
Furniture and equipment, at cost, net of accumulated
depreciation of $726,193 in 1996 and $783,799 in
1997 (Note 2) 138,552 113,663 87,752
Prepaid and refundable income taxes 757,548 710,050 979,486
Other assets 1,106,908 1,366,572 1,822,619
----------- ----------- -----------
Total assets $17,110,250 $17,033,196 $15,818,634
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(Continued)
F-3
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------- September 30,
1996 1997 1998
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Liabilities:
Payable to reinsurer (Note 13) $ 93,121 $ 158,721 $ --
Claims liabilities (Notes 2, 5 and 13) 4,351,500 3,391,950 --
Unearned premiums (Notes 2 and 13) 1,397,380 1,464,800 --
Commissions payable (Notes 4 and 13) 766,575 729,912 226,117
Accounts payable and accrued expenses 1,160,765 1,627,187 3,866,565
Deferred income taxes, net (Notes 2 and 11) 78,329 277,771 1,248,944
Surplus note payable, net (Note 6) 2,865,000 2,880,000 2,891,250
------------ ------------ ------------
Total liabilities 10,712,670 10,530,341 8,232,876
------------ ------------ ------------
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 25,801
Class B convertible common stock, $.01 par value; 50,000
shares authorized, 47,400 shares issued and outstanding 474 474 474
Additional paid-in capital 5,839,609 5,839,609 5,839,609
Paid-in capital attributed to detachable warrant (Note 6) 150,000 150,000 150,000
Retained earnings 935,665 1,035,985 2,121,099
Accumulated other comprehensive income:
Net unrealized investment loss (27,229) (22,274) (24,485)
------------ ------------ ------------
6,924,320 7,029,595 8,112,498
Secured promissory note from shareholder (Note 4) (500,000) (500,000) (500,000)
Cost of 10,000 shares Class A common stock
held in treasury (26,740) (26,740) (26,740)
------------ ------------ ------------
Total stockholders' equity 6,397,580 6,502,855 7,585,758
------------ ------------ ------------
Total liabilities and stockholders' equity $ 17,110,250 $ 17,033,196 $ 15,818,634
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(Restated)
<S> <C> <C> <C> <C> <C>
Revenue (Notes 2, 4, and 17):
Gross earned premiums $ 26,091,714 $ 23,160,259 $ 20,763,439 $ -- $ --
Ceded earned premiums (Notes 13 and 20) 13,045,857 11,580,129 10,381,719 -- --
------------ ------------ ------------ ------------ ------------
Net earned premiums 13,045,857 11,580,130 10,381,720 -- --
Third party administrative services (Note 8d) 204,367 260,664 351,346 248,091 1,035,988
Net realized and unrealized investment
income (losses) (Note 14) (495) (367) (2,713) (2,519) 346
Net investment income (Note 14) 252,134 440,539 513,913 379,849 403,626
Other income 128,838 38,660 7,087 4,900 21,323
------------ ------------ ------------ ------------ ------------
Total revenue 13,630,701 12,319,626 11,251,353 630,321 1,461,283
------------ ------------ ------------ ------------ ------------
Expenses:
Underwriting:
Gross claims incurred (Note 2) 16,588,801 15,288,310 12,212,694 -- --
Ceded claims incurred (Note 13) 8,294,400 7,644,155 6,106,347 -- --
------------ ------------ ------------ ------------ ------------
Net claims incurred 8,294,401 7,644,155 6,106,347 -- --
------------ ------------ ------------ ------------ ------------
Gross commissions incurred (Note 4) 4,616,807 4,206,730 3,907,264 -- --
Ceded commissions incurred (Note 13) 4,447,545 3,559,620 3,937,966 -- --
------------ ------------ ------------ ------------ ------------
Net commissions incurred (earned) 169,262 647,110 (30,702) -- --
------------ ------------ ------------ ------------ ------------
Total underwriting expenses 8,463,663 8,291,265 6,075,645 -- --
General and administrative expenses 5,015,558 4,920,536 4,682,640 810,000 1,041,800
------------ ------------ ------------ ------------ ------------
Total expenses before charge for com-
pensation expense resulting from
the exercise of options and warrants 13,479,221 13,211,801 10,758,285 810,000 1,041,800
Compensation expense resulting from the
exercise of options and warrants (Note 19) -- 757,350 -- -- --
------------ ------------ ------------ ------------ ------------
Total expenses 13,479,221 13,969,151 10,758,285 810,000 1,041,800
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income tax provision (benefit) 151,480 (1,649,525) 493,068 (179,679) 419,393
------------ ------------ ------------ ------------ ------------
</TABLE>
(Continued)
F-5
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------ --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(Restated)
<S> <C> <C> <C> <C> <C>
Provision (benefit) for income taxes (Note 11):
Provision for income taxes $ 92,900 $ 81,176 $ 392,748 $ -- $ 163,563
Net operating loss benefit -- (554,838) -- (70,075) --
------------ ------------ ------------ ----------- -----------
Net provision (benefit) 92,900 (473,662) 392,748 (70,075) 163,563
------------ ------------ ------------ ----------- -----------
Income (loss) from continuing operations 58,580 (1,175,863) 100,320 (109,604) 255,830
------------ ------------ ------------ ----------- -----------
Discontinued operations:
Income from operations of disposed segment
(net of income taxes) (Note 3) 5,643 -- -- 243,864 (8,887)
Gain on disposal of segment (net of income
taxes of $127,891 and $530,719) 192,300 -- -- -- 838,171
------------ ------------ ------------ ----------- -----------
197,943 -- -- 243,864 829,284
------------ ------------ ------------ ----------- -----------
Net income (loss) $ 256,523 $(1,175,863) $ 100,320 $ 134,260 $ 1,085,114
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Net income (loss) per common share:
Basic:
Continuing operations (Notes 12 and 19) $ 0.03 $ (0.51) $ 0.04 $ (0.04) $ 0.10
Discontinued operations 0.10 -- -- 0.09 0.31
------------ ------------ ------------ ----------- -----------
Net income (loss) $ 0.13 $ (0.51) $ 0.04 $ 0.05 $ 0.41
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Diluted:
Continuing operations (Notes 12 and 19) $ 0.02 $ (0.51) $ 0.04 $ (0.04) $ 0.10
Discontinued operations 0.09 -- -- 0.09 0.31
------------ ------------ ------------ ----------- -----------
Net income (loss) $ 0.11 $ (0.51) $ 0.04 $ 0.05 $ 0.41
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Weighted average number of common shares:
Basic (Note 14) 1,978,000 2,297,750 2,617,500 2,617,500 2,617,500
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Diluted (Note 14) 2,279,287 2,297,750 2,617,500 2,617,500 2,617,500
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
</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, 1995, 1996 and 1997 and
Unaudited for the Nine Months Ended September 30, 1998
<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 loss -- -- -- -- -- --
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
Net income (unaudited) -- -- -- -- -- --
Net investment loss (unaudited) -- -- -- -- -- --
--------- ----------- --------- ---------- ---------- -----------
Balance - September 30, 1998 (unaudited) 2,580,100 $ 25,801 47,400 $ 474 $5,839,609 $ 150,000
--------- ----------- --------- ---------- ---------- -----------
--------- ----------- --------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
Accumulated Class A
other Secured common
compre- promissory stock
Retained hensive note held in
earnings Income receivable treasury Total
----------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1995 $ 1,855,005 $ (30,278) $ -- $ (26,740) $ 6,011,221
Net loss 256,523 -- -- -- 256,523
Net investment gains -- 18,436 -- -- 18,436
Issuance of surplus note (Note 6) -- -- -- -- 150,000
----------- ------------ ------------ ------------ --------------
Balance - 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
Net income (unaudited) 1,085,114 -- -- -- 1,085,114
Net investment loss (unaudited) -- (2,211) -- -- (2,211)
----------- ------------ ------------ ------------ --------------
Balance - September 30, 1998 (unaudited) $ 2,121,099 $ (24,485) $ (500,000) (26,740) $ 7,585,758
----------- ------------ ------------ ------------ --------------
----------- ------------ ------------ ------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 256,523 $(1,175,863) $ 100,320 $ 134,260 $ 1,085,114
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 57,321 64,641 57,606 42,992 35,910
Amortization of deferred acquisition costs 323,202 332,633 319,775 224,545 484,398
Amortization of discount on surplus note -- 15,000 15,000 11,250 11,250
Loss on sale of investments 137 208 2,519 2,625 --
Amortization of intangible assets 248,957 -- -- -- --
Gain on sale of subsidiary (320,192) -- -- -- --
Deferred income taxes 343,385 (544,098) 199,442 109,946 (1,257,257)
Unrealized loss on trading securities 358 341 194 -- --
Compensation arising from exercise of
options and warrants -- 757,350 -- -- --
(Increase) decrease in operating assets
excluding effects of divestiture:
Premiums receivable 1,196,795 827,505 1,325,600 504,700 2,978,600
Prepaid and refundable income taxes 51,412 8,329 47,498 193,010 710,050
Receivable from related parties (50,145) (53,727) (260,395) (122,079) (119,212)
Other assets 59,171 (309,854) (259,664) 181,861 (456,047)
Receivables from reinsurer -- -- -- -- (1,461,360)
Increase (decrease) in operating liabilities
excluding effects of divestiture:
Payable to reinsurer 81,083 (68,355) 65,600 (4,146) (158,721)
Claims liabilities (395,131) (174,815) (959,550) (651,300) (3,391,950)
Unearned premiums (30,155) 69,170 67,420 82,920 (1,464,800)
Commissions payable (401,078) (175,903) (36,663) 71,186 (503,795)
Income taxes payable -- -- -- -- 1,248,944
Accounts payable and accrued expenses (316,273) 387,796 466,422 349,364 2,239,378
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,105,370 (39,642) 1,151,124 1,131,134 (19,498)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Furniture and equipment acquired (130,228) (9,644) (32,717) (32,717) (9,999)
Proceeds from sale of investments 222,239 56,987 225,146 112,990 8,942
Purchases of investments -- (41,281) (109,233) (279) --
Proceeds from sale of subsidiary 764,675 -- -- -- --
Payments and costs associated with
acquired business (588,595) (62,389) (14,036) -- --
Divestiture of subsidiary (320,997) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (52,906) (56,327) 69,160 79,994 (1,057)
----------- ----------- ----------- ----------- -----------
</TABLE>
(Continued)
F-8
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Increase in surplus note payable (Note 6) $ 3,000,000 $ -- $ -- $ -- $ --
Increase in note discount (Note 6) (150,000) -- -- -- --
Proceeds attributed to stock warrants (Note 6) 150,000 -- -- -- --
Issuance of Class A common stock -- 395,300 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 3,000,000 395,300 -- -- --
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and equivalents 4,052,464 299,331 1,220,284 1,211,128 (20,555)
Cash and equivalents:
Beginning of period 2,724,864 6,777,328 7,076,659 7,076,659 8,296,943
----------- ----------- ----------- ----------- -----------
End of period $ 6,777,328 $ 7,076,659 $ 8,296,943 $ 8,287,787 $ 8,276,388
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental cash flow disclosure:
Cash paid during the period for:
Income taxes $ 327,231 $ 296,847 $ 305,725 $ 295,931 $ 299,195
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
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, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
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.
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.
(Continued)
F-10
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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).
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 $57,321, $64,641 and $57,606, respectively.
Investments
Pursuant to the requirements of FASB Statement No. 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.
(Continued)
F-11
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of the reinsurer to honor its obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurer and monitors concentrations of credit risk arising from activities to
minimize its exposure to significant losses from reinsurer default.
Fair Value of Financial Instruments
The carrying amounts and related fair values of financial instruments at
December 31, 1996 and 1997 and at September 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- -----------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and equivalents $7,076,659 $7,076,659 $8,296,943 $8,296,943 $8,276,388 $8,276,388
Investments:
Held-to-maturity securities 2,696,220 2,650,210 2,630,453 2,632,904 2,621,165 2,621,165
Available for sale securities 56,920 56,920 9,250 9,250 7,104 7,104
Trading securities 319 319 85 85 366 336
Premiums receivable 4,304,200 4,304,200 2,978,600 2,978,600 --
Receivable from related parties 182,787 182,787 443,182 443,182 562,394 562,334
Payable to reinsurer 93,121 93,121 158,721 158,721
Claims liabilities 4,351,500 4,351,500 3,391,950 3,391,950
Unearned premiums 1,397,380 1,397,380 1,464,800 1,464,800
Surplus note payable, net 2,865,000 3,000,000 2,880,000 3,000,000 2,891,250 3,000,000
</TABLE>
(Continued)
F-12
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments (Continued)
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.
(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 SAP basis of accounting (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 Class 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, 1995 and 1996 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, 1996 and 1997 cash and cash equivalents include
certificates of deposits, commercial paper, and money market accounts as
follows:
(Continued)
F-13
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents (Continued)
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Cash in bank $ 2,230,519 $ 2,683,620
Money market accounts 1,446,499 1,396,236
Commercial paper 3,087,829 3,992,528
Certificates of deposit 311,812 224,559
----------- ------------
$ 7,076,659 $ 8,296,943
----------- ------------
----------- ------------
</TABLE>
3. SALE OF ASSETS
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.
In November 1998, the Company completed the sale of its insurance business
previously conducted by its wholly-owned subsidiary, Arista, to The Guardian
Life Insurance Company of America ("The Guardian") for cash plus the assumption
of related assets and liabilities. The sale resulted in a net gain of $838,171,
net of taxes of $530,719. The net assets of the discontinued operations at
September 30, 1998 have been segregated in the consolidated balance sheet. The
summary of operating results of the discontinued operations excluding the gain
on disposal, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross premiums earned $ 5,475,359 $ 281,000 $ 16,471,370 $ 9,792,264
Ceded premiums earned 2,737,680 -- 8,235,685 4,630,632
------------ ------------ ------------ ------------
Net premiums earned 2,737,629 281,000 8,235,685 5,161,632
------------ ------------ ------------ ------------
Underwriting expenses 3,485,032 (141,424) 9,424,406 4,839,236
Ceded underwriting expenses 1,742,516 (128,166) 4,712,203 2,362,164
------------ ------------ ------------ ------------
1,742,516 (13,258) 4,712,203 2,477,072
------------ ------------ ------------ ------------
Gross commissions incurred 979,502 77,844 3,056,620 1,965,300
Gross commissions ceded 906,190 56,351 3,255,823 1,538,787
------------ ------------ ------------ ------------
73,312 21,493 (199,203) 426,513
------------ ------------ ------------ ------------
</TABLE>
(Continued)
F-14
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
3. SALE OF ASSETS (Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1997 1998 1997 1998
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
$ 1,815,828 $ 8,235 $ 4,513,000 $ 2,903,585
General and administrative expense 900,297 -- 3,042,146 2,272,616
----------- --------- ----------- -----------
Total expenses 2,716,125 8,235 7,555,146 5,176,201
----------- --------- ----------- -----------
Profit (loss) from discontinued
operations, before tax 21,554 272,765 680,539 (14,569)
Tax provision (benefit) 60,925 106,378 436,675 (5,682)
----------- --------- ----------- -----------
Net income (loss) from discontinued
operations, net of tax $ (39,371) $ 166,387 $ 243,864 $ (8,887)
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
4. TRANSACTIONS WITH RELATED PARTIES
Agents
Bernard Kooper ("Kooper"), Chairman of the Board of the Company and
Arista, and owner of 10.4% in 1995 and 19.1% in 1996 and 20.4% in 1997 of the
Company's outstanding Class A common stock, and 100% of the Company's Class B
common stock, is one of the more than 390 general agents under contract with
Arista. Gross earned premiums from policies placed by Kooper's agency, Bernard
Kooper Life Agency, Inc. (the "Agency") aggregated $1,297,784, $1,254,143, and
$1,258,156 for the years ended December 31, 1995, 1996 and 1997, respectively.
The Agency received approximately $224,000, $223,000 and $227,000 in commissions
from Arista during 1995, 1996 and 1997, respectively, for premiums on policies
placed with Arista. Such premiums represented approximately 5.0%, 5.4% and 6.1%,
respectively, of the consolidated gross premiums earned during the years ended
December 31, 1995, 1996 and 1997. The Agency, in turn, paid approximately
$143,000, $159,000 and $131,000 during 1995, 1996 and 1997, respectively, to
other brokers, including approximately $23,000, $26,000 and $26,000,
respectively, to brokers who are members of the Board of Directors of Arista.
Commissions payable to the related agencies at December 31, 1995, 1996 and 1997
were $11,271, $13,268 and $13,960, 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 8a.
(Continued)
F-15
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
4. TRANSACTIONS WITH RELATED PARTIES (Continued)
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 $12,000 in 1995 and $30,000 in 1996, 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
1995, 1996 and 1997.
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 payment for the shares, Kooper
paid $11,000 in cash and issued his secured promissory note (the "Note") to the
Company for $500,000. Such 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 are 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 (see Note 9). The Note is secured by the 365,000 shares of Class A common
stock.
Salary Advances
At December 31, 1996 and 1997, salary advances to an officer and director
of Arista aggregated $81,000 and $222,750, 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,
1996 and 1997 and for the nine months ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Balance at beginning of period $ 4,526,316 $ 4,351,500 $ 3,391,950
Less reinsurance recoverables 2,263,158 2,175,750 1,695,975
------------ ------------ -----------
Net claims liabilities 2,263,158 2,175,750 1,695,975
------------ ------------ -----------
Claims incurred:
Current year 15,007,646 12,939,875 4,911,562
Prior years 280,664 (727,181) 69,098
------------ ------------ -----------
Total claims incurred 15,288,310 12,212,694 4,980,660
------------ ------------ -----------
</TABLE>
(Continued)
F-16
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
5. CLAIMS LIABILITIES (Continued)
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Claims paid:
Current year $ 10,656,146 $ 9,875,609 $ 3,656,237
Prior years 4,806,980 3,296,635 3,020,398
------------ ----------- -----------
Total claims paid 115,463,126 13,172,244 6,676,635
------------ ----------- -----------
Balance at end of period:
Net claims liabilities 2,175,750 1,695,975 --
Plus reinsurance recoverables 2,175,750 1,695,975 --
------------ ----------- -----------
Total liability $ 4,351,500 $ 3,391,950 $ --
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
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, 1996 and
1997 totaled $315,000 and $348,075, 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, 1996 and 1997.
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.
(Continued)
F-17
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
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:
<TABLE>
<S> <C>
1998 $ 218,636
1999 228,450
2000 96,892
----------
$ 543,978
----------
----------
</TABLE>
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 $205,080 in 1995, $252,171 in 1996 and $249,973 in 1997.
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.
(Continued)
F-18
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
8. COMMITMENTS AND CONTINGENCIES (Continued)
(a) Employment Agreements (Continued)
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
agreements, the Company and Arista will pay the premiums on these policies for a
period of time specified in each agreement, on behalf of Kooper and Mandel. The
premium payments are to be treated as loans to both Kooper and Mandel and are
collateralized by the underlying policy. Insurance loans to Kooper and Mandel
aggregated $168,372 and $212,563 at December 31, 1996 and 1997, 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,
1996 and 1997 the estimated amounts needed to render these policies as paid up
are approximately $176,000 and $128,500, respectively.
(b) Uninsured Risk
At December 31, 1996 and 1997 cash and equivalents on deposit with
financial institutions exceeded federal deposit insurance coverage by
approximately $2,108,613 and $4,045,970, respectively.
(c) Policy Acquisitions
Arista incurred costs under various agreements it entered into to acquire
the right to offer New York State statutory disability benefits coverage to
former policyholders of other disability carriers. The costs included
professional fees and finder's fees as well as fees paid directly to the former
disability carriers for such rights which have been capitalized and are being
amortized on the straight-line basis over five to seven years. Such costs
amounted to $62,389 and $14,036 for the years ended December 31, 1996 and 1995,
respectively. Amortization of deferred acquisition costs charged to operations
for all acquisitions were $323,202, $332,633 and $319,775 for the years ended
December 31, 1995, 1996 and 1997, respectively. Accumulated amortization was
$1,540,746 and $1,860,521 at December 31, 1996 and 1997, respectively.
(Continued)
F-19
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for
the Nine Months Then Ended Is Unaudited)
8. COMMITMENTS AND CONTINGENCIES (Continued)
(c) Policy Acquisitions (Continued)
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.
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 Arista paid $23,712 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 1995 and 1996 Arista
incurred costs of $241,951 and $7,102, 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 1995 and 1996 Arista
incurred acquisition costs of $121,850 and $170,831, respectively, and at
December 31, 1996 and 1997, $5,000 and $4,411, 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)). In March 1998, Arista terminated this agreement with The
Cologne and entered into a similar reinsurance agreement with The Guardian Life
Insurance Company of America ("The Guardian").
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 incurred
acquisition costs of $62,325, and at December 31, 1996 and 1997, $23,132 and
$9,096, respectively, was receivable from the Ceding Group under this
arrangement.
(Continued)
F-20
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
8. COMMITMENTS AND CONTINGENCIES (Continued)
(d) Other Matters
(1) Effective July 1, 1993, Arista entered into an
agreement to perform certain administrative services
for The Guardian. Fees for these services are
determined in accordance with a prescribed schedule
based on the type of service provided. The agreement
will remain in effect until terminated by either party
upon 180 days prior written notice.
(2) Effective January 1, 1995, Arista entered into an
agreement to perform certain administrative services
for the United States Life Insurance Company in the
City of New York, a competitor in the business of
writing statutory disability benefits insurance. Fees
for these services are determined in accordance with a
prescribed schedule based on the type of service
provided. The agreement will remain in effect until
terminated by either party upon 180 days prior written
notice.
(3) Effective April 1, 1995, the Company entered into an
agreement to perform certain administrative services
for the American Bankers Insurance Company of Florida.
Fees for these services are determined in accordance
with a prescribed schedule based on the type of service
provided. The agreement will remain in effect until
terminated by either party upon 180 days prior written
notice.
(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, 1995, 1996 and 1997 were as
follows:
<TABLE>
<CAPTION>
Gross Ceded Net
Amount Amount Amount
------------ ----------- ----------
1995
<S> <C> <C> <C>
Premium receivable $ 345,000 $ 172,500 $ 172,500
Claims liabilities $ 160,000 $ 80,000 $ 80,000
Unearned premiums $ 27,360 $ 13,680 $ 13,680
</TABLE>
(Continued)
F-21
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
8. COMMITMENTS AND CONTINGENCIES (Continued)
(e) Reinsurance (Continued)
<TABLE>
<CAPTION>
Gross Ceded Net
Amount Amount Amount
------------ ----------- ----------
1996
<S> <C> <C> <C>
Premium receivable $ - $ - $ -
Claims liabilities $ - $ - $ -
Unearned premiums $ - $ - $ -
1997
Premium receivable $ - $ - $ -
Claims liabilities $ - $ - $ -
Unearned premiums $ - $ - $ -
</TABLE>
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, 1995, 1996 and 1997 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>
F-22
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
9. STOCK OPTIONS AND WARRANTS (Continued)
(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.
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-23
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
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, 1996 and 1997, 225,900 and 197,400 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-24
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
11. INCOME TAXES
At December 31, 1996 and 1997, deferred tax assets aggregated
$1,529,758 (including NOL carryforward of $554,838), $1,460,170 (including NOL
carryforward of $405,089), respectively, and deferred tax liability aggregated
$1,608,087 and $1,737,941, respectively, as follows:
<TABLE>
<CAPTION>
1996 1997
-------------- ---------
<S> <C> <C>
Deferred tax asset:
Commissions payable $ 281,713 $ 366,239
Investment in securities 9,832 22,588
Reinsurance 679,876 656,974
Other assets 3,499 9,280
Accounts payable and accrued expenses - -
Loss carryforward 554,838 405,089
-------------- --------------
Total deferred tax asset 1,529,758 1,460,170
-------------- --------------
Deferred tax liability:
Deferred acquisition costs 308,153 188,915
Other assets - 153,785
Claims liabilities 156,488 172,965
Reinsurance due 1,118,078 1,161,478
Accounts payable and accrued expenses 25,368 60,798
-------------- --------------
Total deferred tax liability 1,608,087 1,737,941
-------------- --------------
Net deferred tax liability $ 78,329 $ 277,771
-------------- --------------
-------------- --------------
</TABLE>
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>
1995 1996 1997
-------------------------- --------------------------- -----------------------
Percentage Percentage Percentage
of pretax of pretax of pretax
Amount income Amount income Amount income
--------- ----- ----------- ------- --------- ------
<S> <C> <C> <C>
Income (loss) before income taxes
from continuing operations $ 151,480 $(1,649,525) $ 493,068
--------- ----------- ---------
--------- ----------- ---------
Tax provision (benefit) at statutory rates $ 51,503 34.0 $(560,839) (34.0) $167,643 34.0
Increase in income taxes resulting from:
Discontinued operations 131,778 87.0 - - - -
State franchise and local taxes,
net of federal benefit 41,397 27.3 46,615 2.8 218,976 44.4
Other - - 40,562 2.5 6,129 1.2
--------- ----- ----------- ------- --------- ------
Income tax provision (benefit) $ 224,678 148.3 $ (473,662) (28.7) $ 392,748 79.6
--------- ----- ----------- ------- --------- ------
--------- ----- ----------- ------- --------- ------
</TABLE>
(Continued)
F-25
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
11. INCOME TAXES (Continued)
The provision (benefit) for income taxes consists of the following for the
years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- ---------
<S> <C> <C> <C>
Currently payable (benefit):
Federal $ (208,709) $ - $ 130,550
State and local 90,000 70,436 212,505
-------------- -------------- --------------
(118,709) 70,436 343,055
-------------- -------------- --------------
Deferred tax asset:
Beginning of period (11,476) (1,025,739) (974,920)
End of period (1,025,739) (974,920) (1,055,081)
-------------- -------------- --------------
Net change (1,014,263) 50,819 (80,161)
-------------- -------------- --------------
Deferred tax liability:
Beginning of period 290,516 1,648,166 1,608,087
End of period 1,648,166 1,608,087 1,737,941
-------------- -------------- --------------
Net change 1,357,650 (40,079) 129,854
-------------- -------------- --------------
Net deferred tax effect 343,387 10,740 49,693
-------------- -------------- --------------
Income tax provision before NOL benefit 224,678 81,176 392,748
Net operating loss benefit - (554,838) -
-------------- -------------- --------------
Net income tax provision (benefit) $ 224,678 $ (473,662) $ 392,748
-------------- -------------- --------------
-------------- -------------- --------------
</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, 1995, 1996 and 1997, respectively.
(Continued)
F-26
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
12. NET INCOME (LOSS) PER COMMON SHARE (Continued)
<TABLE>
<CAPTION>
Income Per Share
(Loss) Shares Amount
-------------- ----------- -----------
<S> <C> <C> <C>
Year Ended December 31, 1995:
Basic EPS - previously reported $ 256,523 2,251,400 $ 0.11
Effects of restatement to comply
with FASB Statement No. 128 - (273,400) 0.02
-------------- ----------- -----------
Basic EPS - as restated 256,523 1,978,000 0.13
Effects of dilutive securities(1):
Options outstanding - 129,409 (0.01)
Warrants outstanding - 171,878 (0.01)
-------------- ----------- -----------
Diluted EPS $ 256,523 2,279,287 $ 0.11
-------------- ----------- -----------
-------------- ----------- -----------
Year Ended December 31, 1996:
Basic EPS - previously reported $ (1,175,863) 2,617,500 $ (0.45)
Effects of restatement to comply with
FASB Statement No. 128 - (319,750) (0.06)
-------------- ----------- -----------
Basic EPS - as restated (1,175,863) 2,297,750 (0.51)
Effects of dilutive securities: None(2) - - -
-------------- ----------- -----------
Diluted EPS $ (1,175,863) 2,297,750 $ (0.51)
-------------- ----------- -----------
-------------- ----------- -----------
Year Ended December 31, 1997:
Basic EPS $ 100,320 2,617,500 $ 0.04
Effects of dilutive securities: None(3) - - -
-------------- ----------- -----------
Diluted EPS $ 100,320 2,617,500 $ 0.04
-------------- ----------- -----------
-------------- ----------- -----------
</TABLE>
(1) 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.
(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) 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.
(Continued)
F-27
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
13. REINSURANCE
Effective October 1, 1993, Arista entered into a new agreement (the
"Agreement") with Harbourton whereby Arista agreed to cede by way of
reinsurance, a 50% quota share of Arista's liability with respect to the
insurance business written to policyholders. In 1994 and 1995 Harbourton
received a fee based on premiums ceded. The Agreement was terminated on
September 30, 1995.
Effective October 1, 1995, Arista entered into a reinsurance agreement
with The Cologne (see Notes 6 and 8) whereby Arista ceded by way of reinsurance,
a 50% quota share participation in Arista's insurance business, both for
policies in force as of October 1, 1995 and for all new insurance business
written or acquired on or after October 1, 1995. The agreement calls for Arista
to pay to The Cologne its proportionate share of the gross premium written less
a provisional ceding commission of 25%, which includes premium tax, less The
Cologne's proportionate share of the gross losses applicable to this business.
The provisional ceding commission will be adjusted quarterly. At December 31,
1996 and 1997, $93,121 and $158,721, 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 8.)
Ceded transactions for the years ended December 31, 1995, 1996 and 1997
were as follows:
<TABLE>
<CAPTION>
Gross Ceded Net
Amount Amount Amount
-------------- -------------- --------------
<S> <C> <C> <C>
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
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
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 $ 355,900 $ 1,085,812
</TABLE>
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.
(Continued)
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
14. INVESTMENTS
Investments at December 31, 1996 and 1997 and at September 30,
1998 consisted of the following types:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Held-to-maturity securities $ 2,696,220 $ 2,630,453 $ 2,621,165
Available-for-sale securities 56,920 9,250 7,104
Trading securities 319 85 366
-------------- -------------- --------------
$ 2,753,459 $ 2,639,788 $ 2,628,635
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Trading securities are adjusted to fair value and carried in the
accompanying financial statements. The aggregate fair value, gross unrealized
holding gains, gross unrealized holding losses, and amortized cost for
available-for-sale and held-to-maturity securities by major security type at
December 31, 1996 and 1997 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, 1996:
Redeemable preferred securities $ 84,149 $ - $ 27,229 $ 56,920
-------------- ------------- -------------- --------------
$ 84,149 $ - $ 27,229 $ 56,920
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
December 31, 1997:
Redeemable preferred securities $ 31,524 $ - $ 22,274 $ 9,250
-------------- -------------- -------------- --------------
$ 31,524 $ - $ 22,274 $ 9,250
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity securities
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1996:
Corporate debt securities $ 53,601 $ - $ 4,601 $ 49,000
U.S. Treasury securities 2,642,619 9,959 51,368 2,601,210
-------------- -------------- -------------- --------------
$ 2,696,220 $ 9,959 $ 55,969 $ 2,650,210
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
December 31, 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
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</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 and money market accounts with a carrying value of approximately
$2,547,000 at December 31, 1996 and 1997.
(Continued)
F-29
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
14. INVESTMENTS (Continued)
Investment Income
Net investment income for the years ended 1995, 1996 and 1997 and for the
nine months ended September 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividends:
Bonds and long-term investments $ 174,156 $ 161,812 $ 148,582 $ 94,722
Short-term investments 77,978 258,391 328,765 288,539
-------------- -------------- -------------- --------------
Total interest and dividends 252,134 420,203 477,347 383,261
Interest on note receivable from related party - 20,336 36,566 20,365
-------------- -------------- -------------- --------------
Total investment income $ 252,134 $ 440,539 $ 513,913 $ 403,626
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
Realized and unrealized gains and losses on investments for the years ended
December 31, 1995, 1996 and 1997 and for the nine months ended September 30,
1998 consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Realized gains (losses)
Redeemable preferred securities $ (137) $ (208) $ (2,625) $ -
Equity securities - - 106 -
-------------- -------------- -------------- --------------
Total realized losses (137) (208) (2,519) -
-------------- -------------- -------------- --------------
Unrealized losses
Equity securities (358) (159) (194) 346
-------------- -------------- -------------- --------------
Total unrealized losses (358) (159) (194) 346
-------------- -------------- -------------- --------------
Net investment loss $ (495) $ (367) $ (2,713) $ 346
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
Investment Maturity
The following schedule sets forth the respective maturity dates as at
December 31, 1997:
<TABLE>
<CAPTION>
Available-for-sale securities
-----------------------------
Fair
Cost Value
---- -----
<S> <C> <C>
Due after one year through five years $ 31,524 $ 9,250
-------------- --------------
-------------- --------------
</TABLE>
(Continued)
F-30
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
14. INVESTMENTS (Continued)
<TABLE>
<CAPTION>
Held-to-maturity securities
---------------------------
Fair
Cost Value
-------------- --------------
<S> <C> <C>
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
-------------- --------------
-------------- --------------
</TABLE>
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, 1995, 1996 and
1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Capital and surplus reported for SAP purposes $ 6,432,629 $ 6,175,568 $ 6,206,020
Add (deduct):
Inclusion of nonadmitted assets 1,872,086 1,956,065 2,624,539
Surplus notes payable (3,000,000) (3,000,000) (3,000,000)
Deferred costs, net of tax 441,221 205,689 66,158
Claims reserves, net of tax 559,193 509,495 548,059
Unrealized depreciation on marketable securities, net (16,038) (31,425) (26,471)
Other, net of tax 70,330 18,427 217,267
Adjustment to premiums receivable, net of tax 533,443 533,443 533,443
Prior period tax over accrual (360,883) (359,082) (330,248)
Realized gain on investments, net of tax (33,853) (27,720) (27,370)
NOL carryforward - 34,500 -
-------------- -------------- --------------
Stockholder's equity reported in
Arista's financial statements $ 6,498,128 $ 6,014,960 $ 6,811,397
-------------- -------------- --------------
-------------- -------------- --------------
Net income (loss) reported for SAP purposes $ 231,349 $ (61,398) $ 698,926
Add (deduct):
Deferred costs, net of tax 131,036 (235,532) (139,531)
Other, net of tax (48,427) (51,902) 164,339
Claims reserves, net of tax (20,922) (49,698) 38,564
Adjustment to premiums receivable, net of tax 504,752 - -
Realized gain on investments, net of tax - 6,133 350
Amortization of intangible asset, net of tax (122,705) - -
Gain on sale of subsidiary, net of tax (76,404) - -
Income tax expense differences (210,152) 1,800 28,834
-------------- -------------- --------------
Net income (loss) reported in Arista's
financial statements $ 388,527 $ (390,597) $ 791,482
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
(Continued)
F-31
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
15. STATUTORY MATTERS (Continued)
Arista was in compliance with the NYSID minimum statutory capital and
surplus requirement at December 31, 1995, 1996 and 1997.
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. 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.
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,
1995, 1996 and 1997 were as follows:
(Continued)
F-32
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
(Information as of September 30, 1998 and for the
Nine Months Then Ended Is Unaudited)
17. INDUSTRY SEGMENTS (Continued)
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Disability insurance $ 26,091,714 $ 23,160,259 $ 20,763,439
Property and casualty - - -
Third party administrative 204,367 260,664 351,346
-------------- -------------- --------------
Total revenues $ 26,296,081 $ 23,420,923 $ 21,114,785
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
18. MAJOR CUSTOMER
For the year ended December 31, 1996, one group, 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, 1995 and 1997, 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 $3,692,000 in 1995 and $2,506,000
in 1997.
In January 1998, Arista was notified by 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
investigation will 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, 1995, 1996 and 1997 aggregated $2,034,000, $2,468,331
and $1,266,499, respectively.
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.
F-33
<PAGE>
ARISTA INVESTORS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Introduction
As discussed elsewhere herein, Arista has entered into a Coinsurance and
Assumption Reinsurance Agreement (the "Treaty") subject to the approval of the
Superintendent of Insurance of the State of New York and the Company's
shareholders, pursuant to which it has agreed to cede to The Guardian Life
Insurance Company of America ("The Guardian") all New York State statutory,
super statutory and voluntary disability benefits insurance (collectively, the
"insurance business") underwritten by Arista. Under the Treaty The Guardian will
assume all of Arista's insurance liabilities (other than liabilities arising
from acts, errors or omissions by Arista). In exchange for the transfer of the
insurance business, Arista will receive a fee based on its estimated earned
premiums for the preceding twelve months. The Company will concurrently enter
into an Administrative Services Agreement (the "TPA Agreement") with The
Guardian to service all insurance business insured by The Guardian for a fee
based on the premium earned by The Guardian. The Company may earn additional
fees depending upon the performance results achieved by The Guardian, as well as
fees based on the premiums earned from other administrative services agreements.
The TPA Agreement is effective for a period of up to five years from its
effective date, subject (under certain conditions) to earlier termination by The
Guardian. The sale will accelerate certain payments by the Company and Arista
including Arista's Surplus Note (subject to approval by the New York State
Superintendent of Insurance), and other amounts pursuant to employment
agreements with the Company's executive vice president and its chairman.
The accompanying condensed consolidated financial information has been prepared
to provide each stockholder with information useful in analyzing the future
prospects of the Company by illustrating the possible scope of change in the
Company's historical financial statements that would result from the sale and
related transactions described above and in Proposal 1 of this Proxy Statement.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet has been adjusted
as if all the transactions occurred on September 30, 1998. The Unaudited Pro
Forma Condensed Consolidated Statement of Operations for the year ended December
31, 1997 and for the nine months ended September 30, 1998 has been prepared as
if all the transactions occurred on January 1, 1997. Further, although the
accompanying pro forma balance sheet reflects and/or gives effect to the gain on
the sale of the insurance business of Arista, such gain was excluded from the
accompanying pro forma statements of operations at December 31, 1997. The
accompanying pro forma financial information is unaudited and not necessarily
indicative of the results that would actually have occurred if the transactions
had been consummated as of January 1, 1997 or September 30, 1998, or the results
which may be obtained in the future.
The pro forma adjustments, as described in the notes to the Unaudited Pro Forma
Condensed Consolidated Financial Information are based on available information
and upon certain assumptions that management believes are reasonable. The
accompanying Unaudited Condensed Consolidated Financial Information should be
read in conjunction with the historical financial statements of the Company
included elsewhere in this Proxy Statement.
F-34
<PAGE>
ARISTA INVESTORS CORP.
----------------------
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1998
($000)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Investments $ 2,629 (A) $ 127 $ 2,756
Cash and equivalents 8,276 (B) (3,859) 4,377
(E) (250)
(F) 210
Premiums receivable - -
Deferred policy acquisition costs - -
Prepaid and refundable income taxes 979 979
Furniture and equipment 88 88
Receivable from reinsurer 1,461 1,461
Receivable related parties 562 (F) (562) -
Receivable from third party administration 941 941
Other assets 882 882
--------- --------- --------
Total assets $ 15,818 $ (4,334) $ 11,484
--------- --------- --------
--------- --------- --------
</TABLE>
(Continued)
F-35
<PAGE>
ARISTA INVESTORS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1998 - Continued
($000)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Payable to reinsurer $ - $ -
Claims liabilities - -
Commissions payable 226 226
Accounts payable and accrued expenses 3,867 (B) (859) 3,008
Deferred income taxes 1,249 (D) (428) 821
Surplus note payable 2,891 (B) (3,000) -
Unearned premiums (B) 109
- -
--------- ---------- ---------
Total liabilities 8,233 (4,178) 4,055
--------- ---------- ---------
Stockholders' equity:
Class A common stock 26 (C) 1 26
Class B common stock 1 (C) (1) -
Common stock warrants 150 (B) (150) -
Additional paid-in capital 5,839 (C) (66) 5,897
(G) (27)
(B) 150
Retained earnings 2,121 1,499
(M) (25)
(A) (127)
(B) (109)
(C) (434)
(D) 428
(E) (250)
(F) (352)
Net unrealized loss on investment securities (25) (G) 25 -
--------- ---------- ---------
8,112 (683) 7,429
Secured promissory note from shareholder (500) (C) 500 -
Cost of stock held in treasury (27) (G) 27 -
--------- ---------- ---------
Total stockholders' equity 7,585 (156) 7,429
--------- ---------- ---------
$ 15,818 $ 4,334 $ 11,484
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
See notes to unaudited pro forma condensed consolidated financial
statements.
F-36
<PAGE>
ARISTA INVESTORS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
($000, except per share amount)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Nine Months Ended September 30, 1998
--------------------------------------- ---------------------------------------
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Gross earned premium $20,764 (N) $(20,764) $ - $9,792 (N) $(9,792) $ -
Ceded earned premium 10,382 (N) (10,382) - 4,630 (N) (4,630) -
------- ------- ------- ------ ------- -------
Net earned premium 10,382 (10,382) - 5,162 (5,162) -
Third party administrative fees (O) 3,422 3,422 1,036 1,036
351 (N) (351) -
Investment income, net 511 (N) (511) - 404 404
(O) 20 20
Other income 7 (N) (7) - 21 21
------- ------- ------- ------ ------- -------
Total revenue 11,251 (7,809) 3,442 6,623 (5,162) 1,461
------- ------- ------- ------ ------- -------
Expenses:
Underwriting:
Gross claims incurred 12,213 (N) (12,213) - 4,839 (N) (4,839) -
Ceded claims incurred 6,106 (N) (6,106) - 2,362 (N) (2,362) -
------- ------- ------- ------ ------- -------
Net claims incurred 6,107 (6,107) - 2,477 (2,477) -
------- ------- ------- ------ ------- -------
Gross commissions incurred 3,907 (N) (3,907) - 1,965 (N) (1,965) -
Ceded commissions incurred 3,938 (N) (3,938) - 1,539 (N) (1,539) -
------- ------- ------- ------ ------- -------
Net commissions incurred (31) (31) - 427 (427) -
------- ------- ------- ------ ------- -------
Total underwriting expenses 6,076 (6,076) - 2,904 (2,904) -
(O) 2,105 2,105
(O) 740 740 (O) 1,042 1,042
General and administrative expenses 4,682 (N) (4,682) - 2,272 (N) (2,272) -
------- ------- ------- ------ ------- -------
Total expenses 10,758 (7,913) 2,845 5,176 (4,134) 1,042
------- ------- ------- ------ ------- -------
Income (loss) before provision
for income taxes 493 104 597 1,447 (1,028) 419
Provision for income taxes 393 (N) 393 - 362 (N) 362 -
(O) (233) 233 (O) (163) 163
------- ------- ------- ------ ------- -------
Net income $ 100 $ 264 $ 364 $1,085 $ (829) $ 256
------- ------- ------- ------ ------- -------
------- ------- ------- ------ ------- -------
Earnings per common share $ 0.04 $ 0.10 $ 0.14 $ 0.41 $ (0.31) $ 0.10
------- ------- ------- ------ ------- -------
------- ------- ------- ------ ------- -------
Weighted average shares outstanding:
Basic and diluted 2,617,500 2,617,500 2,617,500 2,617,500 2,617,500 2,617,500
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
See notes to unaudited pro forma condensed consolidated financial
statements.
F-37
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
As of September 30, 1998 and for the Year Ended December 31, 1997
and Nine Months Ended September 30, 1998
(A) Adjustment to record "held-to-maturity" investments from cost to fair
value, and to write-off the unamortized deferred policy acquisition costs
related to the policies sold to The Guardian.
(B) Adjustment to record the payment of the principal balance of the surplus
note issued by Arista to CLUMCO. On the effective date of the agreement,
the surplus note will become payable upon demand by CLUMCO. The surplus
note must be paid prior to the closing of the sale of Arista, and such
payment is to be made from the free and divisible surplus of Arista,
subject to prior approval of the New York State Insurance Department:
<TABLE>
<CAPTION>
<S> <C>
Surplus note $ 3,000,000
Detachable stock warrants 150,000
Interest expense 108,750
Accrued interest 859,136
Unamortized discount (108,750)
Additional paid-in capital (150,000)
Cash payment (3,859,136)
--------------
$ -
--------------
--------------
</TABLE>
(C) Adjustment to record the exercise of Class B option by the Company as
follows:
<TABLE>
<CAPTION>
<S> <C>
Class B Common canceled $ 474
Additional paid-in capital 65,886
Retained earnings - dividend to Class B shareholder 434,114
Class A Common issued (474)
Secured promissory note from shareholder (500,000)
-------------
$ -
-------------
-------------
</TABLE>
(D) Adjustment to record the change in deferred income taxes resulting from
the elimination of the temporary differences due to the sale of the
insurance business to The Guardian. The assets and liabilities were sold
and therefore the temporary differences were eliminated, as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Commissions payable $ 330,935
Other assets 585
Accounts payable and accrued expenses 4,907
---------
336,427
---------
Deferred tax liability:
Deferred acquisition costs 128,319
Claims liabilities 286,767
Reinsurance 348,972
---------
764,058
---------
$ 427,631
---------
---------
</TABLE>
(Continued)
F-38
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - Continued
As of September 30, 1998 and for the Year Ended December 31, 1997
and Nine Months Ended September 30, 1998
(E) Adjustment to recognize the estimated aggregate professional costs
incurred and to be incurred in connection with the sale of the insurance
business to The Guardian.
(F) Adjustment for receipt of $209,750 from Mandel for salary advances and
write-off of the remaining $249,837 of life insurance premium pursuant to
employment agreements with Kooper and Mandel.
(G) Adjustment to write off cost of treasury shares and unrealized loss on
investment securities charged to stockholders' equity.
(N) Adjustment as of January 1, 1997 to eliminate insurance underwriting
revenues and underwriting expenses pertaining to New York State
disability insurance business sold to The Guardian, and other related
income and expenses.
(O) Adjustment to record TPA operations as if the Company commenced
performance under the TPA Agreement effective January 1, 1997.
Under the TPA Agreement the Company receives a service fee for
administrative functions based on both fixed and variable percentages of
paid premiums earned by the underwriter. The Company earns a basic fee of
7% based on paid premiums. The basic fee is subject to a service fee
adjustment of +/- 1% of paid premium, depending on actual performance
calculated semi-annually. If certain levels of performance are met, the
Company may earn an additional 1% "audit based fee"; if performance falls
below a specified level of performance, 1% would be deducted from the
basic fee. Under no circumstances would the annual service fee be less
than 6% per year. The Company may also earn an additional "experience
incentive fee" ("EIF") based on claim experience. EIF is based on a
percentage of earned premium on administered contracts calculated
annually based on the following formula: EIF = .5x (.88 less .59 (assumed
loss ratio), less .01 (premium tax), less .018 (assessment reserves),
less .1625 (commissions)). Under this formula, EIF may not be less than
0% or higher than 5%. Cost percentage is defined as incurred claims plus
commissions earned plus premium tax and DBL assessments incurred divided
by earned premiums. The Company's agreement with U.S. Life calls for a
service fee ranging from 6.5% to 7.5% based on premiums earned by the
underwriter. Paid premiums from policyholders aggregated approximately
$22,156,265 for the year ended December 31, 1997.
F-39
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<S> <C>
2.1 Assumption Reinsurance Agreement, dated as of September 23,
1998, by and among Arista Insurance Company, Arista
Investors Corp. and The Guardian Life Insurance Company of
America.*
10.1 Administration Services Agreement, dated as of September 23,
1998, between The Guardian Life Insurance Company of
America and Arista Insurance Company.*
99.1 Press Release, dated September 28, 1998.
99.2 Press Release, dated October 21, 1998.
99.3 Press Release, dated November 13, 1998.
</TABLE>
- ------------------------------
* Incorporated by reference to the Company's definitive proxy statement,
filed with the Securities and Exchange Commission on September 28, 1998
(File No. 000-16520).
<PAGE>
Exhibit 99.1
ARISTA INVESTORS CORP.
116 John Street
New York, New York 10038
N.Y. (212) 964-2150
Fax: (212) 608-6473
UPSTATE: (800)522-3114
FOR IMMEDIATE RELEASE Contact: Stanley S. Mandel
Executive Vice President
New York, New York; September 28, 1998. . . Arista Investors Corp. (OTC:ARINA)
announced that, together with Arista Insurance Company and The Guardian Life
Insurance Company of America, one of America's largest providers of employee
benefits, definitive agreements regarding the acquisition by The Guardian of
Arista Insurance's entire block of New York State Statutory Disability
Benefits Insurance business ("DBL Business") have been executed. Pursuant to
the terms of the Administrative Services Agreement, upon completion of the
proposed transaction, Arista Investors will administer of DBL Business that
was previously underwritten by Arista Insurance, as well as all of the DBL
Business underwritten by The Guardian.
Stanley S. Mandel, President of Arista Insurance and the person who will
become the President of Arista Investors following the completion of the
transaction, stated "While the approval of the New York State Insurance
Department and each of the Boards of Directors of Arista Insurance and
Arista Investors has been received, the proposed sale of substantially all of
the Company's assets pursuant to the Assumption Reinsurance Agreement is
subject to the approval of the holders of the Class A Common Stock of Arista
Investors. A special meeting of stockholders has been scheduled for October
19, 1998, at 2:00 p.m., local time, at the New York Marriott Financial
Center, New York, New York to seek such approval. Today, the Company is
mailing a Notice of Meeting, a Proxy and Proxy Statement to the holders of
the Company's Class A Common Stock seeking such approval."
The proceeds from the session of the DBL Business will be based upon Arista
Insurance's last twelve months adjusted earned premiums as of July 1, 1998.
The Company also announced that it anticipates making a distribution to its
stockholders of a Portion of the proceeds from the disposition of the DBL
Business to The Guardian and the proceeds from the disposition of the stock
of Arista Insurance pursuant to a Plan of Partial Liquidation of the Company,
that may be adopted by the Company's Board of Directors. Mr. Mandel further
stated, "While it is not possible for the Company to determine the exact
amount that may ultimately be realized upon the disposition of the Company's
assets, if a Plan is adopted by the Board of Directors, the Directors believe
that the amount available for distribution as a result of a partial liquidating
<PAGE>
distribution will be approximately $2.00 per share, all as more fully
described in the Proxy Statement."
Copies of the Company's Proxy Statement, filed with the Securities and
Exchange Commission, may be obtained free of charge by writing to: Ms. Susan
J. Hall, Senior Vice President and Treasurer of Arista Investors Corp., 116
John Street, New York, New York 10038.
The information in this press release may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, and is subject to the safe harbor
created by those sections. These forward-looking statements are subject to
known and unknown risks, uncertainties and other factors that may cause actual
results to be materially different from those contemplated by the
forward-looking statements.
2
<PAGE>
EXHIBIT 99.2
ARISTA INVESTORS CORP.
116 John Street
New York, New York 10038
N.Y. (212) 964-2150
FAX: (212) 608-6473
UPSTATE: (800) 522-3114
FOR IMMEDIATE RELEASE Contact: Stanley S. Mandel
Executive Vice President
(212) 964-2150
New York, New York; October 21, 1998 .... Arista Investors Corp.
(NASDAQ:ARINA) announced that, at a Special Meeting of Stockholders of Arista
Investors Corp., held on October 19, 1998, at the New York Marriott Financial
Center, New York, New York, the holders of the shares of the Company's Class
A Common Stock and the holder of the shares of the Company's Class B Common
Stock approved the sale of substantially all of the Company's assets pursuant
to an Assumption Reinsurance Agreement by and among Arista Insurance Company,
the Company's wholly-owned insurance subsidiary, the Company and The Guardian
Life Insurance Company of America.
The Company anticipates that it will close the transaction with The Guardian
within the next few weeks. Pursuant to the terms of the Administrative
Services Agreement entered into by the Company with The Guardian, upon
consummation of the transaction, the Company will administer the New York
State Statutory Disability Benefits Insurance business underwritten by The
Guardian.
The information this press release may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, and is subject to the safe harbor
created by those sections. These forward-looking statements are subject to
known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different from those contemplated by the
forward-looking statements.
<PAGE>
EXHIBIT 99.3
ARISTA INVESTORS CORP.
116 John Street
New York, New York 10038
N.Y. (212) 964-2150
FAX (212) 608-6473
UPSTATE: (800) 522-3114
FOR IMMEDIATE RELEASE Contact: Stanley S. Mandel
President
(212) 964-2150
New York, New York, November 13, 1998 .... Arista Investors Corp.
(NASDAQ:ARINA) announced that, together with Arista Insurance Company, it has
consummated the sale of Arista Insurance's book of New York State statutory,
super statutory and voluntary disability benefits insurance business ("DBL
Business") to The Guardian Life Insurance Company of America.
Stanley S. Mandel, President of Arista Investors Corp., stated "We are
pleased to have completed the transaction with The Guardian, and look forward
to continuing operations in the area of third party administration."
Pursuant to the terms of the Administrative Services Agreement between Arista
Investors and The Guardian, Arista Investors Corp. commenced the
administration of the DBL Business that was formerly underwritten by Arista
Insurance, as well as all of the DBL Business formerly administered by Arista
Insurance Company.
The information in this press release may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, and is subject to the safe harbor
created by those sections. These forward-looking statements are subject to
known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different from those contemplated by the
forward-looking statements.
