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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __)
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ARISTA INVESTORS CORP.
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/x/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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ARISTA INVESTORS CORP.
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on October 19, 1998
-------------------
Notice is hereby given that a Special Meeting of Stockholders (the
"Meeting") of Arista Investors Corp. (the "Company") will be held on October 19,
1998, at 2:00 p.m., local time, at the New York Marriott Financial Center, 85
West Street, New York, New York 10006, for the following purposes:
1. To consider and approve the sale of substantially all
of the Company's assets pursuant to an Assumption
Reinsurance Agreement by and among Arista Insurance
Company ("Arista"), the Company and The Guardian Life
Insurance Company of America ("The Guardian"), dated
September 23, 1998.
2. To transact such other business as may properly come
before the Meeting or any adjournment or adjournments
thereof.
The close of business on September 1, 1998, has been fixed as the
record date (the "Record Date") for the determination of stockholders entitled
to receive notice of and to vote at the Meeting, and any adjournment or
adjournments thereof.
Whether or not you expect to be present at the Meeting, please
complete, date, and sign the enclosed proxy card and return it in the envelope
provided. Your vote is important regardless of the number of shares you own.
By Order of the Board of Directors,
LOUIS H. SALTZMAN,
Secretary
Date: September 23, 1998
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ARISTA INVESTORS CORP.
116 John Street
New York, New York 10038
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PROXY STATEMENT
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SPECIAL MEETING OF STOCKHOLDERS
To Be Held on October 19, 1998
INTRODUCTION
This Proxy Statement is being furnished to stockholders of Arista
Investors Corp., a Delaware corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company of proxies for use at a
Special Meeting of Stockholders (the "Meeting") of the Company to be held at the
New York Marriott Financial Center, 85 West Street, New York, New York 10006,
local time, on 2:00 p.m., October 19, 1998, and at any adjournment or
adjournments thereof. This Proxy Statement and the accompanying Notice of
Meeting of Stockholders and Form of Proxy are first being mailed to stockholders
of the Company on or about September 25, 1998. In addition to the use of the
mails, proxies may be solicited by the directors, officers and employees of the
Company by personal interview, telephone or telegram. Such directors, officers
and employees will not be additionally compensated, but may be reimbursed for
out-of-pocket expenses incurred in connection with such solicitations.
At the meeting, the stockholders will be asked to vote on the proposed
cession of the Insurance (as hereinafter defined) to The Guardian Life Insurance
Company of America ("The Guardian") which cession, the Board of Directors
believes, would constitute a sale of substantially all of the assets of the
Company. The proceeds from the cession of the Insurance to The Guardian will
equal 18% of the Company's last twelve months adjusted earned premium as of July
1, 1998, ("the Effective Date"), or approximately $3,357,700. Additionally, the
cession of the Insurance will make available approximately $14,374,000 in
investments, cash and cash equivalents and premium receivables which include
Arista Insurance Company's required capital as a New York State insurance
company. The combined $17,732,000 in proceeds from the cession of the Insurance
plus assets made available from the cession of the Insurance will be offset by
approximately $5,530,000 in net policyholder liabilities, resulting in
approximately $12,202,000 remaining available for the following: repayment of
the Surplus Note (as hereinafter defined) of $3,000,000 plus accrued interest of
approximately $855,000 at June 30, 1998; all termination payments to management
in the amount of $1,856,000, and approximately $128,000 payable to insurers on
behalf of split dollar life insurance contracts for management; professional
fees and expenses associated with the cession of
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the Insurance which are expected to be in the range of $400,000 to $600,000; and
the Company's expected distribution to stockholders of approximately $5,318,000
or $2.03 per share ($7,318,000, less the Nasdaq capital adjustment amount of
approximately $2,000,000).
The Board of Directors has fixed the close of business on September 1,
1998 as the record date (the "Record Date") for the determination of those
stockholders of the Company entitled to notice of and to vote at the Meeting.
Only those holders of record on the books of the Company on the Record Date will
be entitled to vote at the Meeting. Each stockholder of the Company's Class A
Common Stock, par value $0.01 per share (the "Class A Common Shares" or "Class A
Common Stock") and the Company's Class B Common Stock, par value $0.01 per share
(the "Class B Common Shares" or "Class B Common Stock") will be entitled to
cast, in person or by properly executed proxy, one vote for or against each of
the proposals set forth herein for each share of common stock held.
On the Record Date, there were outstanding 2,570,100 Class A Common
Shares and 47,400 Class B Common Shares. The presence, either in person or by
properly executed proxies, of the holders of a majority of the outstanding Class
A Common Shares entitled to vote and of the holder of the outstanding Class B
Common Shares entitled to vote are necessary to constitute a quorum at a meeting
of the Company's stockholders. With respect to the proposed sale of
substantially all of the assets of the Company, the holders of the Class A
Common Shares and the holder of the Class B Common Shares each vote as a
separate class. With respect to the proposal, the affirmative vote of a majority
of the Class A Common Stock outstanding and the affirmative vote of the holder
of the Class B Common Stock outstanding, whether present in person or
represented by proxy at the Meeting and entitled to vote on the subject matter,
shall be the act of the stockholders. Abstentions will be considered shares
present for purposes of determining whether a quorum is present at the Meeting,
and, therefore, will have the same legal effect as votes against a proposal.
Broker non-votes will be counted towards a quorum, but will be considered as
shares not entitled to vote and will, therefore, not be considered in the
tabulation of votes.
All Class A Common Shares represented at the Meeting by properly
executed proxies received by the Company, and not revoked prior to the taking of
the vote at the Meeting, will be voted at the Meeting in accordance with the
instructions on such proxies. If no instructions are indicated, such proxies
will be voted in favor of all of the proposals.
As of the Record Date, all of the outstanding Class B Common Shares
were owned by Bernard Kooper. The Class B Common Stock is convertible into Class
A Common Stock on a share-for-share basis and Mr. Kooper's Class B Common Shares
are subject to repurchase by the Company pursuant to the Company's Class B
Repurchase Option (as hereinafter defined). The Company's Board of Directors has
resolved to exercise the Class B Repurchase Option at any time prior to a
distribution to the stockholders of a portion of the proceeds from the
transaction, provided that the Treaty and the TPA Agreement (each as hereinafter
defined) have been executed by The Guardian. Mr. Kooper has agreed to vote the
47,400 Class B Common Shares held by him as of the Record Date in favor of
Proposal No. 1 set forth in this Proxy Statement and has provided the Company
with
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an irrevocable proxy voting in favor of Proposal No. 1. Assuming that the
Company exercises the Class B Repurchase Option, there will be no Class B Common
Shares issued and outstanding at the time of a distribution of a portion of the
proceeds from the transaction, or thereafter.
The Company does not know of any other matters which will be presented
at the Meeting other than the proposed sale of substantially all of the assets
of the Company pursuant to the Treaty entered into by and among the Company,
Arista and The Guardian. However, if any other matters are properly presented at
the Meeting for action, the proxy holders will have the authority to vote on
such matters at their discretion.
Any proxy given pursuant to this solicitation may be revoked by the
holder of the Class A Common Shares who granted such proxy by giving notice
thereof at any time before the proxy is voted. Such revocation will not be
effective until written notice thereof is received by the Secretary of the
Company. All notices of revocation of proxies should be delivered to the
Secretary either (i) at Arista Investors Corp., 116 John Street, New York, New
York 10038, prior to the Meeting, or (ii) at the Meeting. Attendance by a
stockholder at the Meeting will not, in and of itself, constitute revocation of
such stockholder's proxy.
The Company will bear the costs of the solicitation of proxies from its
stockholders. In addition to the use of the mails, proxies may be solicited by
the directors, officers, and employees of the Company by personal interview,
telephone, or telegram. Such directors, officers, and employees will not be
additionally compensated, but may be reimbursed for out-of-pocket expenses
incurred in connection with such solicitation. Arrangements will also be made
with brokerage houses and other custodians, nominees, and fiduciaries for the
forwarding of solicitation material to the beneficial owners of stock held of
record by such persons, and the Company will reimburse such custodians,
nominees, and fiduciaries for reasonable out-of-pocket expenses incurred in
connection therewith.
PROPOSAL NO. 1.
PROPOSAL TO SELL SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS
Recommendation of The Board of Directors. The Company's Board of
Directors unanimously recommends to the stockholders that the stockholders
approve the cession of the book of New York State statutory, super statutory and
voluntary disability benefits insurance (collectively, the "Insurance") of
Arista Insurance Company ("Arista"), a New York insurance company and a
wholly-owned subsidiary of the Company, to The Guardian pursuant to the
Assumption Reinsurance Agreement as described herein. The Board of Directors
believes that the cession of its insurance business would constitute a sale of
substantially all of the assets of the Company.
The Agreements. The Company and Arista have entered into an Assumption
Reinsurance Agreement (the "Treaty"), and the Company has entered into an
Administrative Services Agreement (the "TPA Agreement"), each dated September
23, 1998, with The Guardian, a New York mutual
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life insurance company. The transaction contemplated by the Treaty and the TPA
Agreement will close on or about twenty-five (25) business days following the
Meeting (the "Closing Date"). The Treaty and the TPA Agreement are to become
effective retroactive as of the Effective Date. Arista entered into a quota
share reinsurance treaty (the "Quota Share Reinsurance Treaty") with The
Guardian effective as of January 1, 1998, whereby Arista cedes by way of
reinsurance a 50% participation in the Insurance, both for business in force as
of January 1, 1998 and for business written or acquired after January 1, 1998.
See "The Purchaser" for a description of The Guardian and its business
activities. See "Cession of Insurance Business" for a description of the Treaty.
See "Administrative Services Agreement" for a description of the TPA Agreement.
See "Quota Share Reinsurance Treaty" for a description of Arista's reinsurance
arrangement with The Guardian.
Cession of Insurance Business. Pursuant to the Treaty, Arista has
agreed to cede to The Guardian all of Arista's liabilities (other than
liabilities arising from (i) acts, errors or omissions of Arista, its directors,
officers, employees or agents prior to the Closing Date, (ii) any bad faith,
willful misconduct, fraud or gross negligence of Arista prior to the Closing
Date or (iii) any act, error or omission by Arista, its directors, officers,
employees or agents under the TPA Agreement) under each and every policy of the
Insurance underwritten by Arista. The assumption reinsurance provided by The
Guardian under the Treaty is subject to the same limitations, terms and
conditions as the Insurance. As of the closing under the Treaty, Arista will
discontinue sales of all of the Insurance.
The cession of the Insurance to The Guardian will be deemed to have
taken place as of the Effective Date. Any new policies issued by Arista between
the Effective Date and the Closing Date will be presented to The Guardian on the
Closing Date and will be subject to the acceptance of The Guardian. Such
acceptance may not be unreasonably withheld by The Guardian if the policies were
written in accordance with Arista's standards. Any new policies not accepted by
The Guardian will be immediately canceled by Arista and terminated within thirty
days after the Closing Date.
The Guardian is not assuming any liabilities other than the express
obligations set forth in the Insurance or any costs or liabilities arising as a
result of any inaccuracies or inconsistencies in the Insurance. Between the
Effective Date and the Closing Date Arista is obligated to continue its
operations in accordance with prior practices and in conformity with prevailing
industry standards and customs. The Guardian will be responsible for the
handling of, and all costs and expenses (including legal fees) relating to,
litigation or other claims under the Insurance. However, The Guardian will not
be responsible for liabilities arising out of or relating to actions for
declaratory judgments initiated within 120 days of the Closing Date. See
"Purchase Price and Assumption of Liabilities" and "Representations, Warranties
and Contingencies."
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The following assets will be sold to The Guardian on the Closing Date,
based upon financial information as of the Effective Date:
Asset Valuation
- ----- ---------
Book of Business $3,357,700 (18% of last 12 months
adjusted earned premium; and)
Due Premium, Net of Commissions $2,703,529
==========
Additionally, the following liabilities and related values will be
transferred to The Guardian on the Closing Date, based upon financial
information as of the Effective Date:
Liability Valuation
--------- ---------
Unearned Premium Liability, Net of $1,122,269
Commissions and Premium Taxes
Claim Reserves $2,350,000
Claim Expense Reserves $ 70,500
GAAP Assessment Reserves $ 283,700
The book of business encompasses some 229,000 covered lives and
approximately 23,000 policyholders as of June 30, 1998.
The Company will account for the cession of Insurance and the
assumption of specified assets and liabilities as a purchase by The Guardian.
Under this method, the Company will recognize in earnings the net gain on
disposal of a segment of its business representing the excess of (1) the cession
allowance of 18% of the last twelve months adjusted earned premium, plus the
proceeds from the assumption of the due premium receivables at the Effective
Date by The Guardian over (2) all unpaid claim reserves, unearned premium
liability, plus claim expense reserves and GAAP assessment reserves assumed by
The Guardian, and the cost of disposal. The Company will surrender control over
all assets and liabilities transferred to The Guardian, and will retain no
beneficial interest.
After the closing of the cession of the Insurance to The Guardian, the
Company will retain Arista's insurance company license and charter, cash and
cash equivalents and other assets in excess of $2,000,000 and an ongoing TPA
operation.
Currently management knows of no ascertained or contingent liabilities
and expenses which will remain subsequent to the cession of the Insurance to The
Guardian other than normal operating business expenses.
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The Board of Directors believes that the Insurance constitutes
substantially all of the assets of Arista, and since Arista is the principal
operating subsidiary of the Company, the cession of the Insurance by Arista to
The Guardian constitutes a sale of substantially all of the Company's and
Arista's assets. Subsequent to the consummation of the cession of the Insurance
pursuant to the Treaty, the Company anticipates commencing operations in the
area of insurance policy and claim administration and management pursuant to the
TPA Agreement, as described herein, and in addition, selling the stock of Arista
Insurance Company. Although from time to time the Company has received inquiries
regarding the possible sale of its operations and may continue to receive such
inquiries in the future, the Board of Directors has not evaluated the merits or
disadvantages of a possible future sale of the Company's operations after the
cession of the Insurance. See "Additional Arrangements With and Payments to
Management".
Purchase Price and Assumption of Liabilities. In exchange for the
cession of the Insurance, The Guardian has agreed to pay Arista a cession
allowance in an amount, in cash, based on the premiums, as adjusted, earned by
Arista for the twelve month period through the Effective Date. Such premiums
will be accounted for by utilizing the actual earned premium for the most recent
twelve month period prior to the Effective Date. The cession allowance will be
18% of the adjusted earned premium. Adjusted earned premium means the earned
premiums for the most recent twelve month period prior to the Effective Date
(but excludes earned premium for the Federation of Jewish Philanthropies due to
the termination of Arista's relationship with the Federation of Jewish
Philanthropies effective February 1, 1998). See "The Company". The funds to be
used by The Guardian to purchase the Insurance will come from its corporate
surplus. Arista will transfer certain reserves and liabilities to The Guardian
and The Guardian will assume all liabilities, duties and obligations of Arista
relating to the Insurance, except as discussed herein. See "Cession of Insurance
Business."
The following liabilities and reserves and related current values would
be transferred to The Guardian as of the Effective Date:
Liability Valuation
- --------- ---------
Unearned Premium Liability,
Net of Commissions and
Premium Taxes $1,122,269
==========
Reserves
- --------
Claim Reserves $2,350,000
Claim Expense Reserves 70,500
GAAP Assessment Reserves 283,700
----------
Total Reserves $2,704,200
==========
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The Guardian will be required to mail an Assumption Certificate
("Certificate") to each policyholder's last known address, which certificate
will reflect the assumption by The Guardian of all risks, duties and obligations
associated with the Insurance. The Treaty and the Certificate must meet all of
the requirements of the New York State Insurance Department and must be approved
by the Superintendent of Insurance of the State of New York prior to
consummation of the cession of the Insurance, which Treaty and Certificate were
approved as of May 6, 1997. A revised version of the Treaty, containing a new
Effective Date, was subsequently approved on May 18, 1998.
Since most premiums for New York State statutory disability benefits
insurance ("DBL") are billed quarterly in arrears, the cession allowance of 18%
of the Company's last twelve months adjusted earned premium as of the Effective
Date ($3,357,700) represents an estimate at the time of the stockholder vote.
Administrative Services Agreement. The Company is licensed by the New
York State Insurance Department as an independent accident and health adjuster
(the "License"), and on the date that the cession of the Insurance is
consummated, the Company will commence servicing the Insurance pursuant to the
TPA Agreement. This License may continue in perpetuity unless suspended or
terminated by an act of the regulator. In March 1998, the Company paid a fee of
$100 for the License. The effectiveness of the TPA Agreement is subject to the
approval of the Treaty by the New York State Insurance Department. As a third
party administrator, the Company will perform various services relating to the
Insurance and other such insurance policies underwritten by The Guardian,
including, but not limited to, pricing of risk, underwriting new and renewal
business, investigation, calculation and payment of claims, preparation and
transmission of bills, preparation of policy kits and forms, preparation of
commission statements, maintenance of records, responding to inquiries from
policyholders and providing updates on regulatory changes. The Company will
receive a fee based upon the premiums earned by The Guardian plus additional
fees based upon performance by the Company and results achieved by The Guardian.
The TPA Agreement sets three pricing parameters; (i) a basic fee of 7% of earned
premium for all required functions, (ii) adjustments to the basic fee of +/- 1%
of the earned premium pursuant to a semi-annual audit performed by The Guardian
to determine whether the performance criteria under the TPA Agreement have been
complied with, and (iii) a contingency payment to be paid annually based on the
developed incurred loss ratio. The TPA Agreement is effective for a period of
five years subject, under certain conditions, to earlier termination by The
Guardian, as described below.
The Guardian may terminate the TPA Agreement during the full term of
the TPA Agreement upon 60 days prior written notice to the Company upon the
occurrence of any of the following "events of default": (i) breach of the TPA
Agreement by the Company which is not cured within 30 days or which may cause or
has caused the revocation of The Guardian's license to do an insurance business
in any jurisdiction, (ii) the termination prior to the Closing Date or
non-effectiveness of the Treaty, (iii) the commencement of a voluntary or
involuntary reorganization, liquidation or receivership of the Company, (iv) an
order entered by a court of competent jurisdiction affecting more than 50% of
the Company's property under conservatorship, liquidation, insolvency or similar
laws, (v) the failure of Stanley S. Mandel, President of Arista and Executive
Vice President of the
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Company, to maintain control of the day-to-day operations of the Company at any
time during the first five years following the Effective Date (other than by
reason of Mr. Mandel's death or disability, in which case a replacement
acceptable to The Guardian may be appointed), (vi) the Company permits any other
person to gain operational control of its administrative servicing business or
agrees to any arrangement which would end the existence of such business,
without giving The Guardian a right of first refusal to purchase such business
or (vii) the Company fails to maintain a minimum stockholders' equity on its
balance sheet of not less than 3.5% of the gross premiums earned on the
contracts administered pursuant to the TPA Agreement in the prior calendar year,
and such failure continues without being cured for 10 days after receiving
notice of such failure from The Guardian. Additionally, after the first two
years of the initial five year term of the TPA Agreement, The Guardian may
terminate the TPA Agreement in the event that The Guardian desires to perform
the administrative services.
In performing the services under the TPA Agreement, the Company is
obligated to use commercially reasonable efforts to keep informed of and comply
in all material respects with applicable laws, rates and regulations and to
maintain necessary facilities, equipment and personnel to perform its duties
under the TPA Agreement. The Company has granted The Guardian the right of first
refusal to purchase the Company's administrative servicing business in the event
the Company permits any other person to gain operational control of such
business or agrees to any arrangement which would end the existence of such
business.
Representations, Warranties and Contingencies. Arista makes various
representations and warranties with respect to the Insurance as well as its
other assets, liabilities and activities. These representations and warranties
relate to, among other things, Arista's good standing, due incorporation,
compliance with applicable laws and the reserves held by Arista in support of
the Insurance. Arista and the Company have agreed to indemnify The Guardian for
all liabilities arising from any breach by Arista of any covenants or failure to
perform any obligations contained in the Treaty, which indemnity provision will
survive for two years following the termination of the Treaty. All of the
representations and warranties contained in the Treaty constitute conditions
which must be met prior to closing and consummation of the cession transaction.
The Treaty requires Arista to carry on its business in the normal
course and restricts Arista from taking certain actions during the period from
the signing of the Treaty until the Closing Date.
Quota Share Reinsurance Treaty. Arista entered into the Quota Share
Reinsurance Treaty with The Guardian effective as of January 1, 1998, pursuant
to which Arista cedes by way of reinsurance a 50% participation in the
Insurance, both for business in force as of January 1, 1998 and for business
written or acquired after January 1, 1998. The termination of Arista's
reinsurance agreement with Cologne Life Reinsurance Company ("Cologne") and the
execution of the Quota Share Reinsurance Treaty with The Guardian were
conditioned upon the execution of the Treaty by The Guardian. In the event that
the cession of the Insurance to The Guardian is not consummated, management
believes that Arista will be able to reinstate its reinsurance arrangement with
Cologne,
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or enter into a reinsurance treaty with another insurer on terms not less
favorable than the Quota Share Reinsurance Treaty.
Closing. The transactions contemplated by the Treaty and the TPA
Agreement are scheduled to close on or about twenty-five (25) business days
following the Meeting. Following the closing, the Company plans to sell the
stock of Arista Insurance Company.
Approval of Regulatory Authorities. State insurance laws and
regulations applicable to Arista generally provide that no person may acquire
control of Arista or acquire Arista's insurance business unless such person has
provided certain required information to, and such acquisition has been approved
(or not disapproved) by, the appropriate insurance regulatory authority. In
accordance with New York State Insurance Laws, Arista and The Guardian each have
filed applications and received approval for the cession and assumption of the
Insurance from the New York State Insurance Department.
Hart-Scott-Rodino Antitrust Improvements Act. The assumption by The
Guardian of the Insurance is exempt from the notification and waiting period
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
The Company. The Company through its wholly-owned subsidiary, Arista,
has been engaged in the sale and underwriting of the Insurance in the State of
New York since 1979. The Company's principal executive offices are located at
116 John Street, New York, New York 10038. Its telephone number is (212)
964-2150.
The Company is a Delaware corporation incorporated on August 19, 1986,
which succeeded to the business of its predecessor, Arista Investors Corp., a
New York corporation organized in 1978. Arista was licensed to write accident
and health insurance by the New York State Insurance Department in October 1979,
and sells and underwrites New York statutory, super statutory and voluntary
disability benefits insurance. During the year ended December 31, 1993, Arista
amended its charter and became licensed to write a line of property and casualty
insurance in New York as well. To date, Arista has not written any property and
casualty insurance business. Such licenses may continue in perpetuity unless
suspended or terminated by an act of the regulator.
Under New York State law, all eligible employees, including full-time
and part-time employees in New York State, are required to be provided with
disability coverage unless excluded by statute, e.g., government, railroad,
maritime or farm workers. Statutory disability benefits insurance presently
provides for a payment to totally disabled employees in the amount of 50% of
weekly salary to a maximum payment of $170 per week, for a maximum of 26 weeks
beginning with the eighth day of disability due to off-the-job accident or
sickness. On-the-job accident or sickness is covered by worker's compensation
insurance, not statutory disability benefits insurance. Arista charges a premium
for the insurance coverage based upon a rate structure approved by the New York
State Insurance Department. In order for an insurer to alter its rate structure
it must obtain prior written approval from the New York State Insurance
Department. Under New York State law, an
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employer may require an employee to contribute one-half of one percent of
covered payroll up to a maximum of $.60 per week towards the premium charge for
statutory disability benefits insurance.
In addition to standard statutory disability benefits insurance
coverage, Arista offers certain augmented benefits which include the payment of
the disability benefit from the first day of disability as opposed to the eighth
day of disability, increased duration of benefits from 26 weeks up to 52 weeks,
benefits increased over the maximum of $170 weekly benefit and an additional
multiple if related to hospitalization (e.g., 150% of the benefit if an employee
is hospitalized). Arista also offers coverage for association groups on a
competitive basis. The underwriting of these augmented benefits and specialized
coverages currently does not represent a significant percentage of Arista's
earned premiums.
Pursuant to agreements effective July 1, 1993 and January 1, 1995,
Arista has been acting as a third party administrator for the New York State
statutory disability benefits insurance books of business of The Guardian and
the United States Life Insurance Company in the City of New York ("U.S. Life").
The administrative service fees collected by Arista during the years ended
December 31, 1995, 1996 and 1997 were $165,801, $234,176, and $312,378,
respectively, and for the six month periods ended June 30, 1997 and 1998 were
$150,486 and $195,379, respectively. Following the Closing, the Company
anticipates servicing the existing books of business and will seek additional
books of business for administration.
During the three-year period ended December 31, 1997, Arista entered
into arrangements to acquire books of New York State statutory disability
benefits insurance from American Medical and Life Insurance Company, Greater New
York Mutual Insurance Company and Insurance Company of Greater New York.
For the six months period ended June 30, 1998, no customer accounted
for 10% or more of the Company's consolidated gross revenues. For the years
ended December 31, 1995 and December 31, 1997, no customer accounted for 10% or
more of the Company's consolidated gross revenues. However, during the year
ended December 31, 1995 and 1997, Arista was the underwriter for the Insurance
for two large groups with combined earned premiums of approximately $3,692,000
in 1995 and $2,506,000 in 1997. For the year ended December 31, 1996, one group,
the Federation of Jewish Philanthropies, accounted for approximately 11% of
Arista's revenue. Arista's relationship with the Federation of Jewish
Philanthropies terminated effective February 1, 1998. No other group accounted
for 10% or more of the Company's consolidated revenues or Arista's revenues in
the year ended December 31, 1996.
Marketing
Arista currently has under contract more than 350 general agents. These
general agents place the Insurance with other insurance companies in addition to
Arista. These general agents submit to Arista insurance written through more
than 6,900 insurance brokers and soliciting agents. Arista enters into written
contracts with these general agents who in turn engage brokers and soliciting
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agents. Arista's contract with each general agent may be canceled by either
party on 30 days' prior written notice. The commissions paid by Arista are
competitive with the commissions paid by other insurers in the statutory
disability benefits insurance industry. Each general agent is responsible for
payment of any commissions due brokers or soliciting agents engaged by the
general agent.
Claims
Gross claims incurred by Arista amounted to $16,588,801 in 1995,
$15,288,310 in 1996, and $12,212,694 in 1997, and $5,939,374 and $4,980,660 for
the six months ended June 30, 1997 and 1998, respectively.
The factors generally affecting gross claims incurred are a function of
the number of risks covered with either part-time or full-time workers, the wage
level of each covered employee to a maximum of $170 per week and the duration of
disability to a maximum of 26 weeks. The gross amount of claims incurred at any
point in time is also affected by the number of females covered since maternity
claims must be treated statutorily as any other disability claim.
Reinsurance Ceded
Arista utilizes reinsurance principally to reduce its liability on
business in force through risk sharing. A ceding of insurance does not discharge
the original insurer from its primary liability to the policyholder. A ceding
company is required to pay losses to the extent the assuming company fails to
meet its obligations under the reinsurance agreement. The practice of insurers,
however, subject to certain statutory limitations and as permitted by regulatory
authorities, is to account for reinsured risks to the extent of reinsurance
ceded as though they are not risks for which the original insurer remains
liable.
From October 1, 1993 to September 30, 1995, Arista had a quota-share
reinsurance agreement with its reinsurer, Harbourton Reinsurance, Inc.
(formerly, NRG America Reassurance Corporation). Under this agreement, Arista
ceded by way of reinsurance a 50% quota share of its liability with respect to
the Insurance issued to all policyholders. This agreement was subject to
cancellation by either party on 90 days prior written notice.
Effective October 1, 1995, Arista entered into an agreement with
Cologne whereby Arista ceded by way of reinsurance a 50% quota share
participation in the Insurance, both for business in force as of October 1, 1995
and for new business written or acquired after October 1, 1995. As of December
31, 1997, Arista reinsured a quota share participation in the amount of 50% of
approximately $20,000,000 of premium, which resulted in approximately
$10,000,000 as the amount reinsured. This agreement was subject to cancellation
by either party on 90 days prior written notice.
Effective as of January 1, 1998, in connection with Arista's entering
into a new reinsurance arrangement with The Guardian (described below), Arista
terminated its reinsurance agreement with
11
<PAGE>
Cologne. Pursuant to such termination, the principal balance of (and any accrued
but unpaid interest on) a surplus note ("Surplus Note") in the amount of
$3,000,000, issued by Arista to The Cologne Life Underwriting Management Company
("CLUMCO"), effective in December 1995, will be repaid as soon as practicable,
subject to regulatory approval. See "Payment of the Surplus Note and its Warrant
Shares."
Arista entered into the Quota Share Reinsurance Treaty with The
Guardian effective as of January 1, 1998, whereby Arista cedes by way of
reinsurance a 50% participation in the Insurance, both for business in force as
of January 1, 1998 and for business written or acquired after January 1, 1998.
As of June 30, 1998, Arista reinsured a quota share participation in the amount
of 50% of approximately $9,567,000 of earned premiums, which resulted in
approximately $4,658,000 as the amount reinsured. This agreement is subject to
cancellation by either party on ninety (90) days prior written notice. See
"Quota Share Reinsurance Treaty."
Reinsurance Assumed
Effective April 1, 1994 Arista entered into a reinsurance agreement
with Allianz Life Insurance Company of North America ("Allianz") wherein Arista
assumed Hawaii Temporary Disability Insurance business that was ceded by Allianz
since 1994. This agreement was terminated on February 29, 1996.
Reserves
Claims are made by policyholders, and amounts that Arista pays or
expects to pay to the claimant are referred to as losses. The cost of
investigating, resolving and processing these claims are referred to as loss
adjustment expenses ("LAE"). Insurance companies are required to maintain
reserves for unearned premium liabilities and claim reserves for unpaid losses,
unpaid LAE and New York State assessments for this line of business. These claim
reserves are intended to cover the probable ultimate cost of settling all losses
incurred and unpaid, including those incurred but not reported. Arista
establishes its claim reserves based upon case-basis evaluations, prior
experience and statistical projections. A reconciliation of claim reserves for
each of the last three years ended December 31, 1995, 1996 and 1997, and for the
six month period ended June 30, 1997 and 1998 follows:
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
-------------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ 4,921,446 $ 4,526,316 $ 4,351,500 $4,351,500 3,391,950
----------- ----------- ----------- ---------- ---------
Claims incurred:
Current year 16,565,377 15,007,646 12,939,875 6,461,128 4,911,562
Prior years 23,424 280,664 (727,181) (521,754) 69,098
-------------- ------------ ---------- ---------- ---------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
<S> <S> <C> <C> <C> <C>
Total claims incurred 16,588,801 15,288,310 12,212,694 5,939,374 4,980,660
----------- ----------- ----------- --------- ---------
Claims paid:
Current year 12,039,061 10,656,146 9,875,609 3,384,919 2,648,012
Prior years 4,944,870 4,806,980 3,296,635 3,347,955 3,020,398
----------- ----------- ----------- --------- ---------
Total claims paid 16,983,931 15,463,126 13,172,244 6,732,874 5,668,410
----------- ----------- ----------- --------- ---------
Balance at end of period
=========== =========== =========== ========= =========
$ 4,526,316 $ 4,351,500 $ 3,391,950 3,558,000 2,704,200
=========== =========== =========== ========= =========
</TABLE>
Loss reserves are only estimates of what the insurer expects to pay on
claims, based on facts and circumstances then known. Although a degree of
variability is inherent in such estimates, management believes that the
liabilities for unpaid claims, related adjustment expenses and New York State
statutory assessments are adequate. The estimates are continually reviewed and
adjusted as necessary, and such adjustments are reflected in current operations.
The following table (in thousands) shows the development of the reserve
for unpaid claims, LAE and disability benefits insurance ("DBL") assessment for
each of the last ten calendar years compared to the gross amounts actually paid
against these reserves for the last ten years and for the six months ended June
30, 1998 (excludes 1997 and the six months ended June 30, 1998, for which the
development is not yet completed).
<TABLE>
<CAPTION>
Six Months
Year Ended December 31 Ended June 30
-------------------------------------------------------------------- -------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross liability for
unpaid losses,
LAE reserves
and DBL
assessments $3,336 $4,245 $3,882 $5,210 $4,321 $4,168 $4,921 $4,526 $4,351 $3,392 $2,704
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended December 31 Ended June 30
------------------------------------------------------------------------------------ -------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability
re-estimated
as of:
One year later $3,699 $4,397 $3,911 $5,008 $4,777 $4,587 $4,807 $4,561 $3,277 * *
Two years later $3,699 $4,397 $3,911 $5,008 $4,777 $4,587 $4,807 $4,561
Three years later $3,699 $4,397 $3,911 $5,008 $4,777 $4,587 $4,807
Four years later $3,699 $4,397 $3,911 $5,008 $4,777 $4,587
Five years later $3,699 $4,397 $3,911 $5,008 $4,777
Six years later $3,699 $4,397 $3,911 $5,008
Seven years later $3,699 $4,397 $3,911
Eight years later $3,699 $4,397
Nine years later $3,699
Ten years later
Redundancy
(deficiency) $ (363) $ (152) $ ( 29) $ 202 $ (456) $ (419) $ 114 $ (35) $1,074 * *
======= ====== ====== ====== ====== ====== ====== ====== ======
Cumulative
redundancy
(deficiency) $ (109) $ (261) $ (290) $ (88) $(544) $ (963) $ (849) $ (884) $ 190
======= ====== ====== ====== ====== ====== ====== ====== ======
Cumulative
amount
paid through:
One year later $3,699 $4,397 $3,911 $5,008 $4,777 $4,587 $4,807 $4,561 $3,277 * *
Two years later $3,699 $4,397 $3,911 $5,008 $4,777 $4,587 $4,807 $4,561
Three years later $3,699 $4,397 $3,911 $5,008 $4,777 $4,587 $4,807
Four years later $3,699 $4,397 $3,911 $5,008 $4,777 $4,587
Five years later $3,699 $4,397 $3,911 $5,008 $4,777
Six years later $3,699 $4,397 $3,911 $5,008
Seven years later $3,699 $4,397 $3,911
Eight years later $3,699 $4,397
Nine years later $3,699
Ten years later
</TABLE>
* Development of data not yet completed.
The table presents the development of balance sheet liabilities for
1988 through 1998 as of year end 1997. The top table shows the original recorded
unpaid liability for losses, LAE and DBL assessments recorded at the balance
sheet date for each of the indicated years. This liability represents the
estimated amount of losses, LAE and assessments for claims arising in all prior
years,
14
<PAGE>
both paid and unpaid at the balance sheet date, including losses that had been
incurred, but not yet reported, to Arista.
The upper portion of the lower table shows that adjusted (re-estimated)
reserve balance as of the end of each succeeding year. The "cumulative
redundancy (deficiency)" represents the aggregate change in the estimates over
all prior years. For example, the 1994 liability has developed a redundancy of
$114,000 which has been reflected in income in the subsequent year as the
liabilities were re-estimated. The lower section of the table shows the
cumulative amounts paid with respect to the previously recorded liability as of
the end of each succeeding year. This payment pattern is consistent with that of
the insurance disability industry.
Competition
The writing of the Insurance is highly competitive and many insurers
write this line of insurance in New York. These insurers vary in size and
generally have longer operating histories, offer a broader range of insurance
other than the Insurance and generally have greater financial, marketing and
management resources than Arista. In addition, the New York State Insurance Fund
also offers New York State statutory disability benefits insurance. Competition
is primarily based upon service and, in certain classes of business, rate
structure. Arista strives to keep its rates at the median of its competitors for
groups of less than 50 lives. For groups of 50 or more lives, rates are a
function of the prior experience for each risk. Arista's management believes
that the services offered by Arista compare favorably with those offered by its
competitors.
Employees
As of June 30, 1998, the Company had forty (40) full-time and three (3)
part-time employees. Nine (9) of these employees are executive officers, (two
(2) of whom serve part-time), seven (7) provide claims services as examiners,
one (1) provides general and administrative services and twenty-six (26) provide
all other services, one (1) of whom works part-time. The Company believes its
relations with its employees are satisfactory.
Regulation
The State of New York has statutory authorization to enforce its laws
and regulations through various administrative orders and enforcement
proceedings.
Arista and, under certain circumstances, the Company are subject to
regulation by the New York State Insurance Department. Such regulation is
principally for the benefit and protection of policyholders and not
stockholders. Regulation extends to, among other things, the setting of rates to
be charged, the granting and revocation of licenses to transact business, the
licensing of general agents, the approval of policy forms and the form and
content of statutorily mandated financial statements.
15
<PAGE>
Arista was examined during calendar years 1990-1991 for the three-year
period ended December 31, 1989. In accordance with applicable regulations
promulgated by the New York State Insurance Department, a report for the
three-year period ended December 31, 1989 was issued. Arista's Board of
Directors reviewed and approved the recommendations contained therein, and the
report was filed by the New York State Insurance Department on December 17,
1992. In 1996, the New York State Insurance Department examined Arista for the
five-year period ended December 31, 1994. A preliminary report was issued on
March 31, 1998.
The Company is regulated under New York State Insurance Law, Article
15, the "Holding Companies" statute. The regulations promulgated under the
"Holding Companies" statute require prior regulatory agency approval of changes
in control of an insurer and of transactions within the holding company
structure.
The New York State Insurance Law and the regulations thereunder provide
that no corporation or other person may acquire control of the Company and thus
indirect control of Arista, unless it has given notice to Arista and obtained
prior written approval of the Superintendent of Insurance for such acquisition.
Under said law, any purchaser of ten percent or more of the outstanding common
stock of the Company would be presumed to have acquired control of Arista,
unless such presumption is rebutted. Therefore, before the completion of the
sale by the Company of the stock of Arista Insurance Company, the person
acquiring control of Arista must obtain the prior written approval of the
Superintendent of Insurance.
The declaration and payment of dividends by the Company is subject to
the discretion of its Board of Directors. Under the New York State Insurance
Law, without the prior approval of the New York State Insurance Department,
Arista may pay dividends only out of its statutory earned surplus. Generally,
the maximum amount of dividends that Arista may pay without regulatory approval
in any twelve-month period is the lesser of adjusted net investment income or
ten percent (10%) of statutory surplus. See "Anticipated Distribution to
Stockholders".
The Purchaser. The Guardian is a New York mutual life insurance company
with its principal office at 201 Park Avenue South, New York, New York 10003.
The Guardian primarily issues individual life and group insurance coverages
through its career agency force and broker network. The Guardian manages its
operations through six profit centers: life insurance, group insurance,
disability insurance, equity products, group pensions and reinsurance. The
Guardian's major line of business is group accident and health which accounted
for more than one-half of consolidated net premiums in 1997. The other major
contributors to consolidated net premium income were individual life insurance,
individual and group annuities, group life and individual accident and health.
Variable life and annuity products are sold through The Guardian Insurance &
Annuity Company, Inc. ("GIAC"), a subsidiary of The Guardian, which is managed
as part of the equity products profit center.
Group products, including medical, dental, disability and life
coverages, are marketed to small and mid-size employers through group
representatives who work with outside brokers. The
16
<PAGE>
Guardian's current strategy entails establishing marketing ventures in
partnerships with health maintenance organizations in geographic areas where The
Guardian has a strong marketing presence. The Guardian is also a major provider
of dental plans, including its proprietary Preferred Provider Organization
network which covered 35 states at the end of 1997.
Individual disability coverages are marketed primarily to professionals
(physicians, attorneys, dentists, accountants, executives) and self-employed
business owners through The Guardian's career agents and outside brokers.
Traditional whole life, term, and pension trust products, in addition to the
variable life products distributed through GIAC, are marketed primarily to
small, closely-held business owners. The Guardian's life insurance sales are
generated by its over 2,500 career agents, with the remainder being produced by
outside brokers. Virtually all of the direct sales of individual and group
annuities occur in GIAC with most being variable products sales.
The Guardian is also a major reinsurer. The business reinsured by The
Guardian at year end 1997 was comprised of ordinary life, variable life, credit
accident and health and life, fixed annuities and variable annuities. The
Guardian had total assets of approximately $12.1 billion at December 31, 1997
and a Best's rating of A+ as of December 31, 1997.
Payment of the Surplus Note and its Warrant Shares. Upon termination of
Arista's reinsurance agreement with Cologne, the principal balance of the
Surplus Note became payable. However, repayment of the Surplus Note is subject
to the prior approval of the New York State Insurance Department. The Surplus
Note bears interest at the rate of 10.5% per annum and provides for the
principal to be repaid in eight equal installments in years three through ten,
together with any accrued interest. As of June 30, 1998, the accrued but unpaid
interest on the Surplus Note was approximately $855,000. The Surplus Note must
be paid at or prior to the closing of the cession of the Insurance by Arista,
and such payment is to be made from the free and divisible surplus of Arista
with the prior approval of the New York State Insurance Department. If the
principal and interest are not repaid in full at the end of the ten years, the
Surplus Note renews annually for additional one-year terms until the balance is
repaid.
In addition, a ten-year warrant issued to CLUMCO by the Company to
purchase up to 150,000 shares of the Company's Class A Common Stock, at an
exercise price of $3.50 per share, is subject to termination, if not exercised
on or before the third business day prior to the date of the vote on Proposal
No. 1. Pursuant to the terms of the warrant, in the event of any consolidation
or merger of the Company with another entity, or any sale of all or
substantially all of the property, assets, business and goodwill of the Company,
CLUMCO shall continue to have the right, but not the obligation, to exercise any
or all of the warrant. The Board of Directors is obligated to deliver to CLUMCO
a notice ("Transaction Notice") of any such transaction in such reports, proxy
statements or other communications that are sent to security holders by the
Company regarding the transaction no later than the time it is sent to security
holders. Upon receipt of the Transaction Notice, CLUMCO may, in its sole
discretion, exercise the warrant, in whole or in part. The shares of Class A
Common Stock issuable upon the exercise of the warrant shall be subject to terms
and conditions of the Transaction.
17
<PAGE>
Additional Arrangements With and Payments to Management. The Company
has in place certain arrangements providing payments and benefits to key
employees of the Company should a change in control or sale of all or
substantially all of the assets of the Company take place. These "termination
payments" are triggered by a sale of substantially all of the Company's assets
and therefore will be triggered by the proposed transactions. Each of Mr.
Bernard Kooper, Chairman of the Board of Directors and President of the Company,
and Mr. Stanley S. Mandel, a director and Executive Vice President of the
Company and President of Arista, has an employment agreement with the Company
and Arista, respectively. Pursuant to such employment agreements, in the event
of (i) a consolidation or merger of the Company or Arista or (ii) a sale of
substantially all of the assets of (A) the Company, in the case of Mr. Kooper's
employment agreement, or (B) Arista, in the case of Mr. Mandel's employment
agreement, (individually or collectively referred to as a "Corporate Event"),
Messrs. Kooper's and Mandel's respective employment agreements will be
terminated, and upon such termination, Messrs. Kooper and Mandel would each be
entitled to receive a lump sum payout. The payout will be the maximum amount
that will not trigger the excise tax payable in the event of an "excess
parachute payment" as such term is defined in the Internal Revenue Code of 1986,
as amended. As a result of the proposed transactions, the employment agreements
for each of Mr. Kooper and Mr. Mandel will be terminated. Consequently, upon the
consummation of the transactions, and based on their prior remuneration, it is
estimated the lump sum payouts to each of Mr. Kooper and Mr. Mandel would be
approximately $862,000 and $995,000, respectively.
In addition to such lump sum payments, each of Mr. Kooper's and Mr.
Mandel's employment agreements provides that upon the occurrence of a Corporate
Event, the Company and Arista must pay such sums to the insurance carrier so as
to render "paid up" the premiums for the split dollar life insurance provided to
each of Mr. Kooper and Mr. Mandel under their respective employment agreements.
At December 31, 1997, such payments are estimated to be $71,900 for Mr. Kooper's
policy and $56,565 for Mr. Mandel's policy. In the event that Mr. Kooper or Mr.
Mandel shall be living on February 16, 2001, each of them will be entitled to a
lump sum retirement benefit equal to the amount of premiums paid by the Company
or Arista attributable to the cumulative increase in cash surrender value of the
policies during the period ending February 16, 2001.
If a plan of partial liquidation is adopted by the Board of Directors
of the Company, any distribution made to all of the Company's Class A Common
Stockholders, including Mr. Kooper and Mr. Mandel, will be in addition to any
lump sum payments made to Mr. Kooper and Mr. Mandel as employees of the Company
and Arista, respectively.
The Company intends to enter into a new employment arrangement with Mr.
Mandel effective upon the consummation of the cession of the Insurance. Pursuant
to the new employment arrangement, Mr. Mandel would be employed for a two-year
period, plus up to an additional three years (the "Employment Period") subject
to (i) the continuation of the Company's third party administration arrangement
with The Guardian or (ii) the occurrence of a Change-of-Control Event
(hereinafter defined). It is expected that Mr. Mandel's new arrangement will
include a base salary, which will be approximately $24,000 lower than that
currently paid to Mr. Mandel, a bonus based
18
<PAGE>
upon a weighted formula to be determined by the Company's Board of Directors,
options to be granted in an amount to be determined by the Board of Directors,
and will provide for the nomination of Mr. Mandel for election to the Company's
Board of Directors. The weighted formula referred to above will be equal to
eight percent (8%) of the Company's annual earnings before income taxes from
third party administration operations. In the event, during the New Employment
Period, of any consolidation or merger of the Company into or with another
corporation in which the Company is not the surviving entity, or the sale of all
or substantially all of the assets of the Company to another corporation, or in
the event in which at least 50% of the voting Common Stock of the Company is
owned by one or more individuals or entities, who are acting in concert or as
part of an affiliated group of which Mr. Mandel, his spouse, his or his spouse's
siblings or any issue thereof is not a member (individually and collectively, a
"Change-of-Control Event"), the Company may assign Mr. Mandel's employment
agreement to the Company's successor, terminate such employment agreement or
continue such employment Agreement; provided, however, the Company shall (i)
provide Mr. Mandel with written notice of the occurrence of a Change-of-Control
Event, and (ii) deliver to Mr. Mandel a certified or cashier's check in an
amount equal to $370,000. In the event the Company does not assign Mr. Mandel's
employment agreement, Mr. Mandel will be bound by a one-year non-competition
clause. Additionally, Mr. Mandel will be bound by such one-year non-competition
clause under the following circumstances: (i) termination by Mr. Mandel of his
employment in contravention of his employment agreement or (ii) the termination
of the TPA Agreement in conjunction with either the cession of the Insurance by
The Guardian to a third party or the assumption by The Guardian of the Company's
third party administration functions. The Company does not expect to enter into
a new employment agreement with Mr. Kooper.
In June, 1996, the Company issued 365,000 shares of Class A Common
Stock ("Warrant Shares"), upon the exercise of a previously granted warrant to
purchase shares of Class A Common Stock at an exercise price of $1.40 per share,
to Bernard Kooper. The warrant was granted to Mr. Kooper in June 1986. As
consideration for the issuance of the Warrant Shares, Mr. Kooper delivered
$11,000 in cash and a $500,000 principal amount interest-bearing promissory note
(the "Kooper Note") to the Company and granted the Company an option (the "Class
B Repurchase Option") to acquire the 47,400 shares of Class B Common Stock owned
by Mr. Kooper. Additionally, to secure the performance of his obligations under
the Kooper Note, Mr. Kooper pledged the 365,000 shares of Class A Common Stock
owned by him to the Company. The holder of the Class B Common Stock has the
right to elect a majority of the Company's Board of Directors. In addition, the
holder of the Class B Common Stock has the right to vote as a separate class
upon any merger, reorganization, recapitalization, liquidation, dissolution, or
winding-up, sale, transfer or hypothecation of all or a substantial portion of
the assets of the Company, and with regard to any amendment to the certificate
of incorporation which affects the number or par value, or adversely alters or
changes powers, preferences, voting power or special rights of the shares of the
Class B Common Stock. The Class B Repurchase Option, which expires on June 14,
2001, has an exercise price equal to the cancellation of the $500,000
outstanding under the Kooper Note plus delivery by the Company, at its option,
of either 47,400 shares of Class A Common Stock or the fair market value of such
shares to Mr. Kooper. The Company's Board of Directors has resolved to exercise
the Class B Repurchase Option at any time prior to a distribution to
stockholders and upon such
19
<PAGE>
exercise, there will be no Class B Common Shares issued and outstanding. The
Company has determined to exercise the Class B Repurchase Option because the
Board of Directors believes that a repurchase of all of the outstanding Class B
Common Stock may enhance the Company's ability to consummate a private placement
or secondary public offering. Additionally, the elimination of the outstanding
Class B Common Stock would provide added flexibility for the Company to enter
into various transactions because there will be only one class of voting stock
outstanding.
After the Company's exercise of the Class B Repurchase Option, the
Company has agreed that it will nominate Mr. Kooper for election to its Board of
Directors, subject to the TPA Agreement remaining in effect and the continued
beneficial ownership by Mr. Kooper of at least five percent (5%) of the
outstanding shares of Class A Common Stock of the Company.
Employee Options. In addition, the Board of Directors of the Company
had agreed to purchase approximately eighteen thousand and five hundred (18,500)
incentive stock options which were held or previously held by certain employees
of Arista (including officers and a director of Arista and an officer of the
Company) for an amount equal to approximately $30,500 in the aggregate. These
options have now expired and the Company will pay to the former option holders
cash bonuses equal to the value of the options. Susan J. Hall, Senior Vice
President, Treasurer and a director of Arista and Senior Vice President and
Treasurer of the Company, was the holder of 10,000 incentive stock options
granted under the Company's 1986 Incentive Stock Option Plan. The incentive
stock options expired on November 16, 1997. Under the Board of Directors'
proposal, Ms. Hall will receive approximately $13,750.
Background and Reasons for the Cession Transaction
Reasons for the Cession of the Insurance Under the Treaty. Over the
past several years, the Company received indications that various companies were
interested in purchasing Arista's book of New York State statutory, super
statutory and voluntary disability benefits insurance. The Company did not
solicit any indications of interest from other companies but did not discourage
such indications of interest. In December 1995, the Company's Board of Directors
unanimously directed Bernard Kooper, Stanley S. Mandel, and Richard P. Farkas,
the President, Executive Vice President and a Director of the Company,
respectively, to investigate bona fide proposals to purchase Arista or assume
its book of insurance business. The Company's Board of Directors has been
comprised of the following members since October 1994: Bernard Kooper, Stanley
S. Mandel, Louis H. Saltzman, Richard P. Farkas, J. Martin Feinman, Noah
Fischman and Daniel Glassman.
In concluding that it was in the stockholder's best interests to
investigate offers to cede Arista's book of insurance business, the Board of
Directors considered numerous factors as follows:
1. The historical market prices of the Class A Common Stock
were below the amount the Board believed could eventually be
distributed as a result of a transaction.
20
<PAGE>
2. The Board considered the prospects of Arista, including
alternative projections presented by management as to future growth
potential and operating potential, assuming Arista's continued
operation as an insurer. The Company's management and the Board
analyzed the likelihood of achievement of the various projections and
the per share value based on alternative sets of projections. They
concluded that the projections were uncertain and that even if met, per
share values would probably not adequately reflect the true value of
the Company.
3. Competition and consolidation in the insurance industry in
general, and in the statutory disability benefits segment in
particular, has increased markedly in recent years, contributing to a
decline in the Company's profit margins. The effects of such
competition have also been exacerbated by delays in legislative
approval of benefit increases in statutory disability benefits
insurance. The Board considered the financial condition and results of
operations of the Company and determined that these results were, and
would continue to be, subject to competitive pressure.
4. Arista's current capital and surplus requires it to utilize
reinsurance to reduce its liability on business in force and it has
incurred substantial costs in connection with the maintenance of
reinsurance. The cession of the Insurance will eliminate Arista's need
for reinsurance while the proceeds from such cession would enable
Arista to eliminate its existing indebtedness. The Board also
considered the future prospects of the Company and Arista and the
competitiveness of the insurance industry and concluded that Arista
would incur substantial costs in continuing to underwrite insurance
with Arista's existing debt structure and limited capitalization.
5. The Board considered the possibility of making additional
acquisitions as well as the consequences and costs of internal growth.
The Board determined that in view of current market prices for
acquisitions, the costs involved in additional acquisitions would not
likely be adequately rewarded, and that success probably would not be
adequately reflected in the Company's stock prices.
6. In its evaluation of various proposals, The Board
considered the value of the Company in continuing as an operating
company which will continue to be listed as a public company on the
Nasdaq Stock Market. The Board concluded that maintaining the Company's
ability to continue to operate as a third party administrator would
afford greater value to the Company's stockholders than would a sale or
liquidation of the Company.
The Board's decision to sell substantially all of the Company's assets
at this time, as opposed to an earlier or later time, was based primarily on
three factors:
1. New York State mandated statutory disability benefits have
not been increased during the past nine years. During the previous 49
years, statutory disability benefits have been increased by New York
State approximately once every three years, on
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average. In light of this apparent freeze in the increase in statutory
disability benefits, the Board did not foresee a material increase in
the Company's revenues in the near-term.
2. The Company currently has a "B" (fair) rating from A.M.
Best Company, Inc. which prevents the Company from competing for
business in large segments of the insurance market. Competition amongst
"B" rated insurance companies has increased in recent years.
3. The Company has found it increasingly expensive to maintain
its capital and surplus, due to the fact that interest payments on
Arista's outstanding indebtedness are greater than returns earned from
the investment of its surplus.
In accordance with the Board's direction to assess bona fide proposals to
purchase Arista or assume its insurance business, on May 17, 1996, Bernard
Kooper and Stanley S. Mandel reported to the Board that there were several
prospective acquirers of Arista's book of insurance business. Pursuant to the
unanimous recommendation by the Board of Directors on June 3, 1996, the
Acquisition Committee, Bernard Kooper and Stanley S. Mandel were designated to
review such indications of interest. The members of the Acquisition Committee
are Mr. Richard Farkas, Mr. J. Martin Feinman and Mr. Noah Fischman. During the
period commencing on December 1, 1995 and ending on December 31, 1997, the
Company received indications of interest from the following five companies: The
Guardian, Complete Management, Inc., ITT Hartford Life Insurance Companies,
Reliance National Insurance Company, and Universal Holding Corp. Additionally,
the Company received indications of interest from Old Lyme Holding Corporation
and Orion Capital in 1994. The Company's management subsequently held
discussions with and received tentative proposals to negotiate further from
these entities, the details of which discussions and proposals are described
below. The Company did not actively solicit any offers.
Negotiations With The Guardian. Beginning in January 1995 and continuing through
March 1996, The Guardian and Arista held a number of meetings to explore the
possibility of the cession of The Guardian's disability benefits insurance
business to Arista. These meetings were initiated as a result of the third party
administration services which Arista had provided to The Guardian since 1993,
and were facilitated by this relationship. The meetings were attended by Stanley
S. Mandel, President of Arista and Executive Vice President of the Company, and
senior executive officers of The Guardian.
On August 15, 1995, Mr. Mandel, Mr. Sanford B. Herman, F.S.A., Vice
President, Group Pricing and Standards, and Mr. Jeremy Starr, Second Vice
President, Reinsurance of The Guardian met to discuss the possibility of initial
information being provided to The Guardian in connection with The Guardian's
performance of due diligence on Arista. At the meeting it was determined that
The Guardian would request various documents quantifying Arista's experience,
including acquisitions consummated by Arista. The meeting was initiated by The
Guardian.
In April 1996, Mr. Starr advised Mr. Mandel that The Guardian wished to
explore the possible cession of the Insurance from Arista. In a telephone
conversation by Mr. Starr to Mr.
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Mandel on May 8, 1996, and in several subsequent telephone conversations, Mr.
Starr and Mr. Mandel discussed the preparation of an appropriate confidentiality
agreement. At a meeting on May 13, 1996, the Board expressed interest in
pursuing a transaction with The Guardian and directed Mr. Mandel to proceed with
the negotiations relating to such transaction. In May 1996, Mr. Starr advised
Mr. Mandel that The Guardian would offer either of the following purchase price
options: (i) 18% of annualized premiums on the date of transfer of the Insurance
or (ii) 10% of paid premiums over the 24-month period following the transfer
date. On June 5, 1996 the Acquisition Committee of the Company's Board of
Directors met to discuss the cession allowance offered by The Guardian and the
ability of the Company to proceed with a partial liquidating distribution
pursuant to The Guardian's assumption of all policyholder assets and
liabilities, concluded that Mr. Mandel should continue negotiations with respect
to the Treaty and TPA Agreement and authorized the signing of a confidentiality
agreement with The Guardian. The confidentiality agreement between Arista and
The Guardian was signed on June 5, 1996. Subsequently, Mr. Mandel, on behalf of
the Company and Mr. Stuart Shaw, Assistant Vice President, Group Disability of
The Guardian and Mr. Starr, on behalf of The Guardian negotiated the terms of
the Treaty and the TPA Agreement. On June 21, 1996, a meeting initiated by The
Guardian, and attended by Mr. Shaw, F.S.A., an Assistant Vice President of The
Guardian, and an actuary from Milliman & Robertson, an actuarial consulting firm
retained by Arista, was held at Milliman & Robertson, during which The Guardian
indicated a desire to acquire Arista's book of business as well as all policy
related assets and liabilities. The Guardian also confirmed that it would
consider acquiring the Insurance by either paying one lump-sum amount or
structuring the payment on a contingent fee basis over a 24-month period
subsequent to the transfer date.
Prior to the signing of the confidentiality agreement and the
progression of the proposed transaction to the due diligence stage, there were a
number of discussions with representatives of Milliman & Robertson and Mr.
William Odell, F.S.A. Several telephone conversations were held on May 24 and
May 31, 1996 by Mr. Mandel with a principal of Milliman & Robertson, and Mr.
Odell, which calls were initiated by Mr. Mandel. During these conversations, the
Treaty's actuarial considerations were discussed.
An initial due diligence meeting initiated by Mr. Mandel and attended
by Mr. William Odell, F.S.A., an independent consulting actuary retained by The
Guardian, Mr. Starr, Mr. Herman, Mr. Shaw and several other members of The
Guardian staff, and Mr. Mandel was held on June 14, 1996. At this meeting, the
parties conducted an on sight review of documentation previously furnished to
Mr. Shaw on June 10, 1996 by Mr. Mandel. The Acquisition Committee met again on
June 21, 1996 to discuss the cession allowance and the terms of the Treaty. A
conclusion was reached by Messrs. Farkas, Feinman and Fischman of the
Acquisition Committee to proceed with a transaction with The Guardian. The
Acquisition Committee felt that the transaction with The Guardian was
particularly attractive to the Company in that it would maximize the return to
the Company's stockholders by allowing the Company to maintain and expand its
third party administration capacity. The Acquisition Committee also considered
tax and accounting issues relating to the transaction.
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A telephone conversation initiated by Mr. Starr was held on July 24,
1996 between Mr. Starr and Mr. Mandel to discuss The Guardian's offer to acquire
Arista's insurance business, which offer was formalized in a letter of July 26,
1996 from Mr. Starr, on behalf of The Guardian, to Mr. Mandel. The offer
provided two alternative purchase price options; 18% of annualized premiums on
the date of transfer of the Insurance or 10% of paid premium over a two year
term commencing on the transfer date. Additionally, the offer proposed the
transfer of assets equal to statutory reserves plus or minus any reserve
inadequacy or redundancy (less the purchase price) to The Guardian. On August
15, 1996, at a meeting of the Company's Board, Mr. Mandel was directed to
continue negotiations with The Guardian. Mr. Mandel forwarded an initial draft
of the Treaty to The Guardian on October 22, 1996. A revised draft was forwarded
to the Company by The Guardian on November 7, 1996. On November 12, 1996 a
meeting initiated by Mr. Starr was held between Mr. Starr and Mr. Mandel during
which various terms of a revised third party administration agreement were
discussed, including fees, audit standards, notifications, and administrative
functions. Specifically, the pricing terms of the fee structure to be included
in the TPA Agreement were discussed, including (i) a basic fee of 7% of
administered premium, (ii) adjustments to the basic fee of +/- 1% of earned
premium pursuant to a semi-annual audit performed by The Guardian, and (iii) a
contingency payment to be paid on an annual basis as a function of the developed
incurred loss ratio for the same period.
During the summer of 1996, numerous telephone conversations were held
between and among Messrs. Farkas, Feinman and Fischman of the Acquisition
Committee to discuss the economic terms of the proposed transaction. During
those conversations, the Treaty and the TPA Agreement were discussed in light of
the alternative proposals from ITT Hartford Life Insurance Companies, Universal
Holding Corp. and Reliance National Insurance Company which were being
considered at that time. However, on July 2, 1996, Reliance National Insurance
Company withdrew its proposal.
Subsequently, Messrs. Farkas, Feinman and Fischman decided to accept an
invitation from Universal Holding Corp. to present a proposal to acquire that
Company's book of insurance business. A May 30, 1996 proposal from Universal
Holding Corp. for the acquisition of the Company, had already been analyzed by
the Acquisition Committee, and determined to be insufficient. With respect to
ITT Hartford Life Insurance Companies, Messrs. Farkas, Feinman and Fischman
concluded that based on the May 1996 proposal received from ITT Hartford Life
Insurance Companies, it would be inappropriate for the Company to agree to the
observance of a "no-shop" provision, which would prohibit negotiations and
discussions with any other possible acquirer. At the August 15, 1996 Board
meeting, Messrs. Farkas, Feinman and Fischman reported that the proposals from
ITT Hartford Life Insurance Companies and Universal Holding Corp. were no longer
under consideration.
Commencing on November 6, 1996 the Boards of Directors of the Company
and Arista held a number of meetings regarding the cession of the Insurance to
The Guardian, and drafts of the Treaty and TPA Agreement were presented to each
of the members of the Boards of Directors of the Company and Arista for
consideration. The proposed cession allowance and third party
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administration fees were discussed at those meetings. The following Company
Board members were present at each of these meetings: Bernard Kooper, Stanley
S. Mandel, Richard Farkas, J. Martin Feinman, Noah Fischman and Louis H.
Saltzman. Additionally, Mr. Daniel Glassman was present at certain of these
meetings. On November 22, 1996 the Board unanimously concluded that management
should continue to negotiate the terms of both the Treaty and the TPA Agreement.
During the period December 1996 through March 1997, the Company's
legal, actuarial and accounting advisors, along with the members of the Boards
of Directors of the Company and Arista, met and held telephone conversations to
address various issues associated with the proposed cession, the Treaty and the
TPA Agreement. Milliman & Robertson reviewed the actuarial implications of the
Treaty and the TPA Agreement, Morrison Cohen Singer & Weinstein, LLP reviewed
the legal issues pertaining to the Treaty and the TPA Agreement, and Rosen
Seymour Shapss Martin & Company, LLP reviewed the financial terms of the Treaty
and the TPA Agreement, including the tax implications and the effect on the
stockholders. At a meeting on December 11, 1996 the Board reviewed both the
Treaty and the TPA Agreement. In addition, the Board discussed the distribution
to stockholders which would take place upon the sale of the book of business to
The Guardian as well as the financial consequences of the servicing of that
business by the Company.
A meeting between The Guardian and the Company was held on December 12,
1996 to discuss various issues relating to the cession of the Insurance,
including rates, benefits administration and possible economies of scale. Mr.
Mandel, Ms. Susan Hall, Ms. Suzanne Bauer and Mr. Caputo, senior officers of
Arista, and Mr. Shaw and Mr. Joseph Moore, Team Manager, Group Disability
Underwriting of The Guardian, were in attendance at that meeting. On December
18, 1996 a meeting between Mr. Moore, and Ms. Suzanne Bauer, Vice President of
Sales of Arista took place to discuss agency and marketing considerations. The
meeting was initiated by Ms. Bauer. At a meeting on January 22, 1997 the Board
reviewed the status of the Treaty and the requirement that it be filed with the
New York Insurance Department, unanimously approved the terms of the Treaty,
directed management to seek regulatory approval of the Treaty from the New York
State Insurance Department and to seek stockholder approval of the transaction
and directed that Mr. Mandel should complete the TPA Agreement negotiations. In
addition, the Board reviewed a hypothetical distribution pro forma presentation
prepared by the Company's auditors, Rosen Seymour Shapss Martin & Company, LLP
and reviewed the status of the TPA Agreement. Alan Willinger, CPA is a tax
partner with the Company's independent auditors. He is one of the co-partners in
charge of the firm's tax practice serving individual and corporate tax clients.
Mr. Willinger and his firm were selected to provide the assessment based on the
firm's intimate knowledge of the Company's and Arista's tax and financial
matters. Mr. Willinger's informal presentation was an assessment of management's
calculation of the hypothetical proceeds to be distributed to the stockholders
if the sale is approved, and the tax consequences of the transactions to the
Company's Class A Common Stockholders. Mr. Willinger reported no significant
differences with management's estimates, and independently believes that the
transaction would be non-taxable to the stockholders of the Company.
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Previously, the Board had requested management to ascertain the
feasibility of obtaining a fairness opinion with respect to the transaction. At
the January 22, 1997 meeting, a representative of Oppenheimer & Co., Inc. gave a
presentation to the Board as to the procedures and expenses related to obtaining
a fairness opinion. The Board concluded after such presentation that it would
not seek a fairness opinion for a number of reasons, including the Company's
experience in evaluating alternative transactions and the expense associated
with such an opinion.
A draft of the Treaty was submitted to the New York State Insurance
Department on February 4, 1997. On March 13, 1997, Mr. Shaw initiated a
telephone conversation with Mr. Mandel to discuss Insurance Department
regulatory matters, premium rates, agency considerations and third party
administration. This conversation was delineated in a letter from Mr. Mandel to
Mr. Shaw dated March 13, 1997. On April 24, 1997, the Company's Board of
Directors authorized the mailing of a preliminary proxy statement relating to
the cession of the Insurance to the Securities and Exchange Commission. As of
May 6, 1997, the New York State Insurance Department granted approval to the
parties of the implementation of the Treaty as presented. On September 23, 1998,
the Board approved the terms of the TPA Agreement, subject to the approval of
the sale of substantially all of the Company's assets pursuant to the Treaty by
the Company's stockholders, and directed that the TPA Agreement be entered into
prior to the mailing of this proxy statement to the Company's stockholders.
Effective January 1, 1998 the existing reinsurance treaty with Cologne
was terminated and Arista entered into the Quota Share Reinsurance Treaty with
The Guardian.
The Decision to Proceed with the Guardian Transaction.
In approving the transaction with The Guardian, the Board carefully
considered all of the proposals and ultimately determined that it would be in
the stockholders' best interests to pursue the proposal made by The Guardian. In
making this determination, the Board concluded that not only did the other
proposals not properly reflect the Company's worth, but also that the cession of
the Insurance to The Guardian, in conjunction with a new third party
administration agreement, would maximize return to stockholders by enabling the
Company to (i) realize the fair value of the Insurance, (ii) maintain and expand
a profitable insurance administration business, and (iii) retain assets
including cash and cash equivalents in the amount of $2,000,000 (equivalent to
approximately $0.77 per share), and the proceeds to be received from the
anticipated sale of the stock of Arista Insurance Company. Additionally, the
cession of the Insurance would enable the Company to eliminate the risk
associated with underwriting the Insurance and to make a distribution to its
stockholders without the delay which would normally result from the necessity of
running off reserves and assessments.
In addition to considering the relative merits of The Guardian
proposal, the Board of Directors discussed and reviewed the lump sum payments to
Messrs. Mandel and Kooper in light of the assets which would be available to the
stockholders pursuant to the Plan of Partial Liquidation (as hereinafter
defined) following the sale of the Insurance to The Guardian. The Board
determined
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that such payments would not have an appreciable effect on the Company's results
of operations and financial condition. Neither Mr. Mandel nor Mr. Kooper
participated in making such determinations.
Reasons for Approval of The Treaty
In reaching its decision to accept the proposal of The Guardian and to
approve the Treaty, the TPA Agreement, and the subsequent sale of the stock of
Arista Insurance Company, the Board considered the following relevant
advantages:
1. The Treaty enables the Company to realize the fair value of
the Insurance, eliminate the risk associated with the Insurance and to eliminate
the surplus requirements necessary to underwrite the Insurance. Additionally,
payment under the Treaty is non-contingent and is a direct function of Arista's
existing earned premium.
2. As part of the overall transaction with The Guardian, the
Company will enter into an expanded TPA Agreement with The Guardian. No other
proposal would have permitted the Company to continue as a viable third party
administrator as well as a public company. The Board believes that the TPA
Agreement will provide a higher return, eliminate insurance risk and contain
generally more favorable terms than proposals made by other companies including,
Old Lyme Holding Corporation and Orion Capital Corp. (Old Lyme Holding
Corporation was the subject of a press release dated June 16, 1994 and Orion
Capital Corp. was the subject of press releases dated November 9, 1994 and March
17, 1995), Reliance National Insurance Company and Universal Holding Corp., each
of which discussed merging with Arista, and ITT Hartford Life Insurance
Companies, which discussed purchasing Arista or assuming Arista's insurance
risks. Although ITT Hartford Life Insurance Companies did make an oral proposal
that the Company operate as a third party administrator, the Board concluded
that the fee structure applicable to this proposal was approximately 30% below
that of the TPA Agreement proposed by The Guardian and contained no provision
for an increase contingent upon performance and results.
3. The Guardian is an established insurance company which has
demonstrated measured and consistent growth for many years. The Board considered
that this continued growth by The Guardian may result in a concomitant increase
in the Company's fees and additional opportunities pursuant to the TPA
Agreement.
4. The TPA Agreement will be effective for a period of five
years, subject, under certain conditions, to earlier termination by The
Guardian, provides for annual renewals, at the sole discretion of The Guardian,
after the fifth year and will place the Company in a greatly expanded position
as a third party administrator with respect to future operations. The Guardian
does not currently have an existing infrastructure to support an in-house
administrative capacity, and therefore, will continue to require such services
for the near term, particularly in light of The Guardian's possible expansion in
the DBL market.
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5. The transfer of liabilities and assets between Arista and
The Guardian will enable the Company, if a Plan of Partial Liquidation (as
hereinafter defined) is adopted by its Board of Directors, to make a
distribution to the stockholders, without the delay, which would otherwise be
necessitated in running-off statutory assessments and claim reserves. See
"Estimated Per Share Amount Available For Distribution."
In addition, the Board considered the following relevant disadvantages to The
Guardian transaction:
1. It is possible that a statutory benefit increase could
ensue subsequent to the transaction, which, if the sale of the Insurance did not
take place, might increase the Company's revenues without a substantial increase
in expenses. However, this lost opportunity for increased revenues due to a
statutory benefits increase would be offset by an increase in the Company's fees
under the TPA Agreement.
2. Additional candidates for assumption reinsurance might
surface subsequent to the transaction, which might have added to Arista's book
of business.
Alternative Proposals Considered
Generally. As an alternative to the cession of the Insurance, the Board
considered various transactions, including a sale or merger of the Company, the
assumption of additional insurance and the sale of the stock of Arista Insurance
Company. Sale, merger or assumption proposals were discussed with Universal
Holding Corp., Complete Management, Inc., Reliance National Insurance Company,
Old Lyme Holding Corporation, and Orion Capital Corp. The sale of the stock of
Arista Insurance Company was discussed with ITT Hartford Life Insurance
Companies, among others. The Company was negotiating with Orion and Old Lyme in
1994 and early 1995 and subsequently with the other above named entities
simultaneously.
Over the course of many months, as Messrs. Kooper and Mandel, as well
as members of the Acquisition Committee and the full Board, held numerous formal
and informal meetings to discuss the various proposals for the disposition of
Arista's assets, a consensus was reached that the sale of assets contemplated by
the Treaty was a more advantageous alternative than either the sale or merger of
the Company or continuing Arista with the prospect of additional assumptions of
books of DBL insurance, and additionally, was a more desirable alternative then
any of the recent proposals received by the Company. The Board, after
consultations with Bernard Kooper, Stanley Mandel and the Acquisition Committee,
reached this conclusion because a merger or sale would have eliminated the
possibility of continuing the Company as a public entity and as a third party
administrator and because it had become evident that a statutory benefit
increase would not be approved during 1997. The Board further concluded that the
combination of maintaining a third party administration business, along with the
revenue generated by the cession of the Insurance and elimination of insurance
risk and surplus requirements, was the best available alternative. This
alternative approach will enable the Company to remain in business as a third
party administrator with retained assets including cash and cash equivalents in
the amount of $2,000,000 (equivalent to approximately $0.77
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per share) plus the proceeds received from the anticipated sale of the stock of
Arista Insurance Company (comprised of Arista's charter, its insurance license
and its minimum retained capital).
Proposals Received in 1994
Old Lyme Holding Corporation. In the last quarter of 1994, Old Lyme Holding
Corporation ("Old Lyme"), expressed an interest in acquiring the Company. The
Company held preliminary discussions with Mr. Larry Greenfield, the Chairman of
Old Lyme, and Mr. Ned Sherwood, a director of Old Lyme. As a result of these
preliminary discussions, the Acquisition Committee, Mr. Kooper and Mr. Mandel
continued negotiations with Mr. Greenfield and Mr. Sherwood related to a
possible merger of the Company with a subsidiary of Old Lyme, Old Lyme offered
$3.75 per share for the Class A Common Stock, with 40% of the total
consideration to be paid in Old Lyme common stock and 60% in cash. The
negotiations terminated principally over the parties inability to reach
agreement on certain key terms, including the relative amounts of cash and Old
Lyme common stock which Arista's stockholders would receive, Old Lyme's
valuation of its common stock and because the Acquisition Committee believed
such stock to be relatively illiquid. The price of Old Lyme common stock has
decreased significantly through June 30, 1998.
Orion Capital Corp. In early October 1994, Richard Farkas, Chairman of the
Acquisition Committee, and Stanley S. Mandel attended a meeting at the offices
of Orion Capital Corp. ("Orion"), initiated by Mr. Alan Gruber, Chairman and CEO
of Orion, at which time discussions were held with regard to Orion's purchase of
the Company. Subsequent to that meeting, Mr. Farkas, Mr. Kooper and Mr. Mandel
attended a meeting with Mr. Gruber, and Mr. Vincent Papa, the Vice President and
Treasurer of Orion, at which time the terms of a proposal were discussed. These
terms included a consideration of $3.75 per share, the form of the transaction,
the requirement of approval by a majority vote of Arista's Class A Common
Stockholders and Class B Common Stockholders, regulatory approvals and due
diligence requirements. On October 25, 1994, Mr. Mandel forwarded to Mr. Papa an
outline of the discussions from the meeting in early October. On November 3,
1994, Mr. Papa delivered to the Company the terms of a proposal for further
negotiations, which included the consideration for each of the outstanding
shares of Common Stock of approximately $3.75 per share to be paid in cash, the
completion of Orion's due diligence, approval by a majority vote of the
Company's Class A Common Stockholders and Class B Common Stockholders voting as
a separate class and any and all regulatory approvals. On November 9, 1994, the
Company announced an agreement in principal on a merger of the Company with a
subsidiary of Orion. The total consideration for outstanding shares of common
stock of the Company was approximately $3.75 per share, to be paid in cash. The
proposed transaction was subject to the completion by Orion of its due
diligence, approval by a majority vote of the Company's Class A and Class B
Common Stockholders and required regulatory approval. Following completion of
the due diligence performed by Orion, the price to be received by each Class A
Common Stockholder and Class B Common Stockholder was reduced by Orion to $3.50
per share and was subsequently further reduced to $3.40 per share, an amount
which the Company's Board considered at to be least 10% below the actual value
of the Company at that time. In addition, Arista had recently completed an
agreement with United States Life Insurance Company to act as its third party
administrator for their
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portfolio of DBL Insurance, was completing the acquisition of American Medical
and Life Insurance Company's book of business and was in discussions with
Greater New York Mutual Insurance Company and the Insurance Company of Greater
New York regarding the possible acquisition of their books of insurance
business. Therefore, considering the offering price and the ongoing growth
through acquisitions including third party administration agreements with The
Guardian and United States Life Insurance Company, the Acquisition Committee
concluded that Orion's offer was inadequate. On March 17, 1995, the Board of
Directors, after considering the most recent proposal from Orion for the
acquisition of the Company, and in light of the progress of the negotiations to
date, determined to suspend those negotiations and to engage in negotiations for
the sale of the Company with other parties which had been discontinued after the
receipt of the Orion's offer. From March 1995 through December 1995, subsequent
to the negotiations with Orion, the Company continued discussions with other
parties. However, no other formal proposals were received by the Company until
late 1995.
Proposals Received Since December 1, 1995
Hartford. Over the past several years, ITT Hartford Life Insurance Companies
("Hartford") has made inquiries to the Company to obtain information for the
assumption of its insurance business. In May 1996, Mr. Lon A. Smith, the
President of Hartford, and Mr. Mandel discussed a proposal under which Hartford
would acquire the shares of capital stock of the Company. This proposal was for
the purchase of all of the outstanding shares of Class A and Class B Common
Stock of the Company for an amount equal to approximately $3.00 per share. The
proposal was subject to completion of due diligence, the structuring of the
transaction in a manner acceptable to Hartford based upon, among other factors,
tax considerations, the consent of Hartford's board of directors, approval by
applicable government authorities, the negotiation, execution and delivery of a
mutually acceptable, legally binding definitive purchase agreement, the
observance of "no-shop" and confidentiality provisions by the Company, Arista
and each of their respective directors, officers, employees, agents, consultants
and other advisors. Hartford also retained the right to withdraw the proposal at
any time prior to the execution of a definitive agreement for any reason
whatsoever.
Mr. Mandel and Mr. Maher, a Vice President of Hartford, subsequently
discussed the overall structure of the proposed transaction, and as a result of
these discussions, and several telephone conversations between Mr. Mandel and
Mr. Maher, relating to the financial terms, timing and due diligence
requirements of Hartford, in June 1996 the Company's Board of Directors
determined that Hartford's proposal to acquire the Company was inadequate, as
compared to other proposals under consideration by the Company. For example, the
Board of Directors of the Company determined that the amount of the proposal was
less than the amount that could be realized under The Guardian proposal (as
discussed in this Proxy) and the proposal by Reliance (which was for an equal
dollar amount, but provided for a contingency payment in an amount not to exceed
27 cents per share). The Board determined that the Hartford proposal of $3.00
per share did not compare favorably with the terms of The Guardian transaction
which would allow an estimated $2.03 per share to be distributed to the
Company's stockholders some time after the third quarter of 1998, enabling the
Company (i) to retain cash and cash equivalents and other assets in the amount
of $2,000,000, or
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approximately $.77 per share, (ii) continue the Company as a public entity
performing third party administrative services, and (iii) realize proceeds to be
received from the anticipated sale of the stock of Arista (comprised of Arista's
charter, its insurance license and its minimum retained capital). In addition,
unlike The Guardian's offer, Hartford's offer of a third party administration
arrangement would not enable the Company to participate in any statutory benefit
rate increase. Additionally, the fee structure which would be applicable to the
administrative contract was approximately 30% below that of The Guardian and
contained no provision for increases contingent upon performance and results.
Since Hartford had for many years expressed an interest in acquiring the
Company, on March 27, 1997 the Company and Hartford executed an updated
confidentiality agreement.
Reliance National Insurance Company. Pursuant to the request of Ms. Joanne
Duarte, agent of Reliance National Insurance Company ("Reliance") the Company
held preliminary discussions with Reliance in December 1995 regarding the
possible acquisition by Reliance of 100% of the capital stock of the Company. In
March 1996, the Company forwarded to Reliance certain preliminary due diligence
materials relating to the Company and, in late March of that year, Stanley S.
Mandel and Bernard Kooper met with Mr. Dennis A. Busti, President, Mr. Albert J.
Marino, Chief Financial Officer and A. Raymond Williams, Executive Vice
President, regarding the proposed acquisition. In the late March 1996 meeting,
Messrs. Mandel and Kooper discussed with the officers of Reliance the mechanism
by which the New York State Insurance Department might approve a plan of
acquisition and operation established by Reliance and further analyzed the
preliminary due diligence materials previously delivered in March 1996. In May
1996, a proposal was received by Messrs. Kooper and Mandel which required
further conversations by and among members of the Acquisition Committee and Ms.
Joanne Duarte in order to review the nature of the proposed contingency payments
and the financial consequences of the proposal. On May 30, 1996, a revised
proposal for the sale of the capital stock of the Company was received by
Messrs. Kooper and Mandel which included a request by Reliance that the Company
advise Reliance within three business days after May 30, 1996 of its position
with regard to the proposal.
Mr. Farkas, Chairman of the Acquisition Committee, subsequently
contacted Mr. Williams in order to facilitate negotiations. In June 1996 Mr.
Farkas continued negotiations with Mr. Williams and presented an amended
proposal, which had been unanimously approved by the Company's Board, to Mr.
Williams. On June 27, 1996, the Company received a revised proposal from
Reliance which contained a contingent offer of approximately $3.27 per share of
the Company's common stock and pursuant to which Mr. Kooper would receive a
payment in accordance with the terms of his current employment contract. Mr.
Mandel would receive the same contingent arrangement contained in the May 30,
1996 proposal. The offer of approximately $3.27 per share was contingent upon
Arista's retention of an after-closing average of $27,000,000 in earned annual
premiums for the ensuing three year period subsequent to the closing. Reliance
would reduce the lock-up period from 90 days to 60 days in exchange for a
break-up fee payable by the Company, and acknowledgment by the Company that the
Company would not seek any additional compensation for deferred acquisition
costs, net operating loss carry forward and excess statutory reserves.
Reliance's contingent offer of approximately $3.27 per share, was deemed
inadequate by the Board, and, in any event, was withdrawn by Reliance on July 2,
1996, at which time Reliance
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informed the Company that it was no longer interested in acquiring the Company.
Therefore, the Board was not called upon to consider whether the Reliance
proposal should be approved.
Complete Management, Inc. In February 1996 Complete Management, Inc. ("CMI")
proposed that the Company and CMI enter into negotiations regarding a possible
merger of the two companies. In late June 1996, CMI withdrew its offer to
negotiate a merger and expressed an interest in acquiring Arista Insurance
Company's charter and third party administration business, rather than merging
with the Company. Meetings regarding CMI's new proposal were held in the summer
of 1996 by and among Mr. Farkas, Mr. Mandel, Mr. Kooper and Mr. Rabinovici, the
Chairman and CEO of CMI. The discussions by and among Mr. Farkas, Mr. Mandel,
Mr. Kooper and Mr. Rabinovici focused on CMI's acquisition of both the charter
and the third party administration business, which activities could not commence
until such time as Arista disposed of its book of insurance business.
At a meeting held on August 15, 1996, the Board of Directors
unanimously concluded that until such time as Arista disposed of its insurance
risks, under New York State Insurance Department regulations, it would be unable
to consider either the sale of the stock of Arista Insurance Company or the sale
of the third party administrator.
Universal Holding Corp. In April of 1996, Richard Barasch, President of
Universal Holding Corp. ("Universal") contacted Stanley S. Mandel to express
interest in acquiring 100% of the capital stock of the Company. In a series of
telephone conversations held during the end of May, Richard Barasch and Richard
Farkas discussed the terms under which Universal would purchase the capital
stock of the Company. Universal's proposal was formalized in a written offer
sent to the Company on May 30, 1996 which offer was to purchase the Company's
capital stock for approximately $3.20 per share. After further analysis and
several telephone conversations between Mr. Farkas and Mr. Barasch during which
Mr. Farkas continued to seek to explore an increase in the offering price, it
was determined that the negotiations should include the alternative of Arista
assuming Universal's book of DBL business. The Company considered Arista's
acquiring Universal's DBL business for the following reasons: (i) Universal
suggested that the Company make a proposal for the acquisition of its book of
DBL business if an acquisition by Universal of the Company could not be
accomplished, and (ii) Arista had consummated the acquisition of more than five
books of DBL business from other insurers during the prior three year period and
was continuing to seek to obtain other books of DBL business.
The Board of Directors of the Company analyzed Universal's offer and
the resulting net per share return to the Company's stockholders. On August 15,
1996 the Company's Board of Directors determined that the per share return of
$3.20 per share was inadequate and rejected Universal's offer. The Board of
Directors believed that the per share return was inadequate because negotiations
with The Guardian, which were taking place simultaneously with the negotiations
with Universal, indicated to the Board that The Guardian transaction, as
previously described, would permit the Company to provide a distribution in cash
to the stockholders while continuing as a public company engaged in the third
party administration business. The Board determined that the Universal
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proposal of $3.20 per share did not compare favorably with the terms of The
Guardian transaction which would allow an estimated $2.03 per share to be
distributed to the Company's stockholders some time after the third quarter of
1998, while enabling the Company to (i) retain cash and cash equivalents and
other assets in the amount of $2,000,000, or approximately $.77 per share, (ii)
continue the Company as a public entity performing third party administrative
services, and (iii) realize the proceeds to be received from the anticipated
sale of the stock of Arista (comprised of Arista's charter, its insurance
license and its minimum retained capital). Additionally, at the time Universal's
offer was made, Arista was in the process of completing the acquisitions of the
Greater New York Mutual and the Insurance Company of Greater New York, which the
Board felt would increase the Company's worth. Moreover, at the time, third
party administration activities with respect to The Guardian and U.S. Life were
intensifying and gross income from these sources was expanding. On January 28,
1997, the Company was advised that Universal had ceded its book of DBL business
to Standard Security Life Insurance Company of New York, and had withdrawn from
the DBL business entirely.
The Board of Directors reviewed the recent alternative proposals and
compared each of these proposals to the transaction with The Guardian. The Board
of Directors concluded that The Guardian transaction, which includes: (i) an
estimated distribution of $2.03 per share to the Company's stockholders, and
(ii) the retention of cash and cash equivalents and other assets in the amount
of $2,000,000 or of approximately $0.77 per share, plus an assumption that the
sale of Arista's charter will be in the range of between $0.17 per share to
$0.29 per share (the recent sale by Arista of a charter for approximately
$765,000 or $0.29 per share based on 2,617,500 shares of outstanding Class A
Common Stock and Class B Common Stock), along with an assumption that the value
of the public company as a third party administrator with the TPA Agreement with
The Guardian and third party administration agreement with United States Life
Insurance Company is in excess of $0.36 per share, caused the Board of Directors
to value The Guardian transaction in excess of any of the alternative proposals
received since December 1, 1995, and described herein.
Required Vote of Stockholders. The Treaty requires the Company to
obtain the approval of its stockholders, which vote requires that the holders of
a majority of the Class A Common Shares and the Class B Common Shares approve
the transactions contemplated by the Treaty. In addition, pursuant to the
Company's Certificate of Incorporation and Section 271 of the Delaware
Corporation Law, the affirmative vote of a majority of the outstanding stock of
a corporation is required for the sale of all or substantially all of the
corporation's property and assets. Stockholder approval of the TPA Agreement is
not required under the Company's Certificate of Incorporation or any applicable
state law.
Anticipated Distribution to Stockholders. The Company anticipates
making a distribution to its stockholders of a portion of the proceeds from the
cession of the Insurance and the proceeds from the disposition of the stock of
Arista Insurance Company, pursuant to a Plan of Partial Liquidation (the
"Plan"). The Board does not anticipate that it will approve the Plan before the
stockholders vote on Proposal No. 1. The Plan, if approved by the Board of
Directors of the Company, will be subject to (i) the approval of the
stockholders of Proposal No. 1 and (ii) the
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Closing of the transaction. No regulatory approvals are required for the Plan.
After the cession of the Insurance and the delivery of the related assets and
liabilities to The Guardian, the Board of Directors will proceed in the
following manner:
1. To the extent deemed necessary by the Board of Directors, the Board
will establish and set aside reasonable amounts to meet claims against Arista,
including ascertained and contingent liabilities and expenses. At this time, the
Board is not aware of any claims against Arista, and therefore does not
anticipate the establishment of a reserve or an escrow account.
2. Arista will have submitted to the New York State Insurance
Department a request for payment of two (2) extraordinary dividends from Arista
to the Company; one request for an extraordinary dividend in the amount of $5.2
million payable subsequent to the Closing, and the other dividend in an amount
which will reduce the surplus of Arista to the minimum amount permitted by the
New York State Insurance Department. The Company anticipates being able to make
an initial distribution, if approved by the Board of Directors of the Company,
to stockholders of the Company sometime after the third quarter of 1998. There
is, however, no assurance that such a distribution will or can be made at that
date or any other specific date.
3. The Company will actively seek a purchaser of the stock of Arista
Insurance Company following the Closing.
4. After provision for creditors' claims is made, and the policy
related assets and liabilities have been transferred to The Guardian, if there
are then no pending legal, administrative or arbitration proceedings (or
adequate provisions have been made to satisfy any judgment arising therefrom),
any and all other necessary or appropriate actions will be taken to (i) have the
Company assume any liability for such legal, administrative or arbitration
proceedings and (ii) distribute the amount authorized and agreed upon by the
Board of Directors to the stockholders of the Company.
The Board is considering the Plan because, as a result of Arista's
exiting the insurance business followed by the anticipated sale of its stock,
the Company will require significantly less capital and surplus in connection
with its performance under the TPA Agreement than would be required to
effectively operate an insurer.
Estimated Per Share Amount Available for Distribution. The following
estimate of the amount available for distribution to stockholders is based upon
the Board of Directors' best estimate of the amount available, the expenses to
be incurred and provisions for outstanding contingent liabilities. Although the
Directors have carefully reviewed all of this material, it must be emphasized
that the amount is an estimate only and must be considered as preliminary.
Accordingly, no assurance can be given that the estimated partial liquidating
distribution amount will actually be realized or that the amount distributed to
stockholders will not vary materially from the preliminary amount which is set
forth below.
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While it is not possible to determine the exact amount that may
ultimately be realized upon disposition of the Company's assets if the Plan is
adopted by the Directors, the Directors believe that the initial amount
available for distribution as a result of the partial liquidating distribution
will be approximately $2.03 per share as set forth below.
The estimated amount to be distributed represents the liquid assets
available following the cession of the Insurance business, as described in
Proposal No. 1, and after the payment of all net liabilities and obligations
related to the Insurance business, including the repayment of Arista's Surplus
Note held by CLUMCO, including accrued interest, upon approval by the New York
State Superintendent of Insurance, and after deducting a reasonable amount of
capital to be retained by the Company for continued listing on the Nasdaq Stock
Market as well as working capital.
The Company estimates its liquid assets to be approximately $7,318,000
or $2.80 per share, and the estimated net liquid assets available for initial
distribution to stockholders sometime after the third quarter of 1998 to be
approximately $5,318,000, or $2.03 per share. A second distribution, if any, is
not expected until such time as the sale of the Arista Insurance Company stock
is completed.
The estimated liquid assets available and the estimated net assets
available for initial distribution were based on the following hypothetical
example of the transactions that will follow the stockholders' approval of
Proposal No. 1. Stockholders should note that certain amounts used to compute
estimated liquid assets and the estimated net liquid assets available for
initial distribution to stockholders in the example below are estimated amounts
used for illustrative purposes only, and should not be treated as exact or
actual amounts that will be distributed in the partial liquidation of the
Company:
<TABLE>
<CAPTION>
Amount
($000) Per Share
<S> <C> <C>
Net assets at estimated liquid value............................... $ 7,318 $ 2.80
Resources for TPA capitalization and the net tangible asset
requirement of NASDAQ.............................................. (2,000) (0.77)
------- ------
Estimated net liquid assets available for distribution to
stockholders....................................................... $ 5,318 $ 2.03
======= ======
</TABLE>
After the closing of the cession of the Insurance to The Guardian and
the initial distribution to stockholders, the Company will be comprised of
Arista Insurance Company's license and charter, and its ongoing TPA operation.
In addition, the Company will retain cash and cash equivalents and other assets
in the amount of $2,000,000, or approximately $0.77 per share. The Company may
consider the sale of its operations at a future date.
The federal income tax consequences of any distributions are discussed
in the sections below.
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Distribution; Provision for Liabilities and Claims. The Board of
Directors believes that all major contingent claims and liabilities which may be
outstanding as of the date of the Proxy Statement have been adequately reserved
for.
Because there is no assurance that the amounts reserved will be
adequate to cover all claims and liabilities, the Company may establish escrows
or other provisions to assure that all claims and liabilities are paid prior to
any final distribution to stockholders. At this time, however, the Board is not
aware of any claim against the Company and therefore does not anticipate the
establishment of a reserve or an escrow account. The amount available for
distribution to stockholders will be reduced accordingly. Any amounts which are
not used from any such escrow or other provision may be distributed to
stockholders at a future date or retained by the Company for working capital.
However, there is no assurance that such additional amounts will be available
for distribution.
The Plan may provide that the balance of the distribution will be
distributed to stockholders at such time as may be determined by the Board of
Directors. The character, amount and timing of any distributions will depend
upon the Plan, as well as any amounts deemed necessary or appropriate to provide
for the satisfaction of the Company or Arista's liabilities, either fixed or
contingent, as well as the expenses of the transactions contemplated herein.
The expenses of administering Arista, winding up of Arista's affairs,
preparing all reports required by federal and state laws in connection with
Arista's continued existence, the negotiation and completion of payment of any
claims against Arista, as well as all expenses and liabilities which continue to
arise or to be incurred during the course of the process will reduce the amount
of assets available for distribution to stockholders.
Stockholders will not be required to surrender their stock certificates
for cancellation in connection with the distributions to be made pursuant to the
Plan.
Stockholder approval of the Plan is not required under the Company's
Certificate of Incorporation or any applicable state law and the Company's
stockholders are not being solicited to approve the Plan.
Directors and Officers. It is anticipated that all of Arista's
directors (each of whom is a stockholder of the Company except for Richard
Farkas and Richard Greenwald) will remain directors of Arista until the stock of
Arista Insurance Company has been sold and its assets have all been distributed
to the Company.
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THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
PROPOSAL NO. 1.
RIGHTS OF DISSENTING STOCKHOLDERS
Under Section 262 of the Delaware General Corporation Law, stockholders
are granted appraisal rights only in the case of a merger or a consolidation.
However, under Section 262(c), a corporation may include in its certificate of
incorporation a provision to grant appraisal rights to its stockholders in
connection with a transaction other than a merger, such as a sale of all or
substantially all of the assets of a corporation. The Company has no provisions
in its certificate of incorporation that provide for appraisal rights of
stockholders.
FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States Federal income
tax consequences to Arista, the Company, and the stockholders, which would
result if the Plan were adopted. It is based upon the Internal Revenue Code of
1986, as presently amended (the "Code"), Treasury Regulations promulgated and
proposed thereunder, administrative pronouncements and judicial decisions, all
of which are subject to change (either prospectively or retroactively), which
changes could materially affect the tax consequences herein.
No rulings have been or will be requested from the Internal Revenue
Service (the "IRS") as to the matters discussed herein and, as to some such
matters, such a ruling might not be obtainable even if requested. Accordingly,
no assurance can be given that the IRS will not challenge the tax treatment of
certain matters discussed herein, which challenge, if any, might be upheld by
the courts.
This summary is necessarily general in nature, and does not address all
of the tax consequences that may be relevant to particular stockholders in
light of their personal circumstances, or to certain types of stockholders (such
as certain financial institutions, dealers in securities or commodities,
insurance companies, tax exempt organizations, or persons who hold shares as a
position in a straddle). In particular, the discussion herein applies only to a
stockholder who is a United States resident for Federal income tax purposes.
This summary further assumes that all shares of stock are held as "capital
assets", and thus may not be applicable as to shares acquired as compensation
(including shares acquired upon the exercise of options). This summary also does
not address the state, local or foreign tax consequences to a stockholder of the
proposed transaction.
ACCORDINGLY, EACH STOCKHOLDER IS URGED TO CONSULT WITH AND TO OBTAIN THE ADVICE
OF HIS OR HER OWN TAX ADVISOR AS TO THE TAX CONSEQUENCES OF THE PROPOSED
TRANSACTIONS AS TO SUCH STOCKHOLDER.
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Federal Income Tax Consequences, In General
The contemplated distributions, if made, would be accomplished by the
following interrelated steps:
(a) The Company's adoption of a Plan of Complete Liquidation of Arista
pursuant to Code Section 332, in furtherance of which (i) Arista will cede all
of its Insurance by implementing the Treaty with The Guardian; (ii) contingent
upon the Closing, Arista will distribute to the Company the net proceeds
received from the cession of its Insurance together with all of Arista's
remaining assets (including the assets to be used in its third party
administration business ("TPA business")) except that Arista will retain
ownership only of its corporate charter, state insurance licenses, and assets
necessary to meet minimum capital and surplus requirements to maintain such
licenses (collectively the "Retained Assets"); (iii) the Company will assume all
of Arista's liabilities, other than policyholder liabilities; and (iv) within
twelve months of the distribution referred to in (ii), the Company will either
(x) sell all of the stock of Arista Insurance Company, subject to the approval
of the New York State Insurance Department to an unrelated purchaser; or (y)
dissolve Arista under New York law, receive in distribution all Retained Assets
and cause any charter or license of Arista that is not distributable to be
terminated or otherwise cease to exist; and
(b) The Company's adoption of the Plan pursuant to Code Section
302(b)(4), in furtherance of which it will, contingent upon the Closing,
distribute in cash, in a pro rata redemption of its Common Stock from each of
its stockholders in an aggregate amount equal to: (i) the cash proceeds received
from the cession of the Insurance; (ii) the other net liquid assets of Arista
attributable to the terminated insurance business; and (iii) the proceeds it
receives from the sale of all of the stock of Arista Insurance Company
(comprised of Arista's charter, its insurance licenses and its minimum retained
capital) or the dissolution of Arista. The Company will retain, and continue to
own and actively operate, the TPA business (and associated assets) previously
conducted by Arista.
Opinions of Counsel
The Company has received an opinion from its counsel, Morrison Cohen
Singer & Weinstein, LLP ("Counsel") that, on the basis of the facts,
representations and assumptions described in all material respects below under
this "Federal Income Tax Consequences" section of the Proxy Statement, for
Federal income tax purposes it is Counsel's opinion that it is more likely than
not that (i) the contemplated liquidation of Arista into the Company pursuant to
the Plan of Complete Liquidation of Arista would, if adopted, qualify as a
non-taxable liquidation under Section 332 of the Code, and (ii) the Company's
contemplated distribution to the stockholders of the proceeds from the cession
of the Insurance and the proceeds from the sale of the stock of Arista Insurance
Company or the dissolution of Arista (collectively the "Distribution Proceeds")
would, if the Plan of Partial Liquidation were adopted, be a distribution in
"partial liquidation" of the Company within the meaning of Code Section
302(b)(4).
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In rendering its opinion, Counsel has relied upon representations of
management of the Company substantially similar to representations that the IRS
customarily requires for an advance ruling on a non-taxable liquidation under
Section 332 of the Code and a distribution in partial liquidation under Section
302(b)(4) of the Code, and upon certain other assumptions as to the occurrence
of future events, including that: the Plan of Complete Liquidation of Arista and
the Plan will both be adopted on a timely basis; the distribution of the assets
of Arista to the Company (including the sale proceeds from the cession of the
Insurance) will all occur by not later than December 31, 1999; that following
the cession of the Insurance and until the Company's sale of the stock of Arista
Insurance Company, Arista will retain only the minimum amount of Retained Assets
necessary to retain its insurance licenses and corporate charter and will not
engage in any other business activities; the Company will sell the stock of
Arista Insurance Company or dissolve Arista by not later than twelve months
after the final distribution of the assets of Arista to the Company; considering
the operations of the Company and Arista on a consolidated basis, the sale of
the Insurance business by Arista to The Guardian pursuant to the Treaty, and the
distribution by the Company to its stockholders pursuant to the Plan of Partial
Liquidation, will result in 20% or greater reduction in revenues, gross fair
market value of assets, net fair market value of assets and employees compared
to their historical levels; no portion of the sale proceeds from the cession of
the Insurance or the sale of the stock of Arista Insurance Company or the
dissolution of Arista will be used to expand the remaining TPA business to be
conducted by the Company or used by the Company in any manner except for having
been placed in identified and segregated separate cash accounts such as savings
accounts, money market certificates, certificates of deposit and similar liquid
short term investments; and that all such proceeds will in fact be distributed
to the stockholders by not later than December 31, 1999.
Counsel's opinion represents Counsel's best legal judgment, and is not
binding upon the IRS or any Court. If any representation or assumption relied
upon in rendering Counsel's opinion is inaccurate, or if the IRS were to
challenge successfully the Federal income tax treatment of the transactions
described in Counsel's opinion, then the distribution from the Company to all
stockholders would be treated as a "distribution" from the Company, rather than
as a "sale or exchange", which would be treated as a dividend to such
stockholders to the extent the Company has current or accumulated earnings and
profits. Such dividend would be includable in a stockholder's gross income as
ordinary income in its entirety, without reduction for the tax basis for the
shares redeemed, and no loss will be recognized for tax purposes.
Liquidation of Arista into the Company Pursuant to Code Section 332.
The consummation of the Treaty between Arista and The Guardian,
pursuant to which Arista will cede its Insurance, will be characterized as a
fully taxable sale of the insurance contracts for Federal income tax purposes,
on which Arista would expect to recognize a taxable gain. The taxability of such
sale is not affected by Arista's liquidation pursuant to Code Section 332.
However, if the liquidation of Arista qualifies as one described in Code Section
332, then Arista will not recognize any gain or loss upon the distribution of
its non-cash assets (including the assets used in the TPA business and the
goodwill associated with the business) to the Company, pursuant to such
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<PAGE>
liquidation, nor will the Company be required to recognize gain upon its receipt
of such liquidation proceeds. On the other hand, if notwithstanding Counsel's
opinion, the liquidation of Arista were not to qualify under Code Section 332,
then: (i) Arista would be required to recognize gain upon its liquidation, equal
to the excess of the fair market value of its assets (including the fair market
value of the TPA business and its other non-cash assets) over Arista's tax basis
in those assets; and (ii) the Company would recognize gain on the liquidation of
Arista in an amount equal to the excess of the net fair market value of the
assets it receives upon Arista's liquidation over the Company's basis in its
Arista stock.
Code Section 332 requires, among other things, that a liquidating
corporation actually distribute all of its assets to its corporate stockholder
pursuant to the plan of liquidation in complete cancellation or redemption of
its stock. The retention in Arista of the Retained Assets, and the Company's
planned sale of the stock of Arista Insurance Company, would on their face seem
to be inconsistent with such requirement. However, the Treasury Regulations
permit a corporation liquidating under Code Section 332 to retain sufficient
assets minimally necessary to preserve its legal existence and retain valuable
licenses and charters, so long as it does not engage in any business operations
while holding those minimal assets. Further, in many private letter rulings, the
IRS has ruled that liquidation of insurance companies have qualified for Code
Section 332 treatment, notwithstanding their having retained minimum liquid
assets in corporate solution for the purpose of preserving their corporate
existence and insurance licenses and facilitating the transfer of their
insurance licenses and charters through the sale of stock. In all such private
letter rulings, the IRS treated the liquidating subsidiary's retained assets as
if they had been "deemed" distributed to its parent company pursuant to the
liquidation, and treated the subsequent sale by the parent of such subsidiary
stock as though it were a "deemed" asset sale by the parent. In more recent
private letter rulings, however, the IRS extended its rationale by treating the
parent corporation (after it had received a "deemed" distribution of assets) as
if it had then recontributed those assets to a "deemed" new subsidiary, so that
when the parent sold the stock of the subsidiary the sales proceeds were treated
as proceeds from the sale of stock and not proceeds from the sale of assets.
While, under either rationale, the subsidiary's liquidation qualified under Code
Section 332, whether the proceeds received by the Company from its sale of
Arista stock would be treated as proceeds from the sale of stock or as proceeds
from the sale of assets, could effect whether those proceeds, when distributed
to the stockholders, qualify as proceeds from a "partial liquidation", as
described below.
Assuming, as is anticipated, that the Company sells the stock of Arista
Insurance Company within twelve months after the final distribution of the
assets of Arista to the Company, the Company will realize and recognize capital
gain or loss on such sale measured by the difference between the amount realized
from such sale over its tax basis in its stock of Arista Insurance Company,
which basis is deemed to be equal to Arista's cost basis in the Retained Assets.
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Partial Liquidation of the Company Pursuant to Code Section 302(b)(4);
Federal Income Tax Consequences to the Stockholders
The Company's proposed redemption of Common Stock from the stockholders
will be a taxable transaction as to such stockholders for Federal income tax
purposes, and will be treated either as (i) a so-called "sale or exchange" of a
stockholder's redeemed Common Stock, on which gain or loss will be recognized
or, alternatively, (ii) as a "distribution" from the Company, which could be
taxed wholly or partially as a dividend (without reference to a stockholder's
cost basis in the Common Stock redeemed), as discussed below.
Under Section 302(b) of the Code, a redemption will be treated as a
"sale or exchange" as to a redeeming stockholder if the redemption (i) results
in a "complete termination" of a redeeming stockholder's equity interest in a
corporation, (ii) results in a "substantially disproportionate" redemption with
respect to such stockholder, (iii) is "not essentially equivalent to a dividend"
with respect to such stockholder, or (iv) as to non-corporate stockholders only,
is a redemption in "partial liquidation" of the redeeming corporation pursuant
to Code Section 302(b)(4). The first three of these Code Section 302(b) tests
require, at a minimum, that a redeeming stockholder's percentage ownership
interest in the corporation in fact be reduced by reason of the redemption.
Since the proposed redemption is to be made on a pro rata basis among the
stockholders, no stockholder's percentage interest in the Company will be
reduced by reason of the redemption. Therefore, only if the proposed redemption
were to qualify as a redemption in "partial liquidation" of the Company pursuant
to Code Section 302(b)(4) would a non-corporate stockholder have such redemption
treated for income tax purposes as a "sale or exchange" of his redeemed stock,
rather than as a "distribution".
If the proposed distribution in redemption to the stockholders
qualifies as one made in partial liquidation of the Company under Code Section
302(b)(4), then a non-corporate stockholder will recognize, for Federal income
tax purposes, gain or loss on such redemption equal to the difference between
(i) the amount of cash he receives, and (ii) such stockholder's tax basis in the
Common Stock considered to be redeemed from him. For the first distribution, the
amount of Common Stock considered to be redeemed from a stockholder will be that
number of shares whose aggregate value is equal to the distribution received,
based on the trading price of the Common Stock immediately before the record
date of the distribution. For the second distribution the same principle
applies, provided that appropriate adjustments are made to reflect the deemed
redemption resulting from the first distribution. Any such gain or loss will be
capital gain or loss and in general, would be subject to Federal tax rates of
not more than 20% if the holding period for the Common Stock exceeded one year
as of the date of the exchange. Stockholders having more than one block of
shares (that is, shares acquired at the same cost in a single transaction) will
be treated as having shares from each block redeemed, with shares redeemed from
each block ratably. Gain or loss must be determined separately for each block of
shares. If a stockholder recognizes loss on the redemption of his shares, some
or all of such loss will not be allowed as an income tax deduction under the
so-called "wash sale" rules of Code Section 1091 if, at any time during the
period commencing thirty days before,
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and ending thirty days after, the redemption, the stockholder purchases (or
enters into a contract or option to purchase) other shares of the Company.
If the redemption does not qualify as one which is made in "partial
liquidation" of the Company pursuant to Code Section 302(b)(4), then the entire
amount of the cash received by such stockholder in such redemption will be
treated as a dividend in the year of the redemption to the extent that the
Company has current or accumulated earnings and profits. Such dividend will be
includable in the stockholder's gross income as ordinary income in its entirety,
without reduction for the tax basis for the shares redeemed, and no loss will be
recognized for tax purposes. The stockholder's tax basis in the shares redeemed,
however, will be added to such stockholder's tax basis in the remaining shares
that he owns.
Because "partial liquidation" treatment under Section 302(b)(4) only
obtains with respect to non-corporate stockholders, the entire amount of the
redemption proceeds will in any event be treated as a "distribution" as to
corporate stockholders, whether or not treated as in "partial liquidation" of
the Company. To the extent that the distribution received by a corporate
stockholder is treated as a dividend it will generally be eligible for the
dividends-received deduction. In the case of the corporate stockholder owning
less than 20% (by vote and value) of the Common Stock of the Company, the
dividends-received deduction will generally be equal to 70% of the dividends so
received; subject, however, among other limitations, to (i) its having satisfied
the minimum holding period requirements of Code Section 246, and (ii) possible
reduction in the amount of such dividend-received deduction if and to the
extent that the Common Stock owned by it is considered to be "debt financed"
under Code Section 246A. In addition, and irrespective of a corporate
stockholder's holding period for its Common Stock, such dividend will be
characterized as an "extraordinary dividend" under Code Section 1059, with the
result that the portion of such dividend which qualifies for the
dividend-received deduction will reduce the corporate stockholder's tax basis in
its Common Stock. To the extent such deduction exceeds such basis, such excess
would be taxed in the taxable year of the receipt of the extraordinary dividend.
If the amount of the distribution exceeds the Company's earnings and
profits, such excess will first be treated as a non-taxable return of capital to
the stockholder to the extent of his tax basis in the shares, with any balance
being treated as a gain from the sale or exchange of his shares.
Qualification of the Redemption as One Made in Partial Liquidation of the
Company.
For purposes of Code Section 302(b)(4), a distribution will be treated
as one in partial liquidation of a corporation if the distribution is not
essentially equivalent to a dividend, as determined at the corporate rather
than stockholder level, is made pursuant to a plan of partial liquidation, and
is paid out before the end of the taxable year following the taxable year of the
corporation in which the plan was adopted. A distribution will be considered to
be not essentially equivalent to a dividend as determined at the corporate
level, if either: (a) it is attributable to a "genuine contraction" of the
corporation, or (b) it falls within the safe harbor rules of Code Section
302(e)(2) and (3).
(a) Genuine Contraction. The criteria for determining whether a
corporation has experienced a genuine contraction have been derived primarily
from judicially developed law. In
42
<PAGE>
general, significant reduction in the corporation's level of business activities
must be shown. For private ruling purposes, the IRS will not ordinarily issue a
ruling that a distribution qualifies as a distribution in partial liquidation
under the "contraction" theory unless the contraction results in a 20 percent or
greater reduction in the distributing corporation's: (i) gross revenue; (ii) net
fair market value of assets; and (iii) number of employees. While it is the
business activity of the distributing corporation that must be shown to have
contracted, the IRS has ruled that a parent corporation's distribution of the
assets of a wholly-owned subsidiary that had been liquidated into the parent
under Code Section 332 can qualify as a genuine contraction of the parent
corporation if the subsidiary had actually conducted a trade or business, on the
theory that the tax history and attributes of the subsidiary are inherited by
the parent upon such liquidation. Similarly, the parent's distribution of the
proceeds of the sale of the subsidiary's trade or business can qualify. However,
in the absence of a Code Section 338(h)(10) election, the IRS has ruled that a
parent corporation's distribution of the proceeds of the sale of a subsidiary's
stock would not qualify as a distribution in partial liquidation of the parent.
When the businesses of Arista and the Company are considered on a
consolidated basis, the proposed transaction and redemption are expected to
result in a 20% or greater reduction in the Company's revenues and net market
value of its assets. Although many of the business activities conducted as part
of the TPA business are substantially identical to the business activities
previously conducted by the operation of the Insurance business and are labor
intensive, certain business functions will be eliminated, so that the aggregate
number of employees is also expected to decline by at least 20% from historical
levels.
Counsel's opinion that the distributions of the Distribution Proceeds
will all constitute proceeds of a "partial liquidation" of the Company is based
upon various representations of management and assumptions as to future events,
which principally include those related to the expected reduced level and scope
of the Corporation's business activities following the distribution in
comparison to those prevailing beforehand. Such assumptions are based upon
projections of the Company's management. If, notwithstanding such projections,
the level and scope of the Company's future business operations were not
sufficiently reduced from their pre-distribution levels, the principal
assumption on which Counsel's opinion is based on could turn out to be invalid.
Counsel's opinion is also based upon the assumption that the Company
and any purchaser of the stock of Arista Insurance Company will jointly make an
election under Section 338(h)(10) to characterize the proceeds from the sale of
such stock as if they were proceeds from the sale of assets, so as to cause
those proceeds to be included, when distributed to the stockholders, as proceeds
in "partial liquidation" of the Company. If, however, the Company and the
purchaser of Arista stock were not to make an election under Code Section
338(h)(10) with respect to such sale, then Counsel is unable to opine as to
whether it is more likely than not whether the specific proceeds attributable to
such sale, when distributed to the stockholders in redemption of their Common
Stock, would constitute proceeds from a "partial liquidation" of the Company.
43
<PAGE>
(b) Safe Harbor Provisions. Because it is often difficult to determine
whether a corporation has experienced a "genuine contraction", a distribution by
a corporation can also be considered to be one in "partial liquidation" of the
corporation if it meets the so-called "safe harbor" provisions of Code Section
302(e)(2) and (3). To so qualify: (i) the distribution must be attributable to
the distributing corporation's ceasing to conduct a "qualified trade or
business" -- that is, one that was actively conducted throughout the five-year
period ending on the date of the distribution and was not acquired in a taxable
transaction during that five-year period -- and (ii) immediately after the
distribution, the distributing corporation is actively engaged in the conduct of
some other "qualified trade or business". Moreover, there must be a complete
distribution of the proceeds attributable to that discontinued trade or business
in order to qualify under the safe harbor rules.
Although Arista conducted both its Insurance business and its TPA
business throughout the requisite five-year period, there is a significant
overlap in the nature of the functions performed by each such line of business,
and the supervision and control over each such line of business may not have
been clearly separated. Accordingly, there is a risk that the IRS might
successfully determine that the Insurance business and the TPA business were in
fact a single integrated trade or business, rather than two separate businesses,
for purposes of these provisions, in which event the safe-harbor provisions
might not be met.
Federal Income Tax Withholding
Unless an exemption applies under the applicable law concerning "backup
withholding" of Federal income tax, the paying agent will be required to
withhold, and will withhold, 31 percent of the gross proceeds otherwise payable
to a stockholder, unless the stockholder provides such person's tax
identification number (social security number or employer identification number)
and certifies that such number is correct. Each tendering stockholder, other
than a noncorporate foreign stockholder, should complete and sign the main
signature form and the Substitute Form W-9 included as part of the Letter of
Transmittal so as to provide the information and certification necessary to
avoid backup withholding, unless an applicable exemption exists and is proved in
a manner satisfactory to the Company and the paying agent. Noncorporate foreign
stockholders generally should complete and sign a Form W-8, Certificate of
Foreign Status, a copy of which may be obtained from the paying agent, in order
to avoid backup withholding. However, redemption distributions made to
non-residents of the United States will in any event be subject to U.S. with-
holding tax of 30% unless the recipient establishes either (i) an entitlement to
a reduced rate of tax under an income tax treaty between the United States and
his country of residence by furnishing a completed Form 1001 to the Company; or
(ii) that the payment is effectively connected with the conduct of the
recipient's trade or business in the United States by furnishing a completed
Form 4224 to the Company. A foreign stockholder may be eligible to obtain a
refund of tax withheld if that stockholder is entitled to capital gain or loss
treatment from the redemption described above, or is otherwise able to establish
that no tax or a reduced amount of tax was due. Backup withholding will
generally not apply to amounts subject to the 30 percent or treaty-reduced rate
of withholding.
44
<PAGE>
PRINCIPAL STOCKHOLDERS; SHARES HELD BY MANAGEMENT
As of the Record Date, the Company had 2,570,100 Class A Common Shares
and 47,400 Class B Common Shares issued and outstanding. The following table
sets forth the number of shares of the Company's Common Stock owned as of
September 1, 1998 by (i) owners of more than 5% of the Company's outstanding
Common Stock, (ii) each director of the Company, (iii) each of the named
executives, and (iv) all officers and directors of the Company as a group.
Except as otherwise indicated, each person or entity named in the table has sole
investment power and sole voting power with respect to the shares of the
Company's common stock set forth opposite his name.
<TABLE>
<CAPTION>
Number of Shares of
Class A and Class B Percentage of Ownership(1)
Name and Address of Common Stock ----------------------------------------------
Beneficial Owner Beneficially Owned Class A Class B Class A and Class B
- -------------------------------------------- -------------------- ------- ------- -------------------
<S> <C> <C> <C> <C>
Bernard Kooper, Chairman of the 572,600 20.4% 100% 21.9%
Board of Directors and President(2)(4)
116 John Street
New York, New York 10038
Stanley S. Mandel, Executive Vice-President 105,400 4.1% -- 4.0%
and Director(3)(7)
116 John Street
New York, New York 10038
Louis H. Saltzman, Secretary and Director(4) 70,000 2.7% -- 2.7%
116 John Street
New York, New York 10038
Richard P. Farkas, Director -- -- -- --
500 Route 36
Havesink, New Jersey 07752
Noah Fischman, Director(5) 71,600 2.8% -- 2.7%
99 Powerhouse Road
Roslyn Heights, New York 11577
J. Martin Feinman, Director(6) 51,200 2.0% -- 2.0%
270-07 E Grand Central Parkway
Floral Park, New York 11005
Daniel Glassman, Director 38,600 1.5% -- 1.5%
4 Magnolia Lane
Woodbury, New York 11797
Keith E. Mandel, M.D. (3)(7) 178,400 6.9% -- 6.8%
99 Pond Avenue, #303
Brookline, MA 02445
Old Lyme Holding Corporation(8) 205,000 8.0% -- 7.8%
122 East 42nd Street
New York, NY 10168
All officers and directors 910,500 33.6% 100% 34.8%
as a group (8 persons)
(2)(3)(4)(5)(6)
</TABLE>
- ----------------------------------------
(1) Based upon 2,570,100 shares of Class A Common Stock outstanding and 47,400
shares of Class B Common Stock outstanding.
(2) Includes 47,400 shares of Class B Common Stock owned by Bernard Kooper,
representing all of the issued and outstanding shares of Class B Common
Stock of the Company, and 30,400 shares of Class A Common
45
<PAGE>
Stock owned by Arlyne Kooper, wife of Bernard Kooper. Mr. Kooper has pledged
365,000 shares of Class A Common Stock to secure his performance on an
interest-bearing promissory note made to the Company. See "Additional
Arrangements With and Payments to Management."
(3) Includes shares of Class A Common Stock held individually by Stanley S.
Mandel and in the various retirement accounts of Stanley S. Mandel and Joy
Mandel, wife of Stanley S. Mandel. Mr. Mandel has pledged 17,600 shares of
Class A Common Stock with a bank to secure a loan made to his son, Dr. Keith
E. Mandel.
(4) Bernard Kooper is the father-in-law of Louis Saltzman. Each disclaims
beneficial ownership of the securities of the Company owned by the other.
(5) Includes 23,200 shares of Class A Common Stock owned by Barbara Fischman,
the wife of Noah Fischman.
(6) Includes 2,400 shares of Class A Common Stock owned by Carl Feinman, the son
of J. Martin Feinman, 2,400 shares of Class A Common Stock owned by Lisa
Feinman Baum, the daughter of J. Martin Feinman, and 2,400 shares of Class A
Common Stock owned by Jane Feinman Kendes, the daughter of J. Martin
Feinman. Mr. Feinman disclaims beneficial ownership of the shares of Class A
Common Stock owned by his children.
(7) Dr. Keith E. Mandel is the son of Stanley S. Mandel. Each disclaims
beneficial ownership of the securities of the Company owned by the other.
(8) According to the Schedule 13D, Amendment No. 1, dated April 4, 1995, filed
by Old Lyme Holding Corporation on behalf of itself and certain reporting
persons.
FINANCIAL STATEMENTS AND INFORMATION
The Consolidated Selected Financial Data should be read in conjunction
with the Historical Consolidated Financial Statements and the related notes, as
well as the Pro Forma Condensed Consolidated Financial Statements (unaudited)
and the related notes, located herein beginning at page F-1.
<TABLE>
<CAPTION>
Consolidated Selected Financial Data
Six Months
Ended Years Ended December 31,
June 30, ------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---- ---- ---- ---- ----
(In Thousands, Except per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Revenue:
-------
Gross premiums earned .......................... $ 9,511 $ 20,763 $ 23,160 $ 26,092 $ 26,189 $ 24,219
======== ======== ======== ======== ======== ========
Net premiums earned ............................. $ 4,881 $ 10,382 $ 11,580 $ 13,046 $ 13,094 $ 21,329
Investment income ............................... 265 514 440 252 215 182
Realized and unrealized investment gains
(losses)......................................... -- (3) -- -- (3) 47
Other income .................................... 216 358 299 333 280 130
Expenses:
--------
Net underwriting expenses ....................... (2,895) (6,075) (8,291) (8,464) (9,113) (16,979)
General and administrative expenses ............. (2,273) (4,683) (5,678) (5,016) (4,794) (3,728)
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before provision income taxes .................. 193 493 (1,650) 151 (321) 981
-------- -------- -------- -------- -------- --------
Provision for income taxes and tax benefit
of net operating loss carryforward:
Provision for income taxes .................... 127 393 81 92 127 541
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
June 30, ------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---- ---- ---- ---- ----
(In Thousands, Except per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Tax benefit of net operating loss -- -- (555) -- (207) --
carryforward...................................
-------- -------- -------- -------- -------- --------
Net provision (benefit) ....................... 127 393 (474) 92 (80) 541
-------- -------- -------- -------- -------- --------
Net income (loss) from
continuing operations ............ 66 100 (1,176) 59 (241) 440
-------- -------- -------- -------- -------- --------
Discontinued operations:
Income from operations of disposed segment
(net of taxes of $3) .......................... -- -- -- 6 -- 2
Gain on disposal of segment (net of
income taxes of $128) ......................... -- -- -- 192 -- --
-------- -------- -------- -------- -------- --------
Net income from discontinued operations ... -- -- -- 198 -- 2
-------- -------- -------- -------- -------- --------
Net income (loss) ......................... $ 66 $ 100 $ (1,176) $ 257 $ (241) $ 442
======== ======== ======== ======== ======== ========
Per common share:
Basic:
Income (loss) from continuing operations ...... $ 0.03 $ 0.04 $ (0.51) $ 0.03 $ (0.12) $ 0.22
Income from discontinued operations ........... -- -- -- $ 0.10 -- --
-------- -------- -------- -------- -------- --------
Total ................................. $ 0.03 $ 0.04 $ (0.51) $ 0.13 $ (0.12) $ 0.22
-------- -------- -------- -------- -------- --------
Diluted:
Income (loss) from continuing operations ...... $ 0.03 $ 0.04 $ (0.51) $ 0.03 $ (0.12) $ 0.20
Income from discontinued operations .......... -- -- -- $ 0.09 -- --
-------- -------- -------- -------- -------- --------
Total ................................. $ 0.03 $ 0.04 $ (0.51) $ 0.12 $ (0.12) $ 0.20
-------- -------- -------- -------- -------- --------
Weighted average number of common shares:
Basic ......................................... 2,618 2,618 2,298 1,978 1,978 1,978
======== ======== ======== ======== ======== ========
Diluted ....................................... 2,618 2,618 2,298 2,279 1,978 2,254
======== ======== ======== ======== ======== ========
Balance sheet data:
Short-term investments .......................... $ -- $ -- $ -- $ -- $ 208 $ 726
Cash and equivalents ............................ 8,241 8,297 7,077 6,777 2,725 2,355
Premiums receivable ............................. 3,499 2,979 4,304 5,131 6,328 6,652
Total assets .................................... 17,517 17,033 17,110 17,640 15,083 13,783
Payable to reinsurer ............................ 564 159 93 161 80 62
Claims liabilities .............................. 2,704 3,392 4,351 4,526 4,921 4,168
Unearned premiums ............................... 1,507 1,465 1,397 1,328 1,358 960
Commissions payable ............................. 755 730 766 942 1,343 880
Surplus note payable ............................ 3,000 3,000 3,000 3,000 -- --
Total liabilities ............................... 10,949 10,530 10,713 11,204 9,072 7,515
Total stockholders' equity ...................... 6,569 6,503 6,397 6,436 6,011 6,268
</TABLE>
- -----------------
47
<PAGE>
Management's Discussion and Analysis of Financial Condition of Results of
Operations
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements of the Company and the notes thereto
appearing elsewhere in this Proxy. Except for the historical information
contained herein, the following discussion contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those projected in the forward-looking statements discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in this section, as well as in other
sections herein.
General
During fiscal year 1998, the Company anticipates that the increase in
its third party administration and service operations will substantially offset
the decline in operations expected to result from the cession of Insurance to
The Guardian. The Company expects the proceeds from the cession of the Insurance
of approximately $3,357,700, plus approximately $14,374,000 of investments, cash
and cash equivalents and premiums receivable, which will be offset by
approximately $5,530,000 in net policyholder liabilities, resulting in
approximately $12,202,000 remaining available for the following: repayment of
the Surplus Note to CLUMCO of $3,000,000 plus accrued interest of approximately
$855,000 at June 30, 1998; all termination payments to management in the amount
of $1,856,000, and approximately $128,000 payable to insurers on behalf of split
dollar life insurance contracts for management; professional fees and expenses
associated with the cession of the Insurance which are expected to be in the
range of $400,000 to $600,000; and the Company's expected distribution to
stockholders of approximately $5,318,000 or $2.03 per share ($7,318,000, less
the Nasdaq capital adjustment amount of approximately $2,000,000). Since there
is no new employment agreement with Bernard Kooper, and a new employment
agreement with Stanley S. Mandel which will provide for compensation at a level
which is lower than current levels, such agreement is not expected to have an
adverse effect on the Company's operations in 1998 and the near future.
The Guardian assumption reinsurance arrangement will place the Company
in a greatly expanded position as a third party administrator with respect to
future operations. Without Arista's need for the significant capital and surplus
requirements of a New York domiciled insurer writing accident and health
insurance, the Company will be able to adopt the Plan, including a distribution
to all of the holders of Class A Common Stock. In addition, the Company will be
in a position to seek a purchaser of the stock of Arista Insurance Company,
which includes its license and charter. This may result in a final distribution
to stockholders pursuant to the Plan.
The anticipated income statement impact from the cancellation of the
Kooper Note and the issuance of Class A Common Stock is estimated to be less
than $.01 per share, resulting from the cessation of interest payments under the
Kooper Note.
48
<PAGE>
Results of Operations
Six-Month Ended June 30, 1998 vs. June 30, 1997 (unaudited)
The Company's after tax income for the first six months of 1998 was
approximately $66,000; compared to approximately $201,000 for the first six
months of 1997.
Arista's gross premiums earned were approximately $9.5 million and
$11.0 million for the first six months of 1998 and 1997, respectively. The
decrease in gross premiums was due to a continuation of the net loss of covered
lives as well as policyholders which included the termination, effective
February 1, 1998, of the Federation of Jewish Philanthropies. The continuing net
loss in covered lives is a function of an increased competitive rate structure
for non-experience-rated groups. Arista expects this trend to continue.
Arista's gross claims incurred for the first six months of 1998 were
approximately $5.0 million, representing 52.4% of the gross premiums earned. For
the first six months of 1997, gross claims incurred were approximately $5.9
million, representing 54.0% of gross premiums earned. The reduction in the gross
claims incurred were primarily due to the impacts of a mild winter and our very
healthy economy, upon our disability claim experience. Gross claims incurred
includes claim reserves for unpaid losses, unpaid loss adjustment expenses and
statutory assessments. Unpaid loss reserves are only estimates of what the
insurer expects to pay on claims, based on facts and circumstances then known. A
degree of variability is inherent in such estimates. The estimates are
continually reviewed and adjusted as necessary, and such adjustments are
reflected in current operations.
Consolidated investment income for the first six months of 1998 and
1997 was approximately $265,000 and $255,000, respectively. In addition, income
from third-party administrative services was approximately $199,000 and $154,000
for the first six months of 1998 and 1997, respectively. These increases were
attributable to additional business serviced under Arista's existing third-party
administration agreements.
Arista's gross commissions incurred as a percentage of gross premiums
earned were 19.8% and 18.9% for the first six months of 1998 and 1997,
respectively. The principal reason for these minor changes was an increase in
the number of smaller risks in force, generating an increase in the level of
top-of-scale commissions.
The consolidated general and administrative expenses for the first six
months of 1998 and 1997 were approximately $2.3 million and $2.7 million,
respectively. Of this $409,000 decrease, $190,000 was attributable to a
reduction in professional fees and $83,000 to a reduction in employee salaries
and benefits due to terminations.
49
<PAGE>
Year Ended December 31, 1997 vs. December 31, 1996
The Company's net income for the year 1997 was approximately $100,000
($0.04 per share), as compared with a net loss of approximately $1,176,000
(approximately $0.51 per share as restated) for 1996. The profit, before
provision for income taxes, was approximately $493,000 in 1997, as compared with
a loss before provision for income taxes of approximately $1,540,000 for 1996.
The Company's loss in 1996 included approximately $757,000 attributable to
additional compensation expenses incurred from the exercise of warrants and
options during that year. The current operations for the year 1997 included a
reduction in gross claims liabilities of approximately $960,000, or 4.6% of
gross premiums earned.
Arista's gross premiums earned for the year 1997 were approximately
$20.8 million as compared with approximately $23.2 million for 1996. This
decrease was due to Arista's continued net loss of covered lives and
policyholders. The continuing net loss in covered lives is a function of
increased competition for experience-rated groups and a lower competitive rate
structure for non-experience-rated groups. Arista expects this trend to
continue.
Arista's gross claims incurred for 1997 were approximately $12.2
million or 58.8% of gross premiums earned. For the year 1996, gross claims
incurred were approximately $15.3 million, representing 66.0% of gross premiums
earned. Gross claims incurred includes claim reserves for unpaid losses, unpaid
loss adjustment expenses and required assessments. Unpaid loss reserves are only
estimates of what the insurer expects to pay on claims, based on facts and
circumstances then known. A degree of variability is inherent in such estimates.
The estimates are continually reviewed and adjusted as necessary, and such
adjustments are reflected in current operations.
Consolidated investment income for 1997 was approximately $514,000,
representing an increase of approximately $73,000, due mainly to a small
increase in the Company's average annual yield on total investments. In
addition, Arista had insignificant net realized and unrealized investment losses
for 1997 and 1996.
Year Ended December 31, 1996 vs. December 31, 1995
The Company's net loss for the year 1996 was approximately $1,176,000
(approximately $0.51 per share, as restated) compared with a net income of
approximately $59,000 from continuing operations (approximately $0.02 per share,
diluted) for 1995. The loss, before income tax (benefit) for 1996, was
approximately $1,650,000 compared with a profit before provision for income
taxes and tax benefit of approximately $151,000 for 1995. The Company's loss in
1996 included approximately $757,000 (approximately $0.29 per share)
attributable to additional compensation expenses incurred from the exercise of
warrants and options.
Arista's gross premiums earned for the year 1996 were approximately
$23.2 million as compared with approximately $26.1 million for 1995. The
reduction in gross premiums earned was the result of Arista's termination of its
assumption reinsurance agreement during the first quarter of
50
<PAGE>
1996 wherein Arista had assumed Hawaii Temporary Disability Insurance Business
that had been ceded by Allianz Life Insurance Company of North America together
with a continuation of the net loss of covered lives and of policyholders. The
continued net loss of covered lives was a function of increased competition for
experience-rated groups and a lower competitive rate structure for non-
experience-rated groups.
Arista's gross claims incurred for 1996 were approximately $15.3
million or 66.0% of gross premiums earned. For the year 1995, gross claims
incurred were $16.6 million or 63.6% of gross premiums earned.
Consolidated investment income for 1996 was approximately $441,000
representing an increase of $189,000 over 1995. The increase was due mainly to
income earned on the proceeds received by Arista upon the issuance of the
Surplus Note. In addition Arista had insignificant net realized and unrealized
investment losses for 1996 and 1995.
Income from Third Party Administrative services was approximately
$260,000 in 1996, as compared to approximately $204,000 in 1995. Other income
was approximately $39,000 in 1996 as compared to approximately $129,000 for
1995.
Arista's gross commissions incurred for 1996 were approximately $4.2
million or 18.2% of gross premiums earned. For the year 1995, gross commission
incurred were approximately $4.6 million or 17.7% of gross premiums earned. This
increase was due in part to a larger portion of more recently issued policies
acquired from other insurers, requiring the payment of slightly higher average
commissions.
The consolidated general and administrative expenses increased from
approximately $5.0 million for the year 1995 to $5.7 million for the year 1996.
This change was mainly attributable to an aggregate increase in compensation
expense of $757,000 resulting from the exercise of options and warrants, as well
as decreases in payroll and benefits of approximately $266,000, amortization of
intangible expenses of approximately $249,000 and reinsurance costs of
approximately $116,000 related to assumed business; offset by an increase in
professional fees of approximately $220,000 and interest on the Surplus Note of
$330,000.
Liquidity and Capital Resources
Six-Month Ended June 30, 1998 vs. June 30, 1997 (unaudited)
Retained earnings increased from $1,035,985 at December 31, 1997 to
$1,102,222 at June 30, 1998 as a result of the Company's net income.
Management also believes that Arista's statutory capital and surplus of
approximately $7.0 million at June 30, 1998 is sufficient to support its
existing level of annualized premiums.
51
<PAGE>
Management does not believe that the Year 2000 issue, which has received
wide-spread publicity, will have a material impact on the Company.
Arista may pay dividends to the Company from its statutory earned
surplus pursuant to statutory restrictions imposed under the New York State
Insurance Law. The maximum amount of dividends that may be paid in any
twelve-month period without the prior approval of the New York State Insurance
Department is the lesser of adjusted net investment income or 10% of statutory
surplus as defined in the New York State Insurance Law. In 1998, 1996 and 1994,
Arista's Board of Directors authorized the payment of dividends to the Company
in the amount of $279,951, $111,654 and $224,799, respectively. The dividends
were paid on July 15, 1998, April 11, 1996 and May 16, 1994. See "The Company --
Regulation."
Year Ended December 31, 1997
Retained earnings increased from $935,665 at December 31, 1996 to
$1,035,985 at December 31, 1997 as a result of the Company's increase in
operating profits.
Management considered Arista's statutory capital and surplus of
approximately $6.2 million at December 31, 1997 to be sufficient to support its
annual premium level, as well as providing capacity for additional annual
premiums. Pursuant to the termination of Arista's reinsurance agreement with
Cologne, the existing $3,000,000 surplus note, plus accrued interest, will be
repaid as soon as practicable, subject to regulatory approval.
Arista may pay dividends to the Registrant from its statutory earned
surplus pursuant to statutory restrictions imposed under the New York State
Insurance Law. The maximum amount of dividends that may be paid in any
twelve-month period without the prior approval of the New York State Insurance
Department is the lesser of the adjusted net investment income or 10% of
statutory surplus as defined in the New York State Insurance Law. In 1996,
Arista's Board of Directors authorized the payment of a dividend to the
Registrant in the amount of $111,654. The dividend was paid on April 11, 1996.
No dividends were paid by Arista in 1997 and 1995.
Management believes that neither Arista's premium rates nor claim costs
have materially changed due to inflation.
Year Ended December 31, 1996
Retained earnings decreased from $2,111,528 at December 31, 1995 to
$935,665 at December 31, 1996 as a result of the Company's operating loss.
Management considered Arista's statutory capital and surplus of
approximately $6.2 million at December 31, 1996 sufficient to support its 1997
anticipated annual premium level, as well as providing capacity for additional
annual premiums.
52
<PAGE>
Management also believes that neither Arista's premium rates nor claim
costs have materially changed due to inflation.
STOCK PRICE INFORMATION
The Company's Class A Common Stock is traded in the over-the-counter
market. Since 1987, the Company's Class A Common Stock has been quoted on the
National Association of Securities Dealers Automated Quotation System under the
symbol "ARINA". The following table sets forth the range of bid prices for the
Class A Common Stock during the periods indicated and on the date preceding the
date of the Treaty, and represents inter-dealer prices, which do not include
retail mark-ups and mark-downs, or any commission to the broker-dealer, and may
not necessarily represent actual transactions.
Fiscal 1998
---------------------
Quarter High Low
- ------- ---- ---
First................................... 2 3/8 2 5/32
Second.................................. 2 17/32 1 3/4
Third (as of September 22, 1998)........ 2 7/16 2 1/8
Fiscal 1997
---------------------
Quarter High Low
- ------- ---- ---
First................................... 2 9/16 2 1/2
Second.................................. 2 7/16 2 3/8
Third................................... 2 3/8 2 1/8
Fourth.................................. 2 5/32 1 7/8
Fiscal 1996
---------------------
Quarter High Low
- ------- ---- ---
First................................... 2 1/8 2 1/8
Second.................................. 2 1/2 2 1/8
Third................................... 2 1/2 2 1/2
Fourth.................................. 2 1/2 2
The high bid price and low bid price on September 22, 1998, the date
immediately preceding the date of the Treaty, was $2 11/32.
53
<PAGE>
The Company believes that the number of beneficial holders of its
securities, including individual participants in security position listings of
registered clearing agencies, as of September, 1998, is approximately 360.
Approximate Number of
Title of Class Record Holders(1)
-------------- ----------------------
Class A Common Stock, $.01 par value 53
Class B Common Stock, $.01 par value 1
The Company has paid no dividends since its inception. See "Regulation"
and "Anticipated Distribution to Stockholders."
DESCRIPTION OF PROPERTY
The Company's and Arista's principal executive offices are located at
116 John Street, New York, New York 10038. The offices contain approximately
16,100 square feet. On January 9, 1995, effective on or about June 1, 1995, the
Company entered into a five year lease for its principal executive office space
at an average rent over the term of the lease of approximately $210,000 per
year, exclusive of electricity.
The Company has the option to terminate the lease provided it notifies
the landlord ninety days prior to the termination date, and reimburses the
landlord for the unamortized portion of the landlord's contribution for
leasehold improvements which was approximately $80,000 at June 30, 1998.
The Saltzman/Kooper Agency, Inc., a life and health insurance agency
owned by Louis H. Saltzman, a director and the Secretary of the Company and
Arista, occupied adjacent premises pursuant to a sublease with the Company
whereby the Saltzman/Kooper Agency, Inc. was responsible for 16.45% of all
rental charges. The sublease between the Company and the Saltzman/Kooper Agency,
Inc. was on similar terms as the Company's lease with its landlord. The
arrangement terminated on May 31, 1995.
Arista provides certain office services to the Bernard Kooper Life
Agency, a life and health insurance agency owned by Bernard Kooper, the Chairman
of the Board and President of the Company. The Bernard Kooper Life Agency
reimburses Arista for the cost of these services.
- --------
(1) Information is as of September 1, 1998.
54
<PAGE>
LEGAL PROCEEDINGS
Although the Company is involved in some routine litigation incidental
to the business of the Company, the Company is not a party to any litigation
which it considers will have a material adverse effect on its business or
operations.
AUDITORS
Rosen Seymour Shapss Martin & Company, LLP served as independent
auditors of the Company during the year ended December 31, 1997. A
representative of Rosen Seymour Shapss Martin & Company, LLP, who will have an
opportunity to make a statement if he so desires, will be present at the Meeting
and will be available to respond to appropriate questions.
STOCKHOLDERS PROPOSALS FOR 1999 ANNUAL MEETING
The Company currently anticipates holding its next annual meeting of
stockholders on or about May 17, 1999 (the "1999 Annual Stockholder Meeting").
Stockholder Proposals. Proposals of stockholders intended to be
presented at the Company's 1999 Annual Stockholder Meeting (i) must be received
by the Company at its offices no later than January 4, 1999, (ii) may not exceed
500 words and (iii) must otherwise satisfy the conditions established by the
Commission for stockholder proposals to be included in the Company's Proxy
Statement for that meeting.
Discretionary Proposals. Stockholders intending to commence their own
proxy solicitations and present proposals from the floor of the 1999 Annual
Stockholder Meeting in compliance with Rule 14a-4 promulgated under the Exchange
Act of 1934, as amended, must notify the Company before February 16, 1999, of
such intentions. After such date, the Company's proxy in connection with the
1999 Annual Stockholder Meeting may confer discretionary voting authority on the
Board.
55
<PAGE>
GENERAL
The Board of Directors knows of no other matters which are likely to be
brought before the Special Meeting. However, if any other matters are properly
brought before the Special Meeting, the persons named in the enclosed proxy or
their substitutes will vote thereon in accordance with their judgment pursuant
to the discretionary authority conferred by the form of proxy.
BY ORDER OF THE BOARD OF DIRECTORS,
LOUIS H. SALTZMAN,
Secretary
New York, New York
September 23, 1998
56
<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 June 30, 1998.............................................................................................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 and Unaudited for
the Six Months Ended June 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 Six Months Ended June 30, 1998..........................................................................F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 and Unaudited for
the Six Months Ended June 30, 1997 and 1998...............................................................................F-8
Notes to Consolidated Financial Statements..................................................................................F-10
Schedule I - Summary of Investments...................................................................................F-33
Schedule II - Financial Information of Registrant......................................................................F-34
Schedule III - Supplemental Segment Information...........................................................................F-38
Schedule IV - Reinsurance................................................................................................F-39
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Introduction................................................................................................................F-40
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1998..........................................................F-41
Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1997 and the Six Months Ended
June 30, 1998............................................................................................................F-43
Notes to Pro Forma Condensed Consolidated Financial Statements..............................................................F-44
</TABLE>
F-1
<PAGE>
[ROSEN SEYMOUR LETTERHEAD]
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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules on
pages F-33 to F-39 are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not a required part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein.
Rosen Seymour Shapss Martin & Company LLP
-----------------------------------------
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, JUNE 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 $2,688,052 in 1998) $ 2,696,220 $ 2,630,453 $ 2,624,261
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 8,954
Trading securities, at market value (cost of $1,279 in 1996
and $279 in 1997) 319 85 445
----------- ----------- -----------
Total investments 2,753,459 2,639,788 2,633,660
CASH AND EQUIVALENTS (Notes 2 and 14) 7,076,659 8,296,943 8,240,929
PREMIUMS RECEIVABLE (Notes 2 and 13) 4,304,200 2,978,600 3,499,000
DEFERRED POLICY ACQUISITION COSTS, net (Notes 2 and 8) 790,137 484,398 329,022
RECEIVABLES FROM RELATED PARTIES (Notes 4 and 8) 182,787 443,182 447,550
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 99,797
PREPAID AND REFUNDABLE INCOME TAXES 757,548 710,050 823,334
OTHER ASSETS 1,106,908 1,366,572 1,444,022
----------- ----------- -----------
Total assets $17,110,250 $17,033,196 $17,517,314
=========== =========== ===========
</TABLE>
(Continued)
F-3
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1996 1997 1998
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES:
Payable to reinsurer (Note 13) $ 93,121 $ 158,721 $ 563,890
Claims liabilities (Notes 2, 5 and 13) 4,351,500 3,391,950 2,704,200
Unearned premiums (Notes 2 and 13) 1,397,380 1,464,800 1,506,600
Commissions payable (Notes 4 and 13) 766,575 729,912 754,867
Accounts payable and accrued expenses 1,160,765 1,627,187 2,277,606
Deferred income taxes, net (Notes 2 and 11) 78,329 277,771 253,855
Surplus note payable, net (Note 6) 2,865,000 2,880,000 2,887,500
----------- ----------- -----------
Total liabilities 10,712,670 10,530,341 10,948,518
----------- ----------- -----------
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 1,102,222
Accumulated other comprehensive income:
Net unrealized investment loss (27,229) (22,274) (22,570)
----------- ----------- -----------
6,924,320 7,029,595 7,095,536
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 6,568,796
----------- ----------- -----------
Total liabilities and stockholders' equity $17,110,250 $17,033,196 $17,517,314
=========== =========== ===========
</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)
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
REVENUE (Notes 2, 4, and 17):
Gross earned premiums $26,091,714 $23,160,259 $20,763,439 $10,996,011 $ 9,511,264
Ceded earned premiums (Notes 13 and 20) 13,045,857 11,580,129 10,381,719 5,498,005 4,630,632
----------- ----------- ----------- ----------- -----------
Net earned premiums 13,045,857 11,580,130 10,381,720 5,498,006 4,880,632
Third party administrative services (Note 8d) 204,367 260,664 351,346 154,171 198,790
Net realized and unrealized investment
losses (Note 14) (495) (367) (2,713) (2,744) 360
Net investment income (Note 14) 252,134 440,539 513,913 255,015 264,507
Other income 128,838 38,660 7,087 (1,952) 16,714
----------- ----------- ----------- ----------- -----------
Total revenue 13,630,701 12,319,626 11,251,353 5,902,496 5,361,003
----------- ----------- ----------- ----------- -----------
EXPENSES:
Underwriting:
Gross claims incurred (Note 2) 16,588,801 15,288,310 12,212,694 5,939,374 4,980,660
Ceded claims incurred (Note 13) 8,294,400 7,644,155 6,106,347 2,969,687 2,490,330
----------- ----------- ----------- ----------- -----------
Net claims incurred 8,294,401 7,644,155 6,106,347 2,969,687 2,490,330
----------- ----------- ----------- ----------- -----------
Gross commissions incurred (Note 4) 4,616,807 4,206,730 3,907,264 2,077,118 1,887,456
Ceded commissions incurred (Note 13) 4,447,545 3,559,620 3,937,966 2,349,633 1,482,436
----------- ----------- ----------- ----------- -----------
Net commissions incurred (earned) 169,262 647,110 (30,702) (272,515) 405,020
----------- ----------- ----------- ----------- -----------
Total underwriting expenses 8,463,663 8,291,265 6,075,645 2,697,172 2,895,350
General and administrative expenses 5,015,558 4,920,536 4,682,640 2,681,849 2,272,616
----------- ----------- ----------- ----------- -----------
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 5,379,021 5,167,966
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 5,379,021 5,167,966
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income tax provision (benefit) 151,480 (1,649,525) 493,068 523,475 193,037
----------- ----------- ----------- ----------- -----------
</TABLE>
(Continued)
F-5
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PROVISION (BENEFIT) FOR INCOME TAXES (Note 11):
Provision for income taxes $ 92,900 $ 81,176 $ 392,748 $ 322,900 $ 126,800
Net operating loss benefit - (554,838) - - -
------------ ----------- ------------ ------------ ------------
Net provision (benefit) 92,900 (473,662) 392,748 322,900 126,800
------------ ----------- ------------ ------------ ------------
Income (loss) from continuing operations 58,580 (1,175,863) 100,320 200,575 66,237
------------ ----------- ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income from operations of disposed segment
(net of income taxes of $3,887) (Note 3) 5,643 - - - -
Gain on disposal of segment (net of income
taxes of $127,891) (Note 3) 192,300 - - - -
------------ ----------- ------------ ------------ ------------
197,943 - - - -
------------ ----------- ------------ ------------ ------------
Net income (loss) $ 256,523 $(1,175,863) $ 100,320 $ 200,575 $ 66,237
============ =========== ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Continuing operations (Notes 12 and 19) $ 0.03 $ (0.51) $ 0.04 $ 0.08 $ 0.03
Discontinued operations 0.10 - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 0.13 $ (0.51) $ 0.04 $ 0.08 $ 0.03
============ ============ ============ ============ ============
Diluted:
Continuing operations (Notes 12 and 19) $ 0.02 $ (0.51) $ 0.04 $ 0.08 $ 0.03
Discontinued operations 0.09 - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 0.11 $ (0.51) $ 0.04 $ 0.08 $ 0.03
============ ============ ============ ============ ============
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 SIX MONTHS ENDED JUNE 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 Retained
shares $.01 shares $.01 capital warrants earnings
-------- -------- -------- ------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1995 1,940,600 $19,406 47,400 $474 $4,193,354 $ - $ 1,855,005
Net loss - - - - - - 256,523
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 2,111,528
Net loss - - - - - - (1,175,863)
Net investment loss - - - - - - -
Issuance of shares of Class A
common stock under the Incentive
Stock Option Plan, from a
Warrant, and from a Non-qualified
Stock Option (Notes 4 and 9) 639,500 6,395 - - 1,646,255 - -
--------- ------- -------- ---- ---------- --------- -----------
Balance - December 31, 1996 2,580,100 25,801 47,400 474 5,839,609 150,000 935,665
Net income - - - - - - 100,320
Net investment gain - - - - - - -
--------- ------- -------- ---- ---------- --------- -----------
Balance - December 31, 1997 2,580,100 25,801 47,400 474 5,839,609 150,000 1,035,985
Net income (unaudited) - - - - - - 66,237
Net investment loss (unaudited) - - - - - - -
--------- ------- -------- ---- ---------- --------- -----------
Balance - June 30, 1998 (unaudited) 2,580,100 $25,801 47,400 $474 $5,839,609 $150,000 $1,102,222
========= ======= ======== ==== ========== ========= ===========
<CAPTION>
Accumulated Class A
other Secured common
compre- promissory stock
hensive note held in
Income receivable treasury Total
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance - January 1, 1995 $ (30,278) $ - $(26,740) $ 6,011,221
Net loss - - - 256,523
Net investment gains 18,436 - - 18,436
Issuance of surplus note (Note 6) - - - 150,000
--------- ----------- -------- -----------
Balance - December 31, 1995 (11,842) - (26,740) 6,436,180
Net loss - - - (1,175,863)
Net investment loss (15,387) - - (15,387)
Issuance of shares of Class A
common stock under the Incentive
Stock Option Plan, from a
Warrant, and from a Non-qualified
Stock Option (Notes 4 and 9) - (500,000) - 1,152,650
--------- ------------ -------- -----------
Balance - December 31, 1996 (27,229) (500,000) (26,740) 6,397,580
Net income - - 100,320
Net investment gain 4,955 - - 4,955
--------- --------- -------- -----------
Balance - December 31, 1997 (22,274) (500,000) (26,740) 6,502,855
Net income (unaudited) - - - 66,237
Net investment loss (unaudited) (296) - - (296)
--------- --------- -------- -----------
Balance - June 30, 1998 (unaudited) $ (22,570) $(500,000) $(26,740) $ 6,568,796
========= ========= ======== ===========
</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)
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 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 $ 200,575 $ 66,237
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 57,321 64,641 57,606 28,559 23,865
Amortization of deferred acquisition costs 323,202 332,633 319,775 140,682 155,376
Amortization of discount on surplus note - 15,000 15,000 7,500 7,500
Loss on sale of investments 137 208 2,519 2,519 -
Amortization of intangible assets 248,957 - - - -
Gain on sale of subsidiary (320,192) - - - -
Deferred income taxes 343,385 (544,098) 199,442 131,961 (23,916)
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 1,325,600 522,700 (520,400)
Prepaid and refundable income taxes 51,412 8,329 47,498 (23,489) (113,284)
Receivable from related parties (50,145) (53,727) (260,395) (2,723) (4,368)
Other assets 59,171 (309,854) (259,664) 176,765 (77,450)
Increase (decrease) in operating liabilities
excluding effects of divestiture:
Payable to reinsurer 81,083 (68,355) 65,600 (5,745) 405,169
Claims liabilities (395,131) (174,815) (959,550) (793,500) (687,750)
Unearned premiums (30,155) 69,170 67,420 110,580 41,800
Commissions payable (401,078) (175,903) (36,663) 76,370 24,955
Accounts payable and accrued expenses (316,273) 387,796 466,422 454,090 650,419
------------ ----------------- --------- ------------ ---------
Net cash provided by (used in)
operating activities 1,105,370 (39,642) 1,151,124 1,026,844 (51,847)
---------- ------------ --------- ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Furniture and equipment acquired (130,228) (9,644) (32,717) (27,987) (9,999)
Proceeds from sale of investments 222,239 56,987 225,146 60,142 5,832
Purchases of investments - (41,281) (109,233) (1,015) -
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 31,140 (4,167)
---------- ------------ --------- ------------ ---------
</TABLE>
(Continued)
F-8
<PAGE>
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 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 1,057,984 (56,014)
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 $ 8,134,643 $ 8,240,929
========== ============ ============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid
during the period for:
Income taxes $ 327,231 $ 296,847 $ 305,725 $ 210,617 $ 263,459
========== ============ ============ ============ ============
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 JUNE 30, 1998 AND FOR THE SIX 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 JUNE 30, 1998 AND FOR
THE SIX 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 JUNE 30, 1998
AND FOR THE SIX 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 credit worthiness 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 June 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 $ 8,240,929 $ 8,240,929
Investments:
Held-to-maturity securities 2,696,220 2,650,210 2,630,453 2,632,904 2,624,261 2,688,052
Available for sale securities 56,920 56,920 9,250 9,250 8,954 8,954
Trading securities 319 319 85 85 445 445
Premiums receivable 4,304,200 4,304,200 2,978,600 2,978,600 3,499,000 3,499,000
Receivable from related parties 182,787 182,787 443,182 443,182 460,550 460,550
Payable to reinsurer 93,121 93,121 158,721 158,721 563,890 563,890
Claims liabilities 4,351,500 4,351,500 3,391,950 3,391,950 2,704,200 2,704,200
Unearned premiums 1,397,380 1,397,380 1,464,800 1,464,800 1,506,600 1,506,600
Surplus note payable, net 2,865,000 3,000,000 2,880,000 3,000,000 2,887,500 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 JUNE 30, 1998 AND FOR THE
SIX 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 and at June 30, 1998 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 JUNE 30, 1998 AND FOR
THE SIX MONTHS THEN ENDED IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents (Continued)
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash in bank $ 2,230,519 $ 2,683,620 $ 2,081,036
Money market accounts 1,446,499 1,396,236 1,428,027
Commercial paper 3,087,829 3,992,528 4,103,031
Certificates of deposit 311,812 224,559 628,835
-------------- -------------- --------------
$ 7,076,659 $ 8,296,943 $ 8,240,929
============== ============== ==============
</TABLE>
3. SALE OF SUBSIDIARY
In December 1995, Arista sold its investment in its wholly-owned
subsidiary, American, excluding its book of insurance, for $764,675 in cash. The
sale resulted in a pretax gain of $320,192. American was an inactive company
(see Note 16). Except for the effects of the gain, the sale did not have a
significant impact on the Company's operating results.
4. TRANSACTIONS WITH RELATED PARTIES
Agents
Bernard Kooper ("Kooper"), Chairman of the Board of the Company and
Arista, and owner of 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-14
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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 six months ended June 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-15
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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 $ 2,648,012
Prior years 4,806,980 3,296,635 3,020,398
-------------- -------------- --------------
Total claims paid 15,463,126 13,172,244 5,668,410
-------------- -------------- --------------
Balance at end of period:
Net claims liabilities 2,175,750 1,695,975 1,352,100
Plus reinsurance recoverables 2,175,750 1,695,975 1,352,100
------------- -------------- --------------
Total liability $ 4,351,500 $ 3,391,950 $ 2,704,200
============== ============== ==============
</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-16
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND FOR
THE SIX 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:
1998 $ 218,636
1999 228,450
2000 96,892
-----------
$ 543,978
===========
The Company has the option to terminate the lease provided it notifies
the landlord ninety (90) days prior to the termination date, and reimburses the
landlord for the unamortized portion of the landlord's contribution of
approximately $200,000 for leasehold improvements.
Under a separate sublease, the Company was reimbursed by The
Saltzman/Kooper Agency, Inc., an affiliate controlled by a director of the
Company, for a percentage (16.45%) of the lease costs. The sublease arrangement
expired May 31, 1995.
Consolidated rent expense, net of sublease income of approximately
$11,000 in 1995, was $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-17
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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-18
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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-19
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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
------ ------ ------
<S> <C> <C> <C>
1995
----
Premium receivable $ 345,000 $ 172,500 $ 172,500
Claims liabilities $ 160,000 $ 80,000 $ 80,000
Unearned premiums $ 27,360 $ 13,680 $ 13,680
</TABLE>
(Continued)
F-20
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES (Continued)
(e) Reinsurance (Continued)
<TABLE>
<CAPTION>
Gross Ceded Net
Amount Amount Amount
------ ------ ------
<S> <C> <C> <C>
1996
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>
(Continued)
F-21
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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-22
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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-23
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED)
11. INCOME TAXES
At December 31, 1996 and 1997, and at June 30, 1998 deferred tax assets
aggregated $1,529,758 (including NOL carryforward of $554,838), $1,460,170
(including NOL carryforward of $405,089), and $714,579 (including NOL
carryforward of $148,898), respectively, and deferred tax liability aggregated
$1,608,087, $1,737,941 and $968,434, respectively, as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- ---------
<S> <C> <C> <C>
Deferred tax asset:
Commissions payable $ 281,713 $ 366,239 $ 330,935
Investment in securities 9,832 22,588 24,878
Reinsurance 679,876 656,974 204,376
Other assets 3,499 9,280 585
Accounts payable and accrued expenses - - 4,907
Loss carryforward 554,838 405,089 148,898
-------------- -------------- --------------
Total deferred tax asset 1,529,758 1,460,170 714,579
-------------- -------------- --------------
Deferred tax liability:
Deferred acquisition costs 308,153 188,915 128,319
Other assets - 153,785 -
Claims liabilities 156,488 172,965 286,767
Reinsurance due 1,118,078 1,161,478 553,348
Accounts payable and accrued expenses 25,368 60,798 -
-------------- -------------- --------------
Total deferred tax liability 1,608,087 1,737,941 968,434
-------------- -------------- --------------
Net deferred tax liability $ 78,329 $ 277,771 $ 253,855
============== ============== ==============
</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> <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-24
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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, 1997 and for the six months ended June
30, 1998:
<TABLE>
<CAPTION>
1995 1996 1997 1998
-------------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Currently payable (benefit):
Federal $ (208,709) $ - $ 130,550 $ 223,327
State and local 90,000 70,436 212,505 183,580
-------------- -------------- -------------- --------------
(118,709) 70,436 343,055 406,907
-------------- -------------- -------------- --------------
Deferred tax asset:
Beginning of period (11,476) (1,025,739) (974,920) (1,055,081)
End of period (1,025,739) (974,920) (1,055,081) (565,681)
-------------- -------------- -------------- --------------
Net change (1,014,263) 50,819 (80,161) 489,400
-------------- -------------- -------------- --------------
Deferred tax liability:
Beginning of period 290,516 1,648,166 1,608,087 1,737,941
End of period 1,648,166 1,608,087 1,737,941 968,434
-------------- -------------- -------------- --------------
Net change 1,357,650 (40,079) 129,854 (769,507)
-------------- -------------- -------------- --------------
Net deferred tax effect 343,387 10,740 49,693 (280,107)
-------------- -------------- -------------- --------------
Income tax provision before NOL benefit 224,678 81,176 392,748 126,800
Net operating loss benefit - (554,838) - -
-------------- -------------- -------------- --------------
Net income tax provision (benefit) $ 224,678 $ (473,662) $ 392,748 $ 126,800
============== ============== ============== ================
</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, 1997 and for the six months ended June
30, 1998, respectively.
(Continued)
F-25
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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
============== =========== =======
Six Months Ended June 30, 1998:
Basic EPS $ 66,237 2,617,500 $ 0.03
Effects of dilutive securities: None(3) - - -
-------------- ----------- -------
Diluted EPS $ 66,237 2,617,500 $ 0.03
============== =========== =======
</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-26
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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
and for the six months ended June 30, 1998 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 $ 939,075 $ 1,668,978
1998
Premium receivable $ 3,499,000 $ 1,749,500 $ 1,749,500
Claims liabilities $ 2,704,200 $ 1,352,100 $ 1,352,100
Unearned premiums $ 1,506,600 $ 753,300 $ 753,300
Commissions payable $ 754,867 $ 355,900 $ 1,110,767
</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)
F-27
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED)
14. INVESTMENTS
Investments at December 31, 1996 and 1997 and at June 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 $ 2,624,261
Available-for-sale securities 56,920 9,250 8,954
Trading securities 319 85 445
-------------- -------------- --------------
$ 2,753,459 $ 2,639,788 $ 2,633,660
============== ============== ==============
</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-28
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED)
14. INVESTMENTS (Continued)
Investment Income
Net investment income for the years ended 1995, 1996 and 1997 and for
the six months ended June 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 $ 75,969
Short-term investments 77,978 258,391 328,765 170,539
-------------- -------------- -------------- --------------
Total interest and dividends 252,134 420,203 477,347 246,508
Interest on note receivable from related party - 20,336 36,566 17,999
-------------- -------------- -------------- --------------
Total investment income $ 252,134 $ 440,539 $ 513,913 $ 264,507
============== ============== ============== ==============
</TABLE>
Realized and unrealized gains and losses on investments for the years
ended December 31, 1995, 1996 and 1997 and for the six months ended June 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) 360
-------------- -------------- -------------- --------------
Total unrealized losses (358) (159) (194) 360
-------------- -------------- -------------- --------------
Net investment loss $ (495) $ (367) $ (2,713) $ 360
============== ============== ============== ==============
</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-29
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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-30
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX 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 com mencing 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 and for the six months ended June 30, 1998 were as follows:
(Continued)
F-31
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1998 AND
FOR THE SIX MONTHS THEN ENDED IS UNAUDITED)
17. INDUSTRY SEGMENTS (Continued)
<TABLE>
<CAPTION>
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Disability insurance $ 26,091,714 $ 23,160,259 $ 20,763,439 $ 9,511,264
Property and casualty - - - -
Third party administrative 204,367 260,664 351,346 198,790
-------------- -------------- -------------- --------------
Total revenues $ 26,296,081 $ 23,420,923 $ 21,114,785 $ 9,710,054
============== ============== ============== ==============
</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-32
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Amount
Cost or shown in
amortized Market the balance
Type of Investment cost value sheet
- ---------------------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
Held-to-maturity securities:
United States Government and government
agencies and authorities $ 2,630,453 $ 2,632,904 $ 2,630,453
Available for sale:
Redeemable preferred stocks 31,524 9,250 9,250
Trading security:
Common stock 279 85 85
-------------- -------------- --------------
$ 2,662,256 $ 2,642,239 $ 2,639,788
============== ============== ==============
</TABLE>
See independent auditors' report.
F-33
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
-------------- ---------------
<S> <C> <C>
A S S E T S
-----------
Investment in subsidiaries $ 6,496,979 $ 7,181,474
Cash and equivalents 465,316 248,256
Prepaid expenses and other assets 119,258 187,092
Deferred tax asset 447,597 738,049
-------------- --------------
Total assets $ 7,529,150 $ 8,354,871
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 310,593 $ 495,162
Due to subsidiaries, net 948,063 1,488,895
-------------- --------------
Total liabilities 1,258,656 1,984,057
Stockholders' equity 6,270,494 6,370,814
-------------- --------------
Total liabilities and stockholders' equity $ 7,529,150 $ 8,354,871
============== ==============
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Investment income $ 17,883 $ 33,158 $ 48,061
Corporate and administrative expenses 464,340 1,337,158 897,520
-------------- -------------- --------------
Loss from operations before income tax benefits
and equity in net income (loss) of subsidiaries (446,457) (1,304,000) (849,459)
Income tax expense (benefits) 256,411 (693,367) (265,284)
-------------- -------------- --------------
Loss from operations before equity in net
income (loss) of subsidiaries (702,868) (610,633) (584,175)
Equity in net income (loss) of subsidiaries 959,391 (565,230) 684,495
-------------- -------------- --------------
Net income (loss) $ 256,523 $ (1,175,863) $ 100,320
============== ============== ==============
</TABLE>
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes thereto of Arista Investors
Corp. as of December 31, 1996 and 1997 and for each of the three years in the
period ended December 31, 1997.
(Continued)
F-34
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II - CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
-------------- -------------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 256,523 $ (1,175,863) $ 100,320
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation 1,039 1,629 1,404
Equity in net (income) loss of subsidiaries (959,391) 565,230 (684,495)
Compensation arising from exercise of options
and warrants - 757,350 -
Increase (decrease) in assets and liabilities:
Due to subsidiaries 481,502 (97,323) 540,832
Prepaid expenses and other assets 215,838 7,128 (69,238)
Deferred tax asset - (447,597) (290,452)
Accounts payable and accrued expenses (158,417) 153,805 184,569
-------------- -------------- --------------
Net cash used in operating activities (162,906) (235,641) (217,060)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments, net - - -
Proceeds from sale of investments 207,818 - -
Dividend from subsidiary - - -
-------------- -------------- --------------
Net cash provided by investing activities 207,818 - -
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class A common stock - 395,300 -
-------------- -------------- --------------
Net cash provided by financing activities - 395,300 -
-------------- -------------- --------------
Increase (decrease) in cash and equivalents 44,912 159,659 (217,060)
CASH AND EQUIVALENTS:
Beginning of year 260,745 305,657 465,316
-------------- -------------- --------------
End of year $ 305,657 $ 465,316 $ 248,256
============== ============== ==============
</TABLE>
(Continued)
F-35
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II - CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
-------------- -------------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the year for:
Income taxes $ 17,713 $ 21,510 $ 27,720
============== ============== ==============
Interest $ - $ - $ -
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
The Company received a note and issued Class A
common stock as follows:
Secured promissory note receivable $ - $ (500,000) $ -
Compensation expense - (757,350) -
Issuance of Class A common stock - 1,652,650 -
-------------- -------------- --------------
Cash received $ - $ 395,300 $ -
============== ============== ==============
</TABLE>
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes thereto of Arista Investors
Corp. as of December 31, 1996 and 1997 and for each of the three years in the
period ended December 31, 1997.
(Continued)
F-36
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE II - CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1995, 1996 AND 1997
1. BASIS OF PRESENTATION
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Condensed Financial Information of the Registrant
does not include all of the information and notes normally included
with financial statements prepared in accordance with generally
accepted accounting principles. It is therefore suggested that these
condensed financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report as referenced in Form 10-K, Part II, Item 8,
pages F-1 to F-37.
2. CASH DIVIDENDS FROM SUBSIDIARY
In April 1996, Arista paid dividends to the Company in the amount of
$111,684.
See independent auditors' report.
F-37
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE III
SUPPLEMENTAL SEGMENT INFORMATION
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
FUTURE
POLICY
BENEFITS, OTHER
LOSSES, POLICY
DEFERRED CLAIMS CLAIMS AND NET
POLICY AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT ACQUISITION EXPENSES PREMIUMS PAYABLE REVENUE INCOME
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- --------------------------- ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1996
Disability insurance $790,137 $4,351,500 $ 1,397,380 $ - $11,580,130 $ 440,539
Property and casualty - - - - - -
Third party administrative
service - - - - 260,664 -
-------- ---------- ----------- ---------- ----------- ---------
$790,137 $4,351,500 $ 1,397,380 $ - $11,840,794 $ 440,539
======== ========== =========== ========== =========== =========
1997
Disability insurance $484,398 $3,391,950 $ 1,464,800 $ - $10,381,720 $ 513,913
Property and casualty - - - - - -
Third party administrative
service - - - - 351,346 -
-------- ---------- ----------- ---------- ----------- ---------
$484,398 $3,391,950 $ 1,464,800 $ - $10,733,066 $ 513,913
======== ========== =========== ========== =========== =========
<CAPTION>
BENEFIT, AMORTIZATION
CLAIMS, OF DEFERRED
LOSSES AND POLICY OTHER
SETTLEMENT ACQUISITION OPERATING PREMIUMS
EXPENSES COSTS EXPENSES WRITTEN
COLUMN H COLUMN I COLUMN J COLUMN K
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
1996
Disability insurance $ 7,644,155 $ 332,633 $ 5,992,363 $ 23,229,429
Property and casualty - - - -
Third party administrative
service - - - -
----------- ---------- ------------ ------------
$ 7,644,155 $ 332,633 $ 5,992,363 $ 23,229,429
=========== ========== ============ ============
1997
Disability insurance $ 6,106,347 $ 319,775 $ 4,332,163 $ 20,830,859
Property and casualty - - - -
Third party administrative
service - - - -
----------- ----------- ----------- ------------
$ 6,106,347 $ 319,775 $ 4,332,163 $ 20,830,859
=========== ========== =========== ============
</TABLE>
See independent auditors' report.
F-38
<PAGE>
ARISTA INVESTORS CORP.
SCHEDULE IV
REINSURANCE
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES(1) COMPANIES AMOUNT NET AMOUNT
-------------- ------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Life insurance in force $ - $ - $ - $ - 0%
============== ============== ========== ============== =
Premiums:
Life insurance $ - $ - $ - $ - 0%
Accident and health 20,763,439 10,381,720 - 10,381,719 0
Property and liability - - - - 0
Title insurance - - - - 0
-------------- -------------- ---------- ------------- -
$ 20,763,439 $ 10,381,720 $ - $ 10,381,719 0%
============== ============== ========== ============== =
</TABLE>
(1) No amounts of reinsurance or coinsurance income have been netted against
premium ceded.
See independent auditors' report.
F-39
<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 June 30, 1998. The Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the year ended December 31,
1997 and for the six months ended June 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 June 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-40
<PAGE>
ARISTA INVESTORS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
($000)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
------
INVESTMENTS $ 2,634 (D $ 64 $ 2,698
CASH AND EQUIVALENTS 8,241 (A) 3,358 2,650
(B) 2,911
(C) (3,827)
(E) (3,855)
(F) (2,154)
(I) (250)
(J) (1,856)
(K) (128)
(L) 210
PREMIUMS RECEIVABLE 3,499 (B) (3,499) -
DEFERRED POLICY ACQUISITION COSTS 329 (D) (329) -
PREPAID AND REFUNDABLE INCOME TAXES 823 823
FURNITURE AND EQUIPMENT 100 100
RECEIVABLE RELATED PARTIES 460 (L) (460) -
OTHER ASSETS 1,431 (C) (384) 1,047
--------- --------- --------
Total assets $ 17,517 $ (10,199) $ 7,318
========= ========= ========
</TABLE>
(Continued)
F-41
<PAGE>
ARISTA INVESTORS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 - CONTINUED
($000)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
LIABILITIES AND
---------------
STOCKHOLDERS' EQUITY
--------------------
LIABILITIES:
Payable to reinsurer $ 564 (F) $ (564) $ -
Claims liabilities 2,704 (C) (2,704) -
Commissions payable 755 (B) (553) -
(F) (202)
Accounts payable and accrued expenses 2,278 (B) (35) -
(E) (855)
(F) (1,388)
Deferred income taxes 254 (H) (428) (174)
Surplus note payable 2,887 (E) (3,000) -
(E) 113
Unearned premiums 1,507 (C) (1,507) -
--------- ---------- --------
Total liabilities 10,949 (11,123) (174)
--------- ---------- --------
STOCKHOLDERS' EQUITY:
Class A common stock 26 (G) 1 26
Class B common stock 1 (G) (1) -
Common stock warrants 150 (E) (150) -
Additional paid-in capital 5,839 (G) (66) 5,897
(M) (27)
(E) 150
Retained earnings 1,102 (A) 3,358 1,569
(M) (23)
(D) (265)
(E) (113)
(G) (434)
(H) 428
(I) (250)
(J) (1,856)
(K) (128)
(L) (250)
Net unrealized loss on investment securities (23) (M) 23 -
--------- ---------- --------
7,095 397 7,492
Secured promissory note from shareholder (500) (G) 500 -
Cost of stock held in treasury (27) (M) 27 -
--------- ---------- --------
Total stockholders' equity 6,568 924 7,492
--------- ---------- --------
$ 17,517 $ (10,199) $ 7,318
========= ========== ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-42
<PAGE>
ARISTA INVESTORS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
($000, except per share amount)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 SIX MONTHS ENDED JUNE 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) $ - $ 9,511 (N) $(9,511) $ -
Ceded earned premium 10,382 (N) (10,382) - 4,630 (N) (4,630) -
----------- -------- -------- --------- ------- ---------
Net earned premium 10,382 (10,382) - 4,881 (4,881) -
Third party administrative fees (O) 3,422 3,422 (O) 1,680 1,680
351 (N) (351) - 199 (N) (199) -
Investment income, net 511 (N) (511) - 264 (N) (264) -
(O) 20 20 (O) 8 8
Other income 7 (N) (7) - 17 (N) (17) -
----------- ------- ------- --------- ------- ---------
Total revenue 11,251 (7,809) 3,442 5,361 (3,673) 1,688
----------- ------- ------- --------- ------- ---------
EXPENSES:
Underwriting:
Gross claims incurred 12,213 (N) (12,213) - 4,981 (N) (4,981) -
Ceded claims incurred 6,106 (N) (6,106) - 2,491 (N) (2,491) -
----------- ------- ------- --------- ------- ---------
Net claims incurred 6,107 (6,107) - 2,490 (2,490) -
----------- ------- ------- --------- ------- ---------
Gross commissions incurred 3,907 (N) (3,907) - 1,887 (N) (1,887) -
Ceded commissions incurred 3,938 (N) (3,938) - 1,482 (N) (1,482) -
----------- ------- ------- --------- ------- ---------
Net commissions incurred (31) (31) - 405 (405) -
----------- ------- ------- --------- ------- ---------
Total underwriting expenses 6,076 (6,076) - 2,895 (2,895) -
(O) 880 880
(O) 2,105 2,105 (O) 540 540
(O) 740 740
General and administrative expenses 4,682 (N) (4,682) - 2,273 (N) (2,273) -
----------- ------- ------- --------- ------- ---------
Total expenses 10,758 (7,913) 2,845 5,168 (3,748) 1,420
----------- ------- ------- --------- ------- ---------
Income (loss) before provision
for income taxes 493 104 597 193 75 268
PROVISION FOR INCOME TAXES 393 (N) 393 - 127 (N) (127) -
(O) (233) 233 (O) 118 118
----------- ------- ------- --------- ------- ---------
Net income $ 100 $ 264 $ 364 $ 66 $ 84 $ 150
=========== ======== ======= ========= ======= =========
EARNINGS PER COMMON SHARE $ 0.04 $ 0.10 $ 0.14 $ 0.03 $ 0.03 $ 0.06
=========== ======= ======= ========= ======= =========
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-43
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998
(A) Represents the estimated cash to be received by Arista from The Guardian as
a cession allowance for the sale of the insurance business. The cession
allowance is estimated at 18% of the earned premiums by Arista for the
twelve months preceding the date of sale. Management believes the actual
sale price will not materially differ from $3,357,700 (18% of $18,653,957).
(B) Adjustment to transfer from Arista to The Guardian Arista's due premium
receivable, net of commissions, fees and premium taxes as follows:
<TABLE>
<CAPTION>
12/31/97 6/30/98
--------------- ---------------
<S> <C> <C>
Gross premium receivable $ 2,979,000 $ 3,499,000
Commissions payable, net (451,706) (552,971)
NYS Premium tax accrued (29,790) (34,990)
-------------- --------------
$ 2,497,504 $ 2,911,039
============== ==============
</TABLE>
(C) Adjustment to transfer from Arista to The Guardian disability related
reserves as follows:
<TABLE>
<CAPTION>
12/31/97 6/30/98
-------- -------
<S> <C> <C>
Arista's claim reserves, excluding provision for DBL
assessments and loss adjustment expenses $ 3,065,000 $ 2,350,000
Arista's GAAP assessment reserves 235,000 283,700
Arista's loss adjustment expense reserves 91,950 70,500
-------------- --------------
Net unpaid claims liabilities 3,391,950 2,704,200
-------------- --------------
Unearned premium reserves 1,465,000 1,506,600
Prepaid commissions to brokers (353,400) (369,265)
Premium tax (14,650) (15,066)
-------------- --------------
Unearned reserves, net of offsets 1,096,950 1,122,269
-------------- --------------
Total reserves $ 4,488,900 $ 3,826,469
============== ==============
</TABLE>
(D) 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.
(Continued)
F-44
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
AS OF JUNE 30, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998
(E) 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>
<S> <C>
Surplus note $ 3,000,000
Detachable stock warrants 150,000
Interest expense 112,500
Accrued interest 855,386
Unamortized discount (112,500)
Additional paid-in capital (150,000)
Cash payment (3,855,386)
--------------
$ -
==============
</TABLE>
(F) Adjustment to record the payment of commissions payable and accounts
payable and accrued expenses incurred in connection with Arista's
insurance business sold to The Guardian.
(G) Adjustment to record the exercise of Class B option by the Company as
follows:
<TABLE>
<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>
(H) 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>
<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-45
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
AS OF JUNE 30, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998
(I) 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.
(J) Adjustment to recognize "termination payments" to Kooper and Mandel who
have employment agreements which will terminate upon the cession of
insurance to The Guardian, and such terminations will entitle them to
each receive a lump sum "golden parachute payment" equal to the maximum
amount that will not trigger the excise tax payable in the event of an
"excess parachute payment," as defined in the Internal Revenue Code of
1986, as amended.
(K) Adjustment for payments to insurance carriers on behalf of Kooper and
Mandel of amounts to render as "paid up" the premiums for the
split-dollar life insurance provided to them under their respective
employment agreements.
(L) 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.
(M) 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:
<TABLE>
<CAPTION>
Six
Year Months
Ended Ended
12/31/97 6/30/98
-------- -------
<S> <C> <C>
Fee revenues $ 3,422,300 $ 1,680,000
Operating expenses (2,104,600) (880,000)
-------------- --------------
Operating profit 1,317,700 800,000
Interest income 20,000 8,000
General and administrative expenses (740,000) (540,000)
-------------- --------------
Income before income taxes $ 597,700 $ 268,000
============== ==============
</TABLE>
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
(Continued)
F-46
<PAGE>
ARISTA INVESTORS CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
AS OF JUNE 30, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998
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 and $9,032,664 for the six
months ended June 30, 1998. Paid premiums from U.S. Life policyholders
aggregated approximately $628,521 for the year ended December 31, 1997 and
$457,395 for the six months ended June 30, 1998. Fee revenues are based on the
Company's actual performance and experience during the respective periods.
F-47
<PAGE>
ASSUMPTION REINSURANCE AGREEMENT
between
ARISTA INSURANCE COMPANY,
ARISTA INVESTORS CORP.
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS.................................... 2
ARTICLE II REPRESENTATIONS AND WARRANTIES................. 4
ARTICLE III BUSINESS REINSURED............................. 5
ARTICLE IV GENERAL PROVISIONS............................. 7
ARTICLE V REINSURANCE PREMIUM............................ 9
ARTICLE VI ASSUMPTION CERTIFICATES........................ 9
ARTICLE VII CONDITIONS PRECEDENT........................... 12
ARTICLE VIII DUTY OF COOPERATION............................ 13
ARTICLE IX ARBITRATION.................................... 13
ARTICLE X INDEMNIFICATION................................ 14
ARTICLE XI MISCELLANEOUS PROVISIONS....................... 15
EXHIBITS
A Certificate of Assumption
SCHEDULES
1 Reinsurance Report
2 List of Existing Policies
3 List of New Policies Issued by the Company
<PAGE>
ASSUMPTION REINSURANCE AGREEMENT
This Assumption Reinsurance Agreement (the "Agreement"), is
made and entered into as of September 23, 1998, by and between ARISTA INSURANCE
COMPANY, a property/casualty insurance company organized and existing under the
laws of the State of New York (the "Company"), ARISTA INVESTORS CORP., a holding
company organized and existing under the laws of the State of Delaware (the
"Administrator"), and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a life
insurance company organized and existing under the laws of the State of New York
(the "Reinsurer").
WHEREAS, the Company desires to completely exit, as of the
Effective Date (as hereinafter defined), the business of insuring risks pursuant
to the New York State Statutory, Super Statutory and Voluntary Disability
Benefits Law;
WHEREAS, the Company, in order to effect such exit from the
business of providing insurance pursuant to the New York State Statutory, Super
Statutory and Voluntary Disability Benefits Law, intends to assumption reinsure
all Reinsured Policies (as hereinafter defined) and those New Policies (as
hereinafter defined) issued by the Company with the Reinsurer to the extent that
insureds do not object, and to cancel the policies of insureds who do object to
an assumption by the Reinsurer;
WHEREAS, the Company has agreed to cede to the Reinsurer, and
the Reinsurer has agreed to accept and assumption reinsure, all New Policies
issued by the Company and 100% of the Reserves and Liabilities (as hereinafter
defined) arising under or with respect to all Reinsured Policies on the
Effective Date contingent upon the prior receipt of any and all applicable
regulatory approvals and notice to relevant Policyholders under the terms and
conditions set forth herein;
WHEREAS, the Company agrees to transfer responsibility to the
Reinsurer, and the Reinsurer agrees to accept such responsibility, to provide
all administrative services with respect to the Reinsured Policies; and
WHEREAS, the Reinsurer and the Administrator will enter into
an Administrative Services Agreement (the "Administrative Services Agreement"),
concurrently with the execution of this Agreement, pursuant to which the
Administrator shall be appointed with responsibility for the performance of
administrative services with respect to all of the Reinsured Policies on behalf
of the Reinsurer in addition to the Existing Policies and New Policies (both
terms as hereinafter defined);
NOW THEREFORE, in consideration of the foregoing and the
mutual agreements set forth herein, the Company, the Administrator and the
Reinsurer mutually agree as follows:
1
<PAGE>
ARTICLE I
DEFINITIONS
As used in this Agreement, the following capitalized terms
shall have the following meanings (definitions are applicable to both the
singular and the plural forms of each term defined in this Article I):
"Administrative Services Agreement" shall have the meaning set
forth in the fifth recital hereof.
"Annualized Premium" means the earned premiums for the most
recent twelve month period prior to the Effective Date, excluding premium
associated with the Federation of Jewish Philanthropies (policy numbers 126500,
126501 and 126502).
"Benefits" shall have the meaning set forth in Section 6.6.
"Business Day" means any day other than a Saturday or Sunday
or a day on which banking institutions in the State of New York are permitted or
obligated by law to be closed.
"Certificate of Assumption" shall have the meaning set forth
in Section 6.2.
"Closing Date" shall mean the later of that date twenty (20)
Business Days following the Report Date and five (5) Business Days following
approval of the transactions contemplated by this Agreement by the shareholders
of the Administrator.
"Confidentiality Agreement" means that confidentiality
agreement, dated as of May 15, 1996, entered into between the parties hereto.
"Deficiency" shall have the meaning set forth in Section 5.1.
"Effective Date" means July 1, 1998.
"Existing Policies" means all policy numbers issued by the
Reinsurer which are being serviced by the Company as of the date hereof, as more
fully set forth on Schedule 2, attached hereto.
"Extra Contractual Liabilities" means all liabilities, other
than the express obligations set forth in the Reinsured Policies or the New
Policies issued by the Company, including, without limitation, (i) any liability
for consequential, exemplary, punitive or similar damages, relating to the
Reinsured Policies or the New Policies issued by the Company, which liability
arises from any act, error or omission by the Company, its directors, officers,
employees or agents prior to the Closing Date, whether intentional or otherwise
(ii) from any bad faith, willful misconduct, fraud or gross negligence of the
Company prior to the Closing Date in connection with the handling of any claim
or obligation under any of the Reinsured Policies or the New Policies issued by
the Company or in
2
<PAGE>
connection with the issuance, delivery or cancellation of any of the Reinsured
Policies or the New Policies issued by the Company or (iii) any liability,
relating to either the Reinsured Policies or the New Policies issued by the
Company or the Existing Policies, arising from any act, error or omission by the
Company, its directors, officers, employees or agents in the performance of its
obligations under the Administrative Services Agreement on or after the
Effective Date, whether intentional or otherwise.
"Final Reinsurance Report" means the report required to be
prepared in accordance with Section 5.1 and providing the data as shown on
Schedule 1.
"Letter Agreement" means the Letter Agreement dated as of the
same date hereof by and among the Company, the Administrator and the Reinsurer,
in connection with certain communications with Policyholders and producers.
"New Policies" means all new Statutory, Super Statutory and
Voluntary Disability Benefits Law policies, written by the Company and accepted
by the Reinsurer (as will be more fully set forth on the Closing Date on
Schedule 3, the form of which is attached hereto) or written by the Reinsurer
pursuant to the New York State Disability Benefits Law with inception dates on
or after the Effective Date.
"Person" means any corporation, individual, joint stock
company, joint venture, partnership, unincorporated association, governmental
regulatory entity, country, state or political subdivision thereof, trust or
other entity.
"Policyholder" means a holder of a Reinsured Policy or a
holder of a New Policy issued by the Company.
"Preliminary Reinsurance Report" means the report required to
be prepared in accordance with Section 5.1 and providing the data as shown on
Schedule 1.
"Purchase Price" means an amount equal to 18% of the
Annualized Premium on the Effective Date.
"Redundancy" shall have the meaning set forth in Section 5.1.
"Reinsurance Agreement" means any reinsurance agreement
between the Company as cedent and any third party reinsurer under which the
Company's Reserves and Liabilities with respect to the Reinsured Policies or
some portion thereof are transferred, whether or not such contract of
reinsurance is also applicable to business other than the Reinsured Policies.
"Reinsurance Premium" shall have the meaning set forth in
Section 5.1.
"Reinsured Policies" means all New York State Statutory, Super
Statutory and Voluntary Disability Benefits Law policies, issued by the Company,
that are in force on the Effective
3
<PAGE>
Date, and for which a binding transfer is made from the Company to the Reinsurer
after the Effective Date.
"Report Date" shall mean the date upon which the Company
delivers to the Reinsurer a Preliminary Reinsurance Report pursuant to the
provisions of Section 5.1 hereunder if all of the conditions in Article VII
hereunder have been satisfied prior to such date; provided, however, that if all
of the Article VII conditions have not yet been satisfied the Report Date will
be the fifth Business Day following receipt of notice from the Company to the
Reinsurer that all of the conditions in Article VII hereunder have been
satisfied.
"Reserves and Liabilities" means the statutory reserves
required to be held by the Company (including, but not limited to, any
miscellaneous reserves, claim reserves and due premiums) as of the Effective
Date in support of the policy liabilities, including all related claim expense
reserves, GAAP assessment reserves (provided such reserves are deemed definite)
and net unearned premium reserves arising under the Reinsured Policies.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties of the Company. The
Company hereby represents and warrants to the Reinsurer that:
2.1.a. The Company has made, with respect to Reinsured
Policies, or shall make with respect to New Policies issued by the Company,
available to the Reinsurer copies of all forms, applications, rates, and values
with respect to the policies and shall keep the Reinsurer promptly informed with
respect to any changes or modifications to such forms, applications, or rates;
2.1.b. The Company is licensed in good standing in New York
State, the jurisdiction in which Reinsured Policies were, or New Policies issued
by the Company shall be, issued or assumed, and all Reinsured Policies issued,
or New Policies to be issued, by the Company are in full compliance with
applicable laws, regulations and rules. The Company has not been placed in, nor
does it have any reason to believe that it is about to be placed in supervision,
rehabilitation, receivership, revocation, suspension or liquidation by any
insurance department;
2.1.c. The Company is duly organized, validly existing and in
good standing under the laws of the State of New York, and has all necessary
corporate power and authority to entitle it to use its name, to own, lease or
otherwise hold its properties and assets, to carry on its business as currently
conducted, and to perform its obligations;
2.1.d. The Reinsured Policies and New Policies issued, or to
be issued, by the Company are, in the case of those issued, or will be, in the
case of those to be issued, in substantial
4
<PAGE>
compliance with all applicable requirements of law and are on forms approved in
all material respects by the appropriate governmental authorities; and
2.1.e. The reserves being held by the Company in support of
the Reinsured Polices are (i) consistent with statutory accounting practices
prescribed or permitted by the Insurance Department of the State of New York,
(ii) have been determined in accordance with generally accepted actuarial
standards consistently applied and are fairly stated in accordance with sound
actuarial principles, and (iii) include adequate provision for all actuarial
reserves and related statement items which ought to be established under the
foregoing standards, principles and practices.
2.2. Representations and Warranties of the Administrator. The
Administrator hereby represents and warrants to the Reinsurer that:
2.2.a. The Administrator is duly organized, validly existing
and in good standing under the laws of the State of Delaware, and has all
necessary corporate power and authority to entitle it to use its name, to own,
lease or otherwise hold its properties and assets, to carry on its business as
currently conducted, and to perform its obligations; provided, however, that
this representation and warranty will apply to the Administrator with respect to
performance of the obligations undertaken hereunder only as of the Closing Date.
2.3. Representations and Warranties of the Reinsurer. The
Reinsurer hereby represents and warrants to the Company that:
2.3.a. The Reinsurer is duly organized, validly existing and
in good standing under the laws of the State of New York, and has all necessary
corporate power and authority to entitle it to use its name, to own, lease or
otherwise hold its properties and assets, to carry on its business as currently
conducted, and to perform its obligations; and
2.3.b. The Reinsurer is authorized to reinsure the Reinsured
Policies and New Policies issued by the Company in the State of New York.
ARTICLE III
BUSINESS REINSURED
3.1. Coverage. As of the Effective Date and upon the terms and
subject to the conditions and other provisions of this Agreement, the Company
hereby agrees to cede and transfer to the Reinsurer, and the Reinsurer hereby
agrees to accept, on an assumption reinsurance basis, all Reinsured Policies and
New Policies issued by the Company; provided however, that the New Policies
issued by the Company between the Effective Date and the Closing Date shall be
listed on Schedule 3, the form of which is attached hereto, to be presented to
the Reinsurer on the Closing Date and each
5
<PAGE>
policy listed on Schedule 3 shall be subject to the acceptance of the Reinsurer,
which acceptance shall not be unreasonably withheld if such policies were
written in accordance with the Company's standards in effect as of the Effective
Date, and any New Policies not accepted by the Reinsurer shall not be
transferred hereunder and shall immediately be canceled by the Company and
terminated thirty (30) days after the Closing Date.
3.2. Conditions. The reinsurance hereunder is subject to the
same limitations, terms and conditions as the Reinsured Policies and New
Policies issued by the Company, except as otherwise provided in this Agreement.
3.3. Exclusions. This Agreement does not apply to and
specifically excludes from coverage, and the Reinsurer shall not assume, any
Extra Contractual Liabilities. In addition, the Reinsurer shall not assume, and
shall be indemnified by the Company for (i) all guaranty fund assessments and
premium taxes or similar charges imposed on or with respect to the Reinsured
Policies and New Policies issued by the Company to the extent that such
assessments, taxes or charges are based on premiums earned prior to the
Closing Date and (ii) any costs or liabilities imposed upon the Reinsurer, as a
result of any inaccuracies or inconsistencies in the Reinsured Policies or New
Policies issued by the Company or the Company's improper administration of the
Reinsured Policies or the New Policies or the Existing Policies to the extent
that the Company did not bring such inaccuracies, inconsistencies or improper
administration to the attention of the Reinsurer prior to the Effective Date.
3.4. Ceded Reinsurance. The Company agrees that by the Closing
Date it shall cancel its agreements between it and any other party related to
the Reinsured Policies and the New Policies issued by the Company, including the
Company's respective agreements with Cologne Reinsurance Company and the
Reinsurer, and effect the recapture of all policies ceded pursuant thereto. The
Company agrees to pay for all costs, if any, associated with such cancellations.
In connection with the Company's cancellation of the aforementioned ceded
reinsurance agreement with the Reinsurer, the Company and the Reinsurer each
hereby agree to waive any requirements of prior written notice and to effect
cancellation of such agreement simultaneously with the Reinsurer's assumption of
the Reinsured Policies on the Closing Date.
3.5. Conduct of Business. Between the date hereof and the
Closing Date (i) the Company shall continue the operations of its business with
respect to the Reinsured Policies and New Policies in accordance with prior
practices and in conformity with the prevailing standards and customs in the
industry and (ii) the Company shall not enter into any additional Reinsurance
Agreements.
3.6. New Business. The Company, as of the Closing Date, shall
discontinue sales of all New York State Statutory, Super Statutory and Voluntary
Disability Benefits Law business.
3.7. Producers. The Company shall take all reasonable
measures, including the mailing of a notice, which is more fully set forth in
the Letter Agreement, to request that all producers give up their licenses with
the Company and become licensed with the Reinsurer subject to the
6
<PAGE>
Reinsurer's licensing and other criteria. The Reinsurer shall also mail a notice
to such producers, which is more fully set forth in the Letter Agreement.
Notwithstanding the foregoing, the Reinsurer reserves the right to reject any of
the Company's existing producers; provided, however, that the Reinsurer shall be
responsible after the Effective Date for indemnifying the Company for any
compensation paid to such producers, under existing commission agreements
between such producers and the Company, for commissions earned upon the renewal
of any of the Reinsured Policies which they produced on behalf of the Company.
ARTICLE IV
GENERAL PROVISIONS
4.1. Policy Administration. The Administrator shall perform
all administrative services pursuant to the Administrative Services Agreement
with respect to the Reinsured Policies, Existing Policies and New Policies,
including, but not limited to, the collection of premiums and other amounts due
from policyholders and the payment of Benefits and other amounts due to
policyholders. Notwithstanding the foregoing, the Administrator shall provide
administrative services in accordance with the Administrative Services
Agreement.
4.2. Maintenance and Inspection of Records. The Company or the
Administrator, as the case may be, shall maintain all books, records, papers or
any other documents relating to the Reinsured Policies or New Policies issued by
the Company in identified and/or segregated files, in an orderly and organized
condition and in its principal offices or storage facilities. These books,
records, papers or other documents shall be maintained as required by New York
State laws and regulations including, but not limited to, Regulation No. 152.
The Reinsurer or its designated representative may inspect, review and copy the
papers and any and all other books or documents of the Company or Administrator,
as the case may be, relating to the Reinsured Policies or New Policies issued by
the Company, for such period as this Agreement is in effect. The Reinsurer's
rights under this Section shall survive termination of this Agreement.
4.3. Misunderstandings and Oversights. If any delay, omission,
error or failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company, the Administrator and the Reinsurer will adjust the situation to what
it would have been had the misunderstanding or oversight not occurred. The party
first discovering such misunderstanding or oversight, or act resulting from the
misunderstanding or oversight, will notify the other parties in writing promptly
upon discovery thereof, and the parties shall act to correct such
misunderstanding or oversight within thirty (30) Business Days of receipt of
such notice. However, this Section shall not be construed as a waiver by any
party of its right to enforce strictly the terms of this Agreement.
7
<PAGE>
4.4. Litigation; Claims. The Reinsurer shall be responsible
for the handling of, and all costs and expenses, including legal fees, relating
to, litigation or other claims under the Reinsured Policies, Existing Policies
and New Policies. Notwithstanding the foregoing, the Reinsurer shall have no
liability for such costs and expenses to the extent they arise out of or are
based on any actions for declaratory judgments initiated prior to the date one
hundred and twenty (120) days following the Closing Date or for Extra
Contractual Liabilities, and to the extent that the Reinsurer incurs any of the
aforementioned costs or expenses, the Reinsurer shall be indemnified by the
Company pursuant to Section 10.1 hereunder; provided, however, that the Company
may choose to undertake the defense of such actions for declaratory judgments or
Extra Contractual Liabilities and pay for such costs and expenses.
4.5. Retention of In-Force; Non-Compete. The Company shall (i)
make every reasonable effort to keep the Reinsured Policies and New Policies
issued by the Company in-force and (ii) take no action directly or indirectly to
induce any Policyholder to terminate, lapse or exchange such policy.
4.6. Compliance with Applicable Laws and Regulations.
(a) Intent of Parties. It is the intention of the
parties that this Agreement shall be interpreted in accordance with the laws as
of the date of execution hereof by each of the parties and comply with all
existing applicable state and federal laws and regulations, and as from time to
time are or may be in effect, in such a way that the Reinsured Policies remain
reinsured in accordance with the terms of this Agreement.
(b) Procedures to Reflect Changes in Laws or
Regulations. In the event that it is determined by an insurance regulatory
authority or the Internal Revenue Service or by either party upon the advice of
an insurance regulatory authority or the Internal Revenue Service that this
Agreement fails to conform to the requirements of existing applicable laws and
regulations and that the Agreement may be brought into conformity with said
requirements only by means of a change to the Agreement, the parties shall
exercise reasonable efforts to reach an agreement to amend the Agreement. If the
parties are unable to reach an agreement to amend the Agreement, then the
differences between the parties shall be resolved through arbitration in
accordance with the provisions of Article IX.
(c) Notification of Disapproval or Change in Law. Either
party shall promptly notify the other party of any disapprovals, recommended
changes or statements regarding the Agreement that are made by any insurance
regulatory authorities or the Internal Revenue Service and of any change in law,
regulation or rulings affecting this Agreement. Either party shall be allowed to
make its own defense of the Agreement with said authorities.
4.7. Recoupment and Failure of Consideration. If any party to
this Agreement fails to perform this Agreement in full, then any other party to
whom such performance was owed has the right to suspend performance.
Alternatively, a non-defaulting party can recoup damages (including,
8
<PAGE>
without limitation, the amount owed plus interest from the date owed and
calculated at the Chase Bank prime rate plus two points) from future settlements
between the parties.
4.8. Offsets. Any debts or credits between parties arising
under this Agreement or the Administrative Services Agreement are deemed mutual
debts or credits, as the case may be, and shall be netted or set off, as the
case may be, and only the balance shall be allowed or paid hereunder.
ARTICLE V
REINSURANCE PREMIUM
5.1 Reinsurance Premium. As consideration for the assumption
by the Reinsurer of the Reserves and Liabilities hereunder and the New Policies
issued by the Company, assets that are mutually acceptable to the parties which
have an aggregate market value on the Closing Date equal to (i) the Reserves and
Liabilities plus (ii) any reserve inadequacy as determined by the Reinsurer (the
"Deficiency") less (iii) the Purchase Price less (iv) any reserve redundancy as
determined by the Reinsurer (the "Redundancy"), (such net amount being the
"Reinsurance Premium"), shall be either (i) transferred by the Company to the
Reinsurer, if the Reinsurance Premium is positive or (ii) shall be transferred
by the Reinsurer to the Company, if the Reinsurance Premium is negative. A
Preliminary Reinsurance Report in a format similar to the attached Schedule 1
shall be prepared by the Company based upon the Company's most recently filed
Quarterly or Annual Statement prior to the Closing Date. The Company shall
deliver such Preliminary Reinsurance Report to the Reinsurer on the Report Date.
Within fifteen (15) days of the Report Date, the Reinsurer shall make further
and final adjustment of each data component of the Reinsurance Premium displayed
on the Preliminary Reinsurance Report (as adjusted, the "Final Reinsurance
Report"). The Reinsurance Premium transferred on the Closing Date shall be based
upon the Final Reinsurance Report prepared by the Reinsurer.
ARTICLE VI
ASSUMPTION CERTIFICATES
6.1. Assumption of Reinsured Policies. The Reinsurer agrees to
assume the Reinsured Policies being transferred on the Effective Date and the
New Policies issued by the Company, subject to the provisions of Section 3.1
above.
6.2. Policyholder Notices. The Reinsurer shall prepare, with
the cooperation of the Company, certificates of assumption ("Certificates of
Assumption"), and deliver them to the Company for mailing to all potential
Policyholders of Reinsured Policies promptly after the date that all required
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<PAGE>
regulatory approvals are received. Subject to regulatory requirements with
respect to such Policyholders, Certificates of Assumption to be delivered to the
potential Policyholders pursuant to this Section 6.2 shall be substantially in
the form of Exhibit A attached hereto. The parties shall also send such other
notices to Policyholders which are more fully set forth in the Letter Agreement.
In addition, similar Certificates of Assumption shall be prepared and delivered
promptly after the Closing Date in a similar manner as stated above to those
Policyholders of New Policies issued by the Company and accepted by the
Reinsurer on the Closing Date
6.3. Non-assumed Policies. After the Closing Date, in the
event a Reinsured Policy is determined, for whatever reason including, but not
limited to, Policyholder objection, not to have been transferred to the
Reinsurer, such Reinsured Policy shall, for all purposes of this Agreement, be
deemed never to have been a Reinsured Policy (i.e., non-assumed); provided,
however, that the Company shall then immediately exercise its right to cancel
each such non-assumed policy pursuant to the applicable provisions of the New
York State Disability Benefits Law and the Company shall make an appropriate
adjustment to the Reinsurance Premium to account for each such policy's removal
from the book of "Reinsured Policies." No person, including any Policyholder,
insured or beneficiary under such Reinsured Policies so determined shall have
any right of action against the Reinsurer with respect to such Reinsured
Policies that are later deemed to be non-assumed.
6.4. Direct Obligations. After the Closing Date, the Reinsurer
shall be the successor to the Company under the transferred Reinsured Policies
and New Policies issued by the Company as if the Reinsured Policies and New
Policies issued by the Company were direct obligations originally issued by the
Reinsurer. The Reinsurer shall be substituted in the place and instead of the
Company, and each Policyholder, insured or beneficiary under a transferred
Reinsured Policy or assumption reinsured New Policy issued by the Company shall
disregard the Company as a party thereto and treat the Reinsurer as if it had
been originally obligated thereunder. Such persons shall have the right to file
claims or take other actions under the transferred Reinsured Policies or New
Policies issued by the Company on or after the Closing Date directly with the
Reinsurer, and shall have a direct right of action for insurance liabilities
transferred and reinsured thereunder against the Reinsurer, and the Reinsurer
hereby consents to be subject after the Closing Date to direct action taken by
any such persons under a transferred Reinsured Policy or New Policy issued by
the Company. The Reinsurer accepts and assumes the transferred Reinsured
Policies and New Policies issued by the Company subject to any and all defenses,
setoffs and counterclaims to which the Company would be entitled with respect to
such insurance liabilities, it being expressly understood and agreed by the
parties hereto that no such defenses, setoffs or counterclaims are waived by the
execution of this Agreement or the consummation of the transactions contemplated
hereby and that the Reinsurer shall be fully subrogated to all such defenses,
setoffs and counterclaims.
6.5. Release of Company; Indemnity. Upon the consummation of
the transfer and assumption reinsurance of a Reinsured Policy or New Policy
issued by the Company from the Company to the Reinsurer under this Agreement,
the Company shall be released from any and all liability, except for Extra
Contractual Liabilities, with respect to such Reinsured Policy or New Policy
issued by the Company. From and after the consummation of the transfer and
assumption reinsurance
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of a Reinsured Policy or New Policy issued by the Company pursuant to this
Agreement, the Reinsurer agrees to indemnify the Company for any and all
damages, costs and expenses, including reasonable legal counsel fees and
disbursements, arising out of, based upon or relating to such Reinsured Policy
or New Policy issued by the Company; provided, however, that the Reinsurer shall
be under no obligation to indemnify the Company for any (i) declaratory
judgments initiated prior to the date one hundred twenty (120) days following
the Closing Date or Extra Contractual Liabilities or (ii) liabilities that
result from any inaccuracies or inconsistencies in the Reinsured Policies or the
New Policies issued by the Company or the Company's improper administration of
the Reinsured Policies or New Policies issued by the Company to the extent that
the Company did not bring such inaccuracies, inconsistencies or improper
administration to the attention of the Reinsurer prior to the Effective Date.
6.6. Indemnity Reinsurance. With respect to any Policyholder
who objects to the transfer of a Reinsured Policy or New Policy to the
Reinsurer, pursuant to Sections 6.2 or 6.3 hereunder, and/or any Policyholder of
a New Policy not accepted by the Reinsurer, pursuant to Section 3.1 hereunder,
the Company shall give notice of cancellation, dated as of the Closing Date, to
such objecting or nonaccepted Policyholders, terminating coverage for such
Policyholders effective thirty (30) days from the Closing Date and the Reinsurer
shall provide indemnity reinsurance to the Company for any benefits incurred net
of any other reinsurance collectible ("Benefits"), but not including indemnity
for any declaratory judgments or Extra Contractual Liabilities, for such thirty
(30) day period from the Closing Date to termination of coverage for such
Policyholders, at no additional consideration beyond the consideration provided
for by Section 5.1 hereunder. Upon receipt of any information regarding a claim
for Benefits, the Company will immediately notify the Reinsurer of such claim.
The reinsured claim and copies of notification, claim papers, and proofs will be
promptly furnished by the Company to the Reinsurer. The Company will not
contest, compromise, or settle a claim for Benefits without prior consultation
with the Reinsurer. The Company shall submit a monthly accounting of Benefits on
both a paid and incurred basis until such time as there exists no further
obligation on the part of the Company to pay Benefits. The Reinsurer shall make
settlements of Benefits on a paid basis with the Company thirty (30) days
following receipt of any monthly accounting submitted by the Company; provided,
however, that the Reinsurer may offset any amount due to the Company with any
amounts due it from the Company.
6.7. Policy Administration. The Company agrees to cooperate
fully with the Reinsurer in the transfer of the administration, including the
transfer of books and records, relating to the Reinsured Policies and New
Policies issued by the Company, and in the servicing of the Reinsured Policies
and New Policies in accordance with Section 4.1 hereunder.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1. Conditions. The obligations of the Company and the
Reinsurer to consummate the transactions described hereunder are expressly
subject to:
7.1.a. On or before the Closing Date, the Company having
obtained any and all approvals of the New York Superintendent of Insurance
necessary for the consummation of the transactions contemplated by this
Agreement, and such approval(s) being in full force and effect, and not imposing
upon either the Company or the Reinsurer any material conditions or requirements
that would impose upon either party any material additional costs;
7.1.b. On or before the Closing Date, the Reinsurer having
discovered no material errors, omissions or liabilities relating to the
Reinsured Policies and the New Policies issued by the Company previously
undisclosed to it in the due diligence investigation and documentation provided
the Reinsurer by the Company prior to the date hereof;
7.1.c. All of the representations and warranties made by the
parties hereto in Article II hereunder being true and correct in all material
respects on the date hereof and on the Closing Date as if made on such date; and
7.1.d. On or before the Closing Date, each of the parties
having obtained full corporate power and authority to execute, deliver and
perform their respective obligations under this Agreement and having taken all
necessary corporate and other action to authorize the reinsurance of the
Reinsured Policies and New Policies it issued under the terms of this Agreement.
7.1.e. On the Closing Date, the Company shall have fulfilled
its obligations under Section 3.4 hereunder.
7.1.f. On or before the Closing Date, the Administrator shall
have received the approval of its shareholders for the transactions contemplated
by this Agreement.
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ARTICLE VIII
DUTY OF COOPERATION
8.1. Duty of Cooperation. Each party hereto shall cooperate
fully with the other in all reasonable respects in order to accomplish the
objectives of this Agreement. This duty to cooperate shall include obtaining the
governmental and regulatory consents and approvals and taking the other steps
necessary for the assumption of the Reinsured Policies and New Policies issued
by the Company, as described in this Agreement. In addition, this duty to
cooperate shall include making available any Reinsured Policy or New Policy
records which any party subsequently may require to resolve issues related to
claims or liabilities. The Company, the Administrator and the Reinsurer agree to
perform such additional acts and execute such additional documents and
agreements as may be necessary or desirable to carry out the purposes and
objectives of this Agreement, including, but not limited to, any amendments
hereto required by a regulator reviewing this Agreement in order to obtain the
approval of such regulator; provided, however, that such amendments do not
materially change the terms of this Agreement.
ARTICLE IX
ARBITRATION
9.1. Appointment of Arbitrators. In the event of any disputes
or differences arising under or relating in any way to this Agreement as to
which agreement between the parties hereto cannot be reached, then any party can
give notice, pursuant to Section 11.3 hereunder, to the other parties that such
dispute or difference shall be decided by arbitration. Three arbitrators will
decide any dispute or difference. The arbitrators must be disinterested officers
or retired officers of life and/or health insurance or life and/or health
reinsurance companies other than the parties to this Agreement or their
affiliates. Each of the contracting parties agrees to appoint one of the
arbitrators with the third, the "Umpire," to be chosen by the two
party-appointed arbitrators. In the event that either party should fail to
choose its arbitrator within twenty (20) Business Days following written
notification by the other party to do so, the requesting party may choose the
second arbitrator before entering upon arbitration. The two arbitrators shall
select a third arbitrator to act as "Umpire." In the event that the two
arbitrators shall not be able to agree on the choice of the Umpire within twenty
(20) Business Days following the appointment of the second, each arbitrator
shall nominate candidates within the five (5) Business Days thereafter, four of
whom the other shall decline, and the Umpire shall be chosen from the two
remaining candidates by drawing lots. Should the chosen Umpire decline to serve,
the candidate whose lot was not drawn shall be appointed. This process shall
continue until a candidate has agreed to serve.
9.2. Decision. The arbitrators shall consider customary and
standard practices in the life and health reinsurance business. They shall
decide by a majority vote of the arbitrators. There
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<PAGE>
shall be no appeal from their written decision. Judgment may be entered on the
decision of the arbitrators by any court having jurisdiction.
9.3. Expenses of Arbitration. Each party shall bear the
expense of its own arbitrator (whether selected by that party, or by the other
party pursuant to the procedures set out in Section 9.1) and related outside
attorneys' fees, and shall equally bear with the other party the expenses of the
third arbitrator and of the arbitration.
9.4. Site and Applicable Rules of Arbitration. Any arbitration
instituted pursuant to this Article shall be held in New York, New York and, to
the extent applicable, the Federal Arbitration Act shall govern the
interpretation and application of this Article.
9.5. Survival of Article. This Article shall survive for two
years following termination of this Agreement.
ARTICLE X
INDEMNIFICATION
10.1. The Company. The Company hereby agrees on demand to
indemnify and hold harmless the Reinsurer, and its respective officers,
directors and employees from and against any and all demands, actions,
proceedings, suits (by any Person), declaratory judgments and liabilities, paid
or incurred (including reasonable attorneys' fees), resulting from or arising
out of the breach of or failure to perform any of the duties, obligations,
covenants or agreements of the Company contained in this Agreement, the
Confidentiality Agreement, the Letter Agreement or from any declaratory
judgments initiated prior to the date one hundred twenty (120) days following
the Closing Date and/or Extra Contractual Liabilities relating to the Reinsured
Policies or New Policies issued by the Company.
10.2. The Administrator. The Administrator hereby agrees on
demand to indemnify and hold harmless the Reinsurer, and its respective
officers, directors and employees from and against any and all demands, actions,
proceedings, suits (by any Person), declaratory judgments and liabilities, paid
or incurred (including reasonable attorneys' fees), resulting from or arising
out of the breach of or failure to perform any of the duties, obligations,
covenants or agreements of the Administrator contained in this Agreement, the
Administrative Services Agreement, the Confidentiality Agreement, the Letter
Agreement, or from any declaratory judgments initiated prior to the date one
hundred twenty (120) days following the Closing Date and/or Extra Contractual
Liabilities relating to the Reinsured Policies or New Policies issued by the
Company. Additionally, should the Company be unable or unwilling to provide the
indemnification provided for by Section 10.1 hereof, then the Administrator
shall, on behalf of the Company, indemnify the Reinsurer pursuant to the terms
of Section 10.1.
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<PAGE>
10.3. The Reinsurer. The Reinsurer hereby agrees on demand to
indemnify and hold harmless the Company and the Administrator, and their
respective officers, directors and employees from and against any and all
demands, actions, proceedings, suits (by any Person), declaratory judgments and
liabilities, paid or incurred (including reasonable attorneys' fees), resulting
from or arising out of the breach of or failure to perform any of the duties,
obligations, covenants or agreements of the Reinsurer contained in this
Agreement, the Administrative Services Agreement, the Confidentiality Agreement
or the Letter Agreement.
10.4. Survival of Article. This Article shall survive for two
years following termination of this Agreement.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1. No Third Party Beneficiaries. This Agreement is between
the Company, the Reinsurer and the Administrator, and the performance of the
obligations of each party under this Agreement shall be rendered solely to the
other parties. In no instance shall anyone other than the Company, the Reinsurer
or the Administrator, or their successors or permitted assigns, have any rights,
benefits or remedies under this Agreement. Until the Reinsurer has reinsured a
Reinsured Policy or New Policy issued by the Company on an assumption
reinsurance basis pursuant to this Agreement, the Reinsurer shall not be liable
to any insured, contract owner, or beneficiary under any Reinsured Policy or New
Policy issued by the Company.
11.2. Headings, Exhibits and Schedules. Headings used herein
are inserted solely for the convenience of reference and are not a part of this
Agreement and shall not affect the terms hereof. The attached Exhibits and
Schedules are part of this Agreement.
11.3. Notices. All notices and communications hereunder shall
be in writing and shall be deemed to have been received three (3) Business Days
after mailing, or if by telefax or by hand, when received, and if by overnight
mail, on the next Business Day. Any written notice shall be by either certified
or registered mail, return receipt requested, or overnight delivery service
(providing for delivery receipt) or delivered by hand. All notices or
communications with the Reinsurer under this Agreement shall be addressed as
follows:
The Guardian Life Insurance Company of America
Bethlehem Business Park
3900 Burgess Place
Bethlehem, Pennsylvania 18017
Attention: Barry J. Petruzzi, Assistant Actuary, Group Disability SBU
Telefax No.: 610-807-7864
15
<PAGE>
All notices and communications with the Company under this
Agreement shall be directed to:
Arista Insurance Company
116 John Street
New York, New York 10038
Attention: Stanley S. Mandel, President
Telefax No.: 212-608-6473
All notices and communications with the Administrator under this Agreement shall
be directed to:
Arista Investors Corp.
116 John Street
New York, New York 10038
Attention: Stanley S. Mandel, Exec. Vice President
Telefax No.: 212-608-6473
11.4. Severability. If any term or provision of this Agreement
shall be held void, illegal, or unenforceable, the validity of the remaining
portions or provisions of this Agreement shall not be affected thereby;
provided, however, that the parties will cooperate to amend, if possible, this
Agreement so as to restore the original intent of the terms or provisions so
affected.
11.5. Assignment. This Agreement may not be assigned by any
party without the prior written consent of the other parties and any attempted
assignment without such consents shall be void.
11.6. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors and permitted assigns.
11.7. Execution in Counterparts. This Agreement may be
executed by the parties hereto in any number of counterparts, and by each of the
parties hereto in separate counterparts, each of which counterparts, when so
executed and delivered, shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
11.8. Amendments. This Agreement may be amended only by
written amendment executed by the parties hereto.
11.9. Waiver. The failure of the Company, the Administrator or
the Reinsurer to insist on strict compliance with this Agreement, or to exercise
any right or remedy under this Agreement, shall not constitute a waiver of any
rights provided under this Reinsurance Agreement, nor stop the parties from
thereafter demanding full and complete compliance nor prevent the parties from
exercising such a right or remedy in the future.
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11.10. Interpretation. No provision of this Agreement shall be
construed against any party on the ground that such party drafted the provision
or caused it to be drafted.
11.11. Entire Agreement. This Agreement, the Administrative
Services Agreement and the Confidentiality Agreement constitute the sole and
entire agreement and understanding between the parties hereto, and supersede all
prior agreements, whether oral or written, between the parties, with respect to
the subject matter hereof.
11.12. Governing Law and Forum. This Agreement shall be
governed by the laws of the State of New York, without giving effect to
principles of conflicts of law thereof. All parties hereby irrevocably and
unconditionally submit themselves to the exclusive jurisdiction of the Courts of
the State of New York for any actions, suits or proceedings of or relating to
this Agreement and the transactions contemplated thereby that cannot be resolved
pursuant to the provisions of Article IX hereof.
11.13. Confidentiality. Except as required by law, regulatory
authority or as required by the proxy rules of the Securities and Exchange
Commission to gain the approval of the Administrator's shareholders for the
transactions contemplated by this Agreement, none of the Company, the
Administrator or the Reinsurer shall make any public statements with respect to
the transactions contemplated hereby without prior consultation with the other.
Except as required by law or regulatory authority, none of the Company, the
Administrator or the Reinsurer shall publicly disclose the Purchase Price or
other terms of the transfer proposed herein, but this restriction shall
terminate if such Purchase Price and terms shall otherwise become public
knowledge. In the event that the Reinsurer or its representative are requested
or required by oral questions, interrogatories, requests for information or
documents, subpoena, civil investigation, demand or similar process to disclose
any terms or information regarding such transfer it may disclose any terms or
information regarding such transfer provided, however, that to the extent
practicable under the circumstances the Reinsurer shall give the Company
reasonable notice of the order or request before making the disclosure provided
that such notice can be provided without cost to the Reinsurer. This Section
11.13 shall survive termination of this Agreement and the Administrative
Services Agreement. Notwithstanding any of the foregoing, the parties agree to
adhere to the terms and conditions of the Confidentiality Agreement.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives.
ARISTA INSURANCE COMPANY:
By: Stanley S. Mandel
--------------------------------------
Name: Stanley S. Mandel
Title: President
ARISTA INVESTORS CORP.:
By: Stanley S. Mandel
--------------------------------------
Name: Stanley S. Mandel
Title: Vice President
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA:
By: Sanford Herman
--------------------------------------
Name: Sanford Herman
Title: V.P., Group Pricing
and Standards
18
<PAGE>
EXHIBIT A
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
Bethlehem, Pennsylvania
CERTIFICATE OF ASSUMPTION
[Policy Number]
You are hereby notified that THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA ("The Guardian") has, effective as of , 199 (the "Effective
Date"), assumed liability for your policy of insurance with ARISTA INSURANCE
COMPANY ("Arista").
From and after , 199 , all references in the policy to Arista
are hereby changed to The Guardian. The Guardian has assumed all liabilities,
rights and duties under your policy.
The terms, obligations and values under your policy will not
be affected by the change in insurance companies.
All correspondence and inquiries, including notices of claims,
should be submitted to:
The Guardian Life Insurance Company of America
c/o Arista Investors Corp.
116 John Street
New York, New York 10038
This Certificate of Assumption forms a part of and should be
attached to your insurance policy issued to you by Arista.
IN WITNESS WHEREOF, THE GUARDIAN LIFE INSURANCE COMPANY OF
AMERICA has caused this Certificate of Assumption to be duly signed and issued.
----------------------------- ----------------------------------
Secretary President
<PAGE>
Schedule 1
REINSURANCE REPORT
1. In Force by Policy Form
i. DBL Policy Count ___________________
ii. Reinsured Policy Count ___________________
iii. Reserves & Liabilities ___________________
2. Deficiency ___________________
3. Redundancy ___________________
4. Purchase Price ___________________
5. Reinsurance Premium:
= (1) + (2) - (3) - (4) ___________________
<PAGE>
Schedule 2
LIST OF EXISTING POLICIES
<PAGE>
Schedule 3
LIST OF NEW POLICIES ISSUED BY THE COMPANY
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
and
ARISTA INVESTORS CORP.
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS.................................................6
ARTICLE II APPOINTMENT.................................................7
ARTICLE III TERM........................................................7
ARTICLE IV REGULATORY APPROVALS........................................7
ARTICLE V SERVICES PROVIDED BY THE ADMINISTRATOR......................8
A. Generally...................................................8
B. Underwriting Administration................................11
C. Claims Administration......................................11
D. Contract/Issue Administration..............................11
E. Billing Administration.....................................11
F. Other General Services.....................................11
ARTICLE VI FURTHER AGREEMENTS.........................................12
A. Fees for Services..........................................12
B. Specific Actions...........................................12
ARTICLE VII STANDARDS OF PERFORMANCE...................................13
A. Generally..................................................13
B. Standards of Performance...................................14
ARTICLE VIII BANK ACCOUNTS..............................................14
A. Accounts...................................................14
B. Escheat....................................................14
C. Banking Functions..........................................14
D. Assignment.................................................15
ARTICLE IX REPORTS AND RECORDS........................................15
A. Records and Access to Records..............................15
B. Ownership..................................................16
C. Audit......................................................17
ARTICLE X LEGAL ACTIONS..............................................17
ARTICLE XI TERMINATION................................................17
2
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A. Termination of Administrative Services Agreement...........17
B. Events of Default..........................................18
C. Termination Upon Event of Default..........................19
D. Transition Following Termination...........................19
E. Return of Files............................................20
F. Partial Termination........................................20
G. Non-Compete................................................21
H. Continuation of Certain Obligations........................21
ARTICLE XII REGULATORY MATTERS.........................................21
A. Financial Obligations......................................21
B. Responses to Regulatory Authorities........................21
C. Reviews and Audits by Regulatory Authorities...............22
D. Cooperation................................................22
E. Notice to Insureds.........................................23
ARTICLE XIII ARBITRATION................................................23
ARTICLE XIV CONFIDENTIALITY............................................23
A. Generally..................................................23
B. Individuals................................................24
C. Software...................................................24
D. Release of Information.....................................24
ARTICLE XV INDEMNIFICATION............................................25
ARTICLE XVI INSURANCE..................................................25
A. Liability Insurance........................................25
B. Fidelity Bond..............................................25
C. Other Insurance............................................25
D. Notice to the Reinsurer....................................26
E. Failure to Obtain Insurance................................26
ARTICLE XVII GENERAL PROVISIONS.........................................27
A. Cooperation................................................27
B. Amendment; Waivers.........................................27
C. Entire Agreement...........................................27
D. Relationship...............................................28
E. Errors and Omissions.......................................28
F. Best Efforts...............................................28
G. Governing Law and Forum....................................28
H. Invalidity.................................................29
I. Counterparts...............................................29
3
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J. No Third Party Beneficiaries...............................29
K. Assignment.................................................29
L. Headings...................................................30
M. Preparation................................................30
N. Reasonableness.............................................30
O. Notices....................................................30
P. Consistency................................................31
Annex A (Underwriting Administration Services)...............................A-1
Annex B (Claims Administration Services).....................................B-1
Annex C (Contract/Issue Administration Services).............................C-1
Annex D (Billing Administration Services)....................................D-1
Annex E (Other General Administration Services)..............................E-1
Annex F (Fees)...............................................................F-1
Annex G (Bank Accounts)......................................................G-1
4
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
This ADMINISTRATIVE SERVICES AGREEMENT dated as of
September 23, 1998 (hereinafter referred to as the "Administrative Services
Agreement") is made and entered into by and between THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA (the "Reinsurer"), a life insurance company organized and
existing under the laws of the State of New York, and ARISTA INVESTORS CORP.
(the "Administrator"), a holding company organized and existing under the laws
of the State of Delaware.
WHEREAS, Arista Insurance Company (the "Company"), the
Administrator and the Reinsurer are concurrently entering into an Assumption
Reinsurance Agreement as of the same date hereof, pursuant to which the Company
is exiting the Statutory, Super Statutory and Voluntary DBL lines of business by
ceding all of its Reinsured Policies, and the Reinsurer is reinsuring, on an
assumption reinsurance basis, all such Reinsured Policies;
WHEREAS, under the Assumption Reinsurance Agreement, the
Reinsurer has assumed, as of the Effective Date, all administrative and other
services in respect of Reinsured Policies;
WHEREAS, the Administrator desires to provide the Reinsurer
with the necessary administrative and other services in respect of all such
Reinsured Policies as well as Existing Policies and New Policies as the
Reinsurer's subcontractor for the period specified hereunder;
WHEREAS, this Administrative Services Agreement is intended to
implement the provisions of the Assumption Reinsurance Agreement providing for
an orderly transition of the New York Statutory, Super Statutory and Voluntary
Disability Benefits Law business from the Company to the Reinsurer from and
after the Effective Date; and
WHEREAS, the Administrator shall assist the Reinsurer with the
marketing of New York Statutory, Super Statutory and Voluntary Disability
Benefits Law plans to eligible Policyholders (as hereinafter defined).
NOW, THEREFORE, in consideration of the premises and mutual
promises of the parties hereto, they hereby covenant and agree as follows:
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<PAGE>
ARTICLE I
DEFINITIONS
Terms not defined herein shall have the meanings ascribed to
them in the Assumption Reinsurance Agreement.
The following terms, when used in this Administrative Services
Agreement, shall have the meanings set forth herein. The terms defined below
shall be deemed to refer to the singular or plural as the context requires.
"Administered Contracts" shall have the meaning set forth in
Article II.
"Administrative Services" shall have the meaning set forth in
Article V.
"Claim" shall mean any benefit or other amount which may be
payable to a Policyholder or member pursuant to the Assumption Reinsurance
Agreement or any claim which may be payable to a Policyholder, beneficiary,
member or provider that has received an assignment of benefits under an
Administered Contract.
"Claimant" shall mean any person who has a claim.
"DBL" shall mean the Disability Benefits Law as codified in
Article 9 of the New York State Workers' Compensation Law pursuant to which
Statutory, Super Statutory and Voluntary Disability Benefits Law policies are
issued.
"Demands" shall have the meaning set forth in Article VII.B.
hereunder.
"Policyholder" shall mean the holder of an Administered
Contract.
"Standards" shall have the meaning set forth in Article VII.B.
"TPA" shall have the meaning set forth in Article V.A.11.
6
<PAGE>
ARTICLE II
APPOINTMENT
The Reinsurer hereby appoints the Administrator as its
exclusive representative to provide administrative and other services with
respect to all Reinsured Policies under the Assumption Reinsurance Agreement and
all Existing Policies and New Policies (collectively referred to herein as the
"Administered Contracts"), all on the terms, and subject to the limitations and
conditions, set forth in this Administrative Services Agreement. The
Administrator hereby accepts such appointment by the Reinsurer as its exclusive
provider of Administrative Services with respect to all Administered Contracts,
and agrees to perform the Administrative Services, all on the terms, and subject
to the limitations and conditions, set forth in this Administrative Services
Agreement. Subject to the limitations set forth herein, the Administrator shall
have any and all required power, either express or implied, to carry out its
duties and obligations under this Administrative Services Agreement, including,
without limitation, the power and authority to execute documents in the name of
the Reinsurer.
ARTICLE III
TERM
This Administrative Services Agreement shall become effective
as of the Effective Date and shall continue for a period ending five years after
the Effective Date, unless terminated earlier pursuant to Article XI; provided,
however, that this Administrative Services Agreement may be renewed at the end
of the initial five year period, at the sole option of the Reinsurer, annually
for additional one year periods.
ARTICLE IV
REGULATORY APPROVALS
It shall be a condition precedent to the effectiveness of this
Administrative Services Agreement that the Reinsurer and the Administrator shall
have obtained all prior regulatory approvals necessary, if any, for the
consummation and performance of this Administrative Services Agreement.
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ARTICLE V
SERVICES PROVIDED BY THE ADMINISTRATOR
A. Generally.
1. While this Administrative Services Agreement is in effect,
except as provided herein, the Administrator shall provide Administrative
Services (as hereinafter defined) with respect to the Administered Contracts.
2. (a) "Administrative Services" shall mean all services
relating to the issuance, administration or renewal of Administered Contracts;
provided, however, that Administrative Services shall not include any services
which applicable law prohibits or otherwise do not permit to be provided under
this Administrative Services Agreement.
(b) The Administrative Services provided hereunder by the
Administrator shall include but not be limited to: underwriting new and renewal
business; pricing of risk; premium and fee administration including preparing,
distributing and collecting Policyholder bills; transmitting premium and billing
statements to the Reinsurer; policy administration; Policyholder services;
claims administration including investigating, calculating and paying claims;
provision of benefit statements and of certain tax reporting data relating to
the benefit payments; the issuance, preparation and amending of contracts,
policies, endorsements, policy kits (including welcome letters, policy, claim
forms and filing instructions), forms and documents relating to any Administered
Contract; maintenance of files (including, without limiting the foregoing,
financial and tax information) relating to any Administered Contract in
accordance with statutory and generally accepted accounting principles
consistently applied, where applicable; maintenance of forms and policy manuals;
responding to all required DBL forms and filings including any required
statistical data; maintenance of agent records and lists, and transmittal to
agents of all required communications, all as related to any Administered
Contract, including but not limited to, rate revision notices; agents'
compensation calculations and support as related to the Administered Contracts;
provision of other information and data; providing statistical data including
paid versus incurred claim table to assist in the establishing of reserves;
electronic data processing; regulatory compliance; office services; accounting,
financial and other record-keeping services; management of relationships with
third party vendors and others that provide services with respect to any
Administered Contract; providing updates on all significant New York DBL
regulatory changes including, at a minimum, an annual status report of the DBL
regulatory climate in New York; and any and all other services incidental to the
administration of any Administered Contract.
3. The Administrator shall provide Administrative Services in
accordance with and subject to the terms of this Administrative Services
Agreement. The Reinsurer shall reasonably cooperate with the Administrator in
connection with the provision of such services as requested by the
Administrator.
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4. (a) To the extent that the Administrator pays costs for
which the Reinsurer is liable pursuant to this Article, the Reinsurer shall
reimburse the Administrator for such amounts paid by the Administrator, net of
any offset, credit or return that directly reduces such costs. To the extent
that the Reinsurer pays or reimburses the Administrator for any costs, and the
Administrator obtains an offset, credit or return that directly reduces such
costs, the Administrator shall reimburse the Reinsurer for such amounts if not
previously netted.
(b) To the extent the Reinsurer pays costs or expenses
for which the Administrator is liable pursuant to this Article, the
Administrator shall reimburse the Reinsurer for such amounts paid by the
Reinsurer, net of any offset, credit or return that directly reduces such costs.
To the extent that the Administrator pays or reimburses the Reinsurer for any
costs, and the Reinsurer obtains an offset, credit or return that directly
reduces such costs, the Reinsurer shall reimburse the Administrator for such
amounts if not previously netted.
(c) A party shall reimburse the other party within
thirty (30) Business Days of the delivery of any request for reimbursement,
together with any necessary supporting documentation therefor. A party shall
reimburse the other party within thirty (30) Business Days of the receipt of any
offset, credit or return for which the other party is entitled to reimbursement.
Any amount not paid within such thirty day period shall bear simple interest at
the Chase Bank prime rate plus two points until the date of payment.
5. In performing the Administrative Services, the
Administrator agrees to use commercially reasonable efforts to keep informed of
and comply in all material respects with applicable laws, rules and regulations
relating to the Administered Contracts and the performance by the Administrator
of its duties and obligations under this Administrative Services Agreement.
6. The Administrator represents and warrants that it will have
and maintain, from the Closing Date, the necessary facilities, equipment and
personnel to perform its duties and obligations hereunder.
7. All duties and responsibilities undertaken by the
Administrator hereunder shall be performed by officers or employees of the
Administrator or its subcontractors; provided, however, that any subcontractors
of the Administrator hereunder must receive the prior written approval of the
Reinsurer. The Administrator agrees to use commercially reasonable efforts to
maintain a staff of competent and trained personnel and sufficient equipment and
supplies to perform the activities covered by this Administrative Services
Agreement in accordance with all requirements specified by this Administrative
Services Agreement. Whenever the Administrator utilizes its employees to perform
Administrative Services for the Administrator pursuant to this Administrative
Services Agreement, such employees shall at all times remain subject to the
direction and control of the Administrator. It is understood by the
Administrator that in performing its obligations
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under this Administrative Services Agreement it is acting solely as an
independent contractor. The Reinsurer shall exercise no control whatsoever over
the hours, office location, rentals, employees or travel of the Administrator or
manner of performance of duties hereunder except insofar as provided herein. The
Administrator's power of authority shall extend no further than is expressly
stated hereunder and no power of authority shall be implied from the granting or
denial of power specifically mentioned hereunder.
8. The Administrator and the Reinsurer shall each comply with
all applicable federal, state and local laws and regulations in any advertising
or other written and verbal communications in connection with the promotion of
the DBL program. The Reinsurer shall have the right of prior approval in its
absolute discretion over any literature, advertising or other promotional
materials that are directly or indirectly necessary for the DBL program or on
which the name of the Reinsurer appears. The Reinsurer shall distribute or make
available such literature, advertising or other promotional materials to its
agents or brokers for use in their promotion of the DBL program.
9. The Administrator and the Reinsurer each shall from time to
time appoint one or more individuals who shall serve as authorized
representative(s) of such party for the purpose of carrying out this
Administrative Services Agreement. Such persons shall be authorized to act on
behalf of their respective parties as to matters pertaining to this
Administrative Services Agreement. Each party shall notify the other, in
writing, as to the name, address, and telephone number for any such authorized
representative, and of any replacement thereof. Management meetings in respect
of this Administrative Services Agreement and such other business as may be
necessary for the successful continuation of the Reinsurer's DBL program shall
be held between the parties hereto in the New York offices of either of the
parties quarterly, or less frequently at the Reinsurer's request.
10. The Administrator and the Reinsurer shall cooperate to
develop a succession plan during the first two years following the Effective
Date in order to implement a transfer of management of the Administrator to a
person acceptable to the Reinsurer after the second year following the Effective
Date, provided this Administrative Services Agreement is not earlier terminated
pursuant to the provisions hereunder.
11. The Reinsurer hereby reserves the right of first refusal
to purchase the Administrator's administrative servicing business (the "TPA")
should at any time the Administrator:
(i) permit any other Person to gain operational control
of the Administrator's TPA, or
(ii) agree to any arrangement which would end the
existence of the Administrator's TPA.
Should the Administrator receive any offers to enter into
any of the things
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listed in (i) or (ii) above, it shall promptly, and before taking any action
thereon, give notice to the Reinsurer pursuant to Article XVII.O. and provide
all significant details. Should the Reinsurer, upon receiving the aforementioned
notice, desire to exercise any such right of first refusal on the TPA, it shall
do so by giving the Administrator not more than thirty (30) days prior written
notice from the receipt of the forementioned notice from the Administrator.
B. Underwriting Administration.
The underwriting administration obligations of the
Administrator under this Administrative Services Agreement shall be as set forth
on Annex A, attached hereto.
C. Claims Administration.
The claims administration obligations of the Administrator
under this Administrative Services Agreement shall be as set forth on Annex B,
attached hereto.
D. Contract/Issue Administration.
The contract/issue administration obligations of the
Administrator under this Administrative Services Agreement shall be as set forth
on Annex C, attached hereto.
E. Billing Administration.
The billing administration obligations of the Administrator
under this Administrative Services Agreement shall be as set forth on Annex D,
attached hereto.
F. Other General Services.
In addition to the foregoing obligations of the Administrator,
the Administrator shall also be obligated under this Administrative Services
Agreement for those obligations set forth on Annex E, attached hereto.
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ARTICLE VI
FURTHER AGREEMENTS
A. Fees for Services.
1. The Reinsurer agrees to pay the Administrator fees for the
Administrative Services rendered hereunder according to the fee structure
outlined on Annex F, attached hereto.
2. (a) Each party shall provide to the other party as agreed
upon by the parties, a statement, including appropriate documentation, for the
fees charged for services performed hereunder.
(b) Each party shall pay all such fees within five(5)
Business Days of receipt of any statements, including appropriate documentation,
which shall be delivered from the other party setting forth the amounts payable.
If any amount is not paid within such five (5) Business Day grace period, then
the non-defaulting party shall give written notice of such default to the other
party who shall have two (2) Business Days from such notice to cure. Upon
failure to cure such default in payment, unpaid amounts shall bear simple
interest at the daily average rate of the Chase Bank prime rate plus two points
from the day immediately following the cure period until the date of payment.
B. Specific Actions.
1. The Administrator shall take no action with respect to the
Administered Contracts without obtaining the prior written consent of the
Reinsurer, except to the extent required by applicable law or as required by the
provisions of the applicable Administered Contracts or as required or permitted
by this Administrative Services Agreement.
2. The Administrator shall make no change, modification,
amendment or renewal of any of its Administered Contracts or any other
arrangements with a third party to provide services relating to the Administered
Contracts without the prior written consent of the Reinsurer, except to the
extent required by applicable law or as required by the provisions of the
applicable Administered Contract or as required or permitted by this
Administrative Services Agreement; provided, however, that the Reinsurer
consents to the current arrangements with Wolf & Shulman, Apparel Disability
Corporation, Post and Kurtz, and Group Plan Administrators. Notwithstanding
anything to the contrary herein, the Administrator agrees that upon the request
of the Reinsurer, the Administrator will not renew an Administered Contract
unless required to do so by applicable law or the provisions of an Administered
Contract.
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3. The Administrator may not enter into any agreement or incur
any obligation on behalf of the Reinsurer except with the written permission of
the Reinsurer or as otherwise provided hereunder.
4. All costs of litigation including, but not limited to, any
judgments and settlements in regard to Claims will be borne by the Reinsurer
except as otherwise provided hereunder or under the Assumption Reinsurance
Agreement. In all such litigation of Claims, the Reinsurer shall control, direct
and supervise the litigation proceedings, including settlements. Notwithstanding
the foregoing, the Administrator shall be entitled to participate in the defense
of any Claim by counsel of its own choosing, the costs of which shall be borne
by the Administrator. If the Administrator shall participate in the defense of
such Claim, the same shall not be settled as it pertains to the Administrator
without its prior written consent. Any copies of files or records pertaining to
litigation which are forwarded to the Administrator by the Reinsurer or to the
Reinsurer by the Administrator shall be maintained and preserved for its purpose
of records inspection or examination by appropriate authorities.
ARTICLE VII
STANDARDS OF PERFORMANCE
A. Generally.
Subject to the provisions of this Administrative Services
Agreement, the Administrator agrees that in providing the services under this
Administrative Services Agreement, it shall: (i) conduct itself in accordance
with all reasonable commercial and professional standards of care, diligence and
good faith which are substantially equal in quality to the standards the Company
applied prior to the Effective Date, provided that such standards are not
inconsistent with prudent management practices in the DBL business generally,
and shall generally act in such a way as to preserve goodwill toward the
Reinsurer on the part of the general public, customers, and all those having
business relations with the Reinsurer; (ii) comply with all material laws,
regulations and orders applicable to the Reinsurer with respect to the
Administered Contracts and to the conduct of the activities contemplated hereby;
(iii) comply with all terms, conditions and material standards of performance of
all Administered Contracts; and (iv) with respect to the Administered Contracts,
carry on its affairs in the ordinary course of business and not make or
institute any unusual method of doing business, GAAP or SAP accounting or
operation.
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B. Standards of Performance.
Prior to the Closing Date, the Company shall provide the
Reinsurer access to all of the Company's standards, procedures, policies,
operating guidelines, practices and instructions (collectively, the
"Standards"), which are in effect on the Effective Date, and which the
Administrator shall establish and employ to administer the Administered
Contracts, and the Reinsurer shall acknowledge receipt of such Standards. The
Administrator shall be solely liable for all claims, liabilities, demands,
actions, proceedings, damages, including punitive, consequential or Extra
Contractual Obligations and obligations in excess of original policy limits,
losses, deficiencies, fines, penalties, costs or expenses, including reasonable
attorneys' fees ("Demands") relating to or arising out of any act or omission of
the Administrator with respect to the adoption, rejection, modification or
application of such Standards by the Administrator.
ARTICLE VIII
BANK ACCOUNTS
A. Accounts.
1. Consistent with their respective obligations to pay Claims
with respect to the Administered Contracts, the Reinsurer and the Administrator
shall establish or maintain disbursement and claims paying accounts owned by and
in the name of the Reinsurer or the Administrator as the case may be.
2. As between the parties, the rights, responsibilities and
obligations of each party with respect to such bank accounts shall be as set
forth on Annex G, attached hereto.
B. Escheat.
Each party shall retain responsibility for all applicable
escheat administration services with respect to such bank accounts established
by it, including check escheat and related record keeping. Each party agrees to
provide such information available to it and to maintain and transmit such
records with respect to such bank accounts to reflect such information as may be
required by the other party with respect to escheatable amounts.
C. Banking Functions.
Each party, at its own expense, shall retain responsibility
for all banking functions with respect to all such bank accounts of such party,
including performing daily operational activities, account maintenance and
contracts with respective banks, and bank reconciliations. These functions shall
be performed in accordance with the applicable standards set forth hereunder.
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D. Assignment.
At the Closing Date, the Administrator shall assign, or cause
the Reinsurer's name to be added to, all bank accounts theretofore established
by the Administrator pursuant to this Article VIII.
ARTICLE IX
REPORTS AND RECORDS
A. Records and Access to Records.
1. The Reinsurer shall on the Closing Date, or as soon
thereafter as is practicable:
(i) transfer to the Administrator in a
commercially reasonable manner the files, or copies thereof, owned by
it that relate exclusively to each Administered Contract, or, if not
exclusively so relating, copies of those portions of such files
applicable to each Administered Contract to the extent such files are
not already in the possession of the Administrator and that it is
reasonable and practicable; provided, however, that if a file or
portion thereof relating to an Administered Contract can not be
transferred or a copy can not be provided to the Administrator pursuant
to Article IX B., then it will be made available for inspection by the
Administrator; and
(ii) make available to the Administrator
for use by the Administrator with respect to the services provided
pursuant to this Administrative Services Agreement, certain production
systems as agreed upon by the parties.
2. (a) If the transfer of any files requires the consent of
any Person, the Reinsurer shall use all reasonable good faith efforts to secure
such consent on or prior to the date such transfer is to be made. Where such
consent cannot be obtained, the Reinsurer shall not be required to transfer the
applicable files to the Administrator but shall provide copies of such files
unless the absence of such consent prohibits providing copies in which case the
Reinsurer shall provide the Administrator with access to such files.
(b) Nothing in this Section shall require the Reinsurer to
transfer to the Administrator any original files which the Reinsurer is required
by any applicable law or contractual obligations to retain, provided that the
Reinsurer shall provide copies of such original files to the Administrator.
3. During the term of this Administrative Services Agreement
(or thereafter, if required by law), the Administrator shall retain all files of
the Reinsurer or produced by the Administrator on behalf of the Reinsurer
pertaining to this Administrative
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Services Agreement, to the extent such files are required by applicable law to
be retained by either the Administrator or the Reinsurer.
4. To the extent permitted or not prohibited by applicable
law, for the duration of this Administrative Services Agreement, and at any time
(without limitation) as may be required in the judgment of the Reinsurer for the
Reinsurer to comply with any law or to perform its obligations or
responsibilities under this Administrative Services Agreement, the Reinsurer and
its authorized representatives may from time to time reasonably request, and the
Administrator shall:
(i) provide, at reasonable times during
normal business hours: full and open access to examine the files of the
Administrator pertaining to (x) any of the Administered Contracts and (y) to the
services to be provided under this Administrative Services Agreement; and
(ii) discuss such services with the
employees and agents of the Administrator who are knowledgeable therewith, so
that the Reinsurer shall have sufficient opportunity to make whatever
investigation it shall deem necessary and desirable in connection with the
transactions contemplated by this Administrative Services Agreement.
Such access and opportunity shall be exercised by the
Reinsurer and such representatives in a manner that shall not interfere
unreasonably with the operations of the Administrator. Such access shall include
the right of the Reinsurer to make and retain copies of any files to the extent
that the Reinsurer reasonably determines that it requires copies of such files
in order to carry out the transactions contemplated by this Administrative
Services Agreement or for any legitimate business purpose contemplated by this
Administrative Services Agreement. Notwithstanding the first sentence of this
subsection, no request by the Reinsurer shall diminish or otherwise affect any
of the obligations or responsibilities of the Administrator under this
Administrative Services Agreement.
5. Each party hereto shall pay all storage and related
expenses associated with any files, and copies thereof, which it retains in its
possession.
B. Ownership.
1. All original files or suitable copies, which are held by
the Administrator or transferred to the Administrator by the Reinsurer or
produced by the Administrator for the benefit of the Reinsurer pursuant to this
Administrative Services Agreement, shall be or remain the property of the
Reinsurer unless it is otherwise required by applicable law or regulations that
the Administrator retain ownership. At such time as the Administrator determines
it is no longer necessary under applicable law or regulation to retain any file
or copy thereof which is the property of the Reinsurer, it may elect to return
such file or copy thereof to the Reinsurer. Notwithstanding anything here to the
contrary, the
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Administrator shall have the right to retain suitable copies of all files
(originals and copies) pursuant to this Administrative Services Agreement.
C. Audit.
1. For so long as there are Administered Policies issued or
renewed by the Administrator, the Reinsurer may reasonably conduct, at its own
expense (or have conducted on its behalf) an audit of the Administrator with
respect to such files and other relevant documents in the possession of the
Administrator upon reasonable written notice to the Administrator during normal
business hours and solely for the purpose of: (i) responding to any regulatory
investigation or inquiry or (ii) investigating or defending a Claim or a
complaint by a third party against the Reinsurer relating to an Administered
Contract.
ARTICLE X
LEGAL ACTIONS
Neither the Reinsurer nor the Administrator shall have the
authority to institute, prosecute or maintain any legal or regulatory
proceedings on behalf of the other party without the prior written consent of
such other party except to the extent specified by this Administrative Services
Agreement. Notwithstanding any other provision of this Administrative Services
Agreement, no defense shall be interposed and no settlement shall be entered
into or agreed to by either party without the prior written consent of the other
party which consent shall not be unreasonably withheld except that such party in
its sole discretion may withhold consent, if such defense or settlement could
materially affect such party's licenses, or its relationship with any regulatory
or governmental authority.
ARTICLE XI
TERMINATION
A. Termination of Administrative Services Agreement.
This Administrative Services Agreement may be terminated by
the Reinsurer during the full term of this Administrative Services Agreement
pursuant to either (i) Section C. of this Article or (ii) after the first two
years of the initial five year term of this Administrative Services Agreement in
the event that the Reinsurer desires a transfer of the Administrative Services
from the Administrator to the Reinsurer or (iii) during the term of this
Administrative Services Agreement in the event the Reinsurer exercises its right
of first refusal pursuant to Article V.A.11. conditioned upon the Reinsurer
giving the Administrator written notice of such termination at least ninety (90)
days in advance of the date of acquisition of the TPA by the Reinsurer. This
Administrative Services Agreement will,
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unless earlier terminated by the Reinsurer pursuant to this Article XI,
terminate automatically upon the termination of all of the Reinsurer's
liabilities and obligations under the Administered Contracts and the termination
of all of its and the Administrator's obligations under the Assumption
Reinsurance Agreement and this Administrative Services Agreement.
B. Events of Default.
Any one or more of the following shall constitute an Event of
Default:
1. The Administrator fails to perform or observe any material
covenant, term or condition contained herein, including, but not
limited to, breach of performance or payment requirements, and such
failure or breach shall (i) not have been cured within thirty (30)
days, or such lesser period as shall be necessary to avert any imminent
revocation of the Reinsurer's license to do an insurance business in
any jurisdiction, after written notice by the Reinsurer of such failure
or breach, (ii) have caused revocation of the Reinsurer's license to do
an insurance business in any jurisdiction or a material adverse effect
with respect to the Reinsurer, and (iii) have been finally decided
pursuant to the procedures referenced in Article XIII hereof; provided,
however, that this subparagraph (iii) shall not apply if the
Reinsurer's license to do an insurance business in a jurisdiction would
be revoked before the entry of a final arbitration decision pursuant to
the procedures referenced in Article XIII hereof. Any notice delivered
by the Reinsurer pursuant to this subparagraph shall be accompanied by
a demand for a plan of cure, which plan of cure shall be delivered by
the Administrator to the Reinsurer within ten (10) days of the receipt
of such demand.
2. The termination prior to the Closing Date or
non-effectiveness of the Assumption Reinsurance Agreement;
3. If the Administrator shall (i) commence a voluntary case or
other proceeding seeking rehabilitation, conservation, reorganization,
liquidation or other relief with respect to itself or its debts under
any insolvency, conservatorship, receivership, rehabilitation,
liquidation or other similar law now or hereafter in effect that
authorizes the rehabilitation, reorganization, conservation or
liquidation of the Administrator or its debt or the appointment of a
trustee, receiver, conservator, liquidator, receiver, custodian or
other similar official of it or any substantial part (i.e., more than
50%) of its property, or (ii) consent to any such relief or to the
appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, or (iii)
make a general assignment for the benefit of creditors, or (iv) take
any corporate action to authorize any of the foregoing;
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4. Any involuntary case or other proceeding shall be commenced
against the Administrator seeking rehabilitation, conservation,
reorganization, liquidation or other relief with respect to it or its
debts under any insolvency, conservatorship, receivership,
rehabilitation, liquidation or other similar law now or hereafter in
effect seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part
(i.e., more than 50%) of its property, and such involuntary case or
other proceeding shall remain undismissed and unstayed for a period of
sixty (60) days; or
5. An order is entered by a court of competent jurisdiction
affecting substantially all (i.e., more than 50%) of the property or
affairs of the Administrator under insolvency, conservatorship,
receivership, rehabilitation, liquidation or other similar laws as now
or hereafter in effect and such order shall remain undismissed and
unstayed of a period of sixty (60) days.
6. Stanley S. Mandel fails to maintain control of the day to
day operations of the Administrator at any time during the first five
years following the Effective Date; provided, however, that in the
event Stanley S. Mandel becomes disabled and is unable to maintain such
control for a period exceeding sixty days, then the Administrator shall
appoint a person to replace Stanley S. Mandel until such time as
Stanley S. Mandel is able to resume control of operations; provided,
further, that any such replacement for Stanley S. Mandel must meet with
the acceptance of the Reinsurer, who shall not unreasonably withhold
such acceptance.
7. The Administrator at any time (i) permits any other Person
to gain operational control of its TPA, or (ii) agrees to any
arrangement which would end the existence of its TPA, without giving
the Reinsurer a right of first refusal pursuant to Section V.A.11.
8. The Administrator fails to maintain a minimum shareholder
equity on its balance sheet of not less than three and one half percent
(3.5%) of the gross premiums earned on the Administered Contracts in
the prior calendar year and the Administrator continues such failure
after written notice from the Reinsurer to cure such failure within ten
(10) Business Days from the delivery of such notice.
C. Termination Upon Event of Default.
Upon the occurrence of an Event of Default as described in
paragraph B above, the Reinsurer may, at its option, terminate this
Administrative Services Agreement by giving sixty (60) days prior written notice
to the Administrator of its termination of this Administrative Services
Agreement.
D. Transition Following Termination.
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In the event of termination under this Article XI, the
Reinsurer and the Administrator shall effect a transition and an orderly
transfer of responsibilities as follows:
1. Transition. The Administrator will take such actions
reasonably requested by the Reinsurer (including without limitation
continuing to provide such services as are necessary until transfer of
administration to another service provider or the Reinsurer), and will
reasonably cooperate with the Reinsurer, to facilitate the transition
of the services to another service provider selected by the Reinsurer
or to the Reinsurer.
2. Transfer of Information to the Reinsurer. At the
Reinsurer's option and request, the Administrator shall perform those
steps necessary, at the expense of the Administrator in the case of
default, to transfer all Reinsurer property and information to the
Reinsurer or a party designated by the Reinsurer, including, but not
limited to, insurance policies, financial and technical information and
data, and the Administrator shall promptly deliver all such property
and information to the Reinsurer or the Reinsurer's designee.
3. Obligations Regarding Covered Policies. The Reinsurer shall
assume all of the obligations of the Administrator hereunder relating
to the provision of administrative services with respect to the
Administered Contracts.
E. Return of Files.
Upon termination of this Administrative Services Agreement,
under this Article XI, all files pertaining to this Administrative Services
Agreement shall be returned or transferred to the Reinsurer in a commercially
reasonable manner at the expense of the requesting party promptly after written
request therefor shall have been received from such requesting party, provided,
however, that the Administrator shall be permitted to make copies of such files
as may be required for it to meet its obligations and responsibilities and
engage in the transactions contemplated by the Assumption Reinsurance Agreement
or this Administrative Services Agreement or for other good and valid business
reasons contemplated by such agreements, including but not limited to the
obligations of such other party to comply with applicable law or regulatory
requirements or the requirements of Administered Contracts.
F. Partial Termination.
If, as a result of the loss of any license, authorization or
accreditation, the Administrator is unable to perform its obligations hereunder,
then this Administrative Services Agreement shall be terminated as to the
affected obligations only; provided, however, that in such event, the
Administrator shall have arranged for the services of a third party to perform
such affected obligations.
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G. Non-Compete.
With respect to any Policyholder insured by the Reinsurer
under a DBL program on the date of termination hereunder, the Administrator
shall not for a period of twelve (12) consecutive months thereafter, without the
written consent of the Reinsurer, knowingly recommend to the Policyholder that
it convert, cancel or otherwise modify its insurance products that are issued by
the Reinsurer so that such Policyholder can, or will, purchase the insurance
products of another Administrator.
H. Continuation of Certain Obligations.
Notwithstanding the termination of this Administrative
Services Agreement, the obligations of the Administrator or of the Reinsurer, as
the case may be, under Article IX.A.3., Article IX.C., Article XI.D., Article
XI.E., Article XI.G., Article XI.H., Article XIII, Article XIV, Article XV and
Article XVII, paragraphs B, G and O shall remain in full force and effect. In
addition, notwithstanding the termination of this Administrative Services
Agreement, the Administrator shall pay to the Reinsurer all amounts due and
owing to the Reinsurer through the termination of this Administrative Services
Agreement, and the Reinsurer shall pay to the Administrator all amounts due and
owing to the Administrator through the termination of this Administrative
Services Agreement.
ARTICLE XII
REGULATORY MATTERS
A. Financial Obligations.
The Administrator shall be solely liable for any governmental
or other regulatory proceedings relating to the Administered Contracts or the
Administrative Services provided hereunder. Such responsibility shall include,
without limiting the foregoing, all fines, penalties, obligations, liabilities,
costs and expenses including but not limited to liability for all legal expenses
incurred by the Reinsurer after the Effective Date with respect to such
proceedings, and all amounts payable in settlement of such proceedings.
B. Responses to Regulatory Authorities.
The Administrator (with respect to matters affecting its
license and liability) or the Reinsurer (with respect to matters affecting its
license and liability), as the case may be, agrees to provide a prompt initial
response to inquiries received from state insurance departments, other
governmental agencies or regulatory bodies regarding Policyholder,
contractholder, provider and consumer concerns or otherwise arising out of or in
connection with any activity or omission with respect to the Administered
Contracts which occurred prior to, on, or after the Effective Date.
Notwithstanding the foregoing, the Administrator and the Reinsurer shall consult
with one another prior to providing such response or entering
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into any other communications with regulators regarding such inquiries, and they
shall both act in good faith and cooperate with each other in attempting to
agree on the form and substance of such response or communication. The
Administrator and the Reinsurer shall both have the right to participate in
meetings and conversations with such state insurance departments, other
governmental agencies or regulatory bodies to discuss such inquiries. The
Reinsurer or the Administrator, as the case may be, will provide the other party
with all information necessary for such other party to conduct whatever
investigation is reasonable under the circumstances in order to respond to such
inquiries. Each party shall notify in writing the other of any such inquiry
within two (2) Business Days of receipt of such inquiry and provide copies of
all relevant documents related thereto. After such consultation and cooperation,
the Administrator shall have the right to control the resolution (including
entering into settlements) with respect to any inquiry that could lead to the
revocation, suspension or restriction of its license or a monetary penalty. The
Reinsurer shall have the right to control the resolution (including entering
into settlements) with respect to any inquiry that could lead to the revocation,
suspension or restriction of its license or a monetary penalty. Notwithstanding
any of the foregoing, the Reinsurer shall have the right to control the
resolution of any such inquiries with respect to the Administered Contracts.
C. Reviews and Audits by Regulatory Authorities.
Each party agrees to notify in writing the other party within
two (2) Business Days upon receipt of any written or oral communication from any
state insurance department or any other government agency or body of its
intention to commence any market conduct or similar examination or review or to
proceed with any administrative action, such as a hearing, fine, penalty,
license suspension or revocation or similar action, against the Reinsurer or the
Administrator, which examination, review or administrative action relates in any
way to the Administrator's performance under this Administrative Services
Agreement or which otherwise relates solely to any of the Administered
Contracts. The Reinsurer and the Administrator agree to cooperate fully with
each other and to use their reasonable good faith efforts in jointly resolving
any such issue or matter raised by a state insurance department, or any other
government agency or regulatory body.
D. Cooperation.
The Administrator and the Reinsurer agree to cooperate fully
with each other and use their reasonable good faith efforts in dealing with
state insurance departments and other government agencies or regulatory bodies
in maintaining the Administered Contracts in compliance in all material respects
with existing and future laws. If the Administrator determines that any of the
Administered Contracts are materially not in compliance with such laws, the
Administrator shall so notify the Reinsurer and obtain the Reinsurer's approval.
The Administrator shall prepare and file any necessary amendments to such
Administered Contracts and other filings or documents required and shall prepare
any necessary filings for submission by the Reinsurer.
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E. Notice to Insureds.
The Administrator, with the Reinsurer's cooperation, shall
give written notice to insureds of the identity of the Administrator and the
relationship between the Administrator, the Reinsurer and the insured. The
Administrator shall provide the Reinsurer with an advance copy of such notice
for the Reinsurer's approval prior to any distribution of the notice.
ARTICLE XIII
ARBITRATION
Any dispute or difference between the parties with respect to
the operation or interpretation of, or arising from or relating to, this
Administrative Services Agreement on which an amicable understanding cannot be
reached shall be decided by binding arbitration. Arbitration hereunder shall be
pursuant to and in accordance with the terms, conditions and procedures set
forth in Sections 9.1, 9.2, 9.3 and 9.4 of the Assumption Reinsurance Agreement.
ARTICLE XIV
CONFIDENTIALITY
A. Generally.
The Company, the Reinsurer and the Administrator each
acknowledge that they will have access to confidential and proprietary
information concerning the other parties and their businesses, which information
is not readily available to the public, and agree that the Company, the
Reinsurer and the Administrator have taken and will continue to take reasonable
actions to ensure such information is not made available to the public. The
Company, the Reinsurer and the Administrator further agree that they will not at
any time (during the term hereof or thereafter) disclose to any person,
corporation, partnership or other entity whatsoever (except the Company, the
Reinsurer or the Administrator and their respective affiliates and the officers,
directors, employees, agents and representatives of the Company, the Reinsurer
and the Administrator and their affiliates who require such information in order
to perform their duties in connection with the services provided hereunder),
directly or indirectly, or make any use of, for any purpose other than those
contemplated by this Administrative Services Agreement or the Assumption
Reinsurance Agreement, or any information or trade secrets relating to the
Administered Contracts or the business affairs of the Company, the Reinsurer or
the Administrator, including the identity of and/or the compensation
arrangements with, any agents, affiliates and subsidiaries of the Company, the
Reinsurer and the Administrator, so long as such information remains
confidential.
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B. Individuals.
Information that identifies an individual covered under one of
the Administered Contracts may be confidential. The Company and the
Administrator shall take all reasonable precautions to prevent disclosure or use
of information identifying individuals covered under Administered Contracts for
a purpose unrelated to the performance of this Administrative Services Agreement
or the Assumption Reinsurance Agreement. With respect to Administered Contracts,
the Company and the Administrator shall take all reasonable precautions to
prevent disclosure or use of information identifying individuals covered under
such Administered Contracts for a purpose unrelated to the performance of this
Administrative Services Agreement or the Assumption Reinsurance Agreement.
C. Software.
The Company, the Reinsurer and the Administrator acknowledge
that software supplied by either party (including, but not limited to the
design, programming techniques, source codes and documentation thereof) may be
confidential information or trade secrets and may be subject to licensing
restrictions. No party may disclose any confidential or trade secret information
concerning the software owned by any other party to any person, firm or
organization without the other party's prior written consent, or except as
otherwise provided for in this Administrative Services Agreement or in any
license, sub-license or other agreement between the parties or with respect to
software acquired by the Administrator.
D. Release of Information.
The Company, the Administrator or the Reinsurer may disclose
confidential information in the following circumstances (or as otherwise
provided by this Administrative Services Agreement or the Confidentiality
Agreement):
(i) in response to a court order or formal discovery
request after written notice to the other parties;
(ii) if requested by any regulatory authority after
written notice to other parties;
(iii) at the proper request of an insured or his/her
legal representative;
(iv) as otherwise required by law; or
(v) with the consent of all parties, which consent
shall not be unreasonably withheld.
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ARTICLE XV
INDEMNIFICATION
The rights and obligations regarding indemnification by the
parties under this Administrative Services Agreement from and against any and
all Demands to the extent relating to or arising out of any act or omission of
the Administrator or the Reinsurer, or their respective directors, officers,
agents, brokers or employees, in performing their obligations under this
Administrative Services Agreement shall be determined in accordance with the
indemnification provisions in Sections 10.2 and 10.3 of the Assumption
Reinsurance Agreement.
ARTICLE XVI
INSURANCE
A. Liability Insurance.
The Administrator shall use commercially reasonable efforts to
obtain and maintain an errors and omissions liability policy in the amount of no
less than $1,000,000 per claim and $5,000,000 annual aggregate (deductible up to
$10,000 per claim), with an insurance company satisfactory to the Reinsurer, to
cover any loss arising as a result of any real or alleged negligence, errors or
omissions on the part of the Administrator's officers, agent or employees in any
aspect of the performance of services under this Administrative Services
Agreement.
B. Fidelity Bond.
The Administrator shall use commercially reasonable efforts to
obtain and maintain fidelity bond coverage in the amount of $1,000,000
(aggregate $1,000,000) with a company satisfactory to the Reinsurer providing
for indemnity to the Reinsurer in the event of loss due to the misdeeds of its
officers, employees or agents during the term of this Administrative Services
Agreement.
C. Other Insurance.
1. The Administrator shall use commercially reasonable efforts
to obtain and maintain in connection with its performance of services under this
Administrative Services Agreement (i) electronic crime insurance in the amount
of $1,000,000 per claim, and $1,000,000 annual aggregate, and (ii) records and
valuable paper insurance of $100,000 per claim, $100,000 annual aggregate, with
an insurance company satisfactory to the Reinsurer.
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2. The Administrator shall maintain life insurance in the
amount of at least $3,000,000 on the life of Stanley S. Mandel for the term of
this Administrative Services Agreement; provided, however, if there has been an
Event of Default, such insurance shall be maintained until all of the
Administrator's obligations under this Administrative Services Agreement are
paid in full; provided, further, that if a successor to Stanley S. Mandel is
named pursuant to the terms of Article V.A.10. hereunder, then similar life
insurance shall be maintained on such successor. Said insurance shall be issued
by an insurance company and pursuant to a policy satisfactory to the Reinsurer
and shall name the Reinsurer as sole beneficiary.
D. Notice to the Reinsurer.
1. Each insurance policy and bond required under this Article
XVI shall provide that the issuer shall immediately notify the Reinsurer, in
writing, of any failure of the Administrator to pay the premiums due thereon,
and shall give at least thirty (30) days' written notice of cancellation of any
such policy.
2. The Administrator shall furnish the Reinsurer with a copy
of each such policy and bond, and every renewal or replacement thereof, within
thirty (30) days of issuance.
E. Failure to Obtain Insurance.
In the event that the Administrator shall be unable to procure
any policy of insurance required by this Article XVI for any reason, the
Administrator shall either (i) establish and maintain a trust, naming the
Reinsurer as beneficiary and in form reasonably satisfactory to the Reinsurer,
funded by assets reasonably acceptable to the Reinsurer in an amount equal to
the difference between (x) $11,100,000, and (y) the total of aggregate limits
for all policies procured by the Administrator pursuant to this Article XVI, or
(ii) maintain a letter of credit in form and issued by a institution reasonably
acceptable to the Reinsurer in favor of the Reinsurer in the amount described in
clause (i), against any losses that would have been covered by the insurance
required by this Article. The trust assets or letter of credit, as applicable,
shall similarly be available to compensate the Reinsurer for any losses that
would have been covered by the insurance required by this Article XVI. Such
trust or letter of credit shall be maintained during the term of this
Administrative Services Agreement and shall be continued thereafter until the
first anniversary of the date of such termination; provided, however, that in
the event that any claim or claims are made against the Reinsurer or the
Administrator by third parties arising out of the performance by the
Administrator hereunder or in the event that the Reinsurer should make such a
claim or claims against the Administrator, in either event prior to the first
anniversary of the date of such termination, any such trust or letter of credit
shall be maintained in the amount of such claim or claims until the resolution
of such claim or claims.
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ARTICLE XVII
GENERAL PROVISIONS
A. Cooperation.
The parties shall cooperate in a commercially reasonable
manner in order that the duties assumed by the Administrator will be
effectively, efficiently and promptly discharged, and will not take any actions
which would frustrate the intent of the transactions contemplated by this
Administrative Services Agreement or the Assumption Reinsurance Agreement. Each
party shall, at all reasonable times during normal business hours under the
circumstances, make available to the other party properly authorized personnel
for the purpose of consultation and decision. On or before the Closing Date, or
as soon as practicable thereafter, the Administrator shall make available to the
Reinsurer copies of all policy forms and examples of all other forms, including
drafts and checks, used by the Administrator in their administration of the
Administered Contracts as reasonably requested by the Reinsurer.
B. Amendment; Waivers.
This Administrative Services Agreement may be amended or
modified, and any of the terms or conditions hereof may be waived, only by a
written instrument executed by the parties hereto, or in the case of a waiver,
by the party waiving compliance. Any waiver by any party of any condition, or of
the breach of any provision or term contained in this Administrative Services
Agreement, in any one or more instances, shall not be deemed to be nor construed
as a further or continuing waiver of any such condition, or of the breach of any
other provision or term of this Administrative Services Agreement.
C. Entire Agreement.
Together with the Assumption Reinsurance Agreement, and the
Exhibits and Schedules attached thereto, and the Confidentiality Agreement, this
Administrative Services Agreement, including all Annexes attached hereto,
constitute the entire understanding between the parties hereto with respect to
the transactions contemplated hereby and supersede and replace all prior and
contemporaneous agreements and understandings, oral or written with regard to
such transactions. All Annexes delivered pursuant to any provision
27
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hereof are expressly made a part of this Administrative Services Agreement as
fully as though completely set forth herein.
D. Relationship.
The Reinsurer and the Administrator are and shall remain
independent contractors and not employees or agents of the other party. Except
as expressly granted in this Administrative Services Agreement or otherwise by
the other party in writing or as may be required by law or as necessary to
perform the services to be provided hereunder or to obtain the benefits hereof,
no party shall have any authority, express or implied, to act as an agent of the
other party or its subsidiaries or affiliates under this Administrative Services
Agreement. Except as otherwise provided by this Administrative Services
Agreement or by any other agreement between the parties, each party shall be
responsible for the payment of all employment, income and social security taxes
arising in connection with the compensation payable to its personnel involved in
the provision of the services hereunder. Each party hereby indemnifies and holds
the other party, its affiliates and its officers, directors, agents and
employees harmless from any and all municipal, county, state or federal claims
for withholding or employment taxes, Workers' Compensation, unemployment
compensation insurance or fines, penalties or other such assessments or taxes
arising out of the performance of such party's obligations under this
Administrative Services Agreement.
E. Errors and Omissions.
Any delays, errors or omissions on the part of a party
occurring in connection with this Administrative Services Agreement or any
transaction hereunder shall not relieve any other party from any liability to
the first party which would have otherwise attached, had such delay, error or
omission not occurred, provided that such error or omission is rectified as soon
as reasonably practicable after discovery thereof.
F. Best Efforts.
No reference in this Administrative Services Agreement to
"best efforts" shall require a person obligated to use its best efforts to incur
substantial out-of-pocket expenses, to incur indebtedness or, except as
expressly provided herein, to institute litigation or to consent generally to
service of process in any jurisdiction.
G. Governing Law and Forum.
This Administrative Services Agreement shall be deemed to have
been made under and governed by the laws of the State of New York without regard
to New York's choice of law rules. Both parties hereby irrevocably and
unconditionally submit themselves to the exclusive jurisdiction of the Courts of
the State of New York for any actions, suits or proceedings of or relating to
this Administrative Services Agreement and the transactions contemplated thereby
that cannot be resolved pursuant to the provisions of Article XIII hereof.
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H. Invalidity.
Unless the invalidity or unenforceability of any provision or
portion thereof frustrates the intent of the parties or the purpose of this
Administrative Services Agreement, such invalidity or unenforceability shall not
affect the validity or enforceability of the other provisions or portions
thereof. In the event that such provision shall be declared unenforceable by a
court of competent jurisdiction, such provision or portion thereof, to the
extent declared unenforceable, shall be stricken. However, in the event any such
provision or portion thereof shall be declared unenforceable due to its scope,
breadth or duration, then it shall be modified to the scope, breadth or duration
permitted by law and so as to give effect to the original intent of the parties
as closely as possible in a mutually acceptable manner, and shall continue to be
fully enforceable as so modified unless such modification frustrates the intent
of the parties or the purpose of this Administrative Services Agreement.
I. Counterparts.
This Administrative Services Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
J. No Third Party Beneficiaries.
Nothing in this Administrative Services Agreement is intended
to confer any rights or remedies under or by reason of this Administrative
Services Agreement on any persons other than the Reinsurer and the Administrator
and their respective successors and assigns. Nothing in this Administrative
Services Agreement is intended to relieve or discharge the obligations or
liability of any third persons to the Reinsurer or the Administrator. No
provision of this Administrative Services Agreement shall give any third persons
any right of subrogation or action over or against the Reinsurer or the
Administrator.
K. Assignment.
This Administrative Services Agreement is a personal services
contract and may not be substituted or assigned, in whole or in part, and no
assignment of compensation payable hereunder shall be valid without the prior
written consent of the Reinsurer, and any such attempted assignment without such
prior written consent shall be void and of no force and effect; provided,
however, that no such assignment shall reduce or otherwise vitiate any of the
obligations of any other party hereunder; provided, further, that consent by the
Reinsurer to an assignment as a result of the reorganization of the
Administrator shall not be unreasonably withheld. This Administrative Services
Agreement shall inure to the benefit of and shall be binding upon the successors
and permitted assigns of the parties.
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L. Headings.
The headings in this Administrative Services Agreement are for
the convenience of reference only and shall not affect its interpretation.
M. Preparation.
This Administrative Services Agreement has been jointly
prepared by the parties hereto and the terms hereof will not be construed in
favor of or against any such party by reason of its participation in such
preparation.
N. Reasonableness.
Each of the parties will act reasonably and in good faith on
all matters within the terms of this Administrative Services Agreement.
O. Notices.
All notices and communications hereunder shall be in writing
and shall be deemed to have been received three (3) Business Days after mailing,
or if by telefax or by hand, when received, and if by overnight mail, on the
next Business Day. Any written notice shall be by either certified or registered
mail, return receipt requested, or overnight delivery service (providing for
delivery receipt) or delivered by hand. All notices or communications with the
Reinsurer under this Agreement shall be addressed as follows:
The Guardian Life Insurance Company of America
Bethlehem Business Park
3900 Burgess Place
Bethlehem, Pennsylvania 18017
Attention: Barry J. Petruzzi, Assistant
Actuary, Group Disability SBU
Telefax No.: 610-807-7864
All notices and communications with the Administrator under
this Agreement shall be directed to:
Arista Investors Corp.
116 John Street
New York, New York 10038
Attention: Stanley S. Mandel, Exec. Vice President
Telefax No.: 212-608-6473
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P. Consistency.
Both the Administrator and the Reinsurer agree that the rights
and obligations of the Administrator and the Reinsurer under the Assumption
Reinsurance Agreement shall be consistent with and subject to the terms and
conditions of this Administrative Services Agreement.
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IN WITNESS WHEREOF, this Administrative Services Agreement has
been duly executed.
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
Dated: _________, 1998 By: Sanford Herman
-----------------------------
Name: Sanford Herman
Title: V.P., Group Pricing
and Standards
ARISTA INVESTORS CORP.
Dated: _________, 1998 By: Stanley S. Mandel
-----------------------------
Name: Stanley S. Mandel
Title: Vice President
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ANNEX A
UNDERWRITING ADMINISTRATION SERVICES
1. Conduct all underwriting related functions that occur in the typical
course of business. This would include, but would not be limited to,
the following:
(a) analyze each group with regard to its underwriting
characteristics and evaluate the characteristics of the group,
(b) determine that the contract applied for can be legally issued
in the jurisdiction in which it is to be written,
(c) ascertain that the plan to be provided can be satisfactorily
administered by both the Policyholder and the Reinsurer,
(d) establish premium rates that can be expected to produce a
reasonable contribution to surplus.
2. Maintain a detailed underwriting manual, approved by the Reinsurer,
which is regularly updated to reflect current underwriting practices.
If this manual currently does not exist it should be developed by the
Administrator and approved by the Reinsurer within six months of the
Effective Date of this Administrative Services Agreement. If the
underwriting manual exists, updates to the manual should be completed
within three months of the Effective Date of this Administrative
Services Agreement and a copy sent to the Reinsurer.
3. Underwrite new policies and renew enforce policies in conformity with
the underwriting manual. Exceptions must be approved by the Reinsurer.
4. Underwrite new business quotes.
Groups of 50 lives or greater: Quotes should be reviewed and
underwritten in accordance with the experience rating formula and
guidelines set forth in the DBL underwriting manual. Appropriate case
and experience data (male/female content, rate history, nature of
business, paid claim information, etc.) should be requested from the
broker/sales rep and reviewed prior to the release of the rate and
other quote information.
All quotes should be completed and returned to the broker/sales rep.
either by phone or fax within 3 Business Days of receipt.
Cases with an annual premium above $250,000 must be approved by the
Reinsurer before the initial quote and prior to delivery of each
renewal.
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5. Renew rates on inforce groups.
A. Less than 50 life groups:
Renew annually less than 50 life groups based on performance of
the less than 50 life block of business. If target loss ratio
exceeds 65%, the block of business should be renewed, subject to
any regulatory constraints.
B. Greater than or equal to 50 life groups:
Cases where the loss ratio is greater than anticipated and/or
competition requires, must be renewed annually. Rate increases in
excess of 10% must be requested. Thirty day renewal notice must be
given to the broker and Policyholder prior to the anniversary date
to ensure that renewal rates are to be effective on the
anniversary date of the case.
6. Ensure all underwriting practices meet DBL requirements. Rating/plan
provisions should be in compliance of state regulations/legislation.
For the Enhanced DBL product: plan provisions, participation
guidelines, industry selection and case rating should meet established
Reinsurer risk acceptance guidelines.
7. Maintain appropriate underwriting files. Files should be maintained
consistent with determined file set-up in an orderly and systematic
manner. The Administrator should provide the Reinsurer with details
regarding file set-up. All instructions, discrepancies, deviations,
administrative exceptions, correspondence and recommendations should be
properly documented. All necessary communication between sales reps,
brokers and Reinsurer personnel should be documented. Correspondence
should communicate accurate information.
8. Acknowledge/respond to 90% of all phone calls within one Business Day.
9. Acknowledge/respond to 90% of all written underwriting correspondence
within 5 Business Days of receipt.
10. Maintain an underwriting audit manual, approved by the Reinsurer, which
is regularly updated to reflect changes to the audit procedure.
Implement a formal audit program to ensure consistency in underwriting
procedures. If this manual/ audit procedure does not currently exist,
it should be developed and implemented by the Administrator within one
year of the Effective Date of this Administrative Services Agreement.
Audit approx. 10% of each new business quote (especially experience
rated cases) and renewal cases per underwriter per month. The audits
will deal
A-2
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primarily with the 50 lives or more cases. Monitor the results to
identify trends, training needs, resource deficiencies and workplace
efficiencies that can be shared with others.
11. Develop and implement a formal training program for new underwriters.
12. Meet standards for rate calculation accuracy. Maintain a 98% rate
calculation accuracy ratio. Meaning, the total dollar amount of errors
in premium in calculating rates will not exceed 2% of the total premium
dollars paid during a given period.
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ANNEX B
CLAIMS ADMINISTRATION SERVICES
1. Conduct all claims related functions that occur in the typical course
of business. This would include, but would not be limited, to the
following:
(a) develop a reasonable and equitable claims philosophy, pay all
valid claims promptly, courteously and to the full extent of the
policy,
(b) establish procedures to process claims efficiently,
(c) provide clear and concise claim processing instructions to
Policyholders,
(d) exercise adequate controls so that the Reinsurer's philosophy is
being carried out,
(e) accumulate and make available claims data for accounting,
statistical, analytical and research purposes.
2. Maintain a detailed claims procedural manual, approved by the
Reinsurer, which is regularly updated to reflect current claims
practices. If this manual currently does not exist, it should be
developed by the Administrator and approved by the Reinsurer within six
months of the Effective Date of this Administrative Services Agreement.
If the claims manual exists, updates to the manual should be completed
within three months of the Effective Date of this Administrative
Services Agreement and a copy sent to the Reinsurer.
3. Adjudicate and field investigate claims in conformity with the claims
manual. Exceptions must be approved by the Reinsurer.
4. Claims Adjudication
A. Data entry of new claims information by the clerical staff onto
the claims payment system should be completed on the same day of
receipt of the claims data.
B. Accurately process all new claims within 4 Business Days of
initial receipt of claim.
C. Meet standards for claim payment accuracy. Maintain a 98% claim
payment accuracy ratio. Meaning, the total dollar amount of errors
in administering claims will not exceed 2% of the total claim
dollars paid during a given period.
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D. For pending claims, send appropriate correspondence to employee
within 4 Business Days of initial receipt of claim, advising
employee what is needed to further process the claim. Once
additional information is received it must be processed within 4
Business Days.
E. Updated medical and field investigation information for ongoing
claims must be requested every 2 to 4 weeks regardless of
diagnosis. A supplemental medical form should be sent to the
insured via the claim payment system for medical updates.
F. If a claim is terminated, or pending, appropriate correspondence
must be sent to the employee within 4 Business Days of such date.
G. Prepare and process/transmit all related reports, schedules,
listings and other information required to record and control
approval and payment of insured claims (i.e., FICA/FIT reports,
claim settlement drafts, etc.)
H. Arrange for and review reports of all necessary field
investigations and medical examinations.
I. Assist as needed in the representation of the Reinsurer at
Workers' Compensation Board hearings, claims litigation and
inquiries by governmental authorities including the Complaint
Bureau of the New York State Insurance Department;
provided, however, that the Administrator's use of outside
counsel for such representation will be subject to the prior
approval of the Reinsurer.
5. Ensure all claim practices meet DBL requirements.
6. Maintain appropriate claim files. Files should be maintained consistent
with determined file set-up in an orderly and systematic manner. The
Administrator should provide the Reinsurer with details regarding file
set-up. All instructions, discrepancies, deviations, administrative
exceptions, correspondence and recommendations should be properly
documented. All necessary communication between sales reps, brokers,
Reinsurer personnel, Policyholders and claimants should be documented.
Correspondence should communicate accurate information.
7. Acknowledge/respond to 90% of all phone calls within one Business Day.
8. Acknowledge/respond to 90% of all written claims correspondence within
5 Business Days of receipt.
9. Maintain a claim audit manual, approved by the Reinsurer, which is
regularly updated to reflect changes to the audit procedure. Implement
a formal audit
B-2
<PAGE>
program to ensure consistency in claim procedures. If this manual/audit
procedure does not currently exist, it should be developed and
implemented by the Administrator within one year of the Effective Date
of this Administrative Services Agreement.
Audit and field investigate approx. 10% of new and existing claims per
benefit analyst per month. Monitor the results to identify trends,
training needs, resource deficiencies and workplace efficiencies that
can be shared with others.
10. Develop and implement a formal training program for new benefit
analysts.
11. Maintain a detailed claim payment systems manual, approved by the
Reinsurer, which is regularly updated to reflect current changes to the
system. If this manual currently does not exist, it should be developed
by the Administrator and approved by the Reinsurer within six months of
the Effective Date of this Administrative Services Agreement. If the
systems manual exists, updates to the manual should be completed within
three months of the Effective Date of this Administrative Services
Agreement and a copy sent to the Reinsurer.
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ANNEX C
CONTRACT/ISSUE ADMINISTRATION SERVICES
1. Conduct all contract/issue related functions that occur in the typical
course of business. This would include, but would not be limited to,
the following:
(a) installation of the case,
(b) maintaining and filing policy forms,
(c) maintaining compliance and securing/explaining interpretation with
regards to DBL laws and regulations.
2. Maintain a detailed contract/issue procedures manual, approved by the
Reinsurer, which is regularly updated to reflect current practices. If
this manual currently does not exist, it should be developed by the
Administrator and approved by the Reinsurer within six months of the
Effective Date of this Administrative Services Agreement. If the
contract/issue procedures manual exists, updates to the manual should
be completed within three months of the Effective Date of this
Administrative Services Agreement and a copy sent to the Reinsurer.
3. Issue contracts, policies, endorsements, etc., in conformity with the
contract/issue procedures manual. Exceptions must be approved by the
Reinsurer.
4. Issue Process
A. Produce and issue contracts, policies, endorsements and policy
kits in the form as approved by the Reinsurer (including welcome
letter, policy, claims forms and filing instructions).
B. Maintain all forms. Draft Reinsurer responses to all required DBL
forms and filings, including any supporting statistical data.
Final reports must be approved by the Reinsurer.
C. Data entry of new policy information onto the issue system should
be completed within one Business Day of receipt of data.
D. Accurately complete and mail all new policy issue material to the
agent for delivery to the Policyholder within 3 Business Days of
receipt.
E. Meet standards for contract/issue accuracy. Maintain a 95% issue
accuracy ratio. Meaning, the total number of incorrect policies
issued will not exceed 5% of the total policies issued during a
given period.
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Records will need to be documented indicating the number of
policies that were reissued due to administrator (the
Administrator) errors versus total policies issued.
5. Ensure all contract/issue practices/forms meet DBL requirements.
6. Maintain appropriate contract/issue files. Files should be maintained
consistent with determined file set-up in an orderly and systematic
manner. The Administrator should provide the Reinsurer with details
regarding file set-up. All instructions, discrepancies, deviations,
administrative exceptions, correspondence and recommendations should be
properly documented. All necessary communication between sales reps,
brokers, Reinsurer personnel, Policyholders and claimants should be
documented. Correspondence should communicate accurate information.
7. Acknowledge/respond to 90% of all phone calls within one Business Day.
8. Acknowledge/respond to 90% of all written correspondence within
5 Business Days of receipt.
9. Maintain a detailed contract/issue systems manual, approved by the
Reinsurer, which is regularly updated to reflect current changes to the
system. If this manual currently does not exist, it should be developed
by the Administrator and approved by the Reinsurer within six months of
the Effective Date of this Administrative Services Agreement. If the
systems manual exists, updates to the manual should be completed within
three months of the Effective Date of this Administrative Services
Agreement and a copy sent to the Reinsurer.
10. Develop and implement a formal training program for new contract/issue
personnel.
11. Maintain an audit manual, approved by the Reinsurer, which is regularly
updated to reflect changes to the audit procedure. Implement a formal
audit program to ensure consistency in billing procedures. If this
manual/audit procedure does not currently exist, it should be developed
and implemented by the Administrator within one year of the Effective
Date of this Administrative Services Agreement.
C-2
<PAGE>
ANNEX D
BILLING ADMINISTRATION SERVICES
1. Conduct all billing related functions that occur in the typical course
of business. This would include, but would not be limited to, the
following:
(a) billing, collection and accounting of premiums,
(b) calculation and payment of commissions.
2. Maintain a detailed billing procedures manual, approved by the
Reinsurer, which is regularly updated to reflect current billing
practices. If this manual currently does not exist, it should be
developed by the Administrator and approved by the Reinsurer within six
months of the Effective Date of this Administrative Services Agreement.
If the billing procedures manual exists, updates to the manual should
be completed within three months of the Effective Date of this
Administrative Services Agreement and a copy sent to the Reinsurer.
3. Bill new and inforce policies in conformity with the billing
procedures manual. Exceptions must be approved by the Reinsurer.
4. Billing Process
A. New case data entry information by the clerical staff onto the
billing system should be completed within three days of receipt of
the case.
B. Member counts of male/female content and premium payments must be
maintained in the system.
C. Bills should be produced and distributed a minimum of 15 days
before the due date. For example, a quarterly policy effective
l/l/98, should be billed for the January, February and March
period on or about 3/15/98. Bills must be paid on or before the 31
day grace period.
D. Meet standards for billing payment accuracy. Maintain a 98%
billing payment accuracy ratio. Meaning, the total dollar amount
of errors in billing Policyholders will not exceed 2% of the total
premium dollars paid during a given period.
E. Issue notices of premium delinquencies, reinstatements and
cancellations. Cancellation notices should be mailed within twenty
days after the expiration of the grace period. Notices should be
mailed with a copy of the overdue and current billing. Notice
should be mailed directly to the Policyholder, agent and the
Workers' Compensation Board.
D-1
<PAGE>
F. Canceled cases can be reinstated provided the premium is received
within 30 days, subject to DBL requirements. Reinstatement notices
must be mailed to the Policyholder upon receipt of the premium.
G. Review premium statements upon receipt and rectify any
discrepancies uncovered. Attempts must be made to collect all
premium due.
H. Transmit premium and billing statements to the Reinsurer on a
monthly basis.
5. Prepare and deliver commission statements and payments for assumed
policies. Provide the Reinsurer with regular detailed reports on
commission payments for the assumed block. For new policies and
policies from the original Reinsurer TPA agreement, the Reinsurer will
process commissions.
Commissions are to be processed once a month, at the end of each month.
6. Ensure all billing practices meet DBL requirements.
7. Maintain appropriate billing files. Files should be maintained
consistent with determined file set-up in an orderly and systematic
manner. The Administrator should provide the Reinsurer with details
regarding file set-up. All instructions, discrepancies, deviations,
administrative exceptions, correspondence and recommendations should be
properly documented. All necessary communication between sales reps,
brokers, Reinsurer personnel, Policyholders and claimants should be
documented. Correspondence should communicate accurate information.
8. Acknowledge/respond to 90% of all phone calls within one Business Day.
9. Acknowledge/respond to 90% of all written billing correspondence within
5 Business Days of receipt.
10. Maintain a detailed billing systems manual, approved by the Reinsurer,
which is regularly updated to reflect current changes to the system. If
this manual currently does not exist, it should be developed by the
Administrator and approved by the Reinsurer within six months of the
Effective Date of this Administrative Services Agreement. If the
systems manual exists, updates to the manual should be completed within
three months of the Effective Date of this Administrative Services
Agreement and a copy sent to the Reinsurer.
11. Maintain a billing audit manual, approved by the Reinsurer, which is
regularly updated to reflect changes to the audit procedure. Implement
a formal audit program to ensure consistency in billing procedures. If
this manual/audit procedure does not currently exist, it should be
developed and implemented by
D-2
<PAGE>
the Administrator within one year of the Effective Date of this
Administrative Services Agreement.
12. Develop and implement a formal training program for new billing
personnel.
D-3
<PAGE>
ANNEX E
OTHER GENERAL ADMINISTRATION SERVICES
1. Provide updates on all significant DBL regulatory activity. At a
minimum, provide an annual status report on the DBL regulatory climate.
2. Provide the Reinsurer with statistical data - including paid vs.
incurred claim tables - and assist the Reinsurer in establishing
reserves.
3. Maintain on behalf of the Reinsurer good relations with its sales reps,
licensed agents, brokers and other potential sources of DBL business;
respond to inquires concerning policies of the Reinsurer with respect
to its DBL operation.
E-1
<PAGE>
ANNEX F
The Reinsurer agrees to pay to the Administrator
administrative fees for New York Statutory, Super Statutory and Voluntary
Disability Benefits Law cases according to the following fee schedule which
includes three components: basic fee, audit based fee and experience based fee.
<TABLE>
<S> <C>
o Basic Fee: 7% of paid premium, payable
quarterly; an initial payment made
during the first 30 days of each quarter
based upon estimated paid premium
for the quarter, with an adjustment for
actual paid premium made during the
30 days following the close of the
quarter; a final adjustment will be
made during the 30 days after the
termination of this Administrative
Services Agreement.
o Audit Based Fee: This fee can range from -1% to +1%
of paid premium. The actual service
incentive will be calculated semi-
annually as set forth below, and will
be based on a comparison of audit
results to defined service standards.
o Experience Based Fee: This fee will be a percentage of earned
premium on Administered Contracts,
calculated annually, based on the
following formula:
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Experience Incentive = 0.50 x
[0.88 Cost Percentage] With a
minimum value of 0% and a maximum
value of +5%
where,
Cost Percentage = [Incurred
Claims + Commissions Earned +
Premium Taxes + DBL Assessments
Earned]/Earned Premiums
Calculated and paid annually,
four months after the close of
this Administrative Services
Agreement's anniversary year.
</TABLE>
F-2
<PAGE>
CALCULATION OF SERVICE INCENTIVE
Part I. Determine the number of Essential Job Activities Achieved.
Performance of Essential Job Activities
<TABLE>
<CAPTION>
Essential Job
Activity Achieved
Essential Job Activities (Indicate Yes or No)
------------------------ --------------------
<S> <C>
Section A: Underwriting Service Requirements
1. All quotes must be completed and returned to
broker/sales rep within three Business Days.
2. Maintain 98% rate calculation accuracy ratio.
3. Acknowledge/respond to 90% of all phone calls within
one Business Day.
4. Acknowledge/respond to 90% of all written correspondence
within five Business Days.
Section B: Billing Service Requirements
5. Maintain a 98% billing payment accuracy ratio.
6. Acknowledge/respond to 90% of all phone calls within
one Business Day.
7. Acknowledge/respond to 90% of all written correspondence within five
Business Days.
Section C: Contract/Issue Service Requirements
8. Maintain a 98% contract/issue accuracy ratio.
9. Accurately complete and mail all new policy issue
material to the agent for delivery to the Policyholder
within three Business Days.
10. Acknowledge/respond to 90% of all phone calls within
one Business Day.
</TABLE>
F-3
<PAGE>
<TABLE>
<S> <C>
11. Acknowledge/respond to 90% of all written correspondence within five
Business Days.
Section D: Claims Service Requirements
12. Accurately process all new claims within four Business Days of receipt.
13. Maintain a 98% claims payment accuracy ratio.
14. Acknowledge/respond to 90% of all phone calls within
one Business Day.
15. Acknowledge/respond to 90% of all written correspondence within five
Business Days.
Total number of Essential Job Activities Achieved
(Number of Yes Answers)
</TABLE>
F-4
<PAGE>
Part II. Determination of Service Incentive Fee
Follow these steps to determine the recommended service incentive fee
Step 1:
Result
Record the number of Essential Job Activities Achieved from Part I ------
Step 2:
Check the appropriate box below to indicate the number of Essential Job
Activities Achieved which will recommend the service incentive fee. The service
incentive fee can range from -1.0% to +1.0% of DBL premium. The base fee is 7.0%
of DBL premium, paid quarterly.
Number of Essential Job Service Incentive Fee
Activities Achieved
[ ] 13 to 15 +1.0%
[ ] 10 to 12 +0.5%
[ ] 7 to 9 0.0%
[ ] 4 to 6 -0.5%
[ ] 0 to 3 -1.0%
F-5
<PAGE>
ANNEX G
BANK ACCOUNTS
The Administrator and the Reinsurer shall establish bank
accounts for purposes of fulfilling their respective obligations under this
Administrative Services Agreement and the Assumption Reinsurance Agreement as
follows:
PREMIUM ACCOUNTS
The Administrator, as fiduciary, shall establish premium
accounts for the collection of premium for the Reinsurer with respect to the
Administered Contracts issued or assumed by the Reinsurer.
COMMISSION AND OTHER EXPENSE DISBURSEMENT ACCOUNTS
The Administrator, as fiduciary, shall establish accounts for
the payment of commissions and other expenses with respect to the Administered
Contracts issued or assumed by the Reinsurer. The Administrator shall be liable
for payment of commissions and other expenses with respect to Administered
Contracts except for commissions and other expenses payable on business
initially written by the Reinsurer.
CLAIMS PAYING ACCOUNTS
The Administrator, as fiduciary, shall establish accounts for
the payment of Claims for Administered Policies issued or assumed by the
Reinsurer and for the receipt or payment of all other amounts to be received or
paid after the Effective Date with respect to such Administered Policies under
the Assumption Reinsurance Agreement. The Administrator shall be responsible for
arranging for funding and administering all such accounts.
OTHER
The parties shall establish and administer such other bank
accounts as they shall mutually determine to be appropriate.
G-1
<PAGE>
FORM OF PROXY
ARISTA INVESTORS CORP.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
SPECIAL MEETING OF STOCKHOLDERS OF ARISTA INVESTORS CORP.
The undersigned acknowledges receipt of a Notice of Special Meeting and
of accompanying Proxy Statement and hereby appoints Stanley S. Mandel and Louis
H. Saltzman, and either of them, proxies with several powers of substitution, to
vote the shares of Class A Common Stock of ARISTA INVESTORS CORP. (the
"Company") standing in the name of the undersigned at the Special Meeting of
Stockholders of the Company, to be held on Monday, October 19, 1998, or at any
adjournments thereof, as indicated upon the following matters as described in
the Notice of Meeting and accompanying Proxy Statement:
1. To approve the sale of substantially all of the Company's assets
pursuant to an Assumption Reinsurance Agreement by and among Arista Insurance
Company (a wholly-owned subsidiary of the Company), the Company and The Guardian
Life Insurance Company of America.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To act upon any other business that may properly come before the
Meeting or any adjournment thereof according to the number of votes and as fully
as the undersigned would be entitled to vote if personally present, hereby
revoking any prior proxy or proxies. If more than one of the above-named proxies
shall be present in person or by substitute, both of the proxies so present and
voting shall have and may exercise all the powers hereby granted.
IF NO INSTRUCTION IS INDICATED, SAID PROXIES WILL VOTE "FOR" THE PROPOSAL
REFERRED TO IN ITEM 1 AND WILL USE THEIR DISCRETION WITH RESPECT TO ANY MATTERS
REFERRED TO IN ITEM 2.
Dated ______________________________, 1998
(Please Date)
Signature(s):
___________________________________________
___________________________________________
___________________________________________
Signature of Stockholders
Please sign as name appears hereon. If
signing as attorney, executor, administrator,
trustee, guardian or other fiduciary, please
give your full title as it appears. If shares
of Class A Common Stock are held jointly,
each named stockholder should sign.
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY.
