ITEM 1. BUSINESS.
General
Arista Investors Corp. (the "Registrant") through its wholly-owned subsidiary, Arista Insurance Company ("Arista"), a New York corporation (Registrant and Arista are sometimes hereinafter individually or collectively referred to as the "Company"), was engaged in the sale and underwriting of statutory, super statutory and voluntary disability benefits insurance (collectively, the "Insurance") in the State of New York from 1979 to June 30, 1998. Since July 1, 1998, the Registrant has been engaged as a third party administrator. The Registrant is a Delaware corporation incorporated on August 19, 1986, which succeeded to the business of its predecessor, Arista Investors Corp., a New York corporation organized in 1978. The Company's principal executive offices are located at 116 John Street, New York, New York 10038. Its telephone number is (212) 964-2150.
Arista was licensed to write accident and health insurance by the Department in October 1979, and sold and underwrote the Insurance through June 30, 1998. During the year ended December 31, 1993, Arista amended its charter and became licensed to write a line of property and casualty insurance in New York as well. To date, Arista has not written any property and casualty insurance business. Such licenses may continue in perpetuity unless suspended or terminated by an act of the regulator.
The following table sets forth the third party administrative service fees, together with the consolidated investment income and realized investment gains (losses) for each of the three years of the period ended December 31, 1998.
1996 1997 1998 ---- ---- ---- Third party administrative services $ 200,664 $ 351,346 $1,493,153 ========== ========== ========== Investment income $ 440,540 $ 513,913 $ 543,856 ========== ========== ========== Realized investment gains (losses) $ (208) $ (2,519) $ -- ========== ========== ==========
Recent Developments
Cession of Insurance; Commencement of Third Party Administration
The Agreements. The Company entered into an Assumption Reinsurance Agreement, dated September 23, 1998 (the "Treaty"), with The Guardian Life Insurance Company of America, a New York mutual life insurance company ("The Guardian"), and the Registrant entered into an Administrative Services Agreement, also dated September 23, 1998 (the "TPA Agreement"), with The Guardian. The transactions contemplated by the Treaty and TPA Agreement were consummated on November 12, 1998 (the "Closing Date") and deemed effective as of July 1, 1998 (the "Effective Date"). Also, the quota share reinsurance treaty between Arista and The Guardian, effective as of January 1, 1998 (the "Quota Share Reinsurance Treaty"), whereby Arista ceded a 50% participation in the
Insurance by way of reinsurance, both for business in force as of January 1, 1998 and for business written or acquired after January 1, 1998 was terminated. See "-The Treaty; Cession of Insurance Business", "-TPA Agreement; Third Party Administration Business" and "-Reinsurance Treaty" and "-Reinsurance Ceded."
The Treaty; Cession of Insurance Business. Pursuant to the Treaty, the Company ceded to The Guardian all of Arista's liabilities under each and every policy of the Insurance underwritten by Arista, excluding any 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. 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 Date under the Treaty, Arista discontinued all sales of the Insurance.
The cession of the Insurance to The Guardian was deemed to have taken place as of the Effective Date. Pursuant to the Treaty, Arista was required to present to The Guardian on the Closing Date all new policies, if any, which Arista had issued between the Effective Date and the Closing Date for acceptance by The Guardian pursuant to the Treaty. Any new policies not accepted by The Guardian were canceled in accordance with the requirements of the Workers' Compensation Law. On the Closing Date, Arista presented to The Guardian 25,092 policies, of which approximately 99.7% of the policyholders accepted The Guardian assumption.
Pursuant to the Treaty, The Guardian did not assume 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 was obligated to continue its operations in accordance with prior practices and in conformity with prevailing industry standards and customs. The Guardian was responsible for the handling of, and all costs and expenses, including legal fees, relating to litigation or other claims under the Insurance, but excluding liabilities arising out of or relating to actions for declaratory judgments initiated within 120 days of the Closing Date. As of such date, management was not aware of any such liabilities, known, pending or threatened.
As of June 30, 1998 and the fiscal year ended December 31, 1998, the Insurance encompassed some 229,000 and 337,000 covered lives, respectively, and approximately 23,000 and 24,000 policyholders, respectively. See "-TPA Agreement; Third Party Administration Business."
The Registrant accounted for the cession of the Insurance and the assumption of specified assets and liabilities as a purchase by The Guardian. Under this method, the Registrant recognized in earnings the net gain on disposal of a segment of its business representing the excess of (i) 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 (ii) all unpaid claim reserves, unearned premium reserves, plus claim expense reserves and GAAP assessment reserves assumed by The Guardian, and the cost of disposal. The Registrant surrendered control over all assets and liabilities
transferred to The Guardian, and retained no beneficial interest. See Financial Statements and Notes thereto.
After the closing of the cession of the Insurance to The Guardian, the Registrant retained Arista's insurance company license and charter, consolidated cash and cash equivalents and other assets in excess of $2 million and an ongoing TPA operation. See "-TPA Agreement; Third Party Administration Business."
Purchase Price and Assumption of Liabilities. In exchange for the cession of the Insurance, The Guardian paid Arista a cession allowance in an amount, in cash, based on the premiums, as adjusted, earned by Arista for the 12 month period through the Effective Date. Such premiums were accounted for by utilizing the actual earned premium for the most recent 12 month period prior to the Effective Date. The cession allowance was 18% of the adjusted earned premium. See Financial Statements and Notes thereto.
After the closing of the cession of the Insurance to The Guardian, The Guardian mailed an Assumption Certificate ("Certificate") to each policyholder's last known address, which certificate reflected the assumption by The Guardian of all risks, duties and obligations associated with the Insurance. The Treaty and the Certificate met all of the requirements of the Department (the "Department") and was approved by the Superintendent of Insurance of the State of New York prior to consummation of the cession of the Insurance. On the Closing Date, Arista presented to The Guardian 25,092 policies, of which 25,010 policyholders accepted The Guardian assumption, and 82 rejected The Guardian assumption.
Under the Treaty, the Company made various representations and warranties with respect to the Insurance as well as its other assets, liabilities and activities. These representations and warranties related 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 Registrant 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.
TPA Agreement; Third Party Administration Business. The Registrant is licensed by the Department as an independent accident and health adjuster (the "License"), and on the date that the cession of the Insurance was consummated, the Registrant commenced servicing the Insurance pursuant to the TPA Agreement. The License may continue in perpetuity unless otherwise suspended or terminated by an act of the regulator. In March 1998, the Registrant paid a fee of $100 for the License required for its existing sublicensee. The Company is proceeding to have additional employees licensed.
As a third party administrator under the TPA Agreement, the Registrant performs various services relating to the Insurance 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, preparations of commission statements, maintenance of records, responding to inquiries from policyholders and providing updates on regulatory changes. Pursuant to the TPA Agreement, the Registrant receives a fee based upon the premiums earned by The Guardian plus additional fees based upon performance by the Registrant 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 limited contingency payment to be paid annually based upon the developed incurred loss ratio. The TPA Agreement is effective for a period of five years, subject to earlier termination by The Guardian under certain circumstances as described below.
Pursuant to the TPA Agreement, The Guardian has the right to terminate the TPA Agreement during the full term of the TPA Agreement upon 60 days prior written notice to the Registrant upon the occurrence of any of the following events (each an "Event of Default"): (i) breach of the TPA Agreement by the Registrant 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 commencement of a voluntary or involuntary reorganization, liquidation or receivership of the Registrant, (iii) an order entered by a court of competent jurisdiction affecting more than 50% of the Registrant's property under conservatorship, liquidation, insolvency or similar laws, (iv) the failure of Stanley S. Mandel, the Registrant's President, to maintain control of the day-to-day operations of the Registrant 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), (v) the Registrant 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 (vi) the Registrant 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 The Guardian desires to perform the administrative services.
In performing the services under the TPA Agreement, the Registrant is obligated to use commercially reasonable efforts to keep informed of, and comply with, all applicable laws, rates and regulations and to maintain necessary facilities, equipment and personnel to perform its duties under the TPA Agreement. The Registrant has granted The Guardian the right of first refusal to purchase the Registrant's administrative servicing business in the event the Registrant permits any other person to gain operational control of such business or agrees to any arrangement which would end the existence of such business.
The Guardian. The Guardian is a New York mutual life insurance company which 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 1998.
Customers; Third Party Administration
Pursuant to the TPA Agreement, the Registrant is obligated to provide third party administrative services for the Insurance to The Guardian. The Guardian represents the Registrant's largest customer of its third party administration business, accounting for more than 90% of such business. The failure of the Registrant to retain The Guardian as a customer by the failure of the Registrant to correct any Event of Default, by The Guardian electing to administer the Insurance and terminate the TPA Agreement as discussed above, or for any other reason, would have a material adverse effect on the Registrant's business and plan of operations. See "-TPA Agreement; Third Party Administration Business" and "-The Guardian."
Competition
The third party administration business is highly competitive. Competition is primarily based upon range and proficiency of service and fee structure. The Registrant believes that it has few competitors, most of whom service other coverages in addition to the Insurance. The Registrant's competitors vary in size, many of which have longer operating histories, offer a broader range of services other than third party administration of insurance policies and generally have greater financial, marketing and management resources than the Registrant. The Company relies upon the expertise of its employees and executive officers, particularly Stanley S. Mandel, the Company's President. Such employees and executive officer have an average of twenty years experience in the insurance industry and third party administration business. The Registrant and Mr. Mandel entered into an employment agreement effective upon the Closing Date. Pursuant to the employment arrangement, Mr. Mandel is employed for a two-year period, plus up to an additional three years subject to (i) the continuation of the Registrant's third party administration arrangement with The Guardian or (ii) the occurrence of a change-of control Event (as defined therein). The loss of Mr. Mandel would have a material adverse effect upon the Company's business and plan of operations. See "-TPA Agreement; Third Party Administration Business"; "-Marketing" and "-Employees."
Marketing
The Registrant believes that, particularly with respect to the small and medium-sized businesses on which it focused its marketing efforts, carriers generally rely upon third party administrators to service the insurance underwritten by such carrier. Consequently, the Company considers the insurer to be its customer and stresses prompt and personal service in all phases of underwriting, product delivery and claims processing functions.
Insurance Operations
Under New York State law, all eligible employees, including full-time and part-time employees in New York State, are required to be provided with disability insurance coverage unless excluded by statute (e.g., government, railroad, maritime or farm workers). Statutory disability 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 charged a premium for the Insurance coverage based upon a rate structure approved by the Department. In order for an insurer to alter its rate structure it must obtain prior written approval from the Department. Under New York law, an employer may require an employee to contribute 1/2 of 1% of covered payroll up to a maximum of $.60 per week towards the premium charge for statutory disability benefits insurance.
In addition to standard statutory disability benefits insurance coverage, Arista offered certain augmented benefits which included 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 offered coverage for association groups on a competitive basis. The underwriting of these augmented benefits and specialized coverages did not represent a significant percentage of Arista's earned premiums.
Pursuant to agreements effective July 1, 1993 and January 1, 1995, Arista acted as a third party administrator for the statutory disability benefits books of business of The Guardian and the United States Life Insurance Company in the City of New York, respectively. The administrative services fees collected by Arista during the years ended December 31, 1996 and 1997 were $234,176 and $312,378, respectively, and $195,379 for the six months ended June 30, 1998.
During the three-year period ended December 31, 1998, Arista entered into the following arrangements to acquire books of New York State disability insurance:
Effective April 1, 1996, Arista entered into assumption reinsurance treaties with Greater New York Mutual Insurance Company ("GNYMIC") and with Insurance Company of Greater New York ("ICGNY") which authorized Arista to assume all of GNYMIC's and ICGNY's Insurance and issue assumption certificates to the policyholders then currently insured with GNYMIC and ICGNY.
For the six month period, ended June 30, 1998 and for the year ended December 31, 1997, no customer accounted for 10% or more of the Company's consolidated gross revenues. For the year ended December 31, 1996, one group, the Federation of Jewish Philanthropies, accounted for approximately 11% of Arista's consolidated revenue. Arista's relationship with the Federation of Jewish Philanthropies was terminated effective February 1, 1998.
Effective December 29, 1995, Arista issued a $3,000,000 surplus note (the "Surplus Note") to Cologne Life Underwriting Management Company ("CLUMCO"). The Surplus Note provided for interest at the rate of 10.5% per annum, and provided for the principal to be repaid in eight equal installments in years three through ten, together with any accrued interest. These repayments of principal and accrued interest were only to be made out of the free and divisible surplus of Arista, and were subject to the approval of the Superintendent of Insurance of the State of New York. If the principal and interest were not repaid in full at the end of the ten years, the Surplus Note would be renewed annually for additional one-year terms until the balance was repaid. The Surplus Note permitted prepayment subject to the prior approval of the Department. In addition, the Registrant issued a ten year warrant to CLUMCO to purchase up to 150,000 shares of the Company's Class A Common Stock, subject to certain conditions, at an exercise price of $3.50 per share. Effective as of January 1, 1998, in connection with Arista's entering into a new reinsurance arrangement with The Guardian, Arista terminated its reinsurance agreement with Cologne Life Reinsurance Company ("Cologne"). As a result of such termination and the Transaction, the Surplus Note plus accrued interest was repaid on December 18, 1998. In addition, CLUMCO did not exercise the warrant, and such warrant expired in October, 1998. See "-Reinsurance Ceded."
Arista submitted an application for admission as a reinsurer to the Office of the Commissioner of Insurance of the Commonwealth of Puerto Rico during 1989. In 1991, Arista requested that the Commissioner hold its application in abeyance pending the conclusion of certain negotiations regarding a reinsurance arrangement in the Commonwealth. During 1997, the Company decided to discontinue negotiations regarding this arrangement.
Claims
Gross claims incurred by Arista amounted to $15,288,310 in 1996, $12,212,694 in 1997, and $4,889,920 for the six months ended June 30, 1998.
The factors generally affecting gross claims incurred are a function of the number of risks covered with either part-time or full-time workers, the wage level of each covered employee to a maximum of $170 per week and the duration of disability to a maximum of 26 weeks. The gross amount of claims incurred at any point in time is also affected by the number of females covered since maternity is treated statutorily as any other disability.
The Company's estimated-to-actual claims experience was as follows:
Calendar Year Estimated Loss Ratio Actual Loss Ratio - ------------- -------------------- -----------------
1993 65.5% 64.9% 1994 66.5% 65.0% 1995 62.2% 61.8% 1996 62.4% 60.6% 1997 58.8% 58.5%
The estimated loss ratio is calculated for each year based upon an historical estimate of the claims development divided by the premiums earned for a calendar year. It differs from the actual loss ratio which represents the fully developed claims for a calendar year divided by the actual premiums earned for that year.
Reinsurance Ceded
Arista utilized reinsurance principally to reduce its net liability on insurance business in force through risk sharing. The ceding of insurance does not discharge the original insurer from its primary liability to the policyholder. The ceding company is required to pay losses to the extent the assuming company fails to meet its obligations under the reinsurance agreement. The practice of insurers, however, subject to certain statutory limitations and as permitted by regulatory authorities, is to account for reinsured risks to the extent of reinsurance ceded as though they are not risks for which the original insurer remains liable.
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. This agreement was canceled by mutual consent of the parties effective as of January 1, 1998.
Unlike other segments of the accident and health and property and casualty industries, there was no need to facilitate a spread of risk pursuant to any one occurrence as the maximum liability for Arista on any one life could not exceed $4,420. The cost to Arista of obtaining reinsurance had never exceeded approximately 1.2% of its gross premiums received.
Arista entered into a quota share reinsurance treaty with The Guardian effective as of January 1, 1998 , whereby Arista ceded by way of reinsurance a 50% participation in the Insurance, both for business in force as of January 1, 1998 and for business written or acquired after January 1, 1998. This agreement was subject to cancellation by either party on ninety (90) days prior written notice. The agreement was canceled effective June 30, 1998 as a result of the Transaction.
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
Insurance companies are required to maintain reserves for unearned premiums, and claim reserves for unpaid losses, unpaid loss adjustment expenses and New York State assessments for this line of business. These claim reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. Arista established these claim reserves based upon its prior experience. Gross claims liabilities were $4,351,500 and $3,391,950 at December 31, 1996 and 1997, respectively and $2,704,200 at June 30, 1998.
Loss reserves are only estimates of what the insurer expects to pay on claims, based on facts and circumstances then known. Although a degree of variability is inherent in such estimates, management believed that the liabilities for unpaid claims and related adjustment expenses were adequate. The estimates were continually reviewed and adjusted as necessary.
The following table compares Arista's gross liability for unpaid losses, LAE, and DBL assessments, at the end of each of the last five calendar years compared to the gross amounts actually paid against these reserves for the last five years, excluding 1998, for which the development was not yet completed.
Year Ended December 31, ------------------------------------------------- ($ ,000) 1994 1995 1996 1997 1998 ------- ------- ------- ------- -------
Estimated gross liability for unpaid losses, LAE reserves and DBL assessments $ 4,921 $ 4,526 $ 4,351 $ 3,392 $ 0 ------- ------- ------- ------- -------
Gross amounts actually paid against reserves: One year later 4,807 4,561 3,277 2,917 Two years later -- -- -- -- Three years later -- -- -- -- Four years later -- -- -- ------- ------- ------- ------- -------
Redundancy (deficiency) 114 (35) 1,074 475 0 ------- ------- ------- ------- -------
Cumulative redundancy (deficiency) $ (305) $ (340) $ 734 $ 1,209 $ 0 ======= ======= ======= ======= =======
Employees
As of December 31, 1998, the Company had forty-three (43) employees, four (4) of whom are part-time. Nine (9) of these employees are executive officers, (two (2) of whom serve part-time), seven (7) provide claims services as examiners, one (1) provides general and administrative services and twenty-six (26) provide all other services, two (2) of whom works part time. The Company believes its relations with its employees are satisfactory.
Investment Policy
Arista must comply with the insurance laws of New York State with regard to investments. These laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. The investment of Arista's funds generally is subject to the direction and control of its Board of Directors; investments are reviewed on a quarterly basis. Arista's funds generally are invested in federal, state and municipal obligations, corporate debt, preferred and common stocks and such other investments which are specifically prescribed by the New York State Insurance Law.
The following table contains information concerning the Company's investment portfolio as at December 31, 1998:
Amount which is Cost or shown in amortized Market the balance Type of Investment cost value sheet ---------- ---------- ----------
Investment Securities: United States Treasuries $2,618,068 $2,676,995 $2,618,068 Equity Securities 31,803 3,639 3,639 ---------- ---------- ---------- $2,649,871 $2,680,634 $2,621,707 ========== ========== ==========
The following table summarizes the Company's investment results before income taxes for the five years ended December 31, 1998:
- ----------
(1) Calculated on the mean of total investments on the first day and last day of each quarter.
Regulation
The State of New York has statutory authorization to enforce its laws and regulations through various administrative orders and enforcement proceedings
Arista and, under certain circumstances, the Registrant, are subject to regulation by the Department. Such regulation is principally for the benefit and protection of policyholders and not stockholders. Regulation extends to, among other things, the setting of rates to be charged, the granting and revocation of licenses to transact business, the licensing of general agents, the approval of policy forms and the form and content of statutorily mandated financial statements.
The Company is also regulated under New York State Insurance Law, Article 15, the "Holding Companies" statute. The regulations promulgated under the "Holding Companies" statute require prior regulatory agency approval of changes in control of an insurer and of transactions within the holding company structure. Arista was examined during calendar years 1990-1991 for the three year period ended December 31, 1989. In accordance with applicable regulations promulgated by the 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 Department on December 17, 1992. In 1996, the Department examined Arista for the five-year period ended December 31, 1994 and the examination was completed. A preliminary report was issued on March 31, 1998.
The New York State Insurance Law provides that no corporation or other person may acquire control of the Registrant and thus indirect control of Arista, unless it has given notice to Arista and obtained prior written approval of the Superintendent of Insurance for such acquisition. Under said law, any purchaser of ten percent or more of the outstanding Common Stock of the Registrant would be presumed to have acquired control of Arista, unless such presumption is rebutted.
The declaration and payment of dividends by the Registrant is subject to the discretion of its Board of Directors and is dependent upon any dividends the Registrant may receive as the sole shareholder of Arista. Under New York State Insurance Law, Arista may pay dividends only out of its statutory earned surplus. Generally, the maximum amount of dividends that Arista may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or ten percent (10%) of statutory surplus. In 1998 and 1996, Arista's Board of Directors authorized the payment of dividends to the Registrant in the amount of $279,951 and $111,654, respectively. The dividends were paid on July 15, 1998 and April 11, 1996, respectively . No dividends were paid by Arista in 1997.
On February 1, 1999, the Board of Directors of Arista approved a dividend in the amount of $167,526, based on Arista's statutory earned surplus as of its then last filed quarterly statutory statement
at September 30, 1998, to be paid to the Registrant. The dividend was paid to the Registrant on February 2, 1999.
Arista is not aware of any current proposed changes in either federal or state regulations with respect to the Insurance.
Return of Capital
An amendment to Arista's Certificate of Incorporation (the "Amendment") was approved and placed on file with the Department as of December 18, 1998, and filed with the Office of the County Clerk on December 31, 1998. The Amendment decreased the Company's capital from $1,950,000 (comprised of 1,300 shares with a par value of $1,500 per share) to $300,000 (comprised of 200 shares with a par value of $1,500 per share). As of February 28, 1999, Arista's paid-in surplus was $153,000. This recapitalization enabled the Board of Directors of Arista to ratify the return of capital in the amount of $2,492,000 to the Registrant. On January 26, 1999, the Department approved Arista's return of $2,492,000 of capital to the Registrant. The transfer was made on January 28, 1999.
Extraordinary Dividend
In March, 1999, the Department approved an extraordinary cash dividend of $4,000,000 (the "Dividend"), based on their review of Arista's filed December 31, 1998 Annual Statement, on the condition that there has been no event that has significantly impacted upon Arista's last reported surplus as regards policyholders. The Dividend was paid to its parent company on March 31, 1999.
The Collection Group
The Collection Group, Inc., a wholly-owned subsidiary of the Registrant, commenced operations during July 1991. The Board of Directors of the Company has authorized the dissolution of The Collection Group, Inc.
ITEM 2.
ITEM 2. PROPERTIES.
The Registrant'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 $50,000 at December 31, 1998.
Arista provides certain office services to Bernard Kooper Life Agency, a life and health insurance agency owned by Bernard Kooper, the Chairman of the Board of the Company. The Bernard Kooper Life Agency reimburses Arista for the cost of these services.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company is involved in some routine litigation incidental to the business of the Company, the Company is not a party to any litigation which it considers will have a material adverse effect on its business or operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 19, 1998, the Company held a special meeting of stockholders (the "Special Meeting"). As of the record date for the Special Meeting, there were 2,570,100 shares of Class A Common Stock outstanding and 47,400 shares of Class B Common Stock outstanding.
At the Special Meeting, the Company's Class A Common Stockholders and the Class B Common Stockholder approved the sale of substantially all of the Company's assets pursuant to the Treaty (the "Proposal") by and among Arista, the Company and The Guardian.
The Class A Stockholder votes for the Proposal were as follows:
For: 1,904,440 Against: 15,400 Abstain: 0
The Class B Stockholder votes for the Proposal were as follows:
For: 47,400 Against: 0 Abstain: 0
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Class A Common Stock is traded in the over-the-counter market. Since 1987, the Company's Class A Common Stock has been quoted on the National Association of Securities Dealers Automated Quotation System under the symbol "ARINA". The following table sets forth the range of bid prices for the Class A Common Stock during the periods indicated, and represents inter-dealer prices, which do not include retail mark-ups and mark-downs, or any commission to the broker-dealer, and may not necessarily represent actual transactions.
For the period Ended December 31, 1999: --------------------------------------- Class A Quarter Range Common Stock ------- ----- ------------
First High $3 Low $2 5/8
For the period Ended December 31, 1998: --------------------------------------- Class A Quarter Range Common Stock ------- ----- ------------
First High $2 3/8 Low $2 5/32
Second High $2 17/32 Low $1 3/4
Third High $2 13/32 Low $2 1/4
Fourth High $3 Low $2 5/16
For the Period Ended December 31, 1997: --------------------------------------- Class A Quarter Range Common Stock ------- ----- ------------
First High $2 9/16 Low $2 1/2
Second High $2 7/16 Low $2 3/8
Third High $2 3/8 Low $2 1/8
Fourth High $2 5/32 Low $1 7/8
(b) Approximate Number of Equity Security Holders:
The number of holders, including individual participants in security position listings of registered clearing agencies, as of September, 1998, was approximately 360.
Approximate Number of Title of Class Record Holders * -------------- ------------------
Class A Common Stock, $.01 par value 51 Class B Common Stock, $.01 par value 1
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* As of March 17, 1999.
Along with the filing of Arista's first quarter March 31, 1999 Quarterly Statutory Statement with the Department, Arista will request the Department's approval of an additional extraordinary dividend.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following information should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere in this Form 10-K.
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles, which differ in certain respects from those followed in financial state ments prepared for regulatory authorities. See Notes to the accompanying Consolidated Financial Statements.
Item 6. CONSOLIDATED SELECTED FINANCIAL DATA (In Thousands, Except Per Share Data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere in this Form 10-K. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those projected in the forward-looking statements discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in other sections herein.
GENERAL
Prior to July 1, 1998, the Company, through its wholly-owned subsidiary, Arista Insurance Company, operated principally as an underwriter of New York State disability insurance to some 23,000 policyholders and 229,000 covered lives in the New York Metropolitan Area. In November 1998, effective July 1, 1998, the Company ceded its disability insurance underwriting operations to The Guardian pursuant to the Treaty and concurrently, the Registrant entered into the TPA Agreement under which the Company performs various functions as an independent administrator for all disability policies ceded to The Guardian and for other New York State statutory disability policies issued by The Guardian and other companies (the "TPA services").
Pursuant to the terms of the cession of the insurance operations, the Company received a fee 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 over all unpaid claim reserves, unearned premium liability reserves, claim expense reserves and GAAP assessment reserves assumed by The Guardian. These transactions significantly changed the Company's financial condition and results of operations for 1998. Accordingly, the Company reformatted its consolidated statement of income and comprehensive income for 1998, 1997 and 1996 to distinguish continuing operating results from its TPA services from its discontinued underwriting operations.
Results of Operations
Year Ended December 31, 1998 compared to December 31, 1997
Consolidated revenues during the year ended December 31, 1998 were $1,483,080, an increase of $1,131,734 compared to consolidated revenues of $351,346 during 1997 from the Company's continuing third party administrative service operations. In 1998 the Company operated as a full time third party administrative service provider after July 1, compared to a part time basis in 1997 and prior years.
Revenue from discontinued insurance operations for the year 1998 was $5,161,632 compared to $10,381,720 in 1997. Net loss from discontinued operations was $167,122 ($0.06 per share) in 1998
compared to a net income of $21,244 ($0.01 per share) in 1997. Net gain on disposal of discontinued operations was $838,171 (or $0.32 per share) in 1998.
The consolidated net income for the year 1998 was $432,795 ($0.17 per share) consisting of a loss from continuing operations of $238,254 ($0.09 per share), and a gain on disposal of discontinued operations of $671,049 ($0.26 per share). This is compared to consolidated net income in 1997 of $100,220 ($0.04 per share), which consisted of $79,076 ($0.03 per share) from continuing operations, and $21,244 ($0.01 per share) from discontinued operations.
Consolidated investment income in 1998 was $543,856 compared to $513,913 in 1997. This increase was due mainly to the Company's improved average annual yield on total investments.
Consolidated general and administrative expenses for 1998 from continuing operations were $2,427,321 compared to $740,000 in 1997. The increase in 1998 was due to additional costs associated with operating the TPA on a full-time basis after July 1, 1998 compared to a part-time basis in 1997. Operating expenses associated with the Company's discontinued operations were $5,435,604 in 1998 compared to $10,018,285 in 1997.
Year Ended December 31, 1997 compared to December 31, 1996
The Company's net income for the year 1997 was $100,320 ($0.04 per share), as compared with a net loss of $1,175,863 (approximately $0.51 per share as restated) for 1996. Income before provision for income taxes was $493,068 in 1997, as compared with a loss before provision for income taxes of $1,649,525 for 1996. The Company's loss in 1996 included $757,350 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 $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'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 $513,913, representing an increase of $73,374, 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.
Income from TPA services was $351,346 in 1997, as compared to $260,664 for 1996. Other income was $7,087 in 1997, as compared to $38,660 for 1996.
Arista's gross commissions incurred for 1997 were approximately $3.9 million as compared with approximately $4.2 million for 1996.
The consolidated general and administrative expenses for the years 1997 and 1996 were approximately $4.7 million and $5.7 million, respectively. This decrease was due principally to the additional compensation expenses incurred in 1996 from the exercise of warrants and options of $757,350.
Financial Condition
Year Ended December 31, 1998 compared to December 31, 1997
The Company's financial condition remains strong, despite a large reduction in assets and liabilities at December 31, 1998 compared to December 31, 1997. These reductions pertain entirely to the cession of the Company's insurance underwriting operation to The Guardian in 1998.
Liquidity And Capital Resources
Year Ended December 31, 1998
At December 31, 1998, the Company had cash and cash equivalents aggregating $6,330,909 compared to $8,296,943 at December 31, 1997. The decrease in 1998 was due principally to the repayment to Cologne of the surplus note of $3,000,000 plus accrued interest of $1,034,256. These outflows were partially offset by the net proceeds from The Guardian of $1,368,900 upon settlement of the cession transaction.
Year 2000
The Company has considered the impact of Year 2000 issues on its computer systems and applications and has developed a remediation plan. Conversion activities are in process and the Company expects conversion and testing to be completed by the middle of 1999. All expenses in connection with the Year 2000 compliance project are being charged to operations. Expenditures in 1998 aggregated $20,500 and the Company expects to incur additional costs of less than $1,000 in 1999 to complete the project.
Inflation and Seasonality
The Company does not anticipate that inflation will significantly impact its business not does it believe that its business is seasonal.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in Part IV of this Form 10-K on page to S-7.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required under this item will be set forth in the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Company's 1998 year end and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item will be set forth in the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Company's 1998 year end and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item will be set forth in the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Company's 1998 year end and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item will be set forth in the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Company's 1998 year end and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) Financial Statements and Financial Statement Schedules.
Page ----
I. Financial Statements of the Registrant
II. Financial Statement Schedules
A. Schedule I - Summary of Investments- Other Than Investments in Related Parties S-1
B. Schedule II - Condensed Financial Information of Registrant S-2
C. Schedule III - Supplemental Segment S-6 Information
D. Schedule IV - Reinsurance S-7
Exhibit No. (a)(3) Exhibits. - ----------- ----------------
3.1 -- Certificate of Incorporation of the Company (1) 3.2 -- By-Laws of the Company (1) 4.2 -- Form of Class A Common Stock Certificate (1) 4.5 -- Form of Class B Common Stock Certificate (1) 10.4 -- Incentive Stock Option Plan 1985, as supplemented (1) 10.5 -- Incentive Stock Option Plan 1986 (1) 10.6 -- Non-qualified Stock Option issued to Stanley S. Mandel (1) 10.7 -- Warrant issued to Bernard Kooper (1) 10.8 -- Lease between the Company and Hacienda Intercontinental Realty, N.V. (1) 10.8.1 -- Lease dated November 29, 1990 between the Company and Hacienda Intercontinental Realty, N.V. (2) 10.8.2 -- Letter dated December 7, 1992 from Williamson, Picket & Gross, Inc. addressed to the Company,
Exhibit No. - -----------
incorporated by reference to Exhibit 10.8.2 to the Company's Form 10-K for the year ended December 31, 1992 10.9 -- Sublease between the Company and Arista (1) 10.9.1 -- Sublease dated January 1, 1991, between the Company and Arista (2) 10.11 -- Reinsurance Agreement with NRG Reinsurance Company, as amended (1) 10.11.1 -- Amendment to Reinsurance Agreement with NRG Rein surance Company, dated July 16, 1990 (2) 10.11.2 -- Reinsurance Agreement with NRG Reinsurance Company, dated January 29, 1993, incorporated by reference to Exhibit 10.11.2 to the Company's Form 10-K for the year ended December 31, 1992 10.11.3 -- Reinsurance Agreement with NRG America Life Reassurance Corporation, effective October 1, 1993, incorporated by reference to Exhibit 10.11.3 to the Company's 10-K for the year ended December 31, 1993 10.12 -- Agreement for Statutory Disability Benefits General Agents (1) 10.12(a) -- Rider to Statutory Disability Benefits General Agents Agreement (1) 10.14 -- Lease of Additional Space (Room 1101) between the Company and Hacienda Intercontinental Realty, N.V.(1) 10.15 -- Agreement between Arista Insurance Company and American International Life Assurance Company of New York (1) 10.16 -- Sublease (Room 1101) between the Company and Arista (1) 10.17 -- Lease of Additional Space (Room 1201) between the Company and Hacienda Intercontinental Realty, N.V. (1) 10.18 -- Sublease (Room 1201) between the Company and Arista, incorporated by reference to Exhibit No. 1 to the Company's 10-K for the year ended December 31, 1988 10.19 -- Agreement between Arista and First International Life Insurance Company, incorporated by reference to Exhibit No. 2 to the Company's 10-K for the year ended December 31, 1988. 10.21 -- Statutory Disability Benefits Administration Agreement Effective as of October 1, 1991, between Arista and The North Atlantic Life Insurance Company, incorporated by
Exhibit No. - -----------
reference to Exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1992 10.22 -- Employment Agreement between the Company and Bernard Kooper, dated February 17, 1993, incorporated by reference to Exhibit 10.22 to the Company's 10-K for the year ended December 31, 1993 10.22.1 -- Amendment No. 1 to the Employment Agreement between Arista and Bernard Kooper dated July 20, 1994 (3) 10.23 -- Employment Agreement between Arista and Stanley Mandel, dated February 17, 1993, incorporated by reference to Exhibit 10.23 to the Company's 10-K for the year ended December 31, 1993 10.23.1 -- Amendment No. 1 to the Employment Agreement between Arista and Stanley Mandel, dated July 20, 1994 (3) 10.24 -- Consulting Agreement between Arista and International Management Consultants, dated May 1, 1993, incorporated by reference to Exhibit 10.24 to the Company's 10-K for the year ended December 31, 1993 10.25 -- Split-Dollar Insurance Agreement between Arista Investors Corp., Arlyne Kooper and Bernard Kooper, dated July 20, 1994 (3) 10.26 -- Split-Dollar Insurance Agreement between Arista, Stanley Mandel and Joy Mandel, dated July 20, 1994 (3) 10.28 -- Collateral Assignment, dated July 20, 1994 (Joy Mandel) (3) 10.29 -- Collateral Assignment, dated July 20, 1994 (Bernard Kooper and Arlyne Kooper) (3) 10.30 -- Lease Agreement, dated January 9, 1995 between the Company and Hacienda Intercontinental Realty, N.V. (3) 10.30.1 -- Letter dated March 12, 1996 from the Company addressed to Williamson, Picket & Gross, Inc. (4) 10.30.2 -- Letter dated March 13, 1996 from Williamson, Picket & Gross, Inc. addressed to the Company (4) 10.31 -- Assumption Reinsurance Treaty, dated April 1, 1994 between the Company and Aetna Life Insurance Company (3) 10.32 -- Reinsurance Treaty, dated October 1, 1995, between Arista and Cologne Life Reinsurance Company (4) 10.32.1 -- Surplus Note Agreement, dated December 29, 1995, between Arista and Cologne Life Underwriting Management Company (4)
Exhibit No. - -----------
10.32.2 -- Warrant issued to Cologne Life Underwriting Management Company (4) 10.33 -- Lease (Storage space #7) effective January 1, 1996 between the Company and Hacienda Intercontinental Realty, N.V. (4) 10.34 -- Sublease (Storage space #7) effective January 1, 1996 between the Company and Arista (4) 10.35 -- Sublease effective June 1, 1995 between the Company and Arista (4) 10.36 -- Stock Purchase Agreement dated as of July 13, 1995 between Arista and American Travelers Life Insurance Company (4) 10.37 -- Secured Promissory note, dated June 14, 1996, issued by Bernard Kooper to Arista Investors Corp. in the aggregate principal amount of $500,000 (5) 10.38 -- Pledge and Escrow Agreement, dated June 14, 1996, by and among Bernard Kooper, as pledgor, Arista Investors Corp., as pledgee and Morrison Cohen Singer & Weinstein, LLP, as escrow agent (5) 10.39 -- Letter Agreement, dated June 14, 1995, between Bernard Kooper and Arista Investors Corp., granting Arista Investors Corp. an option to acquire 47,000 shares of its Class B common stock, par value $.01 per share (5) 10.40 -- Letter dated October 31, 1996, addressed to Williamson, Picket & Gross, Inc. (6) 10.41 -- Letter Agreement, dated December 11, 1996, terminating sublease between the Company and Arista (Storage Space #5) (6) 10.42 -- Quota Share Reinsurance Treaty between the Company and The Guardian Life Insurance Company of America, effective as of January 1, 1998. 10.43 -- Employment Agreement between Stanley Mandel and the Company, incorporated by reference to Exhibit 10.43 to the Company Form 10-Q for the quarter ended September 30, 1998. 10.44 -- Assumption Reinsurance Agreement between Arista, the Company and The Guardian, dated September 23, 1998, incorporated by reference to Exhibit A to the Company's Definitive Proxy Statement dated September 23, 1998. 10.45 -- Administrative Services Agreement between The Guardian and the Company, dated September 23, 1998, incorporated by
reference and Exhibit B to the Company's Definitive Proxy Statement dated September 23, 1998. 10.46 -- Employment Agreement between Peter Norton and the Company (including Employment Agreement Assignment, dated as of February 1, 1999). 21.1 -- List of Subsidiaries incorporated by reference to Exhibit 21.1 to the Company's 10-K for the year ended December 31, 1993 24.1 -- Powers of Attorney, incorporated by reference to Exhibit 25.1 to the Company's Registration Statement on Form S-1 (File No. 33-20101), dated February 11, 1988, as amended on May 6, 1988, declared effective on May 16, 1988, and amended by Post-Effective Amendment No. 1 dated April 27, 1989. 27 -- Financial Data Schedule
- ----------
(1) Filed as same numbered Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-20101) on February 11, 1988, as amended on May 6, 1988, declared effective on May 16, 1988, and amended by Post-Effective Amendment No. 1 dated April 27, 1989, and incorporated herein by reference.
(2) Filed as same numbered Exhibit to the Company's Form 10-K for the year ended December 31, 1990, and incorporated herein by reference.
(3) Filed as same numbered Exhibit to the Company's Form 10-K for the year ended December 31, 1994, and incorporated herein by reference.
(4) Filed as same numbered Exhibit to the Company's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference.
(5) Filed as the same numbered Exhibit to the Company's Form 10-Q for the fiscal quarter ended June 30, 1996.
(6) Filed as same numbered Exhibit to the Company's Form 10-K for the year ended December 31, 1996, and incorporated herein by reference.
(7) Filed as same numbered Exhibit to the Company's Form 10-K for the year ended December 31, 1997, and incorporated herein by reference.
(b) Reports on Form 8-K
On November 27, 1999, the Company filed with the Securities and Exchange Commission, a Current Report on Form 8-K, Commission File No.0-16520, regarding the cession of Arista's book of New York State statutory, super statutory and voluntary disability benefits insurance business to The Guardian.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARISTA INVESTORS CORP.
Dated: April 12, 1999 By: Stanley S. Mandel ---------------------------- Stanley S. Mandel, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
Bernard Kooper Chairman of the Board April 12, 1999 - ----------------- (principal executive officer) Bernard Kooper
Stanley S. Mandel President and Director April 12, 1999 - ----------------- Stanley S. Mandel
Susan J. Hall Senior Vice President, April 12, 1999 - ----------------- Treasurer and Secretary Susan J. Hall (principal financial and accounting officer)
Richard P. Farkas Director April 12, 1999 - ----------------- Richard P. Farkas
J. Martin Feinman Director April 12, 1999 - ----------------- J. Martin Feinman
Director - ----------------- Noah Fischman
Daniel Glassman Director April 12, 1999 - ----------------- Daniel Glassman
Louis H. Saltzman Director April 12, 1999 - ----------------- Louis H. Saltzman
ARISTA INVESTORS CORP.
FORM 10-K FINANCIAL STATEMENTS AND SCHEDULES
Years Ended December 31, 1998, 1997 and 1996
WITH INDEPENDENT AUDITORS' REPORT
ARISTA INVESTORS CORP.
And Schedules
Page ----
Independent Auditors' Report
Financial Statements of the Registrant:
Consolidated Balance Sheets -4
Consolidated Statements of Income and Comprehensive Income -6
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows -10
Notes to Consolidated Financial Statements -38
Financial Statement Schedules of the Registrant:
Schedule I - Summary of Investments - Other Than Investments in Related Parties S-1
Schedule II - Condensed Financial Information of Registrant S-2-5
Schedule III - Supplemental Segment Information S-6
Schedule IV - Reinsurance S-7
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and notes thereto.
[LETTERHEAD OF ROSEN SEYMOUR SHAPSS MARTIN & COMPANY LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Arista Investors Corp.:
We have audited the accompanying consolidated balance sheets of Arista Investors Corp. as of December 31, 1998 and 1997 and the related consolidated statements of income and comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arista Investors Corp. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules on pages S-1 to S-7 of this Form 10-K are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein.
Rosen Seymour Shapss Martin & Company LLP CERTIFIED PUBLIC ACCOUNTANTS
New York, New York March 4, 1999
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
A S S E T S
(Continued)
ARISTA INVESTORS CORP.
CONSOLIDATED BALANCE SHEETS (Continued) December 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31, 1998, 1997 and 1996
(Continued)
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Continued) Years Ended December 31, 1998, 1997 and 1996
The accompanying notes are an integral part of these financial statements.
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
The accompanying notes are an integral part of these financial statements.
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1997 and 1996
(Continued)
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 1998, 1997 and 1996
(Continued)
ARISTA INVESTORS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 1998, 1997 and 1996
The accompanying notes are an integral part of these financial statements.
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
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. Until July 1, 1998 the Company was 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"). Effective July 1, 1998 the Company entered into an Administrative Services Agreement ("TPA Agreement") with The Guardian Life Insurance Company of America" ("The Guardian") and commenced services as a third party administrator of New York State statutory disability insurance policies (see Note 2). 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 through November 11, 1998 was the writing of New York State statutory disability insurance policies including super statutory and voluntary disability benefits insurance in New York State. In November 1998 the Company completed the assumption and transfer of Arista's insurance business to The Guardian. The effective date of the cession was July 1, 1998. Arista discontinued writing New York State statutory disability insurance policies (the "Insurance"), effective November 12, 1998. 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. At December 31, 1998 the Company operated exclusively as a third party administrator. Collection was incorporated in August 1989 and commenced operations in July 1991. The Board of Directors of the Company approved the dissolution of The Collection Group, Inc. 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 16.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Arista, Collection, and Administrative. All significant intercompany balances and transactions have been eliminated.
Revenue Recognition, Premiums Receivable and Claims Liabilities
(*) Premium revenue is recognized evenly over the term of the policy. Estimates of premiums which have been earned but not collected are accrued since customers generally report and pay such premiums after the earning period based on the number of employees on their payroll during the period of coverage.
(*) 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. Such fees are determined in accordance with prescribed schedules based on the services 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.
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 Note 14).
- ---------- (*) These policies relate to the Company's operations prior to July 1, 1998.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Furniture and Equipment
Furniture and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense for each of the years in the three-year period ended December 31, 1998, was $47,955, $57,606 and $64,641, respectively.
Investments
Pursuant to the requirements of SFAS 115, the Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as "held-to-maturity securities" and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling them in the near future are classified as "trading securities," and reported at fair value, with unrealized gains and losses included in earnings; debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as "available for-sale securities" and reported at fair value, with unrealized gains and losses reported as other comprehensive income as a separate component of stockholders' equity.
Deferred Policy Acquisition Costs
(*) Policy acquisition costs include fees paid and certain other costs in connection with acquiring new business. These costs are deferred and charged to income over the future periods in which the related premiums are earned. Amortization periods range from five to seven years. The remaining unamortized costs were charged to income during 1998, upon the assumption and transfer of the Insurance (see Note 3).
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist principally of receivables from third party administration functions. Credit risk with respect to these receivables is considered minimal due to the financial condition of the insurers and deposits held by the Company.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
The carrying amounts and related fair values of financial instruments at December 31, 1998 and 1997 are summarized as follows:
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. Held-to-maturity investments are carried at cost and their fair values are based on quoted market prices.
(ii) The carrying values of premiums receivable, amounts payable to the reinsurer, unpaid claims liabilities, unearned premiums, receivables from related parties, and receivables from third party administration approximate fair value because of their short-term maturities.
(iii) Surplus note payable is carried net of unamortized discount. Its fair value approximates its face value due to the nearness of its payment date.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Tax returns are prepared using Statutory Accounting Principles ("SAP") until June 30, 1998 (see Note 15). Deferred income taxes reflect the future tax conse quences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end (see Note 11).
Net Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share (Class A and B) have been computed in accordance with FASB Statement No. 128 (SFAS 128), "Earnings Per Share." Basic earnings per share (basic EPS) is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the year. Diluted earnings per share (diluted EPS) is computed by dividing net income (loss) used in determining basic EPS by the weighted average number of common shares outstanding during the year, plus the incremental shares, if any, that would have been outstanding upon the assumed exercise of dilutive stock options and warrants. Basic EPS and diluted EPS for the year ended December 31, 1996 have been restated to conform to the method used in 1997 with the adoption of SFAS 128 (see Note 13).
Cash and 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, 1998 and 1997 cash and cash equivalents include certificates of deposit, commercial paper, and money market accounts as follows:
1998 1997 ---------- ---------- Cash in bank $1,516,391 $2,683,620 Money market accounts 165,360 1,396,236 Commercial paper 4,564,158 3,992,528 Certificates of deposit 85,000 224,559 ---------- ---------- $6,330,909 $8,296,943 ========== ==========
New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income." This pronouncement requires entities to make certain disclosures about all types of income, expenses, gains and losses arising during the period in addition to net income from operations. SFAS 130 is effective for years beginning after December 31, 1997. The financial statements for 1997 and 1996 were restated to provide comparative disclosure for those years.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
3. ARISTA INSURANCE COMPANY
Cession of Insurance Business
In November 1998, the Company completed the assumption and transfer of its insurance operations previously conducted by Arista pursuant to an Assumption Reinsurance Agreement (the "Agreement") with The Guardian, effective July 1, 1998. Under the Agreement, Arista received a cession allowance of $3,421,486 which was calculated as 18% of Arista's earned premium for the period July 1, 1997 to June 30, 1998. The Guardian assumed the insurance related assets and liabilities of Arista as of June 30, 1998. The cession resulted in a net gain of $838,171, net of income taxes of $530,719. Arista discontinued writing disability insurance (the "Insurance") effective November 12, 1998. The Company concurrently entered into the TPA Agreement with The Guardian effective July 1, 1998. Under the terms of the TPA Agreement, the Company performs administrative and other services relating to the insurance policies it previously issued, as well as other insurance policies previously underwritten by The Guardian. The Company earns a service fee based on both fixed and variable percentages of premiums paid to The Guardian.
Recapitalization
Arista amended its Certificate of Incorporation (the "Amendment") which was approved and placed on file with the NYSID as of December 18, 1998, and filed with the Office of the County Clerk on December 31, 1998. This Amendment decreased Arista's capital from $1,950,000 (comprised of 1,300 shares with a par value of $1,500) to $300,000 (comprised of 200 shares with a par value of $1,500 per share). Arista's paid-in-surplus was adjusted to $153,000. The recapitalization enabled the Board of Directors of Arista to ratify the return of capital in the amount of $2,492,000 to the Company. On January 26, 1999 the NYSID approved Arista's return of $2,492,000 to the Company. The transfer was completed on January 28, 1999.
4. TRANSACTIONS WITH RELATED PARTIES
Agents
Bernard Kooper ("Kooper"), Chairman of the Board of the Company and Arista, and owner of 20.4% in 1998 and 1997 and 19.1% in 1996 of the Company's outstanding Class A and 100% of the Company's Class B common stock, is one of the general agents under contract with Arista. Gross earned premiums from policies placed by Kooper's agency, Bernard Kooper Life Agency, Inc. (the "Agency") aggregated $584,965, $1,258,156 and $1,254,143 for the years ended December 31, 1998, 1997 and 1996, respectively. The Agency received approximately $156,000, $227,000 and $223,000
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
4. TRANSACTIONS WITH RELATED PARTIES (Continued)
Agents (Continued)
in commissions from Arista during 1998, 1997 and 1996, respectively, for premiums on policies placed with Arista. Such premiums represented approximately 5.9%, 6.1% and 5.4%, respectively, of the consolidated gross premiums earned during the years ended December 31, 1998, 1997 and 1996, respectively. The Agency, in turn, paid approximately $113,000, $131,000 and $159,000 during 1998, 1997 and 1996, respectively, to other brokers, including approximately $15,000, $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, 1997 and 1996 were $13,960 and $13,268, respectively.
Employment Agreements
The Company and Arista had employment agreements with Kooper and Stanley Mandel ("Mandel") which were to terminate in February 2001 as described in Note 8(a). The Company has entered into an employment agreement with Mandel effective November 12, 1998 which will expire as described in Note 8(a).
Consulting Agreements
Arista had a consulting agreement from May 1993 through September 1993 with an entity principally owned by a director of both Arista and the Company. The Company paid $6,000 to this director in 1998 for services and out-of-pocket expenses incurred for evaluating various business opportunities. The Company paid $30,000 in 1996 to the 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 $25,000 in 1998 and $26,000 per year in 1997 and 1996 under this agreement. The agreement was terminated in January 1999.
Secured Promissory Note
In June 1996 Kooper exercised a warrant granted in 1986 to acquire 365,000 shares of the Company's Class A common stock. In partial payment for the shares, Kooper issued his secured promissory note (the "Note") to the Company for $500,000. The Note bears interest at the one-year London Interbank Offered Rate (LIBOR) plus 1.25% and is adjusted on the first day of every October, January, April and July commencing October 1, 1996. The terms of the Note provide for quarterly payments of interest only at the above determined rate. The principal balance outstanding and accrued
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
4. TRANSACTIONS WITH RELATED PARTIES (Continued)
Secured Promissory Note (Continued)
but unpaid interest is due and payable on June 14, 2001. The Note will be canceled and extinguished if the Company exercises the option to obtain Kooper's 47,400 shares of Class B common stock (Note 9). The Note is secured by the 365,000 shares of Class A common stock.
Salary Advances
At December 31, 1998 and 1997, salary advances to an officer and director of the Company and Arista aggregated $216,750 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, 1998 and 1997 were as follows:
1998 1997 ------------ ------------ Balance at January 1: $ 3,391,950 $ 4,351,500 Less reinsurance recoverables 1,695,975 2,175,750 ------------ ------------ Net claims liabilities 1,695,975 2,175,750 ------------ ------------ Claims incurred: Current year 4,820,822 12,939,875 Prior years (net of $960,000 write-down in 1997) 69,098 (727,181) ------------ ------------ Total claims incurred 4,889,920 12,212,694 ------------ ------------ Claims paid: Current year 2,625,298 9,875,609 Prior years 3,020,398 3,296,635 ------------ ------------ Total claims paid 5,645,696 13,172,244 ------------ ------------ Claims incurred, assumed by The Guardian (Note 3) 2,636,174 -- ------------ ------------ Balance at December 31: Net claims liabilities -- 1,695,975 Plus reinsurance recoverables -- 1,695,975 ------------ ------------ Total liability $ -- $ 3,391,950 ============ ============
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
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 indemnity reinsurance agreement which became effective retroactive to October 1, 1995 (see Note 14). 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. Upon termination of Arista's reinsurance agreement with Cologne Life Reinsurance Company the principal balance of the Note became payable. Repayment of the Note was subject to the prior approval of the New York State Insurance Department. Arista obtained such approval and in December 1998, paid the balance of the Note and accrued interest thereon, from the free and divisible surplus of Arista. Interest expense for the years ended December 31, 1998, 1997 and 1996 totaled $491,181, $348,075 and $315,000, respectively.
In connection with the issuance of the Note, and as an inducement to enter into the transaction with Arista, the Company issued a warrant certificate to purchase 150,000 shares (subject to adjustment for stock dividends or stock splits) of its Class A common stock to CLUMCO. The certificate was exercisable after October 1996 at an exercise price of $3.50 per share and expires in December 2005. At December 31, 1997 the aggregate value of the warrant was $150,000, based on an independent appraisal of $1.00 per underlying share, and has been reflected in stockholders' equity with the corresponding discount charged to surplus note payable. The warrants expired upon the notice of the transaction, and the portion of the Note proceeds attributed to the warrants has been included in additional paid-in capital at December 31, 1998. The discount was being amortized to operations over the option period of 10 years using the straight-line method. The unamortized discount of $106,250 was charged to operations upon the repayment of the Note. Amortization was $120,000 and $15,000 for the years ended December 31, 1998 and 1997, respectively.
7. LEASE COMMITMENTS
On January 9, 1995, the Company entered into a five-year lease for its new principal executive office space, effective June 1, 1995 through May 31, 2000. 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. Pursuant to a sublease agreement between the Company and Arista, Arista reimbursed the Company for 90.90% of the Company's lease obligations through June 30, 1998. The sublease terminated June 30, 1998.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
7. LEASE COMMITMENTS (Continued)
The minimum rental commitments under the operating leases for office space for the remaining two-year period ending May 31, 2000 are as follows:
1999 $ 228,450 2000 96,892 -----------
$ 325,342 ===========
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.
Consolidated rent expense was $261,063 in 1998, $249,973 in 1997 and $252,171 in 1996.
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. Effective with the closing of the transaction with The Guardian on November 12, 1998, Arista assigned this employment agreement to the Company. In addition, the Company may, but is not obligated to, pay a year-end bonus as may be determined by the Board of Directors of the Company. The agreement provides that in the event of termination of the agreement by the Company, the Company 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 the Company.
Kooper and the Company had, unless terminated earlier, entered into an employment contract effective in February 1993 (the "Kooper Agreement") which was to terminate in February, 2001, and provided for an annual base salary of $150,000.
Effective in February 1993 Arista and Mandel had entered into an employment contract (the "Mandel Agreement") which was to terminate in February, 2001 and provided for an annual base salary of $208,750 in each of the eight years plus annual reimbursement of automobile expenses of $9,000 and a nonaccountable expense allowance of $5,000.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
8. COMMITMENTS AND CONTINGENCIES (Continued)
(a) Employment Agreements (Continued)
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. Upon consummation of the Agreement with The Guardian on November 12, 1998, Kooper and Mandel were each given an Employment Agreement Termination Notice on December 10, 1998 (the "Notice") under which their contracts were to terminate sixty days subsequent to the Notice which was February 8, 1999, and also advising them of the lump sum payout they will be receiving. 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. Kooper and Mandel are entitled to receive lump sum payouts of $861,658 and $994,619, respectively. At December 31, 1998 these amounts plus interest compounded monthly, at the applicable federal short-term interest rate as provided in Section 1274(d) of the Internal Revenue Code of 1986, as amended, have been accrued and are included in accounts payable and accrued expenses in the accompanying balance sheet. 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 treated as loans to both Kooper and Mandel and are collateralized by the underlying policy. Insurance loans to Kooper and Mandel aggregated $329,214 and $212,563 at December 31, 1998 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. Upon consummation of the Agreement with The Guardian, the Company and Arista are required to make payments to the insurance carriers aggregating $147,441 to render the policies as "paid up."
Mandel and the Company have entered into an employment contract (the "New Mandel Agreement") commencing November 12, 1998 and will terminate on the later of November 11, 2000, or the termination of the TPA Agreement with The Guardian, but not later than November 11, 2003. The New Mandel Agreement provides for an annual base salary of $185,000 plus a nonaccountable expense allowance of $5,000 per annum. Commencing with the fiscal year beginning January 1, 1999 and ending on December 31 of each fiscal year or portion of such fiscal year for which Mandel is an employee he will receive a bonus equal to eight percent of the Company's annual earnings from third party administration operations before income taxes and nonrecurring events for the bonus period.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
8. COMMITMENTS AND CONTINGENCIES (Continued)
(a) Employment Agreements (Continued)
The New Mandel Agreement provides that, in the event of a consolidation, merger, sale of substantially all of the assets of the Company, or ownership of fifty percent or more of the voting common stock by one or more individuals or entities, who are acting in concert or as an affiliated group of which Mandel is not a participant (a "Change in Control") the employment agreement may be either terminated, assigned by the Company or continued by the Company or any successor or surviving corporation provided that notice of such action is accompanied by a lump sum payment of $370,000.
(b) Uninsured Risk
At December 31, 1998 and 1997 cash and equivalents on deposit with financial institutions exceeded federal deposit insurance coverage by approximately $1,571,910 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 $14,036 and $62,389 for the years ended December 31, 1997 and 1996, respectively. Amortization of deferred acquisition costs charged to operations for all acquisitions were $484,398, $319,775 and $332,633 for the years ended December 31, 1998, 1997 and 1996, respectively. Accumulated amortization was $2,343,669 and $1,860,521 at December 31, 1998 and 1997, respectively.
Aetna. On April 1, 1994, Arista 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"). Aetna received a fee based on annualized premiums in force at March 31, 1994 and on premiums paid and earned for the period April 1, 1994 through March 31, 1995. During 1996 Arista paid $7,102 under this arrangement.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
8. COMMITMENTS AND CONTINGENCIES (Continued)
(c) Policy Acquisitions (Continued)
American Medical and Life. Effective October 1, 1994, Arista entered into an indemnity reinsurance agreement with American Medical and Life Insurance Company ("American Med") dated December 29, 1994 wherein Arista assumed the book of New York State statutory disability insurance that was ceded by American Med. In addition, effective January 1, 1995, Arista, through an assumption reinsurance treaty, acquired the book of New York State statutory disability insurance that had been previously ceded by American Med. American Med received a fee based on premiums paid which were earned during the year ended September 30, 1994 and received a fee based on premiums paid which were earned for the period January 1, 1995 through June 30, 1996. During 1996 Arista paid acquisition costs of $170,831, and at December 31, 1997 $4,411 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 indemnity reinsurance agreement under which Arista agreed to 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. Arista terminated the agreement in March 1998, effective January 1, 1998.
Insurance Company of Greater New York and Greater New York Mutual Insurance Company. In April 1996 Arista entered into an agreement with the Insurance Company of Greater New York and Greater New York Mutual Insurance Company (the "Ceding Group") which provided that effective April 1, 1996, Arista assumed the Ceding Group's New York State statutory disability business and issued assumption certificates to the policyholders of the Ceding Group. The agreement calls for Arista to pay a fee based on premiums received which will be earned during the year ending March 31, 1997. The acquisition has been accounted for under the purchase method of accounting. During 1996 Arista paid acquisition costs of $62,325, and at December 31, 1997, $9,096 was receivable from the Ceding Group under this arrangement.
(d) Other Matters
Effective July 1, 1998, the Company entered into the TPA Agreement with The Guardian to perform administrative and other services relating to the Insurance as well as other disability policies previously underwritten by The Guardian. The Company earns a service fee based on both fixed and variable percentages of paid premiums earned by The Guardian. This agreement replaced a prior agreement between Arista and The Guardian. The agreement will terminate June 30, 2003, however The Guardian may terminate the agreement after the first two years in the event The Guardian desires to perform these services.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
8. COMMITMENTS AND CONTINGENCIES (Continued)
(d) Other Matters (Continued)
(1) Effective July 1, 1993, Arista entered into an agreement to perform certain administrative services for The Guardian. Fees for these services were determined in accordance with a prescribed schedule based on the type of service provided. The agreement was terminated July 1, 1998, the effective date of the New Agreement.
(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. No services are currently being provided under this agreement.
(4) Effective March 1, 1996, Arista arranged 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 arrangement will remain in effect until terminated by either party.
(e) Reinsurance
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, 1998 Arista estimated that it would receive approximately $63,800 under the agreement.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
9. STOCK OPTIONS AND WARRANTS
Transactions involving stock options and warrants in each of the years ended December 31, 1998, 1997 and 1996 are summarized below:
(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. In December 1998 the warrants granted to CLUMCO to purchase 150,000 shares of Class A Common Stock expired upon the repayment of the note and accrued interest.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
9. STOCK OPTIONS AND WARRANTS (Continued)
1985 Plan
The 1985 Incentive Stock Option Plan (the "1985 Plan") provided 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 were 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") provided 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 was 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)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
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. The warrants were not exercised and expired at the end of the third business day prior to the date of the vote on Proposal No. 1 at the Special Stockholders Meeting held on October 18, 1998.
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 automati cally 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 shares of Class B common stock held by Kooper. The option is exercisable by a vote of the majority of Class A directors and by delivering to Kooper, at the Company's option, either 47,400 shares of Class A common stock, or cash equal to the fair market value of 47,400 shares of Class A common stock at the date of exercise plus the cancellation and extinguishment of his secured promissory note (see Note 4) upon payment of all accrued but unpaid interest. The option expires on June 14, 2001 or terminates upon Kooper's death.
At December 31, 1997 and 1996, 197,400 and 225,900 shares, respectively, of Class A common stock were reserved for conversion of Class B common stock and for the exercise of stock warrants outstanding.
In July 1998, as authorized by Arista's Board, Arista paid a dividend of $279,951 to the Company.
In April 1996, as authorized by Arista's Board, Arista paid a dividend of $111,684 to the Company.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
11. INCOME TAXES
At December 31, 1998 and 1997 deferred tax assets aggregated $778,578 and $1,460,170 (including NOL carryforward of $405,089), respectively, and deferred tax liability aggregated $19,268 and $1,737,941, respectively, as follows:
1998 1997 ----------- ----------- Deferred tax asset: Commissions payable $ -- $ 366,239 Investment in securities 40,152 22,588 Reinsurance -- 656,974 Other assets -- 9,280 Accounts payable and accrued expenses 738,426 -- Loss carryforward -- 405,089 ----------- ----------- Total deferred tax asset 778,578 1,460,170 ----------- ----------- Deferred tax liability: Deferred acquisition costs -- 188,915 Other assets -- 153,785 Claims liabilities 19,268 172,965 Reinsurance due -- 1,161,478 Accounts payable and accrued expenses -- 60,798 ----------- ----------- Total deferred tax liability 19,268 1,737,941 ----------- ----------- Net deferred tax asset (liability) $ 759,310 $ (277,771) =========== ===========
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 for continuing operations:
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
11. INCOME TAXES (Continued)
The provision (benefit) for income taxes consists of the following at December 31, 1998, 1997, and 1996:
1998 1997 1996 ----------- ----------- ----------- Currently payable (benefit): Federal $ 1,138,622 $ 130,550 $ -- State and local 584,109 212,505 70,436 ----------- ----------- -----------
1,722,731 343,055 70,436 ----------- ----------- -----------
Deferred tax asset: January 1, (1,055,081) (974,920) (1,025,739) December 31, (778,578) (1,055,081) (974,920) ----------- ----------- -----------
Net change 276,503 (80,161) 50,819 ----------- ----------- -----------
Deferred tax liability: January 1, 1,737,941 1,608,087 1,648,166 December 31, 19,268 1,737,941 1,608,087 ----------- ----------- -----------
Net change (1,718,673) 129,854 (40,079) ----------- ----------- -----------
Net deferred tax effect (1,442,170) 49,693 10,740 ----------- ----------- -----------
Income tax provision before NOL benefit 280,561 392,748 81,176
Net operating loss benefit -- -- (554,838) ----------- ----------- -----------
Net income tax provision (benefit) 280,561 392,748 (473,662)
Tax provision (benefit) applicable to discontinued operations 423,869 342,191 (489,065) ----------- ----------- -----------
Tax provision (benefit) applicable to continuing operations $ (143,308) $ 50,557 $ 15,403 =========== =========== ===========
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
12. DISCONTINUED OPERATIONS
As discussed in Note 2, in November 1998 the Company and Arista ceded its insurance business to The Guardian. The cession resulted in a gain of $838,171, net of income taxes of $530,719. The operating results have been restated to exclude the discontinued operations as follows:
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
13. 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, 1998, 1997 and 1996, respectively.
Net Income Per Share (Loss) Shares Amount ----------- ----------- ---------
Year Ended December 31, 1998: Basic EPS $ 432,795 2,617,500 $ .17 Effects of dilutive securities: None -- -- -- ----------- ----------- -------
Diluted EPS $ 432,795 2,617,500 $ .17 =========== =========== =======
Year Ended December 31, 1997: Basic EPS $ 100,320 2,617,500 $ .04 Effects of dilutive securities: None(1) -- -- -- ----------- ----------- -------
Diluted EPS $ 100,320 2,617,500 $ .04 =========== =========== =======
Year Ended December 31, 1996:
Basic EPS - previously reported $(1,175,863) 2,617,500 $ (.45) Effects of restatement to comply with FASB Statement No. 128 -- (319,750) (.06) ----------- ----------- ------- Basic EPS - as restated (1,175,863) 2,297,750 (.51) Effects of dilutive securities: None(2) -- -- -- ----------- ----------- -------
Diluted EPS $(1,175,863) 2,297,750 $ (.51) =========== =========== =======
(1) Warrants to purchase 150,000 shares of Class A common stock were not included in computing diluted EPS, because their exercise price exceeded the average market price during 1997.
(2) Options to purchase 28,500 shares of Class A common stock and warrants to purchase 150,000 shares of Class A common stock were not included in diluted EPS, because their exercise price exceeded the average market price during 1996.
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
14. REINSURANCE
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 called 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 was adjusted quarterly. At December 31, 1997 and 1996, $158,721 and $93,121, respectively, were accrued by Arista under this agreement. The agreement allowed Arista an annual profit commission of 2% of gross earned premiums ceded to The Cologne, if a certain loss ratio was achieved. The agreement was terminated in March 1998, effective January 1, 1998.
From January 1, 1998 to June 30, 1998, Arista entered into a Quota Share Reinsurance Treaty with The Guardian whereby Arista ceded by way of reinsurance a 50% participation in Arista's insurance business, both for policies in force as of January 1, 1998 and for business written or acquired on or after January 1, 1998.
As discussed in Note 2, effective as of July 1, 1998 the Company agreed to cede to The Guardian all of Arista's liabilities under each and every policy of the Insurance that had been underwritten by Arista. Arista discontinued sales of the Insurance, effective November 12, 1998.
Ceded transactions for the years ended December 31, 1998 and 1997 were as follows:
Gross Ceded Net Amount Amount Amount ---------- ---------- ----------
Premium receivable $ -- $ -- $ -- Claims liabilities $ -- $ -- $ -- Unearned premiums $ -- $ -- $ -- Commissions payable $ -- $ -- $ --
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
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
14. REINSURANCE (Continued)
A contingent liability existed with respect to reinsurance ceded which would become a liability of Arista and the Company in the event that The Cologne was unable to meet the obligations assumed under the reinsurance agreement.
15. INVESTMENTS
Investments at December 31, 1998 and 1997 consisted of the following types:
1998 1997 ---------- ----------
Held-to-maturity securities $2,618,068 $2,630,453 Available-for-sale securities 3,552 9,250 Trading securities 87 85 ---------- ----------
$2,621,707 $2,639,788 ========== ==========
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, 1998 and 1997 are as follows:
Available-for-sale securities -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------
December 31, 1998: Redeemable preferred securities $31,524 $ -- $27,972 $ 3,552 ------- ------- ------- -------
$31,524 $ -- $27,972 $ 3,552 ======= ======= ======= =======
December 31, 1997: Redeemable preferred securities $31,524 $ -- $22,274 $ 9,250 ------- ------- ------- -------
$31,524 $ -- $22,274 $ 9,250 ======= ======= ======= =======
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
15. INVESTMENTS (Continued)
Held-to-maturity securities ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ----------
December 31, 1998: U.S. Treasury securities $2,618,068 $ 58,927 $ -- $2,676,995 ---------- ---------- ---------- ----------
$2,618,068 $ 58,927 $ -- $2,676,995 ========== ========== ========== ==========
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 ========== ========== ========== ==========
Pursuant to New York State insurance regulations, Arista maintains a mandatory trust fund with the Bank of New York containing U.S. Treasury securities with a carrying value of approximately $2,115,444 and $2,124,513 at December 31, 1998 and 1997, respectively.
Investment Income
Net investment income for the years ended 1998, 1997 and 1996 consisted of the following:
1998 1997 1996 -------- -------- --------
Interest and dividends: Bonds and long-term investments $152,794 $148,582 $161,812 Short-term investments 356,168 328,765 258,391 -------- -------- --------
Total interest and dividends 508,962 477,347 420,203
Interest on note receivable from related party 34,894 36,566 20,336 -------- -------- --------
Total investment income $543,856 $513,913 $440,539 ======== ======== ========
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
15. INVESTMENTS (Continued)
Realized and unrealized gains and losses on investments for the years ended December 31, 1998, 1997 and 1996 consisted of the following:
1998 1997 1996 -------- ------- ------- Realized gains (losses) Redeemable preferred securities $ -- $(2,625) $ (208) Equity securities -- 106 -- -------- ------- -------
Total realized losses -- (2,519) (208) -------- ------- -------
Unrealized losses Equity securities -- (194) (159) -------- ------- -------
Total unrealized losses -- (194) (159) -------- ------- -------
Net investment losses $ -- $(2,713) $ (367) ======== ======= =======
Investment Maturity
The following schedule sets forth the respective maturity dates as at December 31, 1998:
Available-for-sale securities ----------------------------- Fair Cost Value ---------- ----------
Due after one year through five years $ 31,524 $ 3,552 ========== ==========
Held-to-maturity securities --------------------------- Fair Cost Value ---------- ----------
Within one year $ 627,678 $ 630,976 Due after one year through five years 1,462,476 1,504,224 Due after five years through ten years 527,914 541,795 ---------- ----------
Total $2,618,068 $2,676,995 ========== ==========
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
16. 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, 1998, 1997, and 1996:
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
16. STATUTORY MATTERS (Continued)
Arista was in compliance with the NYSID minimum statutory capital and surplus requirement at December 31, 1998, 1997 and 1996.
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. Arista paid dividends of $279,951 and $111,684 during 1998 and 1996, respectively.
On February 1, 1999, Arista's Board of Directors approved a dividend in the amount of $167,526, based on its last filed statement at September 30, 1998, to be paid to the Company. The dividend was paid to the Company on February 2, 1999.
In March 1999, the NYSID approved an extraordinary cash dividend of $4,000,000, based on their review of Arista's filed December 31, 1998 Annual Statement, on the condition that there has been no event that has significantly impacted upon Arista's last reported surplus as regards policyholders.
17. INDUSTRY SEGMENTS
Effective July 1, 1998, Arista ceded its insurance segment to The Guardian and discontinued sales of the Insurance effective November 11, 1998. The Company concurrently entered into a TPA Agreement with The Guardian, effective July 1, 1998. The Company also provides third party administrative services for other insurance companies. Arista was 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. Revenues and profit and loss by segment for the years ended December 31, 1998, 1997 and 1996 were as follows:
Discontinued Administrative Insurance Service Consolidated Segment Segment Total ----------- ----------- ----------- Revenues from outside customers $ 9,792,264 $ 1,483,080 $11,275,344 Major customers $ -- $ 1,406,732 $ 1,406,732 Income (loss) before income taxes $ 1,094,918 $ (381,562) $ 713,356
(Continued)
ARISTA INVESTORS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996
17. INDUSTRY SEGMENTS (Continued)
Discontinued Administrative Insurance Service Consolidated Segment Segment Total ----------- ----------- ----------- Revenues from outside customers $ 20,763,439 $ 351,346 $ 21,114,785 Major customers $ 2,505,370 $ -- $ 2,505,370 Income before income taxes $ 363,435 $ 129,633 $ 493,068
Revenues from outside customers $ 23,160,259 $ 260,664 $ 23,420,923 Major customers $ 2,468,331 $ -- $ 2,468,331 Income (loss) before income taxes $ (1,689,021) $ 39,496 $ (1,649,525)
18. MAJOR CUSTOMER
For the year ended December 31, 1998, third party administrative fees from The Guardian represented approximately 95% of the Company's total revenues from continuing operations and 12% of the consolidated total revenues from continuing and discontinued segments (see Note 17).
For the year ended December 31, 1996, one group, the Federation of Jewish Philanthropies ("FOJP"), accounted for approximately 11% of Arista's consolidated revenues from continuing and discontinued segments. No other customer accounted for 10% or more of the Company's consolidated total revenues or Arista's revenues in the year ended December 31, 1996. For the year ended December 31, 1997, no one group accounted for 10% or more of Arista's revenues. However, Arista underwrote disability insurance for two large groups with combined earned premiums of approximately $2,505,000 in 1997.
19. FOURTH QUARTER ADJUSTMENT
During the fourth quarter of 1996, the Company recorded a charge to operations of $757,350 ($0.29 per share), representing compensation resulting from the exercise of stock warrants and options by certain officers of the Company and Arista.
20. YEAR 2000
The Company has begun converting its computer systems so as to be year 2000 compliant. The Company expects this conversion to be completed by the middle of 1999. Expenditures for the Year 2000 Project were $20,500 in 1998 and are expected to be less than $1,000 in 1999. All costs associated with these system changes are charged against income in the period incurred.
ARISTA INVESTORS CORP.
SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998
Amount Cost or shown in amortized Market the balance Type of Investment cost value sheet - ----------------------------------------- ---------- ---------- ----------
Held-to-maturity securities: United States Government and government agencies and authorities $2,618,068 $2,676,995 $2,618,068
Available-for-sale securities: Redeemable preferred stocks 31,524 3,552 3,552
Trading securities: Common stock 279 87 87 ---------- ---------- ----------
$2,649,871 $2,680,634 $2,621,707 ========== ========== ==========
See independent auditors' report.
S-1
ARISTA INVESTORS CORP. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Company Only) BALANCE SHEETS
December 31, ------------------------- 1998 1997 ----------- ----------- A s s e t s Investment in subsidiaries $ 8,727,163 $ 7,181,474 Cash and equivalents 1,208,832 248,256 Receivable from third party administration 748,797 -- Prepaid expenses and other assets 383,838 187,092 Furniture and equipment - net 75,707 -- Deferred tax asset 1,066,834 738,049 ----------- ----------- Total assets $12,211,171 $ 8,354,871 =========== ===========
Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses $ 1,728,208 $ 495,162 Due to subsidiaries, net 3,679,354 1,488,895 ----------- ----------- Total liabilities 5,407,562 1,984,057 Stockholders' equity 6,803,609 6,370,814 ----------- ----------- Total liabilities and stockholders' equity $12,211,171 $ 8,354,871 =========== ===========
STATEMENTS OF OPERATIONS
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, 1998 and 1997 and for each of the three years in the period ended December 31, 1998.
(Continued)
S-2
ARISTA INVESTORS CORP. SCHEDULE II - Continued CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Company Only) STATEMENTS OF CASH FLOWS
(Continued)
S-3
ARISTA INVESTORS CORP. SCHEDULE II - Continued CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Company Only) STATEMENTS OF CASH FLOWS (Continued)
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, 1998 and 1997 and for each of the three years in the period ended December 31, 1998.
(Continued)
S-4
ARISTA INVESTORS CORP.
SCHEDULE II - Continued CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Parent Company Only) NOTES TO CONDENSED FINANCIAL INFORMATION December 31, 1998, 1997 and 1996
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 to.
2. Cash Dividends from Subsidiary
Arista paid dividends to the Company in the amount of $279,951 and $111,684 in July 1998 and April 1996, respectively. On February 1, 1999, Arista's Board of Directors approved a dividend in the amount of $167,526, based on its last filed statement at September 30, 1998, to be paid to the Company. The dividend was paid to the Company on February 2, 1999.
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, pursuant to a plan of partial liquidation. Since the closing of the cession of the Insurance to The Guardian on November 12, 1998, the Department approved Arista's return of capital to the Registrant in the amount of $2,492,000 and an extraordinary dividend of $4,000,000 based on a review of Arista's filed December 31, 1998 Annual Statutory Statements.
See independent auditors' report.
S-5
ARISTA INVESTORS CORP.
SCHEDULE III SUPPLEMENTAL SEGMENT INFORMATION
Years Ended December 31, 1998 and 1997
See independent auditors' report.
S-6
ARISTA INVESTORS CORP.
SCHEDULE IV REINSURANCE
Year Ended December 31, 1998
(1) No amount of reinsurance expense has been netted against premium ceded.
See independent auditors' report.
S-7
EXHIBITS
10.46 Employment Agreement between Peter Norton and the Company (including Employment Agreement Assignment, dated as of February 1, 1999)
27 Financial Data Schedule