<PAGE>
As filed with the Securities and Exchange Commission on October 15, 1996
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
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PREFERRED EMPLOYERS HOLDINGS, INC.
(Name of small business issuer in its charter)
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<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 6411 65-0698779
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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10800 Biscayne Blvd., Penthouse
Miami, FL 33161
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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Mel Harris, Chairman and Chief Executive Officer
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
(305) 893-4040
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Donald J. Bezahler, Esq. Stephen J. Gulotta, Jr., Esq.
Baer Marks & Upham LLP Squadron, Ellenoff, Plesent & Sheinfeld, LLP
805 Third Avenue 551 Fifth Avenue
New York, New York 10022 New York, New York 10176
Tel: (212) 702-5700 Tel: (212) 661-6500
Fax: (212) 702-5941 Fax: (212) 697-6686
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act, please check
the following box. [X]
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<PAGE>
<TABLE>
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CALCULATION OF REGISTRATION FEE
================================================================================================================================
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Aggregate Offering Registration Fee
Per Share(1) Price(1)
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<S> <C> <C> <C> <C>
Shares of Common Stock, par value $.01(2)....... 1,150,000 $10.00 $11,500,000 $3,965.52
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Representative's Warrants 100,000 $ .001 $ 100 $ .03
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Shares of Common Stock, par value $.01(3)(4).... 100,000 $12.00 $ 1,200,000 $ 413.79
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Total....................................... -- -- $12,700,100 $4,379.34
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</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
(2) Includes 150,000 shares of Common Stock which may be issued upon exercise
of the Underwriter's over-allotment option. See "UNDERWRITING."
(3) Shares of Common Stock issuable upon exercise of the Warrants to be sold to
the Representative of the several underwriters at an exercise price of 120%
of the initial public offering price.
(4) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of
anti-dilution adjustment in accordance with the terms of the Warrants to be
sold to the Representative of the several underwriters.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Preferred Employers Holdings, Inc.
CROSS REFERENCE SHEET
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Item No. Caption in Form SB-2 Location in Prospectus
- -------- -------------------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement Outside Front Cover Page.
and Outside Front Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages.
Pages of Prospectus.
Summary Information, Risk Factors Prospectus Summary; Rick Factors.
3. and Ratio of Earnings To Fixed
Charges.
4. Use of Proceeds. Use of Proceeds.
5. Determination of Offering Price. Underwriting.
6. Dilution. Dilution.
7. Selling Security Holders. *
8. Plan of Distribution. Underwriting
9. Description of Securities to be Description of Securities.
Registered.
10. Interest of Named Experts and Legal Matters; Experts.
Counsel.
11. Information with Respect to the Prospectus Summary; Business; Selected Financial Data;
Registrant. Management's Discussion and Analysis of Financial
Condition and Results of Operations; Management;
Management - Executive Compensation; Principal
Stockholders; Certain Transactions; Financial Statements.
12. Disclosure of Commission Position on Management - Indemnification.
Indemnification for Securities Act
Liabilities.
</TABLE>
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*Not Applicable
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS, DATED October 15, 1996
PROSPECTUS
- ---------- Preferred Employers Holdings, Inc.
1,000,000 Shares of Common Stock
Preferred Employers Holdings, Inc. (together with its predecessor and
subsidiaries, the "Company") is hereby offering 1,000,000 shares (the "Shares")
of common stock, par value $.01 per share (the "Common Stock").
Prior to this offering (the "Offering"), no public market existed for the
Common Stock. The Company has applied for the inclusion of the Common Stock on
the Nasdaq SmallCap Market ("Nasdaq") under the symbol "PEGI" and on the Boston
Stock Exchange (the "BSE") under the symbol "PEG". The initial public offering
price will be determined by negotiations between the Company and Commonwealth
Associates, as representative (the "Representative") of the several underwriters
in this Offering (the "Underwriters"). It is currently anticipated that the
initial public offering price per Share will be between $8.00 and $10.00. See
"Underwriting" for a discussion of the factors considered in determining the
public offering price of the Shares.
THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 8 AND
"DILUTION" COMMENCING ON PAGE 17.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Public Underwriting Proceeds to
Discount and Company(2)
Commissions(1)
- --------------------------------------------------------------------------------
Per Share......... $ $ $
- --------------------------------------------------------------------------------
Total(3).......... $ $ $
================================================================================
(1) Does not include additional compensation to be received by the
Representative consisting of (i) a non-accountable expense allowance equal
to 2% of the gross proceeds of this Offering or $_________ ($_________ if
the Underwriters' over-allotment option, is exercised in full), of which
$20,000 has been paid to date, (ii) warrants to purchase up to 100,000
Shares (the "Representative's Warrants"), exercisable during the four years
commencing one year after the date of this Prospectus, at an exercise price
equal to 120% of the initial public offering price per Share, and (iii) a
one-year financial advisory agreement pursuant to which the Representative
will receive an aggregate of 2% of the gross proceeds of this Offering
payable at closing. In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "UNDERWRITING."
(2) Before deducting expenses of this Offering payable by the Company,
estimated to be $_______, including the Representative's non-accountable
expense allowance ($_______ if the Underwriters' over-allotment option is
exercised in full).
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to an additional 150,000 Shares to cover over-allotments, if any. If the
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$_________, $__________ and $________, respectively. See "UNDERWRITING."
---------------------
The shares of Common Stock are being offered, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify this Offering
and to reject any order in whole or in part. It is expected that delivery of the
certificates representing the securities offered hereby will be made against
payment therefor at the offices of Commonwealth Associates at 733 Third Avenue,
New York, New York on or about_________, 1996.
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Commonwealth Associates
The date of this Prospectus is ___________, 1996
<PAGE>
[PICTURE]*
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* Advertisement for Cost Containment
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, ON THE BOSTON
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of the Securities Act of 1933. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
among others, those discussed under the caption "Risk Factors."
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<PAGE>
Except as otherwise indicated, all information in this Prospectus (i) assumes
the Underwriter's over-allotment option is not exercised, and (ii) gives effect
to the consummation immediately prior to this Offering of the exchange by the
stockholders of the Company of their shares of common stock in Preferred
Employers Group, Inc. ("PEGI"), the corporation that now conducts certain of the
Company's business, for shares of the Common Stock. See "Recapitalization."
Except as otherwise specified or when the context otherwise requires, references
to the Company in this Prospectus, include Preferred Employers Holdings, Inc.,
its predecessor, and its subsidiaries through which the Company conducts certain
of its business.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements and notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. This Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to, those
discussed in "Risk Factors."
The Company
The Company is primarily engaged in providing workers' compensation and
business insurance products and risk management services designed for American
franchise businesses, particularly fast food and family style restaurants and
convenience stores. Annual premiums paid for workers' compensation insurance by
the franchise industry exceed $2.5 billion, with annual premiums paid by the
fast food and family style restaurant and convenience store segment alone
representing approximately $1 billion of this amount. Although the Company
believes that such franchise businesses tend to be among the safest insurance
risks, they generally pay the same workers' compensation rates as non-franchise
businesses which may not have formal risk or safety awareness programs.
Consequently, such businesses rarely realize any price advantages from their
favorable safety records and generally suffer premium "redundancy" or an
"overcharge" in their workers' compensation insurance rates. The Company offers
products and services designed to enable its clients to realize substantial
savings in their workers' compensation costs while reducing the time required to
manage this element of their business. Specifically, the Company provides
clients such savings by offering competitive rates and dividends and risk
management services, including cost containment and claims management programs,
which assist clients in managing their workers' compensation costs. As a result
of these measures, the Company has enabled its clients to achieve an average
reduction of 11% over the past four years in their premium experience
modification factors (which are a significant component in determining a
client's premium). As discussed above, the Company provides risk management
services which assist clients in lowering claims costs. The Company believes
that through its innovative, comprehensive and aggressive approach to
safety/loss control and the expertise of its management team, it has succeeded
in helping its clients achieve claims costs which are among the lowest in the
industry to which it provides service. The latest data available from the
National Council on Compensation Insurance, Inc. on restaurant workers'
compensation claims reflects an average cost per claim of $2,515 (medical and
indemnity only). The comparable cost to the Company's clients over the same time
period was $1,584.
Since its inception, the Company has been tracking and recording loss
data related to franchise businesses and has accumulated and developed what it
believes to be the nation's largest database of fast food franchise restaurant
policy loss results. Such information is crucial to writing effective and
competitive policies and maintaining overall profitability. The Company has
developed other proprietary information and claim analyses systems and custom
designed loss reports which explain the claims procedure and motivate client
management to promote safety and control claims expense. The Company's goal is
to exploit its policy loss database to become the leading "risk insurance
manager" for fast food and family style franchise restaurants and convenience
stores throughout North America and to expand into other franchise businesses.
The Company believes that, as one of the only national providers specializing in
workers' compensation insurance for franchise businesses in the United States,
it is uniquely positioned to do so.
Historically, the Company has acted as a managing general agent ("MGA")
representing various major international and domestic insurance carriers. In its
capacity as an MGA, the Company produces both workers' compensation and other
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<PAGE>
forms of property and liability insurance (such other forms of insurance being
hereinafter referred to as "Package") for franchise businesses through its own
sales staff as well as through the use of outside broker/agents. As an MGA, the
Company assumes none of the risks associated with the insurance business it
produces. To date, the Company's principal source of revenue has been from
commissions based on insurance premiums collected on the insurance policies it
sells. Upon consummation of this Offering, the Company will continue writing
business as an MGA, but will significantly expand its focus to include operating
as a reinsurer with the expectation of increasing its overall profitability.
The Company currently writes a Guaranteed Cost Workers' Compensation
Safety Group Dividend Program (the "Safety Group Program" or "Program") on
behalf of The American International Group of companies ("AIG"), a U.S. holding
company whose member companies are global providers of insurance. As the
insurance carrier, AIG assumes 100% of the risks associated with the Program and
receives, as compensation for such assumption, all of the premiums less the
commissions paid to the Company from the Program. Through a subsidiary of the
Company to be formed under the laws of Bermuda (the "Reinsurance Subsidiary"),
the Company will enter into a Reinsurance Agreement (the "Reinsurance
Agreement") with The Insurance Company of the State of Pennsylvania and other
companies, each an affiliate of AIG (the "AIG Affiliates"), pursuant to which
the Reinsurance Subsidiary will act as the reinsurer with respect to certain
workers' compensation insurance policies in force as of the date of the
Reinsurance Agreement with policy inception dates as of January 1, 1996 through
the date of the Reinsurance Agreement (the "Book of Business"), or attaching
during the term thereof, which are written by the Company on behalf of the AIG
Affiliates. Upon entering into the Reinsurance Agreement, the AIG Affiliates
will pay the Reinsurance Subsidiary the related net written premium less the
Program expenses and the losses paid associated with the Book of Business. It is
anticipated that a substantial portion of this amount will be used to fund the
Loss Escrow Fund (as such term is defined in "Business - Reinsurance -
Reinsurance Agreement").
Although the Reinsurance Subsidiary will assume the risks associated
with being a reinsurer, the Reinsurance Agreement requires that the AIG
Affiliates purchase and maintain in effect or reinsure specific and aggregate
excess of loss reinsurance ("Specific and Excess of Loss Coverage") for the
joint benefit of the AIG Affiliates and the Reinsurance Subsidiary which will
limit the liability of the Reinsurance Subsidiary for losses and certain defined
expenses to $300,000 per occurrence. Moreover, the aggregate limit for liability
for all losses and expenses during each 12-month period covered by the
Reinsurance Agreement, will not exceed a ratio of 70% of losses incurred to net
premiums written. The Reinsurance Subsidiary will pay the AIG Affiliates 5% of
the net written premiums for the cost of the Specific and Excess of Loss
Coverage. Pursuant to the Reinsurance Agreement, the Company will retain the
premium revenues presently retained by AIG under the Program with the associated
risks and potential for profitability. See "Business - Strategy." The Company
intends to use a portion of the proceeds of this Offering to fund the operations
of the Reinsurance Subsidiary. See "Use of Proceeds."
In September 1996, an AIG Affiliate made available to the Company a new
workers' compensation program (the "Small Business Workers' Compensation
Program" or "SBP") designed to provide coverage to certain smaller businesses
located in 23 states which pay annual premiums between $5,000 and $50,000 and
which are represented by over 90 separate workers' compensation class codes. The
underwriting process under the SBP has been simplified enabling the Company to
respond promptly with competitively priced quotes. The Company believes that
many broker/agents, regardless of size, have accounts that would be eligible to
participate in the SBP and therefore could be a potential broker/agent to
promote this program. If successful, the SBP could substantially increase the
Company's revenues. The SBP will not be subject to the Reinsurance Agreement.
Preferred Employers Holdings, Inc. was organized in Delaware on
September 20, 1996. Preferred Employers Group, Inc., which will become a
wholly-owned subsidiary of Preferred Employers Holdings, Inc. as a result of the
Exchange, was organized in Florida on November 17, 1988. The Company's executive
offices are located at 10800 Biscayne Blvd., Miami, Florida 33161, and its
telephone number is (305) 893-4040.
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<PAGE>
The Offering
Common Stock offered by
the Company: 1,000,000 shares of Common Stock.
Common Stock to be
outstanding after the
Offering: 4,000,000 (1)
Use of Proceeds: To capitalize the reinsurance operations of
the Reinsurance Subsidiary, for working
capital and general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq Symbol(2): PEGI
Proposed Boston Stock Exchange
Symbol(2): PEG
- ------------------
(1) Does not include (i) 300,000 shares of Common Stock reserved for
issuance upon exercise of stock options which may be granted under the
Company's Employee Stock Option Plan (the "Option Plan"), and (ii)
100,000 shares of Common Stock reserved for issuance upon exercise of
the Representative's Warrants.
(2) There is currently no market for the Common Stock and there can be no
assurances that a liquid or active market will develop or be sustained
for the Common Stock after this Offering. The Company has applied for
inclusion of the Common Stock on Nasdaq and on the BSE. However, there
can be no assurance that such applications will be approved, or if
approved, that such listings will be maintained. See "Risk Factors -
Absence of Public Market."
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<PAGE>
SUMMARY AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30, Pro forma Pro forma
------------------------ ------------------------- Year ended Six months ended
1995 1994 1996 1995 December 31, 1995(3) June 30, 1996(3)
---- ---- ---- ---- -------------------- -----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
- ----------------------------
Total revenue $2,269,92 $2,783,072 $1,230,367 $1,134,989 $18,697,463 $9,271,741
Claims and claim settlement expenses $0 $0 $0 $0 $8,945,475(4) $4,217,088(4)
Total expenses $2,287,43 $1,509,398 $1,487,031 $1,089,287 $8,305,303(5) $4,323,981(5)
Operating income (loss) ($17,518) $1,273,674 ($256,664) $45,702 $1,446,685 $730,672
Nonoperating income (loss) ($69,269) $5,857,749(6) $190,000 $0 ($69,269) $190,000
Income (loss) before income taxes ($86,787) $7,131,423 ($66,664) $45,702 $1,377,416 $920,672
Income taxes (1)
Net income (loss) ($86,787) $7,131,423 ($66,664) $45,702 $1,377,416 $920,672
Net income (loss) per share ($0.03) $2.38 ($0.02) $0.02 $0.46 $0.31
As Adjusted Statement of Operations Data(2):
- -------------------------------------------
Historical income (loss) before income
taxes (benefit) ($86,787) $7,131,423 ($66,664) $45,702 $1,377,416 $920,672
Pro forma provision for income taxes
(benefit) ($32,372) $2,660,021 ($24,866) $17,047 $513,776 $343,411
Pro forma net income (loss) ($54,415) $4,471,402 ($41,798) $28,655 $863,640 $577,261
Pro forma net income (loss) per share ($0.02) $1.49 ($0.01) $0.01 $0.29 $0.19
Weighted average shares outstanding 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
Combined Ratio(4)(5) 92% 92%
December 31, June 30, 1996
------------------ --------------------
Balance Sheet Data: 1995 1994 Actual As Adjusted(7)
- ------------------------------- --------- -------- ------ -----------
(unaudited)
Total assets $3,765,15 $4,985,650 $6,159,441 $13,762,857
Total liabilities $3,474,74 $3,502,903 $5,935,702 $5,935,702
Total stockholders' equity $290,403 $1,482,747 $223,739 $7,827,155
</TABLE>
- ----------------------
(1) For all periods presented, the Company was treated as an S Corporation for
federal and state income tax purposes. As a result, income taxes have not
been provided for herein. The Company's status as an S Corporation will be
terminated upon consummation of this Offering. See "Dividend Policy."
(2) Represents adjustments for U.S. federal and state income taxes as if the
Company had been taxed as a C Corporation rather than an S Corporation for
all periods presented. The pro forma financial information includes income
earned by the Reinsurance Subsidiary, on which the Company will be subject
to tax in the United States. See "Risk Factors - United States Federal
Income Tax Risks - Controlled Foreign Corporation Rules."
(3) The pro forma financial information contained in this Prospectus assumes
that the Company's proposed Reinsurance Subsidiary was operational
effective January 1, 1995. In this regard the pro forma financial
information assumes that the average annualized workers' compensation
premiums in force for the periods presented were reinsured by the
Reinsurance Subsidiary and, as a reinsurance entity, the Reinsurance
Subsidiary recorded and invested premiums received, paid claims and
established reserves on losses incurred, and conducted business consistent
with such business typically conducted by a reinsurer. See "Discussion and
Analysis of Pro Forma Consolidated Financial Information."
(4) Claims and claim settlement expenses incurred of $8,945,475 and $4,217,088
for the year ended December 31, 1995 and the six month period ended June
30, 1996, respectively, are based on an assumed 55% loss ratio (premiums
earned x 55%). The actual average loss ratio experienced by the insurance
carrier in prior years, based on underwriting analyses prepared by the
Company, was 51.5%. The Company has engaged an outside independent firm of
consulting actuaries who annually review the Company's underwriting
analysis for reasonableness.
<PAGE>
(5) Amortization of deferred policy acquisition costs of $6,018,000 and
$2,837,000 for the year ended December 31, 1995 and the six month period
ended June 30, 1996, respectively, represents amortization of contractually
agreed upon Program expenses equal to 37% of premiums earned and include
the following:
a) Ceding commission payable to the insurance carrier 28.83%
b) Specific and excess reinsurance premiums payable 5.00%
c) Acquisition expenses incurred by the Reinsurance Subsidiary 3.17%
-------
Total Program expenses 37.00%
=======
See "Prospectus Summary," "Risk Factors - Reinsurance," "Discussion and
Analysis of Pro Forma Consolidated Financial Information," and "Business -
Strategy - Reinsurance."
(6) The Company received $5,858,000 in 1994, net of expenses, with respect to
litigation regarding a breach of contract. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(7) Adjusted to give effect to the sale of the 1,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $9.00 per Share and the application of the net proceeds therefrom. See
"Use of Proceeds."
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<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to other information contained in this
Prospectus, in evaluating an investment in the shares offered hereby.
Reinsurance
The Company currently writes the Safety Group Program on behalf of AIG.
As the insurance carrier, AIG assumes 100% of the risks associated with the
Program and receives, as compensation for such assumption, all of the premiums
less the commissions paid to the Company from the Program. Upon consummation of
the Offering and pursuant to the Reinsurance Agreement, the Reinsurance
Subsidiary will act as the reinsurer with respect to certain workers'
compensation insurance policies in force as of the date of the Reinsurance
Agreement with policy inception dates as of January 1, 1996 and later (the "Book
of Business"), or attaching during the term thereof, which are written by the
Company on behalf of the AIG Affiliates. Upon entering into the Reinsurance
Agreement, the AIG Affiliates will pay the Reinsurance Subsidiary the related
net written premium less the Program expenses and the losses paid associated
with the Book of Business. It is anticipated that a substantial portion of this
amount will be used to fund the Loss Escrow Fund (as such term is defined in
"Business - Reinsurance - Reinsurance Agreement").
Although the Reinsurance Subsidiary will assume the risks associated
with being a reinsurer, the Reinsurance Agreement requires that the AIG
Affiliates purchase and maintain in effect or reinsure Specific and Excess of
Loss Coverage for the joint benefit of the AIG Affiliates and the Reinsurance
Subsidiary which will limit the liability of the Reinsurance Subsidiary for
losses and certain defined expenses to $300,000 per occurrence. Moreover, the
aggregate limit for liability for all losses and expenses during each 12-month
period covered by the Reinsurance Agreement, will not exceed a ratio of 70% of
losses incurred to net premiums written.
The Company has never received notice of a claim in excess of $300,000
in the seven and one-half years that the Company and AIG have written the
Program; however, there can be no assurance that future claims, with respect to
the Program or under the Reinsurance Agreement, will not exceed this threshold.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - General" and "Business - Reinsurance."
New Lines of Business
Late in 1995, the Company began writing other forms of property and
casualty insurance in addition to workers' compensation insurance on behalf of
the insurance carriers it represents. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - General" and "Business -
Reinsurance." The success of the Company's strategy of entering into these new
lines of business, as well as the Small Business Workers' Compensation Program
and the business of reinsurance through the Reinsurance Subsidiary, will depend
on various factors, including the unpredictable nature of the insurance industry
generally, the ability of the Company to manage its anticipated growth, the
availability of adequate capital and general economic and business conditions.
Not all of the foregoing factors are in the Company's control. There can be no
assurances that the Company will successfully implement its strategy or that its
strategy will result in profitability.
Recent Operating Losses
For the years ended December 31, 1995 and December 31, 1994, the
Company generated total revenues of approximately $2,270,000 and $2,783,000,
respectively, and incurred a net operating loss of approximately $18,000 in 1995
and net operating income of approximately $1,274,000 in 1994. For the six month
period ended June 30, 1996, the Company generated total revenues of
approximately $1,230,000 and a net operating loss of approximately $257,000. For
at least the current fiscal year, the Company may incur a net operating loss as
a result
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<PAGE>
of, among other things, its expansion strategy. There can be no assurance that
the Company's operations will achieve profitability at any time in the future
or, if achieved, sustain such profitability. See "Managements' Discussion and
Analysis of Financial Condition and Results of Operations" and "Business -
Strategy."
Regulation
As a managing general agent ("MGA"), the Company is required to conform
to the insurance licensing regulations of the various states in which it sells
insurance. In this regard, all states require that an officer of the Company be
duly appointed or licensed as an agent or broker. In addition, certain states
require the Company to be licensed as well.
Workers' compensation coverage is a creation of state law, subject to
change by the state legislature, and influenced by the political processes in
each state. Several states have mandated that employers receive coverage only
from funds operated by the state. As a result, the Company's financial
performance could be materially adversely affected by mandatory assessments from
such funds over which the Company has no control. Certain smaller states such as
Hawaii and Maine have promulgated regulations that place onerous assessments on
commercial insurers to subsidize state assigned risk programs. These assessments
generally preclude commercial insurers from offering their workers' compensation
programs in such states because of excessive costs and necessitate insureds to
either participate in state assigned risk programs or to self-insure. The
Company would be precluded from offering workers' compensation insurance in such
states and such restrictions could have a material adverse effect on the
Company's business. In addition, there can be no assurance that other states
will not also pass similar regulations which could have a material adverse
effect on the business of the Company.
The Reinsurance Subsidiary will be a registered Bermuda insurance
company and will be subject to regulation and supervision in Bermuda. The
applicable Bermudian statutes and regulations generally are designed to protect
insureds and ceding insurance companies rather than stockholders. Among other
things, such statutes and regulations require the Reinsurance Subsidiary to
maintain minimum levels of capital and surplus, impose restrictions on the
amount and type of investments it may hold, prescribe solvency standards that it
must meet, limit transfers of ownership of its capital shares, and provide for
the performance of certain periodic examinations of the Reinsurance Subsidiary
and its financial condition. These statutes and regulations may, in effect,
restrict the ability of the Reinsurance Subsidiary to write new business or
distribute funds to the Company. Moreover, if Bermuda were to alter its capital
reserve requirements to require additional reserves for the Reinsurance
Subsidiary, the Reinsurance Subsidiary may require additional infusions of
capital from the Company.
The Reinsurance Subsidiary is neither registered nor licensed as an
insurance company in any jurisdiction in the United States; however, all of the
Reinsurance Subsidiary's premiums are expected to come from ceding insurers in
the United States. The insurance laws of each state in the United States
regulate the assumption of reinsurance within their jurisdiction by foreign
insurers, such as the Reinsurance Subsidiary. The Reinsurance Subsidiary will
conduct its business through offices in Bermuda and will not maintain an office,
and its personnel will not solicit, advertise, settle claims or conduct other
insurance activities, in the United States. Accordingly, the Reinsurance
Subsidiary does not believe it will be subject to the insurance laws of any
jurisdiction in the United States. There can be no assurance, however, that
inquiries or challenges to the Reinsurance Subsidiary's insurance activities
will not be raised in the future or that the Reinsurance Subsidiary's location,
regulatory status or restrictions on its activities resulting therefrom will not
materially adversely affect its ability to conduct its business in the future.
See "Business -- Regulation." Although it conducts its operations from Bermuda,
the Reinsurance Subsidiary is not authorized to underwrite local risks in
Bermuda.
Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny in many jurisdictions, including the United States
and various states within the United States. Many states have recently created
employee class codes that distinguish fast food restaurants from other types of
restaurants. As of the date hereof, the Company believes that workers'
compensation insurance rates with respect to such class codes
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<PAGE>
have not been similarly distinguished. However, there can be no assurance that
certain states will not, in the future, distinguish workers' compensation
insurance rates based upon such class codes, which could have a material
adverse effect on the Company's business. Additionally, in the past, there have
been Congressional and other initiatives in the United States regarding
increased supervision and regulation of the insurance industry, including
proposals to supervise and regulate alien reinsurers. It is not possible to
predict the future impact of changing law or regulation on the operations of the
Company; such changes could, however, have a material adverse effect on the
Company. See "Business - Industry Overview."
Dependence on Independent Insurance Broker/Agents; Product and Service
The Company's programs are predicated upon the successful marketing of
its products and services through independent insurance broker/agents. Although
the programs have been structured to increase revenues for the independent
broker/agents, there can be no assurance that independent broker/agents will
utilize the Company's products or services. These broker/agents are not
obligated to promote the Company's products and services and may sell
competitors' insurance products. Therefore, the Company's growth depends in part
on the marketing efforts of broker/agents and on the Company's ability to
continue to offer workers' compensation products and services that meet the
requirements of these broker/agents and their customers. Failure of these
independent insurance broker/agents to market the Company's products and
services successfully could have a material adverse effect on the Company's
financial condition and results of operations.
The Company custom designs its workers' compensation insurance programs
with nationally recognized carriers rated A or better by A.M. Best and assists
these carriers in establishing competitive rates for American franchise
businesses. The Company believes by offering superior products and services to
this segment of the business community, which tends to be among the safest
insurance risks, it can offer its clients substantial savings in their workers'
compensation programs and reduce the time devoted to managing such programs.
There can be no assurances that these programs will continue or that the rates
offered for these products will remain competitive.
Dependence on Limited Number of Clients
The Company's business largely depends upon its relationships with
owners of multiple franchises in the United States such as Burger King,
McDonald's, Wendy's and Pizza Hut. Although for the year ended December 31,
1995, the Company provided services and products to approximately 750 separate
accounts, none of which accounted for more than 3% of annual revenues,
approximately 32% of the Company's income was derived from owners of Burger King
franchises. In as much as the Company's clients tend to own between three and
140 franchises, the non-renewal of even a limited number of programs or policies
by brand name franchisees could have a material adverse effect on the business
of the Company. Similarly, mandates from franchisors to franchisees dictating
the manner in which franchisees obtain workers' compensation could have a
material adverse effect on the business of the Company.
Dependence on Limited Number of Carriers
The Company currently writes all of its workers' compensation and
Package insurance through AIG and General Accident Insurance Company of America
("GAIC"). The Company has been an MGA with AIG since 1993. The Company has been
an MGA with GAIC since 1995, offering Package insurance for family style and
fast food restaurants, the commissions from which accounted for 15% of the
Company's net revenues in 1995. GAIC has recently advised the Company that it
will no longer accept Package insurance risks for fast food restaurants, but
will continue to do so for family style restaurants. The Company is currently
pursuing other carriers through which it can write such business. The Company
believes that there are many national insurance
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<PAGE>
carriers through which it may write business and that termination of the
Company's relationship with its current insurance carriers would not have a
material adverse effect on the business of the Company.
Investment Income
The Company's income will depend, in part, on the income derived from
the investment of premiums by the Reinsurance Subsidiary. The Company believes
that the risks inherent in the business of the Reinsurance Subsidiary should not
be augmented by a speculative investment policy and therefore its investment
strategy will be partially defined by the need to safeguard its capital. Because
of the unpredictable nature of losses that may arise under insurance policies,
the Reinsurance Subsidiary's liquidity needs may be substantial. The Company's
investment policy will be established by the Company's Investment Committee, and
will be subject to, among other factors, the Company's liquidity requirements.
The Company intends that its investments will consist primarily of cash or
fixed-income securities (none of which will have a rating of less than AA), the
market value of which is subject to fluctuation depending on changes in
prevailing interest rates. Additionally, the Company reserves the right to
invest a limited percentage of its portfolio, to be determined by the Investment
Committee, in common stock of companies listed on national securities exchanges.
The stock of such companies may fluctuate as a result of specific events
affecting such companies as well as general market conditions. Increases in
interest rates or fluctuations in the market price of such companies' stocks may
result in losses, both realized and unrealized, on the Company's investments.
See "Business - Investments."
Competition
The workers' compensation industry is highly competitive. The Company
competes with other MGA's, numerous large insurance companies, managed health
care companies, state sponsored insurance pools, risk management consultants and
non-Company affiliated broker/agents, many of which have significantly larger
operations and greater financial, marketing, human and other resources than the
Company. Competitive factors include product lines, premium rates, personalized
service and effective cost containment measures. Additionally, the Company does
not offer the full line of insurance products which is offered by some of its
competitors. Such competitors may have material advantages over the Company as a
result of additional types of insurance and services they offer. There can be no
assurance that the Company will be able to maintain its competitive position or
that any increased competition will not have a material adverse effect on the
Company's financial condition and results of operations. See "Business -
Competition."
After a period of absence from the market, traditional national
insurance companies have recently re-entered the workers' compensation insurance
market thereby increasing competition in the Company's major market segment.
Although the Company believes that, as one of the only national providers
specializing in workers' compensation insurance for franchise businesses in the
United States, it is uniquely positioned in the industry, no assurance can be
given that other companies will not develop similar national programs or that
the Company will be able to compete effectively in the future.
Reliance Upon Key Personnel
The Company's success depends to a substantial extent upon the
continuing efforts and abilities of Mel Harris, the Company's Chairman and Chief
Executive Officer, Howard Odzer, the Company's President, and upon the efforts
and abilities of certain other key management personnel. The Company has entered
into employment agreements with Messrs. Harris and Odzer. The loss of the
services of Mr. Harris, Mr. Odzer or other key management personnel, for any
reason could have a material adverse effect on the Company's ability to conduct
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its operations. The Company maintains key man insurance on the lives of
Mr. Harris and Mr. Odzer in the amount of $4,000,000 and $3,000,000,
respectively. See "Management."
United States Federal Income Tax Risks
Taxation of Reinsurance Subsidiary
As a Bermuda domiciled corporation, the Reinsurance Subsidiary will not
file United States tax returns. The Company anticipates that the Reinsurance
Subsidiary will operate in such a manner that it will not directly be subject to
U.S. tax (other than U.S. excise tax on reinsurance premiums where the risks
covered thereby are reinsured with another foreign insurer which is neither a
resident of Bermuda nor a resident of a third country with a United States tax
treaty which entitles the foreign insurer to exemption from excise tax, and
withholding tax on certain investment income from U.S. sources) because it will
not engage in business or have a permanent establishment in the United States.
However, because definitive identification of activities which constitute being
engaged in a trade or business in the United States is not provided by the
Internal Revenue Code of 1986, as amended (the "Code") or regulations or court
decisions, there can be no assurance that the Internal Revenue Service (the
"IRS") will not contend in the future that the Reinsurance Subsidiary is engaged
in a trade or business in the United States. If the Reinsurance Subsidiary were
engaged in business in the United States (and, if it were to qualify for
benefits under the income tax treaty between the United States and Bermuda, such
business were attributable to a "permanent establishment" in the United States),
the Reinsurance Subsidiary would be subject to U.S. tax at regular corporate
rates on its income that is effectively connected with its U.S. business plus an
additional 30% "branch profits" tax on such income remaining after the regular
tax, in which case the Company's earnings and stockholders' equity could be
materially adversely affected.
Controlled Foreign Corporation Rules
The Reinsurance Subsidiary will constitute a "controlled foreign
corporation" ("CFC") for United States federal income tax purposes. As a result
the Company must include in its gross income for United States federal income
tax purposes its pro rata share of the CFC's "subpart F income," even if such
subpart F income is not distributed. The Company anticipates that substantially
all of the Reinsurance Subsidiary's income will be subpart F income. If the
Company does not receive distributions of the subpart F income from the
Reinsurance Subsidiary, the Company will be required to utilize other funds to
satisfy the United States federal income taxes due on the subpart F income and
as a result the Company's earnings and shareholder's equity could be materially
adversely affected.
Control by Existing Stockholders
Following completion of this Offering, Mel Harris, members of his
family, and Howard Odzer and members of his family, who together currently
beneficially own 100% of the Company's Common Stock, will own approximately 75%
of the Company's outstanding Common Stock. Accordingly, these stockholders will
have the ability to control the outcome of stockholder votes, which will include
the ability to elect all of the Company's directors, control the adoption or
amendment of provisions in the Company's Certificate of Incorporation and
Bylaws, and approve certain mergers and other significant corporate
transactions. See "Principal Stockholders" and "Description of Securities."
Broad Discretion as to Use of Proceeds
Approximately 54% of the net proceeds of this Offering has been
allocated to working capital and general corporate purposes and will be used for
such purposes as management may determine. Accordingly, management
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will have broad discretion with respect to the expenditure of that portion of
the net proceeds of this Offering. In addition, the Company's estimate of its
allocation of the use of proceeds of this Offering is subject to a
reapportionment of proceeds among the categories set forth herein or to new
categories. The amount and timing of expenditures will vary depending upon a
number of factors, including changing competitive conditions and general
economic conditions. See "Use of Proceeds."
Continued Quotation on Nasdaq and The BSE; Low Priced Stocks
The trading of the Common Stock Securities on Nasdaq and the BSE will
be conditioned upon the Company meeting certain asset, capital and surplus,
earnings and stock price tests set forth by Nasdaq and the BSE. For example, to
maintain eligibility for trading on Nasdaq, the Company will be required to
maintain total assets in excess of $2,000,000, capital and surplus in excess of
$1,000,000 and (subject to certain exceptions) a bid price of $1.00 per share.
To maintain eligibility for trading on the BSE, the Company will be required,
among other things, to maintain total net tangible assets in excess of
$1,000,000. Upon completion of this Offering and the receipt of the proceeds
therefrom, the Company believes that it will meet the respective asset, capital
and surplus earnings tests set forth by Nasdaq and the BSE. If the Company fails
any of the tests, the Common Stock may be delisted from trading on Nasdaq and
the BSE. The effects of delisting include the limited release of the market
prices of the Common Stock and limited news coverage of the Company. Delisting
may restrict investors' interest in the Common Stock and materially adversely
affect the trading market and prices for such securities and the Company's
ability to issue additional securities or to secure additional financing. In
addition to the risk of volatile stock prices and possible delisting, low price
stocks are subject to the additional risks of federal and state regulatory
requirements and the potential loss of effective trading markets. In particular,
if the Common Stock were delisted from trading on such exchanges and the trading
price of the Common Stock was less than $5 per share, the Common Stock could be
subject to Rule 15g-9 under the Exchange Act, which, among other things,
requires that broker/dealers satisfy special sales practice requirements,
including making individualized written suitability determinations and receiving
purchasers' written consent, prior to any transaction. If the Common Stock could
also be deemed to be penny stock under the Securities Enforcement and Penny
Stock Reform Act of 1990, this would require additional disclosure in connection
with any trading of the Common Stock, including the delivery of a disclosure
schedule explaining the nature and risks of the penny stock market. Such
requirements could severely limit the liquidity of the Common Stock and the
ability of purchasers in this Offering to sell their securities in the secondary
market.
Common Stock Prices May Be Highly Volatile
The market prices of equity securities of many companies have
experienced extreme price volatility in recent years for reasons not necessarily
related to the individual performance of specific companies. Accordingly, the
market price of the Common Stock following this Offering may be highly volatile.
Factors such as announcements by the Company or its competitors concerning
products, governmental regulatory actions, other events affecting insurance
companies generally as well as general market conditions may have a significant
impact on the market price of the Common Stock and could cause it to fluctuate
substantially.
Absence of Public Market; Negotiated Offering Price
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that any trading market therefor will
develop or, if any such market develops, that it will be sustained. Accordingly,
purchasers of the Common Stock may experience difficulty selling or otherwise
disposing of such Common Stock. The public offering price of the Common Stock
has been established by negotiation between the Company and the Representative
and does not bear any relationship to the Company's book value, assets, past
operating results, financial condition or other established criteria of value.
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Dilution
The assumed initial public offering price per share of Common Stock
exceeds the book value per share of the Common Stock. Investors in this Offering
will therefore incur immediate and substantial dilution of $7.04 or 78.3% per
share from the initial public offering price. See "Dilution."
Shares Eligible for Future Sale
Upon completion of the Offering, the Company will have 4,000,000 shares
of Common Stock outstanding (4,150,000 shares if the Underwriters'
over-allotment option is exercised in full). The 1,000,000 shares of Common
Stock sold in the Offering will be freely tradeable without restriction or
further registration under the Securities Act, except for any shares purchased
by an "affiliate" of the Company within the meaning of Rule 144 under the
Securities Act ("Rule 144"). The remaining 3,000,000 shares of Common Stock are
"restricted securities," as that term is defined under Rule 144, and may not be
sold in the absence of registration under the Securities Act unless an exemption
from registration is available, including the exemption provided by Rule 144.
The sale of a substantial number of shares of Common Stock or the availability
of Common Stock for sale could adversely affect the market price of the Common
Stock prevailing from time to time. The Company's existing stockholders have
agreed that they will not, without the consent of the Representative, sell or
otherwise dispose of any equity securities of the Company for a period of one
year following the effective date of this Offering. See "Principal
Stockholders," "Shares Eligible for Future Sale" and "Underwriting."
Possible Issuances of Preferred Stock; Anti-Takeover Provisions
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 1,000,000 shares of preferred stock, par value $.01 per
share. The preferred stock may be issued in one or more series, the terms of
which may be determined by the Board of Directors at the time of issuance
without further action by stockholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion and redemption rights and sinking fund
provisions. No preferred stock is currently outstanding and the Company
currently has no intention of issuing any preferred stock. However, the issuance
of any such preferred stock could materially adversely affect the rights of
holders of Common Stock and, therefore, could reduce the value of the Common
Stock. In addition, specific rights granted to future holders of preferred stock
could be used to restrict the Company's ability to merge with, or sell its
assets to, a third party, thereby preserving control of the Company by present
stockholders. The ability of the Board of Directors to issue preferred stock
could have the effect of delaying, deferring or preventing a change in control
of the Company. Certain provisions of Delaware law may also discourage third
party attempts to acquire control of the Company. See "Description of
Securities."
Representative's Warrants
The Company will sell to the Representative and/or its designees, for
nominal consideration, the Representative's Warrants to purchase an aggregate of
up to 100,000 shares of Common Stock. The Representative's Warrants are
exercisable for a four-year period commencing one year from the date of this
Prospectus, at an exercise price per share equal to 120% of the initial public
offering price of the Common Stock. For the life of the Representative's
Warrants, the holders are given, at nominal cost, the opportunity to profit from
a rise in the market price of the Common Stock without assuming the risk of
ownership, with a resulting dilution in the interest of other security holders.
As long as the Representative's Warrants remain unexercised, the terms under
which the Company could obtain additional capital may be adversely affected.
Moreover, the holders of the Representative's Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital through a new offering of its securities on terms more
favorable than those
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<PAGE>
provided by the Representative's Warrants. Additionally, if the holders of the
Representative's Warrants were to effect a distribution of the Representative's
Warrants or the underlying securities, the Representative, prior to and during
such distribution, may be unable to make a market in the Company's securities
and may be required to comply with other limitations on trading set forth in
Rules 10b-2, 10b-6 and 10b-7 promulgated under the Exchange Act. Such rules
restrict the solicitation of purchasers of a security when a person is
interested in the distribution of such security and also limit market making
activities by an interested person until the completion of the distribution. If
the Representative were required to cease making a market, the market and market
price for such securities may be adversely affected and holders of such
securities may be unable to sell such securities. See "Underwriting."
Lack of Dividends
The payment of cash dividends, if any, will be within the discretion of
the Board of Directors and will depend upon the Company's earnings, if any,
capital requirements and financial condition and other relevant factors. The
Board of Directors does not intend to declare any cash or other dividends in the
foreseeable future, but rather intends to retain future earnings, if any, to
provide for the operation and expansion of the Company's business.
See "Dividend Policy" and "Description of Securities."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered
hereby (after deducting underwriting discounts and commissions and other
expenses of the Offering), are estimated to be approximately $7,600,000
($8,800,000 if the over-allotment option is exercised in full). The Company
expects to use the net proceeds in approximately the manner set forth in the
following table:
Approximate
Application of Proceeds Approximate Percentage of
Dollar Amount Net Proceeds
- ----------------------- ----------- -------------
Capitalize Reinsurance Subsidiary .......... $3,500,000 46.05%
Working Capital and General
Corporate Purposes.......................... 4,100,000 53.95%
---------- ------
Total....................................... $7,600,000 100.00%
========== =======
The Company intends to capitalize the Reinsurance Subsidiary initially
at $3,500,000. Such capitalization is based on the current capital requirements
for Class 3 insurers in Bermuda.
The balance of the net proceeds will be used for working capital and
other general corporate purposes. Although as of the date of this Prospectus no
specific acquisition is being contemplated by the Company, such general
corporate purposes may include future acquisitions.
If the Underwriters exercise the over-allotment option in full, the
Company will realize additional net proceeds of approximately $1,200,000, which
will be added to the Company's working capital.
The foregoing uses of proceeds represent the Company's best estimates
of the allocation of the estimated net proceeds of this Offering and there could
be significant variations in the anticipated or actual use of the proceeds due
to changes in business or economic circumstances. Accordingly, the Company
reserves the right to reallocate the foregoing uses of proceeds depending upon
any such change of circumstances.
Pending utilization of the net proceeds of the Offering, the Company
may make temporary investments in, among other things, bank certificates of
deposit, interest-bearing investments, prime commercial paper, United States
government obligations, or money-market funds.
RECAPITALIZATION
Immediately prior to this Offering, the Company and the stockholders of
PEGI at such date (the "Exchanging Stockholders") will effect a recapitalization
whereby the Company will exchange 17,647.06 shares of Common Stock for each
share of common stock of PEGI held by the Exchanging Stockholders (the
"Exchange"). As a result of the Exchange, PEGI will become a wholly-owned
subsidiary of the Company.
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DIVIDEND POLICY
Prior to this Offering, the Company was treated as an S Corporation for
federal income tax purposes. Pursuant to an Amended and Restated Shareholders
Agreement made as of May 15, 1995 (the "Shareholders Agreement") by and between
the Company, Mel Harris and Howard Odzer, the Company was required, as an S
Corporation, to make annual pro rata distributions of cash to stockholders of
not less than 45% of the prior year's net income of the Company. Upon
consummation of this Offering, the Company's status as an S Corporation shall
terminate. The payment of future cash dividends, if any, will be within the
discretion of the Board of Directors and will depend upon the Company's
earnings, if any, capital requirements and financial condition and other
relevant factors. The Board does not intend to declare any cash or other
dividends in the foreseeable future, but rather intends to retain future
earnings, if any, to provide for the operation and expansion of the Company's
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DILUTION
At June 30, 1996, the net tangible book value (total tangible assets
less total liabilities) of the Company was $223,739, or $.07 per share. Without
giving effect to any other changes in the pro forma net tangible book value of
the Company after June 30, 1996, other than to give effect to the sale of the
1,000,000 shares of Common Stock offered hereby at an estimated price per share
of $9.00 (less underwriting discounts and estimated expenses of the Offering and
the application of the estimated net proceeds therefrom), the pro forma net
tangible book value of the Company at June 30, 1996 would have been $7,827,155,
or $1.96 per share, representing an immediate increase in net tangible book
value of $1.89 per share to existing stockholders and an immediate dilution of
$7.04 per share (78.3%) to the purchasers of Common Stock in this Offering. The
following table illustrates this per share dilution:
Assumed initial public offering price.............................. $9.00
Pro forma net tangible book value before this Offering............. $ .07
Increase attributable to new investors............................. $1.89
Pro forma as adjusted net tangible book value after this Offering.. $1.96
Dilution to new investors.......................................... $7.04
The following table summarizes, as of June 30, 1996, the total
consideration paid and the average price per share of Common Stock paid by
existing stockholders and by purchasers of Common Stock in this Offering (before
deduction of underwriting discounts and commissions and estimated offering
expenses):
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<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- ------------------- Average Price
Amount Percentage Amount Percentage Per Share
------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 3,000,000 75.0% $30,000 .33% $.01
New Investors 1,000,000 25.0% $9,000,000 99.67% $9.00
--------- ----- ---------- ------
Total 4,000,000 100.0% $9,030,000 100.0%
========= ====== ========== ======
</TABLE>
The foregoing table does not include (i) 300,000 shares of Common Stock
reserved for issuance upon exercise of stock options which may be granted under
the Option Plan, and (ii) 100,000 shares reserved for issuance pursuant to the
Representative's Warrants. To the extent that any of these options or warrants
are exercised, there may be further dilution to new investors. See
"Capitalization," "Management - Stock Option Plan" and "Underwriting."
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1996, and as adjusted to reflect the issuance and sale of the shares of
Common Stock offered hereby at an assumed initial offering price of $9.00 per
share and the application of the estimated net proceeds therefrom. This table
should be read in conjunction with the consolidated financial statements and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------
(unaudited)
Actual As Adjusted
------ -----------
<S> <C> <C>
Total debt.................................................................. $413,752 $413,752
-------- --------
Stockholders' equity
Common Stock, $.01 par value; 10,000,000 shares authorized;
3,529,412 shares issued; 4,529,412, as adjusted (1)...................... 35,294 45,294
Additional paid-in capital............................................... 0 7,593,416
Retained earnings........................................................ 694,002 694,002
------- -------
Total stockholders' equity ................................................. 729,296 8,332,712
Treasury stock at cost; 529,412 shares...................................... (505,557) (505,557)
--------- ---------
Net stockholders' equity.................................................... 223,739 7,827,155
------- ---------
Total capitalization........................................................ $637,491 $8,240,907
======== ==========
</TABLE>
- ----------------------
(1) Does not include (i) 300,000 shares of Common Stock reserved for issuance
upon exercise of stock options which may be granted under the Option Plan, and
(ii) 100,000 shares reserved for issuance pursuant to the Representative's
Warrants.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and the related Notes contained elsewhere in this
Prospectus.
General
The Company is primarily engaged in the property and casualty insurance
business as a managing general agent ("MGA") for two major domestic and
international insurance carriers. As an MGA, the Company receives commissions on
the business it writes on behalf of the insurance carriers it represents. The
Company has written workers' compensation insurance since its inception and in
late 1995 began writing other forms of property and casualty insurance (such
other forms of insurance being hereinafter referred to as "Package") for family
style and fast food restaurants as an MGA for GAIC. GAIC has recently advised
the Company that it will no longer accept Package insurance risks for fast food
restaurants, but will continue to do so for family style restaurants. The
Company is currently pursuing other carriers through which it can write such
business. The Company believes that there are many national insurance carriers
through which it may write business and that termination of the Company's
relationship with its current insurance carriers would not have a material
adverse effect on the business of the Company. See "Risk Factors - Dependence on
Limited Number of Carriers."
The Company collects workers' compensation premiums from insureds and remits
the same to the insurance carrier net of its commission. Commission income on
workers' compensation business is recognized as income when premiums are
collected. Package insurance premiums are principally collected by the insurance
carrier. The Package insurance carrier remits commissions on Package premiums it
collects to the Company monthly. Commission income on Package business is
recognized as income when premiums are due. In 1995, the Company wrote
approximately $3,800,000 of Package insurance premiums, commissions from which
accounted for approximately 15% of its net revenues.
Results of Operations
For the Six Months Ended June 30, 1996 and 1995
Total Revenues:
Total revenues for the six months ended June 30, 1996 was $1,230,000 compared
to $1,135,000 for the six months ended June 30, 1995, representing a net
increase of $95,000, or 8.4%. The following table provides a comparison of
revenue for the six month periods ended June 30, 1996 and 1995 by category:
1996 1995 Net Change
----------- ---------- ------------
Net commission income:
Workers' compensation $798,000 $981,000 ($183,000)
Package $397,000 $77,000 $320,000
Other, net ($16,000) $28,000 ($44,000)
----------- ---------- ------------
Total net commission income $1,179,000 $1,086,000 $93,000
Interest income $51,000 $49,000 $2,000
---------- ---------- ------------
Total revenues $1,230,000 $1,135,000 $95,000
=========== ========== ============
-19-
<PAGE>
Workers' compensation:
Premiums collected $7,918,000 $9,904,000 ($1,986,000)
=========== ========== ============
Ratio of net commission
income/premiums collected 10.1% 9.9%
=========== ==========
Workers' compensation commission income declined $183,000, or 18.7%, as a result
of the reduction in premiums collected of $1,986,000. The reduction in premiums
collected was the result of the breach of a broker contract and the non-renewal
by a broker of a significant portion of business related to a single restaurant
group. The breached contract was unilaterally cancelled by a broker after two
years of a three year term. The Company filed a lawsuit against the broker for
breach of contract during 1995 and received $190,000 in 1996 in settlement of
such lawsuit. In addition, a broker elected to place the premiums of a single
restaurant group in a rent-a-captive rather than renew such business with the
Company. As of the date hereof, no broker accounts for more than 5.8% of the
Company's annual revenues.
Package commission income increased $320,000, or 415.6%, as a result of the
entry into the Package business (as discussed above) and the execution of a new
MGA contract with GAIC for this line of business.
Total Expenses:
Total expenses for the six months ended June 30, 1996 were $1,487,000 compared
to $1,089,000 for the comparative period ended June 30, 1995, representing an
increase of $398,000, or 36.5%. The following table provides a comparison of
total expenses for the six month periods ended June 30, 1996 and 1995 by
category:
1996 1995 Net Change
----------- ----------- ----------
Personnel expenses $1,028,000 $694,000 $334,000
Professional fees $67,000 $54,000 $13,000
Occupancy expense $101,000 $64,000 $37,000
Interest expense $22,000 $36,000 ($14,000)
Other operating expenses $269,000 $241,000 $28,000
----------- ----------- ----------
Total expenses $1,487,000 $1,089,000 $398,000
=========== =========== ==========
Personnel expenses increased $334,000 as a result of the hiring of new employees
with aggregate annual compensation of $413,000 (including salespersons with an
aggregate annual draw of $175,000) consistent with the entry into new lines of
business and adding the Chairman and Chief Executive Officer to the Company's
payroll at an annual salary of $250,000.
Professional fees increased $13,000, principally as a result of additional
accounting and actuarial fees associated with the Company's business expansion.
Occupancy expense increased $37,000 as a result of the Company's relocation to
larger quarters to accommodate the Company's expansion.
Interest expense decreased $14,000 as a result of a decrease in the principal
balance of a loan from a stockholder.
Other operating expenses increased $28,000, primarily related to employment fees
and employee relocation expenses associated with the increase in staffing
discussed above.
-20-
<PAGE>
Nonoperating Income:
Nonoperating income increased $190,000 as a result of the settlement of a
lawsuit related to the cancellation of a broker contract discussed above.
For the Years Ended December 31, 1995 and 1994
Total Revenues:
Total revenues for the year ended December 31, 1995 were $2,270,000 as
compared to $2,783,000 for the prior year, representing a decrease of $513,000,
or 18.4%. The following table provides a comparison of revenue for the years
ended December 31, 1995 and 1994 by category:
1995 1994 Net Change
----------- ------------ -------------
Net commission income:
Workers' compensation $1,758,000 $2,661,000 ($903,000)
Package $343,000 $0 $343,000
Other, net $81,000 $0 $81,000
----------- ------------ -------------
Total net commission income $2,182,000 $2,661,000 ($479,000)
Interest income $88,000 $122,000 ($34,000)
----------- ------------ -------------
Total revenues $2,270,000 $2,783,000 ($513,000)
=========== ============ =============
Workers' compensation:
Premiums collected $17,112,000 $32,458,000 ($15,346,000)
=========== ============ =============
Ratio of net commission
income/premiums collected 10.3% 8.2%
=========== ============
Workers' compensation commission income declined $903,000, or 44.2%, as a result
of the reduction in premiums collected of $15,346,000. The reduction in premiums
collected was the result of the breach of a broker contract and the non-renewal
by a broker of a significant portion of business related to a single restaurant
group. The breached contract was unilaterally cancelled by a broker after two
years of a three year term. The Company filed a lawsuit against the broker for
breach of contract during 1995 and received $190,000 in 1996 in settlement of
such lawsuit. In addition, a broker elected to place the premiums of a single
restaurant group in a rent-a-captive rather than renew such business with the
Company. The ratio of net commission income to premiums collected increased from
8.2% in 1994 to 10.3% in 1995 as a result of a 2.0% increase in the Company's
gross commission rate.
Package commission income increased $343,000 as a result of the entry into this
new line of business and the execution of a new MGA contract with GAIC for this
line of business. The Company has been an MGA with GAIC since 1995, offering
Package insurance for family style and fast food restaurants, the commission
from which accounted for 15% of the Company's net revenues in 1995. GAIC has
recently advised the Company that it will no longer accept Package insurance
risks for fast food restaurants, but will continue to do so for family style
restaurants. The Company is currently pursuing other carriers through which it
can write such business. The Company believes that there are many national
insurance carriers through which it may write business and that termination of
the Company's relationship with its current insurance carriers would not have a
material adverse effect on the business of the Company.
-21-
<PAGE>
Other commission income increased $81,000 representing revenue from the
provision of marketing and management services to insureds participating in self
insurance funds.
Total Expenses:
Total expenses for the year ended December 31, 1995 were $2,288,000 compared to
$1,509,000 for the year ended December 31, 1994, representing an increase of
$779,000, or 51.5%. The following table provides a comparison of total expenses
for the years ended December 31, 1995 and 1994 by category:
1995 1994 Net Change
------------ ------------ -------------
Personnel expenses $1,472,000 $933,000 $539,000
Professional fees $93,000 $111,000 ($18,000)
Occupancy expense $145,000 $89,000 $56,000
Interest expense $36,000 $8,000 $28,000
Other operating expenses $542,000 $368,000 $174,000
------------ ------------ -------------
Total expenses $2,288,000 $1,509,000 $779,000
============ ============ =============
Personnel expenses increased $539,000 as a result of the hiring of 14 new
employees with aggregate annual compensation of $519,000 (including two
salespersons with an aggregate annual draw of $95,000) consistent with the
Company's expansion into new lines of business.
Professional fees decreased $18,000, principally as a result of reduced legal
fees.
Occupancy expense increased $56,000 as a result of the cost of the Company's
relocation to larger quarters of $35,000 and increased telephone expenses of
$21,000 to accommodate the Company's expansion.
Interest expense increased $28,000 due to the increase in stockholder loans.
Other operating expenses increased $174,000, primarily related to the Company's
increase in staff described above and increased depreciation expense of $74,000
resulting from the Company's purchase of additional property and equipment
associated with its increase in staff and quarters.
Nonoperating Income:
Nonoperating income decreased $5,927,000. The Company received $5,858,000 in
1994, net of expenses associated with the litigation, in settlement of a lawsuit
for breach of contract. The Company incurred legal fees of $69,000 in 1995
related to a separate lawsuit which it settled and with respect to which it
received $190,000 in 1996, as discussed previously.
Liquidity and Capital Resources
Historically, the Company's principal source of cash has been from the
collection of workers' compensation insurance premiums from its insureds. During
the past two years, commission income has been supplemented by proceeds received
in settlement of various litigation described above.
-22-
<PAGE>
For the Six Months Ended June 30, 1996
Net cash and cash equivalents were $408,000 at June 30, 1996 (net of premiums
payable of $4,698,000). Net cash provided by operating activities increased to
$2,458,000 in 1996 from ($884,000) in 1995, an increase of $3,342,000. This
increase resulted primarily from an increase in the proceeds from litigation of
$190,000, an increase in net premiums collected of $3,525,000 and an increase in
expenses paid of $368,000 from 1995 to 1996. The increase in litigation proceeds
is a result of the settlement of a lawsuit in 1996 in which the Company received
$190,000. The increase in net premiums collected is the result of an increase in
the Company's workers' compensation book of business together with additional
net premiums generated from the Company's writing of Package insurance.
Cash flows used in investing activities, which relate solely to the
investment and purchase of property and equipment, decreased by $334,000 to
$47,000 in the six months ended June 30, 1996 compared to $381,000 in the six
months ended June 30, 1995. The decrease is the result of purchases made in 1995
associated with the relocation of the Company's offices and is consistent with
the expansion of the Company's business during 1995 discussed above.
Net cash used in financing activities decreased to ($125,000) in the six
months ended June 30, 1996 from ($625,000) in the six months ended June 30,1995,
a decrease of $500,000. This decrease resulted primarily from a reduction in
stockholders distributions of $600,000 and an increase in payments of $100,000
in connection with the stock repurchase described below.
The Company believes that existing cash balances, proceeds from this offering
and cash flows from activities will be sufficient to meet its financing needs
for at least the next twelve months, including expected capital expenditures and
working capital to fund operations.
For the Years Ended December 31, 1995 and 1994
Net cash and cash equivalents were $466,000 at December 31, 1995 compared to
$1,375,000, at December 31, 1994 (net of premiums payable of $2,354,000 and
$3,415,000 in 1995 and 1994, respectively). Net cash provided by operating
activities decreased to ($878,000) in 1995 from $6,726,000 in 1994, a decrease
of $7,604,000. This decrease resulted primarily from a decrease in the proceeds
from litigation of $5,927,000 and a decrease in net premiums collected of
$1,201,000. The decrease in litigation proceeds was a result of the settlement
of a lawsuit in 1994 in which the Company received $5,858,000, net of expenses,
for breach of contract. The Company paid legal fees totalling $69,000 in 1995
related to a separate lawsuit in which the Company, as plaintiff, sought damages
for the unilateral termination of a broker agreement. The termination of this
broker agreement was also responsible for the decrease in net premiums
collected.
Cash flows used in investing activities which relate solely to the investment
and purchase of property and equipment, increased by $315,000 to $467,000 in
1995 compared to $152,000 in 1994. This increase is consistent with the
expansion of the Company's business as discussed above.
Net cash used in financing activities increased to ($625,000) in 1995 from
($5,596,000) in 1994, an increase of $4,971,000. This increase resulted
primarily from reductions in stockholder distributions and principal payments on
stockholders loans of $4,294,000 and $677,000, respectively.
-23-
<PAGE>
DISCUSSION AND ANALYSIS OF
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following discussion and analysis of the pro forma financial condition
and analysis of operations should be read in conjunction with the Financial
Statements and the related Notes contained elsewhere in this Prospectus.
General
The pro forma financial information contained in this Prospectus assumes that
the Company's proposed Reinsurance Subsidiary was operational effective January
1, 1995. In this regard the pro forma financial information assumes that the
average annualized workers' compensation premiums in force for the periods
presented were reinsured by the Reinsurance Subsidiary and, as a reinsurance
entity, the Reinsurance Subsidiary recorded and invested premiums received, paid
claims and established reserves on losses incurred, and conducted business
consistent with such business typically conducted by a reinsurer. The financial
information identified as "Actual" represents the actual results of operations
for the Company. The financial information identified as "Total" represents the
total results of the combined entities as if the Reinsurance Subsidiary were
operational for all periods presented.
Results of Operations
For the Six Months Ended June 30, 1996
Total revenue, losses incurred and total expenses for the six months ended
June 30, 1996 would have been $9,271,000, $4,217,000 and $4,324,000,
respectively, and consist of the following:
<TABLE>
<CAPTION>
Actual Pro forma Total
-------------------- -------------------- ----------------------
<S> <C> <C> <C>
Net commission income $1,179,000 $0 $1,179,000
Premiums earned $0 $7,667,000 $7,667,000
Interest income $51,000 $0 $51,000
Investment income $0 $374,000 $374,000
-------------------- -------------------- ----------------------
Total revenue $1,230,000 $8,041,000 $9,271,000
-------------------- -------------------- ----------------------
Claims and claim settlement
expenses $0 $4,217,000 $4,217,000
-------------------- -------------------- ----------------------
Personnel expenses $1,028,000 $0* $1,028,000
Professional expenses $67,000 $0* $67,000
Occupancy expenses $101,000 $0* $101,000
Interest expense $22,000 $0* $22,000
Amortization of deferred policy
acquisition costs $0 $2,837,000 $2,837,000
Other operating expenses $269,000 $0* $269,000
-------------------- -------------------- ----------------------
Total expenses $1,487,000 $2,837,000 $4,324,000
----------
-------------------- -------------------- ----------------------
Operating income (loss) ($257,000) $987,000 $730,000
Non-operating income $190,000 $0 $190,000
-------------------- -------------------- ----------------------
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income (loss) before income
taxes ($67,000) $987,000 $920,000
Income taxes (benefit) ($25,000) $368,000 $343,000
-------------------- -------------------- ----------------------
Net income (loss) ($42,000) $619,000 $577,000
-------------------- -------------------- ----------------------
</TABLE>
- -----------------
* Amounts not capitalized into deferred policy acquisition costs will be nominal
and have not been estimated.
Premiums earned of $7,667,000 represent the Company's average annualized
workers' compensation premiums in force adjusted to reflect six months pro rata
earnings.
Investment income of $374,000 is derived by the average flow of funds during the
period at an investment rate of 5.0% per annum. The pro forma financial
information represents income earned by the Reinsurance Subsidiary, on which the
Company will be subject to tax in the United States. See "Prospectus Summary,"
"Risk Factors United States Federal Income Tax Risks -Taxation of Reinsurance
Subsidiary."
Claims and claim settlement expenses incurred of $4,217,000 for six month period
ended June 30, 1996 are based on an assumed 55% loss ratio (premiums earned x
55%). The actual average loss ratio experienced by the insurance carrier in
prior years, based on underwriting analyses prepared by the Company, was 51.5%.
The Company has engaged an outside independent firm of consulting actuaries who
annually review the Company's underwriting analysis for reasonableness.
Amortization of deferred policy acquisition costs of $2,837,000 for the six
month period ended June 30, 1996, respectively, represents amortization of
contractually agreed upon Program expenses equal to 37% of premiums earned and
include the following:
a) Ceding commission payable to the insurance carrier 28.83%
b) Specific and excess reinsurance premiums payable 5.00%
c) Acquisition expenses incurred by the Reinsurance Subsidiary 3.17%
-----
Total Program expenses 37.00%
=====
-25-
<PAGE>
For the Year Ended December 31, 1995
Total revenue, losses incurred and total expenses for the year ended December
31, 1995 were $18,697,000, $8,945,000 and $8,306,000, respectively, and consist
of the following:
<TABLE>
<CAPTION>
Actual Pro forma Total
------------- -------------- --------------
<S> <C> <C> <C>
Net commission income $2,182,000 $0 $2,182,000
Premiums earned $0 $16,264,000 $16,264,000
Interest income $88,000 $0 $88,000
Investment income $0 $163,000 $163,000
------------ ------------- --------------
Total revenue $2,270,000 $16,427,000 $18,697,000
------------ ------------- --------------
Claims and claim settlement
expenses $0 $8,945,000 $8,945,000
------------ ------------- --------------
Personnel expenses $1,472,000 $0 $1,472,000
Professional expenses $93,000 $0 $93,000
Occupancy expenses $145,000 $0 $145,000
Interest expense $36,000 $0 $36,000
Amortization of deferred policy
acquisition costs $0 $6,018,000 $6,018,000
Other operating expenses $542,000 $0 $542,000
------------ ------------- --------------
Total expenses $2,288,000 $6,018,000 $8,306,000
------------ ------------- --------------
Operating income (loss) ($18,000) $1,464,000 $1,446,000
Nonoperating expenses ($69,000) $0 ($69,000)
Income (loss) before taxes ($87,000) $1,464,000 $1,377,000
Income taxes (benefit) ($32,000) $ 546,000 $514,000
Net income (loss) ($55,000) $ 918,000 $863,000
========= ========== ========
</TABLE>
Premiums earned of $16,264,000 represent the Company's average annualized
workers' compensation premiums in force adjusted to reflect twelve months pro
rata earnings.
Investment income of $163,000 is derived by the average flow of funds during the
year at an investment rate of 5.0% per annum.
Claims and claim settlement expenses of $8,945,000 are based on an assumed 55%
loss ratio (premiums earned x 55%). The actual average loss ratio experienced by
the insurance carrier in prior years, based on underwriting analyses prepared by
the Company, was 51.5%. In this regard, the Company has engaged an outside
independent firm of consulting actuaries who annually review the Company's
underwriting analysis for reasonableness.
-26-
<PAGE>
Amortization of deferred policy acquisition costs of $6,018,000 represents
amortization of the Program expense contractually agreed to equal to 37% of
premiums earned which includes the following:
a) Ceding commission payable to the insurance carrier 28.83%
b) Specific and excess reinsurance premiums payable 5.00%
c) Acquisition expenses incurred by the Reinsurance Subsidiary 3.17%
---------
Total Program expenses 37.00%
=========
-27-
<PAGE>
BUSINESS
General
The Company is primarily engaged in providing workers' compensation and
business insurance products and risk management services designed for American
franchise businesses, particularly fast food and family style restaurants and
convenience stores. Annual premiums paid for workers' compensation insurance by
the franchise industry exceed $2.5 billion, with annual premiums paid by the
fast food and family style restaurant and convenience store segment alone
representing approximately $1 billion of this amount. Although the Company
believes that such franchise businesses tend to be among the safest insurance
risks, they generally pay the same workers' compensation rates as non-franchise
businesses which may not have formal risk or safety awareness programs.
Consequently, such businesses rarely realize any price advantages from their
favorable safety records and generally suffer premium "redundancy" or an
"overcharge" in their workers' compensation insurance rates. The Company offers
products and services designed to enable its clients to realize substantial
savings in their workers' compensation costs while reducing the time required to
manage this element of their business. The Company believes that through its
innovative, comprehensive and aggressive approach to safety/loss control and the
expertise of its management team, it has succeeded in helping its clients
achieve claims costs which are among the lowest in the industry to which it
provides service. The latest data available from the National Council on
Compensation Insurance, Inc. on restaurant workers' compensation claims reflects
an average cost per claim of $2,515 (medical and indemnity only). The comparable
cost to the Company's clients over the same time period was $1,584.
Historically, the Company has acted as a managing general agent ("MGA")
representing various major international and domestic insurance carriers. In its
capacity as an MGA, the Company produces both workers' compensation and other
forms of property and liability insurance (such other forms of insurance being
hereinafter referred to as "Package") for franchise businesses through its own
sales staff as well as through the use of outside broker/agents. The Company
currently offers Package insurance for family style and fast food restaurants in
its capacity as an MGA for GAIC. GAIC has recently advised the Company that it
will no longer accept Package insurance risks for fast food restaurants, but
will continue to do so for family style restaurants. The Company is currently
pursuing other carriers to write such business. See "Risk Factors - Dependence
on Limited Number of Carriers." As an MGA, the Company assumes none of the risks
associated with the insurance business it produces. To date, the Company's
principal source of revenue has been from commissions based on insurance
premiums collected on the insurance policies it sells. Upon consummation of this
Offering, the Company will continue writing business as an MGA, but will
significantly expand its focus to include operating as a reinsurer with the
expectation of increasing its overall profitability.
The Company currently writes the Safety Group Program on behalf of AIG. As
the insurance carrier, AIG assumes 100% of the risks associated with the Program
and receives, as compensation for such assumption, all of the premiums less the
commissions paid to the Company from the Program. Through the Reinsurance
Subsidiary, the Company will enter into the Reinsurance Agreement with the AIG
Affiliates, pursuant to which the Reinsurance Subsidiary will act as the
reinsurer with respect to certain workers' compensation insurance policies in
force as of the date of the Reinsurance Agreement with policy inception dates as
of January 1, 1996 through the date of the Reinsurance Agreement (the "Book of
Business"), or attaching during the term thereof, which are written by the
Company on behalf of the AIG Affiliates. Upon entering into the Reinsurance
Agreement, the AIG Affiliates will pay the Reinsurance Subsidiary the related
net written premium less the Program expenses and the losses paid associated
with the Book of Business. It is anticipated that a substantial portion of this
amount will be used to fund the Loss Escrow Fund (as such term is defined in
"Business - Reinsurance - Reinsurance Agreement"). See, however, "Risk Factors -
Reinsurance."
Although the Reinsurance Subsidiary will assume the risks associated with
being a reinsurer, the Reinsurance Agreement requires that the AIG Affiliates
purchase and maintain in effect or reinsure specific and aggregate excess of
loss reinsurance ("Specific and Excess of Loss Coverage") for the joint benefit
of the AIG Affiliates and the Reinsurance Subsidiary which will limit the
liability of the Reinsurance Subsidiary for losses and certain defined expenses
to $300,000 per occurrence. Moreover, the aggregate limit for liability for all
losses and expenses during each 12-month period covered by the Reinsurance
Agreement, will not exceed a ratio of 70% of losses incurred to net premiums
written. The Reinsurance Subsidiary will pay the AIG Affiliates 5% of the net
written premiums for the cost of the Specific and Excess of Loss Coverage.
Pursuant to the Reinsurance Agreement, the Company will
-28-
<PAGE>
retain the premium revenues presently retained by AIG under the Program with the
associated risks and potential for profitability. See "Business - Strategy." The
Company intends to use a portion of the proceeds of this Offering to fund the
operations of the Reinsurance Subsidiary. See "Use of Proceeds."
In September 1996, an AIG Affiliate made available to the Company a new
workers' compensation program (the "Small Business Workers' Compensation
Program" or "SBP") designed to provide coverage to certain smaller businesses
located in 23 states which pay annual premiums between $5,000 and $50,000 and
which are represented by over 90 separate workers' compensation class codes. The
underwriting process under the SBP has been simplified enabling the Company to
respond promptly with competitively priced quotes. The Company believes that
many broker/agents, regardless of size, have accounts that would be eligible to
participate in the SBP and therefore could be a potential broker/agent to
promote this program. If successful, the SBP could substantially increase the
Company's revenues. The SBP will not be subject to the Reinsurance Agreement.
Industry Overview
All fifty States and the District of Columbia have promulgated statutes,
rules and regulations that require employers to provide wage replacement and
medical benefits to work accident victims regardless of fault. As a result of
these mandates, virtually all employers must either (i) purchase workers'
compensation insurance from a private insurance carrier, (ii) obtain coverage
from a state managed fund, or (iii) be self-insured if permitted by the state in
which business is conducted.
Workers' compensation is a major risk management issue of the '90's. In a
poll of risk managers published in the July 1996 issue of Risk Management
Magazine, workers' compensation insurance was the second most frequent concern.
Nationwide, employers workers' compensation costs increased significantly over
the last decade. Workers' compensation costs increased an average of 9.6% per
annum between 1984 and 1990. From 1990 through 1995, costs have increased by
about 2.9% per year. Certain additional intangible losses also directly relate
to increased workers' compensation costs such as higher incidents of employee
turnover, the cost of retraining new employees and litigation expenses. Many
employers are looking for techniques to better control their mounting costs.
The Company believes that franchises often are the safest segment of a
particular industry. Most franchises are standardized operations based upon
successful models with demonstrated profitability. These businesses typically
have standard operating procedures and standard plant and equipment with
standardized safety programs. The design and construction of most franchises
take into account safety engineering of the workplace. For example, in a fast
food restaurant, chairs and tables are set a certain distance apart to allow for
adequate walking space, and the cooking equipment used must conform to certain
safety standards. The franchisor and the franchisee have a shared interest to
maintain safe, clean and uniform environments for their customers and employees.
Consequently, the Company believes that, in general, workers' compensation cost
of claims of franchise businesses are significantly lower than non-franchise
operations.
Franchises are often subject to the same workers' compensation rating system
that the insurance industry uses for any comparable business. As a result, fast
food franchise restaurants pay the same rates as bars and taverns which may be
open all night, as fine dining restaurants where staff often carry heavy trays,
or as "mom and pop" restaurants without safety engineered facilities or a formal
safety program. Although these businesses are charged the same workers'
compensation rates, their claims experience is significantly higher.
Consequently, most franchise companies generally suffer premium "redundancy" or
an "overcharge" in their insurance premiums in many industries. In effect,
franchise businesses subsidize the higher workers' compensation claims costs of
non-franchise operations. Many states have recently created employee class codes
that distinguish fast food restaurants from other types of restaurants. As of
the date hereof, the Company believes that workers' compensation insurance rates
with respect to such class codes have not been similarly distinguished. See
"Risk Factors - Regulation."
-29-
<PAGE>
The Company's Solution
The Company has developed insurance programs designed specifically to reduce
the impact of redundancy on American franchise businesses. By taking advantage
of this business segment's good safety records and providing risk management
services, including loss control and claims management, the Company provides its
clients the opportunity to effectively lower their cost of claims. The Company
has developed proprietary information and claim analyses systems and custom
designed loss reports which explain the claim procedure and motivate client
management to promote safety and control claims expense. Additionally, the
Company, through early intervention, seeks to limit the number of disputes with
injured employees. The Company believes in the prompt settlement of meritorious
claims, but it will aggressively defend against non-meritorious claims. The
Company attempts to resolve cases prior to litigation and, if litigation ensues,
aggressively seeks to settle reasonable claims.
Through a third-party administrator (a "TPA"), the Company provides its
clients with access to national 800 telephone numbers to ensure that their
claims can be reported quickly, 24 hours-a-day, seven days-a-week. The TPA has
made available a trained medical staff to initiate a four party contact among
the claimant, the employer, the adjuster and the treating physician. This
process helps ensure prompt and competent medical care for the employee and
management of the claim which achieves a lower cost. The Company monitors high
loss claims on a weekly basis and interacts with the professional, medical, and
adjusting staff to close out claims cost effectively.
In addition to these cost containing activities, the Company's client
services staff maintains constant communication with clients. Its loss control
department conducts safety seminars and provides periodic newsletters to clients
on how to control the frequency and severity of claims. The Company believes it
has succeeded in persuading clients that safety is not just an issue of good
management but can have a significant impact on the financial success of their
businesses. Since workers' compensation cost has become one of the most
expensive components of non-productive overhead, the Company seeks to
demonstrate to its clients that, by reducing the cost of their claims, they are
improving their overall profitability.
Strategy
General
The Company's goal is to strengthen its position as one of the leading
providers of its products and services to fast food and family style franchise
restaurants and convenience stores throughout North America and to expand into
other franchise businesses. It believes this goal can be accomplished by
devising and implementing programs on a state-by-state basis to:
o accumulate the latest approved rate information;
o obtain approved carrier rate filings;
o maintain up to date information on legislative changes affecting the
industry;
o ascertain current factors affecting pricing in the voluntary market;
o interact with insurance carriers to encourage competitive pricing, while
respecting the carriers need for profitability and to remain viable in the
marketplace;
o target quality risks;
o present insured clients with effective methods of monitoring, reducing and
containing claims costs;
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o monitor claims handling procedures of claims administrators and interact
with them to produce cost effective results;
o market programs designed to reward preferred risks with incentives to
purchase and renew insurance coverage; and
o become a "one-stop" provider of commercial insurance to its selected
franchise industries.
The carriers providing workers' compensation insurance have generally
entered and withdrawn from regional or local markets with some frequency. Often,
the reason for movement is attributed to (i) a change of corporate policy, (ii)
the general conditions in the insurance industry at that time, and (iii) the
carrier's experience with loss ratios. Even where cost containment programs
exist, often they are not adequately managed and are not particularly effective.
The Company is committed to its insured clients as well as its carriers.
To achieve its goals, the Company's staff has been trained to offer a level of
service not otherwise present in a generally complacent industry. By combining
the talents of specialists drawn from diverse backgrounds, the Company has
created a unique environment where sales, marketing, and risk management experts
produce quality products and results. The Company's clients have been able to
achieve an average reduction of 11% over the past four years in their premium
experience modification factors (which are a significant component in
determining a client's premium).
Reinsurance
General
Historically, the Company has acted as MGA and, as such, assumes none of
the risks associated with the insurance business it produces. To date, the
Company's principal source of revenue has been from commissions based on
premiums collected on the business it produces. Upon consummation of this
Offering, the Company will continue writing business as an MGA, but will expand
its focus to include operating as a reinsurer.
The Company currently writes the Safety Group Program on behalf of AIG.
As the insurance carrier, AIG assumes 100% of the risks associated with the
Program and receives, as compensation for such assumption, all of the premiums
less the commissions paid to the Company from the Program.
Reinsurance Agreement
Upon the consummation of the Offering, the Company will fund the
operations of the Reinsurance Subsidiary pursuant to the Reinsurance Agreement
whereby the Reinsurance Subsidiary will act as the reinsurer with respect to
certain workers' compensation insurance policies in force as of the date of the
Reinsurance Agreement with policy inception dates as of January 1, 1996 through
the date of the Reinsurance Agreement (the "Book of Business"), or attaching
during the term thereof, which are written by the Company on behalf of the AIG
Affiliates. Upon entering into the Reinsurance Agreement, the AIG Affiliates
will pay the Reinsurance Subsidiary the related net written premium less the
Program expenses and the losses paid associated with the Book of Business. It is
anticipated that a substantial portion of this amount will be used to fund the
Loss Escrow Fund (as such term is defined below). The Reinsurance Agreement
requires that the AIG Affiliates purchase and maintain in effect or reinsure
specific and aggregate excess of loss reinsurance ("Specific and Excess of Loss
Coverage") for the joint benefit of the AIG Affiliates and the Reinsurance
Subsidiary which will limit the liability of the Reinsurance Subsidiary for
losses and certain defined expenses to $300,000 per occurrence. Moreover, the
aggregate limit for liability for all losses and expenses during each 12-month
period covered by the Reinsurance Agreement, will not exceed a ratio of 70% of
losses incurred to net premiums written. Such excess of loss contracts provide a
defined limit of liability, which will permit the reinsurance Subsidiary to
quantify its aggregate maximum loss exposure. By contrast, maximum liability
under pro-rata or quota share contracts is more difficult to quantify precisely.
Quantification of loss exposure will be fundamental to the
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reinsurance Subsidiary's ability to manage its losses. The Reinsurance
Subsidiary will pay the AIG Affiliates 5% of the net written premiums for the
cost of the Specific and Excess of Loss Coverage.
The AIG Affiliates will pay the Reinsurance Subsidiary 100% of the
premiums derived from business written by the Company on behalf of the AIG
Affiliates. The AIG Affiliates shall receive a commission allowance of 28.83%
based on the net premiums. Accordingly, the Company believes that the
Reinsurance Subsidiary's operations will provide the Company the opportunity to
retain the underwriting profitability that is presently being retained by AIG,
while creating a relatively limited risk exposure under the Reinsurance
Agreement. See, however, "Risk Factors - Reinsurance."
The Reinsurance Subsidiary will deposit an amount equal to 60% of the net
written premiums (or a letter of credit for a portion or all of such amount) in
a loss escrow fund to be located in the United States and managed by the Company
(the "Loss Escrow Fund") for the payment of losses and the costs and expenses
that are allocable to specific claims incurred by the AIG Affiliates in the
investigation, appraisal, adjustment, settlement, litigation, defense or appeal
of such claims. The Reinsurance Subsidiary will retain all of the investment
income earned by the Loss Escrow Fund funded by the Reinsurance Subsidiary on
behalf of the AIG Affiliates. The Reinsurance Subsidiary and the AIG Affiliates
shall jointly determine the investment instruments to be used for investment of
the Loss Escrow Fund.
Products and Services
The Company custom designs its insurance programs to be offered only
through nationally recognized carriers with the highest industry ratings. It
works with these carriers to establish competitive rates, while being mindful of
a carrier's need to maintain profitability and remain viable in the marketplace.
Additionally, the Company offers products and services designed to enable its
clients to realize substantial savings in their workers' compensation costs
while reducing the time required to manage this element of their business.
Specifically, the Company provides clients such savings by offering competitive
rates and dividends and cost containment programs which assist its clients in
managing their workers' compensation costs. As a result of these measures, the
Company has enabled its clients to achieve an average reduction of 11% over the
past four years in their premium experience modification factors (which are a
significant component in determining a client's premium). For larger clients,
"loss sensitive" programs (also known as "retro" programs) can be established.
The Company has created a new, innovative, comprehensive and aggressive
approach to safety/loss control. The Company blends old and new prevention
techniques to develop safety programs specific to each industry it serves. While
the primary thrust of the Company's programs is safety for employees and
customers, emphasis is also placed on motivating client management to implement
safety programs as a means of improving profitability. The Company conducts
workshops to demonstrate the benefits of using the Company's loss control safety
programs. Proprietary, custom designed loss management information is
communicated by mail and phone to the Company's clients.
The Company believes its safety programs help reduce workers'
compensation claims costs. The basic elements of its safety programs, as
recommended to its clients, are:
o a written safety policy;
o specific written safety rules;
o regularly scheduled safety meetings;
o new employee hiring practices;
o training of all new and transferred employees;
o supervisor responsibility and accountability;
o a regular self-inspection program administered by identified supervisors;
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o defensive driving courses;
o first aid and CPR programs;
o an incentive program that rewards safety awareness;
o a team safety committee program;
o a timely accident reporting and investigation program;
o a monitored record keeping system for all accidents;
o a policy to implement corrective action for unsafe conditions and acts; and
o a monthly review by top management of the program and its implementation.
Many states have allowed a reduction in workers' compensation insurance premiums
when an employer implements an approved safety program. The Company's safety
programs meet the requirements of most states that do so.
Customers, Sales and Marketing
The Company markets its products primarily to the franchise industry
through broker/agents. Its customers typically are sophisticated owners of
multiple unit franchises who understand the importance of cost containment and
safety features. While the Company focuses its efforts on large, national
franchisees operating multiple outlets, it also serves smaller, regional
franchise operators. For the year ended December 31, 1995, the Company provided
services and products to approximately 750 separate insureds, none of which
accounted for more than 3% of annual revenues. As of the date hereof, no
broker/agent accounted for more than 5.8% of annual revenues.
Consumers of insurance products have traditionally focused on price
rather than cost containment. They have come to expect little or no customer
service. The Company capitalizes on these insurance industry deficiencies by
tailoring its products for each niche market, providing exceptional customer
service and, most importantly, providing loss control and cost containment
services.
The Company conducts regional safety seminars showing how to contain
costs and reduce losses. Although not a sales effort, it is one of the ways the
Company generates new business while continuing to educate its existing clients.
Each franchisee is provided with its own personalized client service
representative who is knowledgeable and available throughout the work day. An
800 "hot line" is also available to reach the manager of client services should
any issue need immediate resolution. The Company believes that, over a
continuing period of time, these client support services will distinguish it
from its competition.
The Company has created a central database to keep it abreast of market
trends, current premium rates, rate filings, renewal dates and information on
its competition.
The Company's sales and marketing programs are varied. The Company
engages in multiple direct mail programs each year and carefully monitors the
responses to determine the effectiveness of each of these programs. The Company
also utilizes its database of franchisees to contact and generate potential
clients through an extensive telemarketing effort. Identified prospective
clients are then quoted prices by a Company representative. Periodic telephone
calls and quarterly newsletters nurture and cultivate the Company's name
recognition and update its database. The Company has also designed marketing
programs tailored for the specific needs of the high revenue broker/agents
(those whose client bases that produce workers' compensation annual premiums
ranging between $2 million and $15 million) as well as smaller broker/agents who
operate in small towns, and their respective clients. Because the Company's
programs relieve the broker/agent of administrative and claims tasks, the
broker/agent can earn more revenue by focusing its efforts on selling Company
products. Other benefits provided to these
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broker/agents include (i) increasing the geographical area in which the
broker/agent generates business, (ii) a lower likelihood of the broker/agent
losing larger multiple store and multiple state franchisees because the
broker/agents will have many more states in which they are able to write
business, (iii) being able, through the Company, to also offer the Company's
other property and casualty products to their clients, and (iv) providing to the
broker/agent's clients the benefit of the Company's loss control and cost
containment programs to reduce the clients losses, thus enabling the client
potentially to receive a dividend through low losses.
Policy Renewals
Client policy renewals are critical to the Company's prosperity. The Company
believes it can achieve its goal of maintaining favorable renewal rates by (i)
providing its clients superior service, (ii) ensuring that all insurance policy,
endorsement and audit documents are distributed to each client on a timely
basis, and (iii) ensuring that all documents distributed to clients are complete
and accurate. The Company communicates with each client at least four times per
year in order to maintain close relationships and to learn of any real or
perceived problems and concerns on a timely basis. The Company responds quickly
to all written and telephone communications initiated by the client. The Company
believes that its superior service is a major factor in its client retention
rate.
The Company's underwriting department reviews prospect applications to
identify risks that appear undesirable from a historical viewpoint and to
recognize those prospects dedicated to significant improvement in their loss
history which thereby makes them a valuable addition to the Company's customer
base and to a carrier's portfolio. The Company's underwriting department
re-evaluates each client for renewal purposes. This evaluation determines
whether the particular client is eligible to receive a decrease or other form of
modification to its renewal premium. If the client has responded to loss control
recommendations and its loss history reflects improvement, a reduction in its
renewal premium rate may be implemented. The department will also identify
clients whose experience has deteriorated and who have not responded to loss
control guidance and recommendations. If the deterioration is significant enough
and the client has not demonstrated a sincere commitment to improvement in loss
experience, the underwriting department may make a recommendation not to renew
the policy.
Data Management
The Company has dedicated significant resources and capital in
developing its current management information systems which constitute an
integral part of the Company's business operations. The Company utilizes such
systems to process insurance applications, control the issuance of policies and
endorsements, audit medical fees, pay broker/agent commissions, manage claims,
provide reports to its clients, provide accounting statements and financial
reports, and analyze claims data, all of which give the Company the ability to
write more effective and competitive policies and result in a higher rate of
policy renewals. In order to ensure proper coordination, the Company's data
processing policies encompass the following features:
o maintaining the highest degree of compatibility within the Company in the
design, implementation and operation of management information systems;
o conducting periodic meetings with department managers to review current
system developments and enhancements;
o maintaining procedures to insure that proper management approval and review
are obtained prior to the initiation of any systems development, software or
hardware procurement;
o ensuring effective utilization of software and hardware;
o maintaining guidelines for systems documentation, project control, security
and system operations; and
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o maintaining inventory records of hardware and software.
Competition
The workers' compensation industry is highly competitive. The Company
competes with other MGA's, numerous large insurance companies, managed health
care companies, state sponsored insurance pools, risk management consultants and
non-Company affiliated broker/agents, many of which have significantly larger
operations and greater financial, marketing, human, and other resources than the
Company. Such competitors may have material advantages over the Company as a
result of additional forms of insurance and services they offer in addition to
workers' compensation products and services. Competitive factors include product
lines, premium rates, personalized service and effective cost containment
measures.
Although the Company believes that, as one of the only national
providers specializing in workers' compensation insurance for franchise
businesses in the United States, it is uniquely positioned in the industry, no
assurance can be given that other companies will not develop similar national
programs. See "Risk Factors Competition."
Regulation
General
The Company, as an MGA, is required to conform to the insurance
licensing regulations of the various states in which it produces business. In
this regard, all states require that an officer of the Company be duly appointed
or licensed as an agent or broker. Certain states require the Company to be
licensed as well. The Company's business is subject to state-by-state regulation
of workers' compensation insurance and workers' compensation insurance
management services. Under the workers' compensation system, employer insurance
or self-funded coverage is governed by individual laws in each of the fifty
states and by certain federal laws. Changes in individual state regulation of
workers' compensation or managed health care may create a greater or lesser
demand for some or all of the Company's services, or require the Company to
develop new or modified services in order to meet the needs of the marketplace
and compete effectively in that marketplace.
Reinsurance Subsidiary
It is anticipated that the Reinsurance Subsidiary will be registered as
a Class 3 insurer in Bermuda and, accordingly, will be subject to the provisions
of the Bermuda Insurance Act 1978, as amended, and the regulations promulgated
thereunder (collectively, the "Insurance Act"). The Insurance Act provides that
no person shall carry on insurance business in or from within Bermuda unless
registered as an insurer under the Insurance Act by the Minister of Finance (the
"Minister"). The Minister, in determining whether to grant registration, has
broad discretion to act as he thinks fit in the public interest. The Minister is
required by the Insurance Act to ascertain whether the applicant is a fit and
proper body to be engaged in the insurance business and, in particular, whether
it has, or has available to it, adequate knowledge and expertise. In connection
with registration, the Minister may impose conditions relating to the writing of
certain types of insurance business.
The Insurance Act imposes on Bermuda insurance companies such as the
Reinsurance Subsidiary solvency and liquidity standards and auditing and
reporting requirements and grants to the Minister powers to supervise,
investigate and intervene in the affairs of insurance companies. Significant
aspects of the Bermuda insurance regulatory framework are set forth below.
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o The Reinsurance Subsidiary will be required to maintain a principal office in
Bermuda and appoint and maintain a principal representative in Bermuda. The
Insurance Act places a duty on the principal representative to report to the
Minister the occurrence of certain events, including, but not limited to, the
failure by the insurer for which he or she acts to comply with a condition
imposed by the Minister relating to a solvency margin or a liquidity or other
ratio with respect to any other such condition not so relating. Without a
reason acceptable to the Minister, the Reinsurance Subsidiary may not
terminate the appointment of its principal representative, and the principal
representative may not cease to act as such, unless 30 day's advance notice
in writing to the Minister is given of the intention to do so.
o The Reinsurance Subsidiary will be required to appoint an independent auditor
to conduct the annual audit of the statutory-basis financial statements.
o The Reinsurance Subsidiary will be required to maintain share capital of at
least $120,000.
o The Reinsurance Subsidiary must maintain statutory capital and surplus
exceeding the greater of the following three criteria:
o $1,000,000
o 20% of the net premiums where the net premiums in the
current financial year do not exceed $6,000,000, or,
where the net premiums exceed $6,000,000, $1,200,000
plus 15% of the net premiums which exceed $6,000,000.
The net premium is the gross premium after deduction
for any premium ceded for reinsurance.
o 15% of reserves for losses and loss expenses.
o The Reinsurance Subsidiary will be required to maintain liquid assets
(referred to in the Insurance Act as "relevant assets") at a level equal to
or greater than 75% of its net relevant (insurance) liabilities. For this
purpose, liquid assets include cash and time deposits, quoted (publicly
traded) investments, unquoted bonds and debentures, mortgage loans backed by
first liens on real estate, accrued investment income, accounts and premiums
receivable, reinsurance balances receivable and funds held by ceding
companies.
o The Reinsurance Subsidiary will be required to have a copy of its Statutory
Financial Statements available at its principal office for production to the
Registrar of Companies ("Registrar") and to file these Statutory Financial
Statements and a Statutory Financial Return within four months after the end
of the financial year (or such longer period, not exceeding seven months, as
the Registrar, on application, may allow).
o The Reinsurance Subsidiary will be required to include in its annual
Statutory Financial Return the opinion of a loss reserve specialist in
respect of its loss and loss expense reserves.
o The Minister may appoint an inspector with extensive powers to investigate
the affairs of an insurer or reinsurer if the Minister believes that an
investigation is required in the interest of the insurer's or reinsurer's
policyholders or persons who may become policyholders. To verify or
supplement information otherwise provided to him, the Minister may direct an
insurer or reinsurer to produce documents or information relating to matters
connected with the insurer's or reinsurer's business.
Under current Bermuda law, there is no Bermuda income, corporation or
profits tax, withholding tax, capital gains tax, capital transfer tax, estate
duty or inheritance tax payable by stockholders of the Company other than
stockholders ordinarily resident in Bermuda for exchange purposes. The Company
is not subject to stamp or other similar duty on the issue, transfer or
redemption of its shares of Common Stock.
It is expected that the Company will obtain an assurance from the
Minister under the Exempted Undertakings Tax Protection Act 1966 that, in the
event of there being enacted in Bermuda any legislation imposing tax computed on
profits or income or computed on any capital assets, gain or appreciation or any
tax in the nature
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of estate duty or inheritance tax, such tax shall not, until March 28, 2016, be
applicable to the Company or to its operations, or to the shares, debentures or
other obligations of the Company except in so far as such tax applies to persons
ordinarily resident in Bermuda and holding such shares, debentures or other
obligations of the Company or any real property or leasehold interests in
Bermuda owned by the Company. As an exempted company, the Company is liable to
pay a registration fee in Bermuda based upon its authorized capital and the
premium on its issued shares of Common Stock at a rate not exceeding $25,000 per
annum.
Premium Rate Restrictions
State regulations governing the workers' compensation system impose
restrictions and limitations on the Reinsurance Subsidiary's business
operations. State laws regulate what workers' compensation benefits must be paid
to injured workers. Additionally, most states must approve the workers'
compensation premium rates that may be charged. As a consequence, the
Reinsurance Subsidiary's ability to pay insured workers' compensation claims out
of the premium revenue generated from the Reinsurance Subsidiary's assumption of
such insurance is dependent on the level of benefits and premium rates approved
by the various states. In this regard it is significant that the state
regulatory agency that regulates workers' compensation benefits is often not the
same agency that regulates workers' compensation insurance premium rates.
Possible Future Regulations
Several state legislatures and the federal government have considered
and are considering a number of cost containment and health care reform
proposals. The Company believes it may benefit from some proposals that favor
the growth of managed care. However, no assurance can be given that the state or
federal government will not adopt future health care reforms that would have a
material adverse effect on the Company.
Investment Income
The Company's income will depend, in part, on the income derived from
the investment of premiums by the Reinsurance Subsidiary. The Company believes
that the risks inherent in the business of the Reinsurance Subsidiary should not
be augmented by a speculative investment policy and therefore its investment
strategy will be partially defined by the need to safeguard its capital. Because
of the unpredictable nature of losses that may arise under insurance policies,
the Reinsurance Subsidiary's liquidity needs may be substantial. The Company's
investment policy will be established by the Company's Investment Committee, and
will be subject to, among other factors, the Company's liquidity requirements.
The Company intends that its investments will consist primarily of cash or
fixed-income securities (none of which will have a rating of less than AA), the
market value of which is subject to fluctuation depending on changes in
prevailing interest rates. Additionally, the Company reserves the right to
invest a limited percentage of its portfolio, to be determined by the Investment
Committee, in common stock of companies listed on national securities exchanges.
The stock of such companies may fluctuate as a result of specific events
affecting such companies as well as general market conditions. Increases in
interest rates or fluctuations in the market price of such companies' stocks may
result in losses, both realized and unrealized, on the Company's investments.
See "Risk Factors - Investment Income."
Employees
The Company currently has approximately 35 full-time employees, of whom
five are officers, four are managers, three are sales personnel and the balance
are accounting, clerical, loss control and underwriting staff. None of the
Company's employees is subject to collective bargaining agreements. The Company
believes that its relationships with its employees are good.
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Facilities
The Company leases approximately 12,600 square feet of office space in
Miami, Florida for use as its corporate headquarters. The lease agreement has an
initial seven year term, which expires in 2002, with two five-year renewal
options. The Company believes that its present facilities are well maintained,
in good condition and are suitable for its needs for the foreseeable future.
Legal Proceedings
The Company is a party to various claims and lawsuits arising in the
ordinary course of business. At present, management does not anticipate that the
resolution of any of these claims and lawsuits will have a material adverse
affect on the financial condition or operations of the Company.
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MANAGEMENT
Directors and Executive Officers
The names, ages and positions of the executive officers and Directors
of the Company are as follows:
Name Age Position
- ---- --- --------
Mel Harris 56 Chairman, Chief Executive Officer and Director
Howard Odzer 61 President and Director
William R. Dresback 48 Chief Financial Officer and Secretary
John Rearer 38 Vice President
Nancy Ryan 40 Vice President and Assistant Secretary
Stuart J. Gordon 66 Director
Jack D. Burstein 51 Director*
Maxwell M. Rabb 86 Director*
Mel Harris has been a Director of the Company since its inception in
1988 and has been Chairman and Chief Executive Officer of the Company since
April 1993. Mr. Harris served as Vice Chairman of Jardine Insurance Brokers New
York, Inc. from February 1992 until January 1994. From 1988 until February 1992,
Mr. Harris served as Vice Chairman of Alexander & Alexander of New York, Inc. (a
wholly-owned subsidiary of A&A Services, Inc.), a global insurance brokerage
organization. In addition, Mr. Harris serves as President of International
Insurance Group, Inc., an insurance brokerage company located in Miami and New
York and has been a director of Koo Koo Roo, Inc., a casual dining chain, since
September 1996. Mr. Harris has agreed to devote such time as is necessary and in
any event, no less than 80% of his business time, to the affairs of the Company.
Howard Odzer has been President and a Director of the Company since its
inception in 1988. Between 1976 and 1988, Mr. Odzer carried on business
principally as a private investor. Mr. Odzer co-founded "MarkeTiming," a company
that became an affiliate of Jesup and Lamont, members of the NYSE, and which was
a provider of research to major financial institutions throughout the United
States and pioneered the use of computer analysis for investment and program
trading. He served as President of MarkeTiming from its inception until 1976.
Prior to founding MarkeTiming, Mr. Odzer worked as a stock market analyst with
Moore and Schley, members of the NYSE, where he became a Vice President of
Institutional Research. Mr. Odzer participates in the National Restaurant
Association Risk and Safety Managers Group, and is a member of the Advisory
Council of GAB Robins, one of the largest claims administrators in the country.
Mr. Odzer is a graduate of Princeton University.
William R. Dresback has been Chief Financial Officer and Secretary since
May 1993. From 1986 to 1992, he served as Chief Financial Officer of Cobb
Partners Financial, Inc. (previously a wholly-owned subsidiary of The Walt
Disney Company), a national financial services company primarily involved in the
mortgage banking, construction and real estate development businesses. From 1981
to 1986, Mr. Dresback served as Senior Vice President and Chief Financial
Officer of International Financial Services, Inc. (a subsidiary of The Torchmark
Corporation), an international financial services company primarily involved in
the financial planning, life insurance and securities brokerage businesses. From
1969 to 1981, he was employed by KPMG Peat Marwick where he was responsible for
managing the firm's South Florida Insurance Practice.
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*These individuals will be elected directors prior to this Offering.
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John Rearer has been a Vice President of the Company since February
1994. Mr. Rearer has over ten years of commercial insurance experience. From
1989 to 1994, Mr. Rearer was Executive Vice President of the Food Service
Division of The Garlington Group, a large retail insurance agency specializing
in fast food franchisee insurance programs. From 1986 to 1989, Mr. Rearer
concentrated on the development and marketing of workers' compensation and
property and liability insurance and overall agency management for Coastal
Plains Insurance. From 1984 to 1986, Mr. Rearer was employed by Arthur Young &
Company as a Certified Public Accountant in their Tax Department.
Nancy Ryan has been a Vice President and Assistant Secretary of the
Company since July 1992. Ms. Ryan has over 12 years commercial insurance
experience. Ms. Ryan served as a Vice President of Jardine Insurance Brokers New
York, Inc. from February 1992 until January 1994. From 1988 until February 1992,
she served as a Vice President of Alexander & Alexander of New York, Inc. (a
wholly-owned subsidiary of A&A Services, Inc.), a global insurance brokerage
organization. In addition, since 1984 Ms. Ryan serves as Vice President of
International Insurance Group, Inc. Ms. Ryan devotes approximately 50% of her
business time to the affairs of the Company.
Stuart J. Gordon has been a director of the Company since 1995. Mr.
Gordon has been a partner at the law firm of Metzger, Hollis, Gordon & Alprin
since 1989. Mr. Gordon has served as Chief Counsel of Special Enforcement with
the Securities and Exchange Commission, Special Assistant to the Comptroller of
the Currency, Deputy Chairman and Treasurer of the United States Senate campaign
of Daniel Patrick Moynihan, the first Administrative Assistant and Chief of
Staff to Senator Moynihan in Washington, D.C., and Deputy Finance Chairman of
the Presidential campaign of Senator John Glenn. Mr. Gordon was appointed by the
Governor of the State of Maryland to the Foster Care Review Board and is a
member of the Board of Governors of Daytop Village. Mr. Gordon is also a member
of the board of the Independent College Fund of New York.
Jack D. Burstein will be elected a director of the Company prior to this
Offering. Mr. Burstein has been the Chairman and President of each of Strategica
Group, Inc., a merchant bank ("Strategica Group"), and Strategica Capital Corp.,
an affiliate of Strategica Group and a merchant bank ("Strategica Capital"),
since 1992. From 1984 to present, Mr. Burstein served as Chief Executive Officer
and President of American Capital Corp., a savings and loan holding corporation,
and as Chief Executive Officer of TransCapital Financial Corporation, a savings
and loan holding corporation. Prior to such time, Mr. Burstein was a senior
partner in the accounting firms of Schecter Beame Burstein Price & Co. and
Seidman & Seidman, respectively.
Maxwell M. Rabb will be elected a director of the Company prior to this
Offering. Mr. Rabb has been of Counsel to the law firm of Kramer, Levin,
Naftalis, Nessen, Kamin & Frankel since 1991 and was a partner in the law firm
of Stroock & Stroock & Lavan from 1958 to 1981 and from 1989 to 1991. Mr. Raab
served as the United States Ambassador to Italy from 1981 to 1989. In addition,
Mr. Raab serves as a director of the Sterling National Bank, MIC Industries,
Inc., Liberty Cable Company, Inc., Black Hole Technologies, Inc., Data Software
and Systems, Inc., and CompuTower.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Directors currently
receive no cash compensation for serving on the Board of Directors. Officers are
elected by and serve at the discretion of the Board of Directors. The Company
will establish, effective upon the consummation of this Offering, an Audit
Committee, an Investment Committee, an Executive Committee, a Compensation
Committee.
The Audit Committee will review and evaluate the results and scope of
the audit and other services provided by the Company's independent accountants,
as well as the Company's accounting principles and system of internal accounting
controls. The members of the Audit Committee will be Messrs. Burstein, Gordon
and Rabb.
The Investment Committee will establish the Company's investment policy
and will have complete discretion in investing the Company's portfolio,
including the investment of premiums assumed by the Reinsurance Subsidiary. The
members of the Investment Committee will be Messrs. Harris, Burstein and Gordon.
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<PAGE>
The Executive Committee will exercise all power and authority of the
Board of Directors in the management and affairs of the Company between meetings
of the Board of Directors, to the extent permitted by law. The members of the
Executive Committee will be Messrs. Harris, Burstein and Gordon.
The Compensation Committee will make recommendations to the Board of
Directors concerning the compensation, including incentive arrangements, of the
Company's officers, key employees and others and will administer the Option Plan
and will determine the officers, key employees and others to be granted options
under the Option Plan and the Additional Option Agreement and the number of
shares subject to such options. The members of the Compensation Committee will
be Messrs. Harris, Burstein and Gordon.
Executive Compensation
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company during the years ended 1995,
1994 and 1993 by the Chief Executive Officer and each of the Company's other
executive officers (collectively, the "Named Officers") who received
compensation in excess of $100,000 during any such year.
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
====================================================================================================================================
Name and Year Annual Compensation Long-Term Compensation
Principal Position (1)
---------------------------------------------------------------------------------------
Salary Bonus Other Awards Payouts
($) ($) Annual
Compen-
sation ($)
(3)
---------------------------------------------------
Restricted Securities LTIP All Other
Stock Underlying Pay-outs Compen-
Award(s) Options/SARs sation
($) (#) ($) ($)(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mel Harris 1995 0 0 0 0 0 0 $270,000
-------------------------------------------------------------------------------------------------
Chairman and Chief Executive
Officer 1994 0 0 0 0 0 0 $1,977,468
-------------------------------------------------------------------------------------------------
1993 0 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Howard Odzer 1995 $100,000 0 0 0 0 0 $270,000
-------------------------------------------------------------------------------------------------
President 1994 $100,000 0 0 0 0 0 $1,977,468
-------------------------------------------------------------------------------------------------
1993 $100,641 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
William R. Dresback 1995 $100,000 0 $8,400 0 0 0 0
-------------------------------------------------------------------------------------------------
Chief Financial Officer and
Secretary 1994 $100,000 0 $8,400 0 0 0 0
-------------------------------------------------------------------------------------------------
1993 $66,231 0 $5,600 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
John Rearer 1995 $106,250 0 0 0 0 0 0
-------------------------------------------------------------------------------------------------
Vice President 1994 $87,692 0 0 0 0 0 0
-------------------------------------------------------------------------------------------------
1993 0 0 0 0 0 0 0
====================================================================================================================================
</TABLE>
(1) Mel Harris serves as Chairman and Chief Executive Officer of the Company
pursuant to an employment agreement. Howard Odzer serves as President of
the Company pursuant to an employment agreement.
See "Employment Arrangements."
(2) Dividends paid pursuant to Shareholders Agreement. See "Dividend Policy."
(3) Automobile allowance.
Employment Arrangements
The Company has entered into a one-year employment agreement with Mr.
Harris, dated as of the date hereof, pursuant to which Mr. Harris serves as
Chairman and Chief Executive Officer. The agreement will automatically renew for
successive one-year periods, unless either party gives not less than 90-days
notice to the other party of its desire to terminate the Agreement at the end of
such period. Mr. Harris will receive an annual salary of $150,000 and is also
entitled to receive perquisites similar to perquisites made available to other
senior executives of the Company. Mr. Harris has agreed to devote such time as
is necessary and in any event, no less than 80% of his business time, to the
affairs of the Company. Mr. Harris has agreed that at all times while he is
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<PAGE>
employed by the Company in any capacity, and for a period of three (3) years
after the date of the termination of his employment with the Company,
irrespective of the manner of such termination, Mr. Harris will not (i) be
employed or retained by, seek employment with, or serve as a employee, agent,
officer, director or partner of, or as a consultant to, or directly or
indirectly acquire or own in any manner an interest in (whether as owner,
operator, stockholder, director, financial backer, creditor, consultant,
partner, agent or otherwise), any person, firm, partnership, corporation,
association, sole proprietorship or other entity which engages in competition
with the Company in any and all states in which the Company and/or any of its
subsidiaries conduct their respective businesses, (ii) solicit any current or
previously solicited potential customer of the Company, or (iii) solicit or
induce any person to leave the employ of the Company to engage in activities
competitive with any business of the Company.
The Company has entered into a three-year employment agreement with Mr.
Odzer pursuant to which Mr. Odzer serves as President and as a Director
commencing May 15, 1995, with automatic renewals for successive one-year
periods, unless either party gives not less than 90-days notice to the other
party of its desire to terminate the Agreement at the end of such period (the
"Term"). Mr. Odzer is to remain a director for so long as he is an employee and
stockholder of the Company, unless an investment banker or other acquiror of
securities requires his removal in writing. Upon the consummation of the
Offering and during the remainder of the Term, Mr. Odzer will receive an annual
salary of $200,000. Mr. Odzer is also entitled to receive perquisites similar to
perquisites made available to other senior executives of the Company. In the
event that Mr. Odzer's employment is terminated by the Company other than for
"Cause" (as such term is defined in the agreement), he shall be entitled to
receive all payments and benefits to which he was entitled under the agreement.
For a period of one year after the Term, Mr. Odzer has agreed not to, directly
or indirectly, compete with or be engaged in the same business as the Company,
or be employed by, or act as consultant or lender to, or be a director, officer,
employee, owner or partner of, any business organization which, directly or
indirectly, competes with or is engaged in the same business in which the
Company is engaged at the end of the Term; provided, however, that Mr. Odzer is
permitted to own no more than 5% of the outstanding common stock of any company,
the stock of which is traded on a national securities exchange or on an over the
counter market.
Stock Option Plan
In September 1996, the Board of Directors adopted and the stockholders of
the Company approved the Option Plan. The Option Plan provides for the grant to
qualified employees (including officers and directors) of the Company of options
to purchase shares of Common Stock. A total of 300,000 shares of Common Stock
will be reserved by the Company for issuance upon exercise of stock options
granted or which may be granted under the Option Plan. The Company anticipates
that it will grant options under the Option Plan prior to this Offering.
The Option Plan is administered by the Compensation Committee whose
members are not entitled to receive options under the Plan (excluding options
granted exclusively for directors' fees). The Compensation Committee has
complete discretion to select the optionee and to establish the terms and
conditions of each option, subject to the provisions of the Plan. Options
granted under the Plan may or may not be "incentive stock options" as defined in
Section 422 of the Code ("Incentive Options") depending upon the terms
established by the Compensation Committee at the time of grant, but the exercise
price of options granted may not be less than 100% of the fair market value of
the Common Stock as of the date of grant (110% of the fair market value if the
grant is an Incentive Option to an employee who owns more than 10% of the
outstanding voting power of the Company). Options may not be exercised more than
10 years after the grant (five years if the grant is an Incentive Option to any
employee who owns more than 10% of the outstanding voting power of the Company).
Options granted under the Plan are not transferable and may be exercised only by
the respective grantees during their lifetimes or by their heirs, executors or
administrators in the event of death. Under the Option Plan, shares subject to
canceled or terminated options are reserved for subsequently granted options.
The number of options outstanding and the exercise price thereof are subject to
adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends.
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<PAGE>
Pursuant to an Option Agreement to be entered into prior to this Offering
by and between Howard Odzer and the Company (the "Additional Option Agreement"),
Mr. Odzer agreed to place 300,000 shares of Common Stock beneficially owned by
him in escrow for issuance upon exercise of stock options which will be granted
by him to certain executives and officers designated by the Compensation
Committee, in its sole discretion (the "Additional Options"). The exercise price
of the Additional Options will be no less than the initial public offering price
of the Common Stock as set forth on the cover of this Prospectus. Mr. Odzer will
receive all proceeds from any exercise of the Additional Options. In addition,
any exercise of Additional Options must occur, if at all, within five years from
the date of this Prospectus. After such date the balance of the shares of Common
Stock held in escrow pursuant to the Option Agreement, if any, shall revert to
Mr. Odzer. See "Certain Transactions."
Indemnification
Section 145 of the General Corporation Law of the State of Delaware
permits indemnification by a corporation of its officers and directors.
Consistent therewith the Company's Certificate of Incorporation requires that
the Company indemnify all persons whom it may indemnify pursuant thereto to the
fullest extent permitted by Section 145.
In addition, the Company's Certificate of Incorporation provides that
directors of the Company shall not be liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) an act
related to certain unlawful dividend payments or stock redemptions or purchases,
or (iv) any transaction from which the director derived an improper benefit. The
effect of these provisions is to eliminate the right of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against any director for breach of fiduciary duty as
director (including breaches resulting from negligent or grossly negligent
behavior) except for situations described in clauses (i)-(iv) of the preceding
sentence. These provisions will not affect the availability of injunctive relief
for breach of fiduciary duty or alter the liability of directors under federal
securities laws.
The Underwriting Agreement between the Company and each of the
Underwriters (the "Underwriting Agreement") provides for a reciprocal
indemnification among the Company and the Underwriters against certain civil
liabilities in connection with the Registration Statement of which this
Prospectus is a part, including liabilities under the Securities Act. See
"Underwriting."
Pursuant to the Shareholders Agreement, the Company has agreed to
indemnify each of Mr. Odzer and Mr. Harris for all fines, liabilities,
settlements, costs and expenses, including attorneys' fees, asserted against him
or incurred by him in his capacity as officer, director, trustee, partner, agent
or employee. Although the Shareholders Agreement terminates by its own terms
upon the consummation of the Offering, such indemnification provisions, among
others, are to be incorporated in a new agreement to be entered into with the
Company within 30 days of such termination.
The Company intends to procure and maintain a policy of insurance under
which the directors and officers of the Company will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers, including
liabilities under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted to reflect the sale of 1,000,000 shares of Common Stock offered hereby,
certain information with respect to the beneficial ownership of Common Stock by
(i) each person known by the Company to be the owner of more than 5% of the
outstanding Common Stock, (ii) each director, (iii) each Named Officer, and (iv)
all directors and executive officers as a group:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned
-------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Amount and Nature
Name and Address of Beneficial
of Beneficial Owner (1) Ownership (2) Before Offering (3) After Offering (4)
- ----------------------- ----------------- ------------------- ------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mel Harris(5) 1,739,706 58.0% 43.5%
- -----------------------------------------------------------------------------------------------------------------------------
Howard Odzer 1,111,765 37.06% 27.79%
- -----------------------------------------------------------------------------------------------------------------------------
William R. Dresback ___ ___ ___
- -----------------------------------------------------------------------------------------------------------------------------
John Rearer ___ ___ ___
- -----------------------------------------------------------------------------------------------------------------------------
All directors and executive officers 3,000,000 100% 75.0%
as a group (5 persons)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The address of each beneficial owner is Preferred Employers Holdings, Inc.,
10800 Biscayne Boulevard, Penthouse, Miami, Florida 33161.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. In accordance with Rule 13d-3
under the Exchange Act, a person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
hereof upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days from the date hereof have been
exercised. All shares deemed to be beneficially owned by each of Mr. Harris
and Mr. Odzer are subject to a right of first refusal by the other whereby
each shall have the right to purchase the other's shares on the same terms
as any bona fide offer therefor. In addition, Mr. Harris has voting control
over all shares deemed to be beneficially owned by Mr. Odzer. See "Certain
Transactions."
(3) Based on 3,000,000 shares outstanding.
(4) Based on 4,000,000 shares outstanding, including the 1,000,000 shares of
Common Stock offered hereby.
(5) Includes (i) 88,235 shares held of record by Francine Harris, wife of Mr.
Harris, (ii) 88,235 shares held of record by Francine Harris, wife of Mr.
Harris, as custodian for Jamie Jo Harris, daughter of Mr. and Mrs. Harris,
(iii) 44,118 shares held of record by Ginger Harris, daughter of Mrs.
Harris, (iv) 44,118 shares held of record by Nicole Tannenbaum Kramer,
daughter of Mrs. Harris, and (v) 25,000 shares held of record by Alan
Harris, brother of Mr. Harris, over all of which Mr. Harris has voting
control and of which Mr. Harris may be deemed the beneficial owner. Does
not include (i) 25,000 shares held of record by Nancy Ryan, (ii) 1,111,765
shares held of record by Howard Odzer, and (iii) 123,529 shares held of
record by Mr. Rothstein, step-brother of Mr. Odzer, over all of which Mr.
Harris has voting control and of which Mr. Harris may be deemed to be the
beneficial owner.
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<PAGE>
CERTAIN TRANSACTIONS
Immediately prior to this Offering, the Company and the Exchanging
Stockholders will effect a recapitalization whereby the Company will exchange
17,647.06 shares of Common Stock for each share of common stock of PEGI held by
the Exchanging Stockholders (the "Exchange"). As a result of the Exchange, PEGI
will become a wholly-owned subsidiary of the Company.
Pursuant to the Additional Option Agreement, Mr. Odzer agreed to place
300,000 shares of Common Stock beneficially owned by him in escrow for issuance
upon exercise of stock options which will be granted by him to certain
executives and officers designated by the Compensation Committee, in its sole
discretion (the "Additional Options"). The exercise price of the Additional
Options will be no less than the initial public offering price of the Common
Stock as set forth on the cover of this Prospectus. Mr. Odzer will receive all
proceeds from any exercise of the Additional Options. In addition, any exercise
of Additional Options must occur, if at all, within five years from the date of
this Prospectus. After such date the balance of the shares of Common Stock held
in escrow pursuant to the Option Agreement, if any, shall revert to Mr. Odzer.
See "Management - Stock Option Plan."
Messrs. Harris and Odzer entered into the Shareholders Agreement with
the Company which provides for certain agreements regarding restrictions on the
transferability of shares and other issues relating to corporate governance.
Upon the consummation of the offering, the Shareholders Agreement shall
terminate by its own terms. The Company has agreed to enter into a new agreement
with Mr. Harris and Mr. Odzer within 30 days after such termination which shall
incorporate certain provisions of the Shareholders Agreement, including the
right of first refusal of Mr. Harris and Mr. Odzer with respect to the
disposition of shares of stock by the other, certain tag-along rights and
registration rights of Mr. Odzer, the right to seek arbitration to settle
disputes arising out of the Shareholders Agreement and the indemnification
provisions with respect to Mr. Harris and Mr. Odzer. See "Management -
Indemnification."
The Company entered into a Stock Repurchase Agreement, dated as of May 15,
1995 (the "Repurchase Agreement"), with Mr. Odzer and Mr. Rothstein pursuant to
which the Company agreed to repurchase from them an aggregate of 30 shares
(529,412 shares, as adjusted) of common stock of the Company. The purchase price
for such shares was $600,000 (including interest) to be paid to Mr. Odzer and
Mr. Rothstein in 24 installments of $25,000 each. The closing of the Repurchase
Agreement was subject to the Company's completion of a $600,000 distribution to
the existing stockholders of the Company, pro rata based on the number of shares
of common stock of the Company outstanding, and paid to the stockholders of
record on the date of the Repurchase Agreement, without giving effect to the
repurchase. The $600,000 distribution was made by the Company on May 26, 1995.
The Company agreed, pursuant to a subsequent agreement made with Mr. Harris and
Mr. Odzer, to repay the balance of the purchase price at December 31, 1995 in 23
monthly installments of $25,000 (including interest) commencing in February
1996. As of June 30, 1996, the total amount of payments made by the Company was
$150,000 and the balance of the purchase price outstanding was $450,000.
The Company has agreed to pay to Strategica Group a fee of $50,000 as
compensation for its services provided in connection with this Offering. Mr.
Harris is a director and investor in Strategica Capital, an affiliate of
Strategica Group. Mr. Burstein is the Chairman and President of Strategica Group
and Strategica Capital.
The Company has provided office space, equipment and other administrative
services to International Insurance Group, Inc. ("IIG"), an insurance brokerage
company wholly-owned by Mr. Harris. Under this arrangement, the Company
currently receives approximately $2,400 per month for rendering such services.
The contractual arrangement between the Company and IIG commenced in January
1996, and the aggregate amount billed by the Company for the six months ended
June 30, 1996 was $12,300. Prior to January, 1996, the Company provided these
services without reimbursement. IIG has agreed that it will not solicit any
employee, any customer or any
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<PAGE>
entity which was a customer of the Company within the past 2 years with respect
to any business then being written by the Company. IIG has agreed to pay the
Company any commission received by IIG with respect to any business written by
the Company.
For a description of the voting arrangements among the Company's existing
stockholders, see "Principal Stockholders." For information concerning
employment agreements with, and compensation of, the Company's executive
officers and directors, see "Management - Executive Compensation; Employment
Arrangements; and Stock Option Plan."
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.01 per share, of which 3,000,000 shares are currently outstanding and
held of record by six (6) record holders. Holders of shares of Common Stock are
entitled to one vote for each share held of record on all matters to be voted on
by stockholders. There are no preemptive, subscription, conversion or redemption
rights pertaining to the shares of Common Stock. Holders of shares of Common
Stock are entitled to receive dividends when, as and if declared by the Board of
Directors from funds legally available therefor and to share ratably in the
assets of the Company available upon liquidation, dissolution or winding up. The
holders of shares of Common Stock do not have cumulative voting rights for the
election of directors and, accordingly, the holders of more than 50% of the
shares of Common Stock are able to elect all directors. See "Risk Factors -
Control by Existing Stockholders." All of the outstanding shares of Common Stock
are, and the Common Stock offered hereby, upon issuance and when paid for, will
be, duly authorized, validly issued, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, par value $.10 per share. The preferred stock may be issued in one or
more series, the terms of which may be determined by the Board of Directors at
the time of issuance without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. The issuance of any such preferred stock could
materially adversely affect the rights of holders of Common Stock and,
therefore, could reduce the value of the Common Stock. The ability of the Board
of Directors to issue preferred stock could have the effect of delaying,
deferring or preventing a change in control of the Company. See "Risk Factors -
Possible Issuances of Preferred Stock; Anti-Takeover Provisions."
Limitations upon Transactions with "Interested Stockholders"
Section 203 of the Delaware General Corporation Law prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date, the business combination is
approved by the board of directors and by the affirmative vote of at least 66
2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together
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<PAGE>
with affiliates and associates, owns (or within three years, did own) 15% or
more of the corporation's voting stock. The restrictions of Section 203 do not
apply, among other things, if a corporation, by action of its stockholders,
adopts an amendment to its certificate of incorporation or by-laws expressly
electing not to be governed by Section 203, provided that, in addition to any
other vote required by law, such amendment to the certificate of incorporation
or by-laws must be approved by the affirmative vote of a majority of the shares
entitled to vote. Moreover, an amendment so adopted is not effective until
twelve months after its adoption and does not apply to any business combination
between the corporation and any person who became an interested stockholder of
such corporation on or prior to such adoption. The Company's Certificate of
Incorporation and By-laws do not currently contain any provisions electing not
to be governed by Section 203 of the Delaware General Corporation Law. The
provisions of Section 203 of the Delaware General Corporation Law may have a
depressive effect on the market price of the Common Stock because they could
impede any merger, consolidating takeover or other business combination
involving the Company or discourage a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is the American
Stock Transfer and Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 4,000,000 shares of
Common Stock outstanding (4,150,000 shares if the Underwriters' over-allotment
option is exercised in full). The 1,000,000 shares of Common Stock sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company within the meaning of Rule 144 under the Securities Act ("Rule
144"). The remaining 3,000,000 shares of Common Stock are "restricted
securities," as that term is defined under Rule 144, and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption provided by Rule 144. 40,000
of such shares will be eligible for sale under Rule 144 commencing 90 days after
the consummation of the Offering. However, each officer, director and
stockholder of the Company has agreed to refrain from making any public sale or
distribution of any of his Common Stock, or warrants or options to purchase
Common Stock, or securities of the Company convertible into such Common Stock
(pursuant to Rule 144 or otherwise), owned by him on the effective date of the
Registration Statement for a period of 12 months from such date without the
prior written consent of the Representative. Such persons may make private
transfers, provided that the transferees agree to be bound by the same
restrictions. An appropriate legend will be marked on the face of certificates
representing all such securities.
In general, under Rule 144, as currently in effect, a person, including an
"affiliate" of the Company as defined under the Securities Act (or persons whose
shares are aggregated) who for at least two years has beneficially owned
restricted securities acquired directly or indirectly from the Company or an
affiliate of the Company in a private transaction, is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
1% of the total number of outstanding shares of the same class or the average
weekly trading volume during the four calendar weeks preceding the day notice is
given to the Commission with respect to such sale. A person (or persons whose
shares are aggregated) who is not an affiliate and has not been an affiliate of
the Company at any time during the three months immediately preceding the sale
and who has beneficially owned shares of Common Stock for at least three years
is entitled to sell such shares pursuant to subparagraph (k) of Rule 144 without
regard to the volume limitations described above.
Prior to this Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that a regular trading market will
develop after the Offering, or that if developed it will be sustained.
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<PAGE>
In addition, no prediction can be made as to the effect, if any, that market
sales of Common Stock or the availability of such shares for sale will have on
the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of shares of Common Stock may be sold in the public
market may adversely affect prevailing market prices for the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities.
Rule 701 under the Securities Act provides that, beginning 90 days after
the date of this Prospectus, shares of Common Stock acquired on the exercise of
outstanding options may be resold by persons other than affiliates subject only
to the manner of sale provisions of Rule 144, and by affiliates subject to all
provisions of Rule 144 except its two-year minimum holding period. The Company
intends to file a registration statement under the Securities Act (on Form S-8
or any successor form) to register the shares of Common Stock issued and
reserved for issuance under the Option Plan. Registration would permit the
resale of such shares by non-affiliates in the public market without restriction
under the Securities Act, subject to the lock-up arrangements discussed above.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain material federal income tax
consequences expected to apply to a holder with respect to the purchase,
ownership and disposition of Shares. This discussion is based on the provisions
of the Code, final, temporary and proposed United States Treasury regulations
promulgated thereunder, and the administrative and judicial interpretations
thereof, all as in effect as of the date of this Prospectus. The consequences to
any particular holder may differ from those described below by reason of that
holder's particular circumstances. This summary does not address the
considerations that may be applicable to particular classes of holders,
including financial institutions, broker-dealers, tax-exempt organizations,
banks, insurance companies and persons who are not citizens or residents of the
United States, or who, as to the United States, are foreign corporations,
foreign partnerships or foreign estates or trusts. In addition, this summary is
limited to persons that will hold Shares as "capital assets" within the meaning
of Section 1221 of the Code.
The following discussion does not constitute, and should not be considered
as, legal or tax advice to prospective holders. Each potential holder should
consult with its own tax adviser before determining whether to purchase Shares,
including the effects of applicable state, local, foreign or other tax laws and
possible changes in the tax laws.
Dividends
Dividends paid on the Shares will be taxable as ordinary income to the
extent paid out of the Company's current or accumulated earnings and profits (as
defined for United States federal income tax purposes). Dividends received by
corporations out of such earnings and profits will generally qualify for the 70
percent dividends-received deduction, so long as the holder has held its Shares
for a sufficient time (generally more than 45 days) and certain other conditions
are met. The 70 percent dividends-received deduction may be reduced for holders
who borrow funds directly attributable to the purchase of its Shares. Where the
dividends-received deduction is available, a portion of the amount deducted may
have to be included by a corporation in computing its possible liability for
alternative minimum tax. The amount of any distribution in excess of the
Company's current and accumulated earnings and profits will first be applied to
reduce the holder's tax basis in the Shares, and any amount in excess of tax
basis will be treated as gain from the sale or exchange of the Shares.
Dispositions of Shares
Subject to the discussion below relating to the potential application of
Code Section 1248, a U.S. stockholder will, upon the sale or exchange of any
Shares, recognize a gain or loss for federal income tax purposes equal to the
difference between the amount realized upon such sale or exchange and the
stockholder's basis in the Shares. If the stockholder's holding period for such
Shares is more than one year, such gain will be taxed as long-term capital gain.
Code Section 1248 provides that if a U.S. person disposes of stock in a
foreign corporation and such person owned directly, indirectly or constructively
10% or more of the voting shares of the corporation at any time during the
five-year period ending on the date of disposition when the corporation was a
"controlled foreign corporation" ("CFC"), any gain from the sale or exchange of
the shares may be treated as ordinary income to the extent of the CFC's earnings
and profits during the period that the stockholder held the shares (with certain
adjustments). Holders who acquire Shares in the Offering will own stock in a
U.S. corporation. However, the Reinsurance Subsidiary will qualify as a CFC and
will be a wholly-owned subsidiary of the Company. Code Section 1248(e) provides
that if a United States person, who owns 10% or more of the stock of a U.S.
corporation, sells or exchanges stock of such U.S. corporation and such U.S.
corporation was formed or availed of principally for the holding, directly or
indirectly, of stock of one or more foreign corporations, then all or part of
the United States
-50-
<PAGE>
person's gain from the sale of the stock of the U.S. corporation could be
subject to Section 1248. The determination of whether such U.S. corporation was
formed principally for such purpose is a facts and circumstances analysis. The
Company believes that because of the Company's dispersion of the ownership of
Shares being offered in the Offering, no stockholder who acquires Shares in the
Offering will own 10% or more of the voting shares of the Company and therefore
Section 1248(e) should not apply to such stockholders. Even if such a
stockholder owns, directly or through attribution, 10% or more of the voting
shares of the Company, Code Section 1248(e) should not apply to such stockholder
since, in the Company's view, it was not formed nor will be availed of
principally for the holding, directly or indirectly, of stock of the Reinsurance
Subsidiary. However, U.S. persons who might, directly or through attribution,
acquire 10% or more of the Shares of the Company should consider the possible
application of Code Section 1248(e). In all events, a corporate stockholder is
not currently subject to Code Section 1248(e) since the federal income tax rate
at which capital gain and ordinary income are taxed is the same.
Backup Withholding
Certain noncorporate holders may be subject to backup withholding at a
rate of 31 percent on dividends. Generally, backup withholding applies only when
the taxpayer fails to furnish or certify a proper Taxpayer Identification Number
or when the taxpayer is notified by the IRS that the taxpayer has failed to
report payments of interest and dividends properly. Holders should consult their
tax advisers regarding their qualification for exemption for backup withholding
and the procedure for obtaining any applicable exemption.
-51-
<PAGE>
UNDERWRITING
The Underwriters named below, for which Commonwealth Associates is acting
as representative (the "Representative"), have agreed, severally and not
jointly, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase from the Company, and the Company has agreed to sell to
the several Underwriters, an aggregate of 1,000,000 shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase is
set forth opposite its name below.
Number of Shares
Underwriters to be Purchased
- ------------ ---------------
Commonwealth Associates..............................
The Underwriters are committed on a firm commitment basis to purchase and
pay for all of the Common Stock offered hereby (other than shares offered
pursuant to the over-allotment option) if any shares are purchased. The shares
are being offered by the Underwriters, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters and subject to approval of certain
legal matters by counsel and to certain other conditions.
The Underwriters have advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus. The Underwriters may allow to
certain dealers who are members of the National Association of Securities
Dealers, Inc. (the "NASD") concessions, not in excess of $ per share, of which
not in excess of $ per share may be reallowed to other dealers who are members
of the NASD. After the commencement of the offering, the public offering price,
the concessions and re-allowance may be changed by the Underwriters.
The Company has granted to the Representative, exercisable for 45 days
from the date of this Prospectus, an option to purchase up to an additional
150,000 share of Common Stock at the public offering price set forth on the
cover page of the Prospectus, less the underwriting discounts and commissions.
The Representative may exercise this option in whole or, from time to time, in
part, solely for the purpose of covering over-allotments, if any, made in
connection with the sale of the shares of Common Stock offered hereby.
The Company has agreed to pay the Representative, individually and not as
the representative of the Underwriters, a nonaccountable expense allowance of 2%
of the gross proceeds of the Common Stock offered hereby (including any Common
Stock purchased pursuant to the Underwriters' over-allotment option) of which
$20,000 has been paid to date.
The Company has agreed to sell to the Representative and/or its designees
warrants (the "Representative's Warrants") to purchase up to 100,000 shares of
Common Stock at an exercise price per share equal to 120% of the initial public
offering price (the "Strike Price"). Both the number of shares issuable upon
exercise of the Representative's Warrant and the exercise price per share
thereunder are subject to adjustment under certain circumstances. The
Representative's Warrants may not be sold, transferred, assigned or hypothecated
for a period of one year from the effective date of this Prospectus, except to
the officers, directors, employees or partners of
-52-
<PAGE>
the Representative, and are exercisable during the four-year period commencing
one year from the date of this Prospectus (the "Warrant Exercise Term").
The Representative's Warrants will contain antidilution provisions
providing for appropriate adjustments of the Strike Price and number of shares
which may be purchased upon exercise upon the occurrence of certain events. The
antidilution provisions of the Representative's Warrants generally are triggered
by the issuance of Common Stock (or securities exchangeable for or convertible
into Common Stock) by the Company at a price below the Strike Price (subject to
certain exceptions) for a period of five years from the date of this Prospectus,
as well as by stock splits, stock dividends and other similar dilutive events in
which the Company increases its outstanding stock without receiving additional
consideration.
The Company has agreed that it will, on any one occasion during the
Warrant Exercise Term, register the Representative's Warrants and the underlying
securities, at the Company's expense, at the request of holders of at least 51%
of the Representative's Warrants. The Company has also agreed, during the
four-year period commencing one year from the date of this Prospectus, to
register on a "piggy-back" basis, on an unlimited number of occasions, the
Representative's Warrants and the underlying securities whenever the Company
files a registration statement.
For the life of the Representative's Warrants, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price for the
Common Stock of the Company without assuming the risk of ownership, with a
resulting dilution in the interest of other security holders. As long as the
Representative's Warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. Moreover, the holders
of the Representative's Warrants might be expected to exercise them at a time
when the Company would, in all likelihood, be able to obtain any needed capital
by a new offering of its securities on terms more favorable than those provided
by the Representative's Warrants. See "Risk Factors."
The Company has also agreed, for a period of three years from the date of
this Prospectus, if so requested by the Representative, to allow the
Representative to have an observer at all Board meetings.
The Underwriting Agreement provides for a reciprocal indemnification among
the Company and the Underwriters against certain civil liabilities in connection
with the Registration Statement of which this Prospectus is a part, including
liabilities under the Securities Act.
The Company has agreed to pay the Representative upon the consummation of
this Offering a fee equal to 2% of the gross proceeds of this Offering as
compensation for its advisory services in connection with this Offering. The
Company has also agreed to pay the representative a fee with respect to all
funds invested in, or certain other transactions with, the Company by any party
introduced to the Company by the Representative during the two year period
ending August 11, 1998.
The Company and Messrs. Harris or Odzer have also granted to the
Representative a right of first refusal for a period of three years from the
date of this Prospectus to act as lead manager or placement agent in connection
with any public offering or private placement of the Company's securities owned
by any of them or as investment banker in connection with any merger,
acquisition or disposition of assets of the Company, if the Company or Messrs.
Harris or Odzer retain a lead manager, placement agent or investment bank or a
person performing such functions for a fee.
Each of the officers, directors or stockholders owning any of the Common
Stock or warrants, or options to purchase Common Stock, or securities
convertible into such Common Stock, has agreed to refrain from making any public
sale or distribution of his Common Stock, or such warrants, options, or
convertible securities (pursuant to Rule 144 or otherwise), owned by him on the
date of this Prospectus for a period of 12 months from such date without the
prior written consent of the Representative. Such persons may make private
transfers, provided that the transferees agree to be bound by the same
restrictions.
-53-
<PAGE>
The Company has agreed to pay to Strategica Group a fee of $50,000 as
compensation for its services provided in connection with this Offering. Mr.
Harris is a director and investor in Strategica Capital, an affiliate of
Strategica Group. Mr. Burstein is the Chairman and President of Strategica Group
and Strategica Capital.
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the detailed
provisions of the Underwriting Agreement, the form of which has been filed as an
exhibit to the Registration Statement on Form SB-2 of which this Prospectus
forms a part.
Prior to this offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price has been
determined by arms-length negotiations between the Company and the
Representative and does not necessarily bear any relationship to the Company's
book value, assets, past operating results or other established criteria or
evaluation. Among the factors considered in determining the offering price were
the Company's current financial condition and prospects, recent financial
results, financing required by the Company, management, market prices of similar
securities of comparable publicly trades companies, certain financial and
operating information of companies engaged in activities similar to those of the
Company, the general condition of the securities market and other relevant
factors.
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be passed
upon for the Company by Baer Marks Upham LLP, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Squadron, Ellenoff, Plesent
& Sheinfeld, LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company and for the years
ended December 31, 1995, 1994 and 1993 included in the Registration Statement of
which this Prospectus is a part, have been included in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits filed
therewith, certain items of which are omitted from this Prospectus as permitted
by the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to herein are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement, including the exhibits
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the Regional
Offices of the Commission, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Registration Statement has been
filed electronically with the Commission. The Commission
-54-
<PAGE>
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, at http://www.sec.gov.
Following this Offering, the Company will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, will file reports, proxy and information
statements and other information with the Commission. The Company intends to
furnish to its stockholders annual reports containing audited financial
statements and such other periodic reports as the Company may determine to be
appropriate or as may be required by law.
-55-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Preferred Employers Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Preferred
Employers Holdings, Inc. and subsidiary as of December 31, 1995, 1994 and 1993,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Preferred Employers
Holdings, Inc. and subsidiary at December 31, 1995, 1994 and 1993, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
May 3, 1996, except as to note 2
and note 9, which are as of
October 4, 1996
F-2
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1996 (unaudited), December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Assets
-------
December 31,
June 30, --------------------------------------------
1996 1995 1994 1993
---------- --------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,105,761 2,819,829 4,789,703 3,811,825
Commissions and premiums receivable 479,852 345,614 1,118 10,509
Security deposits 22,736 23,586 35,899 3,589
Property and equipment, net 515,907 518,613 158,930 38,136
Other assets 35,185 57,508 -- --
--------- --------- ---------- ---------
$6,159,441 3,765,150 4,985,650 3,864,059
========== ========== ========= =========
Liabilities and Stockholders' Equity (Deficit)
---------------------------------------------
Liabilities:
Premiums payable 4,697,978 2,353,914 3,415,005 3,551,252
Accounts payable 130,100 5,475 24,874 300,027
Stockholder loan 413,752 516,494 -- 701,734
Commissions payable 594,136 296,588 48,715 --
Other liabilities 99,736 302,276 14,309 65,348
--------- --------- --------- ---------
Total liabilities 5,935,702 3,474,747 3,502,903 4,618,361
--------- --------- --------- ---------
Stockholders' equity (deficit):
Common stock, $.01 par value.
Authorized
10,000,000 shares; issued 3,529,412
shares in 1995, 1994 and 1993 35,294 35,294 35,294 35,294
Retained earnings (accumulated deficit) 694,002 760,666 1,447,453 (789,596)
--------- --------- --------- ----------
Total stockholders' equity (deficit) 729,296 795,960 1,482,747 (754,302)
Treasury stock, at cost - 529,412 shares (505,557) (505,557) -- --
---------- ---------- --------- --------
Net stockholders' equity (deficit) 223,739 290,403 1,482,747 (754,302)
---------- ---------- --------- --------
Commitments and contingencies
$6,159,441 3,765,150 4,985,650 3,864,059
============= ============= ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
For the six months ended June 30, 1996 and 1995 (unaudited) and for the
years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Six Months Ended
June 30, December 31,
---------------------- ----------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Commission income, net $1,179,415 1,086,398 2,181,868 2,661,424 1,892,875
Interest income 50,592 48,591 88,052 121,648 61,644
-------- -------- --------- --------- ---------
Total revenue 1,230,367 1,134,989 2,269,920 2,783,072 1,954,519
--------- --------- --------- --------- ---------
Expenses:
Personnel expense 1,027,861 693,456 1,471,409 933,033 585,632
Occupancy expense 101,232 63,943 145,421 89,337 75,574
Professional fees 67,368 54,843 92,758 110,620 56,943
Interest expense 22,258 35,937 35,937 8,357 63,968
Other operating expenses 268,312 241,108 541,913 368,051 291,513
-------- --------- --------- --------- ---------
Total expenses 1,487,031 1,089,287 2,287,438 1,509,398 1,073,630
--------- --------- --------- --------- ---------
Operating (loss) income (256,664) 45,702 (17,518) 1,273,674 880,889
Nonoperating (loss) income 190,000 -- (69,269) 5,857,749 (830,151)
------- ----------- --------- --------- ---------
Net (loss) income $ (66,664) 45,702 (86,787) 7,131,423 50,738
========== ======== ========== ========= =========
Unaudited pro forma information (note 1k):
Historical income before income taxes $(66,664) 45,702 (86,787) 7,131,423 50,738
Pro forma income tax provision (benefit) (24,866) 17,047 (32,372) 2,660,021 18,925
Pro forma net income (loss) (41,798) 28,655 (54,415) 4,471,402 31,813
Pro forma income (loss) per share (.01) .01 (.02) 1.49 .01
Weighted average shares outstanding 3,000,000 3,000,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
For the six months ended June 30, 1996 (unaudited) and for the
years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Common Retained
stock Common earnings Treasury Treasury Total
shares stock Paid-in (accumulated stock stock stockholders'
issued amount capital deficit) shares amount equity
------ ------ ------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 200 $ 2 198 (805,240) -- $ -- (805,040)
Net income -- -- -- 50,738 -- -- 50,738
Stock exchange 3,529,212 35,292 (198) (35,094) -- -- --
--------- ------ --- --------- --------- --------- ------
Balance at December 31, 1993 3,529,412 35,294 -- (789,596) -- -- (754,302)
Net income -- -- -- 7,131,423 -- -- 7,131,423
Distribution to stockholders -- -- -- (4,894,374) -- -- (4,894,374)
--------- -------- ------- ----------- --------- --------- -----------
Balance at December 31, 1994 3,529,412 35,294 -- 1,447,453 -- -- 1,482,747
Net loss -- -- -- (86,787) -- -- (86,787)
Distribution to stockholders -- -- -- (600,000) -- -- (600,000)
Purchase of treasury stock -- -- -- -- 529,412 (505,557) (505,557)
--------- -------- ------- --------- ------- --------- ---------
Balance at December 31, 1995 3,529,412 35,294 -- 760,666 529,412 (505,557) 290,403
========= ====== ======= ========= ======== ========== ========
Net loss (unaudited) -- -- -- (66,664) -- -- (66,664)
--------- -------- ------- -------- --------- --------- --------
Balance at June 30, 1996 (unaudited) 3,529,412 $35,294 -- $694,002 529,412 $(505,557) $233,739
========= ======= ======= ======== ======= ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the six months ended June 30, 1996 and 1995 (unaudited) and for the
years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Six months ended
June 30, December 31,
----------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Premiums collected $ 11,351,642 9,978,392 18,371,077 32,458,172 22,794,923
Nonoperating (expense) income 190,000 -- (69,269) 5,857,749 (830,151)
Interest received 50,952 48,591 88,052 121,648 61,644
Premiums paid (7,828,164) (9,979,897) (17,042,483) (29,928,502) (17,886,573)
Expenses paid (1,396,051) (1,028,476) (2,144,646) (1,784,551) (614,163)
Other, net
(89,330) 97,748 (81,067) 1,301 (70,306)
---------- ---------- ---------- --------- -----------
Net cash (used in) provided by
operating activities 2,457,709 (883,642) (878,336) 6,725,817 3,455,374
--------- ---------- ---------- --------- ---------
Cash flows used in investing activities-purchases
of property and equipment (46,777) (381,366) (466,538) (151,831) (36,304)
---------- ---------- ---------- ----------- ----------
Cash flows from financing activities:
Repayment of stockholder loan (125,000) (25,000) (25,000) (701,734) (235,000)
Stockholders' distributions -- (600,000) (600,000) (4,894,374) --
---------- ---------- ---------- ----------- ---------
Net cash used in financing
activities (125,000) (625,000) (625,000) (5,596,108) (235,000)
---------- ---------- ---------- ----------- ---------
Net (decrease) increase in cash and cash equivalents 2,285,932 (1,890,008) (1,969,874) 977,878 3,184,070
Cash and cash equivalents, beginning of year 2,819,829 4,789,703 4,789,703 3,811,825 627,755
---------- ---------- ---------- --------- ---------
Cash and cash equivalents, end of year $ 5,105,761 2,899,695 2,819,829 4,789,703 3,811,825
========== ========== ========== ========= =========
</TABLE>
F-6
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Six months ended
June 30, December 31,
----------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Reconciliation of net (loss) income to
net cash (used in) provided by operating
activities:
Net (loss) income $(66,664) 45,702 (86,787) 7,131,423 50,738
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Depreciation and amortization 49,483 37,994 106,855 31,037 19,855
Amortization of discount on
stockholder loan 22,258 35,937 35,937 -- --
Changes in assets and liabilities:
(Increase) decrease in commissions
and premiums receivable (134,238) (5,113) (344,496) 9,391 (10,509)
Decrease (increase) in security
deposits 850 12,313 12,313 (32,310) (405)
Increase in other assets 22,323 -- (57,508) -- --
Increase (decrease) in premiums
payable 2,344,064 (1,087,702) (1,065,584) (131,754) 2,983,346
Increase (decrease) in accounts
payable 124,625 (24,874) (19,399) (275,153) 300,027
Increase in commissions payable 297,548 (21,510) 296,588 -- 63,968
Increase (decrease) in other liabilities (202,540) 123,611 243,745 (6,817) 48,354
---------- -------- -------- --------- --------
Total adjustments 2,524,373 (929,344) (791,549) (405,606) 3,404,636
--------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities $ 2,457,709 $ (883,642) $ (878,336) 6,725,817 3,455,374
========= ========= =========
Supplemental disclosure of noncash activities:
Stock exchange $ -- $ -- $ -- -- (35,094)
======== ======== ======== ======== ========
Issuance of note payable to stockholder in
exchange for treasury stock $ -- $ -- $ 505,557 -- --
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1996 (unaudited) and December 31, 1995, 1994 and 1993
(1) Business and Summary of Significant Accounting and Reporting Policies
(a) Organization
Preferred Employers Holdings, Inc. (the "Company") is the
successor company to Preferred Employers Group, Inc. ("PEGI").
Immediately prior to the Company's initial public offering,
the Company and the stockholders of PEGI at such date (the
"Exchanging Stockholders") will effect a recapitalization
whereby the Company will exchange 17,647.06 shares of Common
Stock for each share of common stock of PEGI held by the
Exchanging Stockholders (the "Exchange"). As a result of the
Exchange, PEGI will become a wholly-owned subsidiary of the
Company. Except as otherwise specified or when the context
otherwise requires, references to the Company herein, include
Preferred Employers Holdings, Inc. and PEGI, through which the
Company conducts certain of its business.
The Company was appointed as a managing general agent ("MGA")
by The American International Group of companies ("AIG"), a
major international insurance carrier, on January 1, 1993. In
this regard, the Company is authorized to write workers'
compensation as well as other forms of "property and casualty"
business (such other forms of insurance being hereinafter
referred to as "Package") on behalf of AIG. In addition, the
Company was appointed as an MGA by General Accident Insurance
Company of America ("GAIC") on September 1, 1994, with the
authority to write all forms of commercial property and
casualty business for family style and fast food restaurants.
GAIC has recently advised the Company that it will no longer
write Package insurance for fast food restaurants and the
Company is currently pursuing other carriers through which it
can write such business.
The Company writes business by direct solicitation and through
brokers and subproducers, and in turn is compensated via a
commission based on a percentage of the premiums it writes.
(b) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in
the United States. All intercompany balances and transactions
have been eliminated in consolidation.
F-8
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(c) Cash and Cash Equivalents
The Company considers cash in banks and money market accounts
as cash and cash equivalents.
(d) Property and Equipment, Net
Property and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using an accelerated
method of depreciation over the estimated useful lives of the
related assets, which range from five to seven years.
Leasehold improvements are carried at cost less accumulated
amortization provided on the straight-line basis over the
shorter of the lease term or the estimated useful lives of the
improvements.
(e) Premiums Payable
Premiums which are collected from insureds are reported as
assets of the Company and as corresponding liabilities to the
insurance carriers. Premiums received from insureds but not
yet remitted to the carriers are held as invested cash in a
fiduciary capacity.
(f) Revenue Recognition
Commissions are recognized when premiums are received. Any
subsequent commission adjustments, including policy
cancellations, are recognized upon notification from the
insurance carrier or broker.
(g) Income Taxes
Prior to the formation of the Company, PEGI had elected to be
taxed as an S Corporation under the provisions of the Internal
Revenue Code. PEGI's stockholders included in their tax
returns the Company's income or loss. No provision for income
taxes is provided in the consolidated financial statements.
(h) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(i) Reclassification
Certain amounts in the 1994 and 1993 consolidated financial
statements have been reclassified to conform with the
presentation of the 1995 consolidated financial statements.
F-9
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(j) Accounting for Stock-Based Compensation
Statement of Financing Accounting Standard ("SFAS") Number
123, "Accounting for Stock-Based Compensation" was recently
issued and is effective for the Company beginning January 1,
1996. SFAS Number 123 requires expanded disclosures of
equity-based compensation arrangements with employees and does
not require, but encourages compensation cost to be measured
based on fair value of the equity instrument when awarded. The
Company, as allowed, intends to measure equity-based
compensation using the method of accounting prescribed by
Accounting Principles Board Opinion Number 25 that recognized
compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will be required to disclose
certain additional information related to its stock-based
compensation; however, management believes the impact to the
financial statements, as a whole, will not be material.
(k) Pro forma net income (loss) represents the results of
operations for the six months ended June 30, 1996 (unaudited)
and for the years ended December 31, 1995, 1994 and 1993,
adjusted to reflect a provision for income tax (benefit) on
historical income (loss) before provision for income taxes
(benefit), which gives effect to the change in the Company's
income tax status to a C corporation.
(2) Consolidated Financial Statement Restatement
The 1993, 1994 and 1995 consolidated financial statements have been
restated to give retroactive effect to the stock exchange on December
31, 1993 and the 17,647.06 for 1 stock exchange to be effected
immediately prior to the Company's initial public offering. See note 9
for more details.
(3) Property and Equipment, Net
Property and equipment, net, consists of the following at June 30, 1996
(unaudited) and December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
June 30, December 31,
--------- ------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Unaudited
<S> <C> <C> <C> <C>
Computer equipment $238,000 $ 221,529 164,108 53,472
Office equipment 108,675 105,055 50,408 23,845
Furniture and fixtures 246,487 231,301 19,732 18,100
Leasehold improvements 167,400 155,901 13,000 --
------- ------- ------ ------
760,562 713,786 247,248 95,417
Less accumulated
depreciation
and amortization (244,655) (195,173) (88,318) (57,281)
--------- --------- -------- --------
$515,907 $518,613 $158,930 $38,136
======== ======== ======== =======
</TABLE>
F-10
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(4) Stockholder Loan
Stockholder loan at December 31, 1993, consists of an 11.5 percent
demand note which includes accrued interest of $280,734. On March 4,
1994, the Company paid off the balance of the note's principal and
accrued interest.
In May 1995 the Company entered into a stock repurchase agreement (the
"Agreement") with Mr. Odzer and Mr. Rothstein whereby the Company
agreed to repurchase from them an aggregate of 30 shares (529,412
shares, as adjusted) of common stock (the "Shares") of the Company. The
purchase price for the Shares was $600,000 (including interest) to be
paid to Mr. Odzer and Mr. Rothstein in 24 installments of $25,000. The
closing of this Agreement was subject to the Company's completion of a
$600,000 distribution to the stockholders of the Company, pro rata
based on the number of shares of common stock of the Company
outstanding and paid to the stockholders of record on the Agreement
date, without giving effect to the repurchase. The $600,000
distribution was made by the Company on May 26, 1995.
At June 30, 1996 (unaudited) and December 31, 1995, the outstanding
balance of above referenced stockholder loan consists of the following:
June 30, December 31,
1996 1995
---- ----
(Unaudited)
Principal $450,000 575,000
Unamortized discount (10%) (36,248) (58,506)
-------- --------
$413,752 516,494
======== =======
Per a subsequent agreement made with the stockholders, the outstanding
loan balance at December 31, 1995 will be repaid in 23 monthly
installments of $25,000 (including interest) commencing in February
1996.
(5) Nonoperating Expense
During the year ended December 31, 1993, nonoperating expense includes
legal expenses incurred related to litigation to which the Company, as
plaintiff, was involved. In January 1994, the U.S. District Court in
Baltimore, Maryland awarded the Company $9.9 million in damages it
sustained as a result of the first of three separate lawsuits for
breach of contract by Alexander & Alexander Services, Inc. ("A&A"), a
global organization of advisers providing risk management, insurance
brokerage and human resource management consulting services.
On February 28, 1994, the Company entered into a settlement agreement
with A&A, whereby A&A agreed to pay the Company $9.9 million and the
Company agreed to dismiss the remaining untried lawsuits. On March 3,
1994, the Company received $5,857,749, net of expenses associated with
the litigation, of which $4,894,374 was distributed to stockholders of
the Company.
During 1995 the Company incurred expenses amounting to $69,269 for
legal fees associated with the settlement of a lawsuit.
F-11
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(6) Leases
In August 1994, the Company entered into an office lease agreement
which became effective on April 1, 1995. The lease agreement provides
for an initial seven-year term with two five-year renewal options. The
following is a schedule of the approximate future minimum lease
payments as of December 31, 1995.
Year ending Total
December 31, -----
------------
1996 $ 141,000
1997 183,000
1998 191,000
1999 199,000
2000 211,000
Thereafter 268,000
-----------
$ 1,193,000
===========
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$80,078, $38,570 and $34,365, respectively.
(7) Major Suppliers and Industry Concentration
Substantially all of the Company's customers are fast-food and family
style restaurant franchises and convenience stores. In addition,
substantially all insurance policies written by the Company are
underwritten by two insurance carriers.
(8) Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. These elements are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
At December 31, 1995, the carrying amounts of the following instruments
approximate fair value because of the short maturity of these
instruments: cash and cash equivalents, premiums receivable, premiums
payable, accounts payable, commissions payable and other liabilities.
The fair value of the stockholder loan is based on quoted market prices
at the reporting date for similar instruments. The carrying value and
fair value of the stockholder loan at December 31, 1995 were $516,494
and $516,494, respectively.
F-12
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(9) Subsequent Event
The Company is in process of offering 1,000,000 shares of common stock
in an initial public offering at a price of between $8 and $10 per
share. The final offering price will be set immediately prior to the
signing of an underwriting agreement with the underwriters.
F-13
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this Prospectus, or an
offer to sell or a solicitation of an offer to buy any security by any person in
any jurisdiction in which such offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that the information in this Prospectus is correct as of
any time subsequent to its date.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................... 3
Offering..................................................... 5
Summary and Pro Forma Consolidated Financial Information..... 6
Risk Factors................................................. 7
Use of Proceeds.............................................. 15
Recapitalization............................................. 15
Dividend Policy.............................................. 16
Dilution..................................................... 16
Capitalization............................................... 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 19
Discussion and Analysis of Pro Forma Financial
Information.................................................. 24
Business..................................................... 28
Management................................................... 39
Principal Stockholders....................................... 45
Certain Transactions......................................... 46
Description of Securities.................................... 47
Shares Eligible for Future Sale.............................. 48
Certain Federal Income Tax Considerations ................... 50
Underwriting................................................. 52
Legal Matters................................................ 54
Experts...................................................... 54
Available Information........................................ 54
Index to Financial Statements................................ F-1
--------------
Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the securities offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
1,000,000 shares of
Common Stock
PREFERRED EMPLOYERS
HOLDINGS, INC.
------------
PROSPECTUS
------------
Commonwealth Associates
, 1996
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Except to the extent hereinafter set forth, there is no statute,
charter provision, by-law, contract or other arrangement under which any
controlling person, director, or officer of the Company is insured or
indemnified in any manner against liability which he may incur in his capacity
as such.
Section 145 of the General Corporation Law of the State of Delaware
permits indemnification by a corporation of its officers and directors.
Consistent therewith the Company's Certificate of Incorporation requires that
the Company indemnify all persons whom it may indemnify pursuant thereto to the
fullest extent permitted by Section 145.
In addition, the Company's Certificate of Incorporation provides that
directors of the Company shall not be liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) an act
related to certain unlawful dividend payments or stock redemptions or purchases,
or (iv) any transaction from which the director derived an improper benefit. The
effect of these provisions is to eliminate the right of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against any director for breach of fiduciary duty as
director (including breaches resulting from negligent or grossly negligent
behavior) except for situations described in clauses (i)-(iv) of the preceding
sentence. These provisions will not affect the availability of injunctive relief
for breach of fiduciary duty or alter the liability of directors under federal
securities laws.
The Underwriting Agreement between the Company and each of the
Underwriters (the "Underwriting Agreement") provides for a reciprocal
indemnification among the Company and the Underwriters against certain civil
liabilities in connection with this Registration Statement, including
liabilities under the Securities Act. See "Underwriting."
Pursuant to an Amended and Restated Shareholders Agreement made as of
May 15, 1995 (the "Shareholders Agreement") by and between the Company, Mel
Harris and Howard Odzer, the Company has agreed to indemnify each of Mr. Odzer
and Mr. Harris for all fines, liabilities, settlements, costs and expenses,
including attorneys' fees, asserted against him or incurred by him in his
capacity as officer, director, trustee, partner, agent or employee. Although the
Shareholders Agreement terminates by its own terms upon the consummation of the
Offering, such indemnification provisions, among others, are to be incorporated
in a new agreement to be entered into with the Company within 30 days of such
termination.
The Company intends to procure and maintain a policy of insurance under
which the directors and officers of the Company will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers, including
liabilities under the Securities Act.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The expenses payable by the Company in connection with the issuance and
distribution of the securities being registered (other than underwriting
discounts) are estimated as follows:
SEC Registration Fee............................... $4,379
National Association of Securities
Dealers, Inc. Fee................................. 1,650
Nasdaq Fee and the Boston Stock Exchange Fee....... 13,750
Transfer Agent's Fee............................... 3,500
Printing and Engraving Expenses.................... 100,000
Legal Fees and Expenses............................ 150,000
Underwriters' non-accountable expense
allowance........................................ 180,000*
State Securities Qualification
Fees and Expenses................................. 45,000
Accounting and Auditing Fees
and Expenses...................................... 50,000
Miscellaneous...................................... 50,000
--------
Total......................................... $598,279
========
- -----------------
*$207,000 if the over-allotment option is exercised in full.
Item 26. Recent Sale of Unregistered Securities
Immediately prior to the Company's initial public offering, the Company
and the stockholders of Preferred Employers Group, Inc. ("PEGI") at such date
(the "Exchanging Stockholders") will effect a recapitalization whereby the
Company will exchange 17,647.06 shares of Common Stock for each share of common
stock of PEGI held by the Exchanging Stockholders (the "Exchange").
No underwriter was involved in the Exchange and the Company believes
that the securities issued therein did not involve a public offering and were
issued in reliance upon an exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended.
Item 27. Exhibits
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Company.
*3.2 By-Laws of the Company.
*4.1 Form of Representative Warrants.
*4.2 Specimen Common Stock Certificate.
*5.1 Opinion of Baer Marks & Upham LLP.
*10.1 The Company's 1996 Employee Stock Option Plan.
*10.2 Option Agreement between the Company and Howard Odzer.
10.3 Employment Agreement, dated May 15, 1995, between the
Company and Howard Odzer.
*10.4 Employment Agreement between the Company and Mel Harris.
*10.5 Letter regarding Agreement between the Reinsurance Subsidiary
and The Insurance Company of
the State of Pennsylvania and other AIG Affiliates.
II-2
<PAGE>
*10.6 Office Space Lease Agreement, dated August 1, 1994 between the
Company and K/B Opportunity Fund I, LP and PEGI.
*10.7 Advisory Service Agreement between the Company and the
Representative.
10.8 Stock Repurchase Agreement, dated as of May 15, 1995, among
the Company, Howard Odzer and Ronald Rothstein.
*10.9 Cost Sharing Agreement, among the Company and International
Insurance Group, Inc.
*10.10 Share Exchange Agreement among the Company and certain
stockholders of PEGI listed therein.
10.11 Amended and Restated Shareholders Agreement, dated as of
May 15, 1995 among the Company, Howard Odzer and Mel Harris.
*21.1 Subsidiaries of the Company.
*23.1 The consent of Baer Marks & Upham LLP.
23.2 The consent of KPMG Peat Marwick LLP, certified public
accountants.
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
- ----------
* To be filed by amendment to this Registration Statement.
Item 28. Undertakings
The Company hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement;
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(4) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a Director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
(6) For determining any liability under the Securities Act, to treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Act as part of this registration statement as of the time the
Commission declared it effective.
(7) For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of City of New York, State of New York, on the 15th
day of October, 1996.
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/ Mel Harris
-------------------------------
Mel Harris
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below, hereby constitutes and
appoints Mel Harris and William R. Dresback and any agent for service named in
this Registration Statement, and each of them, his, her or its true and lawful
attorney-in-fact and agents, with full power of substitution and resubstitution
for him, her or it and in his, her, or its name, place and stead, in any and all
capacities, to sign and file (i) any and all amendments (including
post-effective amendments) to this Registration Statement, with all exhibits
thereto, and all other documents in connection therewith, and (ii) any
registration statement, and any and all amendments thereto, relating to the
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act
of 1933, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he, she, or it
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agrees or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mel Harris Chairman of the Board and Chief Executive October 15, 1996
- --------------------------------- Officer (Principal Executive Officer)
Mel Harris
/s/ William Dresback Chief Financial Officer October 15, 1996
- ---------------------------------
William Dresback (Principal Financial Officer)
/s/ Howard Odzer President; Director October 15, 1996
- ---------------------------------
Howard Odzer
/s/ Stuart J. Gordon Director October 15, 1996
- ---------------------------------
Stuart J. Gordon
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
Exhibits
3.1 Certificate of Incorporation of the Company.
10.3 Employment Agreement, dated May 15, 1995, between the Company and
Howard Odzer.
10.8 Stock Repurchase Agreement, dated as of May 15, 1995, among the
Company, Howard Odzer and Ronald Rothstein.
10.11 Amended and Restated Shareholders Agreement, dated as of May 15, 1996
among the Company, Howard Odzer and Mel Harris.
23.2 The consent of KPMG Peat Marwick LLP, certified public accountants.
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
<PAGE>
ExhibiT 3.1
CERTIFICATE OF INCORPORATION
OF
PREFERRED EMPLOYERS HOLDINGS, INC.
FIRST: The name of the corporation is Preferred Employers
Holdings, Inc. (hereinafter referred to as the "Corporation").
SECOND: The address of the Corporation's registered office in
the State of Delaware is 1013 Centre Road, City of Wilmington, County of New
Castle. The name of its registered agent at such address is Corporation Service
Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of Delaware ("GCL").
FOURTH: The total number of shares of all classes of stock
which the Corporation shall have authority to issue is eleven million
(11,000,000), consisting of ten million (10,000,000) shares of Common Stock, par
value $.01 per share ("Common Stock"), and one million (1,000,000) shares of
Preferred Stock, par value $.01 per share ("Preferred Stock"). Except as
otherwise provided by law, the shares of stock of the Corporation, regardless of
class, may be issued by the Corporation from time to time in such amounts, for
such consideration and for such corporate purposes as the Board of Directors may
from time to time determine.
Shares of Preferred Stock may be issued from time to time in
one or more series of any number of shares as may be determined from time to
time by the Board of Directors; provided that the aggregate number of shares
issued and not cancelled of any and all such series shall not exceed the total
number of shares of Preferred Stock authorized by this Certificate of
Incorporation. Each series of Preferred Stock shall be distinctly designated.
The voting powers, if any, of each such series and the preferences and relative,
participating, optional and other special rights of each such series and the
qualifications, limitations and restrictions thereof, if any, may differ form
those of any and all other series at any time outstanding; and the Board of
Directors is hereby expressly granted authority to fix, in the resolution or
resolutions providing for the issue of a particular series of Preferred Stock,
the voting powers, if any, of each such series and the designations, preferences
and relative, participating, optional and other special rights of each such
series and the qualifications, limitations and restrictions thereof to the full
extent now or hereafter permitted by this Certificate of Incorporation and the
laws of the State of Delaware.
<PAGE>
FIFTH: The name and mailing address of the sole incorporator
are as follows:
Mary A. Roma
c/o Baer Marks & Upham LLP
805 Third Avenue
New York, New York 10022
SIXTH: The following provisions are inserted for the
management of the business and for the conduct of the affairs of the
Corporation, and for further definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders:
(1) The election of directors need not be by written ballot,
unless the By-laws so provide.
(2) The Board of Directors shall have power, without the
assent or vote of the stockholders to make, alter, amend, change, add to or
repeal the By-Laws of the Corporation.
SEVENTH: The Corporation shall indemnify and advance expenses
to the fullest extent permitted by Section 145 of the GCL, as amended from time
to time, each person who is or was a director or officer of the Corporation and
the heirs, executors and administrators of such a person. Any expenses
(including attorneys' fees) incurred by each person who is or was a director or
officer of the Corporation, and the heirs, executors and administrators of such
a person in connection with defending any such proceeding in advance of its
final disposition shall be paid by the Corporation; provided, however, that if
the GCL requires, an advancement of expenses incurred by an indemnitee in his
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking by or on behalf of such indemnitee, to repay all
amounts so advanced, if it shall ultimately be determined that such indemnitee
is not entitled to be indemnified for such expenses under this Article or
otherwise.
EIGHTH: The personal liability of the directors of the
Corporation is hereby eliminated to the fullest extent permitted by Section
102(b)(7) of the GCL, as the same may be amended or supplemented.
NINTH: The Corporation reserves the right to amend, alter,
change or repeal any provisions contained in this Certificate of Incorporation
in the manner now or hereafter prescribed by law, and all rights and powers
conferred herein on stockholders, directors and officers are subject to this
reserved power.
-2-
<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affirm
that the statements made in this Certificate of Incorporation of Preferred
Employers Holdings, Inc. are true under the penalties of perjury, this 20th day
of September, 1996.
------------------------------
Mary A. Roma
Sole Incorporator
-3-
<PAGE>
Exhibit 10.3
EMPLOYMENT AGREEMENT
This employment agreement (this "Agreement") is made as of May
15, 1995 by and among PREFERRED EMPLOYERS GROUP, INC., having an address at
10800 Biscayne Boulevard, 10th Floor, Miami, Florida 33161 (the "Company") and
HOWARD ODZER, an individual having an address at 1399 Northeast 103rd Street,
Miami Shores Florida 33138 ("Odzer").
W I T N E S S E T H
WHEREAS, Odzer is currently the President and Director of the
Company; and
WHEREAS, the Company and Odzer wish to set forth the terms
upon which Odzer shall hereinafter be employed by the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Term. Odzer shall be employed by the Company for a period
of three (3) years from the date hereof, unless sooner terminated in accordance
with the terms hereof. Thereafter, this Agreement shall be automatically renewed
for additional periods of one (1) year, unless either party has given the other
not less than ninety (90) days notice of its desire to terminate the Agreement
at the end of that period (such three year period, together with any renewals
thereof are referred to herein as the "Term").
2. Positions. During the Term, Odzer shall serve (i) as the
President of the Company, reporting directly to the Chief Executive Officer, and
shall continue to perform only such duties as have previously been performed by
him as the President of the Company, and (ii) as a Director of the Company and
shall not be required to perform such duties outside of Dade or Broward County,
whichever county the Company shall be located except for duties performed while
on trips required of him. For so long as Odzer remains an employee of the
Company and for so long as the Company remains an "S" Corporation, Odzer shall
be elected as a Director. In his capacity, Odzer shall be permitted to maintain
previous relationships developed by him to the same extent as he has heretofore
maintained. If the Company shall become a "C" Corporation, Odzer shall remain a
Director so long as he remains an employee and stockholder of the Company,
unless an investment banker or other acquirer of securities requires his removal
in writing.
3. Compensation. Odzer shall receive an annual salary of
$100,000, payable bimonthly, for so long as the Company elects to be and is
properly classified, for federal tax purposes, as a Subchapter S corporation
within the meaning of Section 1361(a) of the Internal
<PAGE>
Revenue Code of 1986, as amended (the "Code"). In the event that the Company is
not so classified and does not so elect, Odzer shall receive an annual salary of
$200,000, payable in the same manner as other executives. Odzer shall also
receive perquisites similar to perquisites made available to other senior
executives of the Company.
4. Expenses. Odzer shall be entitled to prompt reimbursement
of all reasonable business expenses in accordance with the Company's policy for
such reimbursements.
5. Time Commitment; Other Interests. During the Term, Odzer
shall devote substantially all of his working time to the operations of the
Company and shall not, directly or indirectly, alone or as a member of a
partnership, or as an officer, director or shareholder or any other corporation,
be engaged in any other commercial duties or pursuits relating to the insurance
industry, except that nothing contained herein shall prohibit Odzer from
acquiring publicly traded securities of companies which are involved, directly
or indirectly, in the insurance industry, provided that such securities are
traded on a national securities exchange or on an over the counter market and in
no event shall Odzer's ownership of such securities exceed 5% of the outstanding
common stock of such company.
6. Non-Competition. For a period of one (1) year after the
Term, Odzer shall not, directly or indirectly, compete with or be engaged in the
same business as the Company, or be employed by, or act as consultant or lender
to, or be a director, officer, employee, owner or partner of, any business
organization which , directly or indirectly competes with or is engaged in the
same business as the Company is in at the end of the Term; provided, however,
that Odzer shall be permitted to own no more than 5% of the outstanding common
stock of any company, the stock of which is traded on a national securities
exchange or on an over the counter market.
7. Termination. (a) This Agreement may be terminated by the
Company at any time "For Cause." For purposes of this Agreement, "For Cause"
shall mean the following: (i) if Odzer has persistently and wilfully failed to
devote substantially all of his working time to the operations of the Company,
after specific notice to Odzer of such alleged failure and a 20 day opportunity
to cure, (ii) if Odzer has been convicted of (whether or not subject to appeal)
or plead "nolo contendere" or has made any similar plea to any criminal offense
involving a violation of federal or state securities laws or regulations,
embezzlement, fraud, wrongful taking or misappropriation of property, theft, or
any other crime involving dishonesty, (iii) if Odzer has violated or materially
breached any material provision of this Agreement or that certain Amended and
Restated Shareholders Agreement of even date herewith by and among the Company,
Odzer and Mel Harris, after specific notice to Odzer of such alleged violation
or breach and a 20 day opportunity to cure or (iv) if Odzer ceases to be a
shareholder of the Company.
(b) In the event this Agreement shall be terminated
by the Company for any reason other than pursuant to Section 7(a) or Section 8
hereof, Odzer shall be entitled to
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<PAGE>
receive all payments and benefits to which he was entitled pursuant to this
Agreement to the end of the Term, including any increase in salary pursuant to
the second sentence of Section 3 hereof, regardless of whether he is employed by
the Company when the Company no longer elects to be or is not properly
classified as a Subchapter S corporation under the Code.
8. Disability; Death. (a) If, during the Term, Odzer becomes
physically or mentally disabled, whether by injury, illness or otherwise, so
that he is unable to perform his duties for a period of six successive months,
then the Company may, at its option, terminate this Agreement upon thirty days'
written notice to Odzer without further obligation; provided, however, that the
Company shall continue to pay Odzer his monthly salary until the earlier of (i)
the end of such period of disability and notice, or (ii) the end of the Term.
(b) In the event of Odzer's death during the Term,
this Agreement shall terminate and be of no further force and effect, provided
that Odzer shall be entitled to all salary and other benefits to which he is
entitled through the date of death.
(c) In addition to the other obligations of the
Company to Odzer under this Agreement, in the event Odzer's employment is
terminated, other than for cause, and the Company has not had an initial public
offering of its shares of common stock, the salary in effect at the date of
termination shall continue until the initial public offering or one year from
the date of scheduled termination of this Agreement, whichever comes sooner.
9. Miscellaneous. This Agreement (i) contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements of the parties, written or oral, of any nature
whatsoever, (ii) shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors, and (iii) shall be governed by
the laws of the State of Florida, without giving effect to the conflicts of law
provisions thereof.
10. Arbitration. Any dispute or controversy arising out of or
relating to this Agreement, any document or instrument delivered pursuant to, in
connection with, or simultaneously with this Agreement, or any breach of this
Agreement or any such document or instrument shall be settled by arbitration to
be held in the County of Dade, State of Florida in accordance with the
Commercial Arbitration Rules then in effect of the American Arbitration
Association or any successor thereto, and judgment upon the award rendered by
the Arbitrator(s) may be entered in an Court having jurisdiction thereof. The
Arbitrator(s) may grant injunctions or other relief in such dispute or
controversy. The costs and expenses of such arbitration shall be assumed as
determined by the Arbitrator(s), and each party shall separately pay his own
attorneys' fees and expenses.
11. Notices.
Any notice or other communication to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, or delivered against
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<PAGE>
receipt to the party to whom it is to be given at the address of such party set
forth below. Payment of installments of the Purchase Price shall be sent by
regular or certified mail to the address of Odzer set forth below:
Mr. Odzer: 1399 Northeast 103rd Street
Miami Shores, Florida 33138
with a copy to:
Richard Lampen, Esq.
Steel Hector & Davis
200 South Biscayne Boulevard, 40th Floor
Miami, Florida 33131-2398
The Company: 10800 Biscayne Boulevard, 10th Floor
Miami, Florida 33161
with a copy to:
Donald J. Bezahler, Esq.
Baer Marks & Upham
805 Third Avenue
New York, New York 10022-7513
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the day and year first
above-written.
PREFERRED EMPLOYERS GROUP, INC.
By:
------------------------------------
Name: Mel Harris
Title: Chairman of the Board and
Chief Executive Officer
-------------------------------------
Howard Odzer
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<PAGE>
Exhibit 10.8
STOCK REPURCHASE AGREEMENT
This stock repurchase agreement (the "Agreement") is made as
of May 15, 1995 by and among PREFERRED EMPLOYERS GROUP, INC., having an address
at 10800 Biscayne Boulevard, 1Oth Floor, Miami, Florida 33161 (the "Company"),
HOWARD ODZER, an individual having an address at 1399 Northeast 103rd Street,
Miami Shores, Florida 33138 ("Odzer") and RONALD ROTHSTEIN, an individual having
an address at 351 East 84th Street, New York, New York 10028 ("Rothstein").
W I T N E S S E T H
WHEREAS, Odzer and Rothstein are the record and beneficial
owner of 100 shares of common stock of the Company; and
WHEREAS, the Company wishes to repurchase from Odzer and
Rothstein, and Odzer and Rothstein wish to sell to the Company, 30 shares of
common stock of the Company (the "Shares") on the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Purchase and Sale.
(a) Subject to Section 3 hereof, at the Closing (as
hereinafter defined) Odzer and Rothstein hereby agrees to sell, transfer and
deliver to the Company, free and clear of all restrictions, liens, claims,
charges, pledges or encumbrances of any kind or nature whatsoever (collectively,
"Liens"), the Shares, and the Company hereby agrees to purchase from Odzer and
Rothstein, the Shares, free and clear of all Liens. Twenty-seven (27) of such
Shares shall be from Odzer and 3 of such Shares shall be from Rothstein.
(b) The purchase price for the Shares is $600,000
(the "Purchase Price"). The Purchase Price for the Shares shall be paid to Odzer
in twenty-four (24) installments of $25,000 each, payable by check on the first
day of each month for twenty-four months; provided, however, that the first
installment payment shall be made on the date of the Closing. Interest shall be
deemed to be included in such payments at the applicable federal rate as defined
in Section 1274 of the Internal Revenue Code of 1986, as amended.
<PAGE>
(c) The unpaid balance of the Purchase Price may, at
any time and from time to time, be prepaid in whole or in part, without penalty
or premiums.
2. Closing.
(a) The closing (the "Closing") of the purchase and
sale of the Shares hereunder shall take place at the offices of the Company on
May __, 1995, or at such other place and on such other date as the parties
hereto shall mutually agree.
(b) At the Closing, (i) the Company shall deliver to
Odzer, as pledgeholder, duly executed stock certificates evidencing the Shares
acquired by the Company, (ii) the Company shall deliver to Odzer a check in the
amount of $25,000, representing the first installment payment for the Shares.
The terms of the escrow shall be pursuant to a pledge agreement in the form
attached hereto as Exhibit A.
3. Condition to Closing.
The Closing of the purchase and sale of the Shares
hereunder is conditioned upon the completion by the Company of a $600,000 cash
distribution to the shareholders of the Company, with respect to 1994 income of
the Company, pro rata based on the number of shares of common stock of the
Company outstanding and paid to the shareholders of record on the date hereof,
without giving effect to the repurchase.
4. Notices; Delivery of Purchase Price.
Any notice or other communication to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, or delivered against receipt to the party to whom it is to be
given at the address of such party set forth below. Payment of installments of
the Purchase Price shall be sent by regular or certified mail to the address of
Odzer set forth below:
Rothstein:
351 East 84th Street
New York, New York 10028
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<PAGE>
Odzer: 1399 Northeast 103rd Street
Miami Shores, Florida 33138
with a copy to:
Richard Lampen, Esq.
Steel Hector & Davis
200 South Biscayne Boulevard, 40th Floor
Miami, Florida 33131-2398
The Company: 10800 Biscayne Boulevard, 10th Floor
Miami, Florida 33161
with a copy to:
Donald J. Bezahler, Esq.
Baer Marks & Upham
805 Third Avenue
New York, New York 10022-7513
5. Miscellaneous.
This Agreement (i) contains the entire understanding
of the parties with respect to the subject matter hereof and supersedes all
prior agreements of the parties, written or oral, of any nature whatsoever, (ii)
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors, and (iii) shall be governed by the laws of the
State of Florida, without giving effect to the conflicts of law provisions
thereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered as of the day and year first
above-written.
-------------------------------------
Ronald Rothstein
-------------------------------------
Howard Odzer
PREFERRED EMPLOYERS GROUP, INC.
By:__________________________________
Name: Mel Harris
Title: Chairman of the Board and
Chief Executive Officer
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<PAGE>
Exhibit 10.11
AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
This amended and restated shareholders agreement (this
"Agreement") is made as of May 15, 1995 by and among PREFERRED EMPLOYERS GROUP,
INC., having an address at 10800 Biscayne Boulevard, 10th Floor, Miami, Florida
33161 (the "Company"), MEL HARRIS, an individual having an address at 10800
Biscayne Boulevard, Penthouse, Miami, Florida 33161 ("Harris") and HOWARD ODZER,
an individual having an address at 1399 Northeast 103rd Street, Miami Shores,
Florida 33138 ("Odzer" and, together with Harris, the "Shareholders").
W I T N E S S E T H
WHEREAS, the Company and the Shareholders are parties to an
agreement dated as of November 1, 1988 (the "Shareholders Agreement"); and
WHEREAS, the Company and the Shareholders desire to amend and
restate the Shareholders Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Shareholders Agreement. The parties hereto hereby agree
that this Agreement shall amend and restate the Shareholders Agreement in its
entirety.
2. Directors. (a) The number of directors of the Company shall
be determined from time to time in accordance with the provisions of the By-laws
of the Company.
(b) The number of directors who shall be present at
any meeting of the Board of Directors in order to constitute a quorum for the
transaction of business shall be a majority of the total number of Directors of
the Company.
3. Shareholders. The number of shares of common stock of the
Company (the "Stock"), the holders of which shall be present in person or by
proxy at any meeting of shareholders in order to constitute a quorum for the
transaction of any business at a meeting of the shareholders, shall be a
majority of the issued and outstanding shares of Stock.
4. Restriction on Transferability of Shares. (a) Neither
Shareholder may sell, transfer, or assign any shares of his Stock, except as
otherwise provided by Sections 9, 10, and 11 of this Agreement. Notwithstanding
the foregoing, the shareholders may assign the beneficial interests in or
transfer their shares of Stock to their respective spouses or relatives or
<PAGE>
trusts for their benefit. Any purported sale, transfer, or assignment in
violation of this Section 4 shall be void and null.
(b) Neither Shareholder may pledge, hypothecate, or
otherwise encumber his Stock without the prior written consent of the other
Shareholder. Any such pledge, hypothecation, or encumbrance in violation of this
Section 4 shall be null and void.
(c) Each certificate representing shares of Stock
owned by the Shareholders shall bear the following legends:
(i) "The shares of common stock represented by
this certificate are subject to restrictions on transfer and voting, as provided
in an Amended and Restated Shareholders Agreement, dated as of May 15, 1995
among the Company and certain holders of its common stock, a copy of which is on
file with the Secretary of the Company."
(ii) "The shares of common stock represented by
this certificate have not been registered under the Securities Act of 1933, as
amended (the "Act"), and may not be sold or transferred without an effective
registration statement under the Act or an exemption from the registration
provisions of the Act."
5. Management. Except as otherwise limited by this Agreement
or required by law, the Chief Executive Officer of the Company shall be
responsible for the daily operations of the Company, in the ordinary course of
business, subject to the direction of the Board of Directors.
6. Banking and Books of Accounts. Complete records and books
of account shall be kept in which shall be entered fully and accurately all
transactions and other matters concerning the Company's business as are usually
entered into records and books of account maintained by persons engaged in
business of a like character. The books and records shall at all times be
maintained at the principal place of business of the Company and each
Shareholder shall at all times have access thereto.
7. Indemnification. (a) Each Shareholder (including here and
hereinafter, the heirs, executors, administrators or estate of such Shareholder)
who is or was a director, officer, agent or employee of the Company or who is or
was serving at the request of the Company in the position of a director,
officer, trustee, partner, agent or employee of another corporation,
partnership, joint venture, trust or other enterprise, shall be indemnified by
the Company as of right to the fullest extent permitted or authorized by current
or future legislation or by current or future judicial or administrative
decision (but, in the case of any future legislation or decision, only to the
extent that it permits the Company to provide broader indemnification rights
than permitted prior to the legislation or decision), against all fines,
liabilities, settlements, costs and expenses, including attorneys' fees,
asserted against him or incurred by him (whether arising out of actions or
omissions occurring before or after the date hereof) in his capacity as such
director, officer, trustee, partner, agent or employee, or arising
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<PAGE>
out of his status as such director, officer, trustee, partner, agent or
employee. The foregoing right of indemnification shall not be exclusive of other
rights to which those seeking indemnification may be entitled.
(b) Subject to the provisions of Section 7(c)
hereof, costs, charges and expenses (including reasonable attorneys' fees)
incurred by a person referred to in Section 7(a) hereof in defending a civil or
criminal suit, action or proceeding shall be paid promptly by the Company, as
statements therefor are received, in advance of the final disposition thereof,
upon receipt of an undertaking to repay all amounts advanced if it is ultimately
determined that the person is not entitled to be indemnified by the Company as
authorized by this Section 7.
(c) Promptly after a Shareholder (or his heirs,
executors, administrators and estate) (collectively, an "Indemnified Person")
receives notice of the commencement of any action or other proceeding in respect
of which indemnification or reimbursement may be sought under this Section 7,
such Indemnified Person will notify the Company thereof; but the omission so to
notify the Company shall not relieve the Company from any obligation under this
Section 7 unless, and only to the extent that, such omission results in
prejudice to the rights and interests of the Company. If any such action or
other proceeding shall be brought against any Indemnified Person, the Company
shall, upon written notice given reasonably promptly following the Indemnified
Person's notice to the Company of such action or proceeding, be entitled to
assume the defense thereof at the Company's expense with counsel chosen by the
Company, provided, however, that any Indemnified Person may at his own expense
retain separate counsel to participate in such defense. Notwithstanding the
foregoing, such Indemnified Person shall have the right to employ separate
counsel at the Company's expense and to control his own defense of such action
or proceeding if (i) the Company has failed promptly to assume the defense, or
(ii) in the reasonable opinion of counsel to the Company, there is a conflict of
interest arising from the fact that the same counsel is representing both the
Company and the Indemnified Person or there is a potential conflict of interest
between the Company and such Indemnified Person that would make such separate
representation advisable. The Company will not, without the prior written
consent of the Indemnified Person, settle, compromise or consent to the entry of
any judgment in or otherwise seek to terminate any pending or threatened claim,
action or proceeding in respect of which indemnification or reimbursement may be
sought under this Section 7 (whether or not the Indemnified Person is a party
thereto) unless such settlement, compromise, consent or termination includes an
unconditional release of the Indemnified Person from all liability arising or
that may arise out of such claim, action or proceeding.
(d) If this Section 7 or any portion of it is
invalidated on any ground by a court of competent jurisdiction, the Company
shall nevertheless indemnify each Shareholder (and his heirs, executors,
administrators and estate) to the fullest extend permitted by all portions of
this Section 7 that has not been invalidated and to the fullest extent permitted
by law.
(e) This Section 7 is intended for the benefit of,
and shall be enforceable by, the Shareholders (and the heirs, executors,
administrators and estate of such persons) and shall be binding on the Company
and its respective successors and assigns.
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<PAGE>
8. Dissolution. The Company may be dissolved at any time by a
vote of the shareholders of the Company holding at least a majority of the
issued and outstanding shares of Stock. Upon a dissolution, the Company shall
proceed with reasonable promptness to liquidate its business and assets. Upon
any dissolution and winding up of the Company, the assets of the Company shall
be used and distributed in the following order:
(i) to creditors in the order of priority
provided by law,
(ii) to the shareholders of the Company for
loans, if any, made by them to the Company; and
(iii) to the shareholders of the Company in
proportion to their respective equity investments.
9. Right of First Refusal. (a) A Shareholder (the "Offering
Shareholder") who proposes to dispose of any shares of Stock other than as
provided in Section 10 hereof, shall give a notice (the "Notice") signed by the
offering Shareholder to the Company and on the same day give Notice to the other
Shareholder (the "Non-Offering Shareholder") of such Offering Shareholder's
proposed disposition; provided, however, that no Notice of any proposed
disposition by sale of the offered Shares shall be valid unless the Offering
Shareholder shall have received prior to the date of the Notice an offer
therefor in writing from any bona fide purchaser stating the price, terms, and
conditions of the proposed sale. The Notice shall specify the number of shares
(the "Offered Shares") the Offering Shareholder intends to dispose of, identify
and give the address of the person to whom the Offering Shareholder proposes to
dispose of the Offered Shares, and indicate the price, terms, and conditions of
the proposed disposition. The Company shall have the irrevocable and exclusive
first option, but not the obligation, to purchase all, but not part, of the
Offered Shares, at the price and upon any terms and conditions equal to those
offered by the prospective purchaser, provided that the Company gives notice of
its election to purchase the Offered Shares to the Offering Shareholder within
30 days after the Company receives the Notice; provided, however, that if the
Company elects to purchase, the purchase price shall be paid in quarterly
installments equal to not less than the Minimum Payment Amount (as hereinafter
defined).
(b) If the Company does not elect to purchase all of the
Offered Shares as provided in Section 9 (a) above, then the Offering
Shareholders shall thereafter provide the Non- Offering Shareholder with a
notice (the "Second Notice") that the Company has not so elected, and the
Non-Offering Shareholder shall have the irrevocable and exclusive second option,
but not the obligation, to purchase all, but not part, of the Offered Shares, at
the price and upon such terms and conditions as those offered by the prospective
purchaser. If the Non-Offering Shareholder elects to purchase the Offered Shares
he shall give notice of such election to the Offering Shareholder within 10 days
after the receipt of the Second Notice by the Non-Offering Shareholder and the
purchase thereof shall be closed within 40 days after receipt of the Second
Notice.
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<PAGE>
(c) If an Offering Shareholder gives the required Notice, and
the Second Notice, and the Company and the Non-Offering Shareholder do not
elect, pursuant to Sections 9 (a) and 9 (b) , to purchase the Offered Shares,
the Offering Shareholder may dispose of the Offered Shares to the person or
persons, at the price, and on the terms and conditions specified in the Notice,
provided that each such person acquiring the Offered Shares becomes a party to
this Agreement upon such acquisition, and any shares not so disposed of by such
Offering Shareholder may not thereafter be disposed of, except in compliance
with the terms and conditions of this Agreement.
10. Sale of the Company.
If any bona fide purchaser offers to purchase all of the
issued and outstanding shares ("Outstanding Shares") of the Shareholders and one
of the Shareholders (the "Selling Shareholder") desires to dispose of all the
Outstanding Shares, the Selling Shareholder must give the other Shareholder 30
days' notice (the "Sale Notice") of his desire to sell. The Sale Notice shall
identify and give the address of the bona fide purchaser, and shall indicate the
price, terms and conditions of the proposed disposition. The other Shareholder
shall then have the option of purchasing all of the Selling Shareholder's shares
at a price per share equal to the bona fide purchaser's offered price per share.
Such Shareholder electing to purchase all of the Selling Shareholder's shares
shall give notice of such election to the Selling Shareholder within 30 days
after his receipt of the Sale Notice and the purchase thereof shall be closed
within 60 days after receipt of the Sale Notice. If the other Shareholder does
not elect to purchase the Selling Shareholder's shares as provided above, such
other Shareholder shall immediately offer all of his shares to the bona fide
purchaser in accordance with said purchaser's offer and shall execute all
documents necessary to consummate the sale.
11. Purchase of Shares upon Termination, Disability or Death.
(a) (i) In the event that Odzer is terminated as an employee of the Company "For
Cause" in accordance with the provisions of that certain Employment Agreement
dated as of May 15, 1995 by and between the Company and Odzer (the "Employment
Agreement"), then Odzer shall be deemed to have offered all of the shares of
Stock owned by him upon such termination to the Company. The Company shall have
the right, but not the obligation, to purchase such shares at the fair market
value of such shares, as determined in accordance with Paragraph "c" of this
Section 11, or at such other price as the Company and Odzer shall mutually
agree, such purchase to close within sixty days after the determination of the
fair market value. If the Company elects to so purchase, the purchase price
shall be paid in quarterly installments equal to not less than the Minimum
Payment Amount (as hereinafter defined). If the Company does not elect to
purchase Odzer's shares, Harris shall have the right, but not the obligation, to
purchase such shares at the fair market value of such shares, as determined in
accordance with Paragraph "c" of this Section 11, or at such other price as
Harris and Odzer shall mutually agree, with the purchase to close within ninety
days after the determination of the fair market value.
(ii) In the event that (a) Odzer is terminated
as an employee of the Company for any reason other than "For Cause", or (b) the
scheduled termination of the
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<PAGE>
Employment Agreement occurs, or (c) Odzer is terminated by reason of his
disability in accordance with the Employment Agreement, Odzer shall have the
right to cause the Company to purchase all of the shares of Stock owned by him
at the fair market value of such shares as determined in accordance with
Paragraph "c" of this Section 11; with such election to take place within sixty
days after the date of such termination, and such purchase shall close within
sixty days after the determination of the fair market value, provided that the
purchase price shall be paid in quarterly installments equal to not less than
the Minimum Payment Amount (as hereinafter defined). If the Company is unable
pursuant to Section 12 to purchase Odzer's shares, Harris shall have the right,
but not the obligation, to purchase such shares at the fair market value of such
shares as determined in accordance with Paragraph "c" of this Section 11, or at
such other price as Harris and Odzer shall mutually agree, with such purchase to
close within ninety days after the determination of the fair market value.
(b) (i) Upon the death of a Shareholder, the Company
shall purchase, and the estate of the deceased Shareholder shall sell, all of
the shares of the Company owned by the deceased Shareholder at the time of his
death, at the fair market value of the shares, as determined in accordance with
Paragraph "c" of this Section 11 with such portion of the purchase price as to
which the Company receives life insurance proceeds with respect to the deceased
Shareholder pursuant to Paragraph "d" below to be paid within ten days of the
Company's receipt of such proceeds, with the balance of the purchase price to be
paid in quarterly installments equal to not less than the Minimum Payment Amount
(as hereinafter defined). The first installment shall be made not later than
ninety days after the appointment of the executor of the estate.
(ii) If during the term of this Agreement Harris
shall die, then the rights granted to Odzer, with respect to causing the Company
to purchase all of the shares of Stock owned by Odzer, under Paragraph 11(a)(ii)
shall come into effect, with such portion of the purchase price as to which the
Company receives life insurance proceeds with respect to the deceased
Shareholder pursuant to Paragraph "d" below to be paid within ten days of the
Company's receipt of such proceeds, with the balance of the purchase price to be
paid in quarterly installments as provided therein. Notwithstanding the
preceding sentence, if the estate of Harris delivers notice to Odzer, within
ninety days (90) after the issuance of letters testamentary, that it has
determined that the entire Company shall be sold, then steps shall be taken
forthwith to cause the sale of the Company in such manner and on such terms as
shall be agreed to by the estate of Harris and Odzer, and if no such agreement
shall be had within thirty (30) days after the receipt by Odzer of such notice,
then a mutually agreed upon investment banker shall be retained for purposes of
determining the manner and terms of sale, which shall involve the same amount
and form of consideration for each share of Stock. If the parties are unable to
agree on an investment banker within such 30 day period, such investment banker
shall be selected by the accounting firm then servicing the business of the
Company; provided the investment banker selected shall not be an investment
banker then providing services to the Company or any of the Shareholders or
their estates.
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<PAGE>
(c) If the Company and Odzer, in the case of
paragraph (a) above, or the surviving Shareholder and the estate of the deceased
Shareholder, in the case of paragraph (b) above, cannot agree on the fair market
value of the Stock within three months after the termination of employment of
Odzer or the deceased shareholder's death, respectively, the fair market value
shall be conclusively determined by a firm of Certified Public Accountants
selected jointly by the Board of Directors of the Company and Odzer, or by the
surviving Shareholder and the estate of the deceased Shareholder, as the case
may be, from the following list of firms: Price Waterhouse, Arthur Andersen,
Ernst & Young and Peat Marwick. In the event the parties are unable to agree on
an accounting firm, the firm shall be selected from the above list by the
accountant then servicing the account of the Company; provided the firm selected
shall not be an accounting firm then providing services to the Company or any of
the Shareholders or their estates. For purposes of this Paragraph "c," (i) in
determining the "fair market value" of the Stock, the accounting firm shall use
one or more valuation methods that it, in its best professional judgment,
determines to be most appropriate without giving any effect to any discount for
the lack of liquidity of the Stock, or the controlling or minority status, as
the case may be, of the Shareholder whose Stock is being valued, and the value
of any insurance policy, or proceeds therefrom, on the life of the Shareholder
shall not be considered in determining fair market value under this paragraph.
(d) The Company agrees to use its best efforts to
purchase and keep in effect life insurance for the Company's benefit on the life
of each Shareholder in the amount of $2,000,000 each. Proceeds received from any
insurance policies purchased pursuant to this paragraph which are in excess of
the fair market value of the deceased Shareholder's shares shall be retained by
the Company. Harris has the right, at the expense of the Company, to cause the
Company to acquire an additional $2,000,000 of insurance on his life which
additional $2,000,000 will be used for purposes of 11(b)(ii) hereof.
(e) For the purpose of this Agreement, the "Minimum
Payment Amount" shall mean with respect to any quarterly installment an amount
equal to 35% of the "Taxable Income" of the Company for the preceding fiscal
quarter. "Taxable Income" of the Company shall mean the consolidated pretax
earnings or loss of the Company and its subsidiaries for such fiscal period
prepared in accordance with generally accepted accounting principles
consistently applied, as in existence on the date hereof ("GAAP"), adjusted to
exclude any reduction thereof for interest or any other charge or expense
resulting or arising from, or relating to, the purchase of Stock from Odzer and
Ronald Rothstein by the Company pursuant of Stock Purchase Agreement dated as of
May 15, 1995, or the financing of such purchase by the Company.
12. Limitation on Purchases by the Company. (a)
Notwithstanding any other provision of this Agreement, the Company shall not
have the obligation to purchase any shares of Stock, except out of funds legally
available therefor. If, at any time the Company is required to purchase shares
of Stock pursuant to Sections 9 or 11 and its surplus is legally insufficient
for that purpose, the entire available surplus shall be applied to the payment,
and the Company and the Shareholders jointly and severally agree promptly to
take
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all such action as may be permitted by law to reduce the capital of the Company
or to revalue its asset so as to increase its surplus to the extent necessary to
permit the Company to purchase all shares it is obligated to purchase hereunder.
(b) The Company shall not be permitted to purchase
any company or entity in which Harris has a greater than ten percent (10%)
equity interest without the prior approval of Odzer.
13. Registration Rights; Tag-Along Rights. The Company agrees
that Odzer shall be granted registration rights pari passu with those granted to
Harris (and/or members of Harris' family), if any, pro rata based on the number
of shares of Stock owned by them at the time any such rights are granted. In the
event Harris (or members of Harris' family) proposes to transfer any shares of
Stock, to a bona fide third party purchaser, Harris shall offer Odzer the right
to participate in such transfer on a pro rata basis, at the same price and upon
identical terms and conditions, as such proposed transfer by Harris.
14. Distributions. For so long as the Company elects to be and
is properly classified, for federal tax purposes, as a Subchapter S corporation
within the meaning of Section 1361(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), the Company shall make annual distributions, no later than
90 days following the end of each fiscal year, commencing with the fiscal year
ending December 31, 1995, of cash to its shareholders of not less than 45% of
the prior year's (or such portion thereof that the Company was a Subchapter S
corporation) taxable income of the Company, pro-rata based on ownership of
shares of Stock of the Company. For all purposes under this Agreement, the
taxable income of the Company shall be computed without making any reduction
thereof for interest or any other charge or expense resulting or arising from,
or relating to, the purchase of Stock from Odzer and Ronald Rothstein by the
Company pursuant to the Stock Purchase Agreement dated as of May 15, 1995, or
the financing of such purchase by the Company. The Company shall not voluntarily
elect to terminate its Subchapter S status, except in connection with a
bona-fide financing of the Company or an offering of its Stock.
15. Harris. Harris shall serve as the Chief Executive Officer
and Chairman of the Board of Directors of the Company. For so long as the
Company elects to be and is properly classified for federal tax purposes as a
Subchapter S corporation under the Code, Harris shall not receive salary and
bonus in excess of an aggregate of $250,000 per year.
16. Funding Requirements. If it is determined by the Board of
Directors that the Company needs additional working capital funds or otherwise
requires financing, and if the Company is unable to borrow such funds on
commercially reasonable terms, than each Shareholder shall be given the
opportunity to provide such funds on a debt or equity basis and to the extent
that either party shall not contribute his proportionate share, the other party
shall have the right, but not the obligation, to contribute such noncontributed
share, on the same terms and conditions as were originally offered to each
party.
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17. Termination. (a) This Agreement shall commence as of the
date hereof and terminate on the earlier of (i) ten years from the date hereof,
or (ii) immediately prior to the completion by the Company of an initial public
offering (other than pursuant to a registration on Forms S-4 or S-8 or any
successor forms) of its Stock under the Securities Act of 1933, as amended, or
(iii) upon the sale by the Company of any other securities, or a private
placement of its shares of Stock or other securities, if the purchaser or
investment banker underwriting such securities notifies the Company in writing
that this Agreement or any portion thereof should be terminated or modified.
(b) Within thirty days following the termination of
this Agreement, (i) the provisions of Paragraph 9 shall be incorporated into a
new Agreement between the parties hereto and shall remain as a separate
Agreement for so long as Odzer owns more than fifteen percent (15%) of the
outstanding Stock of the Company and the Proxy given as of even date herewith,
shall continue irrevocable for so long as said Paragraph 9 remains in full force
and effect and (ii) the provisions of Paragraphs 7, 13, 18, 19 and 20 shall be
incorporated into a new Agreement between the parties hereto and shall remain as
a separate agreement for at least six years after Odzer last serves as a
director, officer, agent or employee of the Company or, at the request of the
Company, serves as a director, officer, trustee, partner, agent or employee or
another corporation, partnership, joint venture, trust or other enterprise, and
provided that Paragraph 13 shall only continue in effect for so long as Odzer is
not permitted to sell publicly all of his Stock without registration under the
Act.
18. Arbitration. Any dispute or controversy arising out of or
relating to this Agreement, any document or instrument delivered pursuant to, in
connection with, or simultaneously with this Agreement, or any breach of this
Agreement or any such document or instrument shall be settled by arbitration to
be held in the County of Dade, State of Florida in accordance with the
Commercial Arbitration Rules then in effect of the American Arbitration
Association or any successor thereto, and judgment upon the award rendered by
the Arbitrator(s) may be entered in an Court having jurisdiction thereof. The
Arbitrator(s) may grant injunctions or other relief in such dispute or
controversy. The costs and expenses of such arbitration shall be assumed as
determined by the Arbitrator(s), and each party shall separately pay his own
attorneys' fees and expenses.
19. Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered against receipt to the
party to whom it is to be given at the address of such party set forth below (or
to such other address as the party shall have furnished in writing in accordance
with the provisions of this Section 19):
Mr. Harris: 10800 Biscayne Boulevard, Penthouse
Miami, Florida 33161
with a copy (which copy shall not constitute notice) to:
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Donald J. Bezahler, Esq.
Baer Marks & Upham
805 Third Avenue, 20th Floor
New York, New York 10022-7513
Mr. Odzer: 1399 Northeast 103rd Street
Miami Shores, Florida 33138
with a copy (which copy shall not constitute notice) to:
Richard Lampen, Esq.
Steel Hector & Davis
200 South Biscayne Blvd., 40th Floor
Miami, Florida 33131-2398
Company: 10800 Biscayne Boulevard, 10th Floor
Miami, Florida 33161
with a copy (which copy shall not constitute notice) to:
Donald J. Bezahler, Esq.
Baer Marks & Upham
805 Third Avenue, 20th Floor
New York, New York 10022-7513
Notice to the estate of any party shall be sufficient if addressed to the party
as provided in this Section 19. Any notice or other communication given by
certified mail shall be deemed given at the time of certification thereof,
except for a notice changing a party's address which shall be deemed given at
the time of receipt thereof.
20. Miscellaneous. (a) This Agreement may be amended at any
time and from time to time by unanimous written agreement of the Shareholders.
(b) This Agreement and the rights of the parties
hereunder shall be governed by, and construed in accordance with, the laws of
the state of Florida, without giving effect to rules governing conflicts of law.
(c) This Agreement and the rights and obligations
hereunder, may not be assigned and any such assignment shall be void and null.
Except as otherwise specifically provided herein, this Agreement shall be
binding upon and inure to the benefit of the parties and their legal
representatives, heirs, administrators, executors, and successors.
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<PAGE>
(d) Captions and section headings contained in this
Agreement are inserted only as a matter of convenience and in no way define,
limit, or extend the scope or intent of this Agreement or any provision hereof.
(e) If any provision of this Agreement or the
application of any provision to any person or circumstance shall be held
invalid, the remainder of this Agreement, or the application of that provision
to persons or circumstances other than those to which it is held invalid, shall
not be affected thereby.
(f) This Agreement may be executed in several
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
------------------------------------------
Howard Odzer
------------------------------------------
Mel Harris
PREFERRED EMPLOYERS GROUP, INC.
By:
-----------------------------------------
Name: Mel Harris
Title: Chairman of the Board and
Chief Executive Officer
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Exhibit 23.1
CONSENT OF COUNSEL
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Prospectus contained in this Registration Statement.
BAER MARKS & UPHAM LLP
New York, New York
October 11, 1996
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our reports included herein and to the
reference to our firm under the caption "Expert" in this Prospectus.
KPMG PEAT MARWICK LLP
Miami, Florida
October 11, 1996
