PREFERRED EMPLOYERS HOLDINGS INC, 424B1, 1997-02-07

PREFERRED EMPLOYERS HOLDINGS INC
424B1, 1997-02-07
INSURANCE AGENTS, BROKERS & SERVICE

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Filed Pursuant to Rule 424(b)1
Registration No. 333-14103

PROSPECTUS
PREFERRED EMPLOYERS HOLDINGS, INC.
1,500,000 SHARES OF COMMON STOCK

Preferred Employers Holdings, Inc. (together with Preferred Employers
Group, Inc., which will become its wholly-owned subsidiary as a result of the
Exchange (as defined in "Recapitalization"), and P.E.G. Reinsurance Company,
Ltd., its wholly-owned subsidiary, the "Company") is hereby offering 1,500,000
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 Common Stock has been approved for listing subject to official
notice of issuance on the Nasdaq SmallCap Market ("Nasdaq") under the symbol
"PEGI" and on the Boston Stock Exchange (the "BSE") under the symbol "PEH". The
initial public offering price was determined by negotiations between the Company
and Commonwealth Associates, as representative (the "Representative") of the
several underwriters in this Offering (the "Underwriters"). 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 9
AND "DILUTION" ON PAGE 17

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.

<TABLE>
<CAPTION>
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Underwriting
Discount and Proceeds to
Price to Public Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share ..... $7.25 $.5075 $6.7425
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Total(3) ..... $10,875,000 $761,250 $10,113,750
================================================================================
</TABLE>

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(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 $217,500 ($250,125 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 150,000
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 140% 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 $600,000, including the Representative's non- accountable expense
allowance ($632,625 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 225,000 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 $12,506,250, $875,437.50 and $11,630,812.50, respectively.
See "UNDERWRITING."

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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 February 11, 1997.

------

COMMONWEALTH ASSOCIATES

The date of this Prospectus is February 5, 1997

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[PICTURE]*

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.

------

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of the Securities Act of 1933, as amended. 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."

<PAGE>

FOR CALIFORNIA RESIDENTS ONLY

THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA HAS IMPOSED INVESTOR
SUITABILITY STANDARDS OF (i) A MINIMUM LIQUID NET WORTH (NET WORTH EXCLUDES
PRINCIPAL RESIDENCE, HOME FURNISHINGS AND AUTOMOBILES) OF $60,000, PLUS GROSS
ANNUAL INCOME OF AT LEAST $60,000 OR (ii) A MINIMUM LIQUID NET WORTH OF
$225,000.

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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 the consummation of 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., PEGI, which will become its wholly-owned
subsidiary as a result of the Exchange (as such term is defined in
"Recapitalization") and through which the Company conducts certain of its
business, and the Reinsurance Subsidiary (as defined below).

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 believes that 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 are potentially 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 attributes 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 approximately 11% over the four year period 1990 through
1994 in their premium experience modification factors (which are a significant
component in determining a client's premium).

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 attaining overall profitability. The Company has
developed other proprietary information and

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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 accomplish this
goal.

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
for 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 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 an affiliate of AIG and other affiliated companies
of AIG (the "AIG Affiliates"), pursuant to which the Reinsurance Subsidiary will
act as the reinsurer with respect to certain workers' compensation and
employer's liability 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 certain
Program expenses and commissions and the losses paid associated with the Book of
Business (the "Ceded Premium"). It is anticipated that a substantial portion of
the Ceded Premium will be used as security for the payment of losses for the
benefit of AIG. See "Business -- Reinsurance -- Reinsurance Agreement."

Pursuant to the Reinsurance Agreement, the Reinsurance Subsidiary will retain
the Ceded Premium together with the risks and potential for profitability
associated therewith. See "Business -- Strategy." The Company intends to use a
significant portion of the proceeds of this Offering to fund the operations of
the Reinsurance Subsidiary. See "Use of Proceeds."

Although the Reinsurance Subsidiary will assume the risks associated with
being a reinsurer, the Reinsurance Agreement will limit the liability of the
Reinsurance Subsidiary for losses and certain defined expenses to the first
$300,000 per occurrence. In addition, the Reinsurance Agreement limits the
aggregate liability of the Reinsurance Subsidiary for all coverage to an amount
not to exceed 70% of the gross written premium for each individual underwriting
year. The AIG Affiliates will retain all liabilities in excess of this amount.
The AIG Affiliates will be paid 5% of the gross written premiums under the
Program with which to purchase excess and aggregate reinsurance.

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petitively 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.

THE OFFERING

Common Stock offered by the
Company: .................... 1,500,000
Common Stock to be outstanding
after the Offering: ......... 4,500,000 (1)

Use of Proceeds:............... To capitalize the reinsurance operations of
the Reinsurance Subsidiary and for working
capital and general corporate purposes. See
"Use of Proceeds."

Nasdaq Symbol(2):.................................. PEGI

Boston Stock Exchange
Symbol(2):................... PEH

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(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
1996 Employee Stock Option Plan (the "Option Plan"), including 175,000
options which will be granted prior to the consummation of the Offering,
and (ii) 150,000 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 Common Stock has been approved for
listing, subject to official notice of issuance, on Nasdaq and on the BSE.
However, there can be no assurance that such listings will be maintained.
See "Risk Factors -- Absence of Public Market."

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6
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SUMMARY AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
Pro Forma Pro Forma
Nine months ended Year ended
Nine Months Ended September 30, Years Ended December 31, September 30, December 31,
------------------------------- ------------------------------- ----------------- --------------
1996 1995 1995 1994 1996(4) 1995(4)
---------- ------------ ------------ --------------- ----------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>

Statement of
Operations Data:
Total revenue ...... $1,909,272 $1,652,339 $2,269,920 $ 2,783,072 $13,307,000(1) $18,534,000(1)
---------- ---------- ---------- ------------ ----------- -----------
Claims and claim
settlement expenses. $ -- $ -- $ -- $ -- $ 6,269,000(5) $ 8,305,000(5)
---------- ---------- ---------- ------------ ----------- -----------
Amortization of
deferred policy
acquisition costs . $ -- $ -- $ -- $ -- $ 4,217,000(6) $ 6,018,000(6)
---------- ---------- ---------- ------------ ----------- -----------
Total operating
expenses .......... $2,170,450 $1,648,161 $2,287,438 $ 1,509,398 $ 6,387,000 $ 8,305,000
---------- ---------- ---------- ------------ ----------- -----------
Operating income
(loss) ............ ($ 261,178) $ 4,178 ($ 17,518) $ 1,273,674 $ 651,000 $ 1,284,000
Nonoperating income
(loss) ............ $ 190,000 $ -- ($ 69,269) $ 5,857,749(7) $ 190,000 ($ 69,000)
Income (loss) before
income taxes ...... ($ 71,178) $ 4,178 ($ 86,787) $ 7,131,423 $ 841,000 $ 1,215,000
Income taxes (2) ... $ -- $ -- $ -- $ -- $ -- $ --
Net income (loss) . ($ 71,178) $ 4,178 ($ 86,787) $ 7,131,423 $ 841,000 $ 1,215,000
Net income (loss) per
share ............. ($ .02) $ -- ($ 0.03) $2.38 $ .28 $ .40
As Adjusted Statement
of Operations
Data(3):
Historical income
(loss) before income
taxes
(benefit) ......... ($ 71,178) $ 4,178 ($ 86,787) $ 7,131,423 $ 841,000 $ 1,215,000
Pro forma provision for
income taxes
(benefit) ......... ($ 26,550) $ 1,558 ($ 32,372) $ 2,660,021 $ 314,000 $ 453,000
Pro forma net income
(loss) ............ ($ 44,628) $ 2,620 ($ 54,415) $ 4,471,402 $ 527,000 $ 762,000
Pro forma net income
(loss) per share .. ($ 0.01) $ -- ($ 0.02) $ 1.49 $ .18 $ .25
Weighted average
shares outstanding. 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
Combined Ratio(5)(6). -- -- -- -- 92% 92%

</TABLE>

<TABLE>
<CAPTION>
December 31, September 30, 1996
---------------------------- ------------------------------
Balance Sheet Data: 1995 1994 Actual As Adjusted(8)
------------ ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Total assets .......... $3,765,150 $4,985,650 $6,067,499 $15,313,749
Total liabilities ..... $3,474,747 $3,502,903 $5,848,274 $ 5,848,274
Net stockholders' equity $ 290,403 $1,482,747 $ 219,225 $ 9,465,475
</TABLE>

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(1) Net income does not include expected income from investment of available
cash. Based upon the average flow of funds for the periods presented and
assuming a rate of return of 5%, investment income for the year ended
December 31, 1995 and the nine months ended September 30, 1996 would have
been $163,000 and $364,000, respectively, and net income would have been
$864,000 and $755,000, respectively. Actual results from investment may have
been greater than or less than this amount.

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(2) 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."

(3) 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."

(4) The pro forma financial information contained in this Prospectus assumes
that the 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."

(5) Claims and claim settlement expenses incurred of $8,945,475 and $6,268,956
for the year ended December 31, 1995 and the nine month period ended
September 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% which ratio compares favorably with the loss ratios
experienced by other similarly situated companies in the industry. The
Company has engaged an outside independent firm of consulting actuaries
which annually reviews the Company's underwriting analysis for
reasonableness.

(6) Amortization of deferred policy acquisition costs of $6,018,000 and
$4,217,000 for the year ended December 31, 1995 and the nine month period
ended September 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 Liability,"
"Discussion and Analysis of Pro Forma Consolidated Financial
Information," and "Business -- Strategy -- Reinsurance."

(7) 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."

(8) Adjusted to give effect to the sale of the 1,500,000 shares of Common
Stock offered by the Company hereby at an initial public offering price of
$7.25 per Share and the application of the net proceeds therefrom. See
"Use of Proceeds."

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8
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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 Liability

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 and
employer's liability 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 and, as a result, will
assume all of the risks associated with being a reinsurer. Upon entering into
the Reinsurance Agreement, the AIG Affiliates will pay the Reinsurance
Subsidiary the related net written premium less certain Program expenses and
commissions and the losses paid associated with the Book of Business (the "Ceded
Premium"). It is anticipated that a substantial portion of the Ceded Premium
will be used as security for the benefit of AIG (See "Business -- Reinsurance
Agreement").

Although the Reinsurance Subsidiary will assume the risks associated with
being a reinsurer, the Reinsurance Agreement will limit the liability of the
Reinsurance Subsidiary for losses and certain defined expenses to the first
$300,000 per occurrence. In addition, the Reinsurance Agreement limits the
aggregate liability of the Reinsurance Subsidiary for all coverage to an amount
not to exceed 70% of the gross written premium for each individual underwriting
year. 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 nine month
period ended September 30, 1996, the Company generated total revenues of
approximately $1,909,000 and sustained a net operating loss of approximately
$261,000. For at least the current fiscal year, the Company may incur a net
operating loss as a result 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."

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Regulation

As a general agent ("GA"), the Company is subject to regulation in the
various states in which it sells insurance. These regulations vary from state to
state, and may include such matters as licensing requirements, bonding
requirements, requirements regarding the Company's agreements with the insurance
carriers for which it acts as a GA, and certain other requirements. Penalties
may be imposed for violations of such regulations. Any change in such regulation
may have a material adverse effect on the Company's business and operations.

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. 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, except as provided below with respect
to its status as a foreign insurer. 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.

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 generally impose specific requirements on insurers which seek to
place reinsurance with a foreign insurer such as the Reinsurance Subsidiary, as
a condition to the insurer being permitted to recognize the reinsurance contract
as an admitted asset or as a deduction from liabilities on its statutory
financal statements. Such requirements, which vary from state to state, may
include requiring the foreign insurer to submit to jurisdiction in the United
States, to obtain approval by the state insurance regulator, to meet certain
capital requirements, or to comply with other conditions. Accordingly, failure
of the Reinsurance Subsidiary to comply with the requirements imposed by a
particular state may reduce the interest of insurers in that state in ceding
reinsurance to the Reinsurance Subsidiary. The Company is not required to meet
any capital requirements in connection with the Reinsurance Agreement.

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

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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. 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. 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 -- Regulation."

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, endorsements 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 a GA with AIG since 1993. The Company has been a
GA 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 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 Necessary to Preserve Capital

11
<PAGE>

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 GA'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
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
busi-

12
<PAGE>

ness 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 66.67% 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 41% 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 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."

Possible Nasdaq and BSE Delisting; 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.
Nasdaq has proposed new listing requirements, which, if adopted may impose more
stringent maintenance criteria. 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 transac-

13
<PAGE>

tion. 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.

Immediate Dilution to New Investors of 71.03%

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 $5.15 or 71.03% per share
from the initial public offering price. See "Dilution."

Shares Eligible for Future Sale

Upon completion of the Offering, the Company will have 4,500,000 shares of
Common Stock outstanding (4,725,000 shares if the Underwriters' over-allotment
option is exercised in full). The 1,500,000 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 closing 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

14
<PAGE>

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 150,000 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 140% 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 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, (and, upon its effectiveness, Regulation M which has been promulgated by
the Securities and Exchange Commission to replace such rules.) 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."

LIMITATION OF LIABILITY

The Company has included in its Certificate of Incorporation provisions to
indemnify its directors and officers to the extent permitted by Delaware law. In
addition, as permitted by Delaware law, the Company's Certificate of
Incorporation limits the liability of directors to the Company or to its
stockholders for monetary damages for breach of a director's fiduciary duty
except in certain instances. As a result, stockholders may have limited rights
to recover against directors for breach of fiduciary duty.

15
<PAGE>

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 $9,246,250 ($10,696,250 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:

<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Net Proceeds
---------------------- --------------- ---------------
<S> <C> <C>

Capitalize Reinsurance Subsidiary ............................. $3,500,000 37.85%
Expansion of Marketing and Distribution Systems ............... 1,000,000 10.82%
Upgrading Expansion of Data Processing Facilities and Other
Corporate Systems ............................................ 1,000,000 10.82%
Working Capital and General Corporate Purposes ................ 3,746,250 40.51%
--------------- ---------------
Total ......................................................... $9,245,250 100.00%
=============== ===============

</TABLE>

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, for the expansion of the Company's marketing and
distribution systems and for the upgrading and expansion of its data processing
capabilities and facilities and other corporate systems. Although as of the date
of this Prospectus no specific acquisition is being contemplated by the Company,
such general corporate purposes could include future acquisitions.

If the Underwriters exercise the over-allotment option in full, the Company
will realize additional net proceeds of approximately $1,450,000, 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.

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. Immediately
prior to the 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."

16
<PAGE>

DILUTION

At September 30, 1996, the net tangible book value (total tangible assets
less total liabilities) of the Company was $219,225, or $.07 per share. Without
giving effect to any other changes in the pro forma net tangible book value of
the Company after September 30, 1996, other than to give effect to the sale of
the 1,500,000 shares of Common Stock offered hereby at a price per share of
$7.25 (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 September 30, 1996 would have been
$9,465,475, or $2.10 per share, representing an immediate increase in net
tangible book value of $2.03 per share to existing stockholders and an immediate
dilution of $5.15 per share (71.03%) to the purchasers of Common Stock in this
Offering. The following table illustrates this per share dilution:

<TABLE>
<CAPTION>
<S> <C>
Initial public offering price .................................. $7.25
Pro forma net tangible book value before this Offering ......... $ .07
Increase attributable to new investors ......................... $2.03
Pro forma as adjusted net tangible book value after this
Offering ...................................................... $2.10
Dilution to new investors ...................................... $5.15
</TABLE>

The following table summarizes, as of September 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):

<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 66.667% $ 30,000 .28% $ .01
New Investors 1,500,000 33.333% $10,875,000 99.72% $7.25
----------- ------------ ------------- ------------
Total 4,500,000 100.000% $10,905,000 100.00%
=========== ============ ============= ============
</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, including 175,000 options which will be granted prior to the
consummation of the Offering, and (ii) 150,000 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."

17
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1996, and as adjusted to reflect the issuance and sale of the
shares of Common Stock offered hereby at an initial offering price of $7.25 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>
September 30, 1996
----------------------------
(unaudited)
Actual As Adjusted
----------- -------------
<S> <C> <C>
Total debt .................................... $ 349,563 $ 349,563
----------- -------------
Stockholders' equity
Common Stock, $.01 par value; 10,000,000
shares authorized; 3,529,412 shares
issued; 5,029,412, as adjusted (1) ....... 35,294 50,294
Additional paid-in capital .................. -- 9,231,250
Retained earnings ........................... 689,488 689,488
----------- -------------
Total stockholders' equity .................... 724,782 9,971,032
Treasury stock at cost; 529,412 shares ........ (505,557) (505,557)
----------- -------------
Net stockholders' equity ...................... 219,225 9,465,475
----------- -------------
Total capitalization .......................... $ 568,788 $9,815,038
=========== =============
</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,
including 175,000 options which will be granted prior to the consummation of the
Offering, and (ii) 150,000 shares reserved for issuance pursuant to the
Representative's Warrants.

18
<PAGE>

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 general agent ("GA") for The Insurance Company of the State of
Pennsylvania, an affiliate of AIG, and other AIG affiliates and for GAIC and
certain of its affiliates. Pursuant to its agreements with these carriers, the
Company is authorized to solicit and bind insurance contracts on behalf of the
insurers, collect and account for premiums on business it writes, and request
cancellation or nonrenewal of any policy placed by the Company. The Company
receives, as compensation pursuant to the terms of these agreements, gross
commissions on its business at rates which range from 5% to 20%. 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 a GA 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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995:
TOTAL REVENUES

Total revenues for the nine months ended September 30, 1996 were $1,909,000
compared to $1,652,000 for the nine months ended September 30, 1995,
representing a net increase of $257,000, or 15.6%. The following table provides
a comparison of revenue for the nine month periods ended September 30, 1996 and
1995 by category:

<TABLE>
<CAPTION>
1996 1995 Net Change
---------- ---------- ----------
<S> <C> <C> <C>

Net commission income:
Workers' compensation ....... $1,275,000 $1,396,000 ($121,000)
Package ..................... $ 524,000 $ 107,000 $417,000
Other, net .................. $ 31,000 $ 82,000 ($ 51,000)
---------- ---------- --------
Total net commission income . $1,830,000 $1,585,000 $245,000
Interest income ............. $ 79,000 $ 67,000 $ 12,000
---------- ---------- --------
Total revenues .............. $1,909,000 $1,652,000 $257,000
========== ========== ========
</TABLE>

Workers' compensation:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Premiums collected .......... $12,487,000 $13,753,000 ($1,266,000)
=========== =========== ==========
Ratio of net commission
income/premiums collected . 10.2% 10.2%
=========== ===========
</TABLE>

19
<PAGE>

Workers' compensation commission income declined $121,000, or 8.7%, as a
result of the reduction in premiums collected of $1,266,000. 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 (an entity conceptually
similar to a self-insurance fund) 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 $417,000, or 389.7%, as a result of the
entry into the Package business (as discussed above) and the execution of a new
GA contract with GAIC for this line of business.

TOTAL EXPENSES:

Total expenses for the nine months ended September 30, 1996 were $2,170,000
compared to $1,648,000 for the comparative period ended September 30, 1995,
representing an increase of $522,000, or 31.7%. The following table provides a
comparison of total expenses for the nine month periods ended September 30, 1996
and 1995 by category:

<TABLE>
<CAPTION>
1996 1995 Net Change
---------- ---------- ----------
<S> <C> <C> <C>
Personnel expenses ...... $1,491,000 $1,049,000 $442,000
Professional fees ....... $ 80,000 $ 104,000 ($ 24,000)
Occupancy expense ....... $ 165,000 $ 104,000 $ 61,000
Interest expense ........ $ 33,000 $ 36,000 ($ 3,000)
Other operating expenses . $ 401,000 $ 355,000 $ 46,000
---------- ---------- --------
Total expenses ..... $2,170,000 $1,648,000 $522,000
========== ========== ========
</TABLE>

Personnel expenses increased $442,000 as a result of the hiring of new
employees with aggregate annual compensation of $627,000 (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 decreased $24,000, principally as a result of a reduction
in legal fees.

Occupancy expense increased $61,000 as a result of the Company's relocation
to larger quarters to accommodate the Company's expansion.

Interest expense decreased $3,000 as a result of a decrease in the
principal balance of a loan from a stockholder.

Other operating expenses increased $46,000, primarily related to employment
fees and employee relocation expenses associated with the increase in staffing
discussed above.
<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:

<TABLE>
<CAPTION>
1995 1994 Net Change
----------- ----------- ------------
<S> <C> <C> <C>
Net commission income:
Workers' compensation ......................... $ 1,758,000 $ 2,661,000 ($ 903,000)
Package ....................................... $ 343,000 $ -- $ 343,000
Other, net .................................... $ 81,000 $ -- $ 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%
=========== ===========
</TABLE>

20
<PAGE>

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 (an entity conceptually similar
to a self-insurance fund) 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 GA contract with GAIC for
this line of business. The Company has been a GA 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.

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 $2,287,000
compared to $1,509,000 for the year ended December 31, 1994, representing an
increase of $778,000, or 51.6%. The following table provides a comparison of
total expenses for the years ended December 31, 1995 and 1994 by category:

<TABLE>
<CAPTION>
1995 1994 Net Change
---------- ---------- ----------
<S> <C> <C> <C>

Personnel expenses ...... $1,471,000 $ 933,000 $538,000
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 ..... $2,287,000 $1,509,000 $778,000
========== ========== ========
</TABLE>

Personnel expenses increased $538,000 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 increase in telephone
expenses of $21,000 to accommodate the Company's expansion. Interest expense
increased $28,000 due to an 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 $76,000 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.

21
<PAGE>

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.

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

Net cash and cash equivalents were $565,000 at September 30, 1996 (net of
premiums payable of $4,455,000). Net cash provided by operating activities
increased to $2,495,000 in 1996 from ($1,221,000) in 1995, an increase of
$3,716,000. This increase resulted primarily from an increase in the proceeds
from litigation of $190,000 and an increase in net premiums collected of
$3,959,000, offset in part by an increase in expenses paid of $318,000 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 $341,000 to
$95,000 in the nine months ended September 30, 1996 compared to $436,000 in the
nine months ended September 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 ($200,000) in the nine
months ended September 30, 1996 from ($625,000) in the nine months ended
September 30,1995, a decrease of $425,000. This decrease resulted primarily from
a reduction in stockholders distributions of $600,000 and an increase in
payments of $175,000 in connection with a stock repurchase. See "Certain
Transactions."

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 stockholders' distributions and principal payments
on a stockholder loan of $4,294,000 and $677,000, respectively.

22
<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 NINE MONTHS ENDED SEPTEMBER 30, 1996

Total revenue, claims and claim settlement expenses, amortization of
deferred policy acquisition costs and total operating expenses for the nine
months ended September 30, 1996 would have been $13,308,000, $6,269,000,
$4,217,000 and $6,387,000, respectively, and consist of the following:

<TABLE>
<CAPTION>
Actual Pro forma Total
---------- ----------- -----------
<S> <C> <C> <C>

Net commission income .................................. $1,830,000 $ -- $ 1,830,000
Premiums earned ........................................ $ -- $11,398,000 $11,398,000
Interest income ........................................ $ 79,000 $ -- $ 79,000
Net investment income .................................. $ -- $ -- (1) $ --
---------- ----------- -----------
Total revenue ........................................ $1,909,000 $11,398,000 $13,307,000
---------- ----------- -----------
Claims and claim settlement expenses ................... $ -- $ 6,269,000 $ 6,269,000
---------- ----------- -----------
Amortization of deferred policy acquisition costs ...... $ -- $ 4,217,000 $ 4,217,000
Personnel expenses (1) ................................. $1,491,000 $ -- $ 1,491,000
Professional expenses .................................. $ 80,000 $ -- $ 80,000
Occupancy expenses ..................................... $ 165,000 $ -- $ 165,000
Interest expense ....................................... $ 33,000 $ -- $ 33,000
Other operating expenses ............................... $ 401,000 $ -- $ 401,000
---------- ----------- -----------
Total operating expenses ............................. $2,170,000 $ 4,217,000 $ 6,387,000
---------- ----------- -----------
Operating income (loss) before net investment income (2) ($ 261,000) $ 912,000 $ 651,000
Non-operating income ................................... $ 190,000 $ -- $ 190,000
---------- ----------- -----------
Income (loss) before net investment income and income
taxes (2) ............................................ ($ 71,000) $ 912,000 $ 841,000
Income taxes (benefit) ................................. ($ 26,000) $ 340,000 $ 314,000
---------- ----------- -----------
Net income (loss) before net investment income (2) ..... ($ 45,000) $ 572,000 $ 527,000
========== =========== ===========
</TABLE>

- ------

(1) Personnel expenses do not include salary for Mr. Harris, which at the
current level would have been $112,500 for the period presented.
(2) Net income does not include income from investment of available cash. Based
upon the average flow of funds for the period presented and assuming a rate
of return of 5%, for the nine months ended September 30, 1996 investment
income would have been $364,000 and net income would have been $755,000.
Actual results from investment may have been greater than or less than this
amount.

23
<PAGE>

Premiums earned of $11,398,000 represent the Company's average annualized
workers' compensation premiums in force adjusted to reflect nine months pro rata
earnings. Such amount represents premiums which relate to business previously
written on behalf of AIG and which would have been covered under the Reinsurance
Agreement had it been in effect for the entire period presented.

Claims and claim settlement expenses incurred of $6,269,000 are based on an
assumed 55% loss ratio (premiums earned x 55%). Under the Reinsurance Agreement
the Company's maximum liability for losses is limited to an amount not to exceed
70% of premiums written with respect to each year. The actual average loss ratio
experienced by the insurance carrier in prior years, based on underwriting
analyses prepared by the Company, was 51.5% which ratio compares favorably with
the loss ratios experienced by other similarly situated companies in the
industry. In this regard, the Company has engaged an outside independent firm of
consulting actuaries which annually reviews the Company's underwriting analysis
for reasonableness.

Acquisition expenses are deferred and amortized over the period in which
the related premiums are earned. Amortization of deferred policy acquisition
costs of $4,217,000 represents the amortization of contractually agreed upon
Program expenses equal to 37% of the premiums earned, all of which are fixed for
the term of the contract, and includes the following:

<TABLE>
<CAPTION>
<S> <C>
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%
========
</TABLE>

FOR THE YEAR ENDED DECEMBER 31, 1995

Total revenue, claims and claim settlement expenses, amortization of
deferred policy acquisition costs and total operating expenses for the year
ended December 31, 1995 would have been $18,534,000, $8,945,000, $6,018,000 and
$8,305,000, respectively, and consist of the following:

<TABLE>
<CAPTION>
Actual Pro forma Total
---------- ----------- -----------
$
<S> <C> <C> <C>

Net commission income ..................... $2,182,000 $ -- $ 2,182,000
Premiums earned ........................... $ -- $16,264,000 $16,264,000
Interest income ........................... $ 88,000 $ -- $ 88,000
Net investment income ..................... $ -- $ -- (1) $ --
---------- ----------- -----------
Total revenue ........................... $2,270,000 $16,264,000 $18,534,000
---------- ----------- -----------
Claims and claim settlement expenses ...... $ -- $ 8,945,000 $ 8,945,000
---------- ----------- -----------
Amortization of deferred policy acquisition
costs .................................... $ -- $ 6,018,000 $ 6,018,000
Personnel expenses (1) .................... $1,471,000 $ -- $ 1,471,000
Professional expenses ..................... $ 93,000 $ -- $ 93,000
Occupancy expenses ........................ $ 145,000 $ -- $ 145,000
Interest expense .......................... $ 36,000 $ -- $ 36,000
Other operating expenses .................. $ 542,000 $ -- $ 542,000
---------- ----------- -----------
Total operating expenses ................ $2,287,000 $ 6,018,000 $ 8,305,000
---------- ----------- -----------
Operating income (loss) before net
investment income (2) .................... ($ 17,000) $ 1,301,000 $ 1,284,000
Nonoperating expenses ..................... ($ 69,000) $ -- ($ 69,000)
---------- ----------- -----------
Income (loss) before net investment income
and income taxes (2) ..................... ($ 86,000) $ 1,301,000 $ 1,215,000
Income taxes (benefit) .................... ($ 32,000) $ 485,000 $ 453,000
---------- ----------- -----------
Net income (loss) before net investment
income (2) ............................... ($ 54,000) $ 816,000 $ 762,000
========== =========== ===========

</TABLE>

24
<PAGE>

(1) Personnel expenses do not include salary for Mr. Harris, which at the
current level would have been $150,000 for the period presented. However,
during such period, Mr. Harris received S Corporation distributions of
$270,000. Subsequent to the Offering, Mr. Harris will no longer receive any
such distributions.

(2) Net income does not include income from investment of available cash. Based
upon the average flow of funds for the period presented and assuming a rate
of return of 5%, for the year ended December 31, 1995 investment income
would have been $163,000 and net income would have been $864,000. Actual
results from investment may have been greater than or less than this
amount.

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. Such amount represents premiums which relate to business
previously written on behalf of AIG and which would have been covered under the
Reinsurance Agreement had it been in effect for the entire period presented.

Claims and claim settlement expenses incurred of $8,945,000 for the twelve
months ended December 31, 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% which ratio compares favorably with the loss ratios experienced by
other similarly situated companies in the industry. In this regard, the Company
has engaged an outside independent firm of consulting actuaries which annually
reviews the Company's underwriting analysis for reasonableness.

Acquisition expenses are deferred and amortized over the period in which
the related premiums are earned. Amortization of deferred policy acquisition
costs of $6,018,000 represents the amortization of contractually agreed upon
Program expenses, equal to 37% of the premiums earned, all of which are fixed
for the term of the contract, and includes the following:

<TABLE>
<CAPTION>
<S> <C>
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%
========

</TABLE>

25
<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. The Company believes that 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 are
potentially 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 attributes 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 approach to
cost containment 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 average cost per claim to the
Company's clients for the years 1991 to 1995 was $1,584 (this figure includes
medical, indemnity and loss adjustment expenses). In comparison, although no
data is available for the years 1994 and 1995, 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 (this figure
only includes medical and indemnity expenses) for the years 1991 to 1993.

Historically, the Company has acted as a general agent ("GA") representing
various major international and domestic insurance carriers. In this capacity,
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 a GA 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 a GA, 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 a GA, 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 and employer's liability
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 certain Program expenses and
commissions associated with the Book of Business (the "Ceded Premium"). It is
anticipated that a substantial portion of the Ceded Premium will be used as
security for the payment of losses for the benefit of AIG. See "Risk Factors --
Reinsurance" and "Business -- Reinsurance -- Reinsurance Agreement."

26
<PAGE>

aggregate reinsurance. 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 "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 of between $5,000 and $50,000 and
which are represented by over 500 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.

Workers' Compensation premium rates are generally based upon a formula
which considers the following:

o whether the loss experience qualifies the risk for any available
schedule rating plan discounts;

27
<PAGE>

o the class codes of each employee and such employee's compensation;

o the class code of the employer and the carrier's rate in such class
code;

o the employer's experience modification factor, as determined by each
state's rating organization; and

o whether the employer's total premium qualifies for a state approved
premium volume discount.

With the implementation of the Company's loss control techniques, many of the
Company's customers have experienced a reduction in workers' compensation
premiums as a result of experience modification factor reductions which provide
for scheduling rating credit.

Many states have recently created employee class codes that distinguish
fast food restaurants from other types of restaurants. For example, class code
9079 entitled "Restaurant-NOC" has historically included family style, fine
dining and fast food restaurants as well as bars and taverns. In 1995, the
National Council on Compensation and Insurance (NCCI) recommended to their
members that they divide the class code into three separate codes: (i) 9082
encompassing Restaurant Employees; (ii) 9083 encompassing Fast Food Restaurant
Employees; and (iii) 9084 encompassing Bar, Tavern and similar employees.
Approximately 34 states adopted the new class code designations during 1996.
However, 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." By 1998, it is anticipated that
the actuaries who determine loss costs in this industry will be able to
separately develop a loss cost in each category. During the initial three year
period, it is expected that the rates for all three codes will remain equal.
Thereafter, the Company believes that the franchise industry will continue to
yield a more favorable loss result than the non-franchise industry within the
Fast Food Restaurant code. As a result, the Company believes that, relative to
its competition, changes in employee class codes will not have a material
adverse effect on its business.

THE COMPANY'S SOLUTION

The Company has developed insurance programs designed specifically to
reduce the impact of redundancy on American franchise businesses while also
emphasizing loss containment. 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 claims 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.

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<PAGE>

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;

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 approximately 11% over the four year period 1990
through 1994 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 a GA 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 a GA, but will expand
its focus to include operating as a reinsurer.

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<PAGE>

REINSURANCE AGREEMENT

Upon consummation of this Offering, the Reinsurance Subsidiary will enter
into the Reinsurance Agreement which provides that the Reinsurance Subsidiary
will reimburse the ceding insurer for the first $300,000 of losses paid to
claimants and certain specified loss expenses incurred in connection with such
payments pursuant to various coverages assumed under worker's compensation and
employer's liability insurance policies issued on behalf of the AIG Affiliates
by the Company as part of the Book of Business. The Reinsurance Agreement is
terminable by either party upon the occurrence of certain events. The
Reinsurance Subsidiary's aggregate liability for such amounts for all coverages
under the Reinsurance Agreement shall be limited to an amount not to exceed 70%
of the gross written premium for each individual underwriting year. The AIG
Affiliates shall retain all liabilities in excess of this amount. The AIG
Affiliates will be paid 5% of the gross written premiums under the Program with
which to purchase excess and aggregate reinsurance.

The purchase of excess and aggregate reinsurance by the AIG Affiliates and
the stated aggregate limit of liability in the Reinsurance Agreement will cap
the Reinsurance Subsidiary's liability for loss and loss expenses and will
permit the Reinsurance Subsidiary to quantify its aggregate maximum loss
exposure. By contrast, maximum liability under pro-rata or quota share
reinsurance contracts can be more difficult to quantify precisely.
Quantification of loss exposure will be fundamental to the Reinsurance
Subsidiary's ability to manage its losses.

The AIG Affiliates will pay the Reinsurance Subsidiary 100% of the Ceded
Premium derived from business written by the Company on behalf of the AIG
Affiliates. The AIG Affiliates shall retain a commission allowance of 28.83%
based on the net premiums. Pursuant to the Reinsurance Agreement, the
Reinsurance Subsidiary will retain the Ceded Premium together with the risks and
potential for profitability associated therewith. Accordingly, the Company
believes that the Reinsurance Subsidiary's operations will provide 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 provide the AIG Affiliates, as security for
the payment of losses any combination of cash, United States government
securities and/or an irrevocable letter of credit in an aggregate amount equal
to 70% of the gross Ceded Premium less the amount of losses paid for the
expiring underwriting year as of December 30, 1996 and each December 30
thereafter.

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 approximately
11% over the four year period 1990 through 1994 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 at no additional cost to its clients. Proprietary, custom designed loss
management information is communicated by mail and phone to the Company's
clients at no additional cost.

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<PAGE>

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;

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. Such workers'
compensation safety program discounts are authorized on a state by state basis
and, therefore, guidelines are state specific. The Company deals only with those
state programs applicable to the voluntary market, not the assigned risk market.
Certain states make safety program discounts available to all insureds, while
others make them available only to those insureds with high experience
modification factors or based on the size of the premium. Some states require
state certification of the safety program on a risk by risk basis. The employer,
not the provider of the safety program, qualifies for the program. The Company
evaluates the requirements in the states where such discounts are available and
provides employers with manuals, record keeping tools and recommendations which
assist the employer in obtaining certification.

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.

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<PAGE>

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. The Company's programs relieve the
broker/agent of administrative and claims tasks in that the Company bills and
collects premiums directly from the insured, remits the commission earned to the
broker/agent, deals directly with the insured in connection with any problems
experienced by the insured and serves as a clearinghouse, together with the TPA,
with respect to the reporting, processing, reviewing and evaluating of claims.
As a result of the foregoing, the broker/agent can earn more revenue by focusing
its efforts on selling Company products. Other benefits provided to these
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.

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<PAGE>

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

o maintaining inventory records of hardware and software.

COMPETITION

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

As a GA, the Company is subject to regulation in the various states in
which it sells insurance. These regulations vary from state to state, and may
include such matters as licensing requirements, bonding requirements,
requirements regarding the Company's agreements with the insurance carriers for
which it acts as a GA, and certain other requirements. Penalties may be imposed
for violations of such regulations. Changes in such regulation, if any, may have
a material adverse effect on the Company's business and operations.

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

33
<PAGE>

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.

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
(the aggregate par value of issued shares) 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 obtain the approval of
the Minister before reducing by 15% or more its total statutory
capital (comprised of share capital, contributed surplus and any other
fixed capital) as set out in the previous years financial statements.

o The Reinsurance Subsidiary may declare and pay dividends or make
distributions out of contributed surplus or other assets legally
available for distribution provided that after the payment of any such
dividend or distribution the Reinsurance Subsidiary will continue to
maintain the required statutory capital and surplus and liquid assets
as summarized above.

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).

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<PAGE>

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 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 fluc-

35
<PAGE>

tuate 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 Necessary to Preserve Capital."

EMPLOYEES

As of January 1, 1997 the Company had approximately 35 full-time employees,
of whom five were officers, four were managers, three were sales personnel and
the balance were 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.

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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<PAGE>

MANAGEMENT

Directors and Executive Officers

The names, ages and positions of the executive officers and Directors of
the Company are as follows:

<TABLE>
<CAPTION>
Name Age Position
------------------- ----- ---------------------------------------------
<S> <C> <C>

Mel Harris 56 Chairman, Chief Executive Officer and Director
Howard Odzer 61 President and Director
William R. Dresback 49 Chief Financial Officer and Secretary
Tod C. Powers 45 Senior Vice President
John Rearer 38 Vice President
Nancy Ryan 40 Vice President and Assistant Secretary
Tony Nowakowski 39 Vice President
Stuart J. Gordon 66 Director
Jack D. Burstein 51 Director
Maxwell M. Rabb 86 Director
</TABLE>

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 of the
Company 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.

Tod C. Powers has been Senior Vice President of the Company since January
1997. Mr. Powers has eighteen years of experience in property/casualty
insurance. From 1986 to 1997, Mr. Powers served in various positions with Kaye
Insurance Associates, Inc. ("Kaye"), the nation's fifteenth largest insurance
broker. For the past two years, Mr. Powers served as its Chief Operating Officer
with overall responsibility for marketing, claims and account servicing. From
1986 to 1995, Mr. Powers served as its Assistant Vice President, handling the
agency's tougher workers compensation risks, then as Vice President of a team of
account executives handling most of Kaye's national accounts, and, just prior to
becoming Chief Operating Officer, Mr. Powers served as Group Vice President
responsible for management of Kaye's Connecticut office. From 1979 to 1986, Mr.
Powers served in various capacities with Liberty Mutual Insurance, the nation's
largest workers compensation carrier.

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<PAGE>

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 has served as Vice President of International
Insurance Group, Inc. Ms. Ryan devotes approximately 50% of her business time to
the affairs of the Company.

Tony Nowakowski has served as a Vice President of the Company in charge of
loss control and cost containment since February 3, 1997. Mr. Nowakowski has
served for more than the past five years with Kaye Insurance Associates, Inc.,
most recently as Vice President in charge of technical services.

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 served as
a member of the Board of Governors of Daytop Village. Mr. Gordon is also a
member of the Board of Advisors of the Independent College Fund of New York.

Jack D. Burstein has been a director of the Company since January, 1997.
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 has 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 has been a director of the Company since January, 1997. 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. Rabb served as the
United States Ambassador to Italy from 1981 to 1989. In addition, Mr. Rabb
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. Effective upon the
consummation of this Offering, the Board of Directors intends to establish an
Audit Committee, an Investment Committee, an Executive Committee and 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.

38
<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.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Name and
Principal Position (1) Year Annual Competition Long-Term Compensation
--------------------------- ------ ---------------------------------- --------------------------------------------------------
Awards Payouts
--------------------------------------------------------
Other Restricted Securities LTIP All Other
Annual Stock Underlying Pay-outs Compen-
Salary Bonus Compen- Award(s) Options/SARs sation
($) ($) sation ($) ($) (3) (#) ($) ($) (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 the Shareholders Agreement. See "Dividend
Policy."
(3) Automobile allowance.

EMPLOYMENT ARRANGEMENTS

The Company has entered into a one-year employment agreement with Mr.
Harris, dated January 30, 1997, 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
employed by the Company in any capacity, and for a period of three 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

39
<PAGE>

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 provided, however, that Mr. Harris
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 and provided, further, that Harris may serve as an
employee of or a consultant to a diversified business organization which derives
no more than 5% of its consolidated gross revenues from a line of business
competing with that of the Company. Under no circumstances, however, may Mr.
Harris's services to such organization consist of any activities in competition
with the business of the Company.

The Company has entered into an employment agreement with Mr. Odzer, dated
January 30, 1997, pursuant to which Mr. Odzer serves as President and as a
Director until May 15, 1998, 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 and provided, further, that Odzer may serve as an
employee of or a consultant to a diversified business organization which derives
no more than 5% of its consolidated gross revenues from a line of business
competing with that of the Company. Under no circumstances, however, may Mr.
Odzer's services to such organization consist of any activities in competition
with the business of the Company.

In January 1997, the Company hired Tod Powers as a Senior Vice President of
Marketing at an annual salary of $150,000 plus commissions (with a minimum
guarantee of an additional $25,000 annually). Mr. Powers receives reimbursement
for certain expenses (including medical, moving and automobile expenses) as well
as options to purchase 40,000 shares of Common Stock. In the event of
termination, he becomes entitled to between six months and one year of severance
pay depending on the circumstances of his termination.

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

40
<PAGE>

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.

Pursuant to a Share Escrow Agreement to be entered into prior to the
consummation of this Offering by and between Howard Odzer, Baer Marks & Upham
LLP, as Escrow Agent, and the Company (the "Additional Option Agreement"), Mr.
Odzer has 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, for no consideration, to certain executives, officers and directors
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."

Prior to the consummation of the Offering, the Company intends to grant
options to purchase an aggregate of 350,000 shares of Common Stock under the
Option Plan and the Additional Option Agreement to certain executive officers
and directors of the Company. See "Management -- Principal Stockholders."

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
a 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.

41
<PAGE>

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.

42
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of the date of this Prospectus and as
adjusted to reflect the sale of 1,500,000 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 (3)
-------------------------------------
Amount and Nature
Name and Address of Beneficial
Before Offering After Offering
of Beneficial Owner (1) Ownership (2) (4) (5)
------------------------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C>

Mel Harris(6) 3,000,000 100.00% 66.670%
Howard Odzer(7) 1,111,765 37.06% 24.706%
William R. Dresback -- -- --
John Rearer -- -- --
Stuart Gordon -- -- --
Jack D. Burstein -- -- --
Maxwell M. Rabb -- -- --
All directors and executive officers 3,000,000 100.00% 66.670%
as a group (10 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. See "Certain Transactions."

(3) Does not include options to purchase an aggregate of 350,000 shares of
Common Stock under the Option Plan and the Additional Option Agreement to
certain executive officers and directors of the Company (including options
to purchase 50,000 shares to Mr. Dresback, 40,000 to Mr. Rearer, 20,000 to
Ms. Ryan, 40,000 to Mr. Powers, 30,000 to Mr Nowakowski and 25,000 shares
to each of Messrs. Rabb, Burstein and Gordon) to be granted prior to the
consummation of the Offering. See "Management -- Stock Option Plan."

(4) Based on 3,000,000 shares outstanding.

(5) Based on 4,500,000 shares outstanding, including the 1,500,000 shares of
Common Stock offered hereby.

(6) 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 Tanenbaum Kramer,
daughter of Mrs. Harris, (v) 25,000 shares held of record by Alan Harris,
brother of Mr. Harris, (vi) 25,000 shares held of record by Nancy Ryan,
(vii) 1,111,765 shares held of record by Howard Odzer, and (viii) 123,529
shares held of record by Ronald 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. 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. See
"Certain Transactions."

(7) Mr. Harris has voting control over the 1,111,765 shares held of record by
Mr. Odzer and, therefore, such shares have been included in the 3,000,000
shares beneficially owned by Mr. Harris. See footnote 6 above. Includes
300,000 shares placed in escrow pursuant to the terms of the Share Escrow
Agreement. See "Management -- Stock Option Plan."

43
<PAGE>

CERTAIN TRANSACTIONS

Immediately prior to the consummation of 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 Share Escrow Agreement, Mr. Odzer has 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. The Company has agreed to
pay to Mr. Odzer an amount equal to the additional income tax to which Mr. Odzer
will be subject over and above the rate that would have been applicable if the
gain recognized by Mr. Odzer from the exercise of such options had been taxable
as a "capital gain" rather than "ordinary income." 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.
The Company has agreed to indemnify Mr. Odzer and hold him harmless, against all
claims and liabilities to which Mr. Odzer may become subject under any federal
or securities laws insofar as such claims arise out of or are based upon this
Share Escrow Agreement. 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.
Pursuant to the Shareholders Agreement Mr. Harris has voting control over the
shares held by Mr. Odzer. See "Principal Stockholders." 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 and the
indemification 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, a
step-brother of Mr. Odzer, 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
September 30, 1996, the total amount of payments made by the Company was
$225,000 and the balance of the purchase price outstanding was $375,000.

The Company has agreed to pay to Strategica Group a fee of $50,000 as
compensation for its financial advisory and planning services provided in
connection with this Offering. Mr. Harris is a director and investor in
Strategica Capital, an affiliate of Strategica Group. Mr. Burstein, a director
of the Company, is the Chairman and President of Strategica Group and Strategica
Capital. See "Management -- Directors and Executive Officers."

44
<PAGE>

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 nine months ended
September 30, 1996 was $19,450. 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 entity which was a customer of the Company
within the past two 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.

Except as set forth above, the Company does not presently intend to enter
into any other business transactions with affiliated parties. In the event,
however, that any such business transaction is entered into all future
transactions between the Company and its officers, directors and 5% shareholders
will be on terms no less favorable than could be obtained from unaffiliated
third parties and will be approved by a majority of the independent
disinterested directors of the Company.

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, as of the date of this Prospectus to issue
10,000,000 shares of Common Stock, par value $.01 per share, of which 3,000,000
shares are outstanding and held of record by six 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 1,500,000 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. 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 with affiliates and associates, owns (or
within three years, did own) 15% or more of the

45
<PAGE>

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, consolidation, 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 4,500,000 shares of
Common Stock outstanding (4,725,000 shares if the Underwriters' over-allotment
option is exercised in full). The 1,500,000 Shares sold in this 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 or her 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 or her on the closing date of this Offering
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 Securities and Exchange 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 this Offering, or that if developed it will be sustained. 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.

46
<PAGE>

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.

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 this 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 prin-

47
<PAGE>

cipally for the holding, directly or indirectly, of stock of one or more foreign
corporations, then all or part of the United States 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 this
Offering, no stockholder who acquires Shares in this 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
voting 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.

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 1,500,000 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. The Underwriters have advised the Company
that they do not intend to confirm sales of Common Stock to any account over
which they exercise any discretionary authority.

<TABLE>
<CAPTION>
Number of Shares
Underwriters to be Purchased
----------- ----------------
<S> <C>
Commonwealth Associates ... 1,400,000
HanifenImhoff Inc. ......... 50,000
Roney & Co. ................ 50,000
</TABLE>

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 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 $.30 per share, of which not in excess of $.10 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 225,000
shares 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.

48
<PAGE>

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 150,000 shares of
Common Stock at an exercise price per share equal to 140% 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, or partners of 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 Current Market Price (as
such term is defined in the Representative's Warrant) (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 two occasions during the
Warrant Exercise Term, register the Representative's Warrants and the underlying
securities, at the request of holders of at least 51% of the Representative's
Warrants, at the expense of the Company on one occasion and at the expense of
the selling holders on the other occasion. 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 -- Representative's
Warrants."

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 meetings of the Board of Directors.

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.

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 or her
on the closing date of this Offering 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.

49
<PAGE>

The Company has agreed to pay to Strategica Group a fee of $50,000 as
compensation for its financial advisory and planning services provided in
connection with this Offering. Mr. Harris is a director and investor in
Strategica Capital, an affiliate of Strategica Group. Mr. Burstein, who will be
elected a director of the Company prior to this Offering, is the Chairman and
President of Strategica Group and Strategica Capital. See "Management --
Directors and Executive Officers."

The foregoing discussion of the material terms and provisions of the
Underwriting Agreement and related documents is qualified in its entirety by
reference to the detailed provisions of such documents, the forms of which have
been filed as exhibits 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 of
value. 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 traded companies, certain financial and
operating information of companies engaged in activities similar to those of the
Company, the general condition of the securities markets 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 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 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, 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.

50
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
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

</TABLE>

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 November 11, 1996

F-2

<PAGE>

PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 1996 (UNAUDITED), DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------------------
1996 1995 1994 1993
---------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Assets
------
Cash and cash equivalents ................... $5,019,551 2,819,829 4,789,703 3,811,825
Commissions and premiums receivable ......... 381,160 345,614 1,118 10,509
Security deposits ........................... 22,736 23,586 35,899 3,589
Property and equipment, net ................. 530,904 518,613 158,930 38,136
Other assets ................................ 113,148 57,508 -- --
---------- --------- --------- ---------
$6,067,499 3,765,150 4,985,650 3,864,059
========== ========= ========= =========

Liabilities and Stockholders' Equity (Deficit)
- -----------------------------------------------
Liabilities:
Premiums payable .......................... 4,455,309 2,353,914 3,415,005 3,551,252
Accounts payable .......................... 187,792 5,475 24,874 300,027
Stockholder loan .......................... 349,563 516,494 -- 701,734
Commissions payable ....................... 648,039 296,588 48,715 --
Other liabilities ......................... 207,571 302,276 14,309 65,348
---------- --------- --------- ---------
Total liabilities ....................... 5,848,274 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) ... 689,488 760,666 1,447,453 (789,596)
---------- --------- --------- ---------
Total stockholders' equity (deficit) .... 724,782 795,960 1,482,747 (754,302)
Treasury stock, at cost -- 529,412 shares ... (505,557) (505,557) -- --
---------- --------- --------- ---------
Net stockholders' equity (deficit) ... 219,225 290,403 1,482,747 (754,302)
Commitments and contingencies
---------- --------- --------- ---------
$6,067,499 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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
Nine Months Ended
September 30, December 31,
---------------------------- --------------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Commission income, net .......................... $ 1,829,667 1,585,181 2,181,868 2,661,424 1,892,875
Interest income ................................. 79,605 67,158 88,052 121,648 61,644
----------- ----------- ----------- ----------- -----------
Total revenue ................................. 1,909,272 1,652,339 2,269,920 2,783,072 1,954,519
----------- ----------- ----------- ----------- -----------
Expenses:
Personnel expense ............................ 1,490,947 1,049,420 1,471,409 933,033 585,632
Occupancy expense ............................ 164,750 104,206 145,421 89,337 75,574
Professional fees ............................ 80,160 103,781 92,758 110,620 56,943
Interest expense ............................. 33,069 35,937 35,937 8,357 63,968
Other operating expenses ..................... 401,524 354,817 541,913 368,051 291,513
----------- ----------- ----------- ----------- -----------
Total expenses .............................. 2,170,450 1,648,161 2,287,438 1,509,398 1,073,630
----------- ----------- ----------- ----------- -----------
Operating (loss) income ..................... (261,178) 4,178 (17,518) 1,273,674 880,889

Nonoperating income (loss) ...................... 190,000 -- (69,269) 5,857,749 (830,151)
----------- ----------- ----------- ----------- -----------
Net (loss) income ............................. $ (71,178) 4,178 (86,787) 7,131,423 50,738
=========== =========== =========== =========== ===========
Unaudited pro forma information (note 1k):
Historical (loss) income before income
taxes ...................................... $ (71,178) 4,178 (86,787) 7,131,423 50,738
Pro forma income tax (benefit) provision ..... (26,550) 1,558 (32,372) 2,660,021 18,925
Pro forma net (loss) income .................. (44,628) 2,620 (54,415) 4,471,402 31,813
Pro forma (loss) income per share ............ (.01) .00 (.02) 1.49 .01
Weighted average shares outstanding .......... 3,000,000 3,000,000 3,000,000 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 NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
Common Retained Total
stock Common earnings Treasury Treasury stockholders'
shares stock Paid-in (accumulated stock stock equity
issued amount capital deficit) shares amount (deficit)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<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) ...... -- -- -- (71,178) -- -- (71,178)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1996
(unaudited) ............... 3,529,412 $ 35,294 $ -- $ 689,488 529,412 $ (505,557) $ 219,225
=========== =========== =========== =========== =========== =========== ===========

</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
Nine Months Ended
September 30, December 31,
----------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>

Cash flows from operating activities:
Premiums collected ......................... $ 16,800,971 14,080,501 18,371,077 32,458,172 22,794,923
Nonoperating (loss) income ................. 190,000 -- (69,269) 5,857,749 (830,151)
Interest received .......................... 79,605 67,158 88,052 121,648 61,644
Premiums paid .............................. (12,807,698) (14,047,023) (17,042,483) (29,928,502) (17,886,573)
Expenses paid .............................. (1,721,462) (1,402,915) (2,144,646) (1,784,551) (614,163)
Other, net ................................. (46,521) 81,027 (81,067) 1,301 (70,306)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ................ 2,494,895 (1,221,252) (878,336) 6,725,817 3,455,374
------------ ------------ ------------ ------------ ------------
Cash flows used in investing activities-
purchases of property and
equipment .................................. (95,173) (436,090) (466,538) (151,831) (36,304)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayment of stockholder loan .............. (200,000) (25,000) (25,000) (701,734) (235,000)
Stockholders' distributions ................ -- (600,000) (600,000) (4,894,374) --
------------ ------------ ------------ ------------ ------------
Net cash used in financing
activities .......................... (200,000) (625,000) (625,000) (5,596,108) (235,000)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ........................... 2,199,722 (2,282,342) (1,969,874) 977,878 3,184,070
Cash and cash equivalents, beginning of
period ..................................... 2,819,829 4,789,703 4,789,703 3,811,825 627,755
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of
period ..................................... $ 5,019,551 2,507,361 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)

Reconciliation of net (loss) income to
net cash provided by (used in)
operating activities:
Net (loss) income .......................... $ (71,178) 4,178 (86,787) 7,131,423 50,738
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities:
Depreciation and amortization ......... 82,882 37,994 106,855 31,037 19,855
Amortization of discount on
stockholder loan .................... 33,069 35,937 35,937 -- --
Changes in assets and
liabilities:
(Increase) decrease in
commissions and premiums
receivable .......................... (35,546) (42,233) (344,496) 9,391 (10,509)
Decrease (increase) in security
deposits ............................ 850 11,513 12,313 (32,310) (405)
Increase in other assets .............. (55,640) (29,941) (57,508) -- --
Increase (decrease) in premiums
payable ............................. 2,101,395 (1,319,787) (1,065,584) (131,754) 2,983,346
Increase (decrease) in accounts
payable ............................. 182,317 (24,874) (19,399) (275,153) 300,027
Increase (decrease) in
commissions payable ................. 351,451 (23,121) 296,588 -- 63,968
(Decrease) increase in other
liabilities ......................... (94,705) 129,082 243,745 (6,817) 48,354
------------ ------------ ------------ ------------ ------------
Total adjustments .................... 2,566,073 (1,225,430) (791,549) (405,606) 3,404,636
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ................ $ 2,494,895 (1,221,252) (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

September 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 general agent ("GA") 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 a GA 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 Consolidated 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.

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.

F-8

<PAGE>

PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(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.
Accordingly, 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.

(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 (Loss) Income

Proforma net (loss) income represents the results of operations for the
nine months ended September 30, 1996 and 1995 (unaudited) and for the
years ended December 31, 1995, 1994 and 1993, adjusted to reflect a
(benefit) provision for income tax on historical (loss) income before
income taxes which gives effect to the change in the Company's income tax
status to a C corporation.
<PAGE>

(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 September 30,
1996 (unaudited) and December 31, 1995, 1994 and 1993:

<TABLE>
<CAPTION>
December 31,
September 30, -----------------------------------
1996 1995 1994 1993
--------- --------- -------- --------
Unaudited
<S> <C> <C> <C> <C>
Computer equipment .............. $ 272,592 $ 221,529 164,108 53,472
Office equipment ................ 108,675 105,055 50,408 23,845
Furniture and fixtures .......... 257,097 231,301 19,732 18,100
Leasehold improvements .......... 170,595 155,901 13,000 --
--------- --------- -------- --------
808,959 713,786 247,248 95,417
Less accumulated depreciation and
amortization ................... (278,055) (195,173) (88,318) (57,281)
--------- --------- -------- --------
$ 530,904 $ 518,613 $158,930 $ 38,136
========= ========= ======== ========

</TABLE>

F-9

<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 September 30, 1996 (unaudited) and December 31, 1995, the outstanding
balance of above referenced stockholder loan consists of the following:

<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------- -------
(Unaudited)
<S> <C> <C>
Principal ................ $375,000 575,000
Unamortized discount (10%) (25,437) (58,506)
-------- -------
$349,563 516,494
======== =======

</TABLE>

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. (See Note 9 for more details).

F-10

<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.

<TABLE>
<CAPTION>
Year ending
December 31, Total
----------- ----------
<S> <C>
1996 $ 141,000
1997 183,000
1998 191,000
1999 199,000
2000 211,000
Thereafter 268,000
----------
$1,193,000
==========
</TABLE>

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 estimates 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.

(9) SUBSEQUENT EVENT

In 1996, the Company settled a lawsuit with a major international brokerage
firm that had unilaterally canceled an insurance brokerage agreement. The
Company received $190,000 in settlement of the lawsuit.

The Company is in process of offering 1,500,000 shares of common stock in
an initial public offering at a price of between $7 and $8 per share. The final
offering price will be set immediately prior to the signing of an underwriting
agreement with the underwriters.

F-11

<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

Prospectus Summary ........................................................ 4
The Offering .............................................................. 6
Summary and Pro Forma Consolidated
Financial Information ................................................... 7
Risk Factors .............................................................. 9
Use of Proceeds ........................................................... 16
Recapitalization .......................................................... 16
Dividend Policy ........................................................... 16
Dilution .................................................................. 17
Capitalization ............................................................ 18
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .............................................................. 19
Discussion and Analysis of Pro Forma
Consolidated Financial Information ...................................... 23
Business .................................................................. 26
Management ................................................................ 37
Principal Stockholders .................................................... 43
Certain Transactions ...................................................... 44
Description of Securities ................................................. 45
Shares Eligible for Future Sale ........................................... 46
Certain Federal Income Tax Considerations ................................. 47
Underwriting .............................................................. 48
Legal Matters ............................................................. 50
Experts ................................................................... 50
Available Information ..................................................... 50
Index to Consolidated Financial Statements ................................ F-1

</TABLE>

Until March 2, 1997 (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.

================================================================================

<PAGE>

================================================================================

1,500,000 SHARES OF
COMMON STOCK

PREFERRED EMPLOYERS
HOLDINGS, INC.

----------
PROSPECTUS
----------

Commonwealth Associates

February 5, 1997

================================================================================